-----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, G4ZOLqggE6tUhP+yp+cPez6Tiou4rTbX6M0r97c3MsiVxYH4nPdlasuNBqN6ZLCr pzl6RtuEGkAOc48mzP5BPg== 0000940180-97-000304.txt : 19970329 0000940180-97-000304.hdr.sgml : 19970329 ACCESSION NUMBER: 0000940180-97-000304 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GFSI INC CENTRAL INDEX KEY: 0001036327 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 742810748 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-24189 FILM NUMBER: 97568016 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on , 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- GFSI, INC. (Exact name of registrant as specified in its charter) ---------------- DELAWARE 2396 74-2810748 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Number) Identification Number) incorporation or organization) GFSI, INC. 9700 COMMERCE PARKWAY LENEXA, KANSAS 66219 913-888-0445 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- JOHN L. MENGHINI GFSI, INC. 9700 COMMERCE PARKWAY LENEXA, KANSAS 66219 913-888-0445 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- With a copy to: JAMES B. CARLSON, ESQ. MAYER, BROWN & PLATT 1675 BROADWAY NEW YORK, NEW YORK 10019 (212) 506-2515 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED OFFERING MAXIMUM TITLE OF EACH CLASS OF AMOUNT PRICE AGGREGATE AMOUNT OF SECURITIES TO BE PER OFFERING REGISTRATION TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) FEE - ------------------------------------------------------------------------------ 9 5/8% Series B Senior Subor- dinated Notes Due 2007...... $125,000,000 100% $125,000,000 $37,878.79
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purposes of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MARCH 28, 1997 PROSPECTUS GFSI, INC. OFFER TO EXCHANGE ITS 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 9 5/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007. GFSI, Inc., a Delaware corporation ("GFSI" or the "Company") and a direct, wholly-owned subsidiary of GFSI Holdings, Inc., a Delaware corporation ("Holdings" or "Parent"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (the "Letter of Transmittal") (which together constitute the "Exchange Offer"), to exchange up to $125 million aggregate principal amount of 9 5/8% Series B Senior Subordinated Notes due 2007 (the "New Notes"), of the Company for a like principal amount of the Company's issued and outstanding 9 5/8% Series A Senior Subordinated Notes due 2007 (the "Old Notes" and collectively with the New Notes, the "Notes"), with the holders (each holder of Old Notes, a "Holder") thereof. The terms of the New Notes are substantially identical to the terms of the Old Notes that are to be exchanged therefor. See "Description of the Notes." The Company will receive no proceeds in connection with the Exchange Offer. THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED. The Notes will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including indebtedness under the New Credit Agreement, and pari passu or senior in right of payment to any future subordinated indebtedness of the Company. As of December 31, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate principal amount of Senior Indebtedness of the Company to which the Notes would have been subordinated would have been approximately $67.7 million. The Indenture will permit the Company and its subsidiaries to incur additional indebtedness, including Senior Indebtedness, subject to certain limitations. See "Description of Notes." The Company will accept for exchange any and all Old Notes that are validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on , 1997, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions which may be waived by the Company. The Company has agreed to pay the expenses of the Exchange Offer. There will be no cash proceeds to the Company from the Exchange Offer. See "Use of Proceeds." (Cover continued on following page) ----------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS" ON PAGE 13 OF THIS PROSPECTUS. 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 , 1997 The Old Notes were issued and sold on February 27, 1997 (the "Old Note Offering"), in a transaction not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption provided in Section 4(2) of the Securities Act. Accordingly , the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or unless an applicable exemption from the registration requirements of the Securities Act is available. The New Notes are being offered for exchange in order to satisfy certain obligations of the Company under a Registration Rights Agreement (as defined) between the Company and the Initial Purchasers (as defined). The New Notes will be obligations of the Company evidencing the same indebtedness as the Old Notes and will be entitled to the benefits of the same Indenture (as defined), which governs both the Old Notes and the New Notes. The form and terms (including principal amount, interest rate, maturity and ranking) of the New Notes are the same as the form and terms of the Old Notes, except that the New Notes (i) will be registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Notes, (ii) will not be entitled to registration rights and (iii) will not provide for any Liquidated Damages (as defined). See "The Exchange Offer--Registration Rights; Liquidated Damages." Prior to the Exchange Offer, there has been no established trading market for the Old Notes or the New Notes. The Company does not intend to apply for listing or quotation of the New Notes on any securities exchange or stock market. Therefore, there can be no assurance as to the liquidity of any trading market for the New Notes or that an active public market for the New Notes will develop. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered, or tendered but unaccepted, Old Notes could be adversely affected. Following the consummation of the Exchange Offer, the holders of Old Notes will continue to be subject to the existing restrictions on transfer thereof and the Company will have no further obligations to such holders to provide for the registration of the Old Notes under the Securities Act. See "The Exchange Offer--Consequences of Not Exchanging Old Notes." The Company is making the Exchange Offer pursuant to the registration statement of which this Prospectus is a part in reliance upon the position of the staff of the Securities and Exchange Commission (the "Commission") set forth in certain no-action letters addressed to other parties in other transactions. However, the Company has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer. Based on these interpretations by the staff of the Commission, the Company believes that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not participating and has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes are acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 120 days after the Expiration Date (as defined), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." i SUMMARY The following summary is qualified in its entirety by reference to and should be read in conjunction with the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all references in this Prospectus to the Company's business and pro forma data give effect to the Transactions (as defined). Unless the context indicates or otherwise requires, references in this Prospectus to the "Company" are to GFSI, Inc. and its predecessor, Winning Ways, Inc., and references to a fiscal year are to the twelve months ended June 30 of such year. THE COMPANY The Company, which operates primarily under the brand name GEAR For Sports(R) ("GEAR"), is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports. The Company, which was founded in 1974, custom designs and decorates an extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage. The Company markets its products to over 13,000 active customer accounts through its well-established and diversified distribution channels, rather than through the price sensitive mass merchandise, discount and department store distribution channels. The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR brand name and differentiate its products on the basis of quality. For the twelve months ended December 31, 1996, the Company generated net sales and Adjusted EBITDA (as defined) of $177.1 million and $39.6 million, respectively. From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7 million to $169.3 million from internal growth, representing a compound annual growth rate ("CAGR") of 12.3%. During the same period, the Company's EBITDA (as defined) grew from $17.9 million to $36.0 million, representing a CAGR of 15.0%, and its EBITDA margin increased from 18.9% to 21.3%. The Company has achieved a record of strong sales and EBITDA growth and stable operating margins primarily due to its: (i) leading positions in niche markets; (ii) diversified and stable customer base; (iii) superior product quality and customer service; (iv) broad product portfolio; (v) value-added design and manufacturing capabilities; and (vi) innovative management. The Company expects to continue to grow by leveraging the strength of the GEAR brand name to expand its product lines and access underpenetrated segments of its markets. The Company believes that it is less vulnerable to earnings fluctuations than typical apparel manufacturers and marketers because: (i) the Company designs and custom manufactures basic, classic products with low fashion risk; (ii) consumer demand for sportswear and activewear continues to increase; and (iii) the Company's products are customized based on firm customer orders, minimizing its risk of excess inventory. The Company markets its products primarily through four separate divisions, each of which serves distinct distribution channels and utilizes a salesforce with a specialized knowledge of its particular markets and customers. The Company's network of approximately 140 independent sales representatives and over 70 in-house artists and graphic designers work directly with the Company's customers to create innovative sportswear and activewear products to meet customer specifications. The Company's four divisions include: ^ The Resort Division (40.0% of fiscal 1996 net sales) is a leading marketer of custom logoed sportswear and activewear to over 6,100 active customer accounts, including destination resorts, family entertainment companies, hotel chains, golf clubs, cruise lines, casinos and United States military bases. The division's customers include widely recognized names such as The Walt Disney Company, Universal Studios, The Ritz Carlton, Pebble Beach, Princess Cruise Lines and The Mirage. The Company believes that the breadth of its coordinated product line and its national scope provide it with a distinct competitive advantage in the resort market. ^ The Corporate Division (27.9% of fiscal 1996 net sales) is a leading marketer of corporate identity sportswear and activewear for use by a diverse group of corporations in incentive and promotional programs as well as for office casual wear and uniforms. The division services over 3,500 active customer accounts, including Toyota, Hershey, Dr Pepper/7Up, Anheuser-Busch, MCI and Exxon. The Company believes that it has an advantage over its competitors because it is one of the few national brand name suppliers of sportswear and activewear focused on the corporate market. In addition, the Company recently formed Tandem Marketing to leverage its existing corporate customer base by developing and administering corporate fulfillment programs. The Company typically implements corporate fulfillment programs in conjunction with a catalogue featuring a full line of both apparel and non-apparel merchandise customized with the corporate customer's name, logo or message. ^ The College Bookstore Division (22.3% of fiscal 1996 net sales) is a leading marketer of custom designed, embroidered and silk-screened sportswear and activewear products to over 2,300 active customer accounts, including nearly every major college and university in the United States. The division's largest accounts include each of the major college bookstore lease operators, such as Barnes & Noble College Bookstores, as well as high volume, university managed bookstores, such as the University of Notre Dame, the University of Southern California, Yale University, the University of Michigan and the United States Air Force and Naval academies. The National Association of College Stores has selected the Company as "Vendor of the Year" three times, an honor no other supplier has won more than once. ^ The Sports Specialty Division (3.7% of fiscal 1996 net sales), established in 1994, has entered into licensing agreements to design, manufacture and market sportswear and activewear bearing the names, logos and insignia of professional sports leagues and teams as well as major sporting events. The Company's licensors include, among others, Major League Baseball ("MLB"), the National Basketball Association ("NBA"), the National Hockey League ("NHL"), NASCAR and The Breeder's Cup. The division targets the upscale adult sports enthusiast through the Company's existing distribution channels as well as through new channels such as stadium stores and team retail outlets. The division markets its products to over 600 active customer accounts, including the Indianapolis Motor Speedway, the Chicago Bulls, the Cleveland Indians, the Boston Bruins and Madison Square Garden. FINANCIAL CHARACTERISTICS. The Company's business has the following financial characteristics: ^ Diverse and Stable Customer Base. The Company sells to its niche markets through a diverse base of over 13,000 active customer accounts. In fiscal 1996, no single account represented more than 2.5% of net sales, and the Company's top ten customers accounted for less than 13% of net sales. The number of active customer accounts increased from approximately 5,600 in fiscal 1991 to over 13,000 in fiscal 1996. New potential end-users of the Company's products are added each year as new customers visit resorts and participate in other leisure activities, corporations continue to expand their identity and promotional programs and new students enroll at colleges and universities. ^ Strong Sales and EBITDA Growth. From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7 million to $169.3 million from internal growth, representing a CAGR of 12.3%. During the same period, the Company's EBITDA grew from $17.9 million to $36.0 million, representing a CAGR of 15.0%, and its EBITDA margin increased from 18.9% to 21.3%. The Company believes that this growth can be attributed to: (i) its focus on niche markets where competition is generally based on product and service quality rather than price; (ii) operating leverage resulting from the introduction of new products in established distribution channels; and (iii) its focus on manufacturing efficiencies. ^ Low Capital Expenditures. The Company concentrates on the high value- added production processes of custom design, embroidery, silk-screening and other finishing elements at its state-of-the-art manufacturing facilities. The capital intensive process of manufacturing unfinished garments ("blanks") and other items is outsourced to a network of foreign and domestic independent manufacturers who 2 comply with the Company's stringent specifications. As a result, the Company maintains low fixed costs and requires limited annual capital expenditures. From fiscal 1992 to fiscal 1996, total annual capital expenditures averaged approximately $3 million, or an average of 2.2% of net sales and 10.5% of EBITDA for such years. ^ Historically Non-Cyclical Business. The Company has not experienced a reduction of its business as a result of past general economic downturns. The Company believes that its record of consistent growth is a result of the relatively non-cyclical nature of its primary market segments as well as its competitive position as a supplier of high quality, customized products that are less susceptible to consumer price sensitivity. The Company believes that the diversity of its products, distribution channels and markets also minimizes its exposure to particular customers, economic cycles and geographic concentration. BUSINESS STRATEGY. The Company's objective is to continue to increase sales, EBITDA and operating margins, and is based upon the following strategic elements: ^ Superior Product Quality and Customer Service. Each of the Company's divisions focuses on high-end, customized sportswear, activewear and related products. The Company's products uniquely address each account's specific requirements, while providing the end-user with a high quality product. The Company's ability to maintain consistency in product quality and customer service, regardless of order size, enables it to effectively service a broad range of customers. With over 70 in-house artists and graphic designers and state-of-the-art manufacturing and distribution facilities, the Company believes that it provides products and service that are superior to those of its competitors in each of its markets. ^ Leading Position in Multiple Niche Markets. The Company has a leading position in the resort, corporate and college bookstore markets. The Company's superior service and product customization enable it to more effectively serve the particular needs of these customers. As a result, the Company believes that: (i) it is one of the few national competitors in the highly fragmented resort and leisure market; (ii) it has a leading share of the corporate identity market, where it competes primarily with smaller local and regional companies as well as a few national competitors; and (iii) it has the second largest share of the college bookstore market. ^ Leveraging the GEAR For Sports(R) Brand Name. The Company leverages its GEAR brand name by introducing new products through its established distribution channels. For example, the Company recently introduced new headwear, sports luggage and Baby GEAR product lines. The Company believes that the GEAR brand name is widely recognized by customers and end-users in each of its markets and enjoys a reputation for high quality products. The Company intends to continue to leverage this brand name recognition through its existing distribution channels as well as through alternative distribution channels and markets. ^ Efficient Operations. The Company uses its state-of-the-art facilities to design, embroider and screenprint a significant portion of its products. In addition, the Company uses independent contractors to manufacture its blanks and, where appropriate, to provide other value-added manufacturing services in order to maximize sourcing flexibility while minimizing overhead costs and fixed charges. The Company minimizes the risk of excess inventory by designing and manufacturing its products against firm customers orders. ^ Experienced Management Team with Significant Equity Ownership. The Company's management team has extensive experience in the sportswear and activewear business. The top five senior executives have each been with the Company for at least 13 years and have combined industry experience of over 115 years. Approximately 20 members of the management team contributed an aggregate of $13.6 million in exchange for 50% of the capital stock of the Company's parent, GFSI Holdings, Inc. ("Holdings"). The management team will have significant incentive to continue to increase the Company's sales and EBITDA as a result of their substantial equity ownership and performance based incentive compensation programs that the Company intends to implement. 3 ---------------- The Company was incorporated in the state of Delaware on January 15, 1996. On February 27, 1997, the Company effected a merger with Winning Ways, Inc. "Winning Ways", a Missouri corporation, in which Winning Ways merged with and into the Company. The Company's principal executive offices are located at 9700 Commerce Parkway, Lenexa, Kansas 66219 and its telephone number is (913) 888- 0445. THE TRANSACTIONS Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by affiliates of The Jordan Company and management to effect the acquisition of Winning Ways. Pursuant to an agreement for the purchase and sale of stock, dated as of January 24, 1997 (the "Acquisition Agreement"), Holdings and GFSI acquired all of the issued and outstanding capital stock of Winning Ways on February 27, 1997, and Winning Ways immediately thereafter merged with and into GFSI. The aggregate purchase price for Winning Ways was $232.9 million, subject to adjustment following the closing (the "Closing") of the Transactions (as defined), consisting of $203.5 million in cash and the repayment of $29.4 of the Winning Ways' Existing Indebtedness (as defined). To finance the Acquisition, including approximately $11.1 million of related fees and expenses: (i) TJC, its affiliates and MCIT PLC (collectively, the "Jordan Investors") and certain members of management (the "Management Investors") invested $52.2 million in Holdings and Holdings contributed $51.3 million of this amount in cash to the Company (the "Equity Contribution"); (ii) the Company consummated the offering of Old Notes in the aggregate principal amount of $125.0 million (the "Offering"); and (iii) the Company entered into a credit agreement (the "New Credit Agreement"), providing for borrowings of up to $115.0 million, of which approximately $67.7 million was outstanding and $22.9 million was utilized to cover outstanding letters of credit at Closing. The Equity Contribution is comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for cumulative preferred stock of Holdings due 2009 ("Holdings Preferred Stock") and approximately 50% of the common stock of Holdings; (ii) a contribution of $13.6 million from the Management Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the common stock of Holdings; and (iii) a contribution of $25.0 million from a Jordan Investor to Holdings in exchange for subordinated notes of Holdings (the "Holdings Subordinated Notes"). Approximately $0.8 million of the contribution from the Management Investors was financed by loans from Holdings. Consummation of the Offering was conditioned upon the concurrent consummation of the Acquisition, the Equity Contribution and the initial borrowings under the New Credit Agreement. For additional information, see "The Transactions" and "Use of Proceeds." 4 THE EXCHANGE OFFER Securities Offered.......... $125,000,000 principal amount of 9 5/8% Series B Senior Subordinated Notes due 2007. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except for certain Liquidated Damages provisions relating to the Old Notes described below under "--Summary Description of the New Notes." Issuance of Old Notes; Registration Rights........ The Old Notes were issued on February 27, 1997 to Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (collectively, the "Initial Purchasers"), which placed the Old Notes with "qualified institutional buyers" (as such term is defined in Rule 144A promulgated under the Securities Act). In connection therewith, the Company executed and delivered for the benefit of the holders of Old Notes a certain registration rights agreement (the "Registration Rights Agreement"), pursuant to which the Company agreed (i) to file a registration statement (the "Registration Statement") on or prior to 90 days after February 27, 1997 with respect to the Exchange Offer and (ii) to use their best efforts to cause the Registration Statement to be declared effective by the Commission on or prior to 150 days after February 27, 1997. In certain circumstances, the Company will be required to provide a shelf registration statement (the "Shelf Registration Statement") to cover resales of the Old Notes by the holders thereof. If the Company does not comply with its obligations under the Registration Rights Agreement, it will be required to pay Liquidated Damages to holders of the Old Notes under certain circumstances. See "The Exchange Offer--Registration Rights; Liquidated Damages." Holders of Old Notes do not have any appraisal rights in connection with the Exchange Offer. The Exchange Offer.......... The New Notes are being offered in exchange for a like principal amount of Old Notes. The issuance of the New Notes is intended to satisfy the obligations of the Company contained in the Registration Rights Agreement. Based upon the position of the staff of the Commission set forth in no-action letters issued to third parties in other transactions substantially similar to the Exchange Offer, the Company believes that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities) without further compliance with the registration and 5 prospectus delivery requirements of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not participating and has no arrangement with any person to participate in a distribution (within the meaning of the Securities Act) of such New Notes. Each broker- dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale for such New Notes. Although there has been no indication of any change in the staff's position, there can be no assurance that the staff of the Commission would make a similar determination with respect to the resale of the New Notes. See "Risk Factors." Procedures for Tendering.... Tendering holders of Old Notes must complete and sign the Letter of Transmittal in accordance with the instructions contained therein and forward the same by mail, facsimile or hand delivery, together with any other required documents, to the Exchange Agent, either with the Old Notes to be tendered or in compliance with the specified procedures for guaranteed delivery of Old Notes. Holders of the Old Notes desiring to tender such Old Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. Certain brokers, dealers, commercial banks, trust companies and other nominees may also effect tenders by book-entry transfer. Holders of Old Notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee are urged to contact such person promptly if they wish to tender Old Notes pursuant to the Exchange Offer. Letters of Transmittal and certificates representing Old Notes should not be sent to the Company. Such documents should only be sent to the Exchange Agent. Questions regarding how to tender and requests for information should be directed to the Exchange Agent. See "The Exchange Offer--Procedures for Tendering Old Notes." Tenders, Expiration Date; Withdrawal................. The Exchange Offer will expire the earlier of (i) 5:00 p.m., New York City time, on , 1997 or (ii) the date when all Old Notes have been tendered, or such later date and time to which it is extended, provided it may not be extended beyond , 1997. The tender of Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Old Note not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer-- Terms of the Exchange Offer; Period for Tendering Old Notes" and""--Withdrawal Rights." Certain Conditions to the Exchange Offer............. The Exchange Offer is subject to certain customary conditions, all of which may be waived by the Company, including the absence of 6 (i) threatened or pending proceedings seeking to restrain the Exchange Offer or resulting in a material delay to the Exchange Offer; (ii) a general suspension of trading on any national securities exchange or in the over-the-counter market; (iii) a banking moratorium; (iv) a commencement of war, armed hostilities or other similar international calamity directly or indirectly involving the United States; and (v) change or threatened change in the business, properties, assets, liabilities, financial condition, operations, results of operations or prospects of the Company and its subsidiaries taken as a whole that, in the sole judgment of the Company, is or may be adverse to the Company. The Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes, if at any time before the acceptance of such Old Notes for exchange or the exchange of New Notes for such Old Notes, any of the foregoing events occurs which, in the sole judgment of the Company, make it inadvisable to proceed with the Exchange Offer and/or with such acceptance for exchange or with such exchange. If the Company fails to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy, it will file with the Commission a Shelf Registration Statement to cover resales of the Transfer Restricted Securities (as defined) by the holders thereof who satisfy certain conditions. If the Company fails to consummate the Exchange Offer or file a Shelf Registration Statement in accordance with the Registration Rights Agreement, the Company will pay Liquidated Damages to each holder of Transfer Restricted Securities until the cure of all defaults. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange. See "The Exchange Offer--Registration Rights; Liquidated Damages" and "--Certain Conditions to the Exchange Offer." Federal Income Tax Consequences............... For Federal income tax purposes, the exchange pursuant to the Exchange Offer will not result in any income, gain or loss to the Holders or the Company. See "Certain Federal Income Tax Considerations." Use of Proceeds............. There will be no proceeds to the Company from the exchange pursuant to the Exchange Offer. Appraisal Rights............ Holders of Old Notes will not have dissenters' rights or appraisal rights in connection with the Exchange Offer. Exchange Agent.............. Fleet National Bank is serving as Exchange Agent in connection with the Exchange Offer. 7 CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. See "Risk Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange Offer--Consequences of Exchanging Old Notes." SUMMARY DESCRIPTION OF THE NEW NOTES The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and except that, if the Exchange Offer is not consummated by 1997, subject to certain exceptions, with respect to the first 90-day period immediately following thereafter, the Company will be obligated to pay Liquidated Damages to each Holder of Old Notes in an amount equal to $.05 per week for each $1,000 principal amount of Old Notes, as applicable, held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week with respect to each subsequent 90-day period until the Exchange Offer is consummated, or any other Registration Default (as defined) is cured, up to a maximum of $.40 per week for each $1,000 principal amount of Old Securities, as applicable. The New Notes will bear interest from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid on the Old Notes, from February 27, 1997. Accordingly, registered Holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from February 27, 1997. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date which occurs on or after consummation of the Exchange Offer. 8 THE NEW NOTES Issuer...................... GFSI, Inc. Securities Offered.......... $125 million aggregate principal amount of 9 5/8% Series B Senior Subordinated Notes due 2007. Maturity.................... March 1, 2007. Interest.................... The Old Notes bear interest and the New Notes will bear interest at a rate of 9 5/8% per annum, payable semi-annually in cash in arrears on each March 1 and September 1, commencing on the first such date to occur after the Expiration Date. Optional Redemption......... On or after March 1, 2002, the Notes will be redeemable at the option of the Company, in whole or in part, at any time at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. Notwithstanding the foregoing, at any time prior to March 1, 2000, the Company may redeem up to 40% of the original aggregate principal amount of the Notes with the net proceeds of one or more Equity Offerings (as defined) at a redemption price equal to 110% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. See "Description of Notes--Redemption of Notes." Mandatory Redemption........ Except after the passage of certain events, the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. See "Description of Notes--Mandatory Offers to Purchase Notes." Change of Control........... Upon the occurrence of a Change of Control (as defined), each holder of Notes will have the right to require the Company to purchase such holder's Notes pursuant to an Offer (as defined) at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. Certain transactions with affiliates of the Company may not be deemed to be a Change of Control. Transactions constituting a Change of Control are not limited to hostile takeover transactions not approved by the current management of the Company. Except as described under "Description of Notes--Mandatory Offers to Purchase Notes," the Indenture does not contain provisions that permit the holders of Notes to require the Company to purchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring, including an issuer recapitalization or similar transaction with management. Ranking..................... The Notes will be general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company, including Indebtedness 9 (as defined) under the New Credit Agreement, and pari passu or senior in right of payment to any future subordinated Indebtedness of the Company. As of December 31, 1996, on a pro forma basis after giving effect to the Transactions, the aggregate principal amount of Senior Indebtedness of the Company to which the Notes would have been subordinated would have been approximately $67.7 million. The indenture pursuant to which the Notes will be issued (the "Indenture") will permit the Company and its subsidiaries to incur additional Indebtedness, including Senior Indebtedness, subject to certain limitations. See "Description of Notes--Certain Covenants" and "Description of Certain Indebtedness." The Company believes that prepayment of the Notes pursuant to a Change of Control would constitute a default under the New Credit Agreement. In the event a Change of Control occurs, the Company will likely be required to refinance the Indebtedness outstanding under the New Credit Agreement and the Notes. If there is a Change of Control, any Indebtedness under the New Credit Agreement could be accelerated, which Indebtedness is secured and effectively ranks senior to the Notes. Moreover, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of the Notes given the Company's high leverage. See "Risk Factors-- Leverage and Debt Service." Certain Covenants........... The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries to: (i) pay dividends or make certain other Restricted Payments (as defined); (ii) incur additional Indebtedness; (iii) encumber or sell assets; (iv) enter into certain guarantees of Indebtedness; (v) enter into transactions with affiliates; and (vi) merge or consolidate with any other entity and to transfer or lease all or substantially all of their assets. In addition, under certain circumstances, the Company is required to offer to purchase Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase with the proceeds of certain Asset Sales (as defined). See "Description of Notes--Certain Covenants" and "--Mandatory Offers to Purchase Notes--Asset Sales." RISK FACTORS Holders of Old Notes should consider carefully all of the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors." Risk factors which Holders of Old Notes should evaluate include the consequences of exchanging and not exchanging Old Notes for New Notes, the Company's leverage and coverage, the ranking of the Notes among other indebtedness of the Company, the Company's dependence on intercompany transfers to meet its debt service and other obligations, the Company's limited operating history and the limited relevance of its historical financial information, the restrictive covenants contained in the Indenture and the New Credit Agreement, the absence of a market for the New Notes, the ability of the Company to purchase the Notes upon a Change of Control, the influence of the Company's principal stockholders and fraudulent transfer considerations. 10 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS) The following table presents summary: (i) historical operating and other data of the Company for fiscal 1992, 1993, 1994, 1995 and 1996, the six months ended December 31, 1995 and 1996, and the twelve months ended December 31, 1996; (ii) pro forma data for fiscal 1996, the six months ended December 31, 1995 and 1996 and the twelve months ended December 31, 1996; and (iii) historical and pro forma balance sheet data of the Company as of December 31, 1996. The historical financial statements of the Company for fiscal 1992, 1993, 1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the historical financial statements for fiscal 1996 have been audited by Deloitte & Touche LLP. The historical data of the Company at and for the six months ended December 31, 1995 and 1996 and for the twelve months ended December 31, 1996 have been derived from, and should be read in conjunction with, the unaudited financial statements of the Company and the related notes thereto, which are included elsewhere in this Prospectus. In the opinion of management, such interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the information presented for such periods. The results of operations for the six months ended December 31, 1996 are not necessarily indicative of the results of operations to be expected for the full year. The pro forma income statement data of the Company for the six months ended December 31, 1995 and 1996 and for the twelve months ended December 31, 1996 have been prepared as if the Transactions had occurred on the first day of such period. The pro forma balance sheet data have been prepared as if the Transactions had occurred on December 31, 1996. The summary pro forma data does not purport to represent what the Company's results of operations or financial position would have been if the Transactions had been completed as of the date or for the periods presented, nor does such data purport to represent the results of operations for any future period. The summary financial data set forth below should be read in conjunction with "The Transactions," "Selected Historical Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition," the unaudited pro forma financial statements and the historical financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
TWELVE SIX MONTHS ENDED MONTHS FISCAL YEAR ENDED JUNE 30, DECEMBER 31, ENDED ------------------------------------------------ ------------------ DECEMBER 31, 1992 1993 1994 1995 1996 1995 1996 1996 -------- -------- -------- -------- -------- -------- -------- ------------ STATEMENTS OF INCOME DATA: Net sales............... $118,187 $121,131 $128,171 $148,196 $169,321 $ 97,008 $104,811 $177,124 Gross profit............ 47,079 50,936 53,724 63,327 72,013 41,811 45,353 75,555 Operating expenses...... 25,949 28,201 29,151 34,428 39,179 21,079 23,234 41,334 Operating income........ 21,130 22,735 24,573 28,899 32,834 20,732 22,119 34,221 OTHER DATA: EBITDA(1)............... $ 22,960 $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 22,306 $ 23,791 $ 37,520 Depreciation and amortization........... 1,830 1,998 2,303 2,860 3,201 1,574 1,672 3,299 Capital expenditures.... 2,149 2,304 2,856 4,989 2,611 678 2,133 4,066 EBITDA margin(2)........ 19.4% 20.4% 21.0% 21.4% 21.3% 23.0% 22.7% 21.2% PRO FORMA DATA: Adjusted EBITDA(3)...... $ 37,527 $ 23,216 $ 25,285 $ 39,596 Cash interest expense(4)............. 18,082 Ratio of Adjusted EBITDA to cash interest expense................ 2.2x Ratio of net debt to Adjusted EBITDA(5)..... 4.8x
(footnotes on the following page) 11
AS OF DECEMBER 31, 1996 ----------------------- PRO ACTUAL FORMA ----------------------- BALANCE SHEET DATA: Cash and cash equivalents.............................. $ 727 $ 749 Total assets........................................... 84,417 94,143 Long-term debt, including current portion.............. 23,378 192,700 Total stockholders' equity (deficit)(6)................ 38,747 (116,530)
- -------------------- (1) EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles ("GAAP"), it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. (2) EBITDA margin represents EBITDA as a percentage of net sales. (3) Adjusted EBITDA represents EBITDA less the Wolff noncompetition payments, plus certain costs that are expected to be eliminated as a result of the Transactions and certain non-recurring charges. Adjusted EBITDA has not been reduced by management fees payable by Holdings to TJC pursuant to the TJC Agreement (as defined) and directors fees, both of which are subordinated to the Company's obligations under the Notes.
SIX MONTHS ENDED TWELVE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------ DECEMBER 31, 1996 1995 1996 1996 ----------------- -------- -------- ------------- EBITDA.................. $36,035 $ 22,306 $ 23,791 $37,520 Less Wolff noncompetition payments............... (250) (125) (125) (250) Plus Cost Savings Corporate jet expenses.. 195 78 91 208 Change in officers' life insurance.............. 718 574 477 621 Plus Non-Recurring Charges MIS consulting fees..... 625 250 1,051 1,426 Legal expenses.......... 204 133 -- 71 ------- -------- -------- ------- Adjusted EBITDA....... $37,527 $ 23,216 $ 25,285 $39,596 ======= ======== ======== =======
(4) Cash interest expense represents total interest expense less amortization of deferred financing costs and other non-cash interest charges. (5) Net debt represents total debt less cash and cash equivalents. The ratio of net debt to Adjusted EBITDA was calculated based on pro forma net debt as of December 31, 1996 of $192.0 million. See "Capitalization." (6) The pro forma net capital deficiency of $116.5 million reflects adjustments to total stockholders' equity for the difference between the book value of the net assets of the Company and the $232.9 million purchase price paid for the Company. See "The Transactions" and the unaudited pro forma financial statements and the related notes thereto included elsewhere in this Prospectus. 12 RISK FACTORS Holders of the Old Notes should carefully consider the following risk factors, as well as other information set forth in this Prospectus, before tendering their Old Notes in the Exchange Offer. The risk factors set forth below (other than "Consequences of Exchange and Failure to Exchange") are generally applicable to the Old Notes as well as the New Notes. CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE Issuance of the New Notes in exchange for the Old Notes pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents. Therefore, holders of the Old Notes desiring to tender such Old Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. The Company is under no duty to give notification of defects or irregularities with respect to tenders of Old Notes for exchange. Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. In addition, upon the consummation of the Exchange Offer holders of Old Notes which remain outstanding will not be entitled to any rights to have such Old Notes registered under the Securities Act or to any rights under the Registration Rights Agreement. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a holder's ability to sell untendered, or tendered but unaccepted, Old Notes could be adversely affected. See "The Exchange Offer--Consequences of Not Exchanging Old Notes." Based on interpretations by the staff of the Commission, the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder thereof (other than (i) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities) without further compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and that such holder is not participating and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such New Notes. The Company has not, however, sought its own no-action letter from the staff of the Commission. Although there has been no indication of any change in the staff's position, there can be no assurance that the staff of the Commission would make a similar determination with respect to the resale of the New Notes. Any holder that cannot rely upon such prior staff interpretations must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless such sale is made pursuant to an exemption from such requirements. See "The Exchange Offer--Purpose of the Exchange Offer." LEVERAGE AND DEBT SERVICE Upon consummation of the Transactions, the Company has substantial indebtedness and debt service obligations. At December 31, 1996, the Company's total indebtedness, including current portion, would have been approximately $192.7 million and its net capital deficiency would have been $116.5 million, in each case on a pro forma basis after giving effect to the Transactions. In addition, subject to the restrictions under the New Credit Agreement and the Indenture, the Company may incur additional indebtedness, including Senior Indebtedness, from time to time. As a result of accounting for the Transactions as a recapitalization under GAAP, total stockholders' equity of the Company will change from $38.7 million to a deficit of approximately $116.5 million as of December 31, 1996. See "The Transactions," "Capitalization" and "Description of Notes--Limitation on Incurrence of Indebtedness." 13 The level of the Company's indebtedness could have important consequences to holders of the Notes, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited; and (iii) the Company's level of indebtedness could limit its flexibility to react to changes in its operating environment and economic conditions generally. The Company's ability to pay principal of and interest and Liquidated Damages, if any, on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the New Credit Agreement or a successor facility. The Company anticipates that its operating cash flow, together with borrowings under the New Credit Agreement, will be sufficient to meet its operating expenses and to service its debt requirements as they become due. However, if the Company is unable to service its indebtedness, it will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness, or seeking additional equity capital. There can be no assurance that any of these remedies can be effected on satisfactory terms, if at all. SUBORDINATION The Notes will be subordinated in right of payment to all existing and future Senior Indebtedness of the Company, including all obligations under the New Credit Agreement. In the event of a bankruptcy, liquidation or reorganization of the Company or in the event of acceleration of any indebtedness of the Company upon the occurrence of an event of default, the assets of the Company would be available to pay obligations on the Notes only after the Senior Indebtedness of the Company has been paid in full. The Indenture will limit, but not prohibit, the incurrence by the Company and its Restricted Subsidiaries of additional Senior Indebtedness. At December 31, 1996, after giving pro forma effect to the Transactions, the Company would have had approximately $67.7 million in principal amount of Senior Indebtedness outstanding and would have had additional availability under the New Credit Agreement of approximately $47.3 million, subject to the achievement of certain financial ratios and compliance with certain other conditions. See "Description of Notes--Subordination." CONTROL BY PRINCIPAL STOCKHOLDERS AND CERTAIN TRANSACTIONS After the consummation of the Transactions, the Company's executive officers and directors (and their respective affiliates, including TJC) (collectively, the "Principal Stockholders") will own a majority of the issued and outstanding capital stock of Holdings. See "Principal Stockholders." The Principal Stockholders, if voting together, will have sufficient voting power to elect the entire Board of Directors of each of Holdings and the Company, exercise control over the business, policies and affairs of Holdings and the Company, and, in general, determine the outcome of any corporate transaction or other matters submitted to the stockholders for approval such as any amendment to the certificate of incorporation of the Company (the "Certificate of Incorporation"), the authorization of additional shares of capital stock, and any merger, consolidation, sale of all or substantially all of the assets of the Company and could prevent or cause a change of control of the Company, all of which may adversely affect the Company and holders of the Notes. Messrs. Caputo, Jordan and Zalaznick, all directors of Holdings and the Company, are partners of TJC. In addition, the Company will maintain affiliate transactions with certain members of senior management and, upon the consummation of the Offering, the Company and Holdings will enter into certain affiliate transactions with TJC. See "Certain Transactions." RESTRICTIVE COVENANTS The Indenture will restrict, among other things, the Company's ability to pay dividends or make certain other Restricted Payments, to incur additional Indebtedness, to encumber or sell assets, to enter into transactions 14 with affiliates, to enter into certain guarantees of Indebtedness, to merge or consolidate with any other entity and to transfer or lease all or substantially all of its assets. See "Description of Notes--Certain Covenants." In addition, the New Credit Agreement will contain other and more restrictive covenants and will prohibit the Company from prepaying other indebtedness, including the Notes. The indebtedness outstanding under the New Credit Agreement will be secured by liens on substantially all of the personal property and certain real property of the Company. The New Credit Agreement includes certain covenants that, among other things, restrict: (i) the making of investments, loans and advances and the paying of dividends and other restricted payments; (ii) the incurrence of additional indebtedness; (iii) the granting of liens, other than liens created pursuant to the New Credit Agreement and certain permitted liens; (iv) mergers, consolidations, and sales of all or a substantial part of the Company's business or property; (v) the sale of assets; (vi) the making of capital expenditures; and (vii) operating lease rentals. The New Credit Agreement also requires the Company to comply with certain financial ratios, including minimum interest coverage, minimum fixed charge coverage and maximum leverage ratios. The ability of the Company to comply with these and other provisions of the New Credit Agreement may be affected by events beyond the Company's control. The breach of any of these covenants could result in a default under the New Credit Agreement, in which case, depending on the actions taken by the lenders thereunder or their successors or assignees, such lenders could elect to declare all amounts borrowed under the New Credit Agreement, together with accrued interest, to be due and payable and the Company could be prohibited from making payments of interest and principal on the Notes until the default is cured or all Senior Indebtedness is paid or satisfied in full. If the Company were unable to repay such borrowings, such lenders could proceed against their collateral. If the indebtedness under the New Credit Agreement were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company, including the Notes. See "Description of Notes" and "Description of Certain Indebtedness--New Credit Agreement." CHANGE OF CONTROL In the event of a Change of Control, each holder of Notes will be entitled to require the Company to purchase any or all of the Notes held by such holder at the price stated herein. See "Description of Notes--Mandatory Offers to Purchase Notes--Change of Control" and "--Certain Definitions--Change of Control." The Company expects that prepayment of the Notes following a Change of Control would constitute a default under the New Credit Agreement. In the event that a Change of Control occurs, the Company would likely be required to refinance the indebtedness outstanding under the New Credit Agreement and the Notes. There can be no assurance that the Company would be able to refinance such indebtedness or, if such refinancing were to occur, that such refinancing would be on terms favorable to the Company. The holders of Notes have limited rights to require the Company to purchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring, including an issuer recapitalization or similar transaction with management. Consequently, the Change of Control provisions will not afford any protection in a highly leveraged transaction, including such a transaction initiated by the Company, management of the Company or an affiliate of the Company, if such transaction does not result in a Change of Control. In addition, because the obligations of the Company with respect to the Notes are subordinated to Senior Indebtedness of the Company, existing or future Senior Indebtedness of the Company may prohibit the Company from repurchasing or redeeming any of the Notes upon a Change of Control. Moreover, the ability of the Company to repurchase or redeem the Notes following a Change of Control will be limited by the Company's then-available resources. Accordingly, the Change of Control provision is likely to be of limited usefulness in such situations. The Change of Control provisions may not be waived by the Board of Directors of the Company or the Trustee without the consent of holders of at least a majority in principal amount of the Notes. See "Description of Notes--Mandatory Offers to Purchase Notes--Change of Control." As a result, the Change of Control purchase feature of the Notes may in certain circumstances discourage or make more difficult a sale or takeover of the Company and, thus, the removal of incumbent management. 15 ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFERS The New Notes are being offered to Holders of the Old Notes. The Old Notes were issued on February 27, 1997 to a small number of institutional investors and are eligible for trading in the Private Offering, Resale and Trading through Automated Linkages (PORTAL) Market, the National Association of Securities Dealers' screenbased, automated market for trading of securities eligible for resale under Rule 144A. The New Notes are new securities for which there currently is no market. Although the Initial Purchasers have advised the Company that they currently intend to make a market in the New Notes, they are not obligated to do so and may discontinue such market making at any time without notice. The Company does not intend to list the Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. Accordingly, no assurance can be given that an active market will develop for any of the Notes or as to the liquidity of the trading market for any of the Notes. If a trading market does not develop or is not maintained, holders of the Notes may experience difficulty in reselling such Notes or may be unable to sell them at all. If a market for the Notes develops, any such market may be discontinued at any time. If a trading market develops for the Notes, future trading prices of such Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other factors, including the financial condition of the Company, the Notes may trade at a discount from their principal amount. FRAUDULENT TRANSFER CONSIDERATIONS Under fraudulent transfer law, if a court were to find, in a lawsuit by an unpaid creditor or representative of creditors of the Company, that the Company received less than fair consideration or reasonable equivalent value for incurring the indebtedness represented by the Notes, and, at the time of such incurrence, the Company (i) was insolvent or was rendered insolvent by reason of such incurrence, (ii) was engaged or about to engage in a business or transaction for which its remaining property constituted unreasonably small capital or (iii) intended to incur, or believed it would incur, debts beyond its ability to pay as such debts mature, such court could, among other things, (a) void all or a portion of the Company's obligations to the holders of the Notes and/or (b) subordinate the Company's obligations to the holders of the Notes to other existing and future indebtedness of the Company, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Notes. The measure of insolvency for purposes of determining whether a transfer is avoidable as a fraudulent transfer varies depending upon the law of the jurisdiction which is being applied. Generally, however, a debtor would be considered insolvent if the sum of all of its liabilities were greater than the value of all of its property at a fair valuation, or if the present fair salable value of the debtor's assets were less than the amount required to repay its probable liability on its debts as they become absolute and mature. There can be no assurance as to what standard a court would apply in order to determine solvency. To the extent that proceeds from the sale of the Notes are used to repay Existing Indebtedness, a court may find that the Company did not receive fair consideration or reasonably equivalent value for the incurrence of the Indebtedness represented thereby. On the basis of its historical financial information, its recent operating history as discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and other factors, the Company believes that, after giving effect to the Transactions, the Company was and will be solvent, did and will have sufficient capital for the business in which it is engaged and did not and will not have incurred debts beyond its ability to pay such debts as they mature. There can be no assurance, however, that a court would necessarily agree with these conclusions. ENFORCEABILITY OF SUBSIDIARY GUARANTEES The Company's obligations under the Notes will be guaranteed, jointly and severally, on a senior subordinated basis, by all of the Company's future Restricted Subsidiaries. The Company believes that the Note Guarantees, when incurred, will be incurred for proper purposes and in good faith. Notwithstanding the Company's belief however, if a court of competent jurisdiction in a suit by an unpaid creditor or representative of creditors (such as a trustee in bankruptcy or debtor-in-possession) were to find that, at the time of the 16 incurrence of a Note Guarantee, a Guarantor (i) was insolvent or was rendered insolvent by reason of such issuance, (ii) was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, (iii) intended to incur, or believe that it would incur, debts beyond its ability to pay such debts as they matured, or (iv) intended to hinder, delay or defraud its creditors, and that the indebtedness was incurred for less than reasonably equivalent value, then such court could among other things: (a) void all or a portion of such Guarantor's obligations to the holders of the Notes, the effect of which would be that the holders of the Notes may not be repaid in full or at all and/or (b) subordinate such Guarantor's obligations to the holders of the Notes to other existing and future indebtedness of such Guarantor, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Notes. Among other things, a legal challenge of a Note Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the Guarantor as a result of the issuance by the Company of the Notes. DEPENDENCE UPON LICENSING ARRANGEMENTS The Company's business is dependent, in part, upon licensing agreements pursuant to which the Company is granted the right to use certain names, logos, emblems and other proprietary marks of licensors on the Company's products. In fiscal 1996, the Company had 262 active licensing agreements with licensors. Products manufactured and sold under the Company's licensing agreements represented approximately 14% of the Company's total net sales in fiscal 1996. The length of the Company's license agreements vary, but typically are one to three years. In addition, under the licensing agreements with certain licensors such as MLB, the NBA and the NHL, the licensor may terminate the agreement in the event of a change in control of the Company. To the extent that the Company is unable to renew licenses scheduled to expire or to obtain the consent of certain licensors to the change of control in connection with the Acquisition, the loss of such licenses could have a material adverse effect on the business, operating results, cash flows and financial condition of the Company. See "Business--Licenses." COMPETITION The sportswear and activewear industry is highly competitive with respect to price, product quality and speed and convenience of service. The Company's ability to compete in each of its market depends, in part, on its ability to source quality blanks from suppliers and to recruit and maintain a high quality sales force. There can be no assurance that the Company will be able to maintain its current network of suppliers or its sales force or continue to compete successfully with other competitors, some of which may have greater resources, including financial resources, than the Company. To the extent that any of the Company's competitors offer higher quality products, better service or more attractive pricing, it could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Sales Divisions" and "--Design, Manufacturing and Materials Sourcing." SEASONALITY Historically, Company sales have been seasonal with higher sales during the first half of its fiscal year (July to December) primarily due to increased sales in the Company's College Bookstore division during this period. In fiscal 1996, net sales of the Company during the first and second half of the fiscal year were approximately 57% and 43%, respectively. As a result, the Company is required to predict appropriate inventory levels for the upcoming seasonal demand. To the extent that the Company under-orders inventories, sales and profits could be lost. To the extent that the Company over-orders inventories, the Company may be forced to sell the inventory at reduced prices or to write off the excess inventory as obsolete. See "Management's Discussion and Analysis of Results of Operation and Financial Condition--Seasonality and Inflation" and "Description of Certain Indebtedness--New Credit Agreement." FOREIGN SOURCING The Company currently sources approximately 84% of its blanks through its foreign suppliers. As a result, the Company may be adversely affected by political instability resulting in (i) the disruption of trade from foreign 17 countries in which the Company's suppliers are located, (ii) the imposition of additional regulations relating to imports, duties, taxes and other charges on imports, (iii) decreases in the value of the dollar against foreign currencies or (iv) restrictions on the transfer of funds. These and other factors could result in the interruption of production by the Company's foreign suppliers or a delay in the receipt of the products by the Company in the United States. The Company's future performance may be subject to such factors, which are beyond the Company's control, and there can be no assurance that such factors would not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Design, Manufacturing and Materials Sourcing." DEPENDENCE ON KEY PERSONNEL The Company believes that its success is largely dependent on the abilities and experience of its senior management team. The loss of services of one or more of these senior executives could adversely affect the Company's ability to retain quality suppliers of blanks, maintain tight inventory controls and effectively manage the overall operations of the Company, any of which could adversely affect the financial performance of the Company. In addition, the Company believes that its continued success depends upon its ongoing ability to attract and retain qualified management and employees, particularly in its sales and customer service areas. The loss of a key manager could also adversely affect the financial performance of the Company. See "Management" and "Business--Employees." ENVIRONMENTAL MATTERS The Company's facilities are subject to a broad range of federal, state and local environmental laws and requirements, including those governing discharges to the air and water, the handling of disposal of solid and hazardous substances and wastes and remediation of contamination associated with the release of hazardous substances at the Company's facilities and offsite disposal locations. The Company has made, and will continue to make, expenditures to comply with such laws and requirements. The Company believes, based upon information currently available to management, that it is currently in compliance with all applicable environmental laws and requirements and that the Company will not require material capital expenditures to maintain its environmental compliance during fiscal 1997 or in the foreseeable future. However, future events, such as changes in existing laws and regulations or the discovery of contamination at the Company's facilities, may give rise to additional compliance or remediation costs which could have a material adverse effect on the Company's results of operations or financial condition. Moreover, the nature of the Company's business exposes it to some risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with any such claims. FACTORS AFFECTING OPERATIONS The financial performance of the Company is dependent, in part, on the overall health of the markets it serves. A future downturn in any one market could reduce demand for, and prices of, customized sportswear and activewear products, including those manufactured by the Company. As a result, a significant downturn in any one market could have a material adverse effect on the Company's business, results of operations and financial conditions. The Company's College Bookstore division sells sportswear and activewear primarily through on-campus bookstores, most of which also offer sportswear and activewear products distributed by one or more of the Company's major competitors. Historically, on-campus bookstores have been owned and operated by the colleges and universities. During the last several years, however, an increasing number of campus bookstores have been leased to companies engaged in retail bookstore operations, primarily Barnes & Noble College Bookstores Inc., Follett Corporation and Nebraska Book Co. If any of these operators of campus bookstores were to grant exclusive rights to one of the Company's competitors, or if for any other reason the Company were unable to continue selling its products through these college bookstore operators, the Company would be forced to establish alternative distribution channels such as direct marketing and off-campus bookstores, which could have a material adverse effect on the operating results of the Company. 18 NEW MANAGEMENT INFORMATION SYSTEM The Company is currently upgrading its existing management information system ("MIS") with a new system designed to improve the overall efficiency of the Company's operations and to enable management to more closely track the financial performance of each of its sales and operating areas. Any difficulty with the installation or initial operation of the new MIS could interfere with the Company's inventory purchasing and control, sales or customer service, which could adversely affect the Company's business, results of operations and financial condition. 19 THE TRANSACTIONS Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by affiliates of The Jordan Company and management to effect the acquisition of Winning Ways. Pursuant to the Acquisition Agreement, Holdings and GFSI acquired all of the issued and outstanding capital stock of Winning Ways, and Winning Ways immediately thereafter merged with and into GFSI. The aggregate purchase price for Winning Ways was $232.9 million, subject to adjustment following the Closing, consisting of $203.5 million in cash and the repayment of $29.4 of the Company's Existing Indebtedness. To finance the Acquisition, including approximately $11.1 million of related fees and expenses: (i) the Jordan Investors and Management Investors invested $52.2 million in Holdings and Holdings contributed $51.3 million of this amount in cash to the Company; (ii) the Company consummated the Offering; and (iii) the Company entered into the New Credit Agreement providing for borrowings of up to $115.0 million, of which $67.7 million was outstanding and $22.9 million was utilized to cover outstanding letters of credit at Closing. The Equity Contribution is comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the common stock of Holdings; (ii) a contribution of $13.6 million from the Management Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the common stock of Holdings; and (iii) a contribution of $25.0 million from a Jordan Investor to Holdings in exchange for Holdings Subordinated Notes. Approximately $0.8 million of the contribution from the Management Investors was financed by loans from Holdings. Consummation of the Offering was conditioned upon the concurrent consummation of the Acquisition, the Equity Contribution and the initial borrowings under the New Credit Agreement. Consummation of the Acquisition was subject to the satisfaction or waiver of certain conditions set forth in the Acquisition Agreement, including: (i) obtaining financing for the Acquisition; (ii) the absence of any material adverse change in the business of the Company; (iii) the receipt of certain third party consents and approvals; and (iv) other customary conditions. The Equity Contribution, the consummation of the Offering, the execution of the New Credit Agreement, the consummation of the Acquisition and the repayment of the Company's Existing Indebtedness are collectively referred to herein as the "Transactions." The following chart depicts the organizational structure and common equity interest in Holdings and the Company following consummation of the Transactions. LOGO 20 USE OF PROCEEDS The Company will not receive any proceeds in connection with the Exchange Offer. The gross proceeds from the Old Notes Offering of approximately $125.0 million, together with the Equity Contribution of approximately $51.3 million and borrowings by the Company of approximately $67.7 million under the New Credit Agreement, were used by the Company to: (i) fund the cash portion of the purchase price payable in connection with the Acquisition; (ii) repay in full certain Existing Indebtedness; and (iii) pay fees and expenses in connection with the Transactions. The following table sets forth the estimated sources and uses of funds in connection with the Transactions, assuming that the Transactions had occurred on December 31, 1996 (in millions). SOURCES OF FUNDS: New Credit Agreement(1)......................................... $ 67.7 Senior Subordinated Notes due 2007.............................. 125.0 Equity Contribution(2).......................................... 51.3 ------ Total sources................................................. $244.0 ====== USES OF FUNDS: Cash purchase price of the Acquisition.......................... $203.5 Repayment of Existing Indebtedness(3)........................... 29.4 Fees and expenses(4)............................................ 11.1 ------ Total uses.................................................... $244.0 ======
- --------------------- (1) At Closing, the Company entered into the New Credit Agreement which provides for a Term Loan A (as defined) in the principal amount of $40.0 million, a Term Loan B (as defined) in the principal amount of $25.0 million and a Revolver (as defined) in the principal amount of $50.0 million. At Closing, the Company borrowed approximately $67.7 million, consisting of $65.0 million under the term loans and $2.7 million under the Revolver. The undrawn amount of $47.3 million under the Revolver is available for working capital and general corporate purposes, including the issuance of approximately $22.9 million of letters of credit at Closing, subject to the achievement of certain financial ratios and compliance with certain conditions. See "Description of Certain Indebtedness--New Credit Agreement." (2) The Equity Contribution is comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings; (ii) a contribution of $13.6 million from the Management Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings; and (iii) a contribution of $25.0 million from a Jordan Investor to Holdings in exchange for the Holdings Subordinated Notes. Approximately $0.8 million of the contribution from the Management Investors will be financed by loans from Holdings. (3) The average interest rate on borrowings under Existing Indebtedness for the twelve months ended December 31, 1996 was 7.86%. See "Description of Certain Indebtedness--Existing Indebtedness." (4) Includes estimated discounts, commissions and fees and expenses to be incurred in connection with the Transactions, including fees payable to TJC. See "Certain Transactions--The Jordan Company." 21 CAPITALIZATION (DOLLARS IN THOUSANDS) The following table sets forth the capitalization of the Company as of December 31, 1996 and the pro forma capitalization of the Company as of December 31, 1996, as adjusted to reflect the Transactions. The table should be read in conjunction with the financial statements of the Company and related notes thereto included elsewhere in this Prospectus. See "The Transactions," "Selected Historical Financial Data," the unaudited pro forma financial statements of the Company and the historical financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 ------------------------- ACTUAL PRO FORMA ---------- ------------- Cash and cash equivalents............................ $ 727 $ 749 ========== ============ Short-term debt...................................... $ 6,000 $ -- Long-term debt (including current portion): Existing Indebtedness(1)........................... 23,378 -- New Credit Agreement(2)............................ -- 67,700 Senior Subordinated Notes due 2007................. -- 125,000 ---------- ------------ Total long-term debt............................. 23,378 192,700 Stockholders' equity: Common stock....................................... 149 -- Additional paid in capital......................... 2,720 51,300 Retained earnings (accumulated deficit)(3)......... 37,911 (167,830) Treasury stock..................................... (2,033) -- ---------- ------------ Total stockholders' equity (net capital deficiency)(3).................................. 38,747 (116,530) ---------- ------------ Total capitalization............................. $ 68,125 $ 76,170 ========== ============
- --------------------- (1) For additional information, see "Description of Certain Indebtedness-- Existing Indebtedness." (2) At Closing, the Company entered into the New Credit Agreement which provides for a Term Loan A in the principal amount of $40.0 million, a Term Loan B in the principal amount of $25.0 million and a Revolver in the principal amount of $50.0 million. At Closing, the Company borrowed approximately $67.7 million, consisting of $65.0 million under the term loans and $2.7 million under the Revolver, and utilized $22.9 million of the Revolver to cover outstanding letters of credit. Term Loan A matures in 2002, Term Loan B matures in 2004 and the Revolver matures in 2002. For additional information, see "Description of Certain Indebtedness--New Credit Agreement." (3) The pro forma net capital deficiency of $116.5 million reflects adjustments to stockholders' equity for the difference between the book value of the net assets of the Company and the $232.9 million purchase price paid for the Company. For additional information, see "The Transactions" and the unaudited pro forma financial statements and related notes thereto included elsewhere in this Prospectus. 22 SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents selected: (i) historical operating and other data of the Company for fiscal 1992, 1993, 1994, 1995 and 1996, the six months ended December 31, 1995 and 1996, and the twelve months ended December 31, 1996; and (ii) historical balance sheet data of the Company as of December 31, 1996. The historical financial statements for the Company for fiscal 1992, 1993, 1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the historical financial statements for fiscal 1996 have been audited by Deloitte & Touche LLP. The historical data of the Company at and for the six months ended December 31, 1995 and 1996 and for the twelve months ended December 31, 1996 have been derived from, and should be read in conjunction with, the unaudited financial statements of the Company and the related notes thereto, which are included elsewhere in this Prospectus. In the opinion of management, such interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the information presented for such periods. The results of operations for the six months ended December 31, 1996 are not necessarily indicative of the results of operations to be expected for the full year. The selected financial data set forth below should be read in conjunction with "The Transactions," "Summary Financial Data," "Management's Discussion and Analysis of Results of Operations and Financial Condition," the unaudited pro forma financial statements and the historical financial statements of the Company and the related notes thereto included elsewhere in this Prospectus.
TWELVE SIX MONTHS ENDED MONTHS FISCAL YEARS ENDED JUNE 30, DECEMBER 31, ENDED ------------------------------------------------ ------------------ DECEMBER 31, 1992 1993 1994 1995 1996 1995 1996 1996 -------- -------- -------- -------- -------- -------- -------- ------------ STATEMENTS OF INCOME DA- TA: Net sales.............. $118,187 $121,131 $128,171 $148,196 $169,321 $ 97,008 $104,811 $177,124 Gross profit........... 47,079 50,936 53,724 63,327 72,013 41,811 45,353 75,555 Operating expenses..... 25,949 28,201 29,151 34,428 39,179 21,079 23,234 41,334 -------- -------- -------- -------- -------- -------- -------- -------- Operating income....... 21,130 22,735 24,573 28,899 32,834 20,732 22,119 34,221 Other income (ex- pense)................ (3,053) (2,680) (2,468) (2,679) (2,608) (1,529) (1,422) (2,501) -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes................. 18,077 20,055 22,105 26,220 30,226 19,203 20,697 31,720 Income tax expense(1).. 7,412 8,223 9,063 10,750 12,393 7,873 8,486 13,005 -------- -------- -------- -------- -------- -------- -------- -------- Net income(1).......... $ 10,665 $ 11,832 $ 13,042 $ 15,470 $ 17,833 $ 11,330 $ 12,211 $ 18,715 ======== ======== ======== ======== ======== ======== ======== ======== OTHER DATA: EBITDA(2).............. $ 22,960 $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 22,306 $ 23,791 $ 37,520 Depreciation and amor- tization.............. 1,830 1,998 2,303 2,860 3,201 1,574 1,672 3,299 Capital expenditures... 2,149 2,304 2,856 4,989 2,611 678 2,133 4,066 EBITDA margin(3)....... 19.4% 20.4% 21.0% 21.4% 21.3% 23.0% 22.7% 21.2% Ratio of earnings to fixed charges(4)...... 7.6x 9.1x 10.0x 11.4x 12.6x 14.0x 15.1x 13.2x Dividends per share(5).............. $ 10.10 $ 16.91 $ 16.70 $ 19.82 $ 23.37 $ 14.96 $ 14.28 $ 22.69 AS OF DECEMBER 31, 1996 ---------------------- BALANCE SHEET DATA: Cash and cash equiva- lents ................ $ 527 $ 219 $ 132 $ 112 $ 140 $ 727 Total assets........... 64,520 67,510 70,176 76,938 78,711 84,417 Long-term debt, includ- ing current portion... 22,760 19,157 27,242 24,915 22,276 23,378 Total stockholders' eq- uity.................. 27,489 27,502 29,429 32,106 34,479 38,747
(footnotes on the following page) 23 - --------------------- (1) Prior to the Acquisition, the Company was an S corporation and therefore was not subject to federal and certain state income taxes. The statements of income data presented includes an unaudited adjustment for income taxes which represents the approximate income tax expense that would have been recorded if the Company had been a C corporation, assuming a combined federal and state income tax rate of 41%. (2) EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. (3) EBITDA margin represents EBITDA as a percentage of net sales. (4) The ratio of earnings to fixed charges computed on a pro forma basis would have been 1.8x, 2.4x and 1.8x for the fiscal year ended June 30, 1996, the six months ended December 31, 1996 and the twelve months ended December 31, 1996, respectively. (5) On July 10, 1992, the Company declared a 5-for-1 stock split. All dividend per share information has been restated to reflect this stock split. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW The Company is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports. The Company, which was founded in 1974, custom designs and decorates an extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage. The Company markets its products to over 13,000 active customer accounts through its well-established and diversified distribution channels, rather than through the price sensitive mass merchandise, discount and department store distribution channels. The Company markets its products primarily through four separate divisions, each of which serves distinct distribution channels and utilizes a salesforce with a specialized knowledge of its particular markets and customers. The Company's four divisions include: (i) the Resort division (40.0% of fiscal 1996 net sales); (ii) the Corporate division (27.9% of fiscal 1996 net sales); (iii) the College Bookstore division (22.3% of fiscal 1996 net sales); and (iv) the Sport Specialty division (3.7% of fiscal 1996 net sales). The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR brand name and differentiate its products on the basis of quality. From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7 million to $169.3 million from internal growth, representing a CAGR of 12.3%. During the same period, the Company's EBITDA grew from $17.9 million to $36.0 million, representing a CAGR of 15.0%, and its EBITDA margin increased from 18.9% to 21.3%. EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. RESULTS OF OPERATIONS The following table sets forth certain historical financial information of the Company, expressed as a percentage of net sales, for fiscal 1994, 1995 and 1996 and the six months ended December 31, 1995 and 1996:
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, ---------------------------- ------------------ 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit.................. 41.9 42.7 42.5 43.1 43.3 EBITDA........................ 21.0 21.4 21.3 23.0 22.7 Operating income.............. 19.2 19.5 19.4 21.4 21.1
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1995 Net Sales. Net sales for the six months ended December 31, 1996 increased 8.0% to $104.8 million from $97.0 million in the six months ended December 31, 1995. The increase in net sales primarily reflects increases in net sales at each of the Company's Resort, Corporate and Sport Specialty divisions of 0.8%, 15.2% and 68.6%, respectively, and was offset in part by a slight decrease in the net sales at the College Bookstore division. These increases were driven primarily by volume increases due to continued account expansion and the introduction of new product lines through each distribution channel. 25 Gross Profit. Gross profit for the six months ended December 31, 1996 increased 8.5% to $45.4 million from $41.8 million in the six months ended December 31, 1995, primarily as a result of the net sales increase described above. Gross profit as a percentage of net sales increased to 43.3% in the six months ended December 31, 1996, from 43.1% in the six months ended December 31, 1995. This slight increase in margin reflects a decrease in the cost of materials sold, as a percentage of net sales, from 50.1% in the six months ended December 31, 1995 to 49.5% in the six months ended December 31, 1996. This decrease was offset by an increase in the cost of production, as a percentage of net sales, from 6.8% in the six months ended December 31, 1995 to 7.3% in the six months ended December 31, 1996. These changes were driven primarily by growth in the Resort and Corporate divisions, which focus on higher margin, production intensive embroidered products. EBITDA. EBITDA for the six months ended December 31, 1996 increased 6.7% to $23.8 million from $22.3 million in the six months ended December 31, 1995, primarily as a result of the net sales increase described above. EBITDA as a percentage of net sales decreased slightly to 22.7% in the six months ended December 31, 1996 from 23.0% in the six months ended December 31, 1995. This decrease in margin reflects the change in gross profit described above offset by an increase in operating expenses primarily as a result of an increase in non-recurring MIS consulting charges associated with the installation of the Company's new MIS system from $250,000 in the six months ended December 31, 1995 to $1.1 million in the six months ended December 31, 1996. Operating Income. Operating income for the six months ended December 31, 1996 increased 6.8% to $22.1 million from $20.7 million in the six months ended December 31, 1995, primarily as a result of the net sales increase described above. Operating income as a percentage of net sales decreased to 21.1% in the six months ended December 31, 1996, from 21.4% in the six months ended December 31, 1995. This decrease in margin reflects the change in EBITDA described above. FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995 Net Sales. Net sales for fiscal 1996 increased 14.3% to $169.3 million from $148.2 million in fiscal 1995. The increase in net sales primarily reflects sales increases in the Resort, Corporate and Sport Specialty divisions of 12.8%, 23.1% and 101.1%, respectively, and was offset in part by a slight decrease in net sales in the College Bookstore division. These increases were primarily driven by unit volume increases resulting from account expansion, further penetration of existing accounts and certain new product introductions. Gross Profit. Gross profit for fiscal 1996 increased 13.7% to $72.0 million from $63.3 million in fiscal 1995 primarily as a result of the net sales increase described above. Gross profit as a percentage of net sales decreased slightly to 42.5% in fiscal 1996 from 42.7% in fiscal 1995. This moderate decline in margin reflects slight increases in the cost of materials sold, as a percentage of net sales, from 49.9% in fiscal 1995 to 50.0% in fiscal 1996 and the cost of production, as a percentage of net sales, from 7.4% in fiscal 1995 to 7.5% in fiscal 1996. These slight changes reflect a relatively consistent product mix from fiscal 1995 to fiscal 1996. EBITDA. EBITDA for fiscal 1996 increased 13.5% to $36.0 million from $31.8 million in fiscal 1995 primarily as a result of the net sales increase described above. EBITDA as a percentage of net sales decreased slightly to 21.3% in fiscal 1996 from 21.4% in fiscal 1995. This moderate decline in margin reflects the change in gross profit described above and increased operating expenses, which included $625,000 of non-recurring MIS consulting charges associated with the installation of the Company's new MIS system. Operating Income. Operating income for fiscal 1996 increased 13.6% to $32.8 million from $28.9 million in fiscal 1995 primarily as a result of the net sales increase described above. Operating income as a percentage of net sales decreased slightly to 19.4% in fiscal 1996 from 19.5% in fiscal 1995. This moderate decline in margin reflects the change in EBITDA described above. FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994 Net Sales. Net sales for fiscal 1995 increased 15.6% to $148.2 million from $128.2 million in fiscal 1994. The increase in net sales reflects sales increases at the Company's College Bookstore, Resort, Corporate and 26 Sport Specialty divisions of 5.5%, 19.7%, 27.0% and 91.3%, respectively. These increases were primarily driven by unit volume increases at each of the Company's three existing sales divisions resulting from account expansion, further penetration of existing accounts and certain new product introductions. In addition, net sales increased as a result of the completion of the first full fiscal year of the Sports Specialty division. Gross Profit. Gross profit for fiscal 1995 increased 17.9% to $63.3 million from $53.7 million in fiscal 1994 primarily as a result of the net sales increase described above. Gross profit as a percentage of net sales increased to 42.7% in fiscal 1995 from 41.9% in fiscal 1994. This increase in profit reflects a decrease in the cost of materials sold, as a percentage of net sales, to 49.9% in fiscal 1995 from 51.6% in fiscal 1994. This decrease was offset by an increase in the cost of production, as a percentage of net sales, to 7.4% in fiscal 1995 from 6.5% in fiscal 1994. These changes were driven primarily by growth in the Resort and Corporate divisions, which focus on higher margin, production intensive embroidered products. EBITDA. EBITDA for fiscal 1995 increased 18.2% to $31.8 million from $26.9 million in fiscal 1994 primarily as a result of the net sales increase described above. EBITDA as a percentage of net sales increased to 21.4% in fiscal 1995 from 21.0% in fiscal 1994. This increase in margin reflects the changes in gross profit described above, offset by a slight increase in operating expenses as a percent of net sales. The increase in operating expenses reflects an increase in selling expenses due to the Company's continued focus on the Corporate division, offset by a decrease in general and administrative expenses as a percentage of net sales. Operating Income. Operating income for fiscal 1995 increased 17.6% to $28.9 million from $24.6 million in fiscal 1994 primarily as a result of the net sales increase described above. Operating income as a percentage of net sales increased to 19.5% in fiscal 1995 from 19.2% in fiscal 1994. This increase in margin reflects the change in EBITDA described above. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in fiscal 1996, 1995 and 1994 was $34.0 million, $23.9 million and $24.4 million, respectively. Changes in working capital resulted in cash sources (uses) of $0.9 million, $(4.8) million and $0.7 million in fiscal 1996, 1995 and 1994, respectively. The Company typically makes capital expenditures related to the maintenance and improvement of manufacturing facilities and processing equipment. Capital expenditures in fiscal 1996, 1995 and 1994 were $2.6 million, $5.0 million and $2.9 million, respectively. Capital expenditures in fiscal 1995 include the $1.6 million purchase of a corporate aircraft and were therefore in excess of the Company's normal capital expenditure requirements. Net cash used in financing activities in fiscal 1996, 1995 and 1994 was $31.5 million, $19.7 million and $21.9 million, respectively. The cash was used primarily to make Subchapter S distributions to the Company's stockholders. Following the Transactions, the Company expects that its primary capital requirements will be for debt service, working capital and capital expenditures. The Company believes that cash flow from operating activities and borrowings under the New Credit Agreement will be adequate to meet the Company's short-term and long-term liquidity requirements prior to the maturity of its credit facilities, although no assurance can be given in this regard. Under the New Credit Agreement, the Revolver provides $50.0 million of revolving credit availability (of which $2.7 million was borrowed at the Closing and approximately $22.9 million was utilized for outstanding letters of credit). Pursuant to the terms of the Acquisition Agreement, the purchase price paid for the Company will be subject to a closing date balance sheet adjustment. The Company anticipates that as a result of this closing date balance sheet adjustment, it will pay the former owners, including certain members of current management, a net amount of approximately $1 to $2 million. 27 Following the Closing, the Company anticipates paying dividends to Holdings to enable Holdings to pay corporate income taxes, interest on Holdings Subordinated Notes, fees payable under the TJC Agreement and certain other ordinary course expenses incurred on behalf of the Company. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was implemented on July 1, 1996. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. SEASONALITY AND INFLATION The Company experiences seasonal fluctuations in its sales and profitability, with generally higher sales and gross profit in the first and second quarters of its fiscal year. In fiscal 1996, net sales of the Company during the first half and second half of the fiscal year were approximately 57% and 43%, respectively. The seasonality of sales and profitability is primarily due to higher volume at the College Bookstore division during the first two fiscal quarters. Sales and profitability at the Company's Resorts, Corporate and Sports Specialty divisions typically show no significant seasonal variations. As the Company continues to expand into other markets in its Resorts, Corporate and Sports Specialty divisions, seasonal fluctuations in sales and profitability are expected to decline. The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. 28 BUSINESS The Company, which operates primarily under the brand name GEAR For Sports(R), is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports. The Company, which was founded in 1974, custom designs and decorates an extensive line of high- end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage. The Company markets its products to over 13,000 active customer accounts through its well-established and diversified distribution channels, rather than through the price sensitive mass merchandise, discount and department store distribution channels. The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR brand name and differentiate its products on the basis of quality. For the twelve months ended December 31, 1996, the Company generated net sales and Adjusted EBITDA of $177.1 million and $39.6 million, respectively. From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7 million to $169.3 million from internal growth, representing a CAGR of 12.3%. During the same period, the Company's EBITDA grew from $17.9 million to $36.0 million, representing a CAGR of 15.0%, and its EBITDA margin increased from 18.9% to 21.3%. The Company has achieved a record of strong sales and EBITDA growth and stable operating margins primarily due to its: (i) leading positions in niche markets; (ii) diversified and stable customer base; (iii) superior product quality and customer service; (iv) broad product portfolio; (v) value-added design and manufacturing capabilities; and (vi) innovative management. The Company expects to continue to grow by leveraging the strength of the GEAR brand name to expand its product lines and access underpenetrated segments of its markets. The Company believes that it is less vulnerable to earnings fluctuations than typical apparel manufacturers and marketers because: (i) the Company designs and custom manufactures basic, classic products with low fashion risk; (ii) consumer demand for sportswear and activewear continues to increase; and (iii) the Company's products are customized based on firm customer orders, minimizing its risk of excess inventory. The Company markets its products primarily through four separate divisions, each of which serves distinct distribution channels and utilizes a salesforce with a specialized knowledge of its particular markets and customers. The Company's network of approximately 140 independent sales representatives and over 70 in-house artists and graphic designers work directly with the Company's customers to create innovative sportswear and activewear products to meet customer specifications. FINANCIAL CHARACTERISTICS The Company's business has the following financial characteristics: ^ Diverse and Stable Customer Base. The Company sells to its niche markets through a diverse base of over 13,000 active customer accounts. In fiscal 1996, no single account represented more than 2.5% of net sales, and the Company's top ten customers accounted for less than 13% of net sales. The number of active customer accounts increased from approximately 5,600 in fiscal 1991 to over 13,000 in fiscal 1996. New potential end-users of the Company's products are added each year as new customers visit resorts and participate in other leisure activities, corporations continue to expand their identity and promotional programs and new students enroll at colleges and universities. ^ Strong Sales and EBITDA Growth. From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7 million to $169.3 million from internal growth, representing a CAGR of 12.3%. During the same period, the Company's EBITDA grew from $17.9 million to $36.0 million, representing a CAGR of 15.0%, and its EBITDA margin increased from 18.9% to 21.3%. The Company believes that this growth can be attributed to: (i) its focus on niche markets where competition is generally based on product and service quality rather than price; (ii) operating leverage resulting from the introduction of new products in established distribution channels; and (iii) its focus on manufacturing efficiencies. ^ Low Capital Expenditures. The Company concentrates on the high value- added production processes of custom design, embroidery, silk-screening and other finishing elements at its state-of-the-art 29 manufacturing facilities. The capital intensive process of manufacturing unfinished garments ("blanks") and other items is outsourced to a network of foreign and domestic independent manufacturers who comply with the Company's stringent specifications. As a result, the Company maintains low fixed costs and requires limited annual capital expenditures. From fiscal 1992 to fiscal 1996, total annual capital expenditures averaged approximately $3 million, or an average of 2.2% of net sales and 10.5% of EBITDA for such years. ^ Historically Non-Cyclical Business. The Company has not experienced a reduction of its business as a result of past general economic downturns. The Company believes that its record of consistent growth is a result of the relatively non-cyclical nature of its primary market segments as well as its competitive position as a supplier of high quality, customized products that are less susceptible to consumer price sensitivity. The Company believes that the diversity of its products, distribution channels and markets also minimizes its exposure to particular customers, economic cycles and geographic concentration. BUSINESS STRATEGY The Company's objective is to continue to increase sales, EBITDA and operating margins, and is based upon the following strategic elements: ^ Superior Product Quality and Customer Service. Each of the Company's divisions focuses on high-end, customized sportswear, activewear and related products. The Company's products uniquely address each account's specific requirements, while providing the end-user with a high quality product. The Company's ability to maintain consistency in product quality and customer service, regardless of order size, enables it to effectively service a broad range of customers. With over 70 in-house artists and graphic designers and state-of-the-art manufacturing and distribution facilities, the Company believes that it provides products and service that are superior to those of its competitors in each of its markets. ^ Leading Position in Multiple Niche Markets. The Company has a leading position in the resort, corporate and college bookstore markets. The Company's superior service and product customization enable it to more effectively serve the particular needs of these customers. As a result, the Company believes that: (i) it is one of the few national competitors in the highly fragmented resort and leisure market; (ii) it has a leading share of the corporate identity market, where it competes primarily with smaller local and regional companies as well as a few national competitors; and (iii) it has the second largest share of the college bookstore market. ^ Leveraging the GEAR For Sports(R) Brand Name. The Company leverages its GEAR brand name by introducing new products through its established distribution channels. For example, the Company recently introduced new headwear, sports luggage and Baby GEAR product lines. The Company believes that the GEAR brand name is widely recognized by customers and end-users in each of its markets and enjoys a reputation for high quality products. The Company intends to continue to leverage this brand name recognition through its existing distribution channels as well as through alternative distribution channels and markets. ^ Efficient Operations. The Company uses its state-of-the-art facilities to design, embroider and screenprint a significant portion of its products. In addition, the Company uses independent contractors to manufacture its blanks and, where appropriate, to provide other value- added manufacturing services in order to maximize sourcing flexibility while minimizing overhead costs and fixed charges. The Company minimizes the risk of excess inventory by designing and manufacturing its products against firm customers orders. ^ Experienced Management Team with Significant Equity Ownership. The Company's management team has extensive experience in the sportswear and activewear business. The top five senior executives have each been with the Company for at least 13 years and have combined industry experience of over 115 years. Approximately 20 members of the senior management team contributed an aggregate of $13.6 million in exchange for 50% of the capital stock of the Company's parent, Holdings. The management team will have significant incentive to continue to increase the Company's sales and EBITDA as a result of their substantial equity ownership and performance based incentive compensation programs that the Company intends to implement. 30 SALES DIVISIONS The Company markets its products, which include custom designed fleecewear, jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage, through four sales divisions (dollars in millions):
FISCAL 1996 NET SALES ---------------------- % OF DIVISION CUSTOMERS SALES TOTAL ----------------- ---------------------------------- ----------- ---------- Resort Destination resorts, family $ 67.7 40.0% entertainment companies, hotel chains, golf clubs, cruise lines, and casinos Corporate Large and small companies serving 47.2 27.9 a variety of industries College Bookstore Major colleges and universities as 37.7 22.3 well as college bookstore lease operators Sports Specialty Sports specialty stores and 6.3 3.7 catalogues, stadium stores, and professional sports teams and their staffs Other Various institutions, 10.3 6.1 organizations and individuals ----------- ---------- $ 169.3 100.0% =========== ==========
The Company believes that it enjoys distinct competitive advantages in each of its sales divisions because of its ability to quickly deliver high quality, customized products and provide excellent customer service. The Company operates state-of-the-art design, embroidery and screenprint manufacturing and distribution facilities which management believes have set the standard in the sportswear and activewear industry for product quality and response time to orders and re-orders. Most orders for new product designs can be filled in four weeks and re-orders rarely take longer than two weeks. This allows the Company's retail customers to carry less inventory, increase merchandise turnover and reduce the risk of obsolete merchandise. Resort Division. The Resort division is a leading marketer of custom logoed sportswear and activewear to over 6,100 active customer accounts, including destination resorts, family entertainment companies, hotel chains, golf clubs, cruise lines, casinos and United States military bases. The division's customers include widely recognized names such as The Walt Disney Company, Universal Studios, The Ritz Carlton, Pebble Beach, Princess Cruise Lines and The Mirage. The Resort division, with fiscal 1996 net sales of $67.7 million, accounted for 40.0% of total net sales. The Resort division's net sales have grown from $50.2 million in fiscal 1994 to $67.7 million in fiscal 1996, representing a CAGR of 16.1%. The division's net sales have remained relatively constant as a percentage of total net sales, increasing slightly from 38.9% in fiscal 1994 to 40.0% in fiscal 1996. In fiscal 1996, the top ten accounts of the Resort division combined for approximately 22% of the division's net sales. The Company distributes its Resort division products through its national sales force of approximately 70 independent sales agents. The Company believes that it is well known and respected in the resort and leisure industry because of its quick turnaround for new orders and re-orders along with its product innovation and quality and high level of service. The Company believes that future growth in its Resort division will come from increased penetration of the golf, military, hotel and gaming segments of the industry, and through new product introductions such as headwear, sports luggage and Baby GEAR products for infants and toddlers. Corporate Division. The Corporate division is a leading marketer of corporate identity sportswear and activewear for use by a diverse group of corporations in incentive and promotional programs as well as for office casual wear and uniforms. The division services over 3,500 active customer accounts, including Toyota, Hershey, 31 Dr Pepper/7Up, Anheuser-Busch, MCI and Exxon. In addition, the Company recently formed Tandem Marketing, which develops and administers corporate fulfillment programs on behalf of its major corporate customers. The Corporate division, with fiscal 1996 net sales of $47.2 million, accounted for 27.9% of total net sales. The Corporate division's net sales have grown from $30.2 million in fiscal 1994 to $47.2 million in fiscal 1996, representing a CAGR of 25.0%. The division's net sales as a percentage of total net sales have increased from 23.4% in fiscal 1994 to 27.9% in fiscal 1996, primarily as a result of the increased penetration of the underserved corporate identity market and increased sales by Tandem Marketing. The Company believes that it has an advantage over its competitors because it is one of the few brand name suppliers of sportswear and activewear focused on the corporate market. The Corporate division markets its products to various segments within the corporate market. Products are sold by the Company's national sales force of over 50 independent sales agents directly to corporate customers in connection with corporate incentive programs, employee pride and recognition initiatives, corporate meetings and outings, company retail stores and catalogue programs and dealer incentive programs. In fiscal 1996, approximately 85% of the division's sales were directly to corporations and the remaining 15% were to jobbers, who then resold the Company's products to corporations. The Company, through Tandem Marketing, leverages its existing corporate customer base to market a full line of products, including articles of merchandise imprinted or otherwise customized with the corporation's name, logo or message. These products include sportswear and activewear designed and manufactured by the Company, as well as other premium merchandise such as glassware and stationary items. Currently, Tandem Marketing has active catalogue programs with Lexus, Visa, Pirelli Tire, State Farm, Principal Financial and Shelter Insurance. In fiscal 1996, Tandem Marketing accounted for approximately $3.0 million, or 6.4%, of the Corporate division's net sales, of which approximately 65% were derived from products designed and manufactured by the Company. The Company believes that significant opportunity for future growth exists within the Corporate division through: (i) further penetration of its existing corporate customers; (ii) targeting the thousands of unserved corporations located in the division's key markets; and (iii) growth in the sales of Tandem Marketing. In addition, the Company believes a specific opportunity exists within the uniform market, as corporations switch from traditional uniforms to more casual, higher quality sportswear and activewear. College Bookstore Division. The College Bookstore division is a leading marketer of custom designed, embroidered and silk-screened sportswear and activewear products to over 2,300 active customer accounts, including nearly every major college and university in the United States. The division's largest accounts include each of the major college bookstore lease operators, such as Barnes & Noble College Bookstores, Inc., as well as high volume, university managed bookstores, such as the University of Notre Dame, the University of Southern California, Yale University, the University of Michigan and the United States Air Force and Naval academies. The National Association of College Stores has selected the Company as "Vendor of the Year" three times, an honor no other supplier has won more than once. The College Bookstore division, with fiscal 1996 net sales of $37.7 million, accounted for 22.3% of total net sales. The College Bookstore division's net sales have grown from $35.9 million in fiscal 1994 to $37.7 million in fiscal 1996, representing a CAGR of 2.5%. As the Company has expanded into other markets, the College Bookstore division's net sales as a percent of total net sales has decreased from 28.0% in fiscal 1994 to 22.3% in fiscal 1996. The Company believes that future growth in its College Bookstore division will come primarily from new product introductions such as headwear, sports luggage and Baby GEAR products as well as from general demographic trends. The U.S. Department of Education projects significant growth in the number of college and university students through 2006, following a modest decline in enrollment from 1992 to 1996. However, there can be no assurance that any such projected growth will occur, and, if so, at such rates. 32 Sports Specialty Division. The Sports Specialty division, with fiscal 1996 net sales of $6.3 million, accounted for 3.7% of total net sales. Established in 1994, the division has entered into licensing agreements to design, manufacture and market sportswear and activewear bearing the names, logos and insignia of professional sports leagues and teams as well as major sporting events. The Company's licensors include, among others, MLB, the NBA, the NHL, NASCAR and the Breeder's Cup. The division targets the upscale adult sports enthusiast through the Company's existing distribution channels as well as through new channels such as stadium stores and team retail outlets. The division markets its products to over 600 active customer accounts, including the Indianapolis Motor Speedway, the Chicago Bulls, the Cleveland Indians, the Boston Bruins and Madison Square Garden. INDUSTRY OVERVIEW The sportswear industry in which the Company participates encompasses a broad assortment of merchandise, including activewear and outerwear products such as sweatshirts and jackets. While activewear products have traditionally been associated with athletic-related activities, over the past two decades such products have been increasingly accepted by consumers for a variety of leisure and work-related activities. Activewear products have experienced significant sales growth over this time period due to both this increased acceptance and consumers' increased pursuit of physical fitness and active lifestyles. Moreover, activewear products have registered a number of significant improvements in product characteristics that have contributed to enhanced consumer appeal, including improvements in fabric weight, blends, quality of construction, size, style and color availability. According to industry sources, from 1985 to 1995, total activewear sales at the wholesale level increased from $8.2 billion to $16.5 billion, representing a CAGR of 7.2%. In addition, for the same period total imprinted activewear sales at the wholesale level increased from $1.7 billion to $6.7 billion, representing a CAGR of 14.7%. The sportswear and activewear market is characterized by a low fashion risk as compared to other apparel markets. While substantial opportunity exists for product innovation and differentiation, basic garment styles are not driven by trends or fads. In those market segments where products have a lower relative labor cost content, such as fleecewear and outerwear, the industry is also characterized by barriers to entry as larger capital requirements, sourcing relationships, brand-name recognition and established customer relationships limit the entry of new competitors. Foreign competition is limited due to the short delivery times required for inventory control by retail customers. Sportswear and activewear is distributed through a wide variety of channels, including department stores, chain stores, mass merchandisers, discount retailers and specialty retailers. The Company, however, has avoided many of these larger mass distribution channels and has instead focused on the following niche markets, where the competition has been highly fragmented and generally based more on quality of service and product rather than on price. Resort Market. The Company has defined the resort market to include products sold through niche market retailers at destination resorts, family entertainment companies, hotel chains, cruise lines, casinos and United States military bases. Products sold in this market are typically adorned with the name of the resort and include a full range of activewear and related items. The Company believes that this market is highly fragmented and served primarily by local and regional competitors. In addition, the Company has found that national competitors in this market generally focus on specific market segments, offering a limited range of products. Corporate Market. The corporate identity market is represented by companies or large organizations which purchase articles of merchandise imprinted or otherwise customized with the organization's name, logo or message. These products are used for building corporate identity, marketing, employee incentives or development of goodwill for a targeted audience. According to industry sources, from 1986 to 1995, the total value of sales at the wholesale level in the corporate premium segment of the imprinted apparel market increased from $155 million to $800 million, representing a CAGR of 20.0%. The Company believes that future growth in 33 this market will be fueled, in part, by the continued acceptance of activewear products in the workplace. The Company believes that it is one of the few brand name suppliers of sportswear and activewear focused on the corporate market. College Bookstore Market. The Company estimates, based on industry data prepared by the National Association of College Stores, that wholesale revenues for insignia apparel sold in college bookstores were approximately $280 million in fiscal 1995. The Company believes that approximately 20% of these college bookstores are managed by outside lease operators, such as Barnes & Noble College Bookstores, Inc., and believes that the number of schools who outsource bookstore operations to such lease operators will continue to grow. The Company believes that the college bookstore apparel market is relatively mature and stable. The Company estimates that the top five suppliers to this market have an aggregate market share of approximately 50%, with the share of each such competitor remaining relatively constant over the last five years. Demand in this market is driven primarily by demographic trends such as the number of entering college and university students. As the following table illustrates, the U.S. Department of Education projects significant growth in the numbers of college and university students through 2006, following a modest decline in enrollment from 1992 to 1996. However, there can be no assurance that any such projected growth will occur, and, if so, at such rates. HISTORICAL AND PROJECTED COLLEGE AND UNIVERSITY ENROLLMENT LOGO (STUDENTS IN MILLIONS) Source: U.S. Department of Education, National Center for Education Statistics, Fall Enrollment in Colleges and Universities surveys and Integrated Postsecondary Education Data System surveys. (November, 1995) Professional Sports Licensed Apparel Market. Most of the North American professional sports leagues, including MLB, the NBA, the NFL and the NHL, as well as other sports organizations and events, license the right to sell products adorned with the insignia of its leagues, teams or events. These licensed product sales have grown significantly since the mid-1980's through aggressive management of the licensing programs and increased marketing efforts. According to industry sources, total sales at the wholesale level of licensed sports products exceeded $10.0 billion in 1995. Much of the growth in demand for licensed sports apparel has been 34 advanced by increased television programming and sporting event attendance, as well as introduction of a wide variety of products and styles. Although demand has been impacted in recent years by labor disputes in the professional sports leagues, the Company expects this growth to continue with the resolution of the labor disputes and continued expansion of the professional sports leagues to new geographic markets. The number of competitors in the licensed apparel market has expanded with an increase in the number of licenses granted by the professional sports leagues in recent years. These licenses represent significant barriers to entry as the professional leagues appear less likely to enter into licensing agreements with new entrants. The industry has also been experiencing consolidation in recent years as larger companies have been acquiring smaller competitors. PRODUCTS The Company's extensive product offerings include: (i) fleecewear; (ii) outerwear; (iii) polo shirts, woven shirts and sweaters; (iv) T-shirts and shorts; and (v) other apparel items and accessories. These products are sold in each of the Company's four markets and are currently offered in over 400 combinations of style and color. While its products are generally characterized by a low fashion risk, the Company attempts to incorporate the latest trends in style, color and fabrics with a heavy emphasis on innovative graphics to create leading-edge fashion looks. The Company believes that the quality and breadth of its product lines and its innovative logo designs represent significant competitive advantages in its markets. In order to further capitalize on these advantages, the Company intends to continue to expand both the depth and breadth of its product lines. Currently, the Company has major product introductions in headwear, sports luggage and Baby GEAR products for infants and toddlers. The following illustrates the attributes of the Company's current product lines: Fleecewear. The Company's fleecewear products represented approximately 34% of net sales for fiscal 1996. Current styles offered by the Company include classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops, vests, henleys and bottoms. Products are constructed of a wide range of quality fabrics including combed cotton, textured fleece, ribbed knit cotton and inside out fleece. The resulting product line offers customers a variety of styles ranging from relaxed, functional looks to more sophisticated, casual looks. Outerwear. The Company's outerwear products represented approximately 27% of net sales for fiscal 1996. These products are designed to offer consumers contemporary styling, functional features and quality apparel. Products offerings include a variety of weights and styles, including heavy nylon parkas, denim jackets, corduroy hooded pullovers, nylon windshirts and water- resistant poplin jackets. The Company also provides a number of functional features such as adjustable cuffs, windflaps, vented backs, drawstring bottoms and heavyweight fleece lining. Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt, woven shirt and sweater products represented approximately 22% of net sales for fiscal 1996. The Company's products in this category are designed to be suitable for both leisure and work-related activities with full range of materials and styles. T-Shirts and Shorts. The Company's T-shirt and shorts products represented approximately 15% of net sales for fiscal 1996. The Company's products are designed to address consumer needs for comfort, fit and function while providing innovative logo designs. The Company offers a full line of T-shirts and shorts in a variety of styles, fabrics and colors. Other. The Company also sells headwear, sports luggage, a line of children's products and a number of other miscellaneous apparel items. In addition, through its Tandem Marketing division, the Company distributes a full line of corporate fulfillment products. Sales of "Other" items represented approximately 2% of net sales for fiscal 1996. 35 DESIGN, MANUFACTURING AND MATERIALS SOURCING The Company operates state-of-the-art design, embroidery and screenprint manufacturing and distribution facilities in Lenexa, Kansas. The Company's design group consists of more than 70 in-house artists and graphic designers who work closely with each customer to create the product offering and customization that fulfills the account's needs. The design group is responsible for presenting new ideas to each account in order to continually generate new products. This design function is a key element in the Company's ability to provide value-added services and maintain superior relations with its customers. Once the design and logo specifications have been determined, the Company's in-plant manufacturing process begins. This manufacturing process consists of embroidery and/or screenprinting applications to Company-designed blanks. Substantially all of the screenprinting and a significant portion of the embroidery operations are performed by the Company in its Lenexa, Kansas facilities. In addition, the Company outsources embroidery work to two affiliates as well as to independent contractors, when necessary. See "Certain Transactions." The Company maintains the most updated machinery and equipment available in order to ensure superior product quality and consistency. All of the Company's blanks are sourced and manufactured to the Company's specifications by third party vendors. The Company closely monitors each of its vendors in order to ensure that its specifications and quality standards are met. A significant portion of the Company's blanks are contract manufactured in various off-shore plants. The Company's imported items are currently manufactured in China, Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia, Pakistan, Honduras, Israel, Fiji and Mexico. No foreign country has a manufacturing concentration above 20%. Approximately 16% of its blanks are contract manufactured in the United States. The Company has long- standing contractual relationships with most of its eight independent buying agents who assist the Company in its efforts to control garment quality and delivery. The Company has independent buying agents in each foreign country where it purchases blanks. See "Risk Factors--Foreign Sourcing." COMPETITION The Company's primary competitors vary within each of its four distinct markets. In the resort and leisure market, there are few national competitors and even fewer that operate in all of the varied segments in which the Company operates. In the corporate identity market, there are several large manufacturers of corporate identity products. The Company believes it is one of the few manufacturers and marketers of corporate identity products that specializes in the activewear product segment. In the college bookstore market, the top five competitors hold an aggregate market share of approximately 50%, and the Company believes the market share of each such competitor has remained relatively constant over the last five years. In the sports specialty market, the Company competes with a large number of manufacturers of licensed sportswear. The Company believes, however, that it is one of the few manufacturers of sports specialty products with a primary focus on the adult sports enthusiast. The following table sets forth the Company's primary competitors in each of its markets:
MARKET PRIMARY COMPETITORS ----------------- ------------------------------------------------------- Resort Highly fragmented--primarily local and regional competitors Corporate HA-LO Marketing, Hermann Marketing, Swingster (American Marketing Industries) College Bookstore Champion Products, Jansport (VF Corp.), M.V. Sports Sports Specialty Champion Products, Russell Corporation, Starter
Competition in each of the Company's markets generally is based on product design and decoration, customer service and overall product quality. The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR brand name and differentiate its products on the basis of quality. 36 EMPLOYEES The Company employs over 640 people at its two facilities in Lenexa, Kansas, of which approximately 30 are members of management, 280 are involved in either product design, customer service, sales support or administration and 330 are involved in manufacturing. In an effort to adjust employment levels in accordance with its production schedule and reduce its operating costs, the Company has instituted a voluntary time off program under which management occasionally grants a limited number of employees extended time off (typically four to six weeks). During extended time off periods, employees remain on call and continue to receive employee benefits such as health insurance, but do not receive hourly wages. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that the dedication of its employees is critical to its success, and that its relations with its employees are excellent. TRADEMARKS The Company markets its products primarily under the GEAR For Sports(R) trademarked brand name. In addition, the Company markets its products under, among others, the Pro GEAR(R), Tandem Marketing(R), Big Cotton(R) and Winning Ways(R) trademarks. The Company is currently applying for a trademark for its Baby GEAR brand name. However, there can be no assurance that the Company's application will be approved. Generally, the Company's trademarks will remain in effect as long as the trademark is used by the Company and the required renewals are obtained. The Company licenses its GEAR For Sports(R) trademark to a third-party manufacturer to produce and distribute GEAR For Sports(R) adult sportswear and activewear, headwear and sports luggage products in Canada. The Company expects to renew the license, which is scheduled to expire in fiscal 1998, on terms comparable to those under the existing license agreement. LICENSES The Company markets its products, in part, under licensing agreements, primarily in its College Bookstore and Sports Specialty divisions. In fiscal 1996, net sales under the Company's 262 active licensing agreements totalled $23.8 million, or approximately 14% of the Company's net sales. In fiscal 1996, $20.4 million of College Bookstore division net sales, representing approximately 54% of the division's net sales and 12% of total net sales, were recorded under this division's 214 licensing agreements. In addition, in fiscal 1996, $1.6 million of Sports Specialty division net sales, representing approximately 25% of the division's net sales and 1% of total net sales, were recorded under licensing agreements. The Company's licensing agreements are mostly with (i) high volume, university managed bookstores such as the University of Notre Dame, the University of Southern California and the University of Michigan, (ii) professional sports leagues such as MLB, the NBA and the NHL and (iii) major sporting events such as the Ryder Cup and the Indianapolis 500. Such licensing agreements are generally renewable every one to three years with the consent of the licensor. PROPERTIES The Company owns each of its two properties: its 250,000 square foot headquarters and manufacturing facility in Lenexa, Kansas and its 100,000 square foot manufacturing and distribution facility located approximately two miles from its headquarters. Approximately 200,000 square feet and 100,000 square feet of the headquarter/manufacturing facility and manufacturing/distribution facility, respectively, are devoted to the design and manufacture of the Company's products and to customer service. The Company believes that the two facilities (along with the embroidery facilities used by the two affiliate companies) provide the Company with sufficient space to support its expected expansion over the next several years. LITIGATION From time to time, the Company is involved in routine litigation incidental to its business. The Company is not a party to any pending or threatened legal proceeding which would have a material adverse effect on the Company's results of operations, cash flows or financial condition. 37 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following sets forth the names and ages of the Company's directors and executive officers and the positions they hold as of the date of this Offering Memorandum:
NAME AGE POSITION WITH COMPANY ---- --- --------------------- Robert M. Wolff......... 62 Chairman John L. Menghini........ 47 President, Chief Operating Officer and Director Robert G. Shaw.......... 46 Senior Vice President, Finance and Human Resources and Director Larry D. Graveel........ 48 Senior Vice President, Merchandising and Director Michael H. Gary......... 44 Senior Vice President, Sales Administration A. Richard Caputo, Jr... 31 Director John W. Jordan II....... 49 Director David W. Zalaznick...... 43 Director
Set forth below is a brief description of the business experience of each director and executive officer of the Company. Robert M. Wolff has served as Chairman of the Company since its inception. John L. Menghini has served as President, Chief Operating Officer and a director of the Company since 1984. Prior to that, Mr. Menghini served as a merchandise manager of the Company since 1977. Robert G. Shaw has served as Senior Vice President, Finance and Human Resources and a director of the Company since 1993. Prior to that, Mr. Shaw held several management positions with the Company since 1976, including Vice President of Finance. Larry D. Graveel has served as a director of the Company since February 1997 and as Senior Vice President, Merchandising of the Company since 1993. Prior to that, Mr. Graveel served as a merchandising manager of the Company since 1984. Michael H. Gary has served as Senior Vice President, Sales Administration of the Company since 1993. Prior to that, Mr. Gary held several management positions in sales administration with the Company since 1982. A. Richard Caputo, Jr. has served as a director of the Company since February 1997. Mr. Caputo is a managing partner of TJC, a private merchant banking firm, with which he has been associated since 1990. Mr. Caputo is also a director of AmeriKing, Inc. as well as other privately held companies. John W. Jordan II has served as a director of the Company since February 1997. Mr. Jordan is a managing partner of TJC, which he founded in 1982. Mr. Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc., AmeriKing, Inc., Motors and Gears, Inc. and Rockshox, Inc. as well as other privately held companies. David W. Zalaznick has served as a director of the Company since February 1997. Mr. Zalaznick has been a managing partner of TJC since 1982. Mr. Zalaznick is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc., Marisa Christina, Inc., AmeriKing, Inc., Motors and Gears, Inc. and The Great American Cookie Company as well as other privately held companies. 38 STOCKHOLDERS AGREEMENT In connection with the Acquisition, Holdings, the Management Investors and the Jordan Investors entered into a subscription and stockholders agreement (the "Stockholders Agreement") which sets forth certain rights and restrictions relating to the ownership of Holdings stock and agreements among the parties thereto as to the governance of Holdings and, indirectly, GFSI. The Stockholders Agreement contains provisions which, among other things and subject to certain exceptions, (i) restrict the ability of all Stockholders (as defined therein) to transfer their respective ownership interests, including rights of first refusal and tag along rights held by each of the remaining stockholders, (ii) grant drag along rights to Selling Stockholders (as defined therein) in which the holders of 75% or more of the common stock of Holdings who agree to transfer their stock in an arms-length transaction to a nonaffiliated party may require the remaining stockholders to sell their stock on the same terms and conditions and (iii) grant each Stockholder piggyback registration rights to participate in certain registrations initiated by Holdings. The Stockholders Agreement also contains certain governance provisions which, among other things, (i) provide for the election of three directors (the "Management Directors") nominated by the Management Investors, three directors (the "Jordan Directors") nominated by the Jordan Investors and one director nominated by the Stockholders, (ii) prohibit the removal of the Management Directors other than by the Management Investors or the Jordan Directors other than by the Jordan Investors and (iii) require the approval of at least five directors of certain fundamental transactions affecting Holdings or GFSI. BOARD OF DIRECTORS Liability Limitation. The Certificate of Incorporation provides that a director of the Company shall not be personally liable to it or its stockholders for monetary damages to the fullest extent permitted by the Delaware General Corporation Law. In accordance with the Delaware General Corporation Law, the Certificate of Incorporation does not eliminate or limit the liability of a director for acts or omissions that involve intentional misconduct by a director or a knowing violation of law by a director for voting or assenting to an unlawful distribution, or for any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled. The Delaware General Corporation Law does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. Any amendment to these provisions of the Delaware General Corporation Law will automatically be incorporated by reference into the Certificate of Incorporation and the Bylaws, without any vote on the part of its stockholders, unless otherwise required. Indemnification Agreements. Simultaneously with the consummation of the Offering, the Company and each of its directors entered into indemnification agreements. The indemnification agreements provide that the Company will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of the Company) to which any of them is, or is threatened to be, made a party by reason of their status as a director, officer or agent of the Company, or serving at the request of the Company in any other capacity for or on behalf of the Company; provided that (i) such director acted in good faith and in a manner not opposed to the best interest of the Company, (ii) with respect to any criminal proceedings had no reasonable cause to believe his or her conduct was unlawful, (iii) such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, unless the court views in light of the circumstances the director is nevertheless entitled to indemnification, and (iv) the indemnification does not relate to any liability arising under Section 16(b) of the Exchange Act, or the rules or regulations promulgated thereunder. With respect to any action brought by or in the right of the Company, directors may also be indemnified to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction against expenses actually and reasonably incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company. 39 Director Compensation. After the consummation of the Offering, each director of the Company will receive $20,000 per year for serving as a director of the Company. In addition, the Company reimburses directors for their travel and other expenses incurred in connection with attending meetings of the Board of Directors. EXECUTIVE COMPENSATION The following table sets forth information concerning the aggregate compensation paid and accrued to the Company's top five executive officers for services rendered to the Company during each of the three most recent fiscal years. The executive officers include Robert M. Wolff, Chairman, John L. Menghini, President and Chief Operating Officer, Robert G. Shaw, Senior Vice President, Finance and Human Resources, Larry D. Graveel, Senior Vice President, Merchandising and Michael H. Gary, Senior Vice President, Sales Administration.
FISCAL OTHER ANNUAL POSITION YEAR SALARY BONUS COMPENSATION(1) - -------- ------ -------- -------- --------------- Robert M. Wolff........................ 1996 $240,000 $40,019 Chairman 1995 240,000 $288,000 41,518 1994 240,000 600,000 49,337 John L. Menghini....................... 1996 225,000 300,000 31,136 President and Chief 1995 225,000 300,000 32,502 Operating Officer 1994 200,000 300,000 41,244 Robert G. Shaw......................... 1996 150,000 120,000 31,353 Senior Vice President and 1995 125,000 100,000 32,558 Chief Financial Officer 1994 108,000 100,000 37,723 Larry D. Graveel....................... 1996 170,000 120,000 27,416 Senior Vice President 1995 145,000 120,000 28,915 1994 120,000 120,000 37,734 Michael H. Gary........................ 1996 150,000 120,000 28,579 Senior Vice President 1995 125,000 100,000 30,078 1994 100,000 100,000 34,526
- ---------- (1) Other annual compensation consists of car allowances, profit sharing, group medical benefits and individual beneficiary life insurance premiums paid by the Company. EMPLOYMENT/NONCOMPETITION AGREEMENTS Wolff Employment Agreement. Effective upon the consummation of the Transactions, the Company entered into an Employment Agreement with Robert M. Wolff (the "Wolff Employment Agreement"). Pursuant to the Wolff Employment Agreement, Mr. Wolff will serve as Chairman of the Company for a ten-year period ending on the tenth anniversary of the Acquisition. In exchange for his services, the Company will compensate Mr. Wolff with a base salary of $140,000 per annum, subject to annual increases set forth in the Wolff Employment Agreement, to provide him with certain employee benefits comparable to that received by other Company senior executives, including the use of Company cars, and to reimburse him for expenses incurred in connection with the performance of his duties as Chairman. In the event that Mr. Wolff no longer provides services to the Company due to his dismissal for Cause (as defined in the Wolff Employment Agreement), he will no longer be entitled to any compensation from the Company as of the date of his dismissal, subject to certain rights of appeal. Wolff Noncompetition Agreement. Effective upon the consummation of the Transactions, Holdings entered into a Noncompetition Agreement with Robert M. Wolff (the "Wolff Noncompetition Agreement"). Pursuant to the Wolff Noncompetition Agreement, Mr. Wolff will not, directly or indirectly, (i) (a) engage in or have any active interest in any sportswear or activewear business comparable to that of the Company or (b) sell to, supply, provide goods or services to, purchase from or conduct business in any form with the Company or Holdings for a ten-year period ending on the tenth anniversary of the Acquisition, (ii) disclose at any time other than to the Company or Holdings any Confidential Information (as defined in the Wolff Noncompetition Agreement) and (iii) engage in any business with the Company or Holdings through an affiliate for as long as Mr. Wolff or any 40 member of his family is the beneficial owner of Holdings' capital stock. In exchange for his covenant not to compete, Holdings will pay Mr. Wolff $250,000 per annum for a period of ten years. In the event that the Wolff Noncompetition Agreement is terminated for Cause (as defined in the Wolff Noncompetition Agreement), Holdings will no longer be obligated to make any payment to Mr. Wolff, but Mr. Wolff will remain obligated to comply with the covenants set forth in the Wolff Noncompetition Agreement until its expiration on the tenth anniversary of the Acquisition. INCENTIVE COMPENSATION PLAN Following the consummation of the Transactions, the Company will adopt an incentive compensation plan (the "Incentive Plan"), which will provide for annual cash bonuses payable based on a percentage of EBITA (as defined in the Incentive Plan), if certain EBITA targets are met. PRINCIPAL STOCKHOLDERS All of the outstanding common stock of the Company is owned by Parent. The table below sets forth as of February 27, 1997 certain information regarding beneficial ownership of the common stock of Parent held by (i) each of its directors and executive officers who own shares of common stock of Parent, (ii) all directors and executive officers of Parent as a group and (iii) each person known by Parent to own beneficially more than 5% of its common stock. The Company believes that each individual or entity named has sole investment and voting power with respect to shares of common stock of Parent indicated as beneficially owned by them, except as otherwise noted.
AMOUNT OF BENEFICIAL OWNERSHIP(1) -------------------- NUMBER OF PERCENTAGE SHARES OWNED --------- ---------- EXECUTIVE OFFICERS AND DIRECTORS: Robert M. Wolff(2)(3).................................... 60.0 3.0% John L. Menghini(2)(4)................................... 257.0 12.9 Robert G. Shaw(2)(5)..................................... 235.0 11.8 Larry D. Graveel(2)(6)................................... 110.0 5.5 Michael H. Gary(2)(7).................................... 110.0 5.5 A. Richard Caputo, Jr.(8)................................ 50.0 2.5 John W. Jordan II(8)(9).................................. 78.3125 3.9 David W. Zalaznick(8).................................... 78.3125 3.9 All directors and executive officers as a group (8 persons)................................................ 978.625 48.9% OTHER PRINCIPAL STOCKHOLDERS: MCIT PLC(10)............................................. 500.0 25.0% Leucadia Investors, Inc.(11)............................. 125.0 6.3%
- -------- (1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. As of February 27, 1997, there were 2,000 shares of common stock of Parent issued and outstanding. (2) The address of each of Messrs. Wolff, Menghini, Shaw, Graveel and Gary is c/o GFSI, Inc., 9700 Commerce Parkway, Lenexa, Kansas 66219. (3) All shares are held by the Robert M. Wolff Trust, of which Mr. Wolff is a trustee. (4) 197 shares are held by the John Leo Menghini Revocable Trust, of which Mr. Menghini is a trustee. The remaining 60 shares are held in trust for family members of Mr. Menghini. (5) 175 shares are held by the Robert Shaw Living Trust, of which Mr. Shaw is a trustee. The remaining 60 shares are held by Robert Shaw as custodian of family members. (6) All shares are held by the Larry D. Graveel Revocable Trust, of which Mr. Graveel is a trustee. (7) 90 shares are held by Michael H. Gary Revocable Trust, of which Mr. Gary is a trustee. The remaining 20 shares are held in trust for family members of Mr. Gary. (8) The address of each of Messrs. Caputo, Jordan and Zalaznick is c/o The Jordan Company, 9 West 57th Street, New York, NY 10019. (9) All shares are held by the John W. Jordan II Revocable Trust, of which Mr. Jordan is trustee. (10) The principal address of MCIT PLC is c/o The Jordan Company, 9 West 57th Street, New York, NY 10019. (11) The principal address of Leucadia Investors, Inc. is 315 Park Avenue South, New York, NY 10010. 41 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Exchange Offer is being made by the Company to satisfy its obligations pursuant to the Registration Rights Agreement, which requires the Company to use its best efforts to effect the Exchange Offer. See "--Registration Rights." The Company is making the Exchange Offer in reliance upon the position of the staff of the Commission set forth in certain no-action letters addressed to other parties in other transactions. However, the Company has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Based on these interpretations by the staff of the Commission, the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not participating and has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Notes. Any Holder who tenders Old Notes in the Exchange Offer for the purpose of participating in a distribution of the New Notes could not rely on such interpretations by the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless such sale is made pursuant to an exemption from such requirements. Holders of Old Notes not tendered will not have any further registration rights and the Old Notes not exchanged will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the markets for the Old Notes could be adversely affected. NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS. REGISTRATION RIGHTS; LIQUIDATED DAMAGES In connection with the issuance of the Old Notes, the Company entered into the Registration Rights Agreement with the Initial Purchasers of the Old Notes. Holders of New Notes (other than as set forth below) are not entitled to any registration rights with respect to the New Notes. Pursuant to the Registration Rights Agreement, Holders of Old Notes are entitled to certain registration rights. Under the Registration Rights Agreement, the Company has agreed, for the benefit of the Holders of the Old Notes, that it will, at its cost, (i) within 90 days after the date of the original issue of the Old Notes, file the Registration Statement with the Commission and (ii) within 150 days after the date of original issuance of the Old Notes, use its best efforts to cause such Registration Statement to be declared effective under the Securities Act. The Registration Statement of which this Prospectus is a part constitutes the Registration Statement. If (i) the Company is not permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any Holder of Transfer Restricted Securities (as 42 defined) notifies the Company within the specified time period that (A) due to a change in law or policy it is not entitled to participate in the Exchange Offer, (B) due to a change in law or policy it may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Registration Statement is not appropriate or available for such resales by such holder or (C) it is a broker-dealer and acquired the Notes directly from the Company or an affiliate of the Company, the Company will file with the Commission a Shelf Registration Statement to cover resales of the Transfer Restricted Securities by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Company will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Securities" means each Note, until (i) the date of which such Transfer Restricted Security has been exchanged in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Transfer Restricted Security for a New Note, the date on which such New Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the Prospectus contained in the Registration Statement, (iii) the date on which such security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such security is distributed pursuant to Rule 144 under the Act. The Registration Rights Agreement also provides that, (i) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Company will commence the Exchange Offer and use its best efforts to issue on or prior to 30 business days after the date on which the Registration Statement was declared effective by the Commission, New Securities in exchange for all Transfer Restricted Securities tendered prior thereto in the Exchange Offer and (ii) if obligated to file the Shelf Registration Statement, the Company will file the Shelf Registration Statement with the Commission on or prior to 60 days after such filing obligation arises and use its best efforts to cause the Shelf Registration to be declared effective by the Commission on or prior to 120 days after such obligation arises. The Company shall use its best efforts to keep such Shelf Registration Statement continuously effective, supplemented and amended until the third anniversary of the Closing Date or such shorter period that will terminate when all the Senior Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. If (a) the Company fails to file any of the registration statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such registration statements are not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (c) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Registration Statement, or (d) the Shelf Registration Statement or the Registration Statement is declared effective but thereafter, subject to certain exceptions, ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Company will pay Liquidated Damages to each Holder of Transfer Restricted Securities, with respect to the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $.05 per week for each $1,000 principal amount of Senior Notes held by such Holder. The amount of the Liquidated Damages will increase by an additional $.05 per week with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $.40 per week for each $1,000 principal amount of Senior Notes, as applicable. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of Transfer Restricted Securities will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their Transfer Restricted Securities included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration 43 Rights Agreement, a copy of which is filed as an exhibit to the Registration Statement of which this Prospectus constitutes a part. TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), the Company will accept for exchange Old Notes which are properly tendered on or prior to the Expiration Date and not withdrawn as permitted below. As used herein, the term "Expiration Date" means the earlier of (i) 5:00 p.m., New York City time, on , 1997 or (ii) the date when all Old Notes have been tendered; provided, however, that if the Company, in its sole discretion, has extended the period of time for which the Exchange Offer is open, the term "Expiration Date" means the latest time and date to which the Exchange Offer is extended; provided further that in no event will the Exchange Offer be extended beyond , 1997. The Company may extend the Exchange Offer at any time and from time to time by giving oral or written notice to the Exchange Agent and by timely public announcement. Without limiting the manner in which the Company may choose to make any public announcement and subject to applicable law, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a release to an appropriate news agency. During any extension of the Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer will remain subject to the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations thereunder. As of the date of this Prospectus, $125,000,000 aggregate principal amount of the Old Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 1997, to all Holders of Old Notes known to the Company. The Company's obligation to accept Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth under "--Certain Conditions to the Exchange Offer" below. The terms of the New Notes and the Old Notes are identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes and rights to receive Liquidated Damages. See "-- Registration Rights; Liquidated Damages." The Old Notes were, and the New Notes will be, issued under the Indenture and all such Notes are entitled to the benefits of the Indenture. Old Notes tendered in the Exchange Offer must be in denominations of principal amount of $1,000 and any integral multiple thereof. Any Old Notes not accepted for exchange for any reason will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Old Notes not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified below under "--Certain Conditions to the Exchange Offer". The Company will give oral or written notice of any amendment, nonacceptance or termination to the Holders of the Old Notes as promptly as practicable. Any amendment to the Exchange Offer will not limit the right of Holders to withdraw tendered Old Notes prior to the Expiration Date. See "--Withdrawal Rights." PROCEDURES FOR TENDERING OLD NOTES The tender to the Company of Old Notes by a Holder thereof as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering Holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a Holder who wishes to tender Old Notes for exchange pursuant to the Exchange 44 Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to Fleet National Bank (the "Exchange Agent") at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, either (i) certificates for such Old Notes must be received by the Exchange Agent along, with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is available, into the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant thereto are tendered (i) by a registered Holder of the Old Notes who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States (collectively, "Eligible Institutions"). If Old Notes are registered in the name of a person other than the signer of the Letter of Transmittal, the Old Notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered Holder with the signature thereon guaranteed by an Eligible Institution. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all tenders of any particular Old Notes not properly tendered or to not accept any particular Old Notes which acceptance might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any Holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, all defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such reasonable period of time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Old Notes for exchange, nor shall any of them incur any liability for failure to give such notification. The Exchange Agent intends to use reasonable efforts to give notification of such defects and irregularities. If the Letter of Transmittal is signed by a person or persons other than the registered Holder or Holders of Old Notes, such Old Notes must be endorsed or accompanied by appropriate powers of attorney, in either case signed exactly as the name or names of the registered Holder or Holders that appear on the Old Notes. If the Letter of Transmittal or any Old Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of a corporation or others acting in a fiduciary or representatives capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. 45 By tendering, each Holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the Holder and such person has no arrangement with any person to participate in the distribution of the New Notes. If any Holder or any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company, is engaged in or intends to engage in or has an arrangement or understanding with any person to participate in a distribution of such New Notes to be acquired pursuant to the Exchange Offer, or acquired the Old Notes as a result of market making or other trading activities, such Holder or any such other person (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Old Notes properly tendered and will issue the New Notes promptly after acceptance of the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes of the Exchange Offer, the Company shall be deemed to have accepted properly tendered Old Notes for exchange when, as and if the Company has given oral or written notice thereof to the Exchange Agent, with written confirmation of any oral notice to be given promptly thereafter. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. Accordingly, registered Holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Old Notes, or, if no interest has been paid on the Old Notes, from February 27, 1997. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of (i) certificates for such Old Notes or a timely Book- Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, (ii) a properly completed and duly executed Letter of Transmittal and (iii) all other required documents. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer, or if Old Notes are submitted for a greater amount than the Holder desires to exchange, such unaccepted or nonexchanged Old Notes will be returned without expense to the tendering Holder thereof (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry procedures described below, such nonexchanged Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility) designated by the tendering Holder as promptly as practicable after the expiration or termination of the Exchange Offer. BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at the Book- Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with any 46 required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered Holder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available, or time will not permit such Holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent has received from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form of the corresponding exhibit to the Registration Statement of which this Prospectus constitutes a part (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the Holder of Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book- Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL RIGHTS Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the amount of such Old Notes), and (where certificates for Old Notes have been transmitted) specify the name in which such Old Notes are registered, if different from that of the withdrawing Holder. If certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates the withdrawing Holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such Holder is an Eligible Institution. If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Notes will be credited to an account with such Book-Entry Transfer Facility specified by the Holder) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "--Procedures for Tendering Old Notes" above at any time on or prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange 47 Offer, if at any time before the acceptance of such Old Notes for exchange or the exchange of the New Notes for such Old Notes, any of the following events shall occur: (a) there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission, (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, or assessing or seeking any damages as a result thereof, or (ii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Old Notes pursuant to the Exchange Offer; or any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clauses (i) or (ii) above or, in the sole judgment of the Company, might result in the holders of New Notes having obligations with respect to resales and transfers of New Notes which are greater than those described in the interpretation of the Commission referred to on the cover page of this Prospectus, or would otherwise make it inadvisable to proceed with the Exchange Offer; or (b) there shall have occurred (i) any general suspension of or general limitation on prices for, or trading in, securities on any national securities exchange or in the over-the-counter market, (ii) any limitation by any governmental agency or authority which may adversely affect the ability of the Company to complete the transactions contemplated by the Exchange Offer, (iii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States or any limitation by any governmental agency or authority which adversely affects the extension of credit or (iv) a commencement of a war, armed hostilities or other similar international calamity directly or indirectly involving the United States, or, in the case of any of the foregoing existing at the time of the commencement of the Exchange Offer, a material acceleration or worsening thereof; or (c) any change (or any development involving a prospective change) shall have occurred or be threatened in the business, properties, assets, liabilities, financial condition, operations, results of operations or prospects of the Company and its subsidiaries taken as a whole that, in the sole judgment of the Company, is or may be adverse to the Company, or the Company shall have become aware of facts that, in the sole judgment of the Company, have or may have an adverse effect on the value of the Old Notes or the New Notes. Holders of Old Notes will have registration rights and the right to Liquidated Damages as described under "--Registration Rights; Liquidated Damages" if the Company fails to consummate the Exchange Offer. To the Company's knowledge as of the date of this Prospectus, none of the above events has occurred. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. In addition, the Company will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939. EXCHANGE AGENT Fleet National Bank has been appointed as the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal and Notices of Guaranteed Delivery should be directed to the Exchange Agent at the addresses 48 set forth below. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal and requests for Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: Deliver to: Fleet National Bank, Exchange Agent: BY MAIL: By Overnight Courier: By Hand: Fleet National Bank Fleet National Bank Fleet National Bank Mail Code: CTOPT06D Mail Code: CTOPT06D Corporate Trust Corporate Trust Corporate Trust Operations Operations Operations Department Department Department 1 Talcott Plaza, 6th Floor Customer Service P.O. Box 1440 Hartford, Connecticut 06120 Window Hartford, 1 Talcott Plaza, Connecticut 06143 5th Floor Hartford, Connecticut 06120 By Facsimile: (860) 986-7908 DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL. FEES AND EXPENSES The Company will not make any payment to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company will, however, pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses in connection therewith. The Company will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus and related documents to the beneficial owners of Old Notes, and in handling tenders for their customers. The expenses to be incurred in connection with the Exchange Offer, including the fees and expenses of the Exchange Agent and printing, accounting, registration, and legal fees, will be paid by the Company and are estimated to be approximately $60,000. TRANSFER TAXES Holders who tender their Old Notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Company to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon. APPRAISAL RIGHTS HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER. CONSEQUENCES OF NOT EXCHANGING OLD NOTES Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may 49 not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. Based upon no-action letters issued by the staff of the Commission to third parties, the Company believes the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold or otherwise transferred by a Holder thereof (other than any (i) Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not participating and has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Notes. However, the Company has not sought its own no-action letter and there can be no assurance that the staff of the Commission would make a similar determination with respect to the Exchange Offer as in such other circumstances. Each Holder, other than a broker-dealer, must acknowledge that it is not engaged in, and does not intend to engage in, a distribution of New Notes, and has no arrangement or understanding to participate in a distribution of New Notes. If any Holder is an affiliate of the Company, is engaged in or intends to engage in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, or required the Old Notes as a result of market making or other trading activities, such Holder (i) could not rely on the relevant determinations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and is complied with. The Company has agreed to register or qualify the sale of the New Notes in such jurisdictions only in limited circumstances and subject to certain conditions. ACCOUNTING TREATMENT The exchange of the New Notes for the Old Notes will have no impact on the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. Expenses of the Exchange Offer and expenses related to the Old Notes will be amortized, pro rata, over the term of the New Notes. 50 DESCRIPTION OF NOTES GENERAL The Notes will be issued pursuant to the Indenture between the Company and Fleet National Bank, as trustee (the "Trustee"), in a private transaction that is not subject to the registration requirements of the Securities Act. See "Notice to Investors." 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"), as in effect on the date of original issuance of the Notes. 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 following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. Copies of the proposed form of Indenture and Registration Rights Agreement are available as set forth below under "-- Additional Information." The definitions of certain terms used in the following summary are set forth below under "--Certain Definitions." The Company's obligations under the Indenture and the Notes will be guaranteed (the "Note Guarantees") on a senior subordinated basis by any future Restricted Subsidiaries (the "Guarantors"). See "--Note Guarantees." As of the date of the Indenture, the Company will not have any Subsidiaries. Under certain circumstances, the Company will be able to designate any Subsidiaries formed by the Company or acquired by the Company after the original issuance of the Notes as Non-Restricted Subsidiaries. Non-Restricted Subsidiaries will not be Guarantors and will not be subject to many of the restrictive covenants set forth in the Indenture. The Notes will be limited to $125,000,000 in aggregate principal amount and will mature on March 1, 2007. The Notes will bear interest at the rate set forth on the front cover of this Offering Memorandum. Interest on the Notes is payable semi-annually in cash in arrears on March 1 and September 1 in each year, commencing September 1, 1997, to holders of record of Notes at the close of business on February 15 or August 15 immediately preceding such interest payment date. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Notes will be issued in denominations of $1,000 and integral multiples thereof. Principal of and premium, interest and Liquidated Damages, if any, on the Notes will be payable, and the Notes may be presented for registration of transfer or exchange, at the office of the Paying Agent and Registrar. Holders of Notes must surrender their Notes to the Paying Agent to collect principal payments, and the Company may pay principal and interest by check and may mail checks to a holder's registered address; provided that all payments with respect to Global Notes and with respect to Certificated Notes, the holders of which have given wire transfer instructions to the Company, will be required to be made by wire transfer of immediately available funds to the accounts specified by the holders thereof. The Registrar may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection with certain transfers or exchanges. See "--Transfer and Exchange." The Trustee will initially act as Paying Agent and Registrar. The Company may change the Paying Agent or Registrar without prior notice to holders of Notes, and the Company or any of its Subsidiaries may act as Paying Agent or Registrar. SUBORDINATION The payment of principal of and premium, interest and Liquidated Damages, if any, on the Notes will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full in cash or Marketable Securities of all Senior Indebtedness, whether outstanding on the date of the Indenture or thereafter incurred. The Indenture will permit the incurrence of additional Senior Indebtedness in the future. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its 51 property, an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or Marketable Securities of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before the Holders of Notes will be entitled to receive any payment with respect to the Notes, and until all Obligations with respect to Senior Indebtedness are paid in full in cash or Marketable Securities, any distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Indebtedness (except that Holders of Notes may receive Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Company also may not make any payment upon or in respect of the Notes (except in Permitted Junior Securities or from the trust described under "-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of or premium, if any, or interest on Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Indebtedness that permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a written notice (with a copy to the Company) of such other default (a "Payment Blockage Notice") from the Company or the holders of any Designated Senior Indebtedness. Payments on the Notes may and shall be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received by the Trustee, unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the date of receipt by the Trustee of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice (it being understood that any subsequent action, or any breach of any covenant for a period commencing after the date of receipt by the Trustee of such Payment Blockage Notice, that, in either case, would give rise to such a default pursuant to any provisions under which a default previously existed or was continuing shall constitute a new default for this purpose). The Indenture will further require that the Company promptly notify holders of Senior Indebtedness if payment of the Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, Holders of Notes may recover less ratably than creditors of the Company who are holders of Senior Indebtedness. On a pro forma basis, after giving effect to the Transactions, the aggregate principal amount of Senior Indebtedness outstanding at December 31, 1996 would have been approximately $67.7 million. The Indenture will limit, subject to certain financial tests, the amount of additional Indebtedness, including Senior Indebtedness, that the Company and its subsidiaries can incur. See "--Certain Covenants--Limitation on Incurrence of Indebtedness." NOTE GUARANTEES The Company's payment obligations under the Notes will be jointly and severally guaranteed by the Company's future Restricted Subsidiaries (the "Note Guarantees"). The Note Guarantees will be subordinated to the prior payment in full in cash or Marketable Securities of all Senior Indebtedness of each Guarantor (including such Guarantor's guarantee of the New Credit Agreement) to the same extent that the Notes are subordinated to Senior Indebtedness of the Company. The obligations of any Guarantor under its Note Guarantee will be limited so as not to constitute a fraudulent conveyance under applicable law. The Indenture will provide that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes and the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default 52 exists; (iii) such Guarantor, or any Person formed by or surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction), equal to or greater than the Consolidated Net Worth of such Guarantor immediately preceding the transaction; and (iv) the Company would be permitted by virtue of the Company's pro forma Cash Flow Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage test set forth in the covenant described below under the caption "Limitation on Incurrence of Indebtedness." The requirements of clauses (iii) and (iv) of this paragraph will not apply in the case of a consolidation with or merger with or into the Company or another Guarantor. The Indenture will provide that (a) in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, or (b) in the event that the Company designates a Guarantor to be a Non-Restricted Subsidiary, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor or any such designation) or the corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) will be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See "Mandatory Offers to Purchase Notes." REDEMPTION OF NOTES Optional Redemption. Except as set forth below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the 12- month period beginning on March 1 of the years indicated below, the Notes will be redeemable, at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each holder of Notes to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the redemption date:
YEAR PERCENTAGE ---- ---------- 2002......................................................... 104.813% 2003......................................................... 103.208% 2004......................................................... 101.604% 2005 and thereafter.......................................... 100.000%
Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings of the Company or Holdings (to the extent contributed to the Company); provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. The restrictions on optional redemptions contained in the Indenture do not limit the Company's right to separately make open market, privately negotiated or other purchases of Notes from time to time. Mandatory Redemption. Except as set forth below under "--Mandatory Offers to Purchase Notes--Change of Control" and "--Asset Sales," the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. MANDATORY OFFERS TO PURCHASE NOTES Change of Control. Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes pursuant to an Offer (as defined) at a 53 purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. The Company shall furnish to the Trustee, at least two Business Days before notice of an Offer is mailed to all holders of Notes pursuant to the procedures described below under "--Procedures for Offers," notice that the Offer is being made. Transactions constituting a Change of Control are not limited to hostile takeover transactions not approved by the current management of the Company. Except as described under "--Change of Control," the Indenture does not contain provisions that permit the holders of Notes to require the Company to purchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring, including an issuer recapitalization or similar transaction with management. Consequently, the Change of Control provisions will not afford any protection in a highly leveraged transaction, including such a transaction initiated by the Company, management of the Company or an affiliate of the Company, if such transaction does not result in a Change of Control. In addition, because the obligations of the Company with respect to the Notes are subordinated to all Senior Indebtedness of the Company, existing or future Senior Indebtedness of the Company may prohibit the Company from repurchasing the Notes upon a Change of Control. Moreover, the ability of the Company to repurchase Notes following a Change of Control will be limited by the Company's then-available resources. The Change of Control provisions may not be waived by the Board of Directors of the Company or the Trustee without the consent of holders of at least a majority in principal amount of the Notes. See "--Amendment, Supplement and Waiver." The Company expects that prepayment of the Notes following a Change of Control would, and the exercise by holders of Notes of the right to require the Company to purchase Notes may, constitute a default under the New Credit Agreement or other indebtedness of the Company. The Indenture will provide that, prior to the mailing of the notice referred to below, but in any event within 30 days following any Change of Control Trigger Date, the Company is required to (i) repay in full and terminate all commitments under Indebtedness under the New Credit Agreement and all other Senior Indebtedness the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the New Credit Agreement and all other such Senior Indebtedness and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the New Credit Agreement and all such other Senior Indebtedness to permit the repurchase of the Notes as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions described below. The Company's failure to comply with this covenant shall constitute an Event of Default described in clause (c) and not in clause (b) under "--Events of Default and Remedies" below. In the event a Change of Control occurs, the Company will likely be required to refinance the Indebtedness outstanding under the New Credit Agreement and the Notes. If there is a Change of Control, any Indebtedness under the New Credit Agreement could be accelerated. There is no limitation in the Indenture which prohibits the Company from using the proceeds from the offering of the Notes to finance mandatory purchases of Notes upon a Change of Control. Moreover, there can be no assurance that sufficient funds will be available at the time of any Change of Control to repay Senior Indebtedness and make any required repurchases of the Notes given the Company's high leverage. The financing of the purchases of Notes could additionally result in a default under the New Credit Agreement or other indebtedness of the Company. The occurrence of a Change of Control may also have an adverse impact on the ability of the Company to obtain additional financing in the future. The ability of holders of Notes to require that the Company purchase Notes upon a Change of Control may deter persons from effecting a takeover of the Company. Except as described above with respect to a Change of Control, the Indenture will not contain provisions that permit the holders of Notes to require that the Company purchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring. See "Risk Factors--Leverage and Debt Service. " Asset Sales. The Indenture provides that the Company may not, and may not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale (including the sale of any of the Capital Stock of any Restricted Subsidiary) providing for Net Proceeds in excess of $2.5 million unless at least 75% of the Net Proceeds from such Asset Sale are applied (in any manner otherwise permitted by the Indenture) to one or more of the following purposes in such combination as the Company shall elect: (a) an investment in another asset or business in the same line of business as, or a line of business similar to that of, the line of business of the 54 Company and its Restricted Subsidiaries at the time of the Asset Sale or the making of a capital expenditure otherwise permitted by the Indenture; provided that such investment occurs within 365 days of the date of such Asset Sale (the "Asset Sale Disposition Date"), (b) to reimburse the Company or its Restricted Subsidiaries for expenditures made, and costs incurred, to repair, rebuild, replace or restore property subject to loss, damage or taking to the extent that the Net Proceeds consist of insurance proceeds received on account of such loss, damage or taking, (c) to cash collateralize letters of credit; provided any such cash collateral released to the Company or its Restricted Subsidiaries upon the expiration of such letters of credit shall again be deemed to be Net Proceeds received on the date of such release, (d) the permanent purchase, redemption or other prepayment or repayment of outstanding Senior Indebtedness of the Company or Indebtedness of the Company's Restricted Subsidiaries (with a corresponding reduction in any commitment relating thereto) on or prior to the 365th day following the Asset Sale Disposition Date or (e) an Offer expiring on or prior to the Purchase Date (as defined herein). The Indenture also provides that the Company may not, and may not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale unless at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Marketable Securities; provided that, solely for purposes of calculating such 75% of the consideration, the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto, excluding contingent liabilities and trade payables) of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes) that are assumed by the transferee of any such assets and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 90 days after receipt, converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash and cash equivalents for purposes of this provision. Any Net Proceeds from any Asset Sale that are not applied or invested as provided in the first sentence of this paragraph shall constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million (such date being an "Asset Sale Trigger Date"), the Company shall make an Offer to all holders of Notes to purchase the maximum principal amount of the Notes then outstanding that may be purchased out of Excess Proceeds, at an offer price in cash in an amount equal to 100% of principal amount thereof plus any accrued and unpaid interest and Liquidated Damages, if any, to the Purchase Date in accordance with the procedures set forth in the Indenture. Notwithstanding the foregoing, to the extent that any or all of the Net Proceeds of an Asset Sale is prohibited or delayed by applicable local law from being repatriated to the United States, the portion of such Net Proceeds so affected will not be required to be applied as described in this or the preceding paragraph, but may be retained for so long, but only for so long, as the applicable local law prohibits repatriation to the United States. To the extent that any Excess Proceeds remain after completion of an Offer, the Company may use such remaining amount for general corporate purposes. If the aggregate principal amount of Notes surrendered by holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. Procedures for Offers. Within 30 days following any Change of Control Trigger Date or Asset Sale Trigger Date, subject to the provisions of the Indenture, the Company shall mail a notice to each holder of Notes at such holder's registered address a notice stating: (a) that an offer (an "Offer") is being made pursuant to a Change of Control or an Asset Sale Trigger Date, as the case may be, the length of time the Offer shall remain open and the maximum principal amount of Notes that will be accepted for payment pursuant to such Offer, (b) the purchase price, the amount of accrued and unpaid interest as of the purchase date, and the purchase date (which shall be no earlier than 30 days and no later than 40 days from the date such notice is mailed (the "Purchase Date")), and (c) such other information required by the Indenture and applicable law and regulations. On the Purchase Date for any Offer, the Company will, to the extent required by the Indenture and such Offer, (1) in the case of an Offer resulting from a Change of Control, accept for payment all Notes or portions thereof tendered pursuant to such Offer and, in the case of an Offer resulting from an Asset Sale Trigger Date, 55 accept for payment the maximum principal amount of Notes or portions thereof tendered pursuant to such Offer that can be purchased out of Excess Proceeds, (2) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest on such Notes as of the Purchase Date, and (3) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Offer. The Paying Agent shall promptly mail to each holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus any accrued and unpaid interest thereon, and the Trustee shall promptly authenticate and mail (or cause to be transferred by book-entry) to such holder of Notes accepted for payment in part a new Note equal in principal amount to any unpurchased portion of the Notes and any Note not accepted for payment in whole or in part shall be promptly returned to the holder thereof. The Company will publicly announce the results of the Offer on or as soon as practicable after the Purchase Date. The Company will comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the Indenture by virtue thereof. Selection and Notice. In the event of a redemption or purchase of less than all of the Notes, the Notes to be redeemed or purchased will be chosen by the Trustee pro rata, by lot or by any other method that the Trustee considers fair and appropriate and, if the Notes are listed on any securities exchange, by a method that complies with the requirements of such exchange; provided that, if less than all of a holder's Notes are to be redeemed or accepted for payment, only principal amounts of $1,000 or multiples thereof may be selected for redemption or accepted for payment. On and after any redemption or purchase date, interest shall cease to accrue on the Notes or portions thereof called for redemption or accepted for payment. Notice of any redemption or offer to purchase will be mailed at least 30 days but not more than 60 days before the redemption or purchase date to each holder of Notes to be redeemed or purchased at such holder's registered address. CERTAIN COVENANTS The Indenture contains, among other things, the following covenants: Limitation on Restricted Payments. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on account of the Company's or any Restricted Subsidiary's Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company and dividends or distributions payable by a Restricted Subsidiary pro rata to its shareholders; (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any of its Restricted Subsidiaries, other than any such Equity Interests purchased from the Company or any Restricted Subsidiary for fair market value determined by the Board of Directors in good faith; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness, except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), if, at the time of such Restricted Payment: (a) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; or (b) immediately after such Restricted Payment and after giving effect thereto on a Pro Forma Basis, the Company shall not be able to issue $1.00 of additional Indebtedness pursuant to the first sentence of the "Limitation on Incurrence of Indebtedness" covenant; or (c) such Restricted Payment, together with the aggregate of all other Restricted Payments made after the date of original issuance of the Notes, without duplication, exceeds the sum of: (1) 50% of the aggregate 56 Consolidated Net Income (including, for this purpose, gains from Asset Sales and, to the extent not included in Consolidated Net Income, any gain from a sale or disposition of a Restricted Investment) of the Company (or, in case such aggregate is a loss, 100% of such loss) for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing immediately after the date of original issuance of the Notes and ended as of the Company's most recently ended fiscal quarter at the time of such Restricted Payment; plus (2) 100% of the aggregate net cash proceeds and the fair market value of any property or securities, as determined by the Board of Directors in good faith, received by the Company from the issue or sale of Equity Interests of the Company or Holdings (to the extent contributed to the Company) subsequent to the date of original issuance of the Notes (other than (x) Equity Interests issued or sold to a Restricted Subsidiary and (y) Disqualified Stock); plus (3) $5.0 million; plus (4) the amount by which the principal amount of and any accrued interest on either Senior Indebtedness of the Company or any Restricted Subsidiary is reduced on the Company's consolidated balance sheet upon the conversion or exchange (other than by a Restricted Subsidiary) subsequent to the date of original issuance of the Notes of any Indebtedness of the Company or any Restricted Subsidiary (not held by the Company or any Restricted Subsidiary) for Equity Interests (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair market value of any other property or securities (as determined by the Board of Directors in good faith), distributed by the Company or any Restricted Subsidiary (to persons other than the Company or any other Restricted Subsidiary) upon such conversion or exchange); plus (5) if any Non-Restricted Subsidiary is redesignated as a Restricted Subsidiary, the value of the Restricted Payment that would result if such Subsidiary were redesignated as a Non-Restricted Subsidiary at such time, as determined in accordance with the second sentence of the "Designation of Restricted and Non-Restricted Subsidiaries" covenant; provided, however, that for purposes of this clause (5), the value of any redesignated Non-Restricted Subsidiary shall be reduced by the amount that any such redesignation replenishes or increases the amount of Restricted Investments permitted to be made pursuant to clause (ii) of the next sentence. Notwithstanding the foregoing, the Indenture shall not prohibit as Restricted Payments: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration, such payment would comply with all covenants of such Indenture (including, but not limited to, the "Limitation on Restricted Payments" covenant); (ii) making Restricted Investments at any time, and from time to time, in an aggregate outstanding amount of $10.0 million after the date of original issuance of the Notes (it being understood that if any Restricted Investment after the date of original issuance of the Notes pursuant to this clause (ii) is sold, transferred or otherwise conveyed to any person other than the Company or a Restricted Subsidiary, the portion of the net cash proceeds or fair market value of securities or properties paid or transferred to the Company and its Restricted Subsidiaries in connection with such sale, transfer or conveyance that relates or corresponds to the repayment or return of the original cost of such a Restricted Investment will replenish or increase the amount of Restricted Investments permitted to be made pursuant to this clause (ii), so that up to $10.0 million of Restricted Investments may be outstanding under this clause (ii) at any given time); provided that, without otherwise limiting this clause (ii), any Restricted Investment in a Subsidiary made pursuant to this clause (ii) is made for fair market value (as determined by the Board of Directors in good faith); (iii) the repurchase, redemption, retirement or acquisition of Equity Interests of the Company or Holdings from the executives, management, employees or consultants of the Company or its Restricted Subsidiaries in an aggregate amount not to exceed $7.5 million; (iv) any loans, advances, distributions or payments from the Company to its Restricted Subsidiaries, or any loans, advances, distributions or payments by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, in each case pursuant to intercompany Indebtedness, intercompany management agreements and other intercompany agreements and obligations; (v) the purchase, redemption, retirement or other acquisition of the Notes pursuant to the "--Change of Control" or "--Asset Sales" provisions of the Indenture; 57 (vi) the payment of (a) consulting, financial and investment banking fees under the TJC Agreement, provided, that no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, and the Company's Obligations to pay such fees under the TJC Agreement shall be subordinated expressly to the Company's Obligations in respect of the Notes, and (b) indemnities, expenses and other amounts under the TJC Agreement; (vii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock) or the redemption, repurchase, retirement or other acquisition of any Equity Interests of any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to the Company or a Subsidiary of the Company) of other Equity Interests of such Restricted Subsidiary; provided that, in each case, any net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition, and any Net Income resulting therefrom, shall be excluded from clauses (c)(1) and (c)(2) of the preceding paragraph; (viii) the defeasance, redemption or repurchase of Subordinated Indebtedness of the Company or any Restricted Subsidiary with the net cash proceeds from an issuance of permitted Refinancing Indebtedness or the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock) or the defeasance, redemption or repurchase of Subordinated Indebtedness of any Restricted Subsidiary with the net cash proceeds from the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of such Restricted Subsidiary (other than Disqualified Stock); provided that, in each case, any net cash proceeds that are utilized for any such defeasance, redemption or repurchase, and any Net Income resulting therefrom, shall be excluded from clauses (c)(1) and (c)(2) of the preceding paragraph; (ix) Restricted Investments made or received in connection with the sale, transfer or disposition of any business, properties or assets of the Company or any Restricted Subsidiary, provided, that if such sale, transfer or disposition constitutes an Asset Sale, the Company complies with the "Asset Sale" provisions of the Indenture; (x) any Restricted Investment constituting securities or instruments of a person issued in exchange for trade or other claims against such person in connection with a financial reorganization or restructuring of such person; (xi) payments to Holdings in an amount sufficient to permit Holdings to make required payments on the Holdings Subordinated Notes; (xii) payments in connection with the Transactions as described under "The Transactions" and "Use of Proceeds"; (xiii) payments of fees, expenses and indemnities to the directors of Holdings, the Company and its Restricted Subsidiaries; (xiv) payments to Holdings in respect of accounting, legal or other professional or administrative expenses or reimbursements or franchise or similar taxes and governmental charges incurred by it relating to the business, operations or finances of the Company and its Restricted Subsidiaries and in respect of fees and related expenses associated with any registration statements relating to the Notes filed with the Commission and subsequent ongoing public reporting requirements with respect to the Notes; (xv) so long as Holdings files consolidated income tax returns that include the Company, payments to Holdings pursuant to the Tax Sharing Agreement; (xvi) payments, if any, relating to any purchase price adjustment pursuant to the terms of the Acquisition Agreement; (xvii) payments in respect of the Wolff Noncompetition Agreement; and (xviii) shareholder loans in an aggregate principal amount not to exceed $1.0 million. 58 In addition, Holdings has agreed, for the benefit of the holders of the Senior Indebtedness under the New Credit Agreement and the holders of the Notes, under certain circumstances to repay to the Company amounts received from the Company in violation of the restricted payments covenants set forth in the New Credit Agreement and the Indenture. Limitation on Incurrence of Indebtedness. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, issue any Indebtedness (other than the Indebtedness represented by the Notes) unless the Company's Cash Flow Coverage Ratio for its four full fiscal quarters next preceding the date such additional Indebtedness is issued would have been at least 2.0 to 1 determined on a Pro Forma Basis (including, for this purpose, any other Indebtedness incurred since the end of the applicable four quarter period) as if such additional Indebtedness and any other Indebtedness issued since the end of such four quarter period had been issued at the beginning of such four quarter period. The foregoing limitations will not apply to the issuance of: (i) Indebtedness of the Company and/or its Restricted Subsidiaries under the New Credit Agreement in an aggregate principal amount outstanding on such date of issuance not to exceed the greater of (A) $115.0 million and (B) the sum of: (1) 85% of the book value of accounts receivable of the Company and its Restricted Subsidiaries on a consolidated basis and (2) 65% of the book value of the inventories of the Company and its Restricted Subsidiaries; provided that the aggregate principal amount of Indebtedness outstanding under this clause (i) together with the aggregate principal amount of Indebtedness outstanding under clause (iii) below shall not exceed $140.0 million at any one time outstanding (less the amount of any permanent reductions as set forth under "Asset Sales"); (ii) Indebtedness of the Company and its Restricted Subsidiaries in connection with capital leases, sale and leaseback transactions, purchase money obligations, capital expenditures or similar financing transactions relating to: (A) their properties, assets and rights as of the date of original issuance of the Notes not to exceed $7.5 million in aggregate principal amount at any one time outstanding, or (B) their properties, assets and rights acquired after the date of original issuance of the Notes, provided that the aggregate principal amount of such Indebtedness under this clause (ii)(B) does not exceed 100% of the cost of such properties, assets and rights; (iii) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount up to $25.0 million (all or any portion of which may be issued as additional Indebtedness under the New Credit Agreement) provided that the aggregate principal amount of Indebtedness outstanding under this clause (iii) together with the aggregate principal amount of Indebtedness outstanding under clause (i) above shall not exceed $140.0 million at any one time outstanding (less the amount of any permanent reductions as set forth under "Asset Sales"); and (iv) Other Permitted Indebtedness. No Senior Subordinated Debt. The Indenture will provide that (i) the Company will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Notes, and (ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Note Guarantees. Limitation on Liens. The Indenture will provide that the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, other than Permitted Liens, upon any property or asset now owned or hereafter acquired by them, or any income or profits therefrom, or assign or convey any right to receive income therefrom unless all payments due under the Indenture and the Notes are secured on an equal and ratable basis with the obligations so secured until such time as such obligations are no longer secured by a Lien. 59 Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture will provide that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer 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 or any other interest or participation in, or measured by, its profits, owned by the Company or any Restricted Subsidiary, or pay any Indebtedness owed to, the Company or any Restricted Subsidiary, (b) make loans or advances to the Company, or (c) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reason of: (i) applicable law, (ii) Indebtedness permitted (A) under the first sentence of the first paragraph of the "Limitation on Incurrence of Indebtedness" covenant and (B) under clauses (i), (ii) and (iii) of the second paragraph of the "Limitation on Incurrence of Indebtedness" covenant and clauses (iv), (vii) and (x) of the definition of "Other Permitted Indebtedness," provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive with respect to the items set forth in clauses (a), (b) and (c) of the first paragraph of this covenant than those contained in the New Credit Agreement as in effect on the date of the Indenture, (iii) customary provisions restricting subletting or assignment of any lease or license of the Company or any Restricted Subsidiary, (iv) customary provisions of any franchise, distribution or similar agreement, (v) any instrument governing Indebtedness or preferred stock or any other encumbrance or restriction of a person acquired by the Company or any Restricted Subsidiary at the time of such acquisition, which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person, or the property or assets of the person, so acquired, (vi) Indebtedness or other agreements existing on the date of original issuance of the Notes, (vii) any Refinancing Indebtedness permitted under the "Limitation on Incurrence of Indebtedness" covenant, provided that the restrictions contained in the agreements governing such Refinancing Indebtedness are no more restrictive in any material respect with regard to the interests of the holders of the Notes than those contained in the agreements governing the Indebtedness being refinanced, (viii) any restrictions, with respect to a Restricted Subsidiary, imposed pursuant to an agreement that has been entered into for the sale or disposition of the stock, business, assets or properties of such Restricted Subsidiary, (ix) the terms of purchase money or capital lease obligations, but only to the extent such purchase money obligations restrict or prohibit the transfer of the property so acquired, or (x) any instrument governing the sale of assets of the Company or any Restricted Subsidiary, which encumbrance or restriction applies solely to the assets of the Company or such Restricted subsidiary being sold in such transaction. Nothing contained in this covenant shall prevent the Company from entering into any agreement or instrument providing for the incurrence of Permitted Liens or restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that are subject to Permitted Liens. Limitation on Transactions With Affiliates. The Indenture will provide that neither the Company nor any of its Restricted Subsidiaries may make any loan, advance, guarantee or capital contribution to, or for the benefit of, or sell, lease, transfer or dispose of any properties or assets to, or for the benefit of, or purchase or lease any 60 property or assets from, or enter into any or amend any contract, agreement or understanding with, or for the benefit of, an Affiliate (each such transaction or series of related transactions that are part of a common plan are referred to as an "Affiliate Transaction"), except in good faith and on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated person. The Indenture will further provide that the Company will not, and will not permit any Restricted Subsidiary to, engage in any Affiliate Transaction involving aggregate payments or other transfers by the Company and its Restricted Subsidiaries in excess of $5.0 million (including cash and non-cash payments and benefits valued at their fair market value by the Board of Directors of the Company in good faith) unless the Company delivers to the Trustee: (i) a resolution of the Board of Directors of the Company stating that the Board of Directors (including a majority of the disinterested directors, if any) has, in good faith, determined that such Affiliate Transaction complies with the provisions of the Indenture, and (ii) (A) with respect to any Affiliate Transaction involving the incurrence of Indebtedness, a written opinion of a nationally recognized investment banking or accounting firm experienced in the review of similar types of transactions, (B) with respect to any Affiliate Transaction involving the transfer of real property, fixed assets or equipment, either directly or by a transfer of 50% or more of the Capital Stock of a Restricted Subsidiary which holds any such real property, fixed assets or equipment, a written appraisal from a nationally recognized appraiser, experienced in the review of similar types of transactions or (C) with respect to any Affiliate Transaction not otherwise described in (A) and (B) above, a written certification from a nationally recognized professional or firm experienced in evaluating similar types of transactions, in each case, stating that the terms of such transaction are fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view. Notwithstanding the foregoing, this Affiliate Transactions covenant will not apply to: (1) transactions between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (2) payments under the TJC Agreement; (3) any other payments or transactions permitted pursuant to the "Limitation on Restricted Payments" covenant; (4) (A) payments and transactions under Incentive Arrangements and (B) reasonable compensation paid to officers, employees or consultants of the Company or any Restricted Subsidiary as determined in good faith by the Company's Board of Directors or executives; (5) payments and transactions in connection with the Transactions and the application of the net proceeds therefrom as described under "The Transactions" and "Use of Proceeds;" (6) the sale of the corporate aircraft owned by the Company on the date of issuance of the Notes to Robert M. Wolff or his designee; or (7) the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of issuance of the Notes. In addition, notwithstanding the foregoing, any Affiliate Transaction between the Company and Affiliated Embroiderers relating to the provision of embroidery services in the ordinary course of business shall not be subject to the provisions of clause (ii) above. Subsidiary Guarantees. The Indenture will provide that if the Company or any of its Restricted Subsidiaries shall acquire or create another Restricted Subsidiary after the date of the Indenture, then such newly 61 acquired or created Subsidiary shall execute a Subsidiary Guarantee and deliver an opinion of counsel in accordance with the terms of the Indenture. Designation of Restricted and Non-Restricted Subsidiaries. The Indenture will provide that, subject to the exceptions described below, from and after the date of original issuance of the Notes, the Company may designate any existing or newly formed or acquired Subsidiary as a Non-Restricted Subsidiary; provided that (i) either (A) the Subsidiary to be so designated has total assets of $1.0 million or less or (B) immediately before and after giving effect to such designation on a Pro Forma Basis: (1) the Company could incur $1.00 of additional Indebtedness pursuant to the first sentence of the "Limitation on Incurrence of Indebtedness" covenant determined on a Pro Forma Basis; and (2) no Default or Event of Default shall have occurred and be continuing, and (ii) all transactions between the Subsidiary to be so designated and its Affiliates remaining in effect are permitted pursuant to the "Limitation on Transactions with Affiliates" covenant. Any Investment made by the Company or any Restricted Subsidiary which is redesignated from a Restricted Subsidiary to a Non-Restricted Subsidiary shall be considered a Restricted Payment (to the extent not previously included as a Restricted Payment) made on the day such Subsidiary is designated a Non-Restricted Subsidiary in the amount of the greater of (i) the fair market value (as determined by the Board of Directors of the Company in good faith) of the Equity Interests of such Subsidiary held by the Company and its Restricted Subsidiaries on such date, and (ii) the amount of the Investments determined in accordance with GAAP made by the Company and any of its Restricted Subsidiaries in such Subsidiary. A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary. The Company may not, and may not permit any Restricted Subsidiary to, take any action or enter into any transaction or series of transactions that would result in a Person becoming a Restricted Subsidiary (whether through an acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise, but not including through the creation of a new Restricted Subsidiary) unless, immediately before and after giving effect to such action, transaction or series of transactions on a Pro Forma Basis, (a) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first sentence of "Limitation on Incurrence of Indebtedness" and (b) no Default or Event of Default shall have occurred and be continuing. The designation of a Subsidiary as a Restricted Subsidiary or the removal of such designation is required to be made by a resolution adopted by a majority of the Board of Directors of the Company stating that the Board of Directors has made such designation in accordance with the Indenture, and the Company is required to deliver to the Trustee such resolution together with an Officers' Certificate certifying that the designation complies with the Indenture. Such designation will be effective as of the date specified in the applicable resolution, which may not be before the date the applicable Officers' Certificate is delivered to the Trustee. MERGER OR CONSOLIDATION The Indenture will provide that the Company shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets to, any person (any such consolidation, merger or sale being a "Disposition") unless: (a) the successor corporation of such Disposition or the corporation to which such Disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (b) the successor corporation of such Disposition or the corporation to which such Disposition shall have been made expressly assumes the Obligations of the Company, pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Indenture and the Notes; (c) immediately after such Disposition, no Default or Event of Default shall exist; and (d) the corporation formed by or surviving any such Disposition, or the corporation to which such Disposition shall have been made, shall (i) have Consolidated Net Worth (immediately after the Disposition but prior to giving any pro forma effect to purchase accounting adjustments or Restructuring Charges resulting from the Disposition) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the Disposition, (ii) be permitted immediately after the Disposition by the terms of the Indenture to issue at least $1.00 of additional Indebtedness determined on a Pro Forma Basis, and (iii) have a Cash Flow Coverage Ratio for the four fiscal quarters immediately preceding the applicable Disposition, determined on a Pro Forma Basis, equal to or greater 62 than the actual Cash Flow Coverage Ratio of the Company for such four quarter period. The limitations in the Indenture on the Company's ability to make a Disposition described in this paragraph do not restrict the Company's ability to sell less than all or substantially all of its assets, such sales being governed by the "Asset Sales" provisions of the Indenture as described herein. Prior to the consummation of any proposed Disposition, the Company shall deliver to the Trustee an Officers' Certificate to the foregoing effect and an opinion of counsel stating that the proposed Disposition and such supplemental indenture comply with the Indenture. PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES So long as the Notes are outstanding, whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company and the Guarantors shall file with the Commission (unless the Commission will not accept such filing) the annual reports, quarterly reports and other documents relating to the Company and its Restricted Subsidiaries that the Company would have been required to file with the Commission pursuant to Section 13 or 15(d) if the Company were subject to such reporting requirements. The Company and the Guarantors will also provide to all holders of Notes and file with the Trustee copies of such annual reports, quarterly reports and other documents required to be furnished to stockholders generally under the Exchange Act. In addition, the Company and the Guarantors have agreed that, for so long as any Notes remain outstanding, they will furnish to the Holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. EVENTS OF DEFAULT AND REMEDIES The Indenture will provide that an Event of Default is: (a) a default for 30 days in payment of interest on or Liquidated Damages, if any, with respect to the Notes (whether or not prohibited by the subordination provisions of the Indenture); (b) a default in payment when due of principal or premium, if any, with respect to the Notes (whether or not prohibited by the subordination provisions of the Indenture); (c) the failure of the Company to comply with any of its other agreements or covenants in, or provisions of, such Indenture or the Notes outstanding under such Indenture and the Default continues for the period, if applicable, and after the notice specified in the next paragraph; (d) a default by the Company or any Restricted Subsidiary under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness or guarantee now exists or shall be created hereafter, if (1) either (A) such default results from the failure to pay principal of or interest on any such Indebtedness (after giving effect to any extensions thereof) or (B) as a result of such default the maturity of such Indebtedness has been accelerated prior to its expressed maturity, and (2) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal or interest thereon, or, because of the acceleration of the maturity thereof, aggregates in excess of $10.0 million; (e) a failure by the Company or any Restricted Subsidiary to pay final judgments (not covered by insurance) aggregating in excess of $5.0 million which judgments a court of competent jurisdiction does not rescind, annul or stay within 45 days after their entry; (f) certain events of bankruptcy or insolvency involving the Company or any Significant Subsidiary and (g) except as permitted by the Indenture, any Note Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Note Guarantee. In the case of any Event of Default pursuant to clause (a) or (b) above occurring by reason of any willful action (or inactions) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have to pay pursuant to a redemption of Notes as described under "--Redemption of Notes--Optional Redemption," an equivalent premium shall also become and be immediately, due and payable to the extent permitted by law. A Default or Event of Default under clause (c) (other than an Event of Default arising under the "Merger or Consolidation" covenant which shall be an Event of Default with the notice but without the passage of time 63 specified in this paragraph) is not an Event of Default under the Indenture until the Trustee or the holders of at least 25% in principal amount of the Notes then outstanding notify the Company of the Default and the Company does not cure the Default within 30 days after receipt of the notice. A Default or Event of Default under clause (f) of the preceding paragraph will result in the Notes automatically becoming due and payable without further action or notice. Upon the occurrence of an Event of Default, the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all Notes 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" (the "Acceleration Notice") and the same shall become immediately due and payable or, if there are any amounts outstanding under the New Credit Agreement, shall become immediately due and payable upon the first to occur of acceleration of the New Credit Agreement or five business days after receipt by the Company of such Acceleration Notice, but only if such Event of Default is then continuing. The holders of a majority in principal amount of the Notes then outstanding under the Indenture, by notice to the Trustee, may rescind any declaration of acceleration of such Notes and its consequences (if the rescission would not conflict with any judgment or decree) if all existing Events of Default (other than the nonpayment of principal of or interest on such Notes that shall have become due by such declaration) shall have been cured or waived. Subject to certain limitations, holders of a majority in principal amount of the Notes then outstanding under the Indenture may direct the Trustee in its exercise of any trust or power. Holders of the Notes may not enforce the Indenture, except as provided therein. The Trustee may withhold from holders of Notes notice of any continuing Default or Event of Default (except a Default or an Event of Default in payment of principal, premium, if any, or interest) if the Trustee determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the Notes then outstanding may on behalf of all holders of such Notes waive any existing Default or Event of Default under the Indenture and its consequences, except a continuing Default in the payment of the principal of, or premium, if any, interest or Liquidated Damages, if any, on, such Notes, which may only be waived with the consent of each holder of the Notes affected. Upon any payment or distribution of assets of the Company and its subsidiaries in a total or partial liquidation, dissolution, reorganization or similar proceeding, including a Default under clause (f) above involving certain events of bankruptcy or insolvency of the Company or a Significant Subsidiary, there may not be sufficient assets remaining to satisfy the claims of any Holders of Notes given the subordination of the Notes to the obligations of the Company under Senior Indebtedness and to the obligations of the Subsidiaries of the Company. The Company is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and upon an officer of the Company becoming aware of any Default or Event of Default, a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES, STOCKHOLDERS AND SUBSIDIARIES No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes issued in accordance with the Indenture. Each holder of the Notes by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities laws and the Commission is of the view that such a waiver is against public policy. SATISFACTION AND DISCHARGE OF THE INDENTURE The Company at any time may terminate all of its and the Guarantors' obligations under the Notes, the Note Guarantees and the Indenture ("legal defeasance option"), except for certain obligations (including those with respect to the defeasance trust (as defined herein) and obligations to register the transfer or exchange of the 64 Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes). The Company at any time may terminate (1) its obligations under the "Change of Control" and "Asset Sales" provisions described herein and the covenants described under "Certain Covenants" and certain other covenants in the Indenture, (2) the operation of clauses (c), (d) and (e) contained in the first paragraph of the "Events of Default and Remedies" provisions described herein and (3) the limitations contained in clauses (c) and (d) under the "Merger or Consolidation" provisions described herein (collectively, a "covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes shall not be accelerated because of an Event of Default specified in clauses (c), (d) or (e) in the first paragraph under the "Events of Default and Remedies" provisions described herein or because of the Company's failure to comply with clauses (c) and (d) under the "Merger or Consolidation" provisions described herein. To exercise either defeasance option with respect to the Notes outstanding, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations (as defined in the Indenture) for the payment of principal of and premium and unpaid interest and Liquidated Damages, if any, on the Notes then outstanding to redemption or maturity, as the case may be, and must comply with certain other conditions, including the passage of 91 days and the delivery to the Trustee of an opinion of counsel to the effect that holders of such Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such opinion of counsel must be based on a ruling of the Internal Revenue Service or other change in applicable federal income tax law). TRANSFER AND EXCHANGE Holders of Notes may transfer or exchange their Notes in accordance with the Indenture, but the Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the Indenture, in connection with any such transfer or exchange. Neither the Company nor the Registrar is required to issue, register the transfer of, or exchange (i) any Note selected for redemption or tendered pursuant to an Offer, or (ii) any Note during the period between (a) the date the Trustee receives notice of a redemption from the Company and the date the Notes to be redeemed are selected by the Trustee or (b) a record date and the next succeeding interest payment date. The registered holder of a Note will be treated as its owner for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Subject to certain exceptions, the Indenture may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the Notes then outstanding under the Indenture, and any existing Default or Event of Default (other than a payment default) or compliance with any provision may be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding under the Indenture. Without the consent of any holder of Notes, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption by a successor corporation of the Company's obligations to the holders of Notes in the case of a Disposition, to comply with the Trust Indenture Act, or to make any change that does not adversely affect the legal rights of any holder of Notes. Without the consent of each holder of Notes affected, the Company may not (i) reduce the principal amount of Notes whose holders must consent to an amendment to the Indenture or a waiver under the Indenture; (ii) reduce the rate of or change the interest payment time of the Notes, or alter the redemption provisions 65 with respect thereto (other than the provisions relating to the covenants described above under the caption "--Mandatory Offers to Purchase Notes-- Change of Control" and "--Asset Sales") or the price at which the Company is required to offer to purchase the Notes; (iii) reduce the principal of or change the fixed maturity of the Notes; (iv) make the Notes payable in money other than stated in the Notes; (v) make any change in the provisions concerning waiver of Defaults or Events of Default by holders of the Notes, or rights of holders of the Notes to receive payment of principal or interest; or (vi) waive any default in the payment of principal of or premium, or unpaid interest or Liquidated Damages, if any, on the Notes. In addition, any amendment to the provisions of Article 10 of the Indenture (which relate to subordination) will require the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding if such amendment would adversely affect the rights of Holders of Notes. CONCERNING THE TRUSTEE The Indenture will contain certain limitations on the rights of the Trustee, if it becomes a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined in the Trust Indenture Act) it must eliminate such conflict or resign. The holders of a majority in principal amount of the Notes then outstanding 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 has not been cured), the Trustee will be required, in the exercise of its power, to use the degree of care and skill of a prudent person in similar circumstances in the conduct of its own affairs. Subject to the provisions of the Indenture, the Trustee will be under no obligation to exercise any of its rights or powers under its Indenture at the request of any of the holders of the Notes, unless such holders shall have offered to the Trustee security and indemnity satisfactory to it. BOOK-ENTRY, DELIVERY AND FORM Except as set forth in the next paragraph, the New Notes to be exchanged as set forth herein will initially be issued in the form of one Global New Note (the "Global New Note"). The Global New Note will be deposited on the Expiration Date with, or on behalf of, the Depositary and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global New Note Holder"). New Notes that are issued as described below under "--Certificated New Notes" will be issued in the form of registered definitive certificates (the "Certificated New Notes"). Such Certificated New Notes may, unless the Global New Note has previously been exchanged for Certificated New Notes, be exchanged for an interest in the Global New Note representing the principal amount of New Notes being transferred. The Depositary is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depositary's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary's Participants include securities brokers and dealers (including the Initial Purchasers), banks and trust companies, clearing corporations and certain other organizations. Access to the Depositary's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depositary's Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Depositary's Participants or the Depositary's Indirect Participants. So long as the Global New Note Holder is the registered owner of any New Notes, the Global New Note Holder will be considered the sole holder under the Indenture of any New Notes evidenced by the Global New 66 Note. Beneficial owners of New Notes evidenced by the Global New Note will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records of the Depositary or for maintaining, supervising or reviewing any records of the Depositary relating to the New Notes. Payments in respect of the principal of, premium, if any, and interest on New Notes registered in the name of the Global New Note Holder on the applicable record date will be payable by the Trustee to or at the direction of the Global New Note Holder in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the persons in whose names New Notes, including the Global New Note, are registered as the owners thereof for the purpose of receiving such payments. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of New Notes. The Company believes, however, that it is currently the policy of the Depositary to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective holdings of beneficial interests in the relevant security as shown on the records of the Depositary. Payments by the Depositary's Participants and the Depositary's Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary's Participants or the Depositary's Indirect Participants. CERTIFICATED NEW NOTES Subject to certain conditions, any person having a beneficial interest in the Global New Note may, upon request to the Trustee, exchange such beneficial interest for New Notes in the form of Certificated New Notes. Upon any such issuance, the Trustee is required to register such Certificated New Notes in the name of, and cause the same to be delivered to, such person or persons (or the nominee of any thereof). In addition, if (i) the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days or (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of New Notes in the form of Certificated New Notes under the Indenture, then, upon surrender by the Global New Note Holder of its Global New Note, New Note in such form will be issued to each person that the Global New Note Holder and the Depositary identify as being the beneficial owner of the related New Notes. Neither the Company nor the Trustee will be liable for any delay by the Global New Note Holder or the Depositary in identifying the beneficial owners of New Notes and the Company and the Trustee may conclusively rely on, and will protected in relying on, instructions from the Global New Note Holder or the Depositary for all purposes. SAME-DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the New Notes represented by the Global New Note (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Global New Note Holder. With respect to Certificated New Notes, the Company will make all payments of principal, premium, if any, and interest by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearinghouse or next-day funds. In contrast, New Notes represented by the Global New Note are expected to be eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such New Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in the Certificated New Notes will also be settled in immediately available funds. 67 CERTAIN DEFINITIONS Set forth below are certain of the defined terms used in the Indenture. Reference is made to the Indenture for the definition of all other terms used in the Indenture. "Acquisition Agreement" means the agreement, dated as of January 24, 1997, among Holdings, GFSI, Inc. and the shareholders party thereto, relating to the purchase and sale of the stock of Winning Ways, Inc. "Affiliate" means any of the following: (i) any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, (ii) any spouse, immediate family member or other relative who has the same principal residence as any person described in clause (i) above, (iii) any trust in which any such persons described in clause (i) or (ii) above has a beneficial interest and (iv) any corporation or other organization of which any such persons described above collectively own 50% or more of the equity of such entity. "Affiliated Embroiderers" means the affiliated entities that provide embroidery services for the Company on the date of issuance of the Notes. "Asset Sale" means the sale, lease, conveyance or other disposition by the Company or a Restricted Subsidiary of assets or property whether owned on the date of original issuance of the Notes or thereafter acquired, in a single transaction or in a series of related transactions; provided that Asset Sales will not include such sales, leases, conveyances or dispositions in connection with (i) the sale or disposition of any Restricted Investment, (ii) any Equity Offering by the Company, (iii) the surrender or waiver of contract rights or the settlement, release or surrender of contract, tort or other claims of any kind, (iv) the sale or lease of inventory equipment, accounts receivable or other assets in the ordinary course of business, (v) a sale-leaseback of assets within one year following the acquisition of such assets, (vi) the grant of any license of patents, trademarks, registration therefor and other similar intellectual property, (vii) a transfer of assets by the Company or a Restricted Subsidiary to the Company or a Restricted Subsidiary, (viii) the designation of a Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to the "--Designation of Restricted and Non-Restricted Subsidiaries" covenant, (ix) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company as permitted under "--Merger or Consolidation," (x) the sale or disposition of obsolete equipment or other obsolete assets, (xi) Restricted Payments permitted by the "Limitations on Restricted Payments" covenant, (xii) the exchange of assets for other non-cash assets that (a) are useful in the business of the Company and its Restricted Subsidiaries and (b) have a fair market value at least equal to the fair market value of the assets being exchanged (as determined by the Board of Directors in good faith), (xiii) the sale of the corporate aircraft owned by the Company on the date of issuance of the Notes to Robert M. Wolff or his designees or (xiv) the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of issuance of the Notes. "Board of Directors" means the Company's board of directors or any authorized committee of such board of directors. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including any preferred stock. "Cash Flow" means, for any given period and person, the sum of, without duplication, Consolidated Net Income, plus (a) any provision for taxes based on income or profits to the extent such income or profits were included in computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to the extent deducted in computing Consolidated Net Income, plus (c) the amortization of all intangible assets, to the extent such amortization was deducted in computing Consolidated Net Income (including, but not limited to, inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), plus (d) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees, including those in connection with the Transactions), to the extent deducted in computing Consolidated Net Income, plus (e) all depreciation and all other non-cash charges (including, without limitation, those charges relating to purchase accounting adjustments and LIFO adjustments), 68 to the extent deducted in computing Consolidated Net Income, plus (f) any interest income, to the extent such income was not included in computing Consolidated Net Income, plus (g) all dividend payments on preferred stock (whether or not paid in cash) to the extent deducted in computing Consolidated Net Income, plus (h) any extraordinary or nonrecurring charge or expense arising out of the implementation of SFAS 106 or SFAS 109 to the extent deducted in computing Consolidated Net Income, plus (i) to the extent not covered in clause (d) above, fees paid or payable in respect of the TJC Agreement to the extent deducted in computing Consolidated Net Income, plus (j) the net loss of any person, other than those of a Restricted Subsidiary, to the extent deducted in computing Consolidated Net Income, plus (k) net losses in respect of any discontinued operations as determined in accordance with GAAP, to the extent deducted in computing Consolidated Net Income, minus (l) the portion of Consolidated Net Income attributable to the minority interests in other persons, except the amount of such portion received in cash by the Company or its Restricted Subsidiaries; provided, however, that if any such calculation includes any period during which an acquisition or sale of a person or the incurrence or repayment of Indebtedness occurred, then such calculation for such period shall be made on a Pro Forma Basis. "Cash Flow Coverage Ratio" means, for any given period and person, the ratio of: (i) Cash Flow to (ii) the sum of Consolidated Interest Expense and all dividend payments on any series of preferred stock of such person (except dividends paid or payable in additional shares of Capital Stock (other than Disqualified Stock) and except for accrued and unpaid dividends with respect to the Holdings Preferred Stock outstanding on the date of original issuance of the Notes), in each case, without duplication; provided, however, that if any such calculation includes any period during which an acquisition or sale of a person or the incurrence or repayment of Indebtedness occurred, then such calculation for such period shall be made on a Pro Forma Basis. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties , (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), (iv) the consummation of the first transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) becomes the "beneficial owner" (as defined above), directly or indirectly, of more of the Voting Stock of the Company (measured by voting power rather than number of shares) than is at the time "beneficially owned" (as defined above) by the Principals and their Related Parties in the aggregate or (v) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. For purposes of this definition, any transfer of an equity interest of an entity that was formed following the date of issuance of the Notes for the purpose of acquiring Voting Stock of the Company will be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the Company's assets. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of Notes to require the Company to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Company and its Subsidiaries to another person may be uncertain. "Commission" means the U.S. Securities and Exchange Commission. 69 "Consolidated Interest Expense" means, for any given period and person, the aggregate of the interest expense in respect of all Indebtedness of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount on any such Indebtedness, all non-cash interest payments, the interest portion of any deferred payment obligation and the interest component of capital lease obligations, but excluding amortization of deferred financing fees if such amortization would otherwise be included in interest expense); provided, however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense shall be calculated on a Pro Forma Basis; provided further that any premiums, fees and expenses (including the amortization thereof) payable in connection with the Offering and the Transactions or any other refinancing of Indebtedness will be excluded. For purposes of this definition, the Consolidated Interest Expense of the Company shall include the cash interest expense of Holdings paid in respect of the Holdings Subordinated Notes. "Consolidated Net Income" means, for any given period and person, the aggregate of the Net Income of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that: (i) the Net Income of any person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (ii) Consolidated Net Income of any person will not include, without duplication, any deduction for: (A) any increased amortization or depreciation resulting from the write-up of assets pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended or supplemented from time to time, (B) the amortization of all intangible assets (including amortization attributable to inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), (C) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees), (D) any extraordinary or nonrecurring charges relating to any premium or penalty paid, write-off or deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (E) any Restructuring Charges; provided, however, that for purposes of determining the Cash Flow Coverage Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis. "Consolidated Net Worth" with respect to any person means, as of any date, the consolidated equity of the common stockholders of such person (excluding the cumulated foreign currency translation adjustment), all determined on a consolidated basis in accordance with GAAP, but without any reduction in respect of the payment of dividends on any series of such person's preferred stock if such dividends are paid in additional shares of Capital Stock (other than Disqualified Stock); provided, however, that Consolidated Net Worth shall also include, without duplication: (a) the amortization of all write-ups of inventory, (b) the amortization of all intangible assets (including amortization of goodwill, debt and financing costs, and Incentive Arrangements), (c) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees), (d) any increased amortization or depreciation resulting from the write-up of assets pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended and supplemented from time to time, (e) any extraordinary or nonrecurring charges or expenses relating to any premium or penalty paid, write-off or deferred financing costs or other financial recapitalization charges incurred in connection with redeeming or retiring any Indebtedness prior to its stated maturity, (f) any Restructuring Charges and (g) any extraordinary or non- recurring charge arising out of the implementation of SFAS 106 or SFAS 109; provided, however, that Consolidated Net Worth shall be calculated on a Pro Forma Basis. Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Designated Senior Indebtedness" means (i) any Indebtedness outstanding under the New Credit Agreement and (ii) any other Senior Indebtedness permitted under the Indenture the principal amount of which is $10.0 million or more and that has been designated by the Company as "Designated Senior Indebtedness." 70 "Disqualified Stock" means any Capital Stock that 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, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part on, or prior to, the maturity date of the Notes. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated "A" (or higher) according to S&P or Moody's at the time as of which any investment or rollover therein is made. "Equity Interests" means Capital Stock or partnership interests or warrants, options or other rights to acquire Capital Stock or partnership interests (but excluding (i) any debt security that is convertible into, or exchangeable for, Capital Stock or partnership interests and (ii) any other Indebtedness or Obligation); provided, however, that Equity Interests will not include any Incentive Arrangements or obligations or payments thereunder. "Equity Offering" means a public or private offering by the Company for cash of Equity Interests and all warrants, options or other rights to acquire Capital Stock, other than (i) an offering of Disqualified Stock or (ii) Incentive Arrangements or obligations or payments thereunder. "GAAP" means generally accepted accounting principles, consistently applied, as of the date of original issuance of the Notes. All financial and accounting determinations and calculations under the Indenture will be made in accordance with GAAP. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantors" means each Restricted Subsidiary that executes a Note Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. "Hedging Obligations" means, with respect to any person, the Obligations of such persons under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, (ii) foreign exchange contracts, currency swap agreements or similar agreements and (iii) other agreements or arrangements designed to protect such person against fluctuations, or otherwise to establish financial hedges in respect of, exchange rates, currency rates or interest rates. "Holdings" means GFSI Holdings, Inc., a Delaware corporation. "Holdings Preferred Stock" means the 12% cumulative preferred stock due 2009 of Holdings, as in effect on the date of issuance of the Notes. "Holdings Subordinated Notes" means $25.0 million in aggregate principal amount of Holdings 12% subordinated notes due 2008 as in effect on the date of the issuance of the Notes or any Indebtedness of Holdings issued or given in exchange for, or the proceeds of which are used to, extend, refinance, renew, replace, substitute or refund such Holdings Subordinated Notes; provided that any such Indebtedness (i) is issued in a principal amount not exceeding the then outstanding principal amount of the Holdings Subordinated Notes, (ii) has an interest rate not exceeding 12%, (iii) is subordinated to other Indebtedness of Holdings to the same extent as the Holdings Subordinated Notes and (iv) has a Weighted Average Life to Maturity no greater than the Holdings Subordinated Notes. "Incentive Arrangements" means any earn-out agreements, stock appreciation rights, "phantom" stock plans, employment agreements, non-competition agreements, subscription and stockholders agreements and other incentive and bonus plans, including the Incentive Compensation Plan, and similar arrangements made in connection with acquisitions of persons or businesses by the Company or the Restricted Subsidiaries or the retention of consultants, executives, officers or employees by Holdings, the Company or the Restricted Subsidiaries. 71 "Indebtedness" means, with respect to any person, any indebtedness, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the deferred and unpaid balance of the purchase price of any property (including pursuant to capital leases), except any such balance that constitutes an accrued expense or a trade payable, and any Hedging Obligations, if and to the extent such indebtedness (other than a Hedging Obligation) would appear as a liability upon a balance sheet of such person prepared on a consolidated basis in accordance with GAAP and also includes, to the extent not otherwise included, the guarantee of items that would be included within this definition; provided, however, that "Indebtedness" will not include any Incentive Arrangements or obligations or payments thereunder. "Insolvency or Liquidation Proceeding" means (i) any insolvency or bankruptcy or similar case or proceeding, or any reorganization, receivership, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or (ii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company. "Investment" means any capital contribution to, or other debt or equity investment in, any Person. "issue" means create, issue, assume, guarantee, incur or otherwise become directly or indirectly liable for any Indebtedness or Capital Stock, as applicable; provided, however, that any Indebtedness or Capital Stock of a person existing at the time such person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition, redesignation of a Non- Restricted Subsidiary or otherwise) shall be deemed to be issued by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary. For this definition, the terms "issuing," "issuer," "issuance" and "issued" have meanings correlative to the foregoing. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Marketable Securities" means (a) Government Securities, (b) any certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution, (c) commercial paper maturing not more than 270 days after the date of acquisition of an issuer (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "A-2" (or higher) according to S&P or "P-2" (or higher) according to Moody's or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (d) any bankers acceptances or money market deposit accounts issued by an Eligible Institution and (e) any fund investing exclusively in investments of the types described in clauses (a) through (d) above. "Moody's" means Moody's Investors Service, Inc. "Net Income" means, with respect to any person, the net income (loss) of such person, determined in accordance with GAAP excluding, however, any gain or loss, together with any related provision for taxes, realized in connection with any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions). "Net Proceeds" means, with respect to any Asset Sale, the aggregate amount of cash proceeds (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, and including any amounts received as disbursements or withdrawals from any escrow or similar account established in connection with any such Asset Sale, but, in either such case, only as and when so received) received by the Company or any of its Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the cash expenses of such Asset Sale (including, without limitation, the payment of principal of, and premium, if any, and interest on, Indebtedness required to be paid as a result of such Asset Sale (other than the Notes) and legal, accounting, management and advisory and 72 investment banking fees and sales commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion of cash proceeds that 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 of its Restricted Subsidiaries shall constitute Net Proceeds on such date, (iv) any relocation expenses and pension, severance and shutdown costs incurred as a result thereof, and (v) any deduction or appropriate amounts to be provided by the Company or any of its Restricted Subsidiaries as a reserve in accordance with GAAP against any liabilities associated with the asset disposed of in such transaction and retained by the Company or such Restricted Subsidiary after such sale or other disposition thereof, including, without limitation, pension and other post- employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with such transaction. "New Credit Agreement" means that certain credit facility, dated as of February 27, 1997, among the Company, as borrower, The First National Bank of Chicago, as contractual representative, and the lenders party thereto, together with all loan documents and instruments thereunder (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including, without limitation, increasing the amount of available borrowings, letters of credit or other financial accommodations thereunder, all or any portion of the Obligations under any such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders). "Non-Restricted Subsidiary" means any Subsidiary of the Company other than a Restricted Subsidiary. "Obligations" means, with respect to any Indebtedness, all principal, interest, premiums, penalties, fees, indemnities, expenses (including legal fees and expenses), reimbursement obligations and other liabilities payable to the holder of such Indebtedness under the documentation governing such Indebtedness, and any other claims of such holder arising in respect of such Indebtedness. "Other Permitted Indebtedness" means: (i) Indebtedness of the Company and its Restricted Subsidiaries existing as of the date of original issuance of the Notes and all related Obligations as in effect on such date; (ii) Indebtedness of the Company and its Restricted Subsidiaries in respect of bankers acceptances and letters of credit (including, without limitation, letters of credit in respect of workers' compensation claims) issued in the ordinary course of business, or other Indebtedness in respect of reimbursement-type obligations regarding workers' compensation claims; (iii) Refinancing Indebtedness, provided that: (A) the principal amount of such Refinancing Indebtedness shall not exceed the outstanding principal amount of Indebtedness (including unused commitments) extended, refinanced, renewed, replaced, substituted or refunded plus any amounts incurred to pay premiums, fees and expenses in connection therewith, (B) the Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, substituted or refunded; provided, however, that this limitation in this clause (B) does not apply to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of Refinancing Indebtedness of Subordinated Indebtedness, such Refinancing Indebtedness shall be subordinated to the Notes at least to the same extent as the Subordinated Indebtedness being extended, refinanced, renewed, replaced, substituted or refunded; (iv) intercompany Indebtedness of and among the Company and its Restricted Subsidiaries; (v) Indebtedness of the Company and its Restricted Subsidiaries incurred in connection with making permitted Restricted Payments under clauses (iii), (iv) (but only to the extent that such Indebtedness is provided by the Company or a Restricted Subsidiary) or (x) of the second sentence of the "Limitation on 73 Restricted Payments" covenant; provided that any Indebtedness incurred pursuant to this clause (v) is expressly subordinate in right of payment to the Notes; (vi) Indebtedness of any Non-Restricted Subsidiary created after the date of original issuance of the Notes, provided that such Indebtedness is nonrecourse to the Company and its Restricted Subsidiaries and the Company and its Restricted Subsidiaries have no Obligations with respect to such Indebtedness; (vii) Indebtedness of the Company and its Restricted Subsidiaries under Hedging Obligations; (viii) Indebtedness of the Company and its Restricted Subsidiaries arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts, which will not be, and will not be deemed to be, inadvertent) drawn against insufficient funds in the ordinary course of business; (ix) Indebtedness of the Company and its Restricted Subsidiaries in connection with performance, surety, statutory, appeal or similar bonds in the ordinary course of business; (x) Indebtedness of the Company and its Restricted Subsidiaries in connection with agreements providing for indemnification, purchase price adjustments and similar obligations in connection with the sale or disposition of any of their business, properties or assets; (xi) The guarantee by the Company or any of the Guarantors of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by another provision of the covenant entitled "Limitation on Incurrence of Indebtedness"; and (xii) Indebtedness of any person at the time it is acquired as a Restricted Subsidiary, provided that such Indebtedness was not issued by such person in connection with or in anticipation of such acquisition. "Permitted Junior Securities" means Equity Interests in the Company or subordinated debt securities of the Company that (i) are subordinated to all Senior Indebtedness (and any debt securities issued in exchange for Senior Indebtedness) to at least the same extent as the Notes are subordinated to Senior Indebtedness pursuant to Article 10 of the Indenture, (ii) have a Weighted Average Life to Maturity no shorter than the Weighted Average Life to Maturity of the Notes and (iii) if there are any amounts outstanding under the New Credit Agreement, have a Weighted Average Life to Maturity at least as long as the sum of (a) the Weighted Average Life to Maturity of the New Credit Agreement or any debt securities issued in exchange therefor (whichever is longer) plus (b) the positive difference, if any, between the Weighted Average Life to Maturity of the Notes and the Weighted Average Life to Maturity of the New Credit Agreement, in each case measured immediately prior to the issuance of such Permitted Junior Securities. "Permitted Liens" means: (i) Liens securing Senior Indebtedness of the Company or any Guarantor that was permitted by the terms of the Indenture to be incurred; (ii) Liens for taxes, assessments, governmental charges or claims which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (iii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (iv) Liens incurred on deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; 74 (v) Liens incurred on deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (vi) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Restricted Subsidiaries incurred in the ordinary course of business; (vii) Liens (including extensions, renewals and replacements thereof) upon property acquired (the "Acquired Property") after the date of original issuance of the Notes, provided that: (A) any such Lien is created solely for the purpose of securing Indebtedness representing, or issued to finance, refinance or refund, the cost (including the cost of construction) of the Acquired Property, (B) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of the cost of the Acquired Property, (C) such Lien does not extend to or cover any property other than the Acquired Property and any improvements on such Acquired Property, and (D) the issuance of the Indebtedness to purchase the Acquired Property is permitted by the "Limitation on Incurrence of Indebtedness" covenant; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to an Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any of its Restricted Subsidiaries; (xi) Liens securing Indebtedness under Hedging Obligations; (xii) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or its Restricted Subsidiaries in the ordinary course of business; (xiv) any interest or title of a lessor in property subject to any capital lease obligation or operating lease; (xv) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xvi) Liens existing on the date of original issuance of the Notes and any extensions, refinancings, renewals, replacements, substitutions or refundings thereof; (xvii) any Lien granted to the Trustee and any substantially equivalent Lien granted to any trustee or similar institution under any indenture for Senior Indebtedness permitted by the terms of the Indenture; (xviii) Liens in favor of the Company or any Restricted Subsidiary; (xix) additional Liens at any one time outstanding in respect of properties or assets where aggregate fair market value does not exceed $2.0 million (the fair market value to be determined on the date such Lien is granted on such properties or assets); and (xx) Liens securing intercompany Indebtedness issued by any Restricted Subsidiary to the Company or another Restricted Subsidiary. "Principals" means (a) The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT PLC, and their respective Affiliates, principals, partners and employees, family members of any of the foregoing and trusts for the benefit of any of the foregoing, including, without limitation, Leucadia National Corporation and Jordan Industries, Inc., and their respective Subsidiaries, (b) the officers, directors and employees of the Company on 75 the date of issuance of the Notes and their respective Affiliates and family members and trusts for the benefit of any of the foregoing. For the purpose of the definition of "Principals," The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT PLC shall be deemed to be Affiliates. "Pro Forma Basis" means, for purposes of determining Consolidated Net Income in connection with the Cash Flow Coverage Ratio (including in connection with the "Limitation on Restricted Payments" covenant, the "Designation of Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or Consolidation" covenant, the incurrence of Indebtedness pursuant to the first sentence of the "Limitation on Incurrence of Indebtedness" covenant and Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant) giving pro forma effect to (x) any acquisition or sale of a person, business or asset, related incurrence, repayment or refinancing of Indebtedness or other related transactions, including any Restructuring Charges which would otherwise be accounted for as an adjustment permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence, repayment or refinancing of any Indebtedness and the application of the proceeds therefrom, in each case, as if such acquisition or sale and related transactions, restructurings, consolidations, cost savings, reductions, incurrence, repayment or refinancing were realized on the first day of the relevant period permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP. Furthermore, in calculating the Cash Flow Coverage Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the determination 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 determination date; (2) if interest on any Indebtedness actually incurred on the determination 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 determination date will be deemed to have been in effect during the relevant period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to interest rate swaps or similar interest rate protection Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Redeemable Preferred Stock" means preferred stock that by its terms or otherwise is required to be redeemed or is redeemable at the option of the holder thereof on, or prior to, the maturity date of the Notes. "Refinancing Indebtedness" means (i) Indebtedness of the Company and its Restricted Subsidiaries issued or given in exchange for, or the proceeds of which are used to, extend, refinance, renew, replace, substitute or refund any Indebtedness permitted under this Indenture or any Indebtedness issued to so extend, refinance, renew, replace, substitute or refund such Indebtedness, (ii) any refinancings of Indebtedness issued under the New Credit Agreement, and (iii) any additional Indebtedness issued to pay premiums and fees in connection with clauses (i) and (ii). "Related Party" with respect to any Principal means (A) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (B) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Restricted Investment" means any Investment in any person; provided that Restricted Investments will not include: (i) Investments in Marketable Securities and other negotiable instruments permitted by the Indenture; (ii) any Incentive Arrangements; (iii) Investments in the Company; or (iv) Investments in any Restricted Subsidiary (provided that any Investment in a Restricted Subsidiary was made for fair market value (as determined by the Board of Directors in good faith)). The amount of any Restricted Investment shall be the amount of cash and the fair market value at the time of transfer of all other property (as determined by the Board of Directors in good faith) initially invested or paid for such Restricted Investment, plus all additions thereto, without any adjustments for increases or decreases in value of or write-ups, write-downs or write-offs with respect to, such Restricted Investment. 76 "Restricted Subsidiary" means: (i) any Subsidiary of the Company existing on the date of original issuance of the Notes, and (ii) any other Subsidiary of the Company formed, acquired or existing after the date of original issuance of the Notes that is designated as a "Restricted Subsidiary" by the Company pursuant to a resolution approved a majority of the Board of Directors, provided, however, that the term Restricted Subsidiary shall not include any Subsidiary of the Company that has been redesignated by the Company pursuant to a resolution approved by a majority of the Board of Directors as a Non- Restricted Subsidiary in accordance with the "Designation of Restricted and Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have subsequently been redesignated a Restricted Subsidiary in accordance with clause (ii) of this definition. "Restructuring Charges" means any charges or expenses in respect of restructuring or consolidating any business, operations or facilities, any compensation or headcount reduction, or any other cost savings, of any persons or businesses either alone or together with the Company or any Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act. "S&P" means Standard & Poor's Corporation. "Senior Indebtedness" means, with respect to any person, (i) all Indebtedness of such person outstanding under the New Credit Agreement and all Hedging Obligations with respect thereto, (ii) any other Indebtedness of such person permitted to be incurred under the terms of the Indenture, provided, however, that Senior Indebtedness shall not include any Indebtedness which by the terms of the instrument creating or evidencing the same is subordinated or junior in right of payment to any other Senior Indebtedness in any respect, and (iii) all Obligations (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law) with respect to the foregoing, in each case whether outstanding on the date of the Indenture or thereafter incurred. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of such person to any of its Subsidiaries or other Affiliates (other than Indebtedness arising under the New Credit Agreement), (y) any trade payables or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of the Indenture. "SFAS 106" means Statement of Financial Accounting Standards No. 106. "SFAS 109" means Statement of Financial Accounting Standards No. 109. "Significant Subsidiary" means any Restricted Subsidiary of the Company that would be a "significant subsidiary" as defined in clause (2) of the definition of such term in Rule 1-02 of Regulation S-X under the Securities Act and the Exchange Act. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subordinated Indebtedness" means all Obligations with respect to Indebtedness if the instrument creating or evidencing the same, or pursuant to which the same is outstanding, designates such Obligations as subordinated or junior in right of payment to Senior Indebtedness. "Subsidiary" of any person means any entity of which the Equity Interests entitled to cast at least a majority of the votes that may be cast by all Equity Interests having ordinary voting power for the election of directors or other governing body of such entity are owned by such person (regardless of whether such Equity Interests are owned directly by such person or through one or more Subsidiaries). "Tax Sharing Agreement" means the tax sharing agreement between the Company and Holdings, as in effect on the date of issuance of the Notes. 77 "TJC Agreement" means the Management Consulting Agreement, dated the Closing Date, between the Company and TJC Management Corporation, as in effect on the date of original issuance of the Notes. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect the board of directors. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Indebtedness into (ii) the sum of the product(s) obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other requirement payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wolff Noncompetition Agreement" means the agreement, dated the Closing Date, between Holdings and Robert M. Wolff, relating to certain covenants not to compete with the business of the Company, as in effect on the date of issuance of the Notes. 78 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of important terms of certain indebtedness of the Company: EXISTING INDEBTEDNESS The Company's indebtedness at December 31, 1996 (the "Existing Indebtedness") included: (i) a $40.0 million line of credit from Boatmen's First National Bank ("Boatmen's"); (ii) a $10.0 million line of credit from The First National Bank of Chicago; (iii) a $10.0 million credit agreement from Boatmen's; (iv) a $9.5 million mortgage loan from Prudential Insurance Company of America; and (v) $300,000 of industrial revenue bonds from the City of Lexena, Kansas. The Company used the net proceeds from the Offering and the New Credit Agreement to repay the Existing Indebtedness. See "The Transactions" and "Use of Proceeds." NEW CREDIT AGREEMENT Concurrently with the completion of the Offering, the Company entered into the New Credit Agreement with The First National Bank of Chicago ("FNBC"), as contractual representative, and other lenders thereunder. The New Credit Agreement provides for borrowings of up to $115.0 million under three credit facilities: a term loan ("Term Loan A") in the principal amount of $40.0 million which matures in 2002, a term loan ("Term Loan B") in the principal amount of $25.0 million which matures in 2004 and a revolving credit facility ("Revolver") in the principal amount of up to $50.0 million (based upon availability) which matures in 2002. At the completion of the Transactions, $40.0 million, $25.0 million and approximately $2.7 million was outstanding under Term Loan A, Term Loan B and the Revolver, respectively, leaving approximately $47.3 million available under the Revolver for future borrowings and letter of credit issuances. Approximately $22.9 million of letters of credit were issued at Closing. See "The Transactions." The Company will pay interest (i) under each of Term Loan A and the Revolver based on, at the Company's option, either of FNBC's base rate plus 1.25% or the Eurodollar Rate (as defined in the New Credit Agreement) plus 2.25% and (ii) under Term Loan B based on, at the Company's option, either of FNBC's base rate plus 1.75% or the Eurodollar Rate plus 2.75%. The interest rate under each of Term Loan A, Term Loan B and the Revolver is subject to reduction based upon the Company's Leverage Ratio (as defined in the New Credit Agreement). A commitment fee of 0.50% will be paid by the Company for unutilized commitments under the Revolver, subject to reduction based upon the Company's Leverage Ratio. The Company's obligations under the New Credit Agreement are secured by a security interest in all of the Company's assets. In addition, the Company's obligations under the New Credit Agreement are guaranteed by substantially all of the Company's future subsidiaries. The New Credit Agreement contains customary covenants, including among other things covenants relating to minimum interest expense coverage ratio, minimum fixed charge coverage ratio, maximum leverage ratio and maximum rentals and restrictions on, among other things, granting of liens, asset sales, mergers and consolidations, investments and acquisitions, prepayments or redemptions of the Notes and incurring additional indebtedness. The New Credit Agreement also contains customary events of default, including, without limitation, change of control. 79 CERTAIN TRANSACTIONS The Jordan Company. In connection with the Acquisition, Holdings entered into an agreement (the "TJC Agreement") with TJC Management Corporation ("JMC"), an affiliate of TJC. Under the TJC Agreement, Holdings retained JMC to render services to the Company, its financial and business affairs, its relationships with its lenders and stockholders, and the operation and expansion of its business. The TJC Agreement expires in 2007, but is automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date. For the first two years, the TJC Agreement provides for an annual consulting fee of $500,000 payable on a quarterly basis. For the remaining term of the TJC Agreement, Holdings will pay JMC an annual consulting fee payable on a quarterly basis equal to the higher of (a) $500,000 or (b) 1.5% of EBITA (as defined in the TJC Agreement), provided that in years three through five of the Agreement, the annual fee does not exceed $750,000 and thereafter the annual fee does not exceed $1.0 million. In addition, the TJC Agreement provides for payment to JMC of (i) an investment banking and sponsorship fee of up to 2.0% of the purchase price of certain acquisitions or sales involving Holdings or the Company and (ii) a financial consulting fee of up to 1.0% of any debt, equity or other financing arranged by Holdings or the Company with the assistance of JMC. Both such fees are subject to Board of Directors approval. In connection with the Transactions, the Company paid JMC consulting and investment banking fees of $3.25 million pursuant to the terms of the TJC Agreement. The Company believes that the terms of the TJC Agreement are comparable to the terms that it would obtain from disinterested third parties for comparable services. See "Risk Factors--Control by Principal Stockholders." Tax Sharing Agreement. In connection with the Transactions, the Company and Holdings entered into a tax sharing agreement (the "Tax Sharing Agreement") for purposes of filing a consolidated federal income tax return and paying federal income taxes on a consolidated basis. Pursuant to the Tax Sharing Agreement, the Company and each of its consolidated subsidiaries will pay to Holdings on an annual basis an amount determined by reference to the separate tax liability of the Company as calculated pursuant to Section 1552(a)(1) of the Code and applicable regulations thereunder. Embroidery Service. The Company has entered into supply agreements with two affiliated companies (the "Affiliates") controlled by certain members of Company management. The supply agreements allow the Company to outsource embroidery work to the Affiliates in the event that demand for such work exceeds the Company's manufacturing capacity. Over the past three fiscal years, the Company has purchased $5.3 million of embroidered products under the Affiliate supply agreements. Embroidery work is outsourced only in response to firm customer orders. Under each of the supply agreements, the Affiliate embroiders blanks according to designs provided by the Company and under terms established by the Company. The Company believes that the terms of each of the supply agreements are comparable to the terms it would obtain from disinterested third parties for comparable services. Affiliate Loans. In March, 1996, the Company sold a portion of its embroidery equipment to one of the Affiliates for $181,000. To finance the acquisition of embroidery equipment by the Affiliate and to provide for working capital for both of the Affiliates, the Company loaned $150,000 and $700,000 under separate promissory notes. Each of the promissory notes is unsecured, has an interest rate of 6.8% per annum and matures July 1, 2000. Wolff Employment Agreement. Effective upon the consummation of the Transactions, the Company entered into the Wolff Employment Agreement. See "Management." Pursuant to the Wolff Employment Agreement, Mr. Wolff will serve as Chairman of the Company for a ten-year period ending on the tenth anniversary of the Acquisition. In exchange for his services, the Company will compensate Mr. Wolff with a base salary of $140,000 per annum, subject to annual increases set forth in the Wolff Employment Agreement, to provide him with certain employee benefits comparable to that received by other Company senior executives, including the use of Company cars, and to reimburse him for expenses incurred in connection with the performance of his duties as Chairman. In the event that Mr. Wolff no longer provides services to the Company 80 due to his dismissal for Cause (as defined in the Wolff Employment Agreement), he will no longer be entitled to any compensation from the Company as of the date of his dismissal, subject to certain rights of appeal. Wolff Noncompetition Agreement. Effective upon the consummation of the Transactions, Holdings entered into the Wolff Noncompetition Agreement. See "Management." Pursuant to the Wolff Noncompetition Agreement, Mr. Wolff will not, directly or indirectly, (i) (a) engage in or have any active interest in any sportswear or activewear business comparable to that of the Company or (b) sell to, supply, provide goods or services to, purchase from or conduct business in any form with the Company or Holdings for a ten-year period ending on the tenth anniversary of the Acquisition, (ii) disclose at any time other than to the Company or Holdings any Confidential Information (as defined in the Wolff Noncompetition Agreement) and (iii) engage in any business with the Company or Holdings through an affiliate for as long as Mr. Wolff or any member of his family is the beneficial owner of Holdings' capital stock. In exchange for his covenant not to compete, Holdings will pay Mr. Wolff $250,000 per annum for a period of ten years. In the event that the Wolff Noncompetition Agreement is terminated for Cause, (as defined in the Wolff Noncompetition Agreement), Holdings will no longer be obligated to make any payment to Mr. Wolff, but Mr. Wolff will remain obligated to comply with the covenants set forth in the Wolff Noncompetition Agreement until its expiration on the tenth anniversary of the Acquisition. Management Investors Loans. In connection with the consummation of the Transactions, Holdings loaned approximately $0.8 million to certain Management Investors to finance a portion of their purchase of capital stock of Holdings. Management Stock Purchases. In fiscal 1996, two members of the Company's senior management purchased 6,000 and 7,000 shares of the Company's common stock, respectively, for an aggregate purchase price of $420,000 and $490,000, respectively. Incentive Compensation Plan. Following the consummation of the Transactions, the Company will adopt an incentive compensation plan (the "Incentive Plan"), which will provide for annual cash bonuses payable based on a percentage of EBITA (as defined in the Incentive Plan), if certain EBITA targets are met. Directors and Officers Indemnification. Upon the consummation of the Offering, the Company entered into indemnification agreements with each member of the Board of Directors whereby the Company agreed, subject to certain exceptions, to indemnify and hold harmless each director from liabilities incurred as a result of such person's status as a director of the Company. See "Management--Board of Directors." Future Transactions. The Company has adopted a policy, effective simultaneously with the consummation of the Offering, to provide that future transactions between the Company and its officers, directors and other affiliates must (i) be approved by a majority of the members of the Board of Directors and by a majority of the disinterested members of the Board of Directors and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 81 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account as a result of market-making activities or other trading activities in connection with the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that for a period of 120 days after the Expiration Date, it will make available a prospectus meeting the requirements of the Securities Act to any broker-dealer for use in connection with any such resale. In addition, until , 1997, all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Company will receive no proceeds in connection with the Exchange Offer. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker- dealer or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. FEDERAL INCOME TAX CONSEQUENCES TO EXCHANGING AND NONEXCHANGING HOLDERS The exchange of an Old Note for a New Note pursuant to the Exchange Offer will not be taxable to the exchanging Holders for Federal income tax purposes. As a result (i) an exchanging Holder will not recognize any gain or loss on the exchange, (ii) the holding period for the New Note will include the holding period for the Old Note and (iii) the basis of the New Note will be the same as the basis of the Old Note. The Exchange Offer will result in no Federal income tax consequences to a nonexchanging Holder. The preceding discussion reflects the opinion of Mayer, Brown & Platt, counsel to the Company, as to the material Federal income tax consequences expected to result from the Exchange Offer. The discussion is for general information only and does not constitute tax advice. Each Holder should consult its own tax adviser as to these and any other Federal income tax consequences of the Exchange Offer as well as any tax consequences to it under state, local or other law. This summary is based on the current provisions of the Internal Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial authority and administrative rulings and practice. Those consequences could be modified by future changes in the relevant law (which changes could be applied retroactively). LEGAL MATTERS The validity of the Notes will be passed upon for the Company by Mayer, Brown & Platt, New York, New York. Certain legal matters relating to the Notes offered hereby will be passed upon for the Initial Purchasers by Latham & Watkins, New York, New York. 82 EXPERTS The financial statements of Winning Ways, Inc. as of June 30, 1996 and for the fiscal year ended June 30, 1996 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The balance sheet of GFSI Holdings, Inc. as of January 23, 1997 included in this Prospectus has been audited by Deloitte & Touche LLP, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The balance sheet of GFSI, Inc. as of January 23, 1997 included in this Prospectus has been audited by Deloitte & Touche LLP, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of Winning Ways, Inc. as of June 30, 1995 and for each of the two fiscal years preceding the period ended June 30, 1995 included in this Prospectus have been audited by Donnelly Meiners Jordan Kline, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. On January 2, 1997, the Company, by resolution of the Board of Directors, appointed Deloitte & Touche LLP as one of its independent auditors, effective January 6, 1997. In connection with its audit for the fiscal year ended June 30, 1995 and through December 31, 1996, the Company has had no disagreements with Donnelly Meiners Jordan Kline on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Donnelly Meiners Jordan Kline would have caused them to make reference thereto in their report on the financial statements for such periods. Donnelly Meiners Jordan Kline has furnished a letter addressed to the Commission stating that it agrees with the above statements. The Company currently engages Deloitte & Touche LLP as its independent auditors. During the most recent fiscal year and through the date of this Offering Memorandum, the Company has not consulted with Deloitte & Touche LLP on items which concerned the subject matter of a disagreement or reportable event with the former auditor. AVAILABLE INFORMATION The Company has filed with the Commission the Registration Statement pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the New Notes being offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the New Notes, reference is hereby made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to in the Registration Statement are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. Upon consummation of the Exchange Offer, the Company will become subject to the periodic and other informational requirements of the Exchange Act. Periodic reports and other information filed by the Company with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20540, or at its regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048 at prescribed rates. Such materials may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. 83 GFSI, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The following sets forth the Unaudited Pro Forma Balance Sheet and the Unaudited Pro Forma Statements of Income of GFSI, Inc. ("GFSI") in each case giving effect to the transactions described in Note 1 of the Notes to the Unaudited Pro Forma Financial Statements as if such transactions had been consummated on December 31, 1996 (in the case of the Unaudited Pro Forma Balance Sheet) and at the beginning of the earliest period presented (in the case of the Unaudited Pro Forma Statements of Income). The Unaudited Pro Forma Financial Statements of GFSI do not purport to present the financial position or results of operations of GFSI had the transactions assumed herein occurred on the dates indicated, nor are they necessarily indicative of the results of operations which may be expected to occur in the future. The proposed acquisition of the Company will be accounted for as a leveraged recapitalization, and accordingly, the accompanying Unaudited Pro Forma Financial Statements reflect no change in the accounting basis of GFSI's assets and liabilities for financial accounting purposes. P-1 GFSI, INC. UNAUDITED PRO FORMA BALANCE SHEET DECEMBER 31, 1996
PRO FORMA WINNING ADJUSTMENT WAYS, INC. -------------------- GFSI, INC. HISTORICAL DR CR PRO FORMA ---------- -------- -------- ---------- ASSETS Current assets: Cash and cash equivalents...... $ 727 $ 22(2) $ $ 749 Accounts receivable............ 26,152 26,152 Inventories.................... 28,074 28,074 Prepaid expenses and other cur- rent assets................... 909 4,986(3) 943(4) 6,838 Deferred income taxes.......... 563(7) 563 ------- -------- -------- --------- Total current assets......... 55,862 6,514 62,376 Property, plant and equipment, net............................. 23,480 943(4) 22,537 Other assets: Cash value of life insurance... 4,986 4,986(3) Deferred financing costs....... 84 9,225(5) 84(5) 9,225 Other.......................... 5 5 ------- -------- -------- --------- Total...................... $84,417 $ 15,739 $ 6,013 $ 94,143 ======= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQ- UITY Current liabilities: Short-term borrowings.......... $ 6,000 $ 6,000(6) $ $ Accounts payable............... 10,708 10,708 Accrued expenses............... 5,584 5,584 Current portion of long-term debt ......................... 13,819 13,819(6) 2,250(6) 2,250 ------- -------- -------- --------- Total current liabilities.... 36,111 19,819 2,250 18,542 Deferred income taxes............ 1,681(7) 1,681 Long-term debt................... 9,559 9,559(6) 190,450(6) 190,450 Stockholders' equity: Common stock................... 149 149(8) Additional paid-in capital..... 2,720 2,720(8) 51,300(8) 51,300 Retained earnings.............. 37,911 203,500(8) 1,118(7) 84(5) 1,875(5) 836(8) (167,830) ------- -------- -------- --------- 40,780 209,446 52,136 (116,530) Less treasury stock............ 2,033 2,033(8) -- ------- -------- -------- --------- Total stockholders' equity (deficit)................... 38,747 209,446 54,169 (116,530) ------- -------- -------- --------- Total...................... $84,417 $238,824 $248,550 $ 94,143 ======= ======== ======== =========
P-2 GFSI, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME TWELVE MONTHS ENDED DECEMBER 31, 1996
WINNING PRO FORMA ADJUSTMENTS WAYS, INC. -------------------------- GFSI, INC. HISTORICAL DR CR PRO FORMA ---------- ----------- ---------- ---------- Net sales................. $177,124 $ -- $ -- $177,124 Costs of sales............ 101,569 -- -- 101,569 -------- ----------- ---------- -------- Gross profit.......... 75,555 -- -- 75,555 Operating expenses: Selling................. 17,625 -- -- 17,625 General and administrative......... 23,709 890(11) 1,205(11) 23,394 -------- ----------- ---------- -------- 41,334 890 1,205 41,019 -------- ----------- ---------- -------- Operating income...... 34,221 890 1,205 34,536 Other income/(expense): Interest expense........ (2,597) 19,040(10) 2,597(10) (19,040) Other................... 96 -- -- 96 -------- ----------- ---------- -------- (2,501) 19,040 2,597 (18,944) -------- ----------- ---------- -------- Income before income taxes.................... 31,720 19,930 3,802 15,592 Income tax expense...... -- 6,237(9) -- 6,237 -------- ----------- ---------- -------- Net income................ $ 31,720 $ 26,167 $ 3,802 $ 9,355 ======== =========== ========== ======== Other data: EBITDA (as defined)(12)........... $ 37,520 $ 890 $ 829 $ 37,459 Depreciation and amortization(12)....... 3,299 -- 376 2,923 Cash interest expense(13)............ 2,597 18,082 2,597 18,082
P-3 GFSI, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME SIX MONTHS ENDED DECEMBER 31, 1996
WINNING PRO FORMA ADJUSTMENT WAYS, INC. ------------------------- GFSI, INC. HISTORICAL DR CR PRO FORMA ---------- ---------- ---------- ---------- Net sales................... $104,811 $ -- $ -- $104,811 Costs of sales.............. 59,458 -- -- 59,458 -------- ---------- --------- -------- Gross profit............ 45,353 -- -- 45,353 Operating expenses: Selling................... 10,406 -- -- 10,406 General and administrative........... 12,828 445(11) 757(11) 12,516 -------- ---------- --------- -------- 23,234 445 757 22,922 -------- ---------- --------- -------- Operating income........ 22,119 445 757 22,431 Other income/(expense): Interest expense.......... (1,465) 9,525(10) 1,465(10) (9,525) Other..................... 43 -- -- 43 -------- ---------- --------- -------- (1,422) 9,525 1,465 (9,482) -------- ---------- --------- -------- Income before income taxes.. 20,697 9,970 2,222 12,949 Income tax expense........ -- 5,180(9) -- 5,180 -------- ---------- --------- -------- Net income.................. $ 20,697 $ 15,150 $ 2,222 $ 7,769 ======== ========== ========= ======== Other data: EBITDA (as defined)(12)... $ 23,791 $ 445 $ 568 $ 23,914 Depreciation and amortization(12)......... 1,672 -- 189 1,483 Cash interest expense(13) ......................... 1,465 9,045 1,465 9,045
P-4 GFSI, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME YEAR ENDED JUNE 30, 1996
WINNING PRO FORMA ADJUSTMENT WAYS, INC. ------------------------- GFSI, INC. HISTORICAL DR CR PRO FORMA ---------- ---------- ---------- ---------- Net sales................... $169,321 $ -- $ -- $169,321 Costs of sales.............. 97,308 -- -- 97,308 -------- ---------- --------- -------- Gross profit............ 72,013 -- -- 72,013 Operating expenses: Selling................... 16,963 -- -- 16,963 General and administrative........... 22,216 890(11) 1,265(11) 21,841 -------- ---------- --------- -------- 39,179 890 1,265 38,804 -------- ---------- --------- -------- Operating income........ 32,834 890 1,265 33,209 Other income/(expense): Interest expense.......... (2,608) 19,034(10) 2,608(10) (19,034) Other..................... -- -- -- -- -------- ---------- --------- -------- (2,608) 19,034 2,608 (19,034) -------- ---------- --------- -------- Income before income taxes.. 30,226 19,924 3,873 14,175 Income tax expense........ -- 5,670(9) -- 5,670 -------- ---------- --------- -------- Net income.................. $ 30,226 $ 25,594 $ 3,873 $ 8,505 ======== ========== ========= ======== Other data: EBITDA (as defined)(12)... $ 36,035 $ 890 $ 913 $ 36,058 Depreciation and amortization(12)......... 3,201 -- 352 2,849 Cash interest expense(13).............. 2,608 18,076 2,608 18,076
P-5 GFSI, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1. Presentation and Transactions: The unaudited pro forma financial statements assume the following transactions occurred on December 31, 1996 for purposes of the unaudited pro forma balance sheet and the beginning of the earliest period presented for purposes of the unaudited pro forma statements of income. Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by affiliates of The Jordan Company and management to effect the acquisition of the Company. Pursuant to the Acquisition Agreement, Holdings and GFSI on February 27, 1997, acquired all of the issued and outstanding capital stock of the Company, and the Company immediately thereafter merged with and into GFSI. All of the capital stock of the Company acquired by Holdings in connection with the Acquisition was contributed to GFSI along with the balance of the Equity Contribution, as described below. The aggregate purchase price for the Company was $232.9 million, subject to adjustment following the Closing, consisting of $203.5 million in cash and the repayment of $29.4 of the Company's Existing Indebtedness. To finance the Acquisition, including approximately $11.1 million of related fees and expenses: (i) TJC, its affiliates and MCIT PLC (collectively, the "Jordan Investors") and certain members of management (the "Management Investors") invested $52.2 million in Holdings and Holdings contributed $51.3 million of this amount in cash to the Company (the "Equity Contribution"); (ii) the Company consummated the Offering; and (iii) the Company entered into the New Credit Agreement providing for borrowings of up to $115.0 million, of which approximately $67.7 million was outstanding and $22.9 million was utilized to cover outstanding letters of credit at Closing. The Equity Contribution was comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings; (ii) a contribution of $13.6 million from the Management Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings; and (iii) a contribution of $25.0 million from a Jordan Investor to Holdings in exchange for Holdings Subordinated Notes. Approximately $0.8 million of the contribution from the Management Investors was financed by loans from Holdings. Consummation of the Offering was conditioned upon the concurrent consummation of the Acquisition, the Equity Contribution and the initial borrowings under the New Credit Agreement. The Transactions are reflected in the accompanying unaudited pro forma financial statements of the Company as a leveraged recapitalization under which the existing basis of accounting was continued for financial accounting and reporting purposes. The following summarizes the sources and uses of funds resulting from the Transactions described above at the Company's level (in millions): SOURCES OF FUNDS: New Credit Agreement............................................... $ 67.7 Senior Subordinated Notes due 2007................................. 125.0 Equity Contribution................................................ 51.3 ------ Total sources.................................................... $244.0 ====== USES OF FUNDS: Cash purchase price of the Acquisition............................. $203.5 Repayment of Existing Indebtedness................................. 29.4 Fees and expenses.................................................. 11.1 ------ Total uses....................................................... $244.0 ======
P-6 GFSI, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED) Holdings is dependent upon the cash flows of the Company to provide funds to service $25.0 million of Holdings Subordinated Notes. The annual cash flow requirements to service Holdings Subordinated Notes is $3 million (principal due in balloon payment in 2008). Pursuant to the terms of a deferred limited interest guaranty between the Company and Holdings, the Company is obligated to pay accrued and unpaid interest on the Holdings Subordinated Notes under certain limited circumstances. Additionally, Holdings' cumulative non-cash preferred stock dividends will total $3.2 million annually. Holdings Preferred Stock may be redeemed at stated value ($27.0 million) plus accrued dividends with mandatory redemption in 2009. The annual cash flow requirements relative to the Holdings Subordinated Notes and Holdings Preferred Stock are not reflected in the accompanying unaudited pro forma financial statements. 2. The pro forma adjustment to cash recognizes additional funds generated by the Transactions. 3. The pro forma adjustments to prepaid expense and other current assets and cash value of life insurance recognizes the liquidation of officer life insurance policies. Such policies were cashed out or purchased by and transferred to the related individuals upon closing of the Transactions. 4. The pro forma adjustment to property, plant and equipment represents fixed assets that were purchased by a previous shareholder upon closing of the Transactions. 5. The pro forma adjustment to other assets (in thousands):
DECEMBER 31, 1996 ------------ Fees and expenses related to the Transactions.................... $11,100 Less costs not capitalized....................................... 1,875 ------- Pro forma adjustment............................................. $ 9,225 ======= Eliminate deferred issuance costs on Existing Indebtedness....... $ (84) =======
The $1.875 million of costs not capitalized were expensed upon completion of the Transactions. Such expense is excluded from the accompanying pro forma statements of income as it is considered a non-recurring charge. 6. The pro forma adjustments to debt (in thousands):
DECEMBER 31, 1996 ----------------------------------------- CURRENT SHORT-TERM LONG-TERM MATURITIES BORROWINGS TOTAL --------- ---------- ---------- -------- Record the issuance of Notes offered hereby................... $125,000 -- -- $125,000 Record the issuance of new Revolver......................... 2,700 -- -- 2,700 Record the issuance of new Term Loans............................ 62,750 2,250 -- 65,000 -------- -------- ------- -------- Pro forma adjustment............ $190,450 $ 2,250 $ -- $192,700 ======== ======== ======= ======== Eliminate existing long-term debt and short-term borrowings with proceeds of the Transactions..... $ (9,559) $(13,819) $(6,000) $(29,378) ======== ======== ======= ========
7. The pro forma adjustment to recognize the Company's change in tax status from an S Corporation to a C Corporation for income tax purposes which occurred concurrent with the Closing. 8. The pro forma adjustment to stockholders' equity recognizes the distribution of $203.5 million to previous shareholders for the acquisition of Winning Ways, Inc. common stock and the equity contribution of $51.3 million from Holdings in accordance with the Acquisition Agreement. P-7 GFSI, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(CONTINUED) 9. The pro forma adjustment to provide income taxes at an effective rate of 40% recognizes that the Company is subject to income tax upon revocation of the S Corporation status for income tax purposes. The change associated with the Company's change in tax status reflecting the cumulative difference between the book and tax basis of assets and liabilities as of the date of the conversion is estimated to be $1.1 million. Such expense is charged to operations at the date of conversion, however, it has not been reflected in the accompanying statements of income as it is considered a nonrecurring charge. 10. The pro forma adjustments to interest expense (in thousands):
YEAR TWELVE SIX MONTHS ENDED MONTHS ENDED ENDED JUNE DECEMBER 31, DECEMBER 31, 30, 1996 1996 1996 ------------ ------------ ------- Elimination of interest expense relating to Winning Ways, Inc.'s existing debt agreements: Repay existing 10.125% credit agreement............................ $ (428) $ (197) $ (501) Repay existing line of credit agreement............................ (627) (482) (545) Repay existing 10.28% mortgage loan... (996) (496) (998) Repay existing 5.72% industrial revenue bonds........................ (23) (10) (29) Repay existing short-term borrowings.. (523) (280) (535) ------- ------- ------- Pro forma adjustment................ $(2,597) $(1,465) $(2,608) ======= ======= ======= Additional interest expense related to: Issuance of Notes..................... $12,031 $ 6,016 $12,031 Amortization of deferred issuance costs related to the Notes........... 400 200 400 Issuance of Term Loans assuming 8.44% interest rate........................ 5,486 2,743 5,486 Issuance of Revolver assuming 8.25% interest rate........................ 223 112 223 Amortization of deferred issuance costs related to New Credit Agreement................. 263 132 263 Amortization of deferred issuance costs related to Holdings' subordinated notes................... 295 148 295 Annual administrative agent's fee for New Credit Agreement................. 25 13 25 Commitment fees related to New Credit Agreement............................ 127 61 131 Letter of credit fees related to New Credit Agreement..................... 190 100 180 ------- ------- ------- Pro forma adjustment................ $19,040 $ 9,525 $19,034 ======= ======= =======
P-8 GFSI, INC. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS--(CONCLUDED) 11. The pro forma adjustment to general and administrative expense (in thousands):
TWELVE YEAR MONTHS SIX MONTHS ENDED ENDED ENDED JUNE DECEMBER 31, DECEMBER 31, 30, 1996 1996 1996 ------------ ------------ ------- Additional general and administrative expense related to: Consulting fee to The Jordan Company.. $ 500 $ 250 $ 500 Board of Directors fees............... 140 70 140 Wolff non-competition payments........ 250 125 250 ------- ------ ------- Pro forma adjustment................ $ 890 $ 445 $ 890 ======= ====== ======= Elimination of general and administrative expense related to: Officers life insurance premiums...... $ (621) $ (477) $ (718) Expenses of corporate jet not retained by Company........................... (208) (91) (195) Depreciation on corporate jet not retained by Company.................. (376) (189) (352) ------- ------ ------- Pro forma adjustment................ $(1,205) $ (757) $(1,265) ======= ====== ======= 12. The pro forma adjustments to EBITDA recognize all adjustments to general and administrative expenses noted in footnote 11, except for the elimination of depreciation on the corporate jet not retained by the Company. 13.The pro forma cash interest expense calculated as follows (in thousands): TWELVE YEAR MONTHS SIX MONTHS ENDED ENDED ENDED JUNE DECEMBER 31, DECEMBER 31, 30, 1996 1996 1996 ------------ ------------ ------- Issuance of Notes....................... $12,031 $6,016 $12,031 Issuance of Term Loans assuming 8.44% interest rate.......................... 5,486 2,743 5,486 Issuance of Revolver assuming 8.25% in- terest rate............................ 223 112 223 Annual administrative agent's fee for New Credit Agreement................... 25 13 25 Commitment fees related to New Credit Agreement.............................. 127 61 131 Letter of credit fees related to New Credit Agreement....................... 190 100 180 ------- ------ ------- Total................................. $18,082 $9,045 $18,076 ======= ====== =======
P-9 WINNING WAYS, INC. INDEX TO FINANCIAL STATEMENTS Winning Ways, Inc.--Historical Financial Statements: Independent Auditors' Reports........................................... F-2 Balance Sheets--June 30, 1995 and 1996 and December 31, 1996 (unaudited)............................................................ F-4 Statements of Income--Years Ended June 30, 1994, 1995 and 1996 and Six Months Ended December 31, 1995 and 1996 (unaudited).................... F-5 Statements of Changes in Stockholders' Equity--Years Ended June 30, 1994, 1995 and 1996 and Six Months Ended December 31, 1996 (unaudited)............................................................ F-6 Statements of Cash Flows--Years Ended June 30, 1994, 1995 and 1996 and Six Months Ended December 31, 1995 and 1996 (unaudited)................ F-7 Notes to Financial Statements........................................... F-8 GFSI Holdings, Inc.--Balance Sheet: Independent Auditors' Report............................................ F-14 Balance Sheet--January 23, 1997......................................... F-15 Note to Balance Sheet................................................... F-16 GFSI, Inc.--Balance Sheet: Independent Auditors' Report............................................ F-17 Balance Sheet--January 23, 1997......................................... F-18 Note to Balance Sheet................................................... F-19
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Winning Ways, Inc. Lenexa, Kansas We have audited the accompanying balance sheet of Winning Ways, Inc. (the "Company") as of June 30, 1996, and the related statements of income, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP Kansas City, Missouri January 24, 1997 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors Winning Ways, Inc. Lenexa, Kansas We have audited the accompanying balance sheet of Winning Ways, Inc. (the "Company") as of June 30, 1995, and the related statements of income, stockholders' equity and cash flows for each of the two years in the period ended June 30, 1995. 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, such financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 1995, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. Donnelly Meiners Jordan Kline Kansas City, Missouri July 26, 1996 F-3 WINNING WAYS, INC. BALANCE SHEETS JUNE 30, 1995 AND 1996 AND DECEMBER 31, 1996 (UNAUDITED)
JUNE 30, ----------------------- DECEMBER 1995 1996 31, 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................ $ 112,459 $ 139,977 $ 726,531 Accounts receivable, net of allowance for doubtful accounts of $463,270 and $472,092 at June 30, 1995 and 1996, $708,340 at December 31, 1996 (unaudited)............................. 18,080,480 22,583,452 26,152,172 Inventories, net......................... 29,484,671 27,782,953 28,073,779 Prepaid expenses......................... 1,463,502 802,311 908,829 ----------- ----------- ----------- Total current assets................... 49,141,112 51,308,693 55,861,311 Property, plant and equipment, net......... 23,751,206 23,038,589 23,480,293 Other assets: Loan costs, net of accumulated amortization of $42,103 and $51,459 at June 30, 1995 and 1996 and $55,357 at December 31, 1996 (unaudited)........... 98,239 88,883 84,205 Cash value of life insurance, net of related policy loans of $90,117 at June 30, 1995 and 1996 and at December 31, 1996 (unaudited)........................ 3,935,904 4,267,871 4,985,553 Other.................................... 12,003 7,269 5,483 ----------- ----------- ----------- 4,046,146 4,364,023 5,075,241 ----------- ----------- ----------- Total................................ $76,938,464 $78,711,305 $84,416,845 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings.................... $ 8,000,000 $ 7,000,000 $ 6,000,000 Accounts payable......................... 7,383,223 9,667,536 10,708,396 Accrued expenses......................... 4,533,584 5,288,998 5,583,949 Current portion of long-term debt........ 1,639,443 1,658,160 13,819,024 ----------- ----------- ----------- Total current liabilities.............. 21,556,250 23,614,694 36,111,369 Long-term debt............................. 23,275,973 20,617,878 9,559,080 Commitments and contingencies Stockholders' equity: Common stock, $.10 par value, 2,000,000 shares authorized, 1,491,000 shares issued.................................. 149,100 149,100 149,100 Additional paid-in capital............... 882,746 1,585,691 2,720,087 Retained earnings........................ 33,554,728 35,045,220 37,910,696 ----------- ----------- ----------- 34,586,574 36,780,011 40,779,883 Less treasury stock, at cost............. 2,480,333 2,301,278 2,033,487 ----------- ----------- ----------- Total stockholders' equity............. 32,106,241 34,478,733 38,746,396 ----------- ----------- ----------- Total................................ $76,938,464 $78,711,305 $84,416,845 =========== =========== ===========
See notes to financial statements. F-4 WINNING WAYS, INC. STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 (UNAUDITED)
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ---------------------------------------- ------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ----------- ------------ (UNAUDITED) (UNAUDITED) Net sales............... $128,171,107 $148,196,394 $169,320,620 $97,007,666 $104,810,936 Cost of sales........... 74,447,220 84,869,223 97,307,746 55,196,593 59,458,035 ------------ ------------ ------------ ----------- ------------ Gross profit........ 53,723,887 63,327,171 72,012,874 41,811,073 45,352,901 Operating expenses: Selling............... 12,062,795 14,884,100 16,963,137 9,744,611 10,406,212 General and administrative....... 17,087,995 19,544,325 22,216,193 11,334,850 12,827,644 ------------ ------------ ------------ ----------- ------------ 29,150,790 34,428,425 39,179,330 21,079,461 23,233,856 ------------ ------------ ------------ ----------- ------------ Operating income.... 24,573,097 28,898,746 32,833,544 20,731,612 22,119,045 Other income (expense): Interest expense...... (2,455,129) (2,522,054) (2,608,154) (1,475,627) (1,465,013) Other................. (13,054) (156,869) 490 (53,180) 42,818 ------------ ------------ ------------ ----------- ------------ (2,468,183) (2,678,923) (2,607,664) (1,528,807) (1,422,195) ------------ ------------ ------------ ----------- ------------ Net income.............. $ 22,104,914 $ 26,219,823 $ 30,225,880 $19,202,805 $ 20,696,850 ============ ============ ============ =========== ============ Supplemental information: Income before income taxes................ $ 22,104,914 $ 26,219,823 $ 30,225,880 $19,202,805 $ 20,696,850 Pro forma income tax provision, assuming a 41% effective rate.. 9,063,000 10,750,000 12,393,000 7,873,000 8,486,000 ------------ ------------ ------------ ----------- ------------ Pro forma net income.... $ 13,041,914 $ 15,469,823 $ 17,832,880 $11,329,805 $ 12,210,850 ============ ============ ============ =========== ============
See notes to financial statements. F-5 WINNING WAYS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED)
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL ------------------ PAID-IN RETAINED -------------------- STOCKHOLDERS' SHARES AMOUNTS CAPITAL EARNINGS SHARES AMOUNTS EQUITY --------- -------- ---------- ------------ ------- ----------- ------------- Balance, July 1, 1993 .. 1,491,000 $149,100 $ 413,246 $ 29,543,853 282,250 $(2,604,250) $ 27,501,949 Reissuance of treasury stock................. 7,500 (125) 1,875 9,375 Net income............. 22,104,914 22,104,914 Dividends declared..... (20,186,975) (20,186,975) --------- -------- ---------- ------------ ------- ----------- ------------ Balance, June 30, 1994.. 1,491,000 149,100 420,746 31,461,792 282,125 (2,602,375) 29,429,263 Purchase of treasury stock................. 125 (3,958) (3,958) Reissuance of treasury stock................. 462,000 (8,400) 126,000 588,000 Net income............. 26,219,823 26,219,823 Dividends declared..... (24,126,887) (24,126,887) --------- -------- ---------- ------------ ------- ----------- ------------ Balance, June 30, 1995.. 1,491,000 149,100 882,746 33,554,728 273,850 (2,480,333) 32,106,241 Reissuance of treasury stock................. 702,945 (12,600) 179,055 882,000 Net income............. 30,225,880 30,225,880 Dividends declared..... (28,735,388) (28,735,388) --------- -------- ---------- ------------ ------- ----------- ------------ Balance, June 30, 1996.. 1,491,000 149,100 1,585,691 35,045,220 261,250 (2,301,278) 34,478,733 Reissuance of treasury stock (unaudited) .... 1,134,396 (19,250) 267,791 1,402,187 Net income (unau- dited)................ 20,696,850 20,696,850 Dividends declared (un- audited).............. (17,831,374) (17,831,374) --------- -------- ---------- ------------ ------- ----------- ------------ Balance, December 31, 1996 (unaudited) ...... 1,491,000 $149,100 $2,720,087 $ 37,910,696 242,000 $(2,033,487) $ 38,746,396 ========= ======== ========== ============ ======= =========== ============
See notes to financial statements. F-6 WINNING WAYS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1994, 1995, AND 1996 AND SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 (UNAUDITED)
SIX MONTHS ENDED YEARS ENDED JUNE 30, DECEMBER 31, ---------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operat- ing activities: Net income............. $ 22,104,914 $ 26,219,823 $ 30,225,880 $ 19,202,805 $ 20,696,850 Adjustments to recon- cile net income to net cash provided by oper- ating activities: Depreciation and amor- tization.............. 2,302,955 2,860,190 3,200,951 1,573,604 1,671,933 (Gain) loss on sale or disposal of property, plant and equipment... 5,673 156,869 1,009 53,181 (24,567) Increase in cash value of life insurance..... (638,166) (519,580) (331,967) (243,217) (717,682) Changes in operating assets and liabili- ties: Accounts receivable.... 860,105 (4,993,971) (4,502,972) (5,170,011) (3,568,720) Inventories............ (4,017,993) (1,873,099) 1,701,718 5,538,886 (290,826) Prepaid expenses and other assets.......... 1,331,544 271,658 665,925 810,436 (104,732) Accounts payable and accrued expenses...... 2,481,751 1,783,226 3,039,727 1,772,230 1,335,811 ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activi- ties................ 24,430,783 23,905,116 34,000,271 23,537,914 18,998,067 ------------ ------------ ------------ ------------ ------------ Cash flows from invest- ing activities: Proceeds from sales of property, plant and equipment............. 259,149 733,698 131,032 27,781 48,121 Purchases of property, plant and equipment... (2,856,257) (4,988,639) (2,611,019) (678,104) (2,132,513) ------------ ------------ ------------ ------------ ------------ Net cash used by in- vesting activities.. (2,597,108) (4,254,941) (2,479,987) (650,323) (2,084,392) ------------ ------------ ------------ ------------ ------------ Cash flows from financ- ing activities: Net changes to short- term borrowings....... (9,829,398) 6,200,000 (1,000,000) (8,000,000) (1,000,000) Proceeds from long-term debt.................. 9,700,000 1,000,000 2,000,000 Payments on long-term debt.................. (1,613,838) (2,326,424) (2,639,378) (883,622) (897,934) Dividends paid......... (20,186,975) (24,126,887) (28,735,388) (15,822,850) (17,831,374) Proceeds from sale of treasury stock........ 9,375 588,000 882,000 882,000 1,402,187 Purchase of treasury stock................. (3,958) ------------ ------------ ------------ ------------ ------------ Net cash used by fi- nancing activities.. (21,920,836) (19,669,269) (31,492,766) (22,824,472) (16,327,121) ------------ ------------ ------------ ------------ ------------ Net increase (de- crease) in cash..... (87,161) (19,094) 27,518 63,119 586,554 Cash and cash equiva- lents, Beginning of period.... 218,714 131,553 112,459 112,459 139,977 ------------ ------------ ------------ ------------ ------------ End of period.......... $ 131,553 $ 112,459 $ 139,977 $ 175,578 $ 726,531 ============ ============ ============ ============ ============ Supplemental Cash Flow Information: Interest paid.......... $ 2,465,752 $ 2,496,989 $ 2,628,291 $ 1,507,078 $ 1,482,921 ============ ============ ============ ============ ============
See notes to financial statements. F-7 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1995 AND 1996 AND SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996 (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS--Winning Ways, Inc. is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports. The Company's customer base is spread throughout the United States. CASH AND CASH EQUIVALENTS--The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. INVENTORIES--Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Included in inventories are markdown allowances of $1,570,917 and $1,922,038 at June 30, 1995 and 1996, respectively and $1,834,386 (unaudited) at December 31, 1996. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are recorded at cost. Major renewals and betterments that extend the life of the asset are capitalized; other repairs and maintenance are expensed when incurred. Depreciation and amortization are provided for on the straight-line method over the following estimated useful lives: Buildings and improvements.................................... 40 years Furniture and fixtures........................................ 3-10 years
INTEREST RATE SWAP AGREEMENTS--Income or expense resulting from interest rate swap agreements used in conjunction with on-balance sheet liabilities are accounted for on an accrual basis and recorded as an adjustment to expense on the matched instrument. Interest rate swap agreements that are not matched with specific liabilities are recorded at fair value, with changes in the fair value recognized in current operations. INCOME TAXES--Effective July 1, 1982, the Company elected to be taxed under the S Corporation provisions of the Internal Revenue Code which provide that, in lieu of corporate income taxes, the shareholders are taxed on the Company's taxable income. Therefore, no provision or liability for income taxes is reflected in the accompanying statements. The net book value of assets and liabilities is in excess of their respective income tax basis by approximately $1.7 million at December 31, 1996. Supplemental information relative to the Statements of Income has been provided which reflects a provision for income taxes assuming a 41% effective income tax rate. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL INFORMATION--The unaudited interim financial information as of December 31, 1996 and for the six months ended December 31, 1995 and 1996 has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the interim information. Operating results for the six months ended December 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending June 30, 1997. F-8 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NEW ACCOUNTING STANDARDS--Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was implemented on July 1, 1996. The adoption of this Statement did not have a material impact on the Company's financial position or results of operations. 2. PROPERTY, PLANT AND EQUIPMENT
JUNE 30, ----------------------- DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ (UNAUDITED) Land....................................... $ 2,442,373 $ 2,442,373 $ 2,442,373 Buildings and improvements................. 17,235,686 18,392,598 19,085,721 Furniture and fixtures..................... 15,851,182 16,722,972 17,259,705 ----------- ----------- ----------- 35,529,241 37,557,943 38,787,799 Less accumulated depreciation.............. 11,779,797 14,521,591 16,157,506 ----------- ----------- ----------- 23,749,444 23,036,352 22,630,293 Construction in progress................... 1,762 2,237 850,000 ----------- ----------- ----------- $23,751,206 $23,038,589 $23,480,293 =========== =========== ===========
The net book value of assets under capital lease were $1,653,662 and $1,576,876 at June 30, 1995 and 1996, respectively, and $1,538,484 (unaudited) at December 31, 1996. 3. SHORT-TERM BORROWINGS At June 30, 1996, the Company had a $40,000,000 unsecured line of credit with floating interest (5.37% at June 30, 1996 and 5.89% (unaudited) at December 31, 1996). The line is subject to certain restrictions and covenants, among them being the maintenance of certain financial ratios, the most restrictive of which require the Company to maintain a current ratio of greater than 1.3 to 1.0, a cash flow coverage ratio of greater than 1.5 to 1.0 and a leverage ratio of less than 3.3 to 1.0. Borrowings against this line totaled $8,000,000 and $7,000,000 at June 30, 1995 and 1996, respectively, and $6,000,000 (unaudited) at December 31, 1996. Letters of credit against this line for unshipped merchandise aggregated $18,708,772, and $23,512,080 at June 30, 1995 and 1996, respectively, and $21,989,274 (unaudited) at December 31, 1996. F-9 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. LONG-TERM DEBT Long-term debt consists of:
JUNE 30, ----------------------- DECEMBER 31, 1995 1996 1996 ----------- ----------- ------------ (UNAUDITED) 10.125% credit agreement with bank to borrow up to $10,000,000, unsecured, payable in monthly principal installments of $119,048 plus interest through July 1, 1997 when the remaining unpaid principal and accrued interest is due..................................... $ 5,714,286 $ 4,285,714 $ 3,571,428 Floating interest $10,000,000 line of credit agreement maturing in July 1997. Interest was 5.71% at June 30, 1996 and 6.00% at December 31, 1996.................................... 9,000,000 8,000,000 10,000,000 10.28% first mortgage loan, secured by building and equipment (with a carrying value of $9,556,710 at June 30, 1996), payable in monthly installments of $88,935 through February 1, 2006 when the remaining unpaid principal and accrued interest is due... 9,631,130 9,550,324 9,506,676 5.78% Industrial revenue bonds, payable in amounts equal to the principal and interest payments due on the bonds through 1998............................ 570,000 440,000 300,000 ----------- ----------- ----------- 24,915,416 22,276,038 23,378,104 Less current portion..................... 1,639,443 1,658,160 13,819,024 ----------- ----------- ----------- $23,275,973 $20,617,878 $ 9,559,080 =========== =========== ===========
The above agreements contain certain restrictions and covenants, the most restrictive of which require the Company to maintain a current ratio of greater than 1.3 to 1.0, a cash flow coverage ratio of greater than 1.5 to 1.0 and a leverage ratio of less than 3.3 to 1.0. Scheduled reduction of long-term debt at June 30, 1996 is as follows:
YEAR ENDING JUNE 30, 1997.......................................................... $ 1,658,160 1998.......................................................... 11,101,387 1999.......................................................... 264,942 2000.......................................................... 121,792 2001.......................................................... 134,919 Thereafter.................................................... 8,994,838 ----------- $22,276,038 ===========
Included in the foregoing schedule of long-term debt is the following capital lease information on the Company's 100,000 square foot manufacturing and distribution facility:
JUNE 30, ----------------- DECEMBER 31, 1995 1996 1996 -------- -------- ------------ (UNAUDITED) Total minimum lease payments.................... $639,326 $479,657 $326,731 Less amounts representing interest.............. 69,326 39,657 26,731 -------- -------- -------- Present value of net minimum lease payments..... $570,000 $440,000 $300,000 ======== ======== ========
F-10 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. COMMITMENTS AND CONTINGENCIES The Company is obligated under stock redemption agreements to repurchase all shares owned upon the death of any stockholder and termination of key employee stockholders. The price to be paid is determined annually by the Board of Directors, and the Company can elect a ten year installment payment plan. The majority of the commitment arising from these agreements is funded by life insurance contracts. The Company, in the normal course of business, is threatened with or named as a defendant in various lawsuits. It is not possible to determine the ultimate disposition of these matters, however, management is of the opinion that there are no known claims or known contingent claims that are likely to have a material adverse effect on the results of operations, financial condition, or cash flows of the Company. 6. PROFIT SHARING PLAN The Company provides a non-contributory defined contribution profit sharing plan covering all eligible employees. Contributions are at the discretion of the Board of Directors of the Company and totaled $1,079,215 and $875,756 for the years ended June 30, 1995 and 1996, respectively, and $316,800 (unaudited) for the six months ended December 31, 1995. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company engages in transactions which result in off-balance sheet risk. Interest rate swap agreements are primarily used in conjunction with on- balance sheet liabilities to reduce the impact of changes in interest rates. Interest rate swap agreements are contractual agreements to exchange, or "swap", a series of interest rate payments over a specified period, based on an underlying notional amount but differing interest rate indices, usually fixed and floating. The notional principal amount does not represent a cash requirement, but merely serves as the amount used, along with the reference rate, to calculate contractual payments. Because the instrument is a contract or agreement rather than a cash market asset, the financial derivative transactions described above are referred to as "off-balance sheet" instruments. The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap agreements only with major financial institutions. The Company's interest rate swap agreements are used in conjunction with on- balance sheet liabilities and were as follows:
WEIGHTED AVERAGE CONTRACT OR ESTIMATED INTEREST RATE NOTIONAL FAIR ------------------ AMOUNT VALUE RECEIVABLE PAYABLE ----------- --------- ---------- ------- June 30, 1995...................... $ 7,000,000 $219,000 5.83% 5.62% June 30, 1996...................... 7,000,000 850,000 5.39 5.62 December 31, 1996 (unaudited)...... 12,900,000 557,000 5.46 5.41
The Company has entered into two swap agreements to exchange fixed interest rates for floating rate debt payments. One agreement carries a notional amount of $7,000,000 and terminates on November 18, 2000. The notional amount of the other interest rate swap agreement fluctuates based on the Company's anticipated level of short-term borrowing with the maximum notional amount equalling $33,100,000. This agreement terminates on July 1, 2001. F-11 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments which include cash and cash equivalents, accounts receivables, short-term borrowings, accounts payables, long-term debt and interest rate swap agreements. CASH AND CASH EQUIVALENTS--The carrying amount reported on the balance sheet represents the fair value of cash and cash equivalents. ACCOUNTS RECEIVABLE--The carrying amount of accounts receivable approximates fair value because of the short-term nature of the financial instruments. SHORT-TERM BORROWINGS--Short-term borrowings have variable interest rates which adjust daily. The carrying value of these borrowings is a reasonable estimate of their fair value. ACCOUNTS PAYABLE--The carrying amount of accounts payable approximates fair value because of the short-term nature of the financial instruments. LONG-TERM DEBT--Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value of debt issues with fixed rates. The carrying value of floating rate debt is a reasonable estimate of their fair value. INTEREST RATE SWAP AGREEMENTS--Quoted market prices or dealer quotes are used to estimate the fair value of interest rate swap agreements. The following summarizes the estimated fair value of financial instruments, by type:
JUNE 30, ----------------------------------------------- DECEMBER 31, 1995 1996 1996 ----------------------- ----------------------- ----------------------- (UNAUDITED) CARRYING FAIR CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- ----------- ----------- Assets and liabilities: Cash and cash equivalents............ $ 112,459 $ 112,459 $ 139,977 $ 139,977 $ 726,531 $ 726,531 Accounts receivable..... 18,080,480 18,080,480 22,583,452 22,583,452 26,152,172 26,152,172 Short-term borrowings... 8,000,000 8,000,000 7,000,000 7,000,000 6,000,000 6,000,000 Accounts payable........ 7,383,223 7,383,223 9,667,536 9,667,536 10,708,396 10,708,396 Long-term debt.......... 24,915,416 27,387,454 22,276,038 24,562,702 23,378,104 25,567,823 Off Balance Sheet Financial Instruments: Interest rate swap agreements (asset/(liability)) ... -- 219,000 -- 850,000 -- 557,000
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. F-12 WINNING WAYS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9. RELATED PARTY TRANSACTIONS The Company has entered into supply agreements with several affiliated companies controlled by certain members of Company management. The agreements allow the Company to outsource embroidery work to the affiliates in the event that demand exceeds the Company's manufacturing capacity. Amounts paid to these entities were $2,262,967 and $3,080,718 for the years ended June 30, 1995 and 1996, respectively, and $2,253,516 (unaudited) for the six months ended December 31, 1996. During the six months ended December 31, 1996 (unaudited), the Company loaned the affiliates $150,000 and $700,000 under separate promissory notes to finance the affiliates purchase of embroidery equipment from the Company and to provide for working capital. The equipment was sold at net book value. Each of the promissory notes is unsecured, has an interest rate of 6.8% per annum and matures July 1, 2000. 10. SUBSEQUENT EVENTS (UNAUDITED) PROPOSED ACQUISITION OF THE COMPANY--On October 31, 1996, the Board of Directors of the Company executed a letter of intent to enter into a transaction with The Jordan Company. The anticipated transaction will include the formation of a holding company, GFSI Holdings, Inc. ("Holdings"), which will ultimately acquire 100% ownership of the Company through what is anticipated to be a leveraged recapitalization transaction. Upon completion of the transaction, Holdings will be jointly owned by investors affiliated with The Jordan Company (50%) and current Company management (50%). In order to affect the leveraged recapitalization, GFSI, Inc. is anticipated to be formed. GFSI, Inc. is anticipated to be capitalized with $67.7 million of borrowings under a senior credit facility provided by a commercial bank, $125.0 million of Senior Subordinated Notes to be purchased by institutional investors through a Regulation 144A private placement, and $51.3 million of equity from Holdings. Holdings is anticipated to own 100% of the operating company, GFSI, Inc., upon completion of the transaction. These transactions are expected to be completed in February 1997. However, there are no assurances that such transactions will be completed in the above form, nor that the timing of such events will occur. WINNING WAYS, INC. PROFIT SHARING AND 401(K) PLAN--On August 1, 1996, the Company amended its non-contributory defined contribution profit sharing plan to include employee directed contributions with an annual Company discretionary matching contribution. Participants exercise control over the assets of his or her account and choose from a broad range of investment alternatives. Contributions made by the Company to the plan totaled $198,834 (unaudited) for the six months ended December 31, 1996. * * * * * * F-13 INDEPENDENT AUDITORS' REPORT Board of Directors GFSI Holdings, Inc. Lenexa, Kansas We have audited the accompanying balance sheet of GFSI Holdings, Inc. ("Holdings") as of January 23, 1997. This financial statement is the responsibility of Holdings' management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is 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 audit provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of Holdings as of January 23, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Kansas City, Missouri January 24, 1997 F-14 GFSI HOLDINGS, INC. BALANCE SHEET JANUARY 23, 1997 ASSETS Current assets: Cash................................................................... $100 ---- Total................................................................ $100 ==== STOCKHOLDER'S EQUITY Common stock, $.01 par value; 100,000 shares authorized; 1 share issued and outstanding......................................................... $ 1 Additional paid-in-capital............................................... 99 ---- Total................................................................ $100 ====
See note to balance sheet. F-15 GFSI HOLDINGS, INC. NOTE TO BALANCE SHEET JANUARY 23, 1997 Holdings, a Delaware corporation, was formed on December 23, 1996 to ultimately serve as the parent owning 100% of GFSI, Inc. ( "GFSI") common stock. GFSI intends to offer $125.0 million in aggregate principal amount of Senior Subordinated Notes. The Senior Subordinated Notes will be guaranteed on an unsecured, senior subordinated basis by substantially all of the future subsidiaries of the Company. GFSI is expected to affect an acquisition of Winning Ways, Inc. (the "Acquisition") for a total purchase price of $232.9. million, subject to certain post-closing net worth adjustments. Closing of the Acquisition is expected to occur in February 1997. Holdings is expected to make additional capital contributions to GFSI of approximately $51.3 million. Holdings received an initial capital contribution of $100 on December 24, 1996 in exchange for 1 share of common stock. There have been no other transactions involving Holdings as of January 23, 1997. F-16 INDEPENDENT AUDITORS' REPORT Board of Directors GFSI, Inc. Lenexa, Kansas We have audited the accompanying balance sheet of GFSI, Inc. ("GFSI") as of January 23, 1997. This financial statement is the responsibility of GFSI's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is 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 audit provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of GFSI as of January 23, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Kansas City, Missouri January 24, 1997 F-17 GFSI, INC. BALANCE SHEET JANUARY 23, 1997 ASSETS Current assets: Cash.................................................................... $100 ---- Total................................................................. $100 ==== STOCKHOLDER'S EQUITY Common Stock, $.01 par value; 10,000 shares authorized; 1 share issued and outstanding........................................................ $ 1 Additional paid-in-capital.............................................. 99 ---- Total................................................................. $100 ====
See note to balance sheet. F-18 GFSI, INC. NOTE TO BALANCE SHEET JANUARY 23, 1997 GFSI, a Delaware corporation, was formed on January 15, 1997. GFSI is intended to become a wholly-owned subsidiary of GFSI Holdings, Inc. ("Holdings") concurrent with the consummation of the acquisition of Winning Ways, Inc. (the "Acquisition"), described below. GFSI is expected to affect an acquisition of Winning Ways, Inc. for a total purchase price of $232.9 million, subject to certain post-closing net worth adjustments, with closing to occur in February 1997. In order to finance the Acquisition, GFSI intends to offer $125.0 million in aggregate principal amount of Senior Subordinated Notes in a Rule 144A private placement transaction. In addition to the Senior Subordinated Notes, GFSI is expecting to enter into a new credit facility and receive contributions of capital from Holdings in order to complete the Acquisition. GFSI received an initial capital contribution of $100 on January 16, 1997 in exchange for 1 share of common stock. There have been no other transactions involving GFSI as of January 23, 1997. F-19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COM- PANY OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF- FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECU- RITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITA- TION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFOR- MATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HERE- OF. ---------------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 1 Risk Factors............................................................. 13 The Transactions......................................................... 20 Use of Proceeds.......................................................... 21 Capitalization........................................................... 22 Selected Historical Financial Data....................................... 23 Management's Discussion and Analysis of Results of Operations and Financial Condition..................................................... 25 Business................................................................. 29 Management............................................................... 38 Principal Stockholders................................................... 41 The Exchange Offer....................................................... 42 Description of Notes..................................................... 51 Description of Certain Indebtedness...................................... 79 Certain Transactions..................................................... 80 Plan of Distribution..................................................... 82 Federal Income Tax Consequences.......................................... 82 Legal Matters............................................................ 82 Experts.................................................................. 83 Available Information.................................................... 83 Unaudited Pro Forma Financial Statements................................. P-1 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $125,000,000 GFSI, INC. 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007 ---------------- PROSPECTUS ---------------- , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) The Delaware General Corporation Law (Section 145) gives Delaware corporations broad powers to indemnify their present and former directors and officers and those of affiliated corporations against expenses incurred in the defense of any lawsuit to which they are made parties by reason of being or having been such directors or officers, subject to specified conditions and exclusions; gives a director or officer who successfully defends an action the right to be so indemnified; and authorizes the registrant to buy directors' and officers' liability insurance. Such indemnification is not exclusive of any other rights to which those indemnified may be entitled under any by-laws, agreement, vote of stockholders or otherwise. (b) The Certificate of Incorporation of the registrant requires, and the By- Laws of the registrant provides for, indemnification of directors, officers, employees and agents to the full extent permitted by law. (c) The Purchase Agreement and the Registration Rights Agreement (the forms of which are included as Exhibits 1 and 4.4 to this registration statement) provide for the indemnification under certain circumstances of the registrant, its directors and certain of its officers by the Underwriters. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: A list of the exhibits included as part of this registration statement is set forth in the Exhibit Index that immediately precedes such exhibits and is incorporated herein by reference. (b) Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required, are inapplicable or the required information has already been provided elsewhere in the registration statement. ITEM 22. UNDERTAKINGS (a) The undersigned 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 and of the estimated maximum offering range may be reflected in the form of prospectus file with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent 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; II-1 (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. (b) 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 foregoing provisions, 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 Act 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 Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effecitve 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. (d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (f) The registrant has not entered into any arrangement or understanding with any person to distribute the securities to be received in the Exchange Offer and to the best of the registrant's information and belief, each person participating in the Exchange Offer is acquiring the securities in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the securities to be received in the Exchange Offer. In this regard, the registrant will make each person participating in the Exchange Offer aware (through the Exchange Offer Prospectus or otherwise) that if the Exchange Offer is being registered for the purpose of secondary resales, any securityholder using the exchange offer to participate in a distribution of the securities to be acquired in the registered exchange offer (1) could not rely on the staff position enunciated in Exxon Capital Holdings Corporation (available April 13, 1989) or similar letters and (2) must comply with registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. The registrant acknowledges that such a secondary resale transaction should be covered by an effective registration statement containing the selling securityholder information required by Item 507 of Regulation S-K. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant 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 March 28, 1997. GFSI, INC. /s/ A. Richard Caputo, Jr. By __________________________________ A. RICHARD CAPUTO, JR. VICE PRESIDENT AND DIRECTOR POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints A. Richard Caputo, Jr., John L. Menghini and Robert G. Shaw, and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned and to file the same, with all exhibits thereto, in any and all capabilities, to sign any and all amendments and any registration statement filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended (including post-effective amendments thereto and other documents in connection therewith), with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on March 28, 1997. SIGNATURES TITLE ---------- ----- /s/ Robert M. Wolff Chairman and a Director - ------------------------------------- ROBERT M. WOLFF /s/ John L. Menghini President, Chief Operating Officer - ------------------------------------- and a Director JOHN L. MENGHINI (Principal Executive Officer) /s/ Robert G. Shaw Senior Vice President, Finance and a - ------------------------------------- Director (Principal Financial and ROBERT G. SHAW Accounting Officer) /s/ Larry D. Graveel Senior Vice President, Merchandising - ------------------------------------- and a Director LARRY D. GRAVEEL /s/ A. Richard Caputo, Jr. Vice President and a Director - ------------------------------------- A. RICHARD CAPUTO, JR. /s/ John W. Jordan II Director - ------------------------------------- JOHN W. JORDAN II /s/ David W. Zalaznick Director - ------------------------------------- DAVID W. ZALAZNICK II-3 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION SEQ. # ------- ----------- ------ 1 Purchase Agreement, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. 2.1++ Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. 2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. 2.3 Plan of Merger, dated February 27, 1997, between GFSI, Inc. and Winning Ways, Inc. 3.1 Certificate of Incorporation of GFSI, Inc. 3.2 Bylaws of GFSI, Inc. 4.1 Indenture, dated February 27, 1997, between GFSI, Inc. and Fleet National Bank, as Trustee 4.2 Global Series A Senior Subordinated Note 4.3 Form of Global Series B Senior Subordinated Note 4.4 Registration Rights Agreement, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. 4.5 Subscription and Stockholders Agreement, dated February 27, 1997, by and among GFSI, Inc. and the investors listed thereto 4.6 Deferred Limited Interest Guaranty, dated February 27, 1997 by GFSI, Inc. to MCIT PLC 5 Opinion of Mayer, Brown & Platt 8 Tax Opinion 10.1++ Credit Agreement, dated February 27, 1997, by and among GFSI, Inc., the lenders listed thereto and The First National Bank of Chicago, as Agent 10.2++ Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent 10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent 10.4++ Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases, dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago 10.5(a) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Boatmen's National Bank 10.5(b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Hillcrest Bank 10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. 10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and TJC Management Corporation 10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff
EXHIBIT NUMBER DESCRIPTION SEQ. # ------- ----------- ------ 10.9 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and Robert M. Wolff 10.10 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and its director and executive officers 12 Statement re: Computation of Ratios 16 Letter re: Change in Certifying Accountant Consent of Mayer, Brown & Platt (included in the opinion 23.1 filed as Exhibit 5) 23.2 Consent of Deloitte & Touche 23.3 Consent of Donnelly Meiners Jordan and Kline Power of Attorney (included on the signature page in Part II 24 of the Registration Statement) 25 Statement of eligibility of Trustee 27 Financial Data Schedule 99 Form of Letter of Transmittal
++ The schedules and exhibits to the agreements have not been filed pursuant to Items 601(b)(2) of Regulation S-K. Such schedules and exhibits will be filed supplementally upon the request of the Securities and Exchange Commission. EX-1 2 PURCHASE AGREEMENT Execution Copy ================================================================================ GFSI, INC. ---------------------------------------- $125,000,000 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007 ---------------------------------------- ------------------- PURCHASE AGREEMENT DATED AS OF FEBRUARY 20, 1997 ------------------- Donaldson, Lufkin & Jenrette Jefferies & Company, Inc. Securities Corporation ================================================================================ February 20, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION JEFFERIES & COMPANY, INC. c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: GFSI, Inc., a Delaware corporation (the "COMPANY") and a wholly-owned subsidiary of GFSI Holdings, Inc., a Delaware corporation ("HOLDINGS"), proposes to issue and sell an aggregate of $125,000,000 in principal amount of 9 5/8% Senior Subordinated Notes due 2007 (the "SERIES A NOTES") of the Company to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Jefferies & Company, Inc. ("JEFFERIES" and, together with DLJ, the "INITIAL PURCHASERS"). The payment of principal, premium, interest and liquidated damages on the Notes will be unconditionally guaranteed (the "NOTES GUARANTEE") on a senior subordinated basis by all future Restricted Subsidiaries (as defined in the Offering Memorandum (as defined)) of the Company (the "GUARANTORS"). The Series A Notes and the Series B Notes (as defined) will be issued pursuant to an indenture (the "INDENTURE") between the Company and Fleet National Bank, as trustee (the "TRUSTEE"). Pursuant to an agreement (the "STOCK PURCHASE AGREEMENT") to be dated the Closing Date (as defined) among the Company, Holdings and the Stockholders (the "STOCKHOLDERS") of Winning Ways, Inc., a Missouri corporation, the Company and Holdings have agreed to purchase all of the outstanding shares of common stock of Winning Ways, Inc. from the Stockholders (the "ACQUISITION"). Upon consummation of the Acquisition, Winning Ways, Inc. will merge with and into the Company (the "MERGER") with the Company being the surviving entity. The Stock Purchase Agreement, the related agreements (including but not limited to the Subscription and Stockholders Agreement dated as of the Closing Date by and among the Company and the Stockholders) governing the terms of the Acquisition, and all closing documents relating to the closing of the Acquisition are herein referred to as the "ACQUISITION DOCUMENTS." 1. ISSUANCE OF SECURITIES. The Series A Notes will be offered and sold to the Initial Purchasers pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended (the "ACT"). The Company has prepared a preliminary offering memorandum, dated February 3, 1997 (the "PRELIMINARY OFFERING MEMORANDUM"), and a final offering memorandum, dated February 20, 1997 (the "OFFERING MEMORANDUM" and, together with the Preliminary Offering Memorandum, the "OFFERING DOCUMENTS"), relating to the Company and the Series A Notes. Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Act, the Series A Notes (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS 1 ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, (i) the Company agrees to issue and sell the Series A Notes to the Initial Purchasers, and (ii) each Initial Purchaser agrees, severally and not jointly, to purchase Series A Notes from the Company in the principal amount set forth opposite the name of such Initial Purchaser in Schedule I at a price of 97% of the principal amount of the Series A Notes (the "PURCHASE PRICE"). 3. TERM OF OFFERING. The Initial Purchasers have advised the Company that the Initial Purchasers will make offers (the "EXEMPT RESALES") of the Series A Notes purchased by the Initial Purchasers hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to (i) persons (each, a "144A PURCHASER") whom the Initial Purchasers reasonably believe to be "qualified institutional buyers" as defined in Rule 144A under the Act ("QIBs"), (ii) a limited number of other institutional "accredited investors," as defined in Rule 501(a) (1), (2), (3) and (7) under the Act, that make certain representations and agreements to the Company (each, an "ACCREDITED INSTITUTION") and (iii) to non-U.S. persons outside the United States in reliance upon Regulation S ("REGULATION S") under the Act (such persons specified in clauses (i), (ii) and (iii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial Purchasers will offer the Series A Notes to Eligible Purchasers initially at a price equal to 100% of the principal amount thereof. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Series A Notes will have the registration rights set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date, in substantially the form of Exhibit A hereto, for so long as such Series A Notes constitute "TRANSFER RESTRICTED SECURITIES" (as defined in the Registration Rights Agreement). 2 Pursuant to the Registration Rights Agreement, the Company will agree to file with the Securities and Exchange Commission (the "COMMISSION"), under the circumstances set forth therein, (i) a registration statement under the Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to (A) the Company's 9 5/8% Series B Senior Subordinated Notes due 2007 (the "SERIES B NOTES" and, together with the Series A Notes, the "NOTES") to be offered in exchange for the Series A Notes (such offer to exchange being referred to as the "REGISTERED EXCHANGE OFFER") and/or (ii) a shelf registration statement pursuant to Rule 415 under the Act (the "SHELF REGISTRATION STATEMENT" and together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Series A Notes, and to use their best efforts to cause such Registration Statements to be declared effective. This Agreement, the Indenture, the Registration Rights Agreement, the New Credit Agreement (as defined) and the Acquisition Documents are hereinafter referred to collectively as the "OPERATIVE DOCUMENTS." The Equity Contribution (as defined in the Offering Memorandum), the consummation of the offering of the Notes, the execution of the New Credit Agreement, the consummation of the Acquisition and the repayment of the Company's Existing Indebtedness (as defined in the Offering Memorandum) are collectively referred to herein as the "TRANSACTIONS." 4. DELIVERY AND PAYMENT. Delivery to the Initial Purchasers by the Company of, and payment by the Initial Purchasers for, the Series A Notes shall be made at 9:00 A.M., New York City time, on February 27, 1997 (or such other date as the Company and the Initial Purchasers may agree) (the "CLOSING DATE") at the offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019. One or more Series A Notes in definitive form (the "GLOBAL NOTE"), registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), or such other names as the Initial Purchasers may request upon at least one business days' notice to the Company, having an aggregate principal amount corresponding to the aggregate principal amount of Series A Notes sold pursuant to Exempt Resales, shall be delivered by the Company to the Initial Purchasers, against payment by the Initial Purchasers of the purchase price thereof by wire transfer of immediately available funds to an account designated by the Company at least one business day prior to the Closing Date. The Global Note shall be made available to the Initial Purchasers for inspection at the offices of DLJ not later than 9:30 a.m. on the business day immediately preceding the Closing Date. 5. AGREEMENTS OF THE COMPANY. The Company agrees with the Initial Purchasers: (a) To advise the Initial Purchasers promptly and, if requested by the Initial Purchasers, to confirm such advice in writing, (i) of receipt of any notification with respect to the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any of the Series A Notes for offering or sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 5(f), or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority, and (ii) of the happening of any event that makes any statement of a material fact made in the Offering Documents (or any amendment or supplement thereto) untrue or that requires the making of any additions to or changes in the Offering Documents (or any amendment or supplement thereto) in order to make the statements therein, in the light of the circumstances in which they are made, not misleading. The Company shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption from qualification of the Series A Notes under any state securities or Blue Sky laws, and, if at any time any state securities commission or other regulatory authority shall issue any stop order or order suspending the qualification or exemption 3 from qualification of any of the Series A Notes under any state securities or Blue Sky laws, the Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to the Initial Purchasers, without charge, as many copies of the Offering Documents, and any amendments or supplements thereto, as the Initial Purchasers may reasonably request. The Company consents to the use of the Offering Documents, and any amendments or supplements thereto, by the Initial Purchasers in connection with Exempt Resales. (c) Not to amend or supplement the Offering Memorandum, whether before or after the Closing Date, unless (i) the Initial Purchasers have been previously advised thereof, and (ii) the Initial Purchasers have not reasonably objected thereto (unless in the opinion of counsel to the Company such amendment or supplement is necessary, in the judgment of counsel to the Company, to make the statements made in the Offering Memorandum not misleading); and to prepare, promptly upon the Initial Purchasers' request, any amendment or supplement to the Offering Memorandum that the Initial Purchasers deem necessary or advisable in connection with Exempt Resales (except to the extent any such amendment or supplement requested would, in the judgment of counsel to the Company, render the statements made in the Offering Memorandum, as proposed to be amended or supplemented, misleading). (d) If, after the date hereof, in the opinion of counsel for the Initial Purchasers, any event shall occur as a result of which it becomes necessary to amend or supplement the Offering Memorandum to comply with any law or to make the statements therein, in the light of the circumstances at the time that the Offering Memorandum is delivered to an Eligible Purchaser which is a prospective purchaser, not misleading, to promptly (i) prepare an appropriate amendment or supplement to the Offering Memorandum so that the statements in the Offering Memorandum, as so amended or supplemented, will comply with all applicable laws and will not, in the light of the circumstances at the time it is so delivered, be misleading, and (ii) furnish each Initial Purchaser with such number of copies of the Offering Memorandum, as amended or supplemented, as such Initial Purchaser may reasonably request. (e) Prior to the earlier of consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement if, in the reasonable judgment of the Initial Purchasers, the Initial Purchasers or any of their affiliates (as such term is defined in the rules and regulations under the Act) are required to deliver an offering memorandum in connection with sales of, or market-making activities with respect to, the Notes, (A) to periodically amend or supplement the Offering Memorandum so that the information contained in the Offering Memorandum complies with the requirements of Rule 144A of the Act, (B) to amend or supplement the Offering Memorandum when necessary to reflect any material changes in the information provided therein so that the Offering Memorandum will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing as of the date the Offering Memorandum is so delivered, not misleading and (C) to provide the Initial Purchasers with copies of each such amended or supplemented Offering Memorandum, as the Initial Purchasers may reasonably request. Following the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement and for so long as the Notes are outstanding if, in the reasonable judgment of the Initial Purchasers, the Initial Purchasers or any of their affiliates (as such term is defined in the rules and regulations under the Act) are required to deliver a prospectus in connection with sales of, or market-making activities with respect to, the Notes, (A) to periodically amend the 4 applicable registration statement so that the information contained therein complies with the requirements of Section 10(a) of the Act, (B) to amend the applicable registration statement or supplement the related prospectus or the documents incorporated therein when necessary to reflect any material changes in the information provided therein so that the registration statement and the prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing as of the date the prospectus is so delivered, not misleading and (C) to provide the Initial Purchasers with copies of each amendment or supplement filed and such other documents as the Initial Purchasers may reasonably request. The Company hereby expressly acknowledges that the indemnification and contribution provisions of Section 8 hereof are specifically applicable and relate to each offering memorandum, registration statement, prospectus, amendment or supplement referred to in this Section 5(e). (f) To (i) cooperate with the Initial Purchasers and counsel for the Initial Purchasers in connection with the qualification of the Series A Notes for offer and sale by the Initial Purchasers under the state securities or Blue Sky laws of such jurisdictions as the Initial Purchasers may request, (ii) continue such qualification in effect so long as required for Exempt Resales of the Series A Notes and (iii) file such consents to service of process or other documents as may be necessary in order to effect such qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified, or take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) So long as any of the Notes are outstanding, to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and, during the period of three years following the date of this Agreement, to deliver to the Initial Purchasers, promptly upon their becoming available, (i) copies of all current, regular and periodic reports filed by the Company with any securities exchange or with the Commission or any governmental authority succeeding to any of the Commission's functions, and (ii) copies of each report or other publicly available information of the Company mailed to the holders of Notes and such other publicly available information concerning the Company and its subsidiaries as the Initial Purchasers may request. (h) To use the proceeds from the sale of the Series A Notes in the manner specified in the Offering Documents (and any amendments or supplements thereto) under the captions "Use of Proceeds" and "The Transactions." (i) Not to voluntarily claim, and to resist actively any attempts to claim, the benefit of any usury laws against the holders of the Notes. (j) Except as otherwise agreed to by the parties hereto, to pay all costs, expenses, fees and taxes incident to: (1) the preparation, printing, filing and distribution under the Act of the Offering Documents (including financial statements and exhibits) and all amendments and supplements to any of them; (2) the printing and delivery of the Operative Documents, the Series A 5 Notes, the preliminary and supplemental Blue Sky memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection herewith and with the Exempt Resales (including in each case any disbursements of counsel to the Initial Purchasers relating to such printing and delivery); (3) the issuance and delivery by the Company of the Series A Notes; (4) the registration or qualification of the Series A Notes for offer and sale under the securities or Blue Sky laws of the several states (including in each case the fees and disbursements of counsel to the Initial Purchasers relating to such registration or qualification and memoranda relating thereto); (5) furnishing such copies of the Offering Documents (including all documents incorporated by reference therein) and all amendments and supplements thereto as may be requested for use in connection with the Exempt Resales; (6) the rating of the Series A Notes by rating agencies, if any; (7) all expenses and listing fees in connection with the application for quotation of the Series A Notes in the National Association of Securities Dealers, Inc. Automated Quotation System - PORTAL ("PORTAL"); (8) all fees and expenses (including fees and expenses of counsel) of the Company in connection with approval of the Series A Notes by DTC for "book-entry" transfer; and (9) the performance by the Company of its other obligations under this Agreement. (k) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than a default by the Initial Purchasers) or if for any reason the Company shall be unable or unwilling to perform its obligations hereunder, the Company shall, except as otherwise agreed by the parties hereto, reimburse the Initial Purchasers for the fees and expenses to be paid or reimbursed pursuant to Section 5(j) above, and reimburse the Initial Purchasers for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel to the Initial Purchasers) incurred by the Initial Purchasers in connection with the transactions contemplated by this Agreement. (l) Prior to the Closing Date, to furnish to the Initial Purchasers, as soon as they have been prepared by the Company, a copy of any consolidated financial statements of the Company for any period subsequent to the period covered by the financial statements appearing in the Offering Documents. (m) To cause all future Restricted Subsidiaries of the Company that become co-obligors with respect to the obligations of the Company under the credit agreement, dated as of the Closing Date, between the Company and The First National Bank of Chicago, as contractual representative, and other lenders thereunder (the "NEW CREDIT AGREEMENT"), to concurrently become guarantors with respect to the Notes pursuant to the terms of the Indenture. (n) Not to distribute prior to the Closing Date any offering material in connection 6 with the offering and sale of the Series A Notes other than the Offering Documents. (o) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Series A Notes in a manner that would require the registration under the Act of the sale to the Initial Purchasers or the Eligible Purchasers of Series A Notes. (p) For so long as any of the Notes remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to make available to any Eligible Purchaser or beneficial owner of Notes in connection with any sale thereof and any prospective purchaser of such Notes from such Eligible Purchaser or beneficial owner, the information required by Rule 144A(d)(4) under the Act. (q) To comply with their agreements in the Registration Rights Agreement, and all agreements set forth in the representation letters of the Company to DTC relating to the approval of the Series A Notes by DTC for "book-entry" transfer. (r) To cause the Registered Exchange Offer, if available, to be made in the appropriate form, as contemplated by the Registration Rights Agreement, to permit registration of the Series B Notes to be offered in exchange for the Series A Notes and to comply with all applicable federal and state securities laws in connection with the Registered Exchange Offer. (s) To use its best efforts to effect the inclusion of the Series A Notes in PORTAL. (t) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Series A Notes and the issuance of the Guarantees. (u) During the period beginning from the date hereof and continuing to and including the date that is 180 days after the Closing Date, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of the Company (other than the Series B Notes) that are substantially similar to the Notes including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, Notes or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without your prior written consent. (v) Not to cause any advertisement of the Notes to be published in any newspaper or periodical or posted in any public place and not to issue any circular relating to the Notes, except such advertisements that include the statements required by Regulation S. 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Initial Purchaser that (for purposes of this Section 6, references to the "Company" shall be deemed to include the Company after giving pro forma effect to the Transactions (as defined in the Offering Memorandum): (a) The Offering Documents have been prepared in connection with the Exempt Resales. The Preliminary Offering Memorandum as of its date did not, and the Offering Memorandum as of its date does not and as of the Closing Date will not, and any amendment or 7 supplement thereto will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements or omissions in the Offering Documents (or any amendment or supplement thereto) based upon information relating to the Initial Purchasers furnished to the Company in writing by or on behalf of the Initial Purchasers expressly for use therein. No stop order preventing the use of the any of the Offering Documents, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, have been issued. (b) The Company has been, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will have, full corporate power and authority to carry on its business as it is currently being and is proposed to be conducted and to own, lease and operate its properties, and has been, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, duly qualified and in good standing as a foreign corporation registered to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires or will require such qualification, except where the failure to be so qualified would not be reasonably likely to have a material adverse effect on the condition (financial or other), business, property, prospects, net worth or results of operations of the Company (a "MATERIAL ADVERSE EFFECT"). All of the outstanding capital stock of the Company has been, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, duly authorized and validly issued, fully paid and nonassessable and not subject to preemptive or similar rights other than as set forth in the Operative Documents. The Company has, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will have, all necessary corporate power and authority to enter into and perform its obligations under the Operative Documents and to issue, sell and deliver the Series A Notes to the Initial Purchasers. The Company has, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will have, no subsidiaries. (c) The Company is not, and after giving effect to the Acquisition, will not be, in violation of its charter or bylaws or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company to which the Company is a party or by which the Company or its property is bound. (d) The execution, delivery and performance of the Operative Documents by the Company, compliance by the Company with the provisions of the Operative Documents and the Series A Notes, and the consummation of the transactions contemplated by the Operative Documents and the Series A Notes does not conflict with or constitute a breach of any of the terms or provisions of, or a default under, or result in the imposition of a lien or encumbrance on any properties of the Company or an acceleration of indebtedness pursuant to, (i) the charter or bylaws of the Company, (ii) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party or by which the Company or its property is bound, or (iii) any law or administrative regulation applicable to the Company or any of its assets or properties, or any judgment, order or decree of any court or governmental agency 8 or authority entered in any proceeding to which the Company was or is now a party or to which the Company or its properties may be subject, except, in the case of clauses (ii) and (iii), for any such conflict, breach, default or imposition of a lien that would not be reasonably likely to have a Material Adverse Effect. No consent, approval, authorization or order of, or filing or registration with, any regulatory body, administrative agency, or other governmental agency (except as securities or Blue Sky laws of the various states may require) that has not been made or obtained is required for the execution, delivery and performance of the Operative Documents and the valid issuance and sale of the Series A Notes. No consents or waivers from any person are required to consummate the transactions contemplated by the Operative Documents and the Offering Documents other than such consents and waivers as have been or, prior to the Closing Date, will be obtained, except where the failure to obtain any such consents or waivers, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect or adversely effect the ability to consummate the Transactions. (e) This Agreement has been duly authorized and validly executed by each of the Company and (assuming the due execution and delivery thereof by the Initial Purchasers) is a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution. (f) Each of the Company, Holdings and the Stockholders, as applicable, has duly authorized the Acquisition Documents, and, when the Company, Holdings and the Stockholders, as applicable, have duly executed and delivered the Acquisition Documents, the Acquisition Documents will be a legally valid and binding obligation of each of the Company, Holdings and the Stockholders, as applicable, enforceable against each of them in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (g) The Company has duly authorized the Indenture, and when the Company has duly executed and delivered it (assuming the due authorization, execution and delivery thereof by the Trustee), the Indenture will be a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (h) The Company has duly authorized the Series A Notes and, when issued and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms hereof, the Series A Notes will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). 9 (i) The Company has duly authorized the Series B Notes and, when issued and authenticated in accordance with the terms of the Registration Rights Agreement and the Indenture, the Series B Notes will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (j) The Company has duly authorized the Registration Rights Agreement, and when the Company has executed and delivered it (assuming the due execution and delivery thereof by the Initial Purchasers), the Registration Rights Agreement will be a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution. (k) There is, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the knowledge of the Company, threatened or contemplated to which the Company is or may be a party or to which the business or property of the Company is or may be subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or, to the best knowledge of the Company, proposed by any governmental body and (iii) no injunction, restraining order or order of any nature issued by a federal or state court of competent jurisdiction to which the Company is or may be subject that, in the case of clauses (i), (ii) and (iii) above, (A) is required to be disclosed in the Offering Memorandum and that is not so disclosed, (B) would be reasonably likely to have a Material Adverse Effect, (C) would interfere with or adversely affect the issuance of the Series A Notes or the consummation of the Acquisition or (D) in any manner draw into question the validity of the Operative Documents or the Series A Notes. (l) Following consummation of the Transactions, no holder of any security of the Company has any right to require registration of any security of the Company. (m) The Company is not, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will not be, involved in any material labor dispute nor, to the knowledge of the Company, is any material dispute threatened which, if such dispute were to occur, would be reasonably likely to have a Material Adverse Effect. (n) The Company has not, and after giving effect to the Acquisition, will not have, violated any safety or similar law applicable to its business, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules and regulations promulgated thereunder, except for such instances of noncompliance that, either singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 10 (o) Except as set forth in the Offering Memorandum, the Company is, and after giving effect to the Acquisition, will be, in compliance with all applicable existing federal, state, local and foreign laws and regulations (collectively, "ENVIRONMENTAL LAWS") relating to protection of human health or the environment or imposing liability or standards of conduct concerning any Hazardous Material (as defined below), except for such instances of noncompliance that, either singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. The term "HAZARDOUS MATERIAL" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. Except as set forth in the Offering Memorandum, there is, and after giving effect to the Acquisition, there will be, to the best knowledge and information of the Company, no alleged or potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of the Company arising out of, based on, or resulting from (1) the presence or release into the environment of any Hazardous Material at any location currently or previously owned by the Company or at any location currently or previously used or leased by the Company, or (2) any violation or alleged violation of any Environmental Law, except in each case with respect to clause (1) and (2), alleged or potential liabilities that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (p) The Company owns or possesses, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will own and possess, the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "INTELLECTUAL PROPERTY") presently or proposed to be employed by it in connection with the businesses now or proposed to be operated by it, except where the failure to own or possess such Intellectual Property would not, either singly or in the aggregate, be reasonably likely to have a Material Adverse Effect, and the Company has not received any notice that its use of any Intellectual Property allegedly infringes upon, or conflicts with, rights asserted by others, except for such instances that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect if an unfavorable decision, judgment, ruling or finding is rendered against the Company. (q) All income tax returns required to be filed by the Company in any jurisdiction have been, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, filed, and all material taxes (including, but not limited to, withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from any taxing authority) have been paid other than those (i) being contested in good faith and for which adequate reserves have been provided, or (ii) currently payable without penalty or interest. (r) Except as set forth in the Offering Memorandum or that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect, (i) the Company has, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will have, (1) such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("PERMITS") as are necessary to own, lease and operate its respective properties and to conduct its business as presently conducted, and (2) fulfilled and performed all of its material obligations with respect to the Permits, and (ii) no event has occurred that would 11 allow, or after notice or lapse of time would allow, revocation or termination of any Permit or that would result in any other material impairment of the rights granted to the Company under any Permit, and the Company has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any Permit. (s) Except as set forth in the Offering Memorandum or that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect, (i) the Company has, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will have, good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Offering Memorandum as being owned by it, (ii) each lease to which the Company is a party is, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will be, valid and binding and no default has occurred or is continuing thereunder and (iii) the Company enjoys, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will enjoy, peaceful and undisturbed possession under all such leases to which it is a party as lessee. (t) The Company maintains adequate insurance for its businesses and the value of its properties (including, without limitation, public liability insurance, third party property damage insurance and replacement value insurance), and all such insurance is outstanding and in force as of the date hereof. (u) The financial statements, together with related schedules and notes forming part of the Offering Documents (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company on the basis stated in the Offering Documents at the respective dates or for the respective periods to which they apply, and such financial statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed in the Offering Documents. The other financial and statistical information and data set forth in the Offering Documents (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (v) The Company maintains a system of internal accounting controls sufficient to provide assurance that: (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; and (3) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect thereto. (w) Subsequent to the dates for which information is given in the Offering Documents and up to the Closing Date, unless set forth in the Offering Memorandum: (1) the Company has not incurred any liabilities or obligations, direct or contingent, which are material, individually or in the aggregate, to the Company, nor entered into any material transactions not in the ordinary course of business; (2) there has not been any decrease in the Company's capital stock or any increase in long-term indebtedness to meet working capital requirements or any material increase in short-term indebtedness of the Company or any payment of or declaration to pay any dividends or any other distribution with respect to the Company's capital stock, as the case may be; and (3) there has not been any event or series of events that would be reasonably likely to have a Material Adverse Effect. 12 (x) Prior to the issuance of the Series A Notes, (i) the present fair salable value of the assets of the Company exceeded and will exceed the amount that will be required to be paid on, or in respect of, the Company's debts and other liabilities (including contingent liabilities) as they become absolute and matured, (ii) the assets of the Company do not constitute and will not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted, and (iii) the Company does not intend to, or believe that it will, incur debts or other liabilities beyond its ability to pay such debts and liabilities as they mature. Upon consummation of the Offering, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, (x) the present fair salable value of the assets of the Company will exceed the amount that will be required to be paid on, or in respect of, the Company's debts and other liabilities (including contingent liabilities) as they become absolute and matured, (y) the assets of the Company will not constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted, and (iii) the Company does not intend to, or believe that it will, incur debts or other liabilities beyond its ability to pay such debts and liabilities as they mature. (y) Neither the Company, nor any agent thereof acting on its behalf, has taken, and none of them will take any action that might cause this Agreement or the issuance or sale of the Series A Notes to violate Regulation G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System, in each case as in effect now or as the same may hereafter be in effect on the Closing Date. (z) The Company is not, and after giving effect to the Acquisition pursuant to the terms of the Acquisition Documents, will not be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (aa) Each of Deloitte & Touche LLP and Donnelly Meiners Jordan Kline are independent public accountants with respect to the Company as required by the Act. (ab) When the Series A Notes are issued and delivered pursuant to this Agreement, such Series A Notes will not be of the same class (within the meaning of Rule 144A under the Act) as securities of the Company that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in a United States automated inter-dealer quotation system. (ac) Assuming (i) that the representations and warranties of the Initial Purchasers in Section 7 hereof are true, (ii) that the representations of the Accredited Institutions set forth in the certificates of such Accredited Institutions in the form set forth in Annex A to the Offering Memorandum are true, (iii) compliance by the Initial Purchasers with their covenants set forth in Section 7 hereof and (iv) that each of the Eligible Purchasers is a QIB or an Accredited Institution, the purchase and resale of the Series A Notes pursuant hereto (including pursuant to the Exempt Resales) is exempt from the registration requirements of the Act. No form of general solicitation or general advertising was used by the Company or any of its representatives (other than the Initial Purchasers, as to whom the Company make no representation) in connection with the offer and sale of the Series A Notes, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Series A Notes have 13 been issued and sold by the Company within the six-month period immediately prior to the date hereof. (ad) The execution and delivery of this Agreement and the other Operative Documents and the sale of the Series A Notes to be purchased by the Eligible Purchasers will not involve any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. The representation made by the Company in the preceding sentence is made in reliance upon and subject to the accuracy of, and compliance with, the representations and covenants made or deemed made by the Eligible Purchasers as set forth in the Offering Documents under the section entitled "Notice to Investors." 7. REPRESENTATIONS AND WARRANTIES OF THE INITIAL PURCHASERS. Each Initial Purchaser, severally and not jointly, represents and warrants to the Company as follows: (a) Such Initial Purchaser is either a QIB or an Accredited Institution, in either case with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Series A Notes. (b) Such Initial Purchaser (i) is not acquiring the Series A Notes with a view to any distribution thereof or with any present intention of offering or selling any of the Series A Notes in a transaction that would violate the Act or the securities laws of any State of the United States or any other applicable jurisdiction, (ii) will be reoffering and reselling the Series A Notes only to QIBs in reliance on the exemption from the registration requirements of the Act provided by Rule 144A and to a limited number of Accredited Institutions that execute and deliver a letter containing certain representations and agreements in the form attached as Annex A to the Offering Documents and (iii) has not solicited and, unless and until the Series A Notes are registered under the Act, will not solicit any offer to buy or offer to sell the Series A Notes by means of any form of general solicitation or general advertising (as such terms are defined in Regulation D under the Act) or in any manner involving a public offering within the meaning of the Act. (c) Such Initial Purchaser also understands that the Company and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant hereto, counsel to the Company and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and the Initial Purchasers hereby consent to such reliance. (d) Such Initial Purchaser further agrees that, in connection with the Exempt Resales, it will solicit offers to buy the Series A Notes only from, and will offer to sell the Series A Notes only to, the Eligible Purchasers. Such Initial Purchaser further agrees that it will offer to sell the Series A Notes only to, and will solicit offers to buy the Series A Notes only from, persons who in purchasing such Series A Notes will be deemed to have represented and agreed (1) if such Eligible Purchaser is a QIB, that it is purchasing the Series A Notes for its own account or an account with respect to which it exercises sole investment discretion and that its or such accounts are QIBs, (2) that such Series A Notes will not have been registered under the Act and may be resold, pledged or otherwise transferred, only (A) (I) inside the United States to a person who the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A under the Act in a transaction meeting the requirements of Rule 144A, (II) in a transaction meeting the requirements of Rule 144 under the Act, (III) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Act or (IV) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion 14 of counsel if the Company so requests), (B) to the Company or (C) pursuant to an effective registration statement under the Act, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction, and (3) that the holder will, and each subsequent holder is required to, notify any purchaser from it of the security evidenced thereby of the resale restrictions set forth in (2) above. Accordingly, each Initial Purchaser represents and agrees that neither it, its affiliates nor any persons acting on its or their behalf has engaged or will engage in any directed selling efforts within the meaning of Rule 901(b) of Regulation S with respect to the Notes, and it, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirements of Regulation S. (e) Such Initial Purchaser represents and agrees that the Notes offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions and that such securities have been and will be represented upon issuance by a global security that may not be exchanged for definitive securities until the expiration of the restricted period (as defined in Regulation S) (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Act and who will take delivery of a beneficial ownership interest in a Rule 144A Global Note (as defined in the Indenture), as contemplated by the Indenture) and only upon certification of beneficial ownership of the securities by a non-U.S. person or a U.S. person who purchased such securities in a transaction that was exempt from the registration requirements of the Act. (f) Such Initial Purchaser agrees that, at or prior to confirmation of a sale of Notes (other than a sale pursuant to Rule 144A, to Accredited Institutions in accordance with Section 3(a)(ii) of this Agreement or pursuant to Paragraph (i) of this Section 7), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the Restricted Period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the Act and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Act. Terms used above have the meaning given to them by Regulation S." (g) Such Initial Purchaser further agrees that it has not entered and will not enter into any contractual arrangement with respect to the distribution or delivery of the Notes, except with its affiliates or with the prior written consent of the Company. (h) Notwithstanding the foregoing, Notes in registered form may be offered, sold and delivered by such Initial Purchaser in the United States and to U.S. persons pursuant to Section 3 of this Agreement without delivery of the written statement required by paragraph (f) of this Section 7. (i) Such Initial Purchaser further represents and agrees that (i) it has not offered or sold and will not offer or sell any Notes to persons in the United Kingdom prior to the expiry of the period of six months from the issue date of the Notes, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal 15 or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the Notes to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise lawfully be issued or passed on. (j) Such Initial Purchaser agrees that it will not offer, sell or deliver any of the Notes in any jurisdiction outside the United States except under circumstances that will result in compliance with the applicable laws thereof, and that it will take at its own expense whatever action is required to permit its purchase and resale of the Notes in such jurisdictions. Such Initial Purchaser understands that no action has been taken to permit a public offering in any jurisdiction outside the United States where action would be required for such purpose. (k) Such Initial Purchaser agrees not to cause any advertisement of the Notes to be published in any newspaper or periodical or posted in any public place and not to issue any circular relating to the Notes, except such advertisements that include the statements required by Regulation S. (l) The sale of the Series A Notes in offshore transactions pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. Terms used in this Section 7 that have meanings assigned to them in Regulation S are used herein as so defined. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls either Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Documents (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to such Initial Purchaser furnished in writing to the Company by such Initial Purchaser expressly for use therein; provided, however, that the indemnification contained in this paragraph (a) with respect to the Preliminary Offering Memorandum shall not inure to the benefit of either Initial Purchaser (or to the benefit of any person controlling such Initial Purchaser) on account of any such loss, claim, damage, liability or judgment (i) arising from the sale of the Series A Notes by such Initial Purchaser to any person if a copy of the Offering Memorandum shall not have been delivered or sent to such person, at or prior to the written confirmation of such sale, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in the Preliminary Offering Memorandum was corrected in the Offering Memorandum, provided that the Company has delivered the Offering Memorandum to the Initial 16 Purchasers in requisite quantity on a timely basis to permit such delivery or sending or (ii) resulting from the use by such Initial Purchaser of any offering memorandum, registration statement or prospectus, or any amendment or supplement thereto, referred to in Section 5(e) hereof when, under Section 11 hereof, such Initial Purchaser was not permitted to do so; provided further, however, that the foregoing exceptions in clauses (i) and (ii) shall not affect the indemnity with respect to any other Initial Purchaser not otherwise subject to such exceptions. (b) In case any action shall be brought against either Initial Purchaser or any person controlling such Initial Purchaser, based upon any Offering Document or any amendment or supplement thereto and with respect to which indemnity may be sought against the Company, such Initial Purchaser shall promptly notify the Company in writing, and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses. Either Initial Purchaser or any such controlling person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the reasonable fees and expenses of such counsel shall be at the expense of such Initial Purchaser or such controlling person unless (i) the employment of such counsel has been specifically authorized in writing by the Company, (ii) the Company has failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both such Initial Purchaser or such controlling person and the Company, and such Initial Purchaser or such controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of such Initial Purchaser or such controlling person, it being understood, however, that the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all such Initial Purchasers and controlling persons, which firm shall be designated in writing by DLJ, and that all such fees and expenses shall be reimbursed as they are incurred). The Company shall not be liable for any settlement of any such action effected without the written consent of the Company, but if settled with the Company's written consent, the Company agrees to indemnify and hold harmless the Initial Purchasers and any such controlling person from and against any loss or liability by reason of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (c) Each Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors and officers, and any person controlling them within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (collectively the "ISSUER INDEMNIFIED PARTIES"), to the same extent as the foregoing indemnity from the Company to each Initial Purchaser but only with reference to information relating to such Initial Purchaser furnished in writing by such Initial Purchaser expressly for use in the Offering Documents. In case any action shall be brought against any Issuer Indemnified Party in respect of which indemnity may be sought against an Initial Purchaser, such Initial Purchaser shall have the rights and duties given to the Company (except that if the Company shall have assumed the defense thereof, such Initial Purchaser shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be 17 at the expense of such Initial Purchaser), and the Issuer Indemnified Parties shall have the rights and duties given to such Initial Purchaser by Section 8(b) hereof. (d) If the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand from the offering of the Series A Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Initial Purchasers in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Initial Purchasers shall be deemed to be in the same proportion as the total proceeds from the offering of the Series A Notes (before deducting expenses) received by the Company, and the total discounts and commissions received by the Initial Purchasers, bear to the total price to investors of the Series A Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company and the Initial Purchasers shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The losses, claims, damages, liabilities or judgments of an indemnified party referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the discounts and commissions received by it exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Series A Notes purchased by each of the Initial Purchasers hereunder and not joint. (e) The Company hereby designates The Jordan Company, 9 West 57th Street, New York, New York 10019, as its authorized agent, upon which process may be served in any action, suit or proceeding which may be instituted in any state or federal court in the State of New York by any Initial Purchaser or person controlling such Initial Purchaser asserting a claim for indemnification or contribution under or pursuant to this Section 8, and the Company will accept the jurisdiction of such court in such action, and waive, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any 18 such process shall be sent or given to the Company, at the address for notices specified in Section 11(a) hereof. (f) The indemnity and contribution agreements contained in this Section 8 are in addition to any liability which the indemnifying persons may otherwise have to the indemnified persons referred to above. 9. CONDITIONS OF THE INITIAL PURCHASERS' OBLIGATIONS. The several obligations of the Initial Purchasers to purchase the Series A Notes under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. The Company shall have performed or complied with all of the agreements and satisfied all conditions to be performed, complied with or satisfied by it under this Agreement on or prior to the Closing Date. (b) (1) The Offering Memorandum shall have been printed and copies distributed to the Initial Purchasers not later than 9:00 a.m., New York City time, on the second business day following the date of this Agreement, or at such later date and time as the Initial Purchasers may approve in writing; (2) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Series A Notes; and (3) at the Closing Date, (i) no stop order preventing the use of the Offering Documents, or any amendment or supplement thereto, or suspending the qualification or exemption from qualification of the Series A Notes for sale in any jurisdiction designated by the Initial Purchasers pursuant to Section 5(f) hereof shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or, to the knowledge of the Company, be contemplated. (c) (1) Since the date of the latest balance sheet included in the Offering Documents, there shall not have been any event that had a Material Adverse Effect, or any development involving a prospective change that would be reasonably likely to have a Material Adverse Effect, whether or not arising in the ordinary course of business; (2) since the date of the latest balance sheet included in the Offering Documents, there has not been any change, or any development involving a prospective change, in the capital stock or in the long-term debt of the Company from that set forth in the Offering Documents; (3) the Company shall have no material liability or obligation, direct or contingent, other than those reflected in the Offering Memorandum; and (4) on the Closing Date, the Initial Purchasers shall have received a certificate dated the Closing Date, signed on behalf of the Company by John Menghini and Robert Shaw, in their capacities as President and Senior Vice President, Finance and Human Resources, respectively, of the Company, confirming all matters set forth in 19 Sections 9(a), (b), and (c) hereof. (d) The Initial Purchasers shall have received on the Closing Date an opinion (satisfactory to the Initial Purchasers and counsel to the Initial Purchasers) dated the Closing Date, of Mayer, Brown & Platt, counsel for the Company, to the effect that: (1) The Company has all necessary corporate power and authority to enter into and perform its obligations under the Operative Documents (other than the Acquisition Documents) and to issue, sell and deliver the Series A Notes to the Initial Purchasers to be sold by the Initial Purchasers pursuant hereto; (2) No consent, approval, authorization or order of, or filing or registration with, any regulatory body, administrative agency, or other governmental agency (except as securities or Blue Sky laws of the various states may require) which has not been made or obtained is required for the execution, delivery and performance of the Operative Documents (other than the Acquisition Documents) and the valid issuance and sale of the Series A Notes to the Initial Purchasers as contemplated by this Agreement or the offering of the Series A Notes as contemplated by the Offering Memorandum, except where the failure to obtain any such consents or waivers, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect or adversely effect the ability to consummate the Transactions; (3) To the best of such counsel's knowledge, no consents or waivers from any person are required to consummate the transactions contemplated by the Operative Documents (other than the Acquisition Documents) or the Offering Documents other than such consents and waivers as have been or will be obtained; (4) This Agreement has been duly authorized and validly executed by the Company and (assuming the due execution and delivery thereof by the Initial Purchasers) is a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution; (5) The Company has duly authorized, executed and delivered the Indenture, and (assuming due authorization, execution and delivery thereof by the Trustee) the Indenture is a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (6) The Company has duly authorized the Series A Notes and, when issued and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms hereof, the Series A Notes will conform to the description thereof in the Offering Memorandum, and will be the legally valid and binding obligations of the Company, enforceable against the Company in 20 accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (7) The Company has duly authorized the Series B Notes and, when issued and authenticated in accordance with the terms of the Registration Rights Agreement and the Indenture, the Series B Notes will conform to the description thereof in the Offering Memorandum, and will be the legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (8) The Company has duly authorized, executed and delivered the Registration Rights Agreement, and (assuming the due execution and delivery thereof by the Initial Purchasers) the Registration Rights Agreement is a legally valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution; (9) The statements under the captions "Certain Transactions," "Description of Notes," "Description of Certain Indebtedness," and "Certain U.S. Federal Income Tax Considerations" in the Offering Memorandum, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, are correct in all material respects; (10) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (11) When the Series A Notes are issued and delivered pursuant to this Agreement, such Series A Notes will not be of the same class (within the meaning of Rule 144A under the Act) as securities of the Company that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in a United States automated inter-dealer quotation system; (12) The Indenture is not required to be qualified under the Trust Indenture Act prior to the first to occur of (i) the Registered Exchange Offer and (ii) the effectiveness of the Shelf Registration Statement; (13) No registration under the Act of the Series A Notes is required for the sale of the Series A Notes to the Initial Purchasers as contemplated hereby or for the Exempt Resales (assuming (i) that the Eligible Purchasers who buy the Series A Notes in the Exempt Resales are QIBs or Accredited Institutions, (ii) the accuracy of, and 21 compliance with, the representations of the Initial Purchasers and those of the Company contained in Sections 6 and 7 hereof and (iii) the accuracy of the representations made by each Accredited Institution who purchases Series A Notes pursuant to an Exempt Resale as set forth in the letters of representation executed by such Accredited Institutions in the form of Annex A to the Offering Memorandum). In addition, such counsel shall state that it has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, the Initial Purchasers' representatives and counsel for the Initial Purchasers, at which conferences the contents of the Offering Memorandum and related matters were discussed, and, although such counsel is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Offering Memorandum, and have not made any independent check or verification thereof, during the course of such participation (relying as to materiality to the extent such counsel deemed appropriate upon the statements of officers and other representatives of the Company), no facts came to such counsel's attention that caused such counsel to believe that the Offering Memorandum, as of its date, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; it being understood that such counsel expresses no belief with respect to the financial statements, schedules and other financial and statistical data included in the Offering Memorandum or incorporated therein. (e) The Initial Purchasers shall have received on the Closing Date an opinion (satisfactory to the Initial Purchasers and counsel to the Initial Purchasers) dated the Closing Date of Bryan Cave LLP, counsel for the Company, to the effect that: (1) The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has full corporate power and authority to carry on its respective business as it is currently being conducted and to own, lease and operate its respective properties, and, to the best of such counsel's knowledge, is duly qualified and is in good standing as a foreign corporation registered to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not be reasonably likely to have a Material Adverse Effect; (2) All of the outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and nonassessable and is not subject to preemptive or similar rights; (3) The Company has all necessary corporate power and authority to enter into and perform its obligations under the Acquisition Documents; (4) The Company is not in violation of its charter or bylaws, and, to the best knowledge of such counsel after due inquiry, the Company is not in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company, to which the Company is a party or by which the Company or its property is bound; (5) The execution, delivery and performance of the Operative Documents by the Company, compliance by the Company with the provisions thereof and the Series A 22 Notes, and the consummation of the transactions contemplated hereby and thereby does not conflict with or constitute a breach of any of the terms or provisions of, or a default under, or result in the imposition of a lien or encumbrance on any properties of the Company, or an acceleration of indebtedness pursuant to, (1) the charter or bylaws of the Company, (2) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument known to such counsel after due inquiry to which the Company is a party or by which the Company or any of its property is bound, or (3) to the best of such counsel's knowledge, any law or administrative regulation applicable to the Company or any of its assets or properties, or any judgment, order or decree of any court or governmental agency or authority entered in any proceeding to which the Company was or is now a party or to which the Company or any of its property may be subject; (6) No consent, approval, authorization or order of, or filing or registration with, any regulatory body, administrative agency, or other governmental agency (except as securities or Blue Sky laws of the various states may require) which has not been made or obtained is required for the execution, delivery and performance of the Acquisition Documents, except where the failure to obtain any such consents or waivers, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect or adversely effect the ability to consummate the Transactions; (7) To the best of such counsel's knowledge, no consents or waivers from any person are required to consummate the transactions contemplated by the Acquisition Documents other than such consents and waivers as have been or will be obtained; (8) To the best knowledge of such counsel, after due inquiry, there is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending, threatened or contemplated to which the Company is or may be a party or to which the business or property of the Company is or may be subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or proposed by any governmental body, or (iii) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction applicable to the Company has been issued that, in the case of clauses (i), (ii) and (iii) above, (a) is required to be disclosed in the Offering Memorandum and that is not so disclosed, (b) would interfere with or adversely affect the issuance of the Series A Notes or the consummation of the Acquisition, or (c) might invalidate any provision or the validity of the Operative Documents or the Series A Notes; (9) To the best knowledge of such counsel, there is no contract or document concerning the Company of a character required to be described in the Offering Memorandum that is not so described or filed in a registration statement on Form S-4 if the Senior Notes were registered pursuant to the Act; (10) To the best knowledge of such counsel, after due inquiry, following consummation of the Transactions, no holder of any security of the Company has any right to require registration of any of the Company's securities; (f) The Initial Purchasers shall have received copies, addressed to the Initial 23 Purchasers, of each opinion of counsel to the Company or Holdings delivered in connection with the Transactions, including, without limitation, in connection with the Acquisition and the New Credit Agreement. (g) The Initial Purchasers shall have received on the Closing Date an opinion, dated the Closing Date, of Latham & Watkins, in form and substance satisfactory to the Initial Purchasers, and the Company shall have provided Latham & Watkins such papers and information as it requests to enable it to pass upon the matters contained in such opinion. (h) The Initial Purchasers shall have received letters from each of Deloitte & Touche LLP and Donnelly Meiners Jordan Kline, independent public accountants, on the date hereof and, in the case of Deloitte & Touche LLP, on the Closing Date, in form and substance satisfactory to the Initial Purchasers, with respect to the financial statements and certain financial information contained in the Offering Memorandum. (i) All Acquisition Documents shall have been entered into by the parties thereto, and the Initial Purchasers shall have received counterparts, conformed as executed, thereof and of all other documents and agreements entered into in connection therewith. Each condition to the closing contemplated by the Acquisition Documents shall have been satisfied or, with the Initial Purchasers' specific approval, waived. There shall exist at and as of the Closing Date (after giving effect to the transactions contemplated by this Agreement) no condition that would constitute a default (or an event that with notice or the lapse of time, or both, would constitute a default) under the Acquisition Documents. Prior to, or simultaneously with, the closing of the Offering, the Acquisition pursuant to the terms of the Acquisition Documents shall have been consummated on terms that conform in all material respects to the description thereof in the Offering Documents, and the Initial Purchasers shall have received true and correct copies of all documents pertaining thereto and evidence satisfactory to the Initial Purchasers of the consummation thereof. (j) The Acquisition shall have been consummated, and the Company shall have delivered to you evidence satisfactory to you that the Acquisition has been consummated. (k) The Company shall have entered into the New Credit Agreement on or prior to the Closing Date. (l) The Company shall have entered into the Registration Rights Agreement on or prior to the Closing Date. (m) The Company shall have obtained all necessary consents to the Acquisition from its licensors in connection with its licensing agreements described in the Offering Memorandum, except to the extent that failure to obtain such consents, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect, and the Company shall have delivered to you evidence satisfactory to you that all such consents have been obtained. (n) The Company shall have performed or complied in all material respects with any of the agreements herein contained and required to be performed or complied with by the Company on or prior to the Closing Date. 10. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall become effective at the time that the Company and the Initial Purchasers execute this Agreement. 24 The Initial Purchasers may terminate this Agreement at any time prior to the Closing Date by written notice to the Company if any of the following has occurred: (a) since the respective dates as of which information is given in the Offering Documents, any adverse change or development involving a prospective adverse change, whether or not arising in the ordinary course of business, which would, in the Initial Purchasers' judgment, make it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Documents; (b) any outbreak or escalation of hostilities or other national or international calamity or crisis or material change in economic conditions, if the effect of such outbreak, escalation, calamity, crisis or change on the financial markets of the United States or elsewhere would, in the Initial Purchasers' judgment, make it impracticable to market the Series A Notes on the terms and in the manner contemplated in the Offering Documents; (c) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or limitation on prices for securities on any such exchange; (d) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the Initial Purchasers' opinion causes or could cause a Material Adverse Effect; (e) the declaration of a banking moratorium by either federal or New York State authorities; (f) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Initial Purchasers' opinion has a material adverse effect on the financial markets in the United States; or (g) any of the Company's securities shall have been downgraded or placed on any "watch list" for possible downgrading by any nationally recognized statistical rating organization, provided that in the case of such "watch list" placement, termination shall be permitted only if such placement would, in the judgment of the Initial Purchasers, make it impracticable or inadvisable to market the Series A Notes or to enforce contracts for the sale of the Series A Notes or materially impair the investment quality of the Series A Notes. If on the Closing Date, either of the Initial Purchasers shall fail or refuse to purchase the Series A Notes which it has agreed to purchase hereunder on such date and arrangements satisfactory to the Company for purchase of such Series A Notes are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Initial Purchaser. In any such case that does not result in termination of this Agreement, the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Offering Memorandum or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default by it under this Agreement. 11. MISCELLANEOUS. (a) Notices given pursuant to any provision of this Agreement shall be addressed as 25 follows: (i) if to the Company, The Jordan Company, 9 West 57th Street, 40th Floor, New York, New York 10019, Attention: A. Richard Caputo, Jr. and (ii) if to the Initial Purchasers, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. (b) The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the Initial Purchasers set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Series A Notes, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any such person, (ii) acceptance of the Series A Notes and payment for them hereunder and (iii) termination of this Agreement. (c) Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Initial Purchasers, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Series A Notes from any of the several Initial Purchasers merely because of such purchase. (d) This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of New York without reference to its choice of law provisions. (e) This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. [SIGNATURE PAGE IS THE NEXT PAGE] SCHEDULE I ----------
PRINCIPAL AMOUNT OF SERIES A SENIOR INITIAL PURCHASER NOTES TO BE PURCHASED - ----------------- --------------------- Donaldson, Lufkin & Jenrette Securities Corporation................................. $75,000,000 Jefferies & Company, Inc.................................. 50,000,000 ------------ $125,000,000 ============
28 Please confirm that the foregoing correctly sets forth the agreement between the Company and the Initial Purchasers. Very truly yours, GFSI, INC. By: /s/ Illegible ------------------------------- Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ___________________________________ Name: Title: JEFFERIES & COMPANY, INC. By: ___________________________________ Name: Title: EX-2.1 3 AGREEMENT FOR THE PURCHASE AND SALE OF STOCK AGREEMENT FOR PURCHASE AND SALE OF STOCK AMONG GFSI HOLDINGS, INC., GFSI, INC. AND ALL THE SHAREHOLDERS OF WINNING WAYS, INC. AGREEMENT FOR PURCHASE AND SALE OF STOCK THIS AGREEMENT FOR PURCHASE AND SALE OF STOCK (this "Agreement"), dated as of the 24th day of January, 1997, is made by and among the individuals and entities listed on Schedule X attached hereto, being the holders of all of the outstanding shares of stock of Winning Ways, Inc., a Missouri corporation (the "Company"), all of said individuals being hereinafter collectively referred to as the "Sellers," GFSI HOLDINGS, INC., a Delaware corporation ("Holdings"), and GFSI, INC., a Delaware corporation ("Acquisition"). ARTICLE 1 PURCHASE AND SALE; PRICE 1.1 Effectiveness of Agreement; Purchase and Sale of the Shares. 1.1.1 This Agreement shall become effective and enforceable against the parties hereto only upon the satisfaction of each of the conditions precedent set forth in Section 6.6 of this Agreement. Once this Agreement becomes effective, (i) Holdings' and Acquisition's obligations to consummate the transactions contemplated hereby shall be conditioned upon satisfaction of the conditions set forth in Article 7 and (ii) the Sellers' obligations to consummate the transactions contemplated hereby shall be conditioned upon satisfaction of the conditions set forth in Article 8. 1.1.2 At the Closing (as hereinafter defined) and in the manner herein provided, the Sellers shall sell and deliver all of the shares of capital stock of the Company (hereinafter collectively called the "Shares") to Acquisition and Holdings, and Acquisition and Holdings shall purchase the Shares from the Sellers on the terms and conditions set forth herein. 1.2 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: "Adjusted Net Worth" shall mean the sum of (i) the Company's Net Stockholders' Equity, as reflected on the Closing Balance Sheet (after the accrual and/or payment of any distributions, dividends or bonuses declared and/or paid under Section 4.4 hereof), plus (ii) the principal amount of the Company's Closing Debt (excluding all interest and fees related to such debt). "Closing Balance Sheet" shall mean the statement of financial position of the Company as of the Closing, without giving effect to the transactions contemplated by this Agreement, as prepared by the Company in accordance with GAAP (as defined in Section 12.5), consistently applied. "Closing Debt" shall mean, as of the Closing, the amount of any indebtedness of the Company for (i) borrowed money, whether due to banks, financial institutions or any other party, including all accrued interest and fees related to such indebtedness, or (ii) capital leases. "Closing Debt Deficiency" shall mean the amount by which the Closing Debt, as finally determined pursuant to Section 1.4.3, exceeds the Estimated Closing Debt. "Closing Debt Surplus" shall mean the amount by which the Estimated Closing Debt exceeds the Closing Debt, as finally determined pursuant to Section 1.4.3. "Closing Financials and Computations" shall mean the Closing Balance Sheet and the calculations of the amounts of Closing Debt and Adjusted Net Worth based on the Closing Balance Sheet. "Durable Power of Attorney" shall mean an instrument in the form of a Durable Power of Attorney to be executed by each of the Sellers (other than those Sellers executing this Agreement personally) and by the Sellers' Agents which, among other things, shall appoint the Sellers' Agents as the agents of Sellers and define the responsibilities of the Sellers' Agents. "Escrow Agent" shall mean the law firm of Rose, Brouillette & Shapiro, P.C. "Escrow Agreement" shall mean the escrow agreement to be executed immediately prior to the Closing by the Escrow Agent Acquisition and the Sellers' Agents (as defined below), the form of which is attached hereto as Exhibit 1.2.1. "Estimated Closing Debt" shall mean the Company's good faith written estimate of the Closing Debt, which shall be delivered to Acquisition no more than five (5) nor less than two (2) business days prior to the Closing Date. "Net Worth Deficiency" shall mean, the amount, if any, by which (i) $63,800,000 exceeds (ii) the Adjusted Net Worth, as finally determined pursuant to Section 1.4.3 hereof. "Net Worth Surplus" shall mean, the amount, if any, by which (i) the Adjusted Net Worth, as finally determined pursuant to Section 1.4.3 hereof, exceeds (ii) $63,800,000. 2 "Sellers' Agents" shall mean any of Wolff, Robert Shaw, John Menghini, Larry D. Graveel and Michael H. Gary, as agents for each of the Sellers, and any successor Sellers' Agents. Any reference to the Sellers' Agents shall be deemed to be a reference to any one of such individuals, any three of whom shall have the power and authority to bind those Sellers executing a Durable Power of Attorney. "Wolff" shall mean Robert M. Wolff, individually. 1.3 Preliminary Purchase Price. Subject to the terms and conditions of this Agreement and in reliance on the covenants, representations and warranties of the Sellers herein contained (including, without limitation, the sale, conveyance, transfer and delivery of the Shares to Holdings and Acquisition), Acquisition and Holdings, collectively, shall pay to the Sellers at the Closing an amount equal to (x) $232,900,000 less (y) the Estimated Closing Debt subject to adjustment as of the Closing Date pursuant to Section 1.4 hereof, to be paid as follows: 1.3.1 Holdings shall pay $100,000 to the Sellers by delivery of an aggregate of 100,000 shares of Holdings' Class A Common Stock, par value $0.01 per share, in an exchange that is intended to qualify as a tax-free exchange pursuant to the provisions of Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"); 1.3.2 Holdings shall pay $13,500,000 to the Sellers by delivery of an aggregate of 13,500,000 shares of Holdings' Class A Preferred Stock, par value $0.01 per share, in an exchange that is intended to qualify as a tax-free exchange pursuant to the provisions of Section 351 of the Code; 1.3.3 Subject to the provisions of the following sentence, Acquisition shall pay to the Sellers' Agents, for the benefit of all of the Sellers, an aggregate amount of $219,300,000 minus the amount of the Estimated Closing Debt, the resulting amount of which is hereinafter referred to as the "Preliminary Cash Purchase Price." Six hundred thousand dollars ($600,000) of the Preliminary Cash Purchase Price shall be paid to the Escrow Agent for the benefit of the Sellers, to be held pursuant to the terms of the Escrow Agreement and distributed in accordance with the terms of Section 1.4. The balance of the Preliminary Cash Purchase Price shall be paid to the Sellers' Agents, for the benefit of the Sellers, by wire transfer of immediately available funds to the account designated by the Sellers' Agents in writing to Acquisition no less than five (5) days prior to the Closing. 3 1.4 Post-Closing Adjustments. 1.4.1 No later than sixty (60) days after the Closing Date, the Company shall prepare, or cause to be prepared, and deliver to the parties hereto the Closing Financials and Computations. 1.4.2 Acquisition, the Sellers' Agents and their respective accountants shall, within fifteen (15) days following receipt of the Closing Financials and Computations (the "Review Period"), complete their review of the Closing Financials and Computations. On or before the last day of the Review Period, Acquisition or the Sellers' Agents (the "Objecting Party") shall inform the other (the "Non-Objecting Party") in writing of any objections to the calculation of the Closing Debt and/or Adjusted Net Worth as shown in the Closing Financials and Computations (the "Objections"), setting forth detailed written explanations of the Objections and the adjustments which the Objecting Party believes should be made to the Closing Debt and/or Adjusted Net Worth. The amount of the Preliminary Cash Purchase Price, Closing Debt and/or Adjusted Net Worth not affected by the Objections will be deemed to be final as set forth in the Closing Financials and Computations. Following its receipt of the Objections, the Non-Objecting Party shall have 10 days to review and respond in writing to the Objections. Acquisition and the Sellers' Agents will then have an additional fifteen (15) days at the end of such period to attempt to resolve in good faith the Objections. 1.4.3 If Acquisition and the Sellers' Agents are unable to resolve all of their disagreements with respect to the Objections within the time periods specified in Section 1.4.2 above, they shall refer any unresolved Objections to Deloitte & Touche LLP or to such other nationally-recognized firm of independent certified public accountants as to which the parties mutually agree (the "Arbitrator"), who shall determine, based on the information submitted by Acquisition and the Sellers' Agents (and not by independent review), and only with respect to the remaining differences so submitted, whether and to what extent the Closing Debt and/or Adjusted Net Worth, as shown in the Closing Financials and Computations, require adjustment. The Arbitrator's determination shall be conclusive and binding upon the Sellers and Acquisition. The cost of such Arbitrator's review shall be borne equally by the Sellers and Acquisition. Unless the Sellers' Agents and Acquisition otherwise agree in writing, "Closing Debt" and "Adjusted Net Worth" shall be (i) the amount of Closing Debt and/or Adjusted Net Worth, respectively, set forth in the Closing Financials and Computations in the event that neither Acquisition or the Sellers' Agents deliver any Objections within the Review Period or (ii) the amount of Closing Debt and/or Adjusted Net Worth as adjusted by the Arbitrator. 4 1.4.4 If, as a result of such computations, there is a Closing Debt Deficiency, the amount of the Closing Debt Deficiency shall be paid to Acquisition, first from the funds held by the Escrow Agent and, to the extent such funds are not adequate to pay Acquisition for all of the Closing Debt Deficiency, then Sellers shall pay the remaining amount of such deficiency to Acquisition as a post-Closing purchase price adjustment. 1.4.5 If, as a result of such computations, there is a Closing Debt Surplus, Acquisition shall pay the amount of such surplus to Sellers' Agents, for the benefit of the Sellers, as a post-Closing purchase price adjustment. 1.4.6 If, as a result of such computations, there is a Net Worth Deficiency, the amount of the Net Worth Deficiency shall be paid to Acquisition, first from the funds held by the Escrow Agent and, to the extent such funds are not adequate to pay Acquisition for all of the Net Worth Deficiency (including any payment that may be required pursuant to Section 1.4.4 above), then Sellers shall pay the remaining amount of such deficiency to Acquisition as a post-Closing purchase price adjustment. 1.4.7 If, as a result of such computations, there is a Net Worth Surplus, Acquisition shall pay the amount of such surplus to the Sellers' Agents, for the benefit of the Sellers, as a post-Closing purchase price adjustment. 1.4.8 Any amounts owed to the Sellers or Acquisition, as the case may be, under Sections 1.4.4, 1.4.5, 1.4.6 or 1.4.7 hereof shall be paid within ten (10) days following the final determination of the Closing Debt and/or Adjusted Net Worth, as the case may be. Any amount not paid within such time period shall bear interest from the due date until paid at a rate of 12% per annum. 1.5 Accounts and Notes Receivable. The Sellers' Agents will deliver to Acquisition a schedule of all accounts and notes receivable (and the face amounts thereof) which are outstanding on the Closing Date (as hereinafter defined). All accounts and notes receivable listed on the schedule delivered at the Closing will constitute valid claims against third parties not affiliated with the Company arising in the ordinary course of business of the Company. The parties hereto agree that Acquisition may assign to the Sellers any accounts and notes receivable which are outstanding on the Closing Date, and which are uncollected as of the date six (6) months after the Closing Date, and concurrently with such assignment the Sellers shall pay to Acquisition in cash an amount equal to the aggregate value of such accounts and notes receivable to the extent the same exceeds the reserve for doubtful accounts on the Closing Balance Sheet. All amounts which are collected from an account or note debtor after the Closing Date shall be first 5 applied to reduce the oldest outstanding balance on such account or with such note debtor. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE SELLERS The Sellers hereby jointly and severally represent and warrant to Holdings and Acquisition, as follows: 2.1 Corporate Organization, etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Missouri with all requisite corporate power and authority to carry on its business as it is now being conducted and to own, operate and lease its properties and assets. Exhibit 2.1.1 lists each of the states where the Company is qualified as a foreign corporation. The conduct of its business and its ownership or use of property do not require the Company to be qualified or licensed to do business as a foreign corporation in any state except those listed in Exhibit 2.1.1. Exhibit 2.1.2 contains complete and correct copies of the Company's (i) articles or certificate of incorporation; (ii) bylaws; and (iii) certificates of authority for the states listed in Exhibit 2.1.1, each amended to date. The Company has all federal, state, local and foreign licenses, permits or other approvals required for the operation of its business as now being conducted. 2.2 Capital Stock; Options. The authorized capital stock of the Company and the shares of capital stock of the Company issued and outstanding, of all classes, and the respective holdings of each of the Sellers, are as set forth in Exhibit 2.2. The Shares represent all of the issued and, except for 242,125 shares of treasury stock, outstanding capital stock of the Company. All of the Shares are validly issued, fully paid and nonassessable and are owned by the Sellers, free and clear of all encumbrances or claims, except as set forth on Exhibit 2.2. There are no issued and outstanding options, warrants, rights, securities, contracts, commitments, understandings or arrangements by which the Company is bound to issue any additional shares of its capital stock or options to purchase shares of its capital stock. 2.3 Subsidiaries and Affiliates. The Company has no subsidiaries. Except as set forth in Exhibit 2.3, the Company has no Affiliates or investments in any other entity or business operation. The term "Affiliates" includes each shareholder, director, officer and employee of the Company, the family members of each Seller, and any director, officer or employee of the Company, and any corporation, partnership or other entity in which the Company, any Seller, any family member of a Seller or director or officer of the Company has any financial interest or is a controlling person, as that term is used in connection with the 6 federal securities laws, if such person or entity has, or in the past had, a contractual relationship with or is transacting, or has in the past transacted, business with the Company. All of the outstanding shares of all classes of capital stock of each subsidiary of the Company are owned by the Company free of any liens, security interests, claims or encumbrances. The Company has no Affiliate whose liabilities or obligations will be assumed by Holdings or Acquisition. 2.4 Authorization, etc. The Sellers have full power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. None of the Sellers are residents of any state that has enacted community property statutes nor are any of the Sellers subject to any community property statutes. 2.5 No Violation. Except as set forth in Exhibit 2.5, the Company is not subject to or obligated under any article or certificate of incorporation, bylaw, Law (as defined in Section 12.5), or any agreement or instrument, or any license, franchise or permit, which would be breached or violated by the Sellers' execution, delivery and performance of this Agreement. The Sellers will comply with all applicable Laws in connection with their execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. 2.6 Governmental Authorities. Except as set forth in Exhibit 2.6, neither the Sellers nor the Company are required to submit any notice, report or other filing with, and no consent, approval or authorization is required, by any governmental or regulatory authority in connection with their execution, delivery, consummation or performance of this Agreement or the transactions contemplated hereby. 2.7 Financial Statements. Exhibit 2.7 contains the Company's audited statements of financial position as of June 30 for each of the years 1992 through 1996 and audited statements of income and retained earnings for the fiscal years then ended, each such statement being prepared by Donnelly Meiners Jordan Kline PC. All such statements of financial position and the notes thereto are complete and accurate and fairly present the financial position of the Company as of the respective dates thereof, and such statements of income and retained earnings and the notes thereto fairly present the results of operations for the periods therein referred to, all in accordance with GAAP consistently applied throughout the periods indicated (except as stated therein or in the notes thereto). The statement of financial position as of June 30, 1996 and the notes thereto are referred to as the "Balance Sheet." June 30, 1996 is referred to as the "Financial Statement Date." 2.8 No Undisclosed Liabilities, Claims, etc. Except for (i) liabilities fully reflected or reserved against in the Balance 7 Sheet; (ii) regular and usual liabilities and obligations incurred in the ordinary course of business consistent with past practices after the Financial Statement Date (which shall in no event include any liabilities resulting from breach of contract, any negligent or intentional acts or omissions or any strict liability claim), and (iii) the items listed on Exhibit 2.8, the Company has no liabilities, obligations or claims (absolute, accrued, fixed or contingent, matured or unmatured, or otherwise), including liabilities, obligations or claims which may become known or which arise only after the Closing and which result from actions, omissions or occurrences of the Company prior to the Closing. 2.9 Absence of Certain Changes. Except as set forth on Exhibit 2.9 or the certificate to be delivered pursuant to Sections 4.4 and 7.15, since the Financial Statement Date, there has not been (i) any adverse change in the business, prospects, financial condition, earnings or operations of the Company's business; (ii) any damage, destruction or loss, whether covered by insurance or not, adversely affecting the Company's properties and business; (iii) any declaration, setting aside or payment of any dividend whether in cash, stock or property with respect to the Company's capital stock, or any redemption or other acquisition of such stock by the Company; (iv) any increase in the compensation payable or to become payable by the Company to its directors, officers, key employees, Affiliates or any of the Sellers or any adoption of or increase in any bonus, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any such party; (v) any entry by the Company into any commitment or transaction, including, without limitation, any borrowing or capital expenditure other than in accordance with the Schedule of Capital Expenditures (Exhibit 2.25); (vi) any change by the Company in accounting methods, practices or principles; (vii) any adoption of any statute, rule, regulation or order which adversely affects the Company; (viii) any termination or waiver of any rights of value to the business of the Company; (ix) any other transaction or event other than in the ordinary course of the Company's business; (x) any transaction or conduct inconsistent with the Company's past business practices; (xi) any adoption or amendment of any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, or other plan, agreement, trust, fund or arrangement for the benefit of employees; or (xii) any agreement or understanding made or entered into to do any of the foregoing. 2.10 Contracts. Exhibit 2.10 contains a schedule of, and copies of, all Contracts to which the Company is a party. The term "Contracts" shall include, but shall not be limited to, all oral (which shall be summarized in Exhibit 2.10) and written contracts, agreements, agency agreements, loan agreements, mortgages, indentures, deeds of trust, guarantees, commitments, joint venture agreements, purchase and/or sale agreements, collective bargaining, union, consulting and/or employment contracts, leases of real or 8 personal property, easements, distribution or dealer agreements, service agreements, license agreements and advertising agreements (except there shall not be included agreements which do not exceed, in the case of any one agreement, an annual obligation of $50,000, and in the case of all agreements, an annual aggregate obligation of $500,000). The Company is not in default or alleged to be in default under any Contract nor are any of the Sellers aware of any default by any other party to any Contract, and there exists no event, condition or occurrence which, after notice or lapse of time, or both, would constitute a default under any Contract. All of the Contracts are in full force and effect and constitute legal, valid and binding obligations of the parties thereto in accordance with their terms, and will remain in full force and effect after the Closing without any notice to or consent by any other party. 2.11 True and Complete Copies. Copies of all agreements, contracts and documents delivered and to be delivered hereunder by the Sellers or the Company are and will be true and complete copies of such agreements, contracts and documents. All written summaries of oral agreements will be true and complete. 2.12 Title and Related Matters. Except as set forth in Exhibit 2.12, the Company has good and marketable title to all of the properties and assets reflected in the Balance Sheet or acquired after the date thereof (except properties sold or otherwise disposed of since the date thereof in the ordinary course of business and consistent with past practices), including without limitation, the specific assets referred to in Sections 2.12.1, 2.12.2 and 2.12.3 below, free and clear of all mortgages, security interests, liens, pledges, claims, escrows, options, rights of first refusal, indentures, easements, licenses, security agreements or other agreements, arrangements, contracts, commitments, understandings, obligations, charges or encumbrances of any kind or character, except as reflected on the Balance Sheet. The Company owns or leases, directly or indirectly, all of the assets and properties, and is a party to all licenses and other agreements, presently used or necessary to carry on the business or operations of the Company as presently conducted. 2.12.1 Real Property. 2.12.1.1 The Company has good and marketable title in fee simple to the land, including buildings and improvements thereon, shown on the Balance Sheet. All such land, buildings and improvements of the Company are owned free and clear of all encumbrances, restrictions and charges of every kind and character, including, without limitation, any of the various types listed above, except as set forth on Exhibit 2.12. 2.12.1.2 The Company is not a tenant under any lease(s) of real property used by the Company except as described on Exhibit 2.10. With respect to the leased real property described on 9 Exhibit 2.10 and except as set forth on Exhibit 2.12: (i) all such leases are in full force and effect and constitute valid and binding obligations of the respective parties thereto; (ii) there have not been and there currently are not any defaults thereunder by any party thereto; (iii) no event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default thereunder entitling the lessor to terminate the lease; and (a) the continuation, validity and effectiveness of all such leases under the current rentals and other current terms thereof will in no way be affected by the transactions contemplated by this Agreement or, if any would be affected, the Sellers shall use all necessary means at their disposal to cause an appropriate consent to such transactions to be delivered to Holdings and Acquisition prior to the Closing Date at no cost or other adverse consequences to the Company ((i) through (iv) are hereinafter collectively referred to as "Lease Restrictions"). 2.12.1.3 Except as shown on Exhibit 2.12, each parcel of real property, building, structure and improvement owned, leased or otherwise utilized by the Company (collectively the "Premises") conforms to all applicable Laws, including zoning regulations, none of which will, upon the sale of the Shares to Holdings and Acquisition, prohibit the use of such properties, buildings, structures or improvements, for the purposes for which they are now utilized. The Premises are of good quality construction throughout, are in good condition and working order, are adequate for their intended purposes, have no structural or other substantial deficiencies, and are free from deferred maintenance. 2.12.1.4 The Company does not currently have, and in the past has not had, any interest (as owner, tenant or otherwise) in any real property except as disclosed on Exhibit 2.12. 2.12.2 Personal Property. The Company has good and marketable title to all the personal property and assets, tangible or intangible, shown on the Balance Sheet, except to the extent sold or disposed of in transactions entered into in the ordinary course of business consistent with past practices since the Financial Statement Date. The personal property in the aggregate is in good condition and working order, and each individual item of personal property which would cost in excess of $25,000 to replace is in good condition and working order. None of such assets are subject to any (i) contracts of sale or lease, except contracts for the sale of inventory in the ordinary and regular course of business; or (ii) security interests, encumbrances, liens or charges of any kind or character, except as set forth in Exhibit 2.12. Except as set forth in Exhibit 2.12, there are no Lease Restrictions with respect to the personal property leased by the Company. 10 2.12.3 Inventories. In addition to Section 2.12.2, the inventories of the Company included on the Balance Sheet, to be included on interim balance sheets provided pursuant to Section 4.8 and owned by the Company on the Closing Date: (i) are valued with respect to each category of inventory at the lower of cost (on a FIFO basis) or market; and (ii) excluding the amount of any inventories included in any reserves on the Balance Sheet or the Closing Balance Sheet, do not include any items which are not usable or saleable in the normal course of the business of the Company as currently conducted within normal inventory "turn" experience, the value of which has not been fully written down, or with respect to which adequate reserves have not been provided. The Company has the proper amount of inventories to conduct its business consistent with past practices. There has not been since the Financial Statement Date any provision for markdowns or shrinkage with respect to inventories other than in the ordinary and regular course of business consistent with past practices or as otherwise consented to by Holdings and Acquisition. 2.12.4 No Disposition of Assets. There has not been since the Financial Statement Date any sale, lease or any other disposition or distribution by the Company of any of its assets or properties and any other assets now or hereafter owned by it, except transactions in the ordinary and regular course of business consistent with past practices or as otherwise consented to by Holdings and Acquisition. 2.13 Litigation. Except as set forth in Exhibit 2.13, there is no suit, action, investigation or proceeding pending or, to the knowledge of the Sellers, threatened against the Company or any of the Sellers which, if adversely determined, would adversely affect the business, prospects, operations, earnings, properties or the condition, financial or otherwise, of the Company, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Company having, or which, insofar as can be reasonably foreseen, in the future may have, any such effect. 2.14 Tax Matters. The term "Taxes" means all net income, capital gains, gross income, gross receipts, sales, use, transfer, ad valorem, franchise, profits, license, capital, withholding, payroll, employment, excise, goods and services, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees or assessments, or other governmental charges of any kind whatsoever, together with any interest, fines and any penalties, additions to tax or additional amounts incurred or accrued under applicable Law or assessed, charged or imposed by any governmental authority, domestic or foreign, provided that any interest, penalties, additions to tax or additional amounts that relate to Taxes for any taxable period (including any portion of any taxable period ending on or before the Closing Date) shall be 11 deemed to be Taxes for such period, regardless of when such items are incurred, accrued, assessed or imposed. For the purposes of this Section 2.14 and Section 6.4, the Company shall be deemed to include any predecessor of the Company or any person or entity from which the Company incurs a liability for Taxes as a result of any transferee liability. Except as stated in Exhibit 2.14.1: 2.14.1 The Company has duly and timely filed (and prior to the Closing Date will duly and timely file) true, correct and complete tax returns, reports or estimates, all prepared in accordance with applicable Laws, for all years and periods (and portions thereof) and for all jurisdictions (whether federal, state, local or foreign) in which any such returns, reports or estimates were due. All Taxes shown as due and payable on such returns, reports and estimates have been paid, and there is no current liability for any Taxes due and payable in connection with any such returns. All Taxes not yet due and payable have been fully accrued on the books of the Company and adequate reserves have been established therefor; the charges, accruals and reserves for Taxes provided for on the financial statements delivered or to be delivered pursuant to Section 2.7 and Section 4.8 are adequate; and there are no unpaid assessments for additional Taxes for any period nor is there any basis therefor. Attached hereto as Exhibit 2.14.2 are copies of all federal, state and foreign tax returns filed by the Company for the past five (5) years. 2.14.2 The Company is not, and never has been, a member of any consolidated, combined or unitary group for federal, state, local or foreign tax purposes. The Company is not a party to any joint venture, partnership or other arrangement that could be treated as a partnership for federal income tax purposes. 2.14.3 The Company has (i) withheld all required amounts from its employees, agents, contractors and nonresidents and remitted such amounts to the proper agencies; (ii) paid all employer contributions and premiums and (iii) filed all federal, state, local and foreign returns and reports with respect to employee income tax withholding, and social security and unemployment taxes and premiums, all in compliance with the withholding tax provisions of the Code, as in effect for the applicable year or any prior provision thereof and other applicable Laws. 2.14.4 The federal income tax returns of the Company have been examined by the Internal Revenue Service (the "IRS"), or have been closed by the applicable statute of limitations, for all periods through June 30, 1991; the state tax returns of the Company have been examined by the relevant state agencies or such returns have been closed by the applicable statute of limitations for all periods through June 30, 1991; no deficiencies or reassessments for any Taxes have been proposed, asserted or assessed against the Company by any federal, state, local or foreign taxing authority. 12 Exhibit 2.14.1 describes the status of any federal, state, local or foreign tax audits or other administrative proceedings, discussions or court proceedings that are presently pending with regard to any Taxes or tax returns of the Company (including a description of all issues raised by the taxing authorities in connection with any such audits or proceedings), and no additional issues are being asserted against the Company in connection with any existing audits or proceedings. 2.14.5 The Company has not executed or filed any agreement or other document extending the period for assessment, reassessment or collection of any Taxes, and no power of attorney granted by the Company with respect to any Taxes is currently in force; provided, however, the Company currently is contesting and has appealed certain personal property taxes and has retained Brian Darcy as a consultant to advise the Company on methods of (i) applying for Tax refunds for prior periods and (ii) reducing its future Tax obligations, in either such case, by obtaining the benefits of all statutes and regulations available to the Company. 2.14.6 The Company has not entered into any closing or other agreement with any taxing authority which affects any taxable year of the Company ending after the Closing Date. The Company is not a party to any tax sharing agreement or similar arrangement for the sharing of tax liabilities or benefits. 2.14.7 The Company has not agreed to and is not required to make any adjustment by reason of a change in accounting methods that affects any taxable year ending after the Closing Date. The IRS has not proposed to the Company any such adjustment or change in accounting methods that affects any taxable year ending after the Closing Date. The Company has no application pending with any taxing authority requesting permission for any changes in accounting methods that relate to its business or operations and that affects any taxable year ending after the Closing Date. 2.14.8 The Company has not consented to the application of Code Section 341(f). 2.14.9 There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment by the Company of any amount that would not be deductible by reason of Code Section 280G. 2.14.10 No asset of the Company is tax exempt use property under Code Section 168(h). Except for the real property of the Company located at 16002 W. 110th Street, Lenexa, Kansas, no portion of the cost of any asset of the Company has been financed directly or indirectly from the proceeds of any tax exempt state or local government obligation described in Code Section 103(a). 13 2.14.11 None of the assets of the Company is property that the Company is required to treat as being owned by any other person pursuant to the safe harbor lease provision of former Code Section 168(f)(8). 2.14.12 The Company does not have and has not had a permanent establishment in any foreign country and does not and has not engaged in a trade or business in any foreign country. Neither the Sellers nor the Company is a foreign person within the meaning of Code Section 1445. 2.14.13 None of Holdings, Acquisition or the Company will be liable for any federal, state, local, foreign and other sales, use, documentary, recording, stamp, transfer or similar Taxes applicable to, imposed upon or arising out of the transfer of the Shares to Holdings and Acquisition and the transactions contemplated by this Agreement. 2.15 Government Contracts. Except as disclosed in Exhibit 2.15, no Contract or other aspect of the business of the Company is subject to the Armed Services Procurement Regulations or other regulations of any governmental agency. The Company has not bid on or been awarded any "small business set aside contract," any other "set aside contract" or other order or contract requiring small business or other special status at any time during the last three (3) years. None of the Company's expected sales will be lost, and the Company's customer relations will not be damaged, as a result of the Company's continuing the operations of an entity that does not qualify as a small business. 2.16 Compliance with Law. 2.16.1 Except as disclosed on Exhibit 2.13, the Company has not previously failed and is not currently failing to comply with any applicable Laws relating to the business of the Company or the operation of its assets where such failure or failures would individually or in the aggregate have an adverse effect on the financial condition, business, operations or prospects of the Company. In particular, but without limiting the generality of the foregoing, the Company is in compliance with all applicable Laws relating to (i) anti-competitive practices, (ii) price fixing, (iii) health and safety, (iv) environmental and (v) except as disclosed on Exhibit 2.13, employment and discrimination matters. Except as disclosed on Exhibit 2.13, there are no proceedings of record and no proceedings are pending or threatened, nor has the Company or any of the Sellers received any written notice regarding any violation of any Law, including, without limitation, any requirement of OSHA or any pollution or environmental control agency (including air and water). 2.16.2 Exhibit 2.16 contains copies of all reports of inspections by representatives of any federal, state or local 14 governmental entity or agency of the business and properties of the Company from January 1, 1991 through the date hereof under OSHA and under all other applicable health and safety Laws. The deficiencies, if any, noted on such reports or any deficiencies noted by such inspections through the Closing Date shall be corrected by the Closing Date. Except as disclosed on Exhibit 2.13, neither the Company or any of the Sellers know or have reason to know of any other safety, health, environmental, anti-competitive or discrimination problems relating to the financial condition, business, assets, operations, prospects, earnings or employment practices of the Company. 2.17 Absence of Certain Business Practices. None of the Sellers, any person or entity related to or affiliated with any of the Sellers, any officer, employee or agent of the Company or any of the Sellers, any other person or entity acting on behalf of or associated with the Company or any of the Sellers, nor any other entity directly or indirectly owned or controlled by any of the Sellers or the Company, acting alone or together, has (i) received, directly or indirectly, any rebates, payments, commissions, promotional allowances or any other economic benefit, regardless of its nature or type, from any customer, supplier, trading company, shipping company, governmental employee or other entity or individual with whom the Company has done business directly or indirectly; or (ii) directly or indirectly, given or agreed to give any gift or similar benefit to any customer, supplier, trading company, shipping company, governmental employee or other person or entity who is or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which (1) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (2) if not given in the past, might have had an adverse effect on the assets, business or operations of the Company as reflected in the financial statements set forth as Exhibit 2.7 or (3), if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company or which might subject the Company to suit or penalty in any private or governmental litigation or proceeding. 2.18 ERISA and Related Employee Benefit Matters. 2.18.1 Welfare Benefit Plans. Exhibit 2.18.1 lists each "employee welfare benefit plan" (within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA")) maintained by the Company or to which the Company contributes or is required to contribute, including any multiemployer plan ("Welfare Benefit Plan") and sets forth as of the most recent valuation date (i) the amount of any liability of the Company for payments due with respect to any Welfare Benefit Plan, (ii) the amount of any payment made and to be made, stated separately, by the Company with respect to any Welfare Benefit Plan for the plan year during which the Closing is to occur, and (iii) 15 with respect to any Welfare Benefit Plan to which Section 505 of the Code applies, a statement of assets and liabilities for such Welfare Benefit Plan as of the most recent valuation date. Without limiting the foregoing, Exhibit 2.18.1 discloses any obligations of the Company to provide retiree health benefits to current or former employees of the Company. 2.18.2 Pension Benefit Plans. Exhibit 2.18.2 lists each "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA) maintained by the Company or to which the Company contributes or is required to contribute, including any multiemployer plan ("Pension Benefit Plan"). All costs of the Pension Benefit Plans have been provided for on the basis of consistent methods and, if applicable, in accordance with sound actuarial assumptions and practices that are acceptable under ERISA. With respect to each Pension Benefit Plan that is subject to Title I, Part 3 of ERISA (concerning "funding"), Exhibit 2.18.2 sets forth as of the valuation date (i) the unfunded liability for all accrued benefits, (ii) the funding method, (iii) the actuarially computed value of vested benefits, (iv) the fair market value of the assets held for funding purposes, (v) the amount and plan year of any "accumulated funding deficiency," as defined in Section 302(a)(2) of ERISA (arising for any reason whatever) that exists with respect to any plan year, and (vi) the amount of any contribution by the Company paid and to be paid, stated separately, for the plan year during which the Closing is to occur. With respect to each Pension Benefit Plan that is not subject to Title I, Part 3 of ERISA, Exhibit 2.18.2 sets forth as of the valuation date (i) the amount of any liability of the Company for any contributions due with respect to such Pension Benefit Plan and (ii) the amount of any contribution paid and to be paid, stated separately, by the Company with respect to such Pension Benefit Plan for the plan year during which the Closing is to occur. 2.18.3 Compliance with Applicable Law. Each of the Pension Benefit Plans, Welfare Benefit Plans, any related trust agreements, annuity contracts, and other funding instruments, comply with the provisions of ERISA and the Code and all other statutes, orders, governmental rules and regulations applicable to such Welfare Benefit Plans and Pension Benefit Plans. The Company has performed all of its obligations currently required to have been performed under all Welfare Benefit Plans and Pension Benefit Plans. There are no actions, suits or claims (other than routine claims for benefits) pending or threatened against or with respect to any Welfare Benefit Plans, Pension Benefit Plans or the assets of such plans, and no facts exist that could give rise to any actions, suits or claims (other than routine claims for benefits) against such plans or the assets of such plans. There have been no written or oral communications with the Internal Revenue Service, Department of Labor or any other federal, state or local government entity. Each Pension Benefit Plan is qualified in form and operation under Section 401(a) of the Code, the Internal Revenue 16 Service has issued a favorable determination letter with respect to each Pension Benefit Plan, and no event has occurred that will or could give rise to a disqualification of any Pension Benefit Plan under Code section 401(a). No event has occurred that will or could subject any Welfare Benefit Plan or Pension Benefit Plan to tax under Section 511 of the Code. 2.18.4 Administration of Plans. Each Welfare Benefit Plan and each Pension Benefit Plan has been administered to date in compliance with the requirements of ERISA and the Code. No assets of any Pension Benefit Plan or Welfare Benefit Plan are invested, directly or indirectly, in any obligation or security of the Company or its Affiliates or in any real or personal property of the Company or its Affiliates. No plan fiduciary of any Welfare Benefit Plan or Pension Benefit Plan has engaged in (i) any transaction in violation of Section 406(a) or (b) of ERISA, or (ii) any "prohibited transaction" (within the meaning of Section 4975(c)(1) of the Code) for which no exemption exists under Section 408 of ERISA or Section 4975(d) of the Code. 2.18.5 Title IV Plans. With respect to each Pension Benefit Plan which is subject to the provisions of Title IV of ERISA in which the Company (for purposes of this subsection the Company shall include each trade or business, whether or not incorporated, which is a member of a group of which the Company is a member and which is under common control within the meaning of Section 414 of the Code and the regulations thereunder) participates or has participated, (i) the Company has not withdrawn from such Pension Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (ii) the Company has not completely or partially withdrawn from a Pension Benefit Plan that is a multiemployer plan, and the liability to which the Company would become subject under ERISA if the Company were to withdraw completely from all multiemployer plans in which it currently participates is not in excess of $10,000 as of the most recent valuation date applicable thereto, (iii) the Company has not filed a notice of intent to terminate any such Pension Benefit Plan or adopted any amendment to treat such Pension Benefit Plan as terminated, (iv) the Pension Benefit Guaranty Corporation has not instituted proceedings to terminate any such Pension Benefit Plan, (v) no other event or condition has occurred that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a Trustee to administer, any such Pension Benefit Plan, (vi) all required premium payments to the Pension Benefit Guaranty Corporation have been paid when due, and (vii) no "reportable event" (as described in Section 4043 of ERISA and the regulations thereunder) has occurred with respect to said Pension Benefit Plan. 2.18.6 Other Employee Benefit Plans and Agreements. Exhibit 2.18.3 lists each cafeteria, fringe benefit, profit sharing, deferred compensation, bonus, stock option, stock 17 purchase, pension, retainer, consulting, retirement, welfare, or other incentive plan or agreement, employment agreement not terminable on thirty (30) days or less written notice, and any other employee benefit plan, agreement, arrangement, or commitment not previously listed on the Exhibits to this Section that is maintained by the Company or to which the Company contributes or is required to contribute. 2.18.7 Copies of Plans. Exhibit 2.18.4 includes true and complete copies of: each Welfare Benefit Plan; each Pension Benefit Plan; related service agreements, trust agreements, annuity contracts, insurance contracts and other funding instruments; each plan, agreement, arrangement, and commitment referred to in Section 2.18.6; favorable determination letters; annual reports (Form 5500 series) required to be filed with any governmental agency for each Welfare Benefit Plan, Pension Benefit Plan, and fringe benefit plan for the three most recent plan years, including, without limitation, all schedules thereto and all financial statements with attached opinions of independent accountants; current summary plan descriptions; and actuarial reports as of the last valuation date for each Pension Benefit Plan that is subject to Title IV of ERISA. 2.18.8 Continuation Coverage Requirements for Health Plans. All group health plans of the Company (including any plans of affiliates of the Company that must be taken into account under Section 4980B of the Code) have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code and Title I, Part 6 of ERISA. 2.18.9 Valid Obligations. All Welfare Benefit Plans, Pension Benefit Plans, related trust agreements, annuity contracts or other funding instruments, and all plans, agreements, arrangements and commitments referred to in Section 2.18.6 are legal, valid and binding and in full force and effect, and there are no defaults thereunder. No insurance contract, annuity contract or other funding instrument with any financial entity or other organization would impose a penalty, discount, market value adjustment, or other reduction on account of the withdrawal of assets from such organization or the change in investment of such assets. Except as specified in Exhibit 2.18.5, none of the rights of the Company thereunder will be impaired by the consummation of the transactions contemplated by this Agreement, and all of the rights of the Company thereunder will be enforceable by Holdings and Acquisition, as the case may be, at and after the Closing without the consent or agreement of any other party other than consents and agreements specifically listed in Exhibit 2.18.5. 2.19 Intellectual Property. The Company has good and marketable title to, owns all right, title, and interest in the United States in, to, and under, and Exhibit 2.19 contains a detailed listing of, each copyright, trademark, trade name, service mark, trade dress, patent, franchise, trade secret, product 18 designation, formula, process, know-how, right of publicity, design, registration of any of the foregoing, and application for any patent or registration, and other similar rights (collectively "Intellectual Property Rights") used in, or necessary for, the operation of its business as currently conducted. Except as otherwise set forth on Exhibit 2.19, all of said Intellectual Property Rights, the right to use them, and the right to convey them are free and clear of all royalty and other obligations, security interests, liens and encumbrances. The Company has the right to use all Intellectual Property Rights used in, or necessary for, the operation of its business as currently conducted. The Company has taken all action necessary to protect against and defend against, and neither the Company nor any of the Sellers has any knowledge of, any conflicting use of any such Intellectual Property Rights. The Company has not utilized, nor does it utilize, any Intellectual Property Rights, except those which are set forth in Exhibit 2.19. Except as set forth in Exhibit 2.19, the Company is not a party in any capacity to any franchise, license, royalty or other agreement respecting or restricting any Intellectual Property Rights, and, except as set forth on Exhibit 2.19, the Intellectual Property Rights of the Company do not conflict with the Intellectual Property Rights or other rights of any third party. No product, including final and intermediate products, made, imported, offered for sale, sold or distributed by the Company, or service provided by the Company, or process used by the Company, violates any license or infringes any Intellectual Property Rights or other rights of any third party, and, except as set forth on Exhibit 2.19, there are no pending claims or demands by any third party to the contrary. Neither the Company nor the Sellers are aware that any such claim or demand will be or is likely to be made or of any fact or circumstance that could reasonably give rise to such a claim or demand. The Intellectual Property Rights are valid and enforceable. 2.20 Labor Relations. Except as set forth in Exhibit 2.20, there have been no strikes, work stoppages or any demands for collective bargaining by any union or labor organization since January 1, 1993; there is no collective bargaining relationship between the Company and any union; there is no dispute or controversy with any union or other organization of the Company's employees and there are no arbitration proceedings pending or threatened involving a dispute or controversy. The Company is in full compliance with all Laws respecting employment and employment practices, terms and conditions of employment and wages and hours including, without limitation, the Fair Labor Standards Act, the Family and Medical Leave Act of 1993, the Americans with Disabilities Act of 1990, the Veterans Reemployment Rights Act, the Equal Employment Opportunities Act, as amended by the Civil Rights Act of 1991, the Occupational Safety and Health Act, the Employee Retirement Income Security Act of 1974, the Immigration Reform and Control Act of 1986, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Older Workers 19 Benefit Protection Act, and all other Laws, each as amended to date, relating to employer/employee rights and obligations. The Company currently has satisfactory relationships with its employees. Except as disclosed in Exhibit 2.20 and since January 1, 1993, no officers of the Company have resigned, advised the Company of an intention to resign from such employment or refused to continue employment with the Company. Exhibit 2.20 lists each former employee and/or officer of the Company whose aggregate annualized compensation exceeded $200,000 and whose employment by the Company has ceased for any reasons since January 1, 1993. Set forth opposite the name of each such employee and/or officer are: the positions held; the beginning and ending employment dates; and the reason for the cessation of employment. 2.21 Insurance. Exhibit 2.21 lists and includes copies of all certificates of coverage regarding all of the Company's existing insurance policies, the premiums therefor and the coverage of each policy. Such policies and the amount of coverage and the risks insured are, in the aggregate, sufficient to protect and insure the Company against perils which good business practice demands be insured against or which are normally insured against by other industry members similarly situated, and will remain in full force and effect after the Closing. 2.22 Suppliers. No suppliers of goods or services to the Company that has made sales or provided services representing, individually or in the aggregate, more than $200,000 in payments or commitments by the Company within the last 12 months has (i) ceased, or indicated any intention to cease, doing business with the Company, or (ii) changed or indicated any intention to change any terms or conditions for future supply or sale of products or services from the terms or conditions that existed with respect to the supply or sale of such products or services during the 12-month period ending on the date hereof. 2.23 Environmental. 2.23.1 For purposes of this Section: 2.23.1.1 "Hazardous Materials" means any hazardous, .infectious or toxic substance, chemical, pollutant, contaminant, emission or waste which is or becomes regulated by any local, state, federal or foreign authority. Hazardous Materials include, without limitation, anything which is: (i) defined as a "pollutant" pursuant to 33 U.S.C. ss. 1362(6); (ii) defined as a "hazardous waste" pursuant to 42 U.S.C. ss. 6921; (iii) defined as a "regulated substance" pursuant to 42 U.S.C. ss. 6991; (iv) defined as a "hazardous substance" pursuant to 42 U.S.C. ss. 9601(14); (v) defined as a "pollutant or contaminant" pursuant to 42 U.S.C. ss. 9601(33); (vi) petroleum; (vii) asbestos; and (viii) polychlorinated biphenyl. 20 2.23.1.2 "Environmental Laws and Regulations" means all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any Laws relating to pollution, nuisance, or the environment including, without limitation, (i) the Federal Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq.; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss.ss. 9601 et seq.; (iii) the Federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. ss.ss. 1101 et seq.; (iv) the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. ss.ss. 136 et seq.; (v) the Federal Water Pollution Control Act, 33 U.S.C. ss.ss. 1251 et seq.; (vi) the Solid Waste Disposal Act, 42 U.S.C. ss.ss. 6901 et seq.; (vii) the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et seq.; (viii) Laws relating in whole or part to emissions, discharges, releases, or threatened releases of any Hazardous Material; and (ix) Laws relating in whole or part to the manufacture, processing, distribution, use, coverage, disposal, transportation, storage or handling of any Hazardous Material. 2.23.2 The operations and activities of the Company comply, and have in the past complied, in all respects, with all Environmental Laws and Regulations. There are no pending or currently proposed changes to any Environmental Laws and Regulations which, when implemented or effective, may affect the operations of the Company. 2.23.3 The Company has obtained and is and has been in full compliance with all requirements, permits, licenses and other authorizations which are required with respect to the Company's operations, as well as the transactions contemplated hereby under all Environmental Laws and Regulations. Exhibit 2.23 lists each such permit, license or other authorization. There are no other such permits, licenses or other authorizations which are required by any Environmental Laws and Regulations to be obtained after the Closing. 2.23.4 There is no civil, criminal, administrative or other action, suit, demand, claim, hearing, notice of violation, proceeding, investigation, notice or demand pending, received, or, to the best knowledge of the Company, threatened against the Company relating in any way to any Environmental Laws and Regulations. 2.23.5 The Company has not caused or experienced any past or present events, conditions, circumstances, plans or other matters which: (i) are not in compliance with all Environmental Laws and Regulations; (ii) may give rise to any statutory, common law, or other legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation or investigation based on or relating to Hazardous Materials including, without limitation, such matters relating to any property owned, leased or utilized by the Company at any time; 21 (iii) arise from inventory of or waste from Hazardous Materials; or (iv) arise from any off-site disposal, release or threatened release of Hazardous Materials. 2.23.6 No asbestos, polychlorinated biphenyls, lead-based paints, or radon are on any real property or in any building now or previously owned, operated, leased or utilized by the Company. 2.23.7 No employee or former employee of the Company has been exposed to any Hazardous Material owned, produced or utilized by the Company or any former subsidiary. 2.23.8 The Company has not received any notice or indication from any governmental agency or private or public entity advising it that it is or may be responsible for any investigation or response costs with respect to a release, threatened release or cleanup of chemicals or materials produced by or resulting from any business, commercial or industrial activities, operations or processes, including, without limitation, any Hazardous Materials. The Company is not aware of any facts which might give rise to such notices. 2.23.9 Except for the concrete vault located at 9700 Commerce Parkway, Lenexa, Kansas which is used to store mineral spirits, no underground tanks, piping or subsurface structures of any type exist or have existed on any real property now or previously owned, operated, leased or utilized by the Company. 2.23.10 Exhibit 2.23 contains complete copies of all environmental investigations, assessments, audits, studies, tests and related materials in possession of the Company, or known to the Company to exist, which relate to the current or prior operations of the Company or any real property now or previously owned, operated, leased or utilized by the Company. 2.24 Capital Expenditures. The Company has outstanding commitments for capital expenditures as set forth in Exhibit 2.24 which includes a schedule of substantially all monies disbursed on account of capital expenditures made by the Company between the Financial Statement Date and the date hereof. After the date hereof, no capital expenditures or commitments in excess of $200,000 in the aggregate will be made by the Company, except as set forth in Exhibit 2.24 or with Holdings' and Acquisition's prior written consent. 2.25 Warranties. Except as set forth in Exhibit 2.25, there are no claims existing or threatened under or pursuant to any warranty, whether expressed or implied, on products or services sold by the Company and the Balance Sheet reserves, if any, for anticipated claims are adequate to cover any such claims. Exhibit 2.25 includes a copy of the form of all written warranties 22 furnished by the Company to purchasers of any product since January 1, 1993. 2.26 Dealings with Affiliates. Exhibit 2.26 sets forth a complete list (including the parties) and copies (or a detailed summary in the case of an oral agreement) of all oral or written contracts, arrangements or other agreements to which the Company or any Affiliate is, will be or has been a party at any time from January 1, 1993, to the Closing Date, and to which any other Affiliate or the Company was or is also a party. 2.27 Business Generally. Since July 1, 1996, there have been no events, transactions or information which have come to the attention of the Sellers (other than matters in the public domain) which could be expected to have an adverse effect on the business and operations of the Company, and the Company is not a party to any agreement, contract or covenant limiting the Company from competing in any line of business or with any person or other entity in any geographic area. 2.28 Bank Accounts. Exhibit 2.28 is a list of all bank accounts, lock boxes, post office boxes and safe deposit boxes maintained in the name of or controlled by the Company and the names of the persons having access thereto. 2.29 Disclosure. No representation or warranty made by the Sellers in this Agreement or in any agreement, instrument, document, certificate, statement or letter furnished to Holdings or Acquisition, by or on behalf of the Sellers in connection with any of the transactions contemplated by this Agreement contains any untrue statement of fact or omits to state a fact necessary in order to make the statements herein or therein not misleading in light of the circumstances in which they are made. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND ACQUISITION Holdings and Acquisition hereby represent and warrant to the Sellers, as follows: 3.1 Corporate Organization, etc. Acquisition is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and will be qualified to do business in Kansas on the Closing Date. Holdings is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware. 3.2 Capitalization. Holdings has authorized capital stock consisting of 100,000 shares of Common Stock, par value $.01 23 per share. Acquisition has authorized capital stock consisting of 100,000 shares of Common Stock, par value $.01 per share. 3.3 Authorization, etc. Each of Holdings and Acquisition has full corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. The Board of Directors of each of Holdings and Acquisition has duly authorized the execution and delivery of this Agreement and the transactions contemplated hereby, and no other corporate proceedings on its part are necessary to authorize this Agreement and the transactions contemplated hereby. 3.4 No Violation. Neither Holdings nor Acquisition is subject to or obligated under any certificate of incorporation, bylaw, Law, or any agreement or instrument, or any license, franchise or permit, which would be breached or violated by its execution, delivery or performance of this Agreement. Each of Holdings and Acquisition will comply with all Laws in connection with its execution, delivery and performance of this Agreement and the transactions contemplated hereby. 3.5 Governmental Authorities. Neither Holdings nor Acquisition is required to submit any notice, report or other filing with and no consent, approval or authorization is required by any governmental or regulatory authority in connection with Holdings' and Acquisition's execution or delivery of this Agreement or the consummation of the transactions contemplated hereby. ARTICLE 4 COVENANTS OF THE SELLERS Except as otherwise consented to or approved by Holdings and Acquisition in writing, until the Closing, the Sellers jointly and severally covenant and agree (and will cause the Company to act or refrain from acting where required hereinafter) as follows: 4.1 Regular Course of Business. The Company will operate its business in the ordinary course, diligently and in good faith, consistent with past management practices; will maintain all of its properties in customary repair, order and condition, reasonable wear and tear excepted; will maintain (except for expiration due to lapse of time) all leases and contracts described herein in effect without change except as expressly provided herein; will comply with the provisions of all Laws applicable to the conduct of its business; will not engage in any significant or unusual transaction; will not cancel, release, waive or compromise any debt, claim or right in its favor having a value in excess of $25,000; will maintain insurance coverage up to the Closing Date in amounts adequate to protect and insure the Company against perils which good business practice demands be insured against or which 24 are normally insured against by other industry members similarly situated. 4.2 Amendments. Except as required for the transactions contemplated in this Agreement, no change or amendment shall be made in the Company's articles or certificate of incorporation or bylaws. The Company will not merge into or consolidate with any other corporation or person, or change the character of its business. 4.3 Capital Changes. The Company will not issue or sell any shares of its capital stock of any class or issue or sell any securities convertible into, or options, warrants to purchase or rights to subscribe to, any shares of its capital stock of any class. 4.4 Redemptions; Distributions; Bonuses. The Company will not acquire any shares of its capital stock and will not declare or pay any dividend or other distribution in respect of its capital stock without delivering written notice of such declaration or payment to Holdings and Acquisition within five (5) days after the declaration or payment, as the case may be, of such dividend or other distribution (but in no event later than two (2) days prior to Closing). Concurrently with the execution of this Agreement, the Chief Financial Officer of the Company shall deliver to Holdings and Acquisition a certificate which sets forth the bonuses to be paid to Sellers and the employees of the Company. Except for the payment of bonuses in accordance with such certificate, the Company will not pay, set aside, accrue, agree to or become liable in any manner for any bonus, of any nature or type, to the Sellers or to any employee or officer of the Company. 4.5 Capital Expenditures. The Company will not make any capital expenditures, or commitments with respect thereto, except as set forth in Exhibit 2.24. 4.6 Borrowing. The Company will not (i) incur, assume or guarantee any indebtedness or capital leases, (ii) create or permit to become effective any mortgage, pledge, lien, encumbrance or charge of any kind upon its assets other than in the ordinary course of business or (iii) prepay any debt or obligation in excess of $500,000 in the aggregate (except for prepaying trade accounts payable in the normal course of business to take advantage of cash discounts and for paying down the Company's seasonal working capital revolver). 4.7 Other Commitments. Except in the ordinary course of business consistent with past practices, the Company will not enter into any transaction, make any commitment or incur any obligation. 4.8 Interim Financial Information. The Company will supply Holdings and Acquisition with unaudited monthly financial 25 statements on the earlier of (i) fifteen (15) days following the end of each month ending between the Financial Statement Date and the Closing Date or (ii) the date such unaudited monthly financial statements are prepared, in either case, certified by its President and chief financial officer as having been prepared in accordance with procedures employed by the Company in preparing prior monthly financial statements. All such financial statements shall be accompanied by a certificate of the Company's President and chief financial officer certifying that such financial statements were prepared in accordance with GAAP applied on a basis consistent with the unaudited financial statements for the preceding months and such unaudited statements include all adjustments (all of which were normal recurring adjustments) necessary to fairly present the financial position, results of operations and changes in financial position at and for such period. 4.9 Full Access and Disclosure. 4.9.1 The Company shall afford to Holdings, Acquisition and their counsel, accountants and other authorized representatives access during business hours to the Company's plants, properties, books and records in order that Holdings and Acquisition may have full opportunity to make such reasonable investigations as it shall desire to make of the affairs of the Company and the Company will cause its officers and employees to furnish such additional financial and operating data and other information as Holdings and Acquisition shall from time to time reasonably request. 4.9.2 From time to time prior to the Closing Date, the Company will promptly supplement or amend in writing information previously delivered to Holdings or Acquisition with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or disclosed. 4.10 Consents. The Company will use its best efforts to obtain on or prior to the Closing Date all consents necessary to the consummation of the transactions contemplated hereby. The use of best efforts shall not require the expenditure of money. 4.11 Breach of Agreement. Neither the Sellers nor the Company will take any action which, if taken prior to the Closing Date, would constitute a breach of this Agreement. 4.12 Further Assurances. The Company, the Sellers and the Company's counsel will furnish Holdings or Acquisition with such other and further documents, certificates, opinions, consents and information as either Holdings or Acquisition shall reasonably request to enable Holdings or Acquisition to attempt to borrow funds from a bank or other lending entity or individual(s) for the purchase of the Shares and to evidence compliance with the terms 26 and conditions of any credit agreement to be entered into between Holdings or Acquisition and a bank and/or other lending entities or individuals. 4.13 Fulfillment of Conditions. The Sellers and the Company will take all commercially reasonable steps necessary or desirable, and proceed diligently and in good faith, to satisfy each condition to the obligations of Holdings and Acquisition contained in this Agreement and will not take or fail to take any action that could reasonably be expected to result in the nonfulfillment of any such condition. ARTICLE 5 COVENANTS OF HOLDINGS AND ACQUISITION Holdings and Acquisition hereby covenant and agree with the Sellers that: 5.1 Confidentiality. Each of Holdings and Acquisition will hold in strict confidence and not disclose to any other party (other than its counsel and other advisors), without the prior consent of the Sellers' Agents, all information received by Holdings or Acquisition from any of the Sellers or the Company, any of the Company's officers, directors, employees, agents, counsel or auditors in connection with the transactions contemplated hereby, except as may be required by applicable law or as otherwise contemplated herein. 5.2 Books and Records. Each of Holdings and Acquisition shall preserve and keep the Company's books and records delivered hereunder for a period of three (3) years from the date hereof and shall, during such period, make such books and records available to former officers and directors of the Company for any reasonable purpose. ARTICLE 6 OTHER AGREEMENTS Holdings, Acquisition and the Sellers covenant and agree that: 6.1 Agreement to Defend. In the event any action, suit, proceeding or investigation of the nature specified in Section 7.5 or Section 8.2 hereof is commenced, whether before or after the Closing Date, all the parties hereto agree to cooperate and use their best efforts to defend against and respond thereto. 27 6.2 Consultants, Brokers and Finders. Except for Barrington Associates, whose fees and commissions shall be paid by Acquisition at or promptly after the Closing, the Sellers, Holdings and Acquisition each represent and warrant to the other that they have not retained any consultant, broker or finder in connection with the transactions contemplated by this Agreement. Except for the Assumed Expenses (as defined in Section 12.3), the Sellers, Holdings and Acquisition each hereby agree to indemnify, defend and hold the other party and its officers, directors, employees and affiliates, harmless from and against any and all claims, liabilities or expenses for any brokerage fees, commissions or finders fees due to any consultant, broker or finder retained by the indemnifying party. 6.3 Wolff Noncompetition Agreement. At the Closing, Wolff will enter into a Noncompetition Agreement with Acquisition, in substantially the form set forth as Exhibit 6.3. 6.4 Taxes. 6.4.1 The Sellers shall be liable and indemnify Holdings, Acquisition and the Company for all Taxes of the Company to the extent such Taxes are not adequately provided for as current Taxes on the Balance Sheet (i) for taxable periods ending on or before the Closing Date and (ii) for any period not ending on or before the Closing Date, for the portion of any Taxes attributable to the period ending on the Closing Date. 6.4.2 All Taxes attributable to the operations of the Company for periods after the Closing Date shall be borne by the Company. For any period that includes but does not end on the Closing Date, (i) liability for any Taxes determined by reference to income, capital gains, gross income, gross receipts, sales, net profits, windfall profits or similar items or resulting from a transfer of assets shall be allocated between the Sellers and the Company based on the date on which such items accrued; and (ii) liability for all other Taxes shall be allocated between the Sellers and the Company, pro rata based on the number of days in the taxable period for which each party is liable for Taxes hereunder. With respect to the Subchapter S Corporation tax year of the Company that ends on the Closing Date, the tax liability of the Sellers for items described in Code Section 1366(a) shall be determined as provided in Code Section 1362(e)(3) and an appropriate election shall be made thereunder. The Sellers agree that the Sellers will not permit the Subchapter S Corporation status of the Company to terminate prior to the Closing Date. 6.4.3 The Sellers shall cause the Company to prepare and file all tax returns and reports of the Company due on or prior to the Closing Date, which returns and reports shall be prepared and filed timely and on a basis consistent with existing procedures for preparing such returns and reports and in a manner consistent 28 with prior practice with respect to the treatment of specific items on the returns or reports; provided, however, that if the treatment of any item on any such return or report has not been provided by prior practice, the Sellers shall cause the Company to report such items in a manner that would result in the least amount of tax liability to the Company, Holdings and Acquisition for periods ending after the Closing Date. Holdings and Acquisition shall cause the Company to prepare and file all tax returns and reports of the Company due after the Closing Date, which returns and reports, to the extent they relate to taxable periods beginning prior to, but including the Closing Date, and for the purpose of determining the Sellers' liability for Taxes, shall be prepared and filed timely and on a basis consistent with existing procedures for preparing such returns and in a manner consistent with prior practice with respect to the treatment of specific items on the returns and reports, unless such treatment does not have sufficient legal support to avoid the imposition of penalties. In the event the Sellers are liable under Section 6.4.1 hereof for Taxes due in connection with the returns described in the preceding sentence, the Sellers shall pay the amount of such liability to the Company immediately upon request or at least three (3) business days prior to the filing of such returns, whichever is later. 6.4.4 Holdings, Acquisition, the Company and the Sellers shall provide each other with such assistance as may reasonably be requested by the others in connection with the preparation of any return or report of Taxes, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liabilities for Taxes. Holdings, Acquisition, the Company and the Sellers will retain for the full period of any statute of limitations and provide the others with any records or information which may be relevant to such preparation, audit, examination, proceeding or determination. 6.4.5 If in connection with any examination, investigation, audit or other proceeding in respect of any tax return covering the operations of the Company on or before the Closing Date, any governmental body or authority issues to the Company a written notice of deficiency, a notice of reassessment, a proposed adjustment, an assertion of claim or demand concerning the taxable period covered by such return, Holdings, Acquisition or the Company shall notify the Sellers' Agents of its receipt of such communication from the governmental body or authority within thirty (30) business days after receiving such notice of deficiency, reassessment, adjustment or assertion of claim or demand. No failure or delay of Holdings, Acquisition or the Company in the performance of the foregoing shall reduce or otherwise affect the obligations or liabilities of the Sellers pursuant to this Agreement, except to the extent that such failure or delay shall have adversely affected the Sellers' ability to defend against any liability or claim for Taxes that the Sellers are obligated to pay hereunder. Except as provided below, the Sellers shall, at his, 29 her or its expense, have the nonexclusive right to participate in the contest of any such assessment, proposal, claim, reassessment, demand or other proceedings in connection with any tax return covering taxable periods of the Company ending on or before the Closing Date. Holdings, Acquisition and the Company will not be obligated to settle or resolve any issue related to Taxes for such a period, which, if so settled or resolved, could have an effect on the Company, Holdings or Acquisition for periods after the Closing Date, unless the Sellers' Agents agree in writing with Holdings, Acquisition and the Company, in terms reasonably satisfactory to Holdings, Acquisition and the Company, to indemnify Holdings, Acquisition and the Company from any cost, damage, loss or expense relating to such settlement or resolution. Notwithstanding anything in this Agreement to the contrary, if any examination, investigation, audit or other proceeding relates to a tax return for a period that begins before and ends after the Closing Date, Holdings, Acquisition and the Company shall solely participate in, control and resolve such examination, investigation, audit or other proceeding, provided that Holdings and Acquisition shall communicate with the Sellers' Agents regarding the status of such examination, investigation, audit or proceeding. 6.4.6 If the Company receives any refund for Taxes attributable to the period prior to the Closing, such refund shall be paid promptly to the Sellers by the Company, pro rata according to each Seller's ownership interest in the Company immediately prior to the Closing. Any amounts to be paid to the Sellers pursuant to this paragraph shall be deemed to be a post-Closing purchase price adjustment. 6.5 Life Insurance. Provided the Closing occurs, the parties agree that in connection with the Closing Wolff, Barry Golden, John Menghini and Robert Shaw shall each have the individual option to require that the Company (i) assign to such individual the entire life insurance policy owned by the Company which insures the respective life of such individual (including any cash values thereon if requested by any of such individuals), or (ii) assign to such individual just the life insurance portion of such policy, excluding any cash values on such policies. Such options shall be exercised by delivering written notice thereof to the Company no later than the Closing Date. The cash value of any life insurance policy assigned by the Company to any of such individuals shall be paid to the Company or its successor no later than the time of delivery of the Closing Financials and Computations. At the time such policies are renewed, such individuals shall have the option of paying the premiums for such policies or letting the policies lapse. 30 6.6 Conditions Precedent. The Sellers, Holdings and Acquisition each agree that the following conditions precedent must be satisfied before this Agreement shall be effective and binding upon any party to this Agreement: 6.6.1 Wolff Employment Agreement. No later than January 31, 1997, Wolff and Acquisition shall have agreed upon the form of an Employment Agreement to be executed by Wolff and Acquisition at Closing (the "Wolff Employment Agreement"). Wolff and Acquisition shall each indicate their agreement to the form of the Wolff Employment Agreement by initialling the form of such document no later than January 31, 1997 and attaching the initialled document to this Agreement as Exhibit 6.6.1. 6.6.2 Subscription and Stockholders Agreement. No later than January 31, 1997, the Sellers' Agents and Holdings shall have agreed upon the form of a Subscription and Stockholders Agreement to be executed by all the stockholders of Holdings at Closing (the "Subscription Agreement"). Sellers' Agents and Holdings shall each indicate their agreement to the form of the Subscription Agreement by initialling the form of such document no later than January 31, 1997 and attaching the initialled document to this Agreement as Exhibit 6.6.2. 6.6.3 Consulting Fees. No later than January 31, 1997, the Sellers' Agents and Holdings shall have agreed upon the fees to be paid to TJC Management Corporation ("TJC") pursuant to the consulting agreement to be executed between Holdings and TJC at Closing. Sellers' Agents and Holdings shall each indicate their agreement to the amount of such fees by executing a letter agreement regarding same no later than January 31, 1997. 6.6.4 Approval of Exhibits. No later than January 31, 1997, the Sellers' Agents shall have delivered to Holdings and Acquisition all of the materials to be included in the Exhibits to Article 2 of this Agreement. Holdings and Acquisition shall have until February 15, 1997 to review and accept same. If prior to February 15, 1997, neither Holdings nor Acquisition delivers to the Sellers' Agents a written letter indicating that such party does not wish to proceed with the transactions contemplated by this Agreement, then the materials delivered to Holdings and Acquisition shall be deemed to be the Exhibits to this Agreement by all of the parties to this Agreement; provided, however, Holdings' and Acquisition's acceptance and review of such materials as the Exhibits to this Agreement shall not be deemed to waive or otherwise affect their rights under Article 11 of this Agreement. 6.6.5 Failure to Satisfy Conditions. If each of the conditions precedent set forth in Sections 6.7.1, 6.7.2, 6.7.3 and 6.7.4 of this Agreement is not satisfied by the dates required therein, then this Agreement shall be deemed void ab initio and of 31 no force or effect and no party to this Agreement shall have any obligation or liability to any other party to this Agreement. 6.7 Durable Power of Attorney. Concurrently with the execution of this Agreement, the Sellers' Agents shall deliver to Holdings and Acquisition an executed copy of the Durable Power of Attorney for those Sellers who are executing this Agreement by power of attorney. 6.8 Transfer of Hawker. Provided the Closing occurs, the parties agree that in connection with the Closing Wolff shall have the option to require the Company to assign to him title to the Hawker 1000 aircraft upon payment to the Company from Wolff of the book value of such aircraft as shown on the general ledger of the Company as of the Closing Date. ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF HOLDINGS AND ACQUISITION Each and every obligation of Holdings and Acquisition under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by Holdings and Acquisition: 7.1 Representations and Warranties; Performance. The representations and warranties made by the Sellers herein shall be true and correct on the date of this Agreement and on the Closing Date with the same effect as though made on such date; the Sellers shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by them prior to the Closing Date; the Sellers shall have, and shall have caused the President and chief financial officer of the Company to have delivered to Holdings and Acquisition a certificate, dated the Closing Date, in the form designated Exhibit 7.1 hereto, certifying to such matters and the other conditions contained in this Article 7. 7.2 Consents and Approvals. All consents from and filings with third parties, regulators and governmental agencies required to consummate the transactions contemplated hereby, or which, either individually or in the aggregate, if not obtained, would cause an adverse effect on the Company's financial condition or business shall have been obtained and delivered to Holdings and Acquisition. 7.3 Opinion of the Sellers' Counsel. Holdings and Acquisition shall have received an opinion of the Sellers' counsel, dated the Closing Date, substantially in the form attached hereto as Exhibit 7.3. 32 7.4 No Adverse Change. There shall have been no adverse change since the Financial Statement Date in the business, prospects, financial condition, earnings or operations of the Company's business. 7.5 No Proceeding or Litigation. No action, suit or proceeding before any court or any governmental or regulatory authority shall have been commenced or threatened, and no investigation by any governmental or regulatory authority shall have been commenced or threatened against any of the Sellers, the Company, Holdings, Acquisition or any of their respective principals, officers or directors seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions. 7.6 Comfort Letter and Solvency Certificate. Holdings and Acquisition shall have received (i) a "comfort" letter from the Company's independent certified public accountants, dated the Closing Date, based upon a limited review (but not an audit) conducted no earlier than five (5) business days preceding the Closing Date and (ii) a "solvency" certificate from the Company's President and chief financial officer substantially in the forms of Exhibits 7.6.1 and 7.6.2 hereto, respectively, which documents shall relate to the operations and financial conditions of the Company and the interim financial statements delivered pursuant to Section 4.8 hereof. 7.7 Financial Condition at Closing. 7.7.1 Except for liabilities set forth in the Balance Sheet and accounts payable incurred in the ordinary course of business of the Company consistent with past practices, the Company shall not owe any debt at the Closing Date. The term "debt" includes notes payable and the short-term and long-term portions of any and all debt or obligations, including capitalized lease obligations. 7.7.2 The mix and composition of the assets and liabilities of the Company on the Closing Date will not be materially different than those indicated on the Balance Sheet. 7.7.3 The Company's Adjusted Net Worth as of the Closing shall be at least $63,800,000. 7.7.4 The Company's adjusted earnings (excluding all extraordinary items and non-recurring expenses) before provision for interest, income taxes, depreciation and amortization for the fiscal year ended June 30, 1996, calculated in accordance with GAAP, shall have been at least $36,600,000. 33 7.7.5 The Company's net revenues for the fiscal year ended June 30, 1996, calculated in accordance with GAAP, shall have been at least $169,200,000. 7.8 Audit Review. Deloitte & Touche LLP shall conduct a review of the audit of the Company as at June 30, 1996, the results of which shall be satisfactory to Holdings and Acquisition in their sole and absolute discretion. 7.9 Review. A full due diligence review of the Company's business shall be completed by Holdings, Acquisition, their legal counsel, their outside consultants, or others appointed by Holdings or Acquisition. Holdings and Acquisition shall be satisfied in their sole and absolute discretion with the results of their due diligence review of the Company and its business operations, prospects and assets. Holdings and Acquisition shall bear the costs of this review. 7.10 Other Documents. The Sellers will furnish or cause the Company to furnish Holdings and Acquisition with such other and further documents and certificates of its officers and others as Holdings or Acquisition shall reasonably request to evidence compliance with the conditions set forth in this Agreement. 7.11 Other Agreements. The Agreements described in Article 6 shall have been entered into and delivered. 7.12 Estoppel Certificate. The Sellers shall have furnished Holdings and Acquisition with an estoppel certificate in the form attached hereto as Exhibit 7.12, which shall have been executed by the lessor under the lease described on Exhibit 2.12. 7.13 Withholding Certificate. The Seller shall have executed and delivered to Holdings and Acquisition a certificate, substantially in the form of Exhibit 7.13 attached hereto. 7.14 Financing. Holdings and Acquisition shall have obtained funds in an aggregate amount sufficient to consummate the transactions hereunder on terms and conditions satisfactory to Holdings and Acquisition. 7.15 Compensation. Concurrently with the execution of this Agreement the Chief Financial Officer of the Company shall execute and deliver to Holdings and Acquisition a certificate listing the current job title and total remuneration (including, without limitation, salary, commissions and bonuses) for each of the Sellers and for each officer, director, employee or consultant of the Company who received total remuneration in excess of $200,000 from the Company during any of the past three (3) fiscal years or who is expected to receive total remuneration in excess of such amount during the current fiscal year. Except as disclosed on such certificate, the Company shall not increase or commit to 34 increase the base compensation, commission, bonus or the rate (or any other component) of total compensation payable or to become payable by the Company to any employee (including any director or officer), whether such person is listed on such certificate or not, and no extraordinary compensation or bonus shall be paid by the Company. ARTICLE 8 CONDITIONS TO THE OBLIGATIONS OF THE SELLERS Each and every obligation of the Sellers under this Agreement shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions unless waived in writing by the Sellers' Agents: 8.1 Representations and Warranties; Performance. The representations and warranties made by Holdings and Acquisition herein shall be true and correct on the date of this Agreement and on the Closing Date with the same effect as though made on such date; each of Holdings and Acquisition shall have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed and complied with by it prior to the Closing Date; each of Holdings and Acquisition shall have delivered to the Sellers' Agents a certificate of its President, dated the Closing Date, certifying to the fulfillment of the conditions set forth herein, in the form designated as Exhibit 8.1 and the other conditions contained in this Article 8. 8.2 No Proceeding or Litigation. No action, suit or proceeding before any court or any governmental or regulatory authority shall have been commenced, or threatened, and no investigation by any governmental or regulatory authority shall have been commenced, or threatened, against the Company, Holdings, Acquisition, any of the Sellers, or any of their respective principals, officers or directors, seeking to restrain, prevent or change the transactions contemplated hereby or questioning the validity or legality of any of such transactions or seeking damages in connection with any of such transactions. 8.3 Opinion of Counsel. The Sellers' Agents shall have received an opinion of counsel to Holdings and Acquisition dated the Closing Date substantially in the form of Exhibit 8.3. 8.4 Consents and Approvals. All consents from and filings with third parties, regulators and governmental agencies required to consummate the transactions contemplated hereby, or which, either individually or in the aggregate, if not obtained, would cause an adverse effect on the Company's financial condition or business shall have been obtained and delivered to Holdings and Acquisition. 35 8.5 Payment. The payment(s) described in Section 1.3 shall have been made. 8.6 Other Documents. Holdings and Acquisition will furnish the Sellers' Agents with such other documents and certificates to evidence compliance with the conditions set forth in this Article as may be reasonably requested by the Sellers' Agents. 8.7 Other Agreements. The agreements described in Article 6 shall have been entered into and delivered. 8.8 Financing. No later than February 17, 1996, Holdings and Acquisition shall have obtained and delivered to the Sellers' Agents commitment letters or "highly confident" letters from lenders that propose to loan funds to Holdings and Acquisition in an aggregate amount sufficient to consummate the transactions hereunder. 8.9 Review. No later than January 31, 1997, Holdings and Acquisition shall have delivered to the Sellers' Agents a letter indicating that Holdings and Acquisition have completed their due diligence review of the Company's business. ARTICLE 9 CLOSING 9.1 Closing. Unless this Agreement shall have been terminated or abandoned pursuant to the provisions of Article 10 hereof, a closing (the "Closing") shall be held on February 28, 1997, or on such other date (the "Closing Date") mutually agreed upon in New York, New York or at such other place or places as Holdings and Acquisition shall designate. Each party has the right at any time to extend the Closing Date for a period of up to thirty (30) business days from the date stated above, by written notice to the other party or parties. 9.2 Deliveries at Closing. 9.2.1 At the Closing, the Sellers shall transfer and assign to Holdings and Acquisition, as the case may be, all of the Shares by delivering certificates representing each of the Shares, duly endorsed for transfer to Holdings and Acquisition, as the case may be, with signatures guaranteed, and the cash consideration, securities and the other agreements, certifications and other documents required to be executed and delivered hereunder at the Closing shall be duly and validly executed and delivered. 9.2.2 From time to time after the Closing, at Holdings' and Acquisition's request and without further 36 consideration from Holdings or Acquisition, the Sellers shall execute and deliver such other instruments of conveyance and transfer and take such other action as Holdings or Acquisition reasonably may require to convey, transfer to and vest in Holdings and Acquisition and to put Holdings and Acquisition in possession of the Shares to be sold, conveyed, transferred and delivered hereunder. 9.3 Legal Actions. If, prior to the Closing Date, any action or proceeding shall have been instituted by any third party before any court or governmental agency to restrain or prohibit this Agreement or the consummation of the transactions contemplated herein, the Closing shall be adjourned at the option of any party hereto for a period of up to one hundred twenty (120) days. If, at the end of such one hundred twenty (120) day period, the action or proceeding shall not have been favorably resolved, any party hereto may, by written notice thereof to the other party or parties, terminate its obligation hereunder. 9.4 Specific Performance. The parties agree that if any party hereto is obligated to, but nevertheless does not, consummate this transaction, then any other party, in addition to all other rights or remedies, shall be entitled to the remedy of specific performance mandating that the other party or parties consummate this transaction. In an action for specific performance by any party hereto against any other party, the other party shall not plead adequacy of damages at law. ARTICLE 10 TERMINATION AND ABANDONMENT 10.1 Methods of Termination. This Agreement may be terminated and the transactions herein contemplated may be abandoned at any time (notwithstanding approval by the Board of Directors of each of Holdings and Acquisition): 10.1.1 by mutual consent of Holdings, Acquisition and the Sellers' Agents; or 10.1.2 by either Holdings or Acquisition on the one hand, or the Sellers' Agents on the other hand, if (i) in the case of Holdings and Acquisition, neither party is in breach hereunder and the Sellers are in breach hereunder or, in the case of the Sellers' Agents, none of the Sellers is in breach hereunder and Holdings or Acquisition is in breach hereunder, and (ii) this Agreement is not consummated on or before the Closing Date, including extensions. 10.2 Procedure Upon Termination. In the event of termination and abandonment pursuant to Section 10.1 hereof, this 37 Agreement shall terminate and shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: 10.2.1 each party will upon request redeliver all documents and other materials of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same; 10.2.2 no party hereto shall have any liability or further obligation to any other party to this Agreement; and 10.2.3 each party shall bear its own expenses. ARTICLE 11 INDEMNIFICATION 11.1 Indemnification by the Sellers. The Sellers, jointly and severally, shall indemnify Holdings, Acquisition and each of their respective shareholders, officers and directors against any loss, damage, or expense, (including but not limited to reasonable attorneys' fees) ("Damages"), incurred or sustained by Holdings, Acquisition or any of their respective shareholders, officers or directors as a result of (i) any breach of any term, provision, covenant or agreement contained in this Agreement by the Sellers; (ii) any inaccuracy in any of the representations or warranties made by the Sellers in Article 2 of this Agreement; (iii) any inaccuracy or misrepresentation in any certificate or other document or instrument delivered by the Sellers or the Company in accordance with any provision of this Agreement and (iv) any of the matters disclosed in Exhibit 2.13. The obligations of the Sellers as set forth in Section 11.1(ii) and 11.1(iv) shall be subject to and limited by the following: 11.1.1 No claim for Damages shall be made until the cumulative amount of such Damages shall equal or exceed $1,500,000; provided, however, that such limitation shall not apply to any Damages resulting from violations under Sections 2.2 and 2.4 hereof, or from intentional or fraudulent actions, misrepresentations or breaches; 11.1.2 Holdings and Acquisition shall give written notice to the Sellers' Agents stating specifically the basis for the claim for Damages, the amount thereof and, provided the amount of such claim for Damages exceeds $1,500,000, shall tender defense thereof 38 to the Sellers' Agents, on behalf of the Sellers, as provided in Section 11.4; and 11.1.3 To the extent of any claim for Damages that exceeds $1,500,000, either alone or in aggregate, and in addition to any other remedy, each of Holdings and Acquisition shall be entitled, but shall not be obligated, to offset all such claims for Damages against any obligation of Holdings or Acquisition to the Sellers now or hereafter existing. 11.2 Investigations; Survival of Warranties. The respective representations and warranties of the Sellers, Holdings and Acquisition contained herein or in any certificates or other documents delivered prior to or at the Closing are true, accurate and correct and shall not be deemed waived or otherwise affected by any investigation made by any party hereto or by the occurrence of the Closing. Each and every such representation and warranty shall survive until sixty (60) days following the delivery of the Company's (or its successor's) audited financial statements for the fiscal year ending June, 1998; provided, however, all representations and warranties made pursuant to Sections 2.2, 2.4, 2.14 and 2.18 hereof, and all claims for Damages based on intentional or fraudulent actions, misrepresentations or breaches, shall survive for the applicable statute of limitations and provided further, all claims for Damages based on a breach of warranty or misrepresentation under Section 2.23 shall expire on the third anniversary of the Closing Date. 11.3 Indemnification by Holdings and Acquisition. Holdings and Acquisition, jointly and severally, shall indemnify each Seller against any Damages incurred or sustained by such Seller personally as a result of any liability or obligation of the Company that accrues after the Closing; provided, however, nothing contained in this section shall create any obligation for Holdings or Acquisition to indemnify any Seller in any instance in which such Seller would not be entitled to indemnification under the Certificate of Incorporation or Bylaws of Holdings or Acquisition and provided further, nothing contained in this section shall create any obligation for Holdings or Acquisition to indemnify any Seller in any instance in which the liability of such Seller accrues as a result of a misrepresentation or breach of warranty under Article 2 of this Agreement. 11.4 Tender of Defense for Damages. Promptly upon receipt by Holdings or Acquisition of a notice of a claim by a third party which may give rise to a claim for Damages, Holdings and Acquisition shall give written notice thereof to the Sellers' Agents. No failure or delay of Holdings or Acquisition in the performance of the foregoing shall relieve, reduce or otherwise affect the Sellers' obligations and liability to indemnify Holdings and Acquisition pursuant to this Agreement, except to the extent 39 that such failure or delay shall have adversely affected the Sellers' ability to defend against such claim for Damages. If the Sellers' Agents give to Holdings and Acquisition an agreement in writing, in a form reasonably satisfactory to Holdings' and Acquisition's counsel, to defend such claim for Damages, the Sellers may, at their sole expense, undertake the defense against such claim and may contest or settle such claim on such terms, at such time and in such manner as the Sellers' Agents, in their sole discretion, shall elect and Holdings and Acquisition shall execute such documents and take such steps as may be reasonably necessary in the reasonable opinion of counsel for the Sellers to enable the Sellers to conduct the defense of such claim for Damages. If the Sellers fail or refuse to defend any claim for Damages, the Sellers may nevertheless, at their own expense, participate in the defense of such claim by Holdings and Acquisition and in any and all settlement negotiations relating thereto. In any and all events, the Sellers' Agents shall have such access to the records and files of Holdings and Acquisition relating to any claim for Damages as may be reasonably necessary to effectively defend or participate in the defense thereof. ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1 Amendment and Modification. This Agreement may be amended, modified and supplemented only by written agreement of the Sellers' Agents, on behalf of all the Sellers, Holdings and Acquisition. 12.2 Waiver of Compliance; Consents. Any failure of the Sellers on the one hand, or Holdings and Acquisition on the other hand, to comply with any obligation, covenant, agreement or condition herein may be waived in writing by Holdings, Acquisition or the Sellers' Agents, on behalf of the Sellers, respectively, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 12.2. 12.3 Expenses. Each party will pay its own legal, accounting and other expenses incurred by such party or on its behalf in connection with this Agreement and the transactions contemplated herein; provided, however, if the Closing occurs, Acquisition shall reimburse the Sellers for all reasonable legal, accounting and other expenses related to the transactions contemplated by this Agreement (the "Assumed Expenses"). 40 12.4 Notices. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) telecopied, with receipt confirmed, addressed as follows: (a) If to the Sellers, to each of: Robert M. Wolff 9700 Commerce Parkway Lenexa, Kansas 66219 Telecopier 913-752-3336 Robert Shaw 9700 Commerce Parkway Lenexa, Kansas 66219 Telecopier 913-752-3336 John Menghini 9700 Commerce Parkway Lenexa, Kansas 66219 Telecopier 913-752-3336 with a copy to: Leonard Rose, Esq. Rose, Brouillette & Shapiro, P.C. 4900 Main Street, 11th Floor Kansas City, MO 64112 Telecopier: 816-756-1639 or to such other person or address as the Sellers' Agents shall furnish to Holdings and Acquisition in writing. (b) If to Holdings or Acquisition, to: GFSI Holdings, Inc. c/o The Jordan Company 9 West 57th Street, Suite 4000 New York, NY 10019 Telecopier: 212-755-5263 Attention: A. Richard Caputo, Jr. 41 with a copy to: G. Robert Fisher, Esq. Michael J. Beal, Esq. Bryan Cave LLP 1200 Main, Suite 3500 Kansas City, MO 64105 Telecopier: 816-391-7600 or such other persons or addresses as shall be furnished in writing by any party to the other party. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) five (5) days after the date when deposited with the United States mail properly addressed, (iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 12.5 Definitions. For the purpose of this Agreement, "Laws" shall include, without limitation, all foreign, federal, state and local laws, statutes, rules, regulations, codes, ordinances, plans, orders, judicial decrees, writs, injunctions, notices, decisions or demand letters issued, entered or promulgated pursuant to any foreign, federal, state or local law. For the purpose of this Agreement, "generally accepted accounting principles" or "GAAP" shall mean such principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board which are applicable in the circumstances as of the date in question, and the requirement that such principles be applied on a "consistent basis" means that accounting principles observed in the current period are comparable in all material respects to those applied in the preceding periods, except as change is permitted or required under or pursuant to such accounting principles. 12.6 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party without the prior written consent of all other parties; provided, however, Holdings and Acquisition may assign their respective rights under this Agreement to any lender that provides financing to such entity in connection with the transactions contemplated by this Agreement. 12.7 Termination of Stock Redemption Agreement. Each Seller hereby agrees that, effective immediately upon the Closing, 42 the Restated Stock Redemption Agreement executed by the Company and each of the Sellers shall be deemed terminated without further action by any party thereto. 12.8 Governing Law. This Agreement shall be governed by the laws of the state of Missouri (regardless of the laws that might otherwise govern under applicable principles of conflicts of law of the state of Missouri as to all matters including, but not limited to, matters of validity, construction, effect, performance and remedies. 12.9 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.10 Neutral Interpretation. This Agreement constitutes the product of the negotiation of the parties hereto and the enforcement hereof shall be interpreted in a neutral manner, and not more strongly for or against any party based upon the source of the draftsmanship hereof. 12.11 Headings. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 12.12 Entire Agreement. This Agreement, which term as used throughout includes the Exhibits hereto, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 43 IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first hereinabove set forth. HOLDINGS: GFSI HOLDINGS, INC. By /s/ A. Richard Caputo, Jr. -------------------------------------- A. Richard Caputo, Jr., President ACQUISITION: GFSI, INC. By /s/ A. Richard Caputo, Jr. -------------------------------------- A. Richard Caputo, Jr., President SELLERS: Robert M. Wolff, Trustee under that certain Trust Agreement dated 5/17/79, by and between Robert M. Wolff, as Grantor, and Robert M. Wolff, as Trustee By /s/ Robert M. Wolff -------------------------------------- Robert M. Wolff, Trustee under that certain Trust Agreement dated 5/17/79, by and between Robert M. Wolff, as Grantor, and Robert M. Wolff, as Trustee Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 By /s/ John Menghini -------------------------------------- John Menghini, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 By /s Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 Robert Shaw, Trustee of the Charles A. Wolff Trust under Trust Agreement dated 9/29/82 By /s/ Robert Shaw -------------------------------------- Robert Shaw, Trustee of the Charles A. Wolff Trust under Trust Agreement dated 9/29/82 Scott M. Wolff By /s/ John Menghini -------------------------------------- John Menghini, attorney-in-fact for Scott M. Wolff By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Scott M. Wolff By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Scott M. Wolff Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ John Menghini -------------------------------------- John Menghini, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ John Menghini -------------------------------------- John Menghini, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s John Menghini -------------------------------------- John Menghini, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 John Leo Menghini, Trustee of the John Leo Menghini Revocable Trust dated 11/18/92 By /s/ John L. Menghini -------------------------------------- John Menghini, Trustee of the John Leo Menghini Revocable Trust dated 11/18/92 Lisa Menghini By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Lisa Menghini By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Lisa Menghini By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Lisa Menghini Robert Shaw, Trustee of the John L. Menghini, Jr. Trust By /s/ Robert Shaw -------------------------------------- Robert Shaw, Trustee of the John L. Menghini, Jr. Trust Robert Shaw, Trustee of the Michael J. Menghini Trust By /s/ Robert Shaw -------------------------------------- Robert Shaw, Trustee of the Michael J. Menghini Trust Larry Douglas Graveel, Trustee of the Larry D. Graveel Trust dated 8/30/91 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, Trustee of the Larry D. Graveel Trust dated 8/30/91 Michael H. Gary, Trustee of The Michael H. Gary Revocable Trust dated 3/10/93 By -------------------------------------- Michael H. Gary, Trustee of The Michael H. Gary Revocable Trust dated 3/10/93 Robert Shaw, Trustee of The Robert Shaw Living Trust dated 2/7/89 By /s/ Robert Shaw -------------------------------------- Robert Shaw, Trustee of The Robert Shaw Living Trust dated 2/7/89 Robert Shaw, Custodian of Andrew Shaw By /s/ Robert Shaw -------------------------------------- Robert Shaw, Custodian of Andrew Shaw Robert Shaw, Custodian of Laura Shaw By /s/ Robert Shaw -------------------------------------- Robert Shaw, Custodian of Laura Shaw Robert Shaw, Custodian of Stacey Shaw By /s/ Robert Shaw -------------------------------------- Robert Shaw, Custodian of Stacey Shaw Anthony Gagliano By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Anthony Gagliano By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Anthony Gagliano By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Anthony Gagliano Lee Ann Stevens By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Lee Ann Stevens By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Lee Ann Stevens William DiRocco Trust By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for William DiRocco Trust By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for William DiRocco Trust By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for William DiRocco Trust Terry V. Glenn By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Terry V. Glenn By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Terry V. Glenn By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Terry V. Glenn Mary Cimpl By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Mary Cimpl By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Mary Cimpl By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Mary Cimpl Dave Geenens By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Dave Geenens By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Dave Geenens By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Dave Geenens David Churchman By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for David Churchman By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for David Churchman By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for David Churchman Steve Arnold By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Steve Arnold By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Steve Arnold By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Steve Arnold Jason Krakow By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Jason Krakow By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Jason Krakow By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Jason Krakow Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Lee Ann Stevens Kirk Kowalewski By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Kirk Kowalewski By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Kirk Kowalewski By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Kirk Kowalewski Mark Schimpf By /s/ John L. Menghini -------------------------------------- John Menghini, attorney-in-fact for Mark Schimpf By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Mark Schimpf By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Mark Schimpf By /s/ Robert Shaw -------------------------------------- Robert Shaw, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ Larry D. Graveel -------------------------------------- Larry D. Graveel, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 EX-2.2 4 AMEND. #1 TO THE AGMT FOR PURCHASE AND SALE AMENDMENT NO. 1 TO AGREEMENT FOR PURCHASE AND SALE OF STOCK THIS AMENDMENT NO. 1 TO AGREEMENT FOR PURCHASE AND SALE OF STOCK (this "Amendment"), dated as of the 27th day of February, 1997, is made by and among the individuals and entities listed on Schedule X attached hereto, being the holders of all of the outstanding shares of stock of Winning Ways, Inc., a Missouri corporation (the "Company"), all of said individuals and entities being hereinafter collectively referred to as the "Sellers," GFSI HOLDINGS, INC., a Delaware corporation ("Holdings"), and GFSI, INC., a Delaware corporation ("Acquisition"). W I T N E S S E T H: WHEREAS, the parties to this Amendment are parties to an Agreement for Purchase and Sale of Stock, dated January 24, 1997 (the "Agreement"), pursuant to which Holdings and Acquisition have agreed to purchase, and the Sellers have agreed to sell and transfer to Holdings and Acquisition, all of the capital stock of the Company; and WHEREAS, the parties hereto desire to amend and modify certain terms of the Agreement as set forth in this Amendment; NOW THEREFORE, in consideration of the premises and the covenants contained herein, the parties hereto covenant and agree as follows: 1. Definitions. Unless defined in this Amendment, capitalized terms used in this Amendment have the meaning given to such terms in the Agreement. 2. Definition of Prudential Premium. The following definition shall be inserted between the definitions of "Net Worth Surplus" and "Sellers' Agents" set forth in Section 1.2 of the Agreement: "Prudential Premium" shall mean any "Prepayment Premium" amounts actually paid to The Prudential Insurance Company of America or its assignee at the Closing pursuant to the terms of that certain Promissory Note executed by the Company on January 17, 1991 in the principal amount of $9,900,000, as such premium ultimately may be agreed upon by The Prudential Insurance Company of America and the Company prior to Closing. 3. Preliminary Purchase Price. Section 1.3 of the Agreement is deleted in its entirety and the following language is inserted in lieu thereof: 1.3 Preliminary Purchase Price. Subject to the terms and conditions of this Agreement and in reliance on the covenants, representations and warranties of the Sellers herein contained (including, without limitation, the sale, conveyance, transfer and delivery of the Shares to Holdings and Acquisition), Acquisition and Holdings, collectively, shall pay to the Sellers at the Closing an amount equal to (x) $232,900,000 less (y) the Estimated Closing Debt, subject to adjustment as of the Closing Date pursuant to Section 1.4 hereof, and less (z) the amount of the Prudential Premium, to be paid as follows: 1.3.1 Holdings shall pay $94,000 to the Sellers by delivery of an aggregate of 940 shares of Holdings' Series A Common Stock, par value $0.01 per share, in an exchange that is intended to qualify as a tax-free exchange pursuant to the provisions of Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"); 1.3.2 Holdings shall pay $12,690,000 to the Sellers by delivery of an aggregate of 12,690 shares of Holdings' Series A Preferred Stock, par value $0.01 per share, in an exchange that is intended to qualify as a tax-free exchange pursuant to the provisions of Section 351 of the Code; 1.3.3 Subject to the provisions of the following sentence, Acquisition shall pay to the Sellers' Agents, for the benefit of all of the Sellers, an aggregate amount of $220,116,000 minus the amount of the Estimated Closing Debt and minus the amount of the Prudential Premium, the resulting amount of which is hereinafter referred to as the "Preliminary Cash Purchase Price." Six hundred thousand dollars ($600,000) of the Preliminary Cash Purchase Price shall be paid to the Escrow Agent for the benefit of the Sellers, to be held pursuant to the terms of the Escrow Agreement and distributed in accordance with the terms of Section 1.4. The balance of the Preliminary Cash Purchase Price shall be paid to the Sellers' Agents, for the benefit of the Sellers, by wire transfer of immediately available funds to the account designated by the Sellers' Agents in writing to Acquisition no less than two (2) days prior to the Closing. 1.3.4 The aggregate amount of the Closing Debt and the Prudential Premium shall be paid by Acquisition to the respective creditors of the Company at the Closing. 4. Post-Closing Adjustments. At such time as any amounts are to be paid to Acquisition or the Sellers, as the case may be, pursuant to the terms of Section 1.4.8 of the Agreement, and in addition to any amounts to be paid pursuant to such Section, (i) if Wolff elects to exercise his option under Section 6.8 of the Agreement to purchase the Company's 2 interest in the Hawker 1000 owned by the Company (the "Aircraft"), Wolff shall pay to the Company the amount of the book value of the Aircraft as shown on the books and records of the Company as of the Closing Date in consideration of the execution by the Company of an FAA Bill of Sale and such other instruments as may be necessary to transfer title of the Aircraft to Wolff, (ii) if any of Wolff, Barry Golden, John Menghini or Robert Shaw elect to exercise their individual rights under Section 6.5 of the Agreement to require the Company to assign to such individual the entire life insurance policy (including the cash value of such life insurance policy) owned by the Company and insuring such individual's life, the individuals exercising such rights shall pay to the Company the cash value of the life insurance policy which insures their life; and (iii) Acquisition shall pay to the Sellers' Agents, for the benefit of the Sellers, the amount of the Prudential Premium paid to The Prudential Insurance Company of America or its assignee at or in connection with the Closing, plus interest on the Prudential Premium from the Closing Date at the prime rate as established by The Boatmen's First National Bank of Kansas City. Acquisition shall take all commercially reasonable means, including seeking additional borrowings under its credit facilities, to assure that funds will be available to make the payments required under this clause (iii). 5. Section 3.2. Section 3.2 of the Agreement is deleted in its entirety and the following language is inserted in lieu thereof: 3.2 Capitalization. Holdings has authorized capital stock consisting of 100,000 shares of Common Stock, par value $.01 per share. Acquisition has authorized capital stock consisting of 10,000 shares of Common Stock, par value $.01 per share. 6. Representations and Warranties. The Sellers hereby jointly and severally represent and warrant to Holdings and Acquisition that the representations and warranties set forth in the Agreement are true and correct in all material respects as of the date hereof. 7. Wolff Employment Agreement. The parties agree that the form of the Wolff Employment Agreement attached hereto as Exhibit A shall be the form of such agreement, as contemplated by Section 6.6.1 of the Agreement, to be executed by Wolff at Closing and shall be deemed to be Exhibit 6.6.1 to the Agreement. 3 8. Subscription Agreement. The parties agree that the form of the Subscription Agreement attached hereto as Exhibit B shall be the form of such agreement, as contemplated by Section 6.6.2 of the Agreement, to be executed by all of the shareholders of Holdings at Closing and shall be deemed to be Exhibit 6.6.2 to the Agreement. 9. Consulting Fees. The parties agree that they are in agreement concerning the amount and types of fees to be paid to TJC pursuant to the terms of the consulting agreement to be executed between TJC and Holdings at Closing. 10. Approval of Exhibits. Holdings and Acquisition hereby acknowledge to the Sellers that the Exhibits delivered to counsel for Holdings and Acquisition as required by Section 6.6.4 of the Agreement shall be deemed to be the Exhibits to the Agreement; provided, however, Holdings' and Acquisition's acceptance and review of such materials as the Exhibits to the Agreement shall not be deemed to waive or otherwise affect their rights under Article 11 of the Agreement. 11. Satisfaction of Section 6.6 Conditions. The parties agree that the terms and conditions of Section 6.6 of the Agreement have been satisfied and that, pursuant to Section 1.1 of the Agreement, (i) the Agreement remains in full force and effect, except as expressly amended and modified by the terms of this Amendment, (ii) the obligations of Holdings and Acquisition to consummate the transactions contemplated by the Agreement remain subject to the fulfillment of the conditions set forth in Article 7 of the Agreement and (iii) the obligations of the Sellers to consummate the transactions contemplated by the Agreement remain subject to the fulfillment of the conditions set forth in Article 8 of the Agreement. 12. Financing Contingency. The parties agree that Section 8.8 of the Agreement is deleted in its entirety. 13. Effect of Amendment. Except as modified and amended by the terms and conditions of this Amendment, all of the terms and conditions of the Agreement remain in full force and effect. 14. Miscellaneous. This Amendment shall be governed by, construed, applied and enforced in accordance with the laws of the state of Missouri, except that no doctrine of choice of law shall be used to apply any law other than that of the state of Missouri. This Amendment shall insure to the benefit of the parties and their respective successors, heirs, and assigns. The language used in this Amendment will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. The captions used in this Amendment (i) are for convenience of reference only, (ii) do not constitute a part of this Amendment and 4 (iii) will not be deemed to limit, characterize or in any way affect any provision of this Amendment. This Amendment and the Agreement contain the complete agreement among the parties and supersedes any prior understandings, agreements or representations by or among the parties, written or oral, which may relate in any way to the subject matter of this Amendment and the Agreement. This Amendment may be executed in one or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. (Signatures on following pages) 5 IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the date first hereinabove set forth. HOLDINGS: GFSI HOLDINGS, INC. By /s/ A. Richard Caputo, Jr. ------------------------------------------ A. Richard Caputo, Jr., Vice President ACQUISITION: GFSI, INC. By /s/ A. Richard Caputo, Jr. ------------------------------------------ A. Richard Caputo, Jr., Vice President SELLERS: Robert M. Wolff, Trustee under that certain Trust Agreement dated 5/17/79, by and between Robert M. Wolff, as Grantor, and Robert M. Wolff, as Trustee By /s/ Robert M. Wolff ------------------------------------------ Robert M. Wolff, Trustee under that certain Trust Agreement dated 5/17/79, by and between Robert M. Wolff, as Grantor, and Robert M. Wolff, as Trustee Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 6 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Marcia W. Wolff, Trustee of the Marcia W. Wolff Trust under Trust Agreement dated 6/22/83 Robert Shaw, Trustee of the Charles A. Wolff Trust under Trust Agreement dated 9/29/82 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Trustee of the Charles A. Wolff Trust under Trust Agreement dated 9/29/82 Scott M. Wolff By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Scott M. Wolff By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Scott M. Wolff By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Scott M. Wolff Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Laura W. Greenbaum, Trustee of the Laura M. Wolff Trust dated 9/20/78 Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Mark Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Mark Golden under Agreement dated 6/20/83 Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Michael Golden and Martin Becker, as Trustees of the Barry S. Golden Discretionary Trust for Michael Golden under Agreement dated 6/20/83 Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Barry S. Golden, as Trustee of the Barry S. Golden Revocable Trust dated 11/11/77 John Leo Menghini, Trustee of the John Leo Menghini Revocable Trust dated 11/18/92 By /s/ John L. Menghini ------------------------------------------ John Menghini, Trustee of the John Leo Menghini Revocable Trust dated 11/18/92 Lisa Menghini By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Lisa Menghini By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Lisa Menghini By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Lisa Menghini Robert Shaw, Custodian of Laura Shaw By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Custodian of Laura Shaw Robert Shaw, Custodian of Stacey Shaw By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Custodian of Stacey Shaw Anthony Gagliano By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Anthony Gagliano By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Anthony Gagliano By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Anthony Gagliano Lee Ann Stevens By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Lee Ann Stevens By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Lee Ann Stevens By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Lee Ann Stevens Kirk Kowalewski By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Kirk Kowalewski By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Kirk Kowalewski By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Kirk Kowalewski Mark Schimpf By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Mark Schimpf By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Mark Schimpf By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Mark Schimpf By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Mary Cimpl By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Mary Cimpl Dave Geenens By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Dave Geenens By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Dave Geenens By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Dave Geenens David Churchman By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for David Churchman By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for David Churchman By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for David Churchman Steve Arnold By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Steve Arnold By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Steve Arnold By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Steve Arnold Jason Krakow By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Jason Krakow By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Jason Krakow By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Jason Krakow Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Martin Becker, Trustee of the Barry S. Golden Trust UTA dated 10/7/96 William DiRocco Trust By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for William DiRocco Trust By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for William DiRocco Trust By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for William DiRocco Trust Terry V. Glenn By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Terry V. Glenn By /s/ Robert Shaw ----------------------------------------- Robert Shaw, attorney-in-fact for Terry V. Glenn By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, attorney-in-fact for Terry V. Glenn Mary Cimpl By /s/ John L. Menghini ------------------------------------------ John Menghini, attorney-in-fact for Mary Cimpl Robert Shaw, Trustee of the John L. Menghini, Jr. Trust By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Trustee of the John L. Menghini, Jr. Trust Robert Shaw, Trustee of the Michael J. Menghini Trust By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Trustee of the Michael J. Menghini Trust Larry Douglas Graveel, Trustee of the Larry D. Graveel Trust dated 8/30/91 By /s/ Larry D. Graveel ----------------------------------------- Larry D. Graveel, Trustee of the Larry D. Graveel Trust dated 8/30/91 Michael H. Gary, Trustee of The Michael H. Gary Revocable Trust dated 3/10/93 By /s/ Michael H. Gary ----------------------------------------- Michael H. Gary, Trustee of The Michael H. Gary Revocable Trust dated 3/10/93 Robert Shaw, Trustee of The Robert Shaw Living Trust dated 2/7/89 By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Trustee of The Robert Shaw Living Trust dated 2/7/89 Robert Shaw, Custodian of Andrew Shaw By /s/ Robert Shaw ----------------------------------------- Robert Shaw, Custodian of Andrew Shaw EX-2.3 5 PLAN OF MERGER PLAN OF MERGER THIS PLAN OF MERGER (the "Plan") sets forth the Plan of Merger between GFSI, Inc., a Delaware corporation ("GFSI"), and Winning Ways, Inc., a Missouri corporation and a wholly-owned subsidiary of GFSI ("Winning Ways"). ARTICLE I THE MERGER SECTION 1.01. The Merger. GFSI owns one hundred percent of the 1,249,000 issued and outstanding shares of capital stock of Winning Ways. Upon the terms and conditions hereof, and in accordance with Section 253 of the Delaware General Corporation Law and Section 351.447 of The General and Business Corporation Law of the State of Missouri, Winning Ways shall be merged with and into GFSI (the "Merger") and GFSI shall be the surviving corporation in the Merger (the "Surviving Corporation"). SECTION 1.02. Effective Time. As soon as practicable after approval of the Merger by GFSI (a) a Certificate of Ownership and Merger with respect to the Merger shall be filed with the Secretary of State of Delaware in accordance with Delaware law and (b) Articles of Merger shall be filed with the Secretary of State of Missouri in accordance with Missouri law. The Merger shall become effective at such time as a Certificate of Merger shall have been issued by the Secretary of State of Delaware (the "Effective Time"). SECTION 1.03. Certain Effects of the Merger. As of the Effective Time of the Merger, (i) the separate existence of Winning Ways shall cease and Winning Ways shall be merged with and into Winning Ways and (ii) the Merger shall have all the effects set forth in the applicable statutes of Delaware and Missouri. GFSI shall assume all of the liabilities, obligations, responsibilities, rights, privileges and immunities of Winning Ways as of the Effective Time. SECTION 1.04. Certificate of Incorporation and Bylaws. The Certificate of Incorporation and Bylaws of GFSI as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation and Bylaws of the Surviving Corporation. SECTION 1.05. Name. The name of the Surviving Corporation shall be GFSI, Inc. SECTION 1.06. Directors and Officers of the Surviving Corporation. The directors and officers of GFSI in office immediately prior to the Effective Time shall be the directors and officers of the Surviving Corporation until such time as their respective successors shall have been duly elected and qualified or until their earlier death, resignation or removal. ARTICLE II EFFECT OF MERGER ON CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS SECTION 2.01. No Conversion of Shares of GFSI. At the Effective Time, each share of the issued and outstanding capital stock of GFSI outstanding immediately prior to the Effective Time shall not be converted, and each such share shall continue to represent one issued and outstanding share of GFSI, as the Surviving Corporation. Each such share shall continue to possess the same rights and limitations as it possessed prior to the Effective Time and no shares of the capital stock of GFSI or securities convertible into such shares shall be issued pursuant to this Plan of Merger. SECTION 2.02. Cancellation of Shares of Winning Ways. At the Effective Time, each share of the capital stock of Winning Ways issued and outstanding immediately prior to the Effective Time shall be cancelled by virtue of the merger and without any action on the part of any holder thereof, and no payment shall be made with respect thereto. ARTICLE III SERVICE OF PROCESS; DISSENTERS' RIGHTS SECTION 3.01 Service of Process. It is agreed that upon and after the Effective Time: a. The Surviving Corporation may be served with process in the State of Missouri in any proceeding for the enforcement of any obligation of Winning Ways, and in any proceeding for the enforcement of the rights of a dissenting shareholder of Winning Ways against the Surviving Corporation; b. The Secretary of State of the State of Missouri shall be and hereby is irrevocably appointed as the agent of the Surviving Corporation to accept service of process in any such proceeding; the address to which the service of process in any such proceeding shall be mailed is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801, Attention: Corporation Trust Company. SECTION 3.02 Dissenters' Rights. The Surviving Corporation will promptly pay to the dissenting shareholders of Winning Ways the amount, if any, to which they shall be entitled under the provisions of the General and Business Corporation Law of Missouri with respect to the rights of dissenting shareholders. EX-3.1 6 GFSI, INC. CERTIFICATE OF INCORPORATION PAGE 1 State of Delaware Office of the Secretary of State ------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "GFSI, INC.", FILED IN THIS OFFICE ON THE FIFTEENTH DAY OF JANUARY, A.D. 1997, AT 2 O'CLOCK P.M. [SEAL] /s/ Edward J. Freel ---------------------------------------- Edward J. Freel. Secretary of State AUTHENTICATION: 8346175 2706842 8100 DATE: 02-25-97 971061815 CERTIFICATE OF INCORPORATION OF GFSI, INC. The undersigned, for the purpose of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, hereby adopts the following: FIRST: The name of the corporation is GFSI, INC. SECOND: The address of the corporation's initial registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of the corporation's initial registered agent at such address is The Corporation Trust Company. 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 total number of shares of capital stock that this corporation shall have authority to issue is 10,000 shares of Common Stock, par value $0.01 per share. FIFTH: The name and mailing address of the incorporator are Michael J. Beal, 1200 Main Street, Suite 3500, Kansas City, Missouri 64105. SIXTH: The name of the person who is to serve as the sole director until the first annual meeting of stockholders, or until his successor is elected and shall qualify, is A. Richard Caputo, Jr., whose mailing address is 9 West 57th Street, Suite 4000, New York, New York 10019. SEVENTH: The duration of the corporation is perpetual. EIGHTH: 1. Elimination of Certain Liability of Directors. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the 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. If the General Corporation Law of the State of Delaware at any time authorizes corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the corporation shall be limited or eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware without further action by the corporation. Any repeal or modification of the foregoing paragraph 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. 2. Indemnification and Insurance. (a) Right to Indemnification. 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, 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 (b) hereof, 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 of the corporation. The right to indemnification conferred in this Section 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: provided, however, that, if the General Corporation Law of the State of Delaware allows, 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, 2 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 Section or otherwise. The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the corporation within thirty days after a written claim 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 standards of conduct which make it permissible under the General Corporation Law of the State of Delaware 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 legal counsel, or its 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 legal counsel, or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section 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-law, agreement, vote of stockholders or disinterested directors or otherwise. (d) Insurance. The corporation may at its option maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against 3 such expense, liability or loss under the General Corporation Law of the State of Delaware. NINTH: The Board of Directors of the corporation is authorized and empowered to make, alter, amend or repeal any or all of the Bylaws of the corporation, subject to the power of the stockholders of the corporation to make, alter, amend or repeal any or all of the Bylaws of the corporation. TENTH: The Corporation reserves the right at any time and from time to time to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by law; and all rights conferred upon stockholders, directors, or any other persons whomsoever by and pursuant to this Certificate of Incorporation in their present form or as hereafter amended are granted subject to this reservation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day of January, 1997. /s/ Michael J. Beal ------------------------------ Michael J. Beal, Incorporator 4 EX-3.2 7 GFSI, INC. BY-LAWS BYLAWS OF GFSI, INC. Offices 1. Registered Office and Registered Agent. The location of the registered office and the name of the registered agent of the corporation in the State of Delaware shall be such as shall be determined from time to time by the board of directors and on file in the appropriate public offices of the State of Delaware pursuant to applicable provisions of law. 2. Corporate Offices. The corporation may have such other corporate offices and places of business anywhere within or without the State of Delaware as the board of directors may from time to time designate or the business of the corporation may require. Seal 3. Corporate Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware." The corporate seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. Meeting of Stockholders 4. Place of Meetings. All meetings of the stockholders shall be held at the offices of the corporation or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. 5. Annual Meeting. An annual meeting of the stockholders of the corporation shall be held on the first Tuesday in December of each year, commencing in 1997, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 a.m., or at such other date and time as shall be determined from time to time by the board of directors and stated in the notice of the meeting. At the annual meeting the stockholders shall elect directors to serve until the next annual meeting of the stockholders and until their successors are elected and qualified, or until their earlier resignation or removal, and shall transact such other business as may properly be brought before the meeting. The stockholders may transact such other business as may be desired, whether or not the same was specified in the notice of the meeting, unless the consideration of such other business without its having been specified in the notice of the meeting as one of the purposes thereof is prohibited by law. 6. Special Meetings. Special meetings of the stockholders may be held for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, and may be called by any officer, by the board of directors, or by the holders of, or by any officer or stockholder upon the written request of the holders of, not less than 25 percent of the outstanding stock entitled to vote at such meeting, and shall be called by any officer directed to do so by the board of directors or requested to do so in writing by a majority of the board of directors. Any such written request shall state the purpose or purposes of the proposed meeting. The "call" and the "notice" of any such meeting shall be deemed to be synonymous. 7. Voting. At all meetings of stockholders, every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument shall provide for a longer period. Unless otherwise provided by the certificate of incorporation, each stockholder shall have one vote for each share of stock entitled to vote at such meeting registered in his name on the books of the corporation. At all meetings of stockholders, the voting may be by voice vote, except that, unless otherwise provided by the certificate of incorporation, any qualified voter may demand a vote by ballot on any matter, in which event such vote shall be taken by ballot. 8. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of any business, except as otherwise provided by law, by the certificate of incorporation or by these bylaws. Every decision of a majority in the amount of stock of such quorum shall be valid as a corporate act, except in those specific instances in which a larger vote is required by law or by the certificate of incorporation or by these bylaws. At any meeting at which a quorum shall not be present, the holders of a majority of the stock present in person or by proxy at such meeting shall have power successively to adjourn the meeting from time to time to a specified time and place, without notice to anyone other than announcement at the meeting, until a quorum shall be present in person or by proxy. At such adjourned meeting at which a quorum shall be present in person or by proxy, any business may be transacted which might have been transacted at 2 the original meeting which was adjourned. If the adjournment is for more than 30 days, or if after 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. 9. Stock Ledger. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list required under Section 10 of these bylaws or the books of the corporation, or to vote in person or by proxy at any meeting of the stockholders. 10. Stockholders List. The secretary or assistant secretary, who shall have charge of the stock ledger, shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list 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, 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 present. 11. Notice. Written or printed notice of each meeting of the stockholders, whether annual or special, stating the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes thereof, shall be given, either personally or by mail, to each stockholder of record of the corporation entitled to vote at such meeting not less than 10 days nor more than 60 days prior to the meeting. The board of directors may fix in advance a date, which shall not be more than 60 nor less than 10 days preceding the date of any meeting of the stockholders, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof; provided, however, that the board of directors may fix a new record date for any adjourned meeting. 12. Action by Stockholders Without Meeting. Any action required by law to be taken at any annual or special meeting of stockholders of the corporation, or any other action which may be taken at any annual or special meeting of such 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 any taking of corporate action without a meeting by less than unanimous written 3 consent shall be given to those stockholders who have not consented in writing. Board of Directors 13. Powers; Number; Term; Qualification. The management of all the affairs, property, and business of the corporation shall be vested in a board of directors. Unless required by the certificate of incorporation, directors need not be stockholders. In addition to the powers and authorities these bylaws and the certificate of incorporation have expressly conferred upon it, 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 bylaws directed or required to be exercised or done by the stockholders. The number of directors shall be as provided from time to time by resolution duly adopted by the holders of a majority of the outstanding shares entitled to vote thereon or by a majority of the whole board of directors. Each director shall hold office until his successor shall have been elected and qualified or until his earlier resignation and removal. Each director, upon his election, shall be deemed to have qualified by filing with the corporation his written acceptance of such office, which shall be placed in the minute book, or by his attendance at, or consent to action in lieu of, any regular or special meeting of directors. Any director may resign at any time by filing a written resignation with the secretary of the corporation and, unless a later date is fixed by its terms, said resignation shall be effective from the filing thereof. 14. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, unless it is otherwise provided in the certificate of incorporation or bylaws, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. 15. Meetings of the Newly Elected Board. The first meeting of the members of each newly elected board of directors shall be held (i) at such time and place either within or without the State of Delaware as shall be suggested or provided by resolution of the stockholders at the meeting at which such newly elected board was elected, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present; or (ii) if not so suggested or provided for by resolution of the stockholders or if a quorum shall not be present, at such time and 4 place as shall be consented to in writing by a majority of the newly elected board of directors, provided that written or printed notice of such meeting shall be given to each of the other directors in the same manner as provided in Section 17 of these bylaws with respect to the giving of notice for special meetings of the board, except that it shall not be necessary to state the purpose of the meeting in such notice; or (iii) regardless of whether the time and place of such meeting shall be suggested or provided for by resolution of the stockholders, at such time and place as shall be consented to in writing by all of the newly elected directors. 16. Regular Meeting. Regular meetings of the board of directors may be held without notice at such times and places either within or without the State of Delaware as shall from time to time be fixed by resolution adopted by the full board of directors. Any business may be transacted at a regular meeting. 17. Special Meeting. Special meetings of the board of directors may be called at any time by the president, any vice president, or the secretary, or by any two or more of the directors. The place may be within or without the State of Delaware as designated in the notice. 18. Notice of Special Meeting. Written or printed notice of each special meeting of the board of directors, stating the place, day, and hour of the meeting and the purpose or purposes thereof, shall be mailed to each director addressed to him at his residence or usual place of business at least two days before the day on which the meeting is to be held, or shall be sent to him by telegram, or delivered personally, at least one day before the day on which the meeting is to be held. The notice may be given by any officer having authority to call the meeting. "Notice" and "call" with respect to such meetings shall be deemed to be synonymous. Any meeting of the board of directors shall be a legal meeting without any notice thereof having been given if all directors shall be present thereat. 19. Quorum. Unless otherwise required by law, the certificate of incorporation or these bylaws, a majority of the total number of directors shall be necessary at all meetings to constitute a quorum for the transaction of business, and except as may be otherwise provided by law, the certificate of incorporation or these bylaws, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors. If at least one-third of the whole board of directors is present at any meeting at which a quorum is not present, a majority of the directors present at such meeting shall have power successively to adjourn the meeting from time to time to a subsequent date, without notice to any director other than 5 announcement at the meeting. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting which was adjourned. 20. Attendance by Telephone. Unless otherwise restricted by the certificate of incorporation, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. 21. 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 one or more directors of the corporation. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in said resolution or resolutions or in these bylaws, shall have and may exercise all of the powers of the board of directors in the management of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. All committees so appointed shall, unless otherwise provided by the board of directors, keep regular minutes of the transactions of their meetings and shall cause them to be recorded in books kept for that purpose in the office of the corporation and shall report the same to the board of directors at its next meeting. The secretary or an assistant secretary of the corporation may act as secretary of the committee if the committee so requests. 22. Compensation. The board of directors may, by resolution, fix a sum to be paid directors for serving as directors of this corporation and may, by resolution, fix a sum which shall be allowed and paid for attendance at each meeting of the board of directors and in each case may provide for reimbursement of expenses incurred by directors in attending each meeting; provided that nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving his regular compensation therefor, Members of special or 6 standing committees may be allowed like compensation for attending committee meetings. 23. Resignation. Any director may resign at any time by giving a written notice to the chairman of the board of directors, the president, or the secretary of the corporation. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 24. Indemnification of Directors and Officers. Each person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation (including the heirs, successors, executors or administrators, or estate of such persons) shall be indemnified by the corporation as of right to the full extent permitted or authorized by the laws of the State of Delaware, as now in effect and as hereafter amended, against any liability, judgment, fine, amount paid in settlement, cost, and expense (including attorneys' fees) asserted or threatened against and incurred by such person in his capacity as or arising out of his status as a director or officer of the corporation or, if serving at the request of the corporation, as a director or officer of another corporation. The indemnification provided by this bylaw provision shall not be exclusive of any other rights to which those indemnified may be entitled under any other bylaws or under any agreement, vote of stockholders or disinterested directors or otherwise, and shall not limit in any way any right which the corporation may have to make different or further indemnification with respect to the same or different persons or classes of persons. 25. Action by Directors without Meeting. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting if all members of the board of directors or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Officers 26. (a) Officers - Who Shall Constitute. The officers of the corporation shall consist of a chairman of the board of directors, a president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors at their first meeting after the annual meeting of the stockholders. The board of directors may also designate additional assistant secretaries and assistant treasurers. In the discretion of the board of directors, the office of chairman of the board of 7 directors may remain unfilled. The chairman of the board of directors (if any) shall at all times be, and other officers may be, members of the board of directors. Any number of offices may be held by the same person. An officer shall be deemed qualified when he enters upon the duties of the office to which he has been elected or appointed and furnishes any bond required by the board; but the board may also require of such person his written acceptance and promise faithfully to discharge the duties of such office. (b) Term. Each officer of the corporation shall hold his office at the pleasure of the board of directors or for such other period as the board may specify at the time of his election or appointment, or until his death, resignation, or removal by the board, whichever first occurs. In any event, each officer of the corporation who is not re-elected or re-appointed at the annual meeting of the board of directors next succeeding his election or appointment and at which any officer of the corporation is elected or appointed shall be deemed to have been removed by the board, unless the board provides otherwise at the time of his election or appointment. (c) Other Officers and Agents. The board of directors from time to time may also appoint such other officers and agents for the corporation as it shall deem necessary or advisable, each of whom shall serve at the pleasure of the board or for such period as the board may specify, and shall exercise such powers, have such titles, and perform such duties as shall be determined from time to time by the board or by an officer empowered by the board to make such determinations. 27. President. The president shall be the chief executive officer of the corporation with such general executive powers and duties of supervision and management as are usually vested in the office of the chief executive officer of a corporation and he shall carry into effect all directions and resolutions of the board of directors. The president shall preside at all meetings of the stockholders and directors. The president may execute all bonds, notes, debentures, mortgages, and other instruments for and in the name of the corporation, and may cause the corporate seal to be affixed thereto. Unless the board of directors otherwise provides, the president, or any person designated in writing by him, shall have full power and authority on behalf of this corporation (i) to attend and to vote or take action at any meeting of the holders of securities of corporations in which this corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to being a holder of such 8 securities and which as the holder thereof this corporation may have possessed and exercised if present, and (ii) to execute and deliver waivers of notice and proxies for and in the name of the corporation with respect to any such securities held by this corporation. He shall, unless the board of directors otherwise provides, be ex officio a member of all standing committees. He shall have such other or further duties and authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors. 28. Vice President. In the absence of the president or in the event of his disability, inability, or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board, or in the absence of any designation, then in the order of their election) shall perform the duties and exercise the powers of the president, and shall perform such other duties as the board of directors may from time to time prescribe. 29. Secretary and Assistant Secretaries. The secretary may attend all sessions of the board of directors and all meetings of the stockholders, and shall record or cause to be recorded all votes taken and the minutes of all proceedings in a minute book of the corporation to be kept for that purpose. He shall perform like duties for committees when requested to do so by the board of directors or any such committee. It shall be the principal responsibility of the secretary to give, or cause to be given, notice of all meetings of the stockholders and of the board of directors, but this shall not lessen the authority of others to give such notice as is authorized elsewhere in these bylaws. The secretary shall see that all books, records, lists, and information, or duplicates, required to be maintained in the State of Delaware or elsewhere, are so maintained. The secretary shall keep in safe custody the seal of the corporation and shall have the authority to affix the seal to any instrument requiring it, and when so affixed, he shall attest the seal by his signature. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. The secretary shall perform such other duties and have such other authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors or the chief executive officer of the corporation, under whose direct supervision he shall be. 9 In the absence of the secretary or in the event of his disability, inability, or refusal to act, the assistant secretary (or in the event there be more than one assistant secretary, the assistant secretaries in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) may perform the duties and exercise the powers of the secretary, and shall perform such other duties as the board of directors may from time to time prescribe. 30. Treasurer and Assistant Treasurers. The treasurer shall have responsibility for the safekeeping of the funds and securities of the corporation, shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall keep, or cause to be kept, all other books of account and accounting records of the corporation. He shall deposit or cause to be deposited all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors or by any officer of the corporation to whom such authority has been granted by the board of directors. He shall disburse, or permit to be disbursed, the funds of the corporation as may be ordered, or authorized generally, by the board of directors, and shall render to the chief executive officer of the corporation and the directors whenever they may require it, an account of all his transactions as treasurer and of those under his jurisdiction, and of the financial condition of the corporation. He shall perform such other duties and shall have such other responsibility and authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors. He shall have the general duties, powers, and responsibilities of a treasurer of a corporation. If required by the board of directors, he shall give the corporation a bond in a sum and with one or more sureties satisfactory to the board, for the faithful performance of the duties of his office, and for the restoration to the corporation, in the case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in his possession or under his control which belong to the corporation. In the absence of the treasurer or in the event of his disability, inability, or refusal to act, the assistant treasurer (or in the event there be more than one assistant treasurer, the assistant treasurers in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) may perform the duties and exercise the powers of the treasurer, and shall perform such other duties and have such 10 other authority as the board of directors may from time to time prescribe. 31. Duties of Officers May be Delegated. If any officer of the corporation be absent or unable to act, or for any other reason that the board of directors may deem sufficient, the board may delegate for the time being some or all of the functions, duties, powers, and responsibilities of any officer to any other officer, or to any other agent or employee of the corporation or other responsible person, provided a majority of the whole board of directors concurs therein. 32. Removal. Any officer or agent elected or appointed by the board of directors, and any employee, may be removed or discharged, with or without cause, at any time by the affirmative vote of a majority of the board of directors, but such removal or discharge shall be without prejudice to the contract rights, if any, of the person so removed or discharged. 33. Salaries. Salaries and other compensation of all elected officers of the corporation shall be fixed, increased or decreased by the board of directors, but this power, except as to the salary or compensation of the president, may, unless prohibited by law, be delegated by the board to the president, or may be delegated to a committee. Salaries and compensation of all other appointed officers, agents, and employees of the corporation may be fixed, increased or decreased by the board of directors, but until action is taken with respect thereto by the board of directors, the same may be fixed, increased or decreased by the president or such other officer or officers as may be designated by the board of directors to do so. 34. Delegation of Authority. The board of directors from time to time may delegate to the president or other officer or executive employee of the corporation, authority to hire, discharge, fix, and modify the duties, salary, or other compensation of employees of the corporation under their jurisdiction, and the board may delegate to such officer or executive employee similar authority with respect to obtaining and retaining for the corporation the services of attorneys, accountants, and other experts. Stock 35. Certificates. Certificates of stock shall be issued in numerical order, and each stockholder shall be entitled to a certificate signed by the president or a vice president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary, certifying to the number of shares owned by the stockholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or 11 registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may nevertheless be issued by the corporation with the same effect as if such officer, transfer agent, or registrar who signed such certificate, or whose facsimile signature shall have been placed thereon, had not ceased to be such officer, transfer agent, or registrar of the corporation. 36. Transfer. Transfers of stock shall be made only upon the transfer books of the corporation, kept at the office of the corporation or respective transfer agents designated to transfer the several classes of stock, and before a new certificate is issued the old certificate shall be surrendered for cancellation. Until and unless the board of directors appoints some other person, firm, or corporation as its transfer agent or transfer clerk (and upon the revocation of any such appointment, thereafter until a new appointment is similarly made) the secretary of the corporation shall be the transfer agent or transfer clerk of the corporation without the necessity of any formal action of the board, and the secretary, or any person designated by him, shall perform all of the duties thereof. 37. Registered Stockholders. Registered stockholders only shall be entitled to be treated by the corporation as the holders and owners in fact of the shares standing in their respective names and the corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. 38. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to give the corporation and its transfer agents and registrars, if any, a bond in such sum as it may direct to indemnify it against any claim that may be made against it with respect to the certificate or certificates alleged to have been lost, stolen, or destroyed. 39. Regulations. The board of directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion, and registration of certificates for shares of the capital stock of the 12 corporation, not inconsistent with the laws of the State of Delaware, the certificate of incorporation of the corporation and these bylaws. 40. Fixing Record Date. 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, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or 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, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. 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 except that the board of directors may fix a new record date for the adjourned meeting. Dividends and Finance 41. Dividends. Dividends upon the outstanding shares of the corporation, subject to the provisions of the certificate of incorporation and of any applicable law and of these bylaws, may be declared by the board of directors at any meeting. Subject to such provisions, dividends may be paid in cash, in property, or in shares of the capital stock of the corporation. 42. Moneys. The moneys of the corporation shall be deposited in the name of the corporation in such bank or banks or trust company or trust companies as the board of directors shall designate, and shall be drawn out only by check signed by persons designated by resolution adopted by the board of directors, except that the board of directors may delegate said powers in the manner hereinafter provided in this Section 42 of these bylaws. The board of directors may by resolution authorize an officer or officers of the corporation to designate any bank or banks or trust company or trust companies in which moneys of the corporation may be deposited, and to designate the person or persons who may sign checks drawn on any particular bank account or bank accounts of the corporation, whether created by direct designation of the board of directors or by an authorized officer or officers as aforesaid. 43. Fiscal Year. The board of directors shall have power to fix and from time to time change the fiscal year of the corporation. In the absence of action by the board of directors, however, the fiscal year of the corporation shall end each year on the date which the corporation treated as the close of its first fiscal year, until such time, if any, as the fiscal year shall be changed by the board of directors. 13 Books and Records 44. Books, Accounts, and Records. The books, accounts, and records of the corporation, except as may be otherwise required by the laws of the State of Delaware, may be kept outside the State of Delaware, at such place or places as the board of directors from time to time determine. The board of directors shall determine whether, to what extent and the conditions upon which the accounts and books of the corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by law or by resolution of the stockholders. Notice 45. Provisions. Whenever the provisions of the statutes of the State of Delaware, the certificate of incorporation or these bylaws require notice to be given to any director, officer, or stockholder, they shall not be construed to required actual personal notice. Notice by mail may be given in writing by depositing the same in a post office or letter box, in a post paid, sealed wrapper, addressed to such director, officer, or stockholder at his or her address as the same appears in the books of the corporation, and the time when the same shall be mailed shall be deemed to be the time of the giving of such notice. If notice be given by telegraph, such notice shall be deemed to be given when the same is delivered to the telegraph company. 46. Waiver. Whenever any notice is required to be given under the provisions of the statutes of the State of Delaware or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting need be specified in any written waiver of notice unless so required by the certificate of incorporation or the bylaws. Amendments 47. Amendments. These bylaws may be altered, amended or repealed by the affirmative vote of a majority of the shares of stock issued and outstanding and entitled to vote thereon, or, if 14 the certificate of incorporation so provides, by the board of directors at any meeting thereof. 15 EX-4.1 8 INDENTURE BTWN. GFSI, INC. AND FLEET NAT'L BANK - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GFSI, Inc. ---------------------------------------- SERIES A AND SERIES B 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007 ---------------------------------------- ------------------- INDENTURE DATED AS OF FEBRUARY 27, 1997 ------------------- FLEET NATIONAL BANK Trustee - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions..................................................................................... 1 Section 1.02. Other Definitions............................................................................... 14 Section 1.03. Incorporation by Reference of Trust Indenture Act............................................... 14 Section 1.04. Rules of Construction........................................................................... 14 ARTICLE 2 THE NOTES Section 2.01. Form and Dating................................................................................. 15 Section 2.02. Execution and Authentication.................................................................... 15 Section 2.03. Registrar and Paying Agent...................................................................... 16 Section 2.04. Paying Agent to Hold Money in Trust............................................................. 16 Section 2.05. Holder Lists.................................................................................... 16 Section 2.06. Transfer and Exchange........................................................................... 17 Section 2.07. Replacement Notes............................................................................... 23 Section 2.08. Outstanding Notes............................................................................... 23 Section 2.09. Treasury Notes.................................................................................. 23 Section 2.10. Temporary Notes................................................................................. 23 Section 2.11. Cancellation.................................................................................... 24 Section 2.12. Defaulted Interest.............................................................................. 24 Section 2.13. Record Date..................................................................................... 24 Section 2.14. CUSIP Number.................................................................................... 24 ARTICLE 3 OPTIONAL REDEMPTION AND MANDATORY OFFERS TO PURCHASE Section 3.01. Notices to Trustee.............................................................................. 24 Section 3.02. Selection of Notes to be Redeemed or Purchased.................................................. 25 Section 3.03. Notice of Redemption............................................................................ 25 Section 3.04. Effect of Notice of Redemption.................................................................. 26 Section 3.05. Deposit of Redemption Price..................................................................... 26 Section 3.06. Notes Redeemed in Part.......................................................................... 27 Section 3.07. Optional Redemption Provisions.................................................................. 27 Section 3.08. Mandatory Purchase Provisions................................................................... 27 ARTICLE 4 COVENANTS Section 4.01. Payment of Notes................................................................................ 29 Section 4.02. SEC Reports..................................................................................... 29 Section 4.03. Compliance Certificate.......................................................................... 30 Section 4.04. Stay, Extension and Usury Laws.................................................................. 31 Section 4.05. Limitation on Restricted Payments............................................................... 31 Section 4.06. Corporate Existence............................................................................. 33 Section 4.07. Limitation on Incurrence of Indebtedness........................................................ 34 Section 4.08 Limitation on Senior Subordinated Debt.......................................................... 34 Section 4.09. Limitation on Transactions With Affiliates...................................................... 35 Section 4.10. Limitation on Liens............................................................................. 35 Section 4.11. Compliance With Laws, Taxes..................................................................... 36
i Section 4.12. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries.................................................. 36 Section 4.13. Maintenance of Office or Agencies............................................................... 37 Section 4.14. Change of Control............................................................................... 37 Section 4.15. Limitation on Asset Sales....................................................................... 38 Section 4.16. Note Guarantees..................................................................................39 Section 4.17. Designation of Restricted and Non-Restricted Subsidiaries....................................... 39 ARTICLE 5 SUCCESSORS Section 5.01. Merger or Consolidation......................................................................... 40 Section 5.02. Successor Corporation Substituted............................................................... 40 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default............................................................................... 41 Section 6.02. Acceleration.................................................................................... 42 Section 6.03. Other Remedies.................................................................................. 43 Section 6.04. Waiver of Past Defaults......................................................................... 43 Section 6.05. Control by Majority............................................................................. 44 Section 6.06. Limitation on Suits............................................................................. 44 Section 6.07. Rights of Holders to Receive Payment............................................................ 44 Section 6.08. Collection Suit by Trustee...................................................................... 44 Section 6.09. Trustee May File Proofs of Claim................................................................ 44 Section 6.10. Priorities...................................................................................... 45 Section 6.11. Undertaking for Costs........................................................................... 45 ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee............................................................................... 45 Section 7.02. Rights of Trustee............................................................................... 46 Section 7.03. Individual Rights of Trustee.................................................................... 47 Section 7.04. Trustee's Disclaimer............................................................................ 47 Section 7.05. Notice to Holders of Defaults and Events of Default............................................. 47 Section 7.06. Reports by Trustee to Holders................................................................... 47 Section 7.07. Compensation and Indemnity...................................................................... 48 Section 7.08. Replacement of Trustee.......................................................................... 48 Section 7.09. Successor Trustee by Merger, Etc................................................................ 49 Section 7.10. Eligibility; Disqualification................................................................... 49 Section 7.11. Preferential Collection of Claims Against the Company........................................... 49 ARTICLE 8 DISCHARGE OF INDENTURE Section 8.01. Discharge of Liability on Notes; Defeasance..................................................... 50 Section 8.02. Conditions to Defeasance........................................................................ 50 Section 8.03. Application of Trust Money...................................................................... 51 Section 8.04. Repayment to the Company........................................................................ 52 Section 8.05. Indemnity for Government Obligations............................................................ 52 Section 8.06. Reinstatement................................................................................... 52
ii ARTICLE 9 AMENDMENTS Section 9.01. Amendments and Supplements Permitted Without Consent of Holders................................. 52 Section 9.02. Amendments and Supplements Requiring Consent of Holders......................................... 53 Section 9.03. Compliance with TIA............................................................................. 54 Section 9.04. Revocation and Effect of Consents............................................................... 54 Section 9.05. Notation on or Exchange of Notes................................................................ 54 Section 9.06. Trustee Protected............................................................................... 54 ARTICLE 10 SUBORDINATION Section 10.01. Agreement to Subordinate........................................................................ 55 Section 10.02. Liquidation; Dissolution; Bankruptcy............................................................ 55 Section 10.03. Default on Designated Senior Indebtedness....................................................... 55 Section 10.04. Acceleration of Notes........................................................................... 56 Section 10.05. When Distribution Must be Paid Over............................................................. 56 Section 10.06. Notice by Company............................................................................... 57 Section 10.07. Subrogation..................................................................................... 57 Section 10.08. Relative Rights................................................................................. 57 Section 10.09. Subordination may not be Impaired by Company.................................................... 57 Section 10.10. Distribution or Notice to Representative........................................................ 57 Section 10.11. Rights of Trustee as Paying Agent............................................................... 58 Section 10.12. Authorization to Effect Subordination........................................................... 58 Section 10.13. Amendments...................................................................................... 58 ARTICLE 11 MISCELLANEOUS Section 11.01. Trust Indenture Act Controls................................................................... 58 Section 11.02. Notices........................................................................................ 58 Section 11.03. Communication by Holders with Other Holders.................................................... 59 Section 11.04. Certificate and Opinion as to Conditions Precedent............................................. 60 Section 11.05. Statements Required in Certificate or Opinion.................................................. 60 Section 11.06. Rules by Trustee and Agents.................................................................... 60 Section 11.07. Legal Holidays................................................................................. 60 Section 11.08. No Recourse Against Others..................................................................... 60 Section 11.09. Counterparts................................................................................... 61 Section 11.10. Variable Provisions............................................................................ 61 Section 11.11. Governing Law.................................................................................. 61 Section 11.12. No Adverse Interpretation of Other Agreements.................................................. 61 Section 11.13. Successors..................................................................................... 61 Section 11.14. Severability................................................................................... 61 Section 11.15. Table of Contents, Headings, Etc............................................................... 61 ARTICLE 12 GUARANTEE OF NOTES Section 12.01. Execution and Deliver of Note Guarantee........................................................ 62 Section 12.02. Subordination of Note Guarantee; Guarantors May Consolidate, etc., on Certain Terms............................................................................... 62
iii EXHIBITS Exhibit A Form of Note ................................................................................... A-1 Exhibit B Certificate of Transferor ...................................................................... B-1 Exhibit C Certificate of Institutional Accredited Investor ............................................... C-1 Exhibit D Certificate of Regulation S Transferor ......................................................... D-1 Exhibit E Form of Note Guarantee.......................................................................... E-1 Exhibit F Form of Supplemental Indenture.................................................................. F-1
iv This Indenture, dated as of February 27, 1997, is between GFSI, Inc., a Delaware corporation (the "Company"), and Fleet National Bank, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the holders of the Company's 9 5/8% Series A Senior Subordinated Notes due 2007 (the "Series A Notes") and the Company's 9 5/8% Series B Senior Subordinated Notes due 2007 (the "Series B Notes" and, together with the Series A Notes, the "Notes"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 DEFINITIONS "Acquisition Agreement" means the agreement, dated as of January 24, 1997, among Holdings, the Company and the shareholders party thereto, relating to the purchase and sale of the stock of Winning Ways, Inc. "Affiliate" means any of the following: (i) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, (ii) any spouse, immediate family member or other relative who has the same principal residence as any Person described in clause (i) above, (iii) any trust in which any such Persons described in clause (i) or (ii) above has a beneficial interest and (iv) any corporation or other organization of which any such Persons described above collectively own 50% or more of the equity of such entity, provided, however that MCIT PLC shall not be deemed an Affiliate of the Company. "Affiliated Embroiderers" means the affiliated entities that provide embroidery services for the Company as of the date of this Indenture. "Agent" means any Registrar, Paying Agent or co-registrar. "Asset Sale" means the sale, lease, conveyance or other disposition by the Company or a Restricted Subsidiary of assets or property whether owned on the date of original issuance of the Notes or thereafter acquired, in a single transaction or in a series of related transactions; provided that Asset Sales will not include such sales, leases, conveyances or dispositions in connection with (i) the sale or disposition of any Restricted Investment, (ii) any Equity Offering by the Company, (iii) the surrender or waiver of contract rights or the settlement, release or surrender of contract, tort or other claims of any kind, (iv) the sale or lease of inventory, equipment, accounts receivable or other assets in the ordinary course of business, (v) a sale-leaseback of assets within one year following the acquisition of such assets, (vi) the grant of any license of patents, trademarks, registration therefor and other similar intellectual property, (vii) a transfer of assets by the Company or a Restricted Subsidiary to the Company or a Restricted Subsidiary, (viii) the designation of a Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to Section 4.17, (ix) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company as permitted under Section 5.01, (x) the sale or disposition of obsolete equipment or other obsolete assets, (xi) Restricted Payments permitted by Section 4.05, (xii) the exchange of assets for other non-cash assets that (a) are useful in the business of the Company and its Restricted Subsidiaries and (b) have a fair market value at least equal to the fair market value of the assets being exchanged (as determined by the Board of Directors in good faith), (xiii) the sale of the corporate aircraft owned by the Company on the date of this Indenture to Robert M. Wolff or his designees or (xiv) the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of this Indenture. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the Company's board of directors or any authorized committee of such board of directors. "Business Day" means any day other than a Legal Holiday. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including any preferred stock. "Cash Flow" means, for any given period and Person, the sum of, without duplication, Consolidated Net Income, plus (a) any provision for taxes based on income or profits to the extent such income or profits were included in computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to the extent deducted in computing Consolidated Net Income, plus (c) the amortization of all intangible assets, to the extent such amortization was deducted in computing Consolidated Net Income (including, but not limited to, inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), plus (d) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees, including those in connection with the Transactions), to the extent deducted in computing Consolidated Net Income, plus (e) all depreciation and all other non-cash charges (including, without limitation, those charges relating to purchase accounting adjustments and LIFO adjustments), to the extent deducted in computing Consolidated Net Income, plus (f) any interest income, to the extent such income was not included in computing Consolidated Net Income, plus (g) all dividend payments on preferred stock (whether or not paid in cash) to the extent deducted in computing Consolidated Net Income, plus (h) any extraordinary or nonrecurring charge or expense arising out of the implementation of SFAS 106 or SFAS 109 to the extent deducted in computing Consolidated Net Income, plus (i) to the extent not covered in clause (d) above, fees paid or payable in respect of the TJC Agreement to the extent deducted in computing Consolidated Net Income, plus (j) the net loss of any Person, other than those of a Restricted Subsidiary, to the extent deducted in computing Consolidated Net Income, plus (k) net losses in respect of any discontinued operations as determined in accordance with GAAP, to the extent deducted in computing Consolidated Net Income, minus (l) the portion of Consolidated Net Income attributable to minority interests in other Persons, except the amount of such portion received in cash by the Company or its Restricted Subsidiaries; provided, however, that if any such calculation includes any period during which an acquisition or sale of a Person or the incurrence or repayment of Indebtedness occurred, then such calculation for such period shall be made on a Pro Forma Basis. "Cash Flow Coverage Ratio" means, for any given period and Person, the ratio of: (i) Cash Flow to (ii) the sum of Consolidated Interest Expense and all dividend payments on any series of preferred stock of such Person (except dividends paid or payable in additional shares of Capital Stock (other than Disqualified Stock) and except for accrued and unpaid dividends with respect to the Holdings Preferred Stock outstanding on the date of this Indenture), in each case, without duplication; provided, however, that if any such calculation includes any period during which an acquisition or sale of a Person or the incurrence or repayment of Indebtedness occurred, then such calculation for such period shall be made on a Pro Forma Basis. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the 2 Principals or their Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 50% of the Voting Stock of the Company (measured by voting power rather than number of shares), (iv) the consummation of the first transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above) becomes the "beneficial owner" (as defined above), directly or indirectly, of more of the Voting Stock of the Company (measured by voting power rather than number of shares) than is at the time "beneficially owned" (as defined above) by the Principals and their Related Parties in the aggregate or (v) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. For purposes of this definition, any transfer of an equity interest of an entity that was formed following the date of issuance of the Notes for the purpose of acquiring Voting Stock of the Company will be deemed to be a transfer of such portion of such Voting Stock as corresponds to the portion of the equity of such entity that has been so transferred. "Consolidated Interest Expense" means, for any given period and Person, the aggregate of the interest expense in respect of all Indebtedness of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (including amortization of original issue discount on any such Indebtedness, all non-cash interest payments, the interest portion of any deferred payment obligation and the interest component of capital lease obligations, but excluding amortization of deferred financing fees if such amortization would otherwise be included in interest expense); provided, however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated Interest Expense shall be calculated on a Pro Forma Basis; provided further that any premiums, fees and expenses (including the amortization thereof) payable in connection with the Transactions or any other refinancing of Indebtedness shall be excluded. For purposes of this definition, the Consolidated Interest Expense of the Company shall include the cash interest expense of Holdings paid in respect of the Holdings Subordinated Notes. "Consolidated Net Income" means, for any given period and Person, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that: (a) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (b) Consolidated Net Income of any Person will not include, without duplication, any deduction for: (i) any increased amortization or depreciation resulting from the write-up of assets pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended or supplemented from time to time, (ii) the amortization of all intangible assets (including amortization attributable to inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), (iii) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees), (iv) any extraordinary or nonrecurring charges relating to any premium or penalty paid, write-off or deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (v) any Restructuring Charges; provided, however, that for purposes of determining the Cash Flow Coverage Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis. "Consolidated Net Worth" with respect to any Person means, as of any date, the consolidated equity of the common stockholders of such Person (excluding the cumulated foreign currency translation 3 adjustment), all determined on a consolidated basis in accordance with GAAP, but without any reduction in respect of the payment of dividends on any series of such Person's preferred stock if such dividends are paid in additional shares of Capital Stock (other than Disqualified Stock); provided, however, that Consolidated Net Worth shall also include, without duplication: (a) the amortization of all write-ups of inventory, (b) the amortization of all intangible assets (including amortization of goodwill, debt and financing costs, and Incentive Arrangements), (c) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and refinancing fees), (d) any increased amortization or depreciation resulting from the write-up of assets pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended and supplemented from time to time, (e) any extraordinary or nonrecurring charges or expenses relating to any premium or penalty paid, write-off or deferred financing costs or other financial recapitalization charges incurred in connection with redeeming or retiring any Indebtedness prior to its stated maturity, (f) any Restructuring Charges and (g) any extraordinary or non-recurring charge arising out of the implementation of SFAS 106 or SFAS 109; provided, however, that Consolidated Net Worth shall be calculated on a Pro Forma Basis. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of this Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Definitive Notes" means Notes that are in the form of Exhibit A attached hereto (but without including the text referred to in footnotes 1 and 2 thereto). "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such pursuant to Section 2.06 of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Designated Senior Indebtedness" means (i) any Indebtedness outstanding under the New Credit Agreement and (ii) any other Senior Indebtedness permitted under this Indenture the principal amount of which is $10.0 million or more and that has been designated by the Company as "Designated Senior Indebtedness." "Disqualified Stock" means any Capital Stock that 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, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part on, or prior to, the maturity date of the Notes. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500,000,000 or its equivalent in foreign currency, whose debt is rated "A" (or higher) according to S&P or Moody's at the time as of which any investment or rollover therein is made. "Equity Contribution" means, collectively, (a) a contribution of $13,600,000 from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the common stock of Holdings; (b) a contribution of $13,600,000 from certain members of management of the Company to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the common 4 stock of Holdings; and (c) a loan of $25,000,000 from a Jordan Investor to Holdings in exchange for Holdings Subordinated Notes. "Equity Interests" means Capital Stock or partnership interests or warrants, options or other rights to acquire Capital Stock or partnership interests (but excluding (i) any debt security that is convertible into, or exchangeable for, Capital Stock or partnership interests and (ii) any other Indebtedness or Obligation); provided, however, that Equity Interests will not include any Incentive Arrangements or obligations or payments thereunder. "Equity Offering" means a public or private offering by the Company for cash of Equity Interests and all warrants, options or other rights to acquire Capital Stock, other than (i) an offering of Disqualified Stock or (ii) Incentive Arrangements or obligations or payments thereunder. "Exchange Offer" means the offer by the Company to Holders to exchange Series B Notes for Series A Notes. "Existing Indebtedness" means the Indebtedness of Winning Ways, Inc. at December 31, 1996. "GAAP" means generally accepted accounting principles, consistently applied, as of the date of original issuance of the Notes. All financial and accounting determinations and calculations under the Indenture will be made in accordance with GAAP. "Global Note" means a Note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Note attached hereto as Exhibit A. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "Guarantors" means each Restricted Subsidiary that executes a Note Guarantee in accordance with the provisions of this Indenture, and their respective successors and assigns. "Hedging Obligations" means, with respect to any Person, the Obligations of such Persons under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, (ii) foreign exchange contracts, currency swap agreements or similar agreements and (iii) other agreements or arrangements designed to protect such Person against fluctuations, or otherwise to establish financial hedges in respect of, exchange rates, currency rates or interest rates. "Holder" means a Person in whose name a Note is registered. "Holdings" means GFSI Holdings, Inc., a Delaware corporation. "Holdings Preferred Stock" means the 12% cumulative preferred stock due 2009 of Holdings, as in effect on the date of this Indenture. "Holdings Subordinated Notes" means $25.0 million in aggregate principal amount of 12% subordinated notes due 2008 of Holdings as in effect on the date of this Indenture or any Indebtedness of Holdings issued or given in exchange for, or the proceeds of which are used to, extend, refinance, renew, replace, substitute or refund such Holdings Subordinated Notes; provided that any such Indebtedness (i) is issued in a principal amount not exceeding the then outstanding principal amount of 5 the Holdings Subordinated Notes, (ii) has an interest rate not exceeding 12%, (iii) is subordinated to other Indebtedness of Holdings to the same extent as the Holdings Subordinated Notes and (iv) has a Weighted Average Life to Maturity no less than the Weighted Average Life to Maturity of the Holdings Subordinated Notes. "Incentive Arrangements" means any earn-out agreements, stock appreciation rights, "phantom" stock plans, employment agreements, non-competition agreements, subscription and stockholders agreements and other incentive and bonus plans, including the Incentive Compensation Plan, and similar arrangements made in connection with acquisitions of Persons or businesses by the Company or the Restricted Subsidiaries or the retention of consultants, executives, officers or employees by Holdings, the Company or the Restricted Subsidiaries. "Incentive Compensation Plan" means the incentive compensation plan for providing annual cash bonuses that the Company expects to adopt following consummation of the Transactions. "Indebtedness" means, with respect to any Person, any indebtedness, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the deferred and unpaid balance of the purchase price of any property (including pursuant to capital leases), except any such balance that constitutes an accrued expense or a trade payable, and any Hedging Obligations, if and to the extent such indebtedness (other than a Hedging Obligation) would appear as a liability upon a balance sheet of such Person prepared on a consolidated basis in accordance with GAAP and also includes, to the extent not otherwise included, the guarantee of items that would be included within this definition; provided, however, that "Indebtedness" will not include any Incentive Arrangements or obligations or payments thereunder. "Indenture" means this Indenture, as amended or supplemented from time to time. "Initial Purchasers" means Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. "Insolvency or Liquidation Proceeding" means (i) any insolvency or bankruptcy or similar case or proceeding, or any reorganization, receivership, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, or (ii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company. "Investment" means any capital contribution to, or other debt or equity investment in, any Person. "issue" means create, issue, assume, guarantee, incur or otherwise become directly or indirectly liable for any Indebtedness or Capital Stock, as applicable; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition, redesignation of a Non-Restricted Subsidiary or otherwise) shall be deemed to be issued by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary. For this definition, the terms "issuing," "issuer," "issuance" and "issued" have meanings correlative to the foregoing. "Jordan Investors" means The Jordan Company, affiliates of The Jordan Company and MCIT PLC. 6 "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, the city in which the principal corporate trust office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "Marketable Securities" means (a) Government Securities, (b) any certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution, (c) commercial paper maturing not more than 270 days after the date of acquisition of an issuer (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "A-2" (or higher) according to S&P or "P-2" (or higher) according to Moodys or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (d) any bankers acceptances or money market deposit accounts issued by an Eligible Institution and (e) any fund investing exclusively in investments of the types described in clauses (a) through (d) above. "Moodys" means Moody's Investors Services, Inc. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP, excluding, however, any gain or loss, together with any related provision for taxes, realized in connection with any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions). "Net Proceeds" means, with respect to any Asset Sale, the aggregate amount of cash proceeds (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, and including any amounts received as disbursements or withdrawals from any escrow or similar account established in connection with any such Asset Sale, but, in either such case, only as and when so received) received by the Company or any of its Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the cash expenses of such Asset Sale (including, without limitation, the payment of principal of, and premium, if any, and interest on, Indebtedness required to be paid as a result of such Asset Sale (other than the Notes) and legal, accounting, management and advisory and investment banking fees and sales commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion of cash proceeds that 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 of its Restricted Subsidiaries shall constitute Net Proceeds on such date, (iv) any relocation expenses and pension, severance and shutdown costs incurred as a result thereof, and (v) any deduction or appropriate amounts to be provided by the Company or any of its Restricted Subsidiaries as a reserve in accordance with GAAP against any liabilities associated with the asset disposed of in such transaction and retained by the Company or such Restricted Subsidiary after 7 such sale or other disposition thereof, including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters or against any indemnification obligations associated with such transaction. "New Credit Agreement" means that certain credit facility, dated as of February 27, 1997, among the Company, as borrower, The First National Bank of Chicago, as contractual representative, and the lenders party thereto, together with all loan documents and instruments thereunder (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including, without limitation, increasing the amount of available borrowings, letters of credit or other financial accommodations thereunder, all or any portion of the Obligations under any such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders). "Non-Restricted Subsidiary" means any Subsidiary of the Company other than a Restricted Subsidiary. "Notes" means the Series A Notes and the Series B Notes. "Obligations" means, with respect to any Indebtedness, all principal, interest, premiums, penalties, fees, indemnities, expenses (including legal fees and expenses), reimbursement obligations and other liabilities payable to the holder of such Indebtedness under the documentation governing such Indebtedness, and any other claims of such holder arising in respect of such Indebtedness. "Offering" means the offer and sale of the Notes as contemplated by the Offering Memorandum. "Offering Memorandum" means the Offering Memorandum, dated February 20, 1997, relating to the Company's offering and placement of the Notes. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 11.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 11.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Other Permitted Indebtedness" means: (i) Indebtedness of the Company and its Restricted Subsidiaries existing as of the date of original issuance of the Notes and all related Obligations as in effect on such date; (ii) Indebtedness of the Company and its Restricted Subsidiaries in respect of bankers acceptances and letters of credit (including, without limitation, letters of credit in respect of workers' compensation claims) issued in the ordinary course of business, or other Indebtedness in respect of reimbursement-type obligations regarding workers' compensation claims; (iii) Refinancing Indebtedness, provided that: (A) the principal amount of such Refinancing Indebtedness shall not exceed the outstanding 8 principal amount of Indebtedness (including unused commitments) extended, refinanced, renewed, replaced, substituted or refunded plus any amounts incurred to pay premiums, fees and expenses in connection therewith, (B) the Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being extended, refinanced, renewed, replaced, substituted or refunded; provided, however, that this limitation in this clause (B) does not apply to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of Refinancing Indebtedness of Subordinated Indebtedness, such Refinancing Indebtedness shall be subordinated to the Notes at least to the same extent as the Subordinated Indebtedness being extended, refinanced, renewed, replaced, substituted or refunded; (iv) intercompany Indebtedness of and among the Company and its Restricted Subsidiaries; (v) Indebtedness of the Company and its Restricted Subsidiaries incurred in connection with making permitted Restricted Payments under clauses (iii), (iv) (but only to the extent that such Indebtedness is provided by the Company or a Restricted Subsidiary) or (x) of Section 4.05(b); provided that any Indebtedness incurred pursuant to this clause (v) is expressly subordinate in right of payment to the Notes; (vi) Indebtedness of any Non-Restricted Subsidiary created after the date of original issuance of the Notes, provided that such Indebtedness is nonrecourse to the Company and its Restricted Subsidiaries and the Company and its Restricted Subsidiaries have no Obligations with respect to such Indebtedness; (vii) Indebtedness of the Company and its Restricted Subsidiaries under Hedging Obligations; (viii) Indebtedness of the Company and its Restricted Subsidiaries arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts, which will not be, and will not be deemed to be, inadvertent) drawn against insufficient funds in the ordinary course of business; (ix) Indebtedness of the Company and its Restricted Subsidiaries in connection with performance, surety, statutory, appeal or similar bonds in the ordinary course of business; (x) Indebtedness of the Company and its Restricted Subsidiaries in connection with agreements providing for indemnification, purchase price adjustments and similar obligations in connection with the sale or disposition of any of their business, properties or assets; (xi) the guarantee by the Company or any of the Guarantors of Indebtedness of the Company or a Restricted Subsidiary of the Company that was permitted to be incurred by Section 4.07; and (xii) Indebtedness of any Person at the time it is acquired as a Restricted Subsidiary, provided that such Indebtedness was not issued by such Person in connection with or in anticipation of such acquisition. "Permitted Junior Securities" means Equity Interests in the Company or subordinated debt securities of the Company that (a) are subordinated to all Senior Indebtedness (and any debt securities issued in exchange for Senior Indebtedness) to at least the same extent as the Notes are subordinated to Senior Indebtedness pursuant to Article 10 of this Indenture, (b) have a Weighted Average Life to Maturity no shorter than the Weighted Average Life to Maturity of the Notes and (c) if there are any amounts outstanding under the New Credit Agreement, have a Weighted Average Life to Maturity at least as long as the sum of (i) the Weighted Average Life to Maturity of the New Credit Agreement or any debt securities issued in exchange therefor (whichever is longer) plus (ii) the positive difference, if any, between the Weighted Average Life to Maturity of the Notes and the Weighted Average Life to Maturity of the New Credit Agreement, in each case measured immediately prior to the issuance of such Permitted Junior Securities. "Permitted Liens" means: (i) Liens securing Senior Indebtedness of the Company or any Guarantor that was permitted by the terms of this Indenture to be incurred; (ii) Liens for taxes, assessments, governmental charges or claims which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor; (iii) statutory Liens of landlords and carriers', warehousemen's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if 9 any, as shall be required in conformity with GAAP shall have been made therefor; (iv) Liens incurred on deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (v) Liens incurred on deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance and return of money bonds and other obligations of a like nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (vi) easements, rights-of-way, zoning or other restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Restricted Subsidiaries incurred in the ordinary course of business; (vii) Liens (including extensions, renewals and replacements thereof) upon property acquired (the "Acquired Property") after the date of original issuance of the Notes, provided that: (A) any such Lien is created solely for the purpose of securing Indebtedness representing, or issued to finance, refinance or refund, the cost (including the cost of construction) of the Acquired Property, (B) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of the cost of the Acquired Property, (C) such Lien does not extend to or cover any property other than the Acquired Property and any improvements on such Acquired Property, and (D) the issuance of the Indebtedness to purchase the Acquired Property is permitted by Section 4.07; (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (ix) judgment and attachment Liens not giving rise to an Event of Default; (x) leases or subleases granted to others not interfering in any material respect with the business of the Company or any of its Restricted Subsidiaries; (xi) Liens securing Indebtedness under Hedging Obligations; (xii) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements; (xiii) Liens arising out of consignment or similar arrangements for the sale of goods entered into by the Company or its Restricted Subsidiaries in the ordinary course of business; (xiv) any interest or title of a lessor in property subject to any capital lease obligation or operating lease; (xv) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xvi) Liens existing on the date of original issuance of the Notes and any extensions, refinancings, renewals, replacements, substitutions or refundings thereof; (xvii) any Lien granted to the Trustee and any substantially equivalent Lien granted to any trustee or similar institution under any indenture for Senior Indebtedness permitted by the terms of the Indenture; (xviii) Liens in favor of the Company or any Restricted Subsidiary; (xix) additional Liens at any one time outstanding in respect of properties or assets where aggregate fair market value does not exceed $2.0 million (the fair market value to be determined on the date such Lien is granted on such properties or assets); and (xx) Liens securing intercompany Indebtedness issued by any Restricted Subsidiary to the Company or another Restricted Subsidiary. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principals" means (a) The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT PLC, and their respective Affiliates, principals, partners and employees, family members of any of the foregoing and trusts for the benefit of any of the foregoing, including, without limitation, Leucadia National Corporation and Jordan Industries, Inc., and their respective Subsidiaries, (b) the officers, directors and employees of the Company on the date of issuance of the Notes and their respective Affiliates and family members and trusts for the benefit of any of the foregoing. For the purpose of the definition of "Principals," The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT PLC shall be deemed to be Affiliates. "Post-Petition Interest" means any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law. 10 "Pro Forma Basis" means, for purposes of determining Consolidated Net Income in connection with the Cash Flow Coverage Ratio (including in connection with Sections 4.05, 4.17 and 5.01, the incurrence of Indebtedness pursuant to Section 4.07(a) and Consolidated Net Worth for purposes of Section 5.01), giving pro forma effect to (x) any acquisition or sale of a Person, business or asset, related incurrence, repayment or refinancing of Indebtedness or other related transactions, including any Restructuring Charges which would otherwise be accounted for as an adjustment permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence, repayment or refinancing of any Indebtedness and the application of the proceeds therefrom, in each case, as if such acquisition or sale and related transactions, restructurings, consolidations, cost savings, reductions, incurrence, repayment or refinancing were realized on the first day of the relevant period permitted by Regulation S-X under the Securities Act or on a pro forma basis under GAAP. Furthermore, in calculating the Cash Flow Coverage Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the determination 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 determination date; (2) if interest on any Indebtedness actually incurred on the determination 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 determination date will be deemed to have been in effect during the relevant period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to interest rate swaps or similar interest rate protection Hedging Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Redeemable Preferred Stock" means preferred stock that by its terms or otherwise is required to be redeemed or is redeemable at the option of the holder thereof on, or prior to, the maturity date of the Notes. "Refinancing Indebtedness" means (i) Indebtedness of the Company and its Restricted Subsidiaries issued or given in exchange for, or the proceeds of which are used to, extend, refinance, renew, replace, substitute or refund any Indebtedness permitted under this Indenture or any Indebtedness issued to so extend, refinance, renew, replace, substitute or refund such Indebtedness, (ii) any refinancings of Indebtedness issued under the New Credit Agreement, and (iii) any additional Indebtedness issued to pay premiums and fees in connection with clauses (i) and (ii). "Registration Rights Agreement" means the Registration Rights Agreement, dated as of February 27, 1997, by and among the Company and the Initial Purchasers. "Related Party" with respect to any Principal means (a) any controlling stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Principal or (b) or trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (a). "Restricted Investment" means any Investment in any Person; provided that Restricted Investments will not include: (i) Investments in Marketable Securities; (ii) any Incentive Arrangements; (iii) Investments in the Company; or (iv) Investments in any Restricted Subsidiary (provided that any Investment in a Restricted Subsidiary was made for fair market value (as determined by the Board of Directors in good faith)). The amount of any Restricted Investment shall be the amount of cash and the fair market value at the time of transfer of all other property (as determined by the Board of Directors in good faith) initially invested or paid for such Restricted Investment, plus all additions thereto, without 11 any adjustments for increases or decreases in value of or write-ups, write-downs or write-offs with respect to, such Restricted Investment. "Restricted Subsidiary" means: (i) any Subsidiary of the Company existing on the date of original issuance of the Notes, and (ii) any other Subsidiary of the Company formed, acquired or existing after the date of original issuance of the Notes that is designated as a "Restricted Subsidiary" by the Company pursuant to a resolution approved a majority of the Board of Directors, provided, however, that the term Restricted Subsidiary shall not include any Subsidiary of the Company that has been redesignated by the Company pursuant to a resolution approved by a majority of the Board of Directors as a Non-Restricted Subsidiary in accordance with Section 4.17 unless such Subsidiary shall have subsequently been redesignated a Restricted Subsidiary in accordance with clause (ii) of this definition. "Restructuring Charges" means any charges or expenses in respect of restructuring or consolidating any business, operations or facilities, any compensation or headcount reduction, or any other cost savings, of any Persons or businesses either alone or together with the Company or any Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act. "S&P" means Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Senior Indebtedness" means, with respect to any Person, (i) all Indebtedness of such Person outstanding under the New Credit Agreement and all Hedging Obligations with respect thereto, (ii) any other Indebtedness of such Person permitted to be incurred under the terms of this Indenture, provided, however, that Senior Indebtedness shall not include any Indebtedness which by the terms of the instrument creating or evidencing the same is subordinated or junior in right of payment to any other Senior Indebtedness in any respect, and (iii) all Obligations (including any Post-Petition Interest) with respect to the foregoing, in each case whether outstanding on the date of the Indenture or thereafter incurred. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness will not include (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) any Indebtedness of such Person to any of its Subsidiaries or other Affiliates (other than Indebtedness arising under the New Credit Agreement), (y) any trade payables or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities) or (z) any Indebtedness that is incurred in violation of this Indenture. "SFAS 106" means Statement of Financial Accounting Standards No. 106. "SFAS 109" means Statement of Financial Accounting Standards No. 109. "Significant Subsidiary" means any Restricted Subsidiary of the Company that would be a "significant subsidiary" as defined in clause (2) of the definition of such term in Rule 1-02 of Regulation S-X under the Securities Act and the Exchange Act. "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. 12 "Subordinated Indebtedness" means all Obligations with respect to Indebtedness if the instrument creating or evidencing the same, or pursuant to which the same is outstanding, designates such Obligations as subordinated or junior in right of payment to Senior Indebtedness. "Subsidiary" of any Person means any entity of which the Equity Interests entitled to cast at least a majority of the votes that may be cast by all Equity Interests having ordinary voting power for the election of directors or other governing body of such entity are owned by such Person (regardless of whether such Equity Interests are owned directly by such Person or through one or more Subsidiaries). "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb), as amended, as in effect on the date of original issuance of the Notes. "Tax Sharing Agreement" means the tax sharing agreement between the Company and Holdings, as in effect on the date of this Indenture. "TJC Agreement" means the Management Consulting Agreement, dated the date of this Indenture, between the Company and TJC Management Corporation, as in effect on the date of this Indenture. "Transactions" means, collectively, the Equity Contribution, the consummation of the Offering, the execution of the New Credit Agreement, the consummation by the Company of the acquisition of Winning Ways, Inc. pursuant to the Acquisition Agreement and the repayment by the Company of the Existing Indebtedness. "Transfer Restricted Notes" means securities that bear or are required to bear the legend set forth in Section 2.06. "Trustee" means Fleet National Bank until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter means the successor. "U.S. Government Obligations" means direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged, provided that no U.S. Government Obligation shall be callable at the issuer's option. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect the board of directors. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the then outstanding principal amount of such Indebtedness into (ii) the sum of the product(s) obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other requirement payment of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wolff Noncompetition Agreement" means the agreement, dated the date of this Indenture, between Holdings and Robert M. Wolff, relating to certain covenants not to compete with the business of the Company, as in effect on the date of this Indenture. 13 SECTION 1.02. OTHER DEFINITIONS. Defined in Term Section "Acceleration Notice" ........................................ 6.02 "Affiliate Transaction" ...................................... 4.09 "Asset Transfer Trigger Date" ................................ 4.15 "Asset Sale Disposition Date" ................................ 4.15 "Change of Control Trigger Date" ............................. 4.14 "covenant defeasance option" ................................. 8.01 "Disposition" ................................................ 5.01 "DTC" ........................................................ 2.03 "Event of Default" ........................................... 6.01 "Excess Proceeds" ............................................ 4.15 "legal defeasance option" .................................... 8.01 "Note Guarantees" ............................................ 4.01 "Notice of Default" .......................................... 6.01 "Offer" ...................................................... 3.08 "Paying Agent" ............................................... 2.03 "Payment Blockage Notice" .................................... 10.03 "Purchase Date" .............................................. 3.08 "Registrar" .................................................. 2.03 "Representative" ............................................. 10.05 "Restricted Payments" ........................................ 4.05 "Successor Corporation" ...................................... 5.01 "Trustee Expenses" ........................................... 6.08 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. Any terms incorporated by reference in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them therein. SECTION 1.04 RULES OF CONSTRUCTION. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it under GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. 14 ARTICLE 2 THE NOTES SECTION 2.01. FORM AND DATING. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is part of this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06. SECTION 2.02. EXECUTION AND AUTHENTICATION. One Officer shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of an authorized signatory of the Trustee, and the Trustee's signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A. The Trustee shall, upon a written order of the Company signed by two Officers directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of the Notes contained herein have been complied with, authenticate Notes for original issuance up to an aggregate principal amount stated in paragraph 4 of the Notes (the aggregate principal amount of outstanding Notes may not exceed that amount at any time, except as provided in Section 2.07). The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. 15 SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain an office or agency (the "Registrar") where Notes may be presented for registration of transfer or for exchange and an office or agency (the "Paying Agent") where Notes may be presented for payment. The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar, and the term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without prior notice to any Holder. The Company shall notify in writing the Trustee and the Trustee shall notify the Holders in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, and such agreement shall incorporate the TIA's provisions and implement the provisions of this Indenture that relate to such Agent. The Company initially appoints The Depository Trust Company ("DTC") to act as Depository with respect to the Global Notes. The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes and as Note Custodian with respect to the Global Notes. The Company or any of its Subsidiaries may act as Paying Agent, Registrar or co-registrar. If the Company fails to appoint or maintain a Registrar and Paying Agent, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the Holders' benefit or the Trustee all money the Paying Agent holds for redemption or purchase of the Notes or for the payment of principal of, or premium, if any, or interest on, or Liquidated Damages, if any, with respect to the Notes, and will promptly notify the Trustee of any Default by the Company in providing the Paying Agent with sufficient funds to (i) purchase Notes tendered pursuant to an Offer arising under Section 4.14, (ii) redeem Notes called for redemption, or (iii) make any payment of principal, premium, interest or Liquidated Damages due on the Notes. While any such Default continues, the Trustee may require the Paying Agent to pay all money it holds to the Trustee and to account for any funds disbursed. The Company at any time may require the Paying Agent to pay all money it holds to the Trustee and to account for any funds disbursed. Upon payment over to the Trustee, the Paying Agent (if other than the Company or any of its Subsidiaries) shall have no further liability for the money it delivered to the Trustee. If the Company or any of its Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the Holders' benefit or the Trustee all money it holds as Paying Agent. SECTION 2.05. 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 all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven 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 that sets forth the names and addresses of, and the aggregate principal amount of Notes held by, each Holder, and the Company shall otherwise comply with Section 312(a) of the TIA. 16 SECTION 2.06. TRANSFER AND EXCHANGE. (a) Transfer and Exchange of Definitive Notes. When Definitive Notes are presented by a Holder to the Registrar with a request: (x) to register the transfer of the Definitive Notes; or (y) to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Notes presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing; and (ii) in the case of a Definitive Note that is a Transfer Restricted Note, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Note is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); or (B) if such Transfer Restricted Note is being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if the Company so requests) or (3) pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); (C) if such Transfer Restricted Note is being transferred to an institutional "accredited investor," within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto) and a certification from the applicable transferee (in substantially the form of Exhibit C hereto); (D) if such Transfer Restricted Note is being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion of counsel if the Company so requests), certifications to that effect from such Holder (in substantially the form of Exhibits B and D hereto); or 17 (E) if such Transfer Restricted Note is being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto). (b) Transfer of a Definitive Note for a Beneficial Interest in a Global Note. A Definitive Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (i) if such Definitive Note is a Transfer Restricted Note, a certification from the Holder thereof (in substantially the form of Exhibit B hereto) to the effect that such Definitive Note is being transferred by such Holder to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act; and (ii) whether or not such Definitive Note is a Transfer Restricted Note, written instructions from the Holder thereof directing the Trustee to make, or to direct the Note Custodian to make, an endorsement on the Global Note to reflect an increase in the aggregate principal amount of the Notes represented by the Global Note, the Trustee shall cancel such Definitive Note in accordance with Section 2.11 and cause, or direct the Note Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Note Custodian, the aggregate principal amount of Notes represented by the Global Note to be increased accordingly. If no Global Notes are then outstanding, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02, the Trustee shall authenticate a new Global Note in the appropriate principal amount. (c) Transfer and Exchange of Global Notes. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture and the procedures of the Depository therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (d) Transfer of a Beneficial Interest in a Global Note for a Definitive Note. (i) Any Person having a beneficial interest in a Global Note may upon request exchange such beneficial interest for a Definitive Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depository, from the Depository or its nominee on behalf of any Person having a beneficial interest in a Global Note, and, in the case of a Transfer Restricted Note, 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 beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B hereto); or 18 (B) if such beneficial interest is being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if the Company so requests) or (3) pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B hereto); or (C) if such beneficial interest is being transferred to an institutional "accredited investor," within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto) and a certification from the applicable transferee (in substantially the form of Exhibit C hereto); (D) if such beneficial interest is being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion of counsel if the Company so requests), certifications to that effect from such Holder (in substantially the form of Exhibits B and D hereto); or (E) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto). the Trustee or the Note Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depository and the Note Custodian, cause the aggregate principal amount of Global Notes to be reduced accordingly and, following such reduction, the Company shall execute and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver to the transferee a Definitive Note in the appropriate principal amount. (ii) Definitive Notes issued in exchange for a beneficial interest in a Global Note pursuant to this Section 2.06(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. The Trustee shall deliver in accordance with the standard procedures of the Depository such Definitive Notes to the Persons in whose names such Notes are so registered. (e) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository 19 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) Authentication of Definitive Notes in Absence of Depository. If at any time: (i) the Depository for the Notes notifies the Company that the Depository is unwilling or unable to continue as Depository for the Global Notes and a successor Depository for the Global Notes is not appointed by the Company within 90 days after delivery of such notice; or (ii) The Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Notes under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02, authenticate and deliver, Definitive Notes in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes and registered in such names as the Depository shall instruct the Trustee or the Company in writing. (g) Legends. (i) Except for any Transfer Restricted Note sold or transferred (including any Transfer Restricted Note represented by a Global Note) as described in (ii) below, each Note certificate evidencing Global Notes and Definitive Notes (and all Notes issued in exchange therefor or substitution thereof) shall bear legends in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF 20 THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Note (including any Transfer Restricted Note represented by a Global Note) pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to the Company and the Registrar that no legend is required: (A) in the case of any Transfer Restricted Note that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Note; and (B) in the case of any Transfer Restricted Note represented by a Global Note, such Transfer Restricted Note shall not be required to bear the legend set forth in (i) above if all other interests in such Global Note have been or are concurrently being sold or transferred pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, but such Transfer Restricted Note shall continue to be subject to the provisions of Section 2.06(c); provided, however, that with respect to any request for an exchange of a Transfer Restricted Note that is represented by a Global Note for a Definitive Note that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B hereto). (iii) Notwithstanding the foregoing, upon consummation of the Exchange Offer, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02, the Trustee shall authenticate, Series B Notes in exchange for Series A Notes accepted for exchange in the Exchange Offer, which Series B Notes shall not bear the legend set forth in (i) above, and the Registrar shall rescind any restriction on the transfer of such Notes, in each case unless the Holder of such Series A Notes is either (A) a broker-dealer, (B) a Person participating in the distribution of the Series A Notes or (C) a Person who is an affiliate (as defined in Rule 144A) of the Company. The Company shall identify to the Trustee such Holders of the Notes in a written certification signed by an Officer of the Company and, absent certification from the Company to such effect, the Trustee shall assume that there are no such Holders. 21 (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in Global Notes have been exchanged for Definitive Notes, redeemed, repurchased or cancelled, all Global Notes shall be returned to or retained and cancelled by the Trustee in accordance with Section 2.11. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for Definitive Notes, redeemed, repurchased or cancelled, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note, by the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect such reduction. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Definitive Notes and Global Notes at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 3.07, 4.14, 4.15 and 9.05). (iii) Neither the Company nor the Registrar shall be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Definitive Notes and Global Notes issued upon any registration of transfer or exchange of Definitive Notes or Global Notes in accordance with this Indenture (including any increase in the aggregate principal amount of the Notes represented by the Global Note pursuant to subsection (b) above) shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Definitive Notes or Global Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required to issue Notes and the Registrar shall not be required to register the transfer of or to exchange Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 and ending at the close of business on the day of selection, or to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, premium, if any, accrued and unpaid interest, and Liquidated Damages, if any, on such Notes, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Definitive Notes and Global Notes in accordance with the provisions of Section 2.02. 22 SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the Company's written order signed by two Officers, shall authenticate a replacement Note if the Trustee's requirements are met. If the Trustee or the Company requires it, the Holder must supply an indemnity bond that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for their expenses in replacing a Note. Every replacement Note is an additional Obligation of the Company. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes the Trustee has authenticated except for those it has cancelled, those delivered to it for cancellation, those representing reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. If a Note is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that a bona fide purchaser holds the replaced Note. If the entire principal of, and premium, if any, and accrued interest on, and Liquidated Damages, if any, with respect to any Note is considered paid under Section 4.01, it ceases to be outstanding and interest and Liquidated Damages on it cease to accrue. Subject to Section 2.09, a Note does not cease to be outstanding because the Company or an Affiliate holds the Note. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or an Affiliate shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Trust Officer of the Trustee knows are so owned shall be so disregarded. Notwithstanding the foregoing, Notes that the Company or an Affiliate offers to purchase or acquires pursuant to an Offer, exchange offer, tender offer or otherwise shall not be deemed to be owned by the Company or an Affiliate until legal title to such Notes passes to the Company or such Affiliate, as the case may be. SECTION 2.10. TEMPORARY NOTES. Until Definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the Company's written order signed by two Officers which shall specify the amount of temporary Notes to be authenticated and the date on which the temporary Notes are to be authenticated, shall authenticate Definitive Notes and deliver them in exchange for temporary Notes. Until such exchange, Holders of temporary Notes shall be entitled to the same rights, benefits and privileges as Definitive Notes. 23 SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange, replacement, payment (including all Notes called for redemption and all Notes accepted for payment pursuant to an Offer) or cancellation, and the Trustee shall cancel all such Notes and shall destroy all cancelled Notes (subject to the Exchange Act's record retention requirements) and deliver a certificate of their destruction to the Company unless by written order, signed by two Officers of the Company, the Company shall direct that cancelled Notes be returned to it. The Company may not issue new Notes to replace any Notes that have been cancelled by the Trustee or that have been delivered to the Trustee for cancellation. If the Company or an Affiliate acquires any Notes (other than by redemption or pursuant to an Offer), such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until such Notes are delivered to the Trustee for cancellation. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01. The Company shall fix or cause to be fixed each such special record date and payment date. As early as practicable prior to the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail a notice that states the special record date, the related payment date and the amount of interest to be paid. SECTION 2.13. RECORD DATE. The record date for purposes of determining the identity of Holders of Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in section 316(c) of the TIA. SECTION 2.14. CUSIP NUMBER. A "CUSIP" number shall be printed on the Notes, and the Trustee shall use the CUSIP number in notices of redemption, purchase or exchange as a convenience to Holders, provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 OPTIONAL REDEMPTION AND MANDATORY OFFERS TO PURCHASE SECTION 3.01. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to Section 3.07, it shall furnish to the Trustee, at least 40 days prior to the redemption date and at least 10 days prior to the date that notice of the redemption is to be mailed by the Company to Holders, an Officers' Certificate stating that the Company has elected to redeem Notes pursuant to Section 3.07(a) or 3.07(b), as the case may be, the date notice 24 of redemption is to be mailed to Holders, the redemption date, the aggregate principal amount of Notes to be redeemed, the redemption price for such Notes and the amount of accrued and unpaid interest on and Liquidated Damages, if any, with respect to such Notes as of the redemption date. If the Trustee is not the Registrar, the Company shall, concurrently with delivery of its notice to the Trustee of a redemption, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, and the aggregate principal amount of Notes held by, each Holder. If the Company is required to offer to purchase Notes pursuant to Section 4.14 or 4.15, it shall furnish to the Trustee, at least two Business Days before notice of the Offer is to be mailed to Holders, an Officers' Certificate setting forth that the Offer is being made pursuant to Section 4.14 or 4.15, as the case may be, the Purchase Date, the maximum principal amount of Notes the Company is offering to purchase pursuant to the Offer, the purchase price for such Notes, and the amount of accrued and unpaid interest on and Liquidated Damages, if any, with respect to such Notes as of the Purchase Date. The Company will also provide the Trustee with any additional information that the Trustee reasonably requests in connection with any redemption or Offer. SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED OR PURCHASED. If less than all outstanding Notes are to be redeemed or if less than all Notes tendered pursuant to an Offer are to be accepted for payment, the Trustee shall select the outstanding Notes to be redeemed or accepted for payment pro rata, by lot or by a method that complies with the requirements of any stock exchange on which the Notes are listed and that the Trustee considers fair and appropriate. If the Company elects to mail notice of a redemption to Holders, the Trustee shall at least five Business Days prior to the date notice of redemption is to be mailed, (i) select the Notes to be redeemed from Notes outstanding not previously called for redemption and (ii) notify the Company of the names of each Holder of Notes selected for redemption, the principal amount of Notes held by each such Holder and the principal amount of such Holder's Notes that are to be redeemed. If less than all Notes tendered pursuant to an Offer on the Purchase Date are to be accepted for payment, the Trustee shall select on or promptly after the Purchase Date the Notes to be accepted for payment. The Trustee shall select for redemption or purchase Notes or portions of Notes in principal amounts of $1,000 or integral multiples of $1,000; except that if all of the Notes of a Holder are selected for redemption or purchase, the aggregate principal amount of the Notes held by such Holder, even if not a multiple of $1,000, shall be redeemed or purchased. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption or tendered pursuant to an Offer also apply to portions of Notes called for redemption or tendered pursuant to an Offer. The Trustee shall notify the Company promptly of the Notes or portions of Notes to be called for redemption or selected for purchase. SECTION 3.03. NOTICE OF REDEMPTION. At least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption to each Holder of Notes or portions thereof that are to be redeemed. The notice shall identify the Notes or portions thereof to be redeemed and shall state: (1) the redemption date; (2) the redemption price for the Notes and separately stating the amount of unpaid and accrued interest on, and Liquidated Damages, if any, with respect to, such Notes as of the date of redemption; 25 (3) if any Note is being redeemed in part, the portion of the principal amount of such Notes to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion will be issued; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price for, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; (6) that, unless the Company defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Notes pursuant to which the Notes called for redemption are being redeemed; and (8) the CUSIP number; provided that no representation is made as to the correctness or accuracy of the CUSIP number listed in such notice and printed on the Notes. At the Company's request, the Trustee shall (at the Company's expense) give the notice of redemption in the Company's name at least 30 but not more than 60 days before a redemption; provided, however, that the Company shall deliver to the Trustee, at least 45 days prior to the redemption date and at least 10 days prior to the date that notice of the redemption is to be mailed to Holders, an Officers' Certificate that (i) requests the Trustee to give notice of the redemption to Holders, (ii) sets forth the information to be provided to Holders in the notice of redemption, as set forth in the preceding paragraph, (iii) states that the Company has elected to redeem Notes pursuant to Section 3.07(a) or 3.07(b), as the case may be, and (iv) sets forth the aggregate principal amount of Notes to be redeemed and the amount of accrued and unpaid interest and Liquidated Damages, if any, thereon as of the redemption date. If the Trustee is not the Registrar, the Company shall, concurrently with any such request, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, the address of, and the aggregate principal amount of Notes held by, each Holder. SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed, Notes called for redemption become due and payable on the redemption date at the price set forth in the Note. Upon surrender to the Trustee or Paying Agent, such Notes called for redemption shall be paid at the redemption price (which shall include accrued interest thereon to the redemption date) but installments of interest, the maturity of which is on or prior to the redemption date, shall be payable to Holders of record at the close of business on the relevant record dates. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. Prior to 10 a.m. on any redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of, and accrued interest on, and Liquidated Damages, if any, with respect to all Notes to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company any money that the Company deposited with the Trustee or the Paying Agent 26 in excess of the amounts necessary to pay the redemption price of, and accrued interest on, and Liquidated Damages, if any, with respect to all Notes to be redeemed. If the Company complies with the preceding paragraph, interest on the Notes to be redeemed will cease to accrue on such Notes on the applicable redemption date, whether or not such Notes are presented for payment. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest will be paid on the unpaid principal, premium, if any, interest and Liquidated Damages, if any, from the redemption date until such principal, premium, interest and Liquidated Damages, if any, is paid, at the rate of interest provided in the Notes and Section 4.01. SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the Company's expense a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.07. OPTIONAL REDEMPTION PROVISIONS. (a) Except as provided in Section 3.07(b), the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve-month period beginning on March 1 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of Notes to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the redemption date:
Year Percentage ---- ---------- 2002........................................................... 104.813 2003........................................................... 103.208 2004........................................................... 101.604 2005 and thereafter............................................ 100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. SECTION 3.08. MANDATORY PURCHASE PROVISIONS. (a) Within 30 days after any Change of Control Trigger Date or Asset Sale Trigger Date, the Company shall mail a notice to each Holder at such Holder's registered address stating (i) that an offer ("Offer") is being made pursuant to Section 4.14 or Section 4.15, as the case may be, the length of time the Offer shall remain open and the maximum aggregate principal amount of Notes that will be 27 accepted for payment pursuant to such Offer; (ii) the purchase price for the Notes (as set forth in Section 4.14 or Section 4.15, as the case may be), the amount of accrued and unpaid interest on, and Liquidated Damages, if any, with respect to, such Notes as of the purchase date, and the purchase date (which shall be no earlier than 30 days and no later than 40 days from the date such notice is mailed (the "Purchase Date")); (iii) that any Note not accepted for payment will continue to accrue interest and Liquidated Damages, if any; (iv) that, unless the Company fails to deposit with the Paying Agent on the Purchase Date an amount sufficient to purchase all Notes accepted by the Company for payment, interest shall cease to accrue on such Notes after the Purchase Date; (v) that Holders electing to tender any Note or portion thereof will be required to surrender their Note, with a form entitled "Option of Holder to Elect Purchase" completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Purchase Date, provided that Holders electing to tender only a portion of any Note must tender a principal amount of $1,000 or integral multiples thereof; (vi) that Holders will be entitled to withdraw their election to tender Notes, if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Note purchased; and (vii) that Holders whose Notes are accepted for payment in part will be issued new Notes equal in principal amount to the unpurchased portion of Notes surrendered; provided that only Notes in a principal amount of $1,000 or integral multiples thereof will be accepted for payment in part. (b) On the Purchase Date for any Offer, the Company shall, to the extent required by this Indenture and such Offer, (i) in the case of an Offer resulting from a Change of Control, accept for payment all Notes or portions thereof tendered pursuant to such Offer and, in the case of an Offer resulting from an Asset Sale, accept for payment the maximum principal amount of Notes or portions thereof tendered pursuant to such Offer that can be purchased out of Excess Proceeds from such Asset Sale Trigger Date, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest and Liquidated Damages, if any, on such Notes as of the Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Offer. (c) With respect to any Offer, if less than all of the Notes tendered pursuant to an Offer are to be purchased by the Company, the Trustee shall select on the Purchase Date the Notes or portions thereof to be accepted for payment pursuant to Section 3.02. (d) Promptly after consummation of an Offer, (i) the Paying Agent shall mail (or cause to be transferred by book entry) to each Holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for, plus any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes, (ii) with respect to any tendered Note not accepted for payment in whole or in part, the Trustee shall return such Note to the Holder thereof, and (iii) with respect to any Note accepted for payment in part, the Trustee shall authenticate and mail to each such Holder a new Note equal in principal amount to the unpurchased portion of the tendered Note. (e) The Company shall publicly announce the results of the Offer on or as soon as practicable after the Purchase Date. (f) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable to the Company, including Rule 14e-1, in connection with an Offer required to be made by the Company to repurchase the Notes as a result of a Change of Control Trigger Date or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company shall comply with the applicable securities laws and 28 regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. (g) With respect to any Offer, if the Company deposits prior to 10 a.m. New York City time with the Paying Agent on the Purchase Date an amount in available funds sufficient to purchase all Notes accepted by the Company for payment, interest shall cease to accrue on such Notes after the Purchase Date; provided, however, that if the Company fails to deposit such amount on the Purchase Date, interest shall continue to accrue on such Notes until such deposit is made. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF NOTES. (a) The Company shall pay the principal of, and premium, if any, and accrued and unpaid interest on the Notes on the dates and in the manner provided in the Notes. Holders of Notes must surrender their Notes to the Paying Agent to collect principal payments. Principal of, premium, if any, and accrued and unpaid interest, and Liquidated Damages, if any, shall be considered paid on the date due if the Paying Agent (other than the Company or any of its Subsidiaries), the Global Note Holder or each Holder that has specified an account, holds, as of 10:00 a.m. New York City time, money the Company deposited in immediately available funds designated for and sufficient to pay in cash all principal, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, then due; provided that, to the extent that the Holders have not specified accounts, such amounts shall be considered paid on the date due if the Company mails a check for such amounts on such date. The Paying Agent shall return to the Company, no later than five (5) days following the date of payment, any money (including accrued interest) that exceeds the amount of principal, premium, if any, accrued and unpaid interest, and Liquidated Damages, if any, paid on the Notes. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. If any Liquidated Damages become payable, the Company shall not later than three (3) Business Days prior to the date that any payment of Liquidated Damages is due (i) deliver an Officers' Certificate to the Trustee setting forth the amount of Liquidated Damages payable to Holders and (ii) instruct the Paying Agent to pay such amount of Liquidated Damages to Holders entitled to receive such Liquidated Damages. (b) To the extent lawful, the Company shall pay interest (including Post-Petition Interest) on (i) overdue principal and premium at the then applicable interest rate on the Notes, compounded semiannually and (ii) overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate as set forth in clause (i), compounded semiannually. SECTION 4.02. SEC REPORTS. (a) So long as the Notes are outstanding, whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company and the Guarantors shall file with the SEC (unless the SEC will not accept such filing) the annual reports, quarterly reports and other documents relating to the Company and its Restricted Subsidiaries that the Company would have been required to file with the SEC pursuant to Section 13 or 15(d) if the Company were subject to such reporting requirements. 29 (b) The Company and the Guarantors shall provide to the Holders and file with the Trustee, within 15 days after it files them with the SEC, copies of the annual reports, quarterly reports and other documents (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act and the SEC will not accept such filing as is prescribed in Section 4.02(a), the Company and the Guarantors shall provide to the Holders and file with the Trustee, within 15 days after it would have been required or permitted, as the case may be, to file with the SEC, financial statements, including any notes thereto (and with respect to annual reports, an auditor's report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," both comparable to that which the Company would have been required to include in such annual reports, quarterly reports and other documents relating to the Company and its Restricted Subsidiaries if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act. Subsequent to the qualification of this Indenture under the TIA, the Company also shall comply with the provisions of section 314(a) of the TIA. (c) If the Company is required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause any annual report furnished to its stockholders generally and any quarterly or other financial reports it furnishes to its stockholders generally to be filed with the Trustee, and the Company shall mail such reports to the Holders at their addresses appearing in the register of Notes maintained by the Registrar. If the Company is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause its financial statements referred to in Section 4.02(a), including any notes thereto (and with respect to annual reports, an auditors' report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," to be so mailed to the Holders within 120 days after the end of each of the Company's fiscal years and within 60 days after the end of each of the first three fiscal quarters of each year. The Company shall cause to be disclosed in a statement accompanying any annual report or comparable information as of the date of the most recent financial statements in each such report or comparable information the amount available for payments pursuant to Section 4.05. (d) If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, for so long as any Notes remain outstanding, the Company shall furnish to the Holders, securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 4.03. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company has taken or proposes to take with respect thereto) and that, to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, 30 with respect to the Notes are prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the financial statements delivered pursuant to Section 4.02 shall be accompanied by a written statement of the Company's independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Section 4.01, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15 or 4.17 or of Article 5 or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.04. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that might affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.05. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on account of the Company's or any Restricted Subsidiary's Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company and dividends or distributions payable by a Restricted Subsidiary pro rata to its shareholders; (ii) purchase, redeem or otherwise acquire or retire for value any Equity Interests of the Company or any of its Restricted Subsidiaries, other than any such Equity Interests purchased from the Company or any Restricted Subsidiary for fair market value determined by the Board of Directors in good faith; (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Subordinated Indebtedness, except a payment of interest or principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments") if, at the time of such Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; or (B) immediately after such Restricted Payment and after giving effect thereto on a Pro Forma Basis, the Company shall not be able to issue $1.00 of additional Indebtedness pursuant to Section 4.07(a); or 31 (C) such Restricted Payment, together with the aggregate of all other Restricted Payments made after the date of original issuance of the Notes, without duplication, exceeds the sum of: (1) 50% of the aggregate Consolidated Net Income (including, for this purpose, gains from Asset Sales and, to the extent not included in Consolidated Net Income, any gain from a sale or disposition of a Restricted Investment) of the Company (or, in case such aggregate is a loss, 100% of such loss) for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing immediately after the date of original issuance of the Notes and ended as of the Company's most recently ended fiscal quarter at the time of such Restricted Payment; plus (2) 100% of the aggregate net cash proceeds and the fair market value of any property or securities, as determined by the Board of Directors in good faith, received by the Company from the issue or sale of Equity Interests of the Company or Holdings (to the extent contributed to the Company) subsequent to the date of original issuance of the Notes (other than (x) Equity Interests issued or sold to a Restricted Subsidiary and (y) Disqualified Stock); plus (3) $5.0 million; plus (4) the amount by which the principal amount of and any accrued interest on either Senior Indebtedness of the Company or any Restricted Subsidiary is reduced on the Company's consolidated balance sheet upon the conversion or exchange (other than by a Restricted Subsidiary) subsequent to the date of original issuance of the Notes of any Indebtedness of the Company or any Restricted Subsidiary (not held by the Company or any Restricted Subsidiary) for Equity Interests (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair market value of any other property or securities (as determined by the Board of Directors in good faith), distributed by the Company or any Restricted Subsidiary (to Persons other than the Company or any other Restricted Subsidiary) upon such conversion or exchange); plus (5) if any Non-Restricted Subsidiary is redesignated as a Restricted Subsidiary, the value of the Restricted Payment that would result if such Subsidiary were redesignated as a Non-Restricted Subsidiary at such time, as determined in accordance with Section 4.17(a); provided, however, that for purposes of this clause (5), the value of any redesignated Non-Restricted Subsidiary shall be reduced by the amount that any such redesignation replenishes or increases the amount of Restricted Investments permitted to be made pursuant to clause (ii) of Section 4.05(b). (b) Notwithstanding the foregoing, the following Restricted Payments may be made: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration, such payment would comply with all covenants of this Indenture (including, but not limited to, Section 4.05); (ii) making Restricted Investments at any time, and from time to time, in an aggregate outstanding amount of $10.0 million after the date of original issuance of the Notes (it being understood that if any Restricted Investment after the date of original issuance of the Notes pursuant to this clause (ii) is sold, transferred or otherwise conveyed to any Person other than the Company or a Restricted Subsidiary, the portion of the net cash proceeds or fair market value of securities or properties paid or transferred to the Company and its Restricted Subsidiaries in connection with such sale, transfer or conveyance that relates or corresponds to the repayment or return of the original cost of such a Restricted Investment will replenish or increase the amount of Restricted Investments permitted to be made pursuant to this clause (ii), so that up to $10.0 million of Restricted Investments may be outstanding under this clause (ii) at any given time); provided that, without otherwise limiting this clause (ii), any Restricted Investment in a Subsidiary made pursuant to this clause (ii) is made for fair market value (as determined by the Board of Directors in good faith); (iii) the repurchase, redemption, retirement or acquisition of Equity Interests of the Company or Holdings from the executives, management, employees or consultants of the Company or its Restricted Subsidiaries in an aggregate amount not to exceed $7.5 million; (iv) any loans, advances, distributions or payments from the Company to its Restricted Subsidiaries, or any loans, advances, 32 distributions or payments by a Restricted Subsidiary to the Company or to another Restricted Subsidiary, in each case pursuant to intercompany Indebtedness, intercompany management agreements and other intercompany agreements and obligations; (v) the purchase, redemption, retirement or other acquisition of the Notes pursuant to Sections 3.08, 4.14 or 4.15; (vi) the payment of (a) consulting, financial and investment banking fees under the TJC Agreement, provided, that no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, and the Company's Obligations to pay such fees under the TJC Agreement shall be subordinated expressly to the Company's Obligations in respect of the Notes, and (b) indemnities, expenses and other amounts under the TJC Agreement; (vii) the redemption, repurchase, retirement or other acquisition of any Equity Interests of the Company or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Company) of other Equity Interests of the Company (other than any Disqualified Stock) or the redemption, repurchase, retirement or other acquisition of any Equity Interests of any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to the Company or a Subsidiary of the Company) of other Equity Interests of such Restricted Subsidiary; provided that, in each case, any net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition, and any Net Income resulting therefrom, shall be excluded from Sections 4.05(a)(iv)(C)(1) and (2); (viii) the defeasance, redemption or repurchase of Subordinated Indebtedness of the Company or any Restricted Subsidiary with the net cash proceeds from an issuance of permitted Refinancing Indebtedness or the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Stock) or the defeasance, redemption or repurchase of Subordinated Indebtedness of any Restricted Subsidiary with the net cash proceeds from the substantially concurrent sale (other than to a Subsidiary of the Company) of Equity Interests of such Restricted Subsidiary (other than Disqualified Stock); provided that, in each case, any net cash proceeds that are utilized for any such defeasance, redemption or repurchase, and any Net Income resulting therefrom, shall be excluded from Sections 4.05(a)(iv)(C)(1) and (2); (ix) Restricted Investments made or received in connection with the sale, transfer or disposition of any business, properties or assets of the Company or any Restricted Subsidiary, provided, that if such sale, transfer or disposition constitutes an Asset Sale, the Company complies with Section 4.15; (x) any Restricted Investment constituting securities or instruments of a Person issued in exchange for trade or other claims against such Person in connection with a financial reorganization or restructuring of such person; (xi) payments to Holdings in an amount sufficient to permit Holdings to make required payments on the Holdings Subordinated Notes; (xii) payments in connection with the Transactions as set forth in the Offering Memorandum; (xiii) payments of fees, expenses and indemnities to the directors of Holdings, the Company and its Restricted Subsidiaries; (xiv) payments to Holdings in respect of accounting, legal or other professional or administrative expenses or reimbursements or franchise or similar taxes and governmental charges incurred by it relating to the business, operations or finances of the Company and its Restricted Subsidiaries and in respect of fees and related expenses associated with any registration statements relating to the Notes filed with the SEC and subsequent ongoing public reporting requirements with respect to the Notes; (xv) so long as Holdings files consolidated income tax returns that include the Company, payments to Holdings pursuant to the Tax Sharing Agreement; (xvi) payments, if any, relating to any purchase price adjustment pursuant to the terms of the Acquisition Agreement; (xvii) payments in respect of the Wolff Noncompetition Agreement; and (xviii) shareholder loans in an aggregate principal amount not to exceed $1.0 million. SECTION 4.06. CORPORATE EXISTENCE. Subject to Section 4.15 and Article 5, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of each of its Restricted Subsidiaries and the rights (charter and statutory), 33 licenses and franchises of the Company and each of its Restricted Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Restricted Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. SECTION 4.07. LIMITATION ON INCURRENCE OF INDEBTEDNESS. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, issue any Indebtedness (other than the Indebtedness represented by the Notes) unless the Company's Cash Flow Coverage Ratio for its four full fiscal quarters next preceding the date such additional Indebtedness is issued would have been at least 2.0 to 1 determined on a Pro Forma Basis (including, for this purpose, any other Indebtedness incurred since the end of the applicable four quarter period) as if such additional Indebtedness and any other Indebtedness issued since the end of such four quarter period had been issued at the beginning of such four quarter period. (b) Section 4.07(a) shall not apply to the issuance of: (i) Indebtedness of the Company and/or its Restricted Subsidiaries under the New Credit Agreement in an aggregate principal amount outstanding on such date of issuance not to exceed the greater of (A) $115.0 million and (B) the sum of: (1) 85% of the book value of accounts receivable of the Company and its Restricted Subsidiaries on a consolidated basis and (2) 65% of the book value of the inventories of the Company and its Restricted Subsidiaries; provided that the aggregate principal amount of Indebtedness outstanding under this clause (i) together with the aggregate principal amount of Indebtedness outstanding under clause (iii) below shall not exceed $140.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in Section 4.15); (ii) Indebtedness of the Company and its Restricted Subsidiaries in connection with capital leases, sale and leaseback transactions, purchase money obligations, capital expenditures or similar financing transactions relating to: (A) their properties, assets and rights as of the date of original issuance of the Notes not to exceed $7.5 million in aggregate principal amount at any one time outstanding, or (B) their properties, assets and rights acquired after the date of original issuance of the Notes, provided that the aggregate principal amount of such Indebtedness under this clause (ii)(B) does not exceed 100% of the cost of such properties, assets and rights; (iii) additional Indebtedness of the Company and its Restricted Subsidiaries in an aggregate principal amount up to $25.0 million (all or any portion of which may be issued as additional Indebtedness under the New Credit Agreement) provided that the aggregate principal amount of Indebtedness outstanding under this clause (iii) together with the aggregate principal amount of Indebtedness outstanding under clause (i) above shall not exceed $140.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in Section 4.15); and (iv) Other Permitted Indebtedness. SECTION 4.08. LIMITATION ON SENIOR SUBORDINATED DEBT. (a) The Company shall not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Notes. (b) No Guarantor shall incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in any respect in right of payment to the Note Guarantees. 34 SECTION 4.09. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) Except as otherwise set forth herein, neither the Company nor any of its Restricted Subsidiaries shall make any loan, advance, guarantee or capital contribution to, or for the benefit of, or sell, lease, transfer or dispose of any properties or assets to, or for the benefit of, or purchase or lease any property or assets from, or enter into or amend any contract, agreement or understanding with, or for the benefit of, an Affiliate (each such transaction or series of related transactions that are part of a common plan are referred to as an "Affiliate Transaction"), except in good faith and on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction on an arm's length basis from an unrelated Person. (b) The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any Affiliate Transaction involving aggregate payments or other transfers by the Company and its Restricted Subsidiaries in excess of $5.0 million (including cash and non-cash payments and benefits valued at their fair market value by the Board of Directors of the Company in good faith) unless the Company delivers to the Trustee: (i) a resolution of the Board of Directors of the Company stating that the Board of Directors (including a majority of the disinterested directors, if any) has, in good faith, determined that such Affiliate Transaction complies with the provisions of this Indenture, and (ii) (A) with respect to any Affiliate Transaction involving the incurrence of Indebtedness, a written opinion of a nationally recognized investment banking or accounting firm experienced in the review of similar types of transactions, (B) with respect to any Affiliate Transaction involving the transfer of real property, fixed assets or equipment, either directly or by a transfer of 50% or more of the Capital Stock of a Restricted Subsidiary which holds any such real property, fixed assets or equipment, a written appraisal from a nationally recognized appraiser, experienced in the review of similar types of transactions or (C) with respect to any Affiliate Transaction not otherwise described in (A) and (B) above, a written certification from a nationally recognized professional or firm experienced in evaluating similar types of transactions, in each case, stating that the terms of such transaction are fair to the Company or such Restricted Subsidiary, as the case may be, from a financial point of view. (c) Notwithstanding Sections 4.09(a) and (b), Section 4.09 will not apply to: (i) transactions between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (ii) payments under the TJC Agreement; (iii) any other payments or transactions permitted pursuant to Section 4.05; (iv) (A) payments and transactions under Incentive Arrangements and (B) reasonable compensation paid to officers, employees or consultants of the Company or any Restricted Subsidiary as determined in good faith by the Company's Board of Directors or executives; (v) payments and transactions in connection with the Transactions and the application of the net proceeds therefrom; (vi) the sale of the corporate aircraft owned by the Company on the date of issuance of the Notes to Robert M. Wolff or his designee; or (vii) the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of issuance of the Notes. (d) Notwithstanding Sections 4.09(a) and (b), any Affiliate Transaction between the Company and Affiliated Embroiderers relating to the provision of embroidery services in the ordinary course of business shall not be subject to the provisions of clause (ii) of Section 4.09(b). SECTION 4.10. LIMITATION ON LIENS. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, other than Permitted Liens, upon any property or asset now owned or hereafter acquired by them, or any income or profits therefrom, or assign or convey any right to receive income therefrom unless all payments due under this Indenture and the 35 Notes are secured on an equal and ratable basis with the obligations so secured until such time as such obligations are no longer secured by a Lien. SECTION 4.11. COMPLIANCE WITH LAWS, TAXES. The Company shall, and shall cause each of its Restricted Subsidiaries to, comply with all statutes, laws, ordinances, or government rules and regulations to which it is subject, the non-compliance with which would materially adversely affect the business, prospects, earnings, properties, assets or condition, financial or otherwise, of the Company and its Restricted Subsidiaries taken as a whole. The Company shall, and shall cause each of its Restricted Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except those contested in good faith by appropriate proceedings. SECTION 4.12. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective, any encumbrance or restriction on the ability of any Restricted Subsidiary to: (i) pay dividends or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits, owned by the Company or any Restricted Subsidiary, or pay any Indebtedness owed to, the Company or any Restricted Subsidiary, (ii) make loans or advances to the Company, or (iii) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reason of: (A) applicable law, (B) Indebtedness permitted (1) under Section 4.07(a) and (2) under clauses (i), (ii) and (iii) of Section 4.07(b) and clauses (iv), (vii) and (x) of the definition of "Other Permitted Indebtedness," provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacement or refinancings are no more restrictive with respect to the items set forth in clauses (i), (ii) and (iii) of this Section 4.12(a) than those contained in the New Credit Agreement as in effect on the date of this Indenture, (C) customary provisions restricting subletting or assignment of any lease or license of the Company or any Restricted Subsidiary, (D) customary provisions of any franchise, distribution or similar agreement, (E) any instrument governing Indebtedness or preferred stock or any other encumbrance or restriction of a Person acquired by the Company or any Restricted Subsidiary at the time of such acquisition, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, (F) Indebtedness or other agreements existing on the date of original issuance of the Notes, (G) any Refinancing Indebtedness permitted under Section 4.07, provided that the restrictions contained in the agreements governing such Refinancing Indebtedness are no more restrictive in any material respect with regard to the interests of the holders of the Notes than those contained in the agreements governing the Indebtedness being refinanced, (H) any restrictions, with respect to a Restricted Subsidiary, imposed pursuant to an agreement that has been entered into for the sale or disposition of the stock, business, assets or properties of such Restricted Subsidiary, (I) the terms of purchase money or capital lease obligations, but only to the extent such purchase money obligations restrict or prohibit the transfer of the property so acquired, or (J) any instrument governing the sale of assets of the Company or any Restricted Subsidiary, which encumbrance or restriction applies solely to the assets of the Company or such Restricted subsidiary being sold in such transaction. (b) Nothing contained in Section 4.12 shall prevent the Company from entering into any agreement or instrument providing for the incurrence of Permitted Liens or restricting the sale or other 36 disposition of property or assets of the Company or any of its Restricted Subsidiaries that are subject to Permitted Liens. SECTION 4.13. MAINTENANCE OF OFFICE OR AGENCIES. The Company shall maintain in the Borough of Manhattan, the City of New York an office or an agency (which may be an office of any Agent) where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of any change in the location of such office or agency. If at any time the Company shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any matter relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee located at 14 Wall Street, 8th Floor, Window #2, New York, New York 10005 as one such office or agency of the Company in accordance with Section 2.03. SECTION 4.14. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to an Offer at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. Although the failure of the Company to purchase all Notes tendered in such an Offer shall be a Default, if the Company is unable to purchase all Notes tendered in such an Offer, the Company shall nevertheless purchase the maximum principal amount of Notes that it is able to purchase at that time. (b) Prior to the mailing of the notice referred to in Section 3.08(a), but in any event within 30 days following any Change of Control Trigger Date, the Company shall (i) repay in full and terminate all commitments under Indebtedness under the New Credit Agreement and all other Senior Indebtedness the terms of which require repayment upon a Change of Control or offer to repay in full and terminate all commitments under all Indebtedness under the New Credit Agreement and all other such Senior Indebtedness and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the New Credit Agreement and all such other Senior Indebtedness to permit the repurchase of the Notes. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Notes pursuant to the provisions of this Section 4.14. The Company's failure to comply with this covenant shall constitute an Event of Default described in clause (a)(iii) and not in clause (a)(ii) under Section 6.01. (c) In the event of a Change of Control, the Company shall not offer to purchase or redeem any Subordinated Indebtedness required or entitled by its terms to be redeemed or purchased until the 37 Change of Control Offer for the Notes has been consummated and all Notes tendered pursuant to such Offer have been accepted for payment. SECTION 4.15. LIMITATION ON ASSET SALES. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale (including the sale of any of the Capital Stock of any Restricted Subsidiary) providing for Net Proceeds in excess of $2.5 million unless at least 75% of the Net Proceeds from such Asset Sale are applied (in any manner otherwise permitted by this Indenture) to one or more of the following purposes in such combination as the Company shall elect: (a) an investment in another asset or business in the same line of business as, or a line of business similar to that of, the line of business of the Company and its Restricted Subsidiaries at the time of the Asset Sale or the making of a capital expenditure otherwise permitted by this Indenture; provided that such investment occurs within 365 days of the date of such Asset Sale (the "Asset Sale Disposition Date"), (b) to reimburse the Company or its Restricted Subsidiaries for expenditures made, and costs incurred, to repair, rebuild, replace or restore property subject to loss, damage or taking to the extent that the Net Proceeds consist of insurance proceeds received on account of such loss, damage or taking, (c) to cash collateralize letters of credit; provided any such cash collateral released to the Company or its Restricted Subsidiaries upon the expiration of such letters of credit shall again be deemed to be Net Proceeds received on the date of such release, (d) the permanent purchase, redemption or other prepayment or repayment of outstanding Senior Indebtedness of the Company or Indebtedness of the Company's Restricted Subsidiaries (with a corresponding reduction in any commitment relating thereto) on or prior to the 365th day following the Asset Sale Disposition Date or (e) an Offer expiring on or prior to the Purchase Date. (b) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale unless at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Marketable Securities; provided that, solely for purposes of calculating such 75% of the consideration, the amount of (x) any liabilities (as shown on the Company's or such Restricted Subsidiary's most recent balance sheet or in the notes thereto, excluding contingent liabilities and trade payables) of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes) that are assumed by the transferee of any such assets and (y) any notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 90 days after receipt, converted by the Company or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash and cash equivalents for purposes of this provision. Any Net Proceeds from any Asset Sale that are not applied or invested as provided in the first sentence of this paragraph shall constitute "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $10.0 million (such date being an "Asset Sale Trigger Date"), the Company shall make an Offer to all Holders of Notes to purchase the maximum principal amount of the Notes then outstanding that may be purchased out of Excess Proceeds, at an offer price in cash in an amount equal to 100% of principal amount thereof plus any accrued and unpaid interest and Liquidated Damages, if any, to the Purchase Date in accordance with the procedures set forth in this Indenture. (d) To the extent that any Excess Proceeds remain after completion of an Offer, the Company may use such remaining amount for general corporate purposes. (e) If the aggregate principal amount of Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis, by 38 lot or by a method that complies with the requirements of any stock exchange on which the Notes are listed and that the Trustee considers fair and appropriate. (f) Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. (g) Notwithstanding the foregoing, to the extent that any or all of the Net Proceeds of an Asset Sale is prohibited or delayed by applicable local law from being repatriated to the United States, the portion of such Net Proceeds so affected will not be required to be applied as described in Section 4.15, but may be retained for so long, but only for so long, as the applicable local law prohibits repatriation to the United States. The Company shall promptly take all reasonable actions required by the applicable local law to permit such repatriation, and once such repatriation of any affected Net Proceeds is not prohibited under applicable local law, such repatriation will be immediately effected and such repatriated Net Proceeds will be applied in the manner set forth above as if such Asset Sale have occurred on the date of repatriation. SECTION 4.16 NOTE GUARANTEES. In the event that the Company or any of its Restricted Subsidiaries shall acquire or create another Restricted Subsidiary after the date of this Indenture, then such newly acquired or created Restricted Subsidiary shall execute and deliver to the Trustee a Note Guarantee in accordance with Section 12.01 hereof. SECTION 4.17 DESIGNATION OF RESTRICTED AND NON-RESTRICTED SUBSIDIARIES. (a) From and after the date of original issuance of the Notes, the Company may designate any existing or newly formed or acquired Subsidiary as a Non-Restricted Subsidiary; provided that (i) either (A) the Subsidiary to be so designated has total assets of $1.0 million or less or (B) immediately before and after giving effect to such designation on a Pro Forma Basis: (1) the Company could incur $1.00 of additional Indebtedness pursuant to Section 4.07(a) determined on a Pro Forma Basis; and (2) no Default or Event of Default shall have occurred and be continuing, and (ii) all transactions between the Subsidiary to be so designated and its Affiliates remaining in effect are permitted pursuant to Section 4.09. Any Investment made by the Company or any Restricted Subsidiary that is redesignated from a Restricted Subsidiary to a Non-Restricted Subsidiary shall be considered a Restricted Payment (to the extent not previously included as a Restricted Payment) made on the day such Subsidiary is designated a Non-Restricted Subsidiary in the amount of the greater of (i) the fair market value (as determined by the Board of Directors of the Company in good faith) of the Equity Interests of such Subsidiary held by the Company and its Restricted Subsidiaries on such date, and (ii) the amount of the Investments determined in accordance with GAAP made by the Company and any of its Restricted Subsidiaries in such Subsidiary. (b) A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary. The Company shall not, and shall not permit any Restricted Subsidiary to, take any action or enter into any transaction or series of transactions that would result in a Person becoming a Restricted Subsidiary (whether through an acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise, but not including through the creation of a new Restricted Subsidiary) unless, immediately before and after giving effect to such action, transaction or series of transactions on a Pro Forma Basis, (i) the Company could incur at least $1.00 of additional Indebtedness pursuant to Section 4.07(a) and (ii) no Default or Event of Default shall have occurred and be continuing. 39 (c) The designation of a Subsidiary as a Restricted Subsidiary or the removal of such designation is required to be made by a resolution adopted by a majority of the Board of Directors of the Company stating that the Board of Directors has made such designation in accordance with this Indenture, and the Company is required to deliver to the Trustee such resolution together with an Officers' Certificate certifying that the designation complies with this Indenture. Such designation will be effective as of the date specified in the applicable resolution, which may not be before the date the applicable Officers' Certificate is delivered to the Trustee. ARTICLE 5 SUCCESSORS SECTION 5.01. MERGER OR CONSOLIDATION. (a) The Company shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets to, any Person (any such consolidation, merger or sale being a "Disposition") unless (i) the successor corporation of such Disposition or the corporation to which such Disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the successor corporation of such Disposition or the corporation to which such Disposition shall have been made expressly assumes the Obligations of the Company, pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Indenture and the Notes; (iii) immediately after such Disposition, no Default or Event of Default shall exist; and (iv) the corporation formed by or surviving any such Disposition, or the corporation to which such Disposition shall have been made, shall (A) have Consolidated Net Worth (immediately after the Disposition but prior to giving any pro forma effect to purchase accounting adjustments or Restructuring Charges resulting from the Disposition) equal to or greater than the Consolidated Net Worth of the Company immediately preceding the Disposition, (B) be permitted immediately after the Disposition by the terms of this Indenture to issue at least $1.00 of additional Indebtedness determined on a Pro Forma Basis, and (C) have a Cash Flow Coverage Ratio, for the four fiscal quarters immediately preceding the applicable Disposition, and determined on a Pro Forma Basis, equal to or greater than the actual Cash Flow Coverage Ratio of the Company for such four quarter period. (b) Prior to the consummation of any proposed Disposition, the Company shall deliver to the Trustee an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed Disposition and such supplemental indenture comply with this Indenture. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any Disposition, the Successor Corporation resulting from such Disposition shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such Successor has been named as the Company herein; provided, however, that neither the Company nor any Successor Corporation shall be released from its Obligation to pay the principal of, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes. 40 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. (a) An Event of Default is: (i) a default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; (ii) a default in payment when due of principal or premium, if any, with respect to, the Notes; (iii) the failure of the Company to comply with any of its other agreements or covenants in, or provisions of, this Indenture or the Notes outstanding and the Default continues for the period, if applicable, and after the notice specified in Section 6.01(b); (iv) a default by the Company or any Restricted Subsidiary under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any Restricted Subsidiary (or the payment of which is guaranteed by the Company or any Restricted Subsidiary), whether such Indebtedness or guarantee now exists or shall be created hereafter, if (A) either (1) such default results from the failure to pay principal of or interest on any such Indebtedness at or after the final maturity thereof (after giving effect to any extensions thereof) or (2) as a result of such default the maturity of such Indebtedness has been accelerated prior to its expressed maturity, and (B) the principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal or interest thereon, or because of the acceleration of the maturity thereof, aggregates in excess of $10,000,000; (v) a failure by the Company or any Restricted Subsidiary to pay final judgments (not covered by insurance) aggregating in excess of $5,000,000, which judgments a court of competent jurisdiction does not rescind, annul or stay within 45 days after their entry; (vi) in existence when the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; and 41 (vii) in existence when a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any Significant Subsidiary in an involuntary case, (B) appoints a Custodian of the Company or any Significant Subsidiary or for all or substantially all of the property of the Company or any Significant Subsidiary, or (C) orders the liquidation of the Company or any Significant Subsidiary, and any such order or decree remains unstayed and in effect for 60 days. (viii) except as permitted by this Indenture, any Note Guarantee shall be held in any judicial proceeding unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Note Guarantee. (b) A Default or Event of Default under Section 6.01(a)(iii) (other than an Event of Default arising under Section 5.01, which shall be an Event of Default with the notice but without the passage of time specified in this Section 6.01(b)) is not an Event of Default under this Indenture until the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding notify the Company of the Default, and the Company does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied, and state that the notice is a "Notice of Default." (c) In the case of any Event of Default pursuant to Sections 6.01(a)(i) and (ii) occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company with the intention of avoiding payment of the premium that the Company would have to pay if the Company then had elected to redeem the Notes pursuant to paragraph 5 of the Notes, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law, anything in this Indenture or in the Notes contained to the contrary notwithstanding. (d) The Trustee shall not be charged with knowledge of any Default or Event of Default unless written notice thereof shall have been given to a Trust Officer at the Corporate Trust Office of the Trustee by the Company or any other Person. (e) The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or an Event of Default pursuant to Sections 6.01(a)(i) and (ii)) if the Trustee determines that withholding notice is in their interest. SECTION 6.02. ACCELERATION. (a) Upon the occurrence of an Event of Default (other than an Event of Default under clause Sections 6.01(a)(vi) and (vii)), the Trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all Notes (i) to be due and payable immediately by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice") and, upon receipt by the Company of such Acceleration Notice, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if 42 any, with respect to all Notes shall be due and payable immediately; or (ii) if there are any amounts outstanding under the New Credit Agreement, to be due and payable immediately upon the first to occur of (A) an acceleration under the New Credit Agreement or (B) five business days after receipt by the Company of such Acceleration Notice, but only if such Event of Default is then continuing; provided, however, that if an Event of Default arises under Section 6.01(a)(vi) or (vii), the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to all Notes, shall 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 Notes. (b) The holders of a majority in principal amount of the Notes then outstanding, by notice to the Trustee, may rescind any declaration of acceleration of such Notes and its consequences (if the rescission would not conflict with any judgment or decree) if all existing Events of Default (other than the nonpayment of principal of or interest on such Notes that shall have become due by such declaration) shall have been cured or waived. (c) If there has been a declaration of acceleration of the Notes because an Event of Default under Section 6.01(a)(iv) has occurred and is continuing, such declaration of acceleration shall be automatically annulled if the holders of the Indebtedness described in Section 6.01(a)(iv) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 Business Days thereof and if (i) the annulment of such acceleration would not conflict with any judgment or decree of a court of competent jurisdiction, (ii) all existing Events of Default, except non-payment of principal, premium, interest or Liquidated Damages that shall have become due solely because of the acceleration, have been cured or waived, and (iii) the Company has delivered an Officers' Certificate to the Trustee to the effect of clauses (i) and (ii) above. SECTION 6.03. 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, premium, if any, or any accrued and unpaid interest on, or Liquidated Damages, if any, with respect to the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes 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. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of all Holders of Notes waive any existing Default or Event of Default under this Indenture and its consequences, except a continuing Default in the payment of the principal of, premium, if any, and interest on, and Liquidated Damages, if any, with respect to such Notes, which may only be waived with the consent of each Holder of Notes affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; provided that no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. 43 SECTION 6.05. CONTROL BY MAJORITY. Subject to Section 7.01(e), the Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it by this Indenture. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability. SECTION 6.06. LIMITATION ON SUITS. A Holder may pursue a remedy with respect to this Indenture or the Notes only if (i) the Holder gives to the Trustee notice of a continuing Event of Default; (ii) the Holders of at least 25% in principal amount of the then outstanding Notes make a request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Holders of the Notes may not enforce this Indenture, except as provided herein. SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to a Note, on or after a respective due date expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective date, shall not be impaired or affected without the consent of the Holder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a)(i) or (ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for (i) the principal, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes, (ii) interest on overdue principal and premium, if any, and, to the extent lawful, interest, and (iii) such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel ("Trustee Expenses"). SECTION 6.09. 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 to have the claims of the Trustee (including any claim for Trustee Expenses) and the Holders allowed in any Insolvency or Liquidation Proceeding or other judicial proceeding relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute to Holders any money or other property payable or deliverable on any such claims and each Holder authorizes any Custodian in any such Insolvency or Liquidation Proceeding or other judicial proceeding to make such payments to the Trustee, and if the Trustee shall consent to the 44 making of such payments directly to the Holders any such Custodian is hereby authorized to make such payments directly to the Holders, and to pay to the Trustee any amount due to it hereunder for Trustee Expenses, and any other amounts due the Trustee under Section 7.07. To the extent that the payment of any such Trustee Expenses, and any other amounts due the Trustee under Section 7.07 out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders may be entitled to receive in such proceeding, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any Insolvency or Liquidation Proceeding. SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.07; Second: to Holders for amounts due and unpaid on the Notes for principal, premium and Liquidated Damages, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium and Liquidated Damages, if any, and interest, respectively; and Third: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. 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 a 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 6.07, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default occurs (and has not been cured) the Trustee shall (i) exercise the rights and powers vested in it by this Indenture, and (ii) use the same degree of care and skill in exercising such rights and powers as a prudent person would exercise or use under the circumstances in the conduct of its own affairs. 45 (b) Except during the continuance of an Event of Default: (i) the Trustee's duties shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, 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 the certificates and opinions to determine whether they conform to this Indenture's requirements. (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 Section 7.01(b); (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 it receives pursuant to Section 6.05. (d) Whether or not expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c) and (e) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money it receives except as the Trustee may agree in writing with the Company. Money the Trustee holds in trust need not be segregated from other funds except to the extent required by law. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may rely on any document it believes to be genuine and to have been signed or presented by the proper Person. The Trustee shall not be obligated to investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may reasonably require an Officers' Certificate or an Opinion of Counsel, or both. 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. The Trustee may consult with counsel and advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. 46 (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any Agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take, except to the extent that such action or omission to act constitutes negligence or wilful misconduct on the part of the Trustee. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. However, if the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as Trustee or resign. Any Agent may do the same with like rights. The Trustee is also subject to Sections 7.10 and 7.11. SECTION 7.04. 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 Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or for any money paid to the Company or upon the Company's direction under any provisions hereof, it shall not be responsible for the use or application of any money any Paying Agent other than the Trustee receives, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document furnished or issued in connection with the sale of the Notes or pursuant to this Indenture, other than its certificate of authentication. SECTION 7.05. NOTICE TO HOLDERS OF DEFAULTS AND EVENTS OF DEFAULT. If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note (including any failure to redeem Notes called for redemption or any failure to purchase Notes tendered pursuant to an Offer that are required to be purchased by the terms of this Indenture), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the Holders' interests. SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each May 15 beginning with May 15, 1997, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with section 313(a) of the TIA (but if no event described in section 313(a) of the TIA has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with section 313(b)(2) of the TIA. The Trustee shall also transmit by mail all reports as required by section 313(c) of the TIA. Commencing at the time this Indenture is qualified under the TIA, a copy of each report at the time of its mailing to Holders shall be filed with the SEC and each national securities exchange on which the Notes are listed. The Company shall notify the Trustee when the Notes are listed on any national securities exchange. 47 SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee (in its capacities as Trustee, Paying Agent and/or Registrar) from time to time reasonable compensation for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, advances, fees and expenses it incurs or makes in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company shall indemnify and hold harmless the Trustee (in its capacities as Trustee, Paying Agent and/or Registrar) against any and all losses, liabilities or expenses the Trustee incurs arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth below. 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 shall reasonably cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company's Obligations under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. The Company need not reimburse any expense or indemnify against any loss or liability the Trustee incurs through the Trustee's negligence or bad faith. To secure the Company's payment of its Obligations in this Section, the Trustee shall have a Lien prior to the Notes on all money or property the Trustee holds or collects. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(a)(vii) or (viii) occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute administrative expenses under any Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (iii) a Custodian or public officer takes charge of the Trustee or its property; or 48 (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee, provided that the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace any successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. 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. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, 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 appointment to Holders. The retiring Trustee shall promptly transfer all property it holds as Trustee to the successor Trustee, provided all sums owing to the retiring Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 shall continue for the retiring Trustee's benefit with respect to expenses and liabilities it incurred prior to being replaced. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times (i) be a corporation organized and doing business under the laws of the United States of America, of any state thereof, or the District of Columbia authorized under such laws to exercise corporate trustee power, (ii) be subject to supervision or examination by federal or state authority, (iii) have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition, and (iv) satisfy the requirements of sections 310(a)(1), (2) and (5) of the TIA. The Trustee is subject to section 310(b) of the TIA. SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee is subject to section 311(a) of the TIA, excluding any creditor relationship listed in section 311(b) of the TIA. A Trustee who has resigned or been removed shall be subject to section 311(a) of the TIA to the extent indicated therein. 49 ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. DISCHARGE OF LIABILITY ON NOTES; DEFEASANCE. (a) When (i) the Company delivers to the Trustee all outstanding Notes (other than Notes replaced pursuant to Section 2.07) for cancellation, or (ii) all outstanding Notes have become due and payable and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity all outstanding Notes, including interest, premium and Liquidated Damages thereon (other than Notes replaced pursuant to Section 2.07), and if in either case the Company pays all other sums payable under this Indenture by the Company, then this Indenture shall, subject to Sections 8.01(c) and 8.06, cease to be of further effect. (b) Subject to Sections 8.01(c), 8.02, and 8.06, the Company at any time may terminate (i) all its obligations under the Notes and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16 and 4.17, and the operation of Sections 5.01(a)(iii), 5.01(a)(iv), or 6.01(a)(iii) through (a)(v) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option, payment of the Notes shall not be accelerated because of an Event of Default specified in Sections 6.01(a)(iii) through (a)(v) or because of the Company's failure to comply with Section 5.01(a)(iii) and 5.01(a)(iv). Upon satisfaction of the conditions set forth herein and upon the Company's request (and at the Company's expense), the Trustee shall acknowledge in writing the discharge of those obligations that the Company has terminated. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.04, 7.07, 7.08, 8.04, 8.05 and 8.06, and the Trustee's and the Paying Agent's obligations in Section 8.04 shall survive until the Notes have been paid in full. Thereafter, the Company's obligations in Sections 7.07 and 8.05 and the Company's, the Trustee's and the Paying Agent's obligations in Section 8.04 shall survive. SECTION 8.02. CONDITIONS TO DEFEASANCE. The Company may exercise its legal defeasance option or its covenant defeasance option only if: (1) the Company irrevocably deposits in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations sufficient for the payment in full of the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes then outstanding, as of the maturity date, the redemption date or the Purchase Date, as the case may be; (2) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants or an investment bank expressing its opinion that the payments of principal and interest when due and without reinvestment of the deposited U.S. Government Obligations plus any deposited money without investment will provide cash 50 at such times and in such amounts as will be sufficient to pay when due principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to all the Notes to maturity or redemption, as the case may be; (3) since the Company's irrevocable deposit provided for in Section 8.02(1), 91 days have passed; (4) no Default has occurred and is continuing on the date of such deposit and after giving effect to it; (5) the deposit does not constitute a default under any other agreement binding on the Company; (6) 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, as amended; (7) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) under 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 deposit and defeasance and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (8) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred (and, in the case of legal defeasance only, such opinion of counsel must be based on a ruling of the Internal Revenue Service or other change in applicable federal income tax law); and (9) 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 Notes contemplated by this Article 8 have been satisfied. Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption or purchase of Notes at a future date in accordance with Article 3. SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes. 51 SECTION 8.04. REPAYMENT TO THE COMPANY. After the Notes have been paid in full, the Trustee and the Paying Agent shall promptly turn over to the Company any excess money or securities they hold. The Trustee and the Paying Agent shall pay to the Company upon written request by the Company any money they hold for the payment of principal, premium, interest or Liquidated Damages that remains unclaimed for one year after the date upon which such payment shall have become due; provided, however, that the Company shall have either caused notice of such payment to be mailed to each Holder entitled thereto no less than 30 days prior to such repayment or within such period shall have published such notice in a financial newspaper of widespread circulation published in The City of New York (including, without limitation, The Wall Street Journal). After payment to the Company, Holders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 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 Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the Company has made any payment of principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to any Notes because of the reinstatement of its Obligations, the Company shall be subrogated to the Holders' rights to receive such payment from the money or U.S. Government Obligations the Trustee or Paying Agent holds. ARTICLE 9 AMENDMENTS SECTION 9.01. AMENDMENTS AND SUPPLEMENTS PERMITTED WITHOUT CONSENT OF HOLDERS. Notwithstanding Section 9.02, the Company and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption by a Successor Corporation of the Company's Obligations to the Holders in the event of a Disposition pursuant to Article 5; (d) to comply with SEC's requirements to effect or maintain the qualification of this Indenture under the TIA; (e) to comply with Section 12.01; or (f) to make any change that does not adversely affect any Holder's legal rights under this Indenture. 52 Upon the Company's request, after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any amended or supplemental indenture, the documents described in Section 9.06, the Trustee shall join with the Company in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be contained in any such amended or supplemental indenture, but the Trustee shall not be obligated to enter into an amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.02. AMENDMENTS AND SUPPLEMENTS REQUIRING CONSENT OF HOLDERS. Subject to Section 6.07, the Company and the Trustee may amend or supplement this Indenture or the Notes with the written consent of the Holders of at least a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes). Subject to Sections 6.04 and 6.07, the Holders of a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for the Notes) may also waive any existing Default or Event of Default (other than a payment Default) and its consequences or compliance in a particular instance by the Company with any provision of this Indenture or the Notes. Upon the Company's request and after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any supplemental indenture, evidence of the Holders' consent, and the documents described in Section 9.06, the Trustee shall join with the Company in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section becomes effective, the Company shall mail to each Holder affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Without the consent of each Holder affected, an amendment, supplement or waiver under this Section may not (1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or change the time for payment of interest, including interest as set forth in Section 4.01, or Liquidated Damages on any Note or alter the redemption or purchase provisions with respect thereto or the price at which the Company is required to offer to purchase any Note; (3) reduce the principal of or change the fixed maturity of any Note; (4) make any Note payable in money other than that stated in the Note; (5) make any change in Section 6.04 or 6.07 or in this sentence of this Section 9.02; or (6) waive a default in the payment of the principal of, or premium, if any, or any accrued and unpaid interest on, or Liquidated Damages, if any, with respect to, or redemption or purchase payment with respect to, any Note (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then outstanding Notes and a waiver of the payment default that resulted from such acceleration). Without the consent of the Holders of at least 75% in aggregate principal amount of the Notes then outstanding, no amendment, supplement or waiver under this Section may make any change in the provisions under Article 10 of this Indenture. 53 SECTION 9.03. COMPLIANCE WITH TIA. Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended supplemental indenture that complies with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same Indebtedness as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his or her Note or portion of a Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officer's Certificate certifying that the Holders of the requisite principal amount of Notes have consented to the amendment or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders of Notes entitled to consent to any amendment or waiver. If a record date is fixed, then, notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders of Notes at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders of Notes after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment or waiver becomes effective it shall bind every Holder, unless it is of the type described in any of clauses (1) through (6) of Section 9.02. In such case, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same debt as the consenting Holder's Note. SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may (at the Company's expense) place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE PROTECTED. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 9 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 or supplemental indenture, the Trustee shall be entitled to receive and, subject to Section 7.01, shall be fully protected in relying upon, an Officers' Certificate and Opinion of Counsel as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. The Company may not sign an amendment or supplemental indenture until the Board of Directors approves it. 54 ARTICLE 10 SUBORDINATION SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and each Holder by accepting a Note agrees, that the Indebtedness evidenced by the Note is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full in cash or Marketable Securities of all Senior Indebtedness (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Indebtedness. SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, in an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities: (a) holders of Senior Indebtedness shall be entitled to receive payment in full in cash or Marketable Securities of all Obligations due in respect of such Senior Indebtedness (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness) before Holders shall be entitled to receive any payment with respect to the Notes (except that Holders may receive (i) Permitted Junior Securities and (ii) payments and other distributions made from any defeasance trust created pursuant to Section 8.02 hereof); and (b) until all Obligations with respect to Senior Indebtedness are paid in full in cash or Marketable Securities, any distribution to which Holders would be entitled but for this Article 10 shall be made to holders of Senior Indebtedness (except that Holders may receive (i) Permitted Junior Securities and (ii) payments and other distributions made from any defeasance trust created pursuant to Section 8.02 hereof), as their interests may appear. SECTION 10.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS. (a) The Company may not make any payment or distribution to the Trustee or any Holder in respect of Obligations with respect to the Notes and may not acquire from the Trustee or any Holder any Notes for cash or property (other than (x) Permitted Junior Securities and (y) payments and other distributions made from any defeasance trust created pursuant to Section 8.02 hereof) until all principal and other Obligations with respect to the Senior Indebtedness have been paid in full if: (i) a default in the payment of any principal or other Obligations with respect to Designated Senior Indebtedness occurs and is continuing beyond any applicable grace period in the agreement, indenture or other document governing such Designated Senior Indebtedness; or (ii) a default, other than a payment default, on Designated Senior Indebtedness occurs and is continuing that then permits holders of the Designated Senior Indebtedness to accelerate its maturity and the Trustee receives a notice of the default (a "Payment 55 Blockage Notice") from a Person who may give it pursuant to Section 10.12 hereof. If the Trustee receives any such Payment Blockage Notice, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until at least 360 days shall have elapsed since the date of receipt by the Trustee of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice (it being understood that any subsequent action, or any breach of any covenant for a period commencing after the date of receipt by the Trustee of such Payment Blockage Notice, that, in either case, would give rise to such a default pursuant to any provision under which a default previously existed or was continuing shall constitute a new default for this purpose). (b) The Company may and shall resume payments on and distributions in respect of the Notes and may acquire them upon the earlier of: (i) the date upon which the default is cured or waived, or (ii) in the case of a default referred to in Section 10.03(a)(ii) hereof, 179 days pass after the applicable Payment Blockage Notice is received by the Company if the maturity of such Designated Senior Indebtedness has not been accelerated (or, if such Designated Senior Indebtedness has been accelerated, such Designated Senior Indebtedness has not been paid in full in cash or Marketable Securities) and if this Article otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. SECTION 10.04. ACCELERATION OF NOTES. If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. (a) In the event that the Trustee or any Holder receives any payment of any Obligations with respect to the Notes at a time when the Trustee or such Holder, as applicable, has actual knowledge that such payment is prohibited by Section 10.03 hereof, such payment shall be held by the Trustee or such Holder in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Indebtedness as their interests may appear or their representative (the "Representative") under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Indebtedness remaining unpaid to the extent necessary to pay such Obligations in full in cash or Marketable Securities in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. (b) With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. 56 SECTION 10.06. NOTICE BY COMPANY. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes to violate this Article, but failure to give such notice shall not affect the subordination of the Notes to the Senior Indebtedness as provided in this Article. SECTION 10.07. SUBROGATION. After all Senior Indebtedness is paid in full in cash or Marketable Securities and until the Notes are paid in full, Holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Holders have been applied to the payment of Senior Indebtedness. A distribution made under this Article to holders of Senior Indebtedness that otherwise would have been made to Holders is not, as between the Company and Holders, a payment by the Company on the Notes. SECTION 10.08. RELATIVE RIGHTS. (a) This Article defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture shall: (i) impair, as between the Company and Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms; (ii) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Indebtedness; or (iii) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Indebtedness to receive distributions and payments otherwise payable to Holders. (b) If the Company fails because of this Article to pay principal of or interest on a Note on the due date, the failure is still a Default or Event of Default. SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY. No right of any holder of Senior Indebtedness to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. 57 SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least five Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time to file such claim, the Holders are hereby authorized to file an appropriate claim. SECTION 10.13. AMENDMENTS. The provisions of this Article 10 shall not be amended or modified without the written consent of the holders of all Senior Indebtedness (in accordance with the provisions thereof). ARTICLE 11 MISCELLANEOUS SECTION 11.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of section 318(c) of the TIA, the imposed duties shall control. SECTION 11.02. NOTICES. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person, mailed by registered or certified mail, postage prepaid, return receipt requested or delivered by telecopier or overnight air courier guaranteeing next day delivery to the other's address: If to the Company: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 58 with copies to: Mayer, Brown & Platt 1675 Broadway New York, New York 10019 Attention: James B. Carlson, Esq. Telecopier No.: (212) 262-1910 The Jordan Company 9 West 57th Street 40th Floor New York, New York 10019 Attention: A. Richard Caputo, Jr. Telecopier No.: (212) 755-5263 If to the Trustee: Fleet National Bank 777 Main Street Hartford, Connecticut 06115 Attention: Corporate Trust Administration CTMO0238 Telecopier No.: (860) 986-7920 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; the date receipt is acknowledged, if mailed by registered or certified mail; when answered back, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first-class mail to his or her address shown on the register kept by the Registrar. 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 within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 11.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders may communicate pursuant to section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and any other Person shall have the protection of section 312(c) of the TIA. 59 SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate (which shall include the statements set forth in Section 11.05) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel (which shall include the statements set forth in Section 11.05) stating that, in the opinion of such counsel, all such conditions precedent provided for in this Indenture relating to the proposed action have been complied with. SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to section 314(a)(4) of the TIA) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) 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; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in such Person's opinion, such condition or covenant has been complied with. SECTION 11.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 11.07. LEGAL HOLIDAYS. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 11.08. NO RECOURSE AGAINST OTHERS. No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or this Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such 60 liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. SECTION 11.09. COUNTERPARTS. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 11.10. VARIABLE PROVISIONS. The Company initially appoints the Trustee as Paying Agent, Registrar and authenticating agent. The first compliance certificate to be delivered by the Company to the Trustee pursuant to Section 4.03 shall be for the fiscal year ending on June 30, 1997. SECTION 11.11. GOVERNING LAW. The internal laws of the State of New York shall govern this Indenture and the Notes, without regard to the conflict of laws provisions thereof. SECTION 11.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries, and no other indenture, loan or debt agreement may be used to interpret this Indenture. SECTION 11.13. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 11.14. SEVERABILITY. If any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.15. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. 61 ARTICLE 12 GUARANTEE OF NOTES SECTION 12.01. EXECUTION AND DELIVERY OF NOTE GUARANTEE. (a) After the date of this Indenture, if the Company, or any of its Restricted Subsidiaries, shall acquire or create a Restricted Subsidiary, or redesignate a Non-Restricted Subsidiary to be a Restricted Subsidiary, then such Restricted Subsidiary shall execute a guarantee (a "Note Guarantee"). Such Note Guarantee shall be substantially in the form of Exhibit E and shall be accompanied by a Supplemental Indenture substantially in the form of Exhibit F, along with such other opinions, certificates and documents as required under this Indenture; provided, however, that any Subsidiary that has been properly designated as a Non-Restricted Subsidiary in accordance with Section 4.17 need not execute a Note Guarantee for so long as it continues to constitute a Non-Restricted Subsidiary. (b) Except as provided for under Section 12.02, a Guarantor shall be subject to the provisions of this Indenture from the date of the Supplemental Indenture to which its Note Guarantee relates and until such time as it has been properly designated as a Non-Restricted Subsidiary pursuant to Section 4.17. SECTION 12.02. SUBORDINATION OF NOTE GUARANTEE; GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. (a) The obligations of each Guarantor under its Note Guarantee pursuant to this Article 12 shall be subordinated to the prior payment in full in cash or Marketable Securities of all Senior Indebtedness of each Guarantor (including such Guarantor's guarantee of the New Credit Agreement) to the same extent that the Notes are subordinated to Senior Indebtedness of the Company pursuant to Article 10 of this Indenture. For the purposes of this foregoing sentence, the Trustee and the Holders shall have the right to receive and/or retain payments by any of the Guarantors in respect of any Note Guarantee only at such times as they may receive and/or retain payments in respect of the Notes pursuant to this Indenture, including Article 10 hereof. (b) No Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless (i) subject to the provisions of Section 12.02(c), the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Notes and this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default exists; (iii) such Guarantor, or any Person formed by or surviving any such consolidation or merger, would have Consolidated Net Worth (immediately after giving effect to such transaction), equal to or greater than the Consolidated Net Worth of such Guarantor immediately preceding the transaction; and (iv) the Company would be permitted by virtue of the Company's pro forma Cash Flow Coverage Ratio, immediately after giving effect to such transaction, to incur at least $1.00 of additional Indebtedness pursuant to the Cash Flow Coverage test set forth in Section 4.07; provided, that the requirements of clauses (iii) and (iv) of this paragraph will not apply in the case of a consolidation with or merger with or into the Company or another Guarantor. (c) In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor or any such designation) or the 62 corporation acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) shall be released and relieved of any obligations under its Note Guarantee; provided that the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of this Indenture. (d) In the event that the Company designates a Guarantor to be a Non-Restricted Subsidiary, then such Guarantor shall be released and relieved of any obligations under its Note Guarantee; provided that such designation is conducted in accordance with Section 4.17. [NEXT PAGE IS SIGNATURE PAGE] 63 Dated as of February 27, 1997 GFSI, INC. By: /s/ Illegible ------------------------------- Name: Title: Dated as of February 27, 1997 FLEET NATIONAL BANK, as Trustee By: /s/ Michael M. Hopkins ------------------------------- Name: MICHAEL M. HOPKINS Title: VICE PRESIDENT 64 EXHIBIT A (Face of Note) 9 5/8% Series [A/B] Senior Subordinated Note due 2007 No. $__________ CUSIP No. [361695AA7/361695AB5] GFSI, INC. promises to pay to or registered assigns, the principal sum of Dollars on _________, 2007. Interest Payment Dates: Record Dates: Dated: February __, 1997 GFSI, INC. By:______________________________ Name: Title: Trustee's Certificate of Authentication Dated: February __, 1997 This is one of the Notes referred to in the within-mentioned Indenture: FLEET NATIONAL BANK, as Trustee By:_____________________________ (Authorized Signatory) A-1 [Unless and until it is exchanged in whole or in part for Notes in definitive form, this Senior Subordinated Note may not be transferred except as a whole 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. The Depository Trust Company shall act as the Depository until a successor shall be appointed by the Company and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer 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 may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be 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.]1 THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Additional provisions of this Senior Subordinated Note are set forth on the other side of this Senior Subordinated Note. - -------- 1. This paragraph should be included only if the Senior Subordinated Note is issued in global form. A-2 (Back of Note) 9 5/8% SERIES [A/B] SENIOR SUBORDINATED NOTE DUE 2007 1. Interest. GFSI, Inc. (the "Company") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 9 5/8% per annum from the date this Note is issued until maturity. The Company will pay Liquidated Damages pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest and Liquidated Damages, if any, will be payable semiannually in cash in arrears on March 1 and September 1 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; provided that the first Interest Payment Date shall be September 1, 1997. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate 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. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. Fleet National Bank (the "Trustee") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of February 27, 1997 (the "Indenture"), among the Company and the Trustee. 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 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured senior obligations of the Company limited to $125,000,000 in aggregate principal amount. 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve-month period beginning November 15 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of Notes A-3 to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption:
Year Percentage ---- ---------- 2002............................................................. 104.813% 2003............................................................. 103.208% 2004............................................................. 101.604% 2005 and thereafter.............................................. 100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of such Equity Offering. 6. Mandatory Redemption. Subject to the Company's obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.14 and 4.15 of the Indenture (as described in paragraph 7 below), the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. (a) Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If the Company or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, the Company will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. A-4 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of the Company's obligations to Holders in the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets to such other corporation; comply with the SEC's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by the Company for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; certain judicial findings of unenforceability or invalidity as to any guarantee of the Notes or the disaffirmance or denial by any guarantor of its guarantee of the Notes; and certain events of bankruptcy or insolvency involving the Company or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under A-5 no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with the Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or any Affiliate, and may otherwise deal with the Company or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. 15. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of February 27, 1997 among the Company, and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (the "Registration Rights Agreement"). 16. Successor Substituted. Upon the consolidation or merger by the Company with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not the Company) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such surviving or other corporation had been named as the Company in the Indenture. 17. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 18. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 19. 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 entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. A-6 The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 A-7 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: (Insert assignee's soc. sec. or tax I.D. no.) (Print or type assignee's name, address and zip code) and irrevocably appoint as agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Your Signature:_______________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:_____________________________ A-8 OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by the Company pursuant to Section 4.14 of the Indenture, check the box: | | If you elect to have this Note purchased by the Company pursuant to Section 4.15 of the Indenture, check the box: | | If you elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or 4.15 of the Indenture, state the amount (multiples of $1000 only): $ Date: Your Signature:_______________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:_____________________________ A-9 SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES2 The following exchanges of a part of this Global Note for Definitive Notes have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note authorized officer of Principal Amount of this Principal Amount of following such decrease Trustee or Note Date of Exchange Global Note this Global Note (or increase) Custodian ---------------- ----------- ---------------- ------------- ----------
- -------- 2. This should be included only if the Note is issued in global form. A-10 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES -----------------, ------- Re: 9 5/8% Series [A/B] Senior Subordinated Notes due 2007 of GFSI, Inc. This Certificate relates to $_____ principal amount of Notes held in * ________ book-entry or *_______ definitive form by ________________ (the "Transferor"). The Transferor*: | | has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Note held by the Depository a Note or Notes in definitive, registered form equal to its beneficial interest in such Global Note (or the portion thereof indicated above); or | | has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. In connection with such request and in respect of each such Note, the Transferor does hereby certify that the Transferor is familiar with the Indenture relating to the above captioned Notes and that the transfer of this Note does not require registration under the Securities Act (as defined below) because:* | | Such Note is being acquired for the Transferor's own account without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section 2.06(d)(i)(A) of the Indenture). | | Such Note is being transferred (i) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), in reliance on Rule 144A or (ii) pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and in the case of clause (ii), based on an opinion of counsel if the Company so requests and together with a certification in substantially the form of Exhibit D to the Indenture). | | Such Note is being transferred (i) in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if the Company so requests) or (ii) pursuant to an effective registration statement under the Securities Act. - ---------- *Check applicable box. B-1 | | Such Note is being transferred to an institutional accredited investor within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests together with a certification in substantially the form of Exhibit C to the Indenture). | | Such Note is being transferred in reliance on and in compliance with another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests). [INSERT NAME OF TRANSFEROR] By:_____________________________________ Name: Title: Address: - ---------- *Check applicable box. B-2 EXHIBIT C FORM OF CERTIFICATE TO BE DELIVERED BY INSTITUTIONAL ACCREDITED INVESTORS ---------------, ----- ___________________, as Registrar Attention: Corporate Trust Department Ladies and Gentlemen: We are delivering this letter in connection with an offering of $125,000,000 of 9 5/8% Series [A/B] Senior Subordinated Notes due 2007 (the "Notes") of GFSI, Inc., a Delaware corporation (the "Company"), all as described in the Offering Memorandum (the "Offering Memorandum") relating to such offering. (i) we are an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional Accredited Investor"); (ii) any purchase of Notes will be for our own account or for the account of one or more other Institutional Accredited Investors; (iii) in the event that we purchase any Notes, we will acquire Notes having a minimum purchase price of at least $100,000 for our own account and for each separate account for which we are acting; (iv) we have such sophistication, knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of purchasing Notes; (v) we are not acquiring Notes with a view to any distribution thereof in a transaction that would violate the Securities Act or the securities laws of any state of the United States or any other applicable jurisdiction; provided that the disposition of our property and the property of any accounts for which we are acting as fiduciary shall remain at all times within our control; and (vi) we have received a copy of the Offering Memorandum and acknowledge that we have had access to such financial and other information, and have been afforded the opportunity to ask such questions of representatives of the Company and receive answers thereto, as we deem satisfactory and necessary in connection with our decision to purchase Notes. We understand that the Notes are being offered in a transaction not involving any public offering within the meaning of the Securities Act and that the Notes have not been registered under the Securities Act, and we agree, on our own behalf and on behalf of each account for which we acquire any Notes, that such Notes may be offered, resold, pledge or otherwise transferred only (i) to a person whom we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of Rule 144 under the Securities Act, outside the U.S. in a transaction meeting the requirements of Rule 904 under the Securities Act, or in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), (ii) to the Company or (iii) pursuant to an effective registration statement, and in each case, in accordance with any applicable securities laws of any State of the United C-1 States or any other applicable jurisdiction. We understand that the registrar and the transfer agent will not be required to accept for registration of transfer any Notes, except upon presentation of evidence satisfactory to the Company that the foregoing restrictions on transfer have been complied with. We further understand the Notes purchased by us will be initially in book-entry form, however, to the extent that the definitive physical certificates are subsequently issued in exchange therefor, such certificates will bear a legend reflecting the substance of this paragraph. We acknowledge that you, the Company and others will rely upon our confirmations, acknowledgements and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, [Name of Purchaser] By:____________________________ Name: Title: Address: C-2 EXHIBIT D FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S -----------------, ------ ______________________, as Registrar Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our proposed sale of certain 9 5/8% Series [A/B] Senior Subordinated Notes due 2007 (the "Notes") of GFSI, Inc., a Delaware corporation (the "Company"), we represent that: (i) the offer of the Notes was not made to a person in the United States; (ii) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (iii) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (iv) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. You and the Company are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, _______________________________ [Name of Transferor] By:____________________________ Name: Title: Address: D-1 EXHIBIT E FORM OF NOTE GUARANTEE Each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture dated as of February 27, 1997, by and between GFSI, Inc. and Fleet National Bank, as Trustee (the "Indenture"), the Notes or the obligations of the Company, hereunder or thereunder, that: (a) the principal of and premium, interest and Liquidated Damages, if any, on the Notes will be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal or, premium and interest and Liquidated Damages, if any, on the Notes if any, if lawful, and all other Obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of the time of payment or renewal of any Notes or any of such other obligations, that same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors will be jointly and severally obligated to pay the same immediately. The Obligations of the Guarantors to the Holders of the Notes and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article 12 of the Indenture. The terms of Article 12 of the Indenture are incorporated herein by reference. This is a continuing Note Guarantee and shall remain in full force and effect and shall be binding upon each Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's Obligations under the Notes and the Indenture. The Note Guarantee shall inure to the benefit of the successors and assigns of the Trustee and the Holders of Notes and, in the event of any transfer or assignment of rights by any Holder of Notes or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Note Guarantee of payment and not of collection. In certain circumstances more fully described in the Indenture, any Guarantor may be released from its liability under this Note Guarantee, and any such release will be effective whether or not noted hereon. This Note Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which this Note Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. By:__________________________________ Name: Title: E-1 EXHIBIT F ================================================================================ GFSI, Inc. and the Guarantors named herein ---------------------------------------- SERIES A AND SERIES B 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007 ---------------------------------------- ------------------- FORM OF SUPPLEMENTAL INDENTURE AND AMENDMENT -- SUBSIDIARY GUARANTEE DATED AS OF ________ ___, ____ ------------------- FLEET NATIONAL BANK Trustee ================================================================================ F-1 This SUPPLEMENTAL INDENTURE, dated as of __________ ___, ____, among GFSI, INC., a Delaware corporation (the "Company"), each of the parties identified under the caption "Guarantors" on the signature pages hereto (the "Guarantors") and Fleet National Bank, as Trustee. RECITALS WHEREAS, the Company and the Trustee entered into an Indenture, dated as of February 27, 1997 (the "Indenture"), pursuant to which the Company issued $125,000,000 in principal amount of 9 5/8% Senior Subordinated Notes due 2007 (the "Notes"); and WHEREAS, Section 9.01(e) of the Indenture provides that the Company and the Trustee may amend or supplement the Indenture in order to execute a Note Guarantee to comply with Section 12.01 thereof without the consent of the Holders of the Notes; and WHEREAS, pursuant to Section 12.01 of the Indenture, all Guarantors must execute a Note Guarantee and Supplemental Indenture. WHEREAS, all acts and things prescribed by the Indenture, by law and by the Certificate of Incorporation and the Bylaws of the Company, of the Guarantors and of the Trustee necessary to make this Supplemental Indenture a valid instrument legally binding on the Company, the Guarantors and the Trustee, in accordance with its terms, have been duly done and performed; NOW, THEREFORE, to comply with the provisions of the Indenture and in consideration of the above premises, the Company, the Guarantors and the Trustee covenant and agree for the equal and proportionate benefit of the respective Holders of the Notes as follows: ARTICLE 1 SECTION 1.01. This Supplemental Indenture is supplemental to the Indenture and does and shall be deemed to form a part of, and shall be construed in connection with and as part of, the Indenture for any and all purposes. SECTION 1.02. This Supplemental Indenture shall become effective immediately upon its execution and delivery be each of the Company, the Guarantors and the Trustee. ARTICLE 2 SECTION 2.01. From this date, in accordance with Section 12.01 and by executing this Supplemental Indenture and the accompanying Note Guarantee (a copy of which is attached hereto), the Guarantors whose signatures appear below are subject to the provisions of the Indenture to the extent provided for in Article 12 thereunder. SECTION 2.02. The Note Guarantee constitutes a part of the Note as soon as the certificate of authentication has been executed by the Trustee. ARTICLE 3 SECTION 3.01. Except as specifically modified herein, the Indenture and the Notes are in all respects ratified and confirmed (mutatis mutandis) and shall remain in full force and effect in accordance F-2 with their terms with all capitalized terms used herein without definition having the same respective meanings ascribed to them as in the Indenture. SECTION 3.02. Except as otherwise expressly provided herein, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture. This Supplemental Indenture is executed and accepted by the Trustee subject to all the terms and conditions set forth in the Indenture with the same force and effect as if those terms and conditions were repeated at length herein and made applicable to the Trustee with respect hereto. SECTION 3.03. The laws of the State of New York shall govern this Supplemental Indenture without regard to the conflict of laws provisions thereof. The Trustee, the Company and each Guarantor agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Supplemental Indenture. SECTION 3.04. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of such executed copies together shall represent the same agreement. [NEXT PAGE IS SIGNATURE PAGE] F-3 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above. GFSI, INC. By: _______________________________________ Name: Title: GUARANTORS [_______________________] By: _______________________________________ Name: Title: FLEET NATIONAL BANK, as trustee By: _______________________________________ Name: Title: F-4 EX-4.2 9 GLOBAL SERIES A SENIOR SUBORDINATED NOTE EXHIBIT 4.2 9 5/8% Series A Senior Subordinated Note due 2007 No.1 $124,173,000 CUSIP No. 361695AA7 GFSI, INC. promises to pay to Cede & Co. or registered assigns, the principal sum of one hundred and twenty-four million, one hundred and seventy-three thousand Dollars on March 1, 2007. Interest Payment Dates: March 1 and September 1 Record Dates: February 15 and August 15 Dated: February 27, 1997 GFSI, INC. By: [illegible] -------------------------------------- Name: Title: Trustee's Certificate of Authentication Dated: February 27, 1997 This is one of the Notes referred to in the within-mentioned Indenture: FLEET NATIONAL BANK, as Trustee By: /s/ illegible] ------------------------------ (Authorized Signatory) Unless and until it is exchanged in whole or in part for Notes in definitive form, this Note may not be transferred except as a whole 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. The Depository Trust Company shall act as the Depository until a successor shall be appointed by the Company and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer 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 may, be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be 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 art interest herein. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Additional provisions of this Note are set forth on the other side of this Note. 2 9 5/8% SERIES A SENIOR SUBORDINATED NOTE DUE 2007 1. Interest. GFSI, Inc. (the "Company") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below Interest on the Notes will accrue at 9 5/8% per annum from the date this Note is issued until maturity. The Company will pay Liquidated Damages pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest and Liquidated Damages, if any, will be payable semiannually in cash in arrears on March 1 and September 1 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; provided that the first Interest Payment Date shall be September 1, 1997. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate 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. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. Fleet National Bank (the "Trustee") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of February 27, 1997 (the "Indenture"), between the Company and the Trustee. 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 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured obligations of the Company limited to $125,000,000 in aggregate principal amount. 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve-month period beginning March 1 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of 3 Notes to be redeemed. at the redemption prices (expressed as percentages of the principal amount) set forth below. plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption:
Year Percentage - ---- ---------- 2002 ................................................................104.813% 2003 ................................................................103.208% 2004 ................................................................101.604% 2005 and thereafter .................................................100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of such Equity Offering. 6. Mandatory Redemption. Subject to the Company's obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.14 and 4.15 of the Indenture (as described in paragraph 7 below), the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. (a) Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date", each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If the Company or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, the Company will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this 4 Indenture, the Company shall comply with applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of the Company's obligations to Holders in the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets to such other corporation; comply with the Securities and Exchange Commission's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by the Company for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; certain judicial findings of unenforceability or invalidity as to any guarantee of the Notes or the disaffirmance or denial by any guarantor of its guarantee of the Notes; and certain events of bankruptcy or insolvency involving the Company or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, 5 premium. if any. and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with the Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or any Affiliate, and may otherwise deal with the Company or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the Commission is of the view that such a waiver is against public policy. 15. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of February 27, 1997 among the Company, and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (the "Registration Rights Agreement"). 16. Successor Substituted. Upon the consolidation or merger by the Company with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not the Company) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such surviving or other corporation had been named as the Company in the Indenture. 17. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 18. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 6 19. 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 entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913)752-3336 7 9 5/8% Series A Senior Subordinated Note due 2007 No. 2 $142,000 CUSIP No. 361695AB5 GFSI, INC. promises to pay to Cede & Co. or registered assigns, the principal sum of one hundred and forty-two thousand Dollars on March 1, 2007. Interest Payment Dates: March 1 and September ] Record Dates: February 15 and August 15 Dated: February 27, 1997 GFSI, INC. By: /s/ [illegible] ------------------------------- Name: Title: Trustee's Certificate of Authentication Dated: February 27, 1997 This is one of the Notes referred to in the within-mentioned Indenture: FLEET NATIONAL BANK, as Trustee By: [illegible] ------------------------------ (Authorized Signatory) Unless and until it is exchanged in whole or in part for Notes in definitive form, this Note may not be transferred except as a whole 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. The Depository Trust Company shall act as the Depository until a successor shall be appointed by the Company and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer 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 may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be 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. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (l)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE FOREIGN REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Additional provisions of this Note are set forth on the other side of this Note. 2 9 5/8%: SERIES A SENIOR SUBORDINATED NOTE DUE 2007 1. Interest. GFSI, Inc. (the "Company" ) promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 9 5/8 per annum from the date this Note is issued until maturity. The Company will pay Liquidated Damages pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest and Liquidated Damages, if any, will be payable semiannually in cash in arrears on March 1 and September 1 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; provided that the first Interest Payment Date shall be September 1, 1997. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate 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. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. Fleet National Bank (the "Trustee") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of February 27, 1997 (the "Indenture"), between the Company and the Trustee. 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 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured obligations of the Company limited to $195,000,000 in aggregate principal amount. 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve-month period beginning March 1 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of 3 Notes to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth, below. plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption:
Year Percentage - ---- ---------- 2002 ..................................................................104.813% 2003 ..................................................................103.208% 2004 ..................................................................101.604% 2005 and thereafter ...................................................100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of such Equity Offering. 6. Mandatory Redemption. Subject to the Company's obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.14 and 4.15 of the Indenture (as described in paragraph 7 below), the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respond to the Notes. 7. Mandatory Offers to Purchase Estates. (a) Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof)of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If the Company or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, the Company will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this 4 Indenture, Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of the Company's obligations to Holders in the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets to such other corporation; comply with the Securities and Exchange Commission's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by the Company for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; certain judicial findings of unenforceability or invalidity as to any guarantee of the Notes or the disaffirmance or denial by any guarantor of its guarantee of the Notes; and certain events of bankruptcy or insolvency involving the Company or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, 5 premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with the Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or any Affiliate, and may otherwise deal with the Company or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the Commission is of the view that such a waiver is against public policy. 15. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of February 27, 1997 among the Company, and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (the "Registration Rights Agreement"). 16. Successor Substituted. Upon the consolidation or merger by the Company with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not the Company) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such surviving or other corporation had been named as the Company in the Indenture. 17. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 18. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 6 19. 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 entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (Custodian), and UIGIMIA (= Uniform Gifts to Minors Act). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913)752-3336 7 9 5/8% Series A Senior Note due 2007 No. 3 $685,000 CUSIP No. 361695AB5 GFSI, INC. promises to pay to Pondwave & Co. or registered assigns, the principal sum of six hundred and eighty-five thousand Dollars on March 1, 2007. Interest Payment Dates: March 1 and September 1 Record Dates: February 15 and August 15 Dated: February 27, 1997 GFSI, INC. By: [illegible] ------------------------------------- Name: Title: Trustee's Certificate of Authentication Dated: February 27, 1997 This is one of the Notes referred to in the within-mentioned Indenture: FLEET NATIONAL BANK, as Trustee By: /s/ [illegible] ------------------------------- (Authorized Signatory) THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER SECURITIES APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. 2 9 5/8% SERIES A SENIOR SUBORDINATED NOTE DUE 2007 1. Interest. GFSI, Inc. (the "Company") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 9 5/8% per annum from the date this Note is issued until maturity. The Company will pay Liquidated Damages pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest and Liquidated Damages, if any, will be payable semiannually in cash in arrears on March 1 and September 1 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; provided that the first Interest Payment Date shall be September 1, 1997. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate 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. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment ate even if such Notes are cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public private debts. The Company will pay principal, premium, if any, interest and Liquidated: Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders or, if no such account's specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. Fleet National Bank (the "Trustee") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of February 27, 1997 (the "Indenture"), between the Company and the Trustee. 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 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured obligations of the Company limited to $125,000,000 in aggregate principal amount. 3 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve-month period beginning March 1 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of Notes to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption:
Year Percentage - ---- ---------- 2002.................................................. 104.813% 2003 ................................................. 103.208% 2004 ................................................. 100.604% 2005 and thereafter .................................. 100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount: thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date We closing of such Equity Offering. 6. Mandatory Redemption. Subject to the Company's obligation to make an offer to purchase Notes under certain circumstances pursuance to Sections 4.14 and 4.15 of the Indenture (as described in paragraph below), the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If the Company or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, the Company will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. 4 (c) Holders may tender all or, subject to paragraph 8 below, any portion of their In a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption for an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes Are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consents of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of the Company's obligations to Holders in the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets to such other corporation; comply with the Securities and Exchange Commission's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes' or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 5 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by the Company for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; certain judicial findings of unenforceability or invalidity as to any guarantee of the Notes or the disaffirmance or denial by any guarantor of its guarantee of the Notes; and certain events of bankruptcy or insolvency involving the Company or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if and any accrued accrued and unpaid interest on. and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with the Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, perform services for the Company or any Affiliate, and may otherwise deal with the Company any Affiliate, if it were not Trustee. 14. No Recourse Against Others. No officcer, employee, director, stockholder or Subsidiary of the Company Shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of Any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the Commission is of the view that such a waiver is against public policy. 15. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of February 27, 1997 among the Company, and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (the "Registration Rights Agreement"). 16. Successor Substituted. Upon the consolidation or merger by the Company with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all 6 of its assets to another corporation. in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not the Company) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such surviving or other corporation had been named as the Company in the Indenture. 17. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 18. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 19. 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 entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 7 EX-4.3 10 FORM OF GLOBAL SERIES B SENIOR SUBORDINATED NOTES REGISTERED REGISTERED NUMBER R GFSI, INC. 9 5/8% SERIES B SENIOR SUBORDINATED NOTE DUE 2007 CUSIP promises to pay to or registered assigns, the principal sum of DOLLARS on March 1, 2007. Interest Payment Dates: Record Dates: Dated : April , 1997 GFSI, INC. TRUSTEE'S CERTIFICATE OF AUTHENTICATION By: This is one of the Notes referred to in the within-mentioned Indenture: FLEET NATIONAL BANK, as Trustee By: Authorized Signatory 9 5/8% SERIES B SENIOR SUBORDINATED NOTE DUE 2007 1. INTEREST. GFSI, Inc. (the "Company ") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 9 5/8% per annum from the date this Subordinated Note is issued until maturity. The Company will pay Liquidated Damages pursuant to Section 5 of the Registration Rights Agreement referred to below. Interest and Liquidated Damages, if any, will be payable semiannually in cash in arrears on March 1 and September 1 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date "). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from the date of original issuance; provided that the first Interest Payment Date shall be September 1, 1997. The Company shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate 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. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are cancelled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. PAYING AGENT AND REGISTRAR. Fleet National Bank (the "Trustee ") will initially act as the Paying Agent and Registrar. The Company may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. INDENTURE. The Company issued the Notes under an Indenture, dated as of February 27, 1997 (the "Indenture"), among the Company and the Trustee. 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 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured senior obligations of the Company limited to $125,000,000 in aggregate principal amount. 5. OPTIONAL REDEMPTION. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of the Company prior to March 1, 2002. During the twelve (12) month period beginning November 15 of the years indicated below, the Notes will be redeemable at the option of the Company, in whole or in part, on at least 30 but not more than 60 days' notice to each Holder of Notes to be redeemed, at the redemption prices (expressed as percentages of the principal amount) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption:
Year Percentage ---- ---------- 2002.................................... 104.813% 2003.................................... 103.208% 2004.................................... 101.604% 2005 and thereafter..................... 100.000%
(b) Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but shall not have the obligation to) redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 110.000% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 60% of the aggregate principal amount of Notes originally issued remain outstanding immediately after the occurrence of any such redemption; and provided, further, that any such redemption shall occur within 60 days of the date of the closing of such Equity Offering. 6. MANDATORY REDEMPTION. Subject to the Company's obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.14 and 4.15 of the Indenture (as described in paragraph 7 below), the Company is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. MANDATORY OFFERS TO PURCHASE NOTES. (a) Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date "), each Holder of Notes shall have the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If the Company or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, the Company will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer ") to purchase Notes at a purchase price equal to 100% of the principal amount of the Notes, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer ") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-I, in connection with an offer required to be made by the Company to repurchase the Notes as a result of a Change of Control or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. NOTICE OF REDEMPTION OR PURCHASE. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $1,000 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be treated as its owner for all purposes. 11. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of the Company's obligations to Holders in the event of a merger or consolidation of the Company in which the Company is not the surviving corporation or a sale of substantially all of the Company's assets to such other corporation; comply with the Securities and Exchange Commission's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. DEFAULTS AND REMEDIES. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by the Company for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; certain judicial findings of unenforceability or invalidity as to any guarantee of the Notes or the disaffirmance or denial by any guarantor of its guarantee of the Notes; and certain events of bankruptcy or insolvency involving the Company or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or any Affiliate, and may otherwise deal with the Company or any Affiliate, as if it were not Trustee. 14. NO RECOURSE AGAINST OTHERS. No officer, employee, director, stockholder or Subsidiary of the Company shall have any liability for any Obligations of the Company under the Notes or the Indenture, or for any claim based on, in respect of, or by reason of, such Obligations or the creation of any such Obligation, except, in the case of a Subsidiary, for an express guarantee or an express creation of any Lien by such Subsidiary of the Company's Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the Commission is of the view that such a waiver is against public policy. 15. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED NOTES. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of February 27, 1997 among the Company, and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (the "Registration Rights Agreement "). 16. SUCCESSOR SUBSTITUTED. Upon the consolidation or merger by the Company with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not the Company) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture with the same effect as if such surviving or other corporation had been named as the Company in the Indenture. 17. GOVERNING LAW. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 18. AUTHENTICATION. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 19. 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 entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint_________________________________________________________ ___________________________________________________________________as agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date:_______________________ Your Signature:_______________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ____________________________ OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by the Company pursuant to Section 4.14 of the Indenture, check the box: [ ] If you elect to have this Note purchased by the Company pursuant to Section 4.15 of the Indenture, check the box: [ ] If you elect to have only part of this Note purchased by the Company pursuant to Section 4.14 or 4.15 of the Indenture, state the amount (multiples of $1000 only): $_______________________ Date:_______________________ Your Signature:_______________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ____________________________ EX-4.4 11 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.4 - -------------------------------------------------------------------------------- GFSI, INC. ---------------------------------------- $125,000,000 9 5/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007 ---------------------------------------- ------------------- REGISTRATION RIGHTS AGREEMENT DATED AS OF FEBRUARY 27, 1997 ------------------- Donaldson, Lufkin & Jenrette Jefferies & Company, Inc. Securities Corporation ================================================================================ This Registration Rights Agreement (this "Agreement") is made and entered into as of February 27, 1997 by and among GFSI Inc., a Delaware corporation (the "Company"), and Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. (each a "Purchaser" and, collectively, the "Purchasers"), each of which has agreed to purchase the Company's 9 5/8% Series A Senior Subordinated Notes due 2007 (the "Series A Notes") pursuant to the Purchase Agreement (as defined). This Agreement is made pursuant to the Purchase Agreement, dated February 20, 1997 (the "Purchase Agreement"), by and between the Company and the Purchasers. In order to induce the Purchasers to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Purchasers set forth in the Purchase Agreement. The parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Business Day: Any day except a Saturday, Sunday or other day in the City of New York, or in the city of the corporate trust office of the Trustee, on which banks are authorized to close. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Broker-Dealer Transfer Restricted Notes: Series B Notes that are acquired by a Broker-Dealer in the Exchange Offer in exchange for Series A Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its affiliates). Closing Date: The date hereof. Commission: The Securities and Exchange Commission. Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. Damages Payment Date: Each Interest Payment Date. Effectiveness Target Date: As defined in Section 5. Exchange Act: The Securities Exchange Act of 1934, as amended. 1 Exchange Offer: The registration by the Company under the Act of the Series B Notes pursuant to the Exchange Offer Registration Statement pursuant to which the Company shall offer the Holders of all outstanding Transfer Restricted Notes the opportunity to exchange all such outstanding Transfer Restricted Notes for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Notes tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchasers propose to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act, and to certain "accredited investors," as such term is defined in Rule 501(a)(1), (2), (3), (5) and (7) of Regulation D under the Act. Holders: As defined in Section 2 hereof. Indemnified Holder: As defined in Section 8(a) hereof. Indenture: The Indenture, dated the Closing Date, between the Company and Fleet National Bank, as trustee (the "Trustee"), pursuant to which the Notes are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. Interest Payment Date: As defined in the Indenture and the Notes. NASD: National Association of Securities Dealers, Inc. Notes: The Series A Notes and the Series B Notes. Person: An individual, partnership, corporation, trust, unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Record Holder: With respect to any Damages Payment Date, each Person who is a Holder of Notes on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of the Company relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Notes pursuant to the Shelf Registration Statement, in each case, (i) which is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. 2 Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer Transfer Restricted Notes. Series B Notes: The Company's 9 5/8% Series B Senior Subordinated Notes due 2007 to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) upon the request of any Holder of Series A Notes covered by a Shelf Registration Statement, in exchange for such Series A Notes. Shelf Registration Statement: As defined in Section 4 hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Notes: Each Note, until the earliest to occur of (a) the date on which such Note is exchanged in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Note is distributed to the public pursuant to Rule 144 under the Act. Underwritten Registration or Underwritten Offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Notes (each, a "Holder") whenever such Person owns Transfer Restricted Notes. 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 90 days after the Closing Date, the Exchange Offer Registration Statement, (ii) use their best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 150 days after the Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause such Exchange Offer Registration Statement to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Notes and to permit sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers as contemplated by Section 3(c) below. (b) The Company shall use its best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open, for a period of not less than the 3 minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Notes shall be included in the Exchange Offer Registration Statement. The Company shall use its best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter. (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Restricted Broker-Dealer who holds Series A Notes that are Transfer Restricted Notes and that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities, may exchange such Series A Notes (other than Transfer Restricted Notes acquired directly from the Company) pursuant to the Exchange Offer; however, such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of each Series B Note received by such Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. The Company shall use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) below to the extent necessary to ensure that it is available for sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers, and to ensure that such Registration Statement conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 120 days from the date on which the Exchange Offer is Consummated. The Company shall promptly provide sufficient copies of the latest version of such Prospectus to such Restricted Broker-Dealers upon such Restricted Broker-Dealers' reasonable request, and in no event later than two Business Days after such request, at any time during such 120-day period in order to facilitate such sales. 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Company is not required to file an Exchange Offer Registration Statement with respect to the Series B Notes because the Exchange Offer is not permitted by applicable law (after the procedures set forth in Section 6(a)(i) below have been complied with) or (ii) if any Holder of Transfer Restricted Notes shall notify the Company in writing within 20 Business Days following the Consummation of the Exchange Offer that (A) such Holder is prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from the Company or one of its affiliates, then the Company shall (x) cause to be filed on or prior to the 4 earliest of (1) 60 days after the date on which the Company is notified by the Commission or otherwise determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above and (2) 60 days after the date on which the Company receives the notice specified in clause (ii) above, a shelf registration statement pursuant to Rule 415 under the Act, (which may be an amendment to the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement")), relating to all Transfer Restricted Notes the Holders of which shall have provided the information required pursuant to Section 4(b) hereof, and (y) use their best efforts to cause such Shelf Registration Statement to become effective at the earliest possible time, but in no event later than 120 days after the date on which the Company becomes obligated to file such Shelf Registration Statement. If, after the Company has filed an Exchange Offer Registration Statement which satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer shall not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above. Such an event shall have no effect on the requirements of clause (y) above, or on the Effectiveness Target Date as defined in Section 5 below. The Company shall use its reasonable best efforts to keep the Shelf Registration Statement discussed in this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Notes by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least three years (as extended pursuant to Section 6(c)(i)) following the date on which such Shelf Registration Statement first becomes effective under the Act or such shorter period that will terminate when all Transfer Restricted Notes covered by the Shelf Registration Statement have been sold pursuant thereto. (b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Notes may include any of its Transfer Restricted Notes in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, such information specified in item 507 of Regulation S-K under the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Notes shall be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has not been Consummated within 30 Business Days after the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) subject to the provisions of Section 6(c)(i) below, any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately (but in any event within five Business Days thereafter) by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective within such five Business Day period, other than, in the case of clause (iv) above, for such period in which such Registration Statement shall cease to be effective as a result of post- 5 effective amendments to incorporate annual filings which the Company is required to file with the Commission or post-effective amendments not otherwise covered by Section 6(c)(i) hereof, provided that the Company in good faith attempts to cause such Registration Statement to be declared effective as soon as reasonably practicable (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company hereby agrees to pay to each Holder of Transfer Restricted Notes, for the first 90-day period immediately following the occurrence of such Registration Default, liquidated damages in an amount equal to $.05 per week per $1,000 principal amount of Notes constituting Transfer Restricted Notes held by such Holder for so long as the Registration Default continues. The amount of liquidated damages payable to each Holder shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Notes held by such Holder for each subsequent 90-day period up to a maximum of $.40 per week per $1,000 in principal amount of Notes constituting Transfer Restricted Notes held by such Holder; provided, however, that (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the liquidated damages payable with respect to such Transfer Restricted Notes as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid by the Company to the Global Note Holder by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified on each Damages Payment Date. All obligations of the Company set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Note at the time such security ceases to be a Transfer Restricted Note shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Company shall comply with all applicable provisions of Section 6(c) below, shall use their best efforts to effect such exchange and to permit the sale of Broker-Dealer Transfer Restricted Notes being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: (i) If, following the date hereof there has been published a change in Commission policy with respect to exchange offers such as the Exchange Offer, such that in the reasonable opinion of counsel to the Company there is a substantial question as to whether the Exchange Offer is permitted by applicable federal law or Commission policy, the Company hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing the Company to Consummate an Exchange Offer for such Series A Notes. The Company hereby agrees to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. In connection with the foregoing, the Company hereby agrees, however, to take all such other actions as are requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the 6 Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff of such submission. (ii) As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Notes shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired by such Holder directly from the Company or an affiliate thereof. (iii) To the extent required by the Commission, prior to effectiveness of the Exchange Offer Registration Statement, the Company shall provide a supplemental letter to the Commission (A) stating that the Company is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that the Company has not entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above. (b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Company shall comply with all the provisions of Section 6(c) below and shall use its best efforts to effect such registration to permit the sale of the Transfer Restricted Notes being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Notes in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. 7 (c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Notes (including, without limitation, any Exchange Offer Registration Statement and the related Prospectus, to the extent that the same are required to be available to permit sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers), the Company shall: (i) use its reasonable efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Notes during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, (1) in the case of clause (A), correcting any such misstatement or omission, and (2) in the case of either clause (A) or (B), use its reasonable efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter. Notwithstanding the foregoing, if (A) the Board of Directors of the Company determines in good faith that it is in the best interests of the Company not to disclose the existence of or facts surrounding any proposed or pending material corporate transaction involving the Company or its subsidiaries and (B) the Company notifies the Holders within two Business Days after the Board of Directors makes such determination, the Company may allow the Shelf Registration Statement to fail to be effective and usable as a result of such nondisclosure for up to 60 days during the three-year period of effectiveness required by Section 4 hereof, but in no event for any period in excess of 30 consecutive days; provided, however, that the three-year period referred to in Section 4 hereof during which the Shelf Registration Statement is required to be effective and usable shall be extended by the number of days during which such registration statement was not effective or usable pursuant to the foregoing provisions. (ii) prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, or such shorter period as will terminate when all Transfer Restricted Notes covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424 and 430A, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise the underwriter(s), if any, and selling Holders promptly upon becoming aware and, if requested by such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Notes for offering or sale in any jurisdiction, or the 8 initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Notes under state securities or Blue Sky laws, the Company shall use its reasonable efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (iv) in the case of a Shelf Registration Statement, use reasonable efforts to furnish to the Purchaser, each selling Holder named in any Registration Statement or Prospectus and each of the underwriter(s) in connection with such sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement) prior to filing, reasonably respond to comments received from such persons, and make the Company's representatives available for discussion of such documents and other customary due diligence matters. (v) subject to execution of confidentiality agreements that are reasonably satisfactory to the Company as to the disclosure of any non-public information obtained pursuant to this Section 6(c)(v) and upon reasonable notice and at reasonable times, make available for inspection at the Company's offices located in Lenexa, Kansas by the selling Holders, any managing underwriter participating in any disposition pursuant to such Registration Statement and any attorney or accountant retained by such selling Holders or any of such underwriter(s), all financial and other records, pertinent corporate documents and properties of the Company and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (vi) in the case of a Shelf Registration Statement, if requested by any selling Holders or the underwriter(s) in connection with such sale, if any, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Notes, information with respect to the principal amount of Transfer Restricted Notes being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Notes to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters reasonably requested to be included in such Prospectus supplement or post-effective amendment; (vii) in the case of a Shelf Registration Statement, furnish to each selling Holder and each of the underwriter(s) in connection with such sale, if any, without charge, at least one copy 9 of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (viii) deliver to each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Notes covered by the Prospectus or any amendment or supplement thereto; (ix) enter into such customary agreements and make such customary representations and warranties and take all such other customary actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Notes pursuant to any Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Transfer Restricted Notes or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, the Company shall: (A) furnish (or in the case of paragraphs (2) and (3), use its best efforts to furnish) to each selling Holder and each underwriter, if any, upon the effectiveness of the Shelf Registration Statement and to each Restricted Broker-Dealer upon Consummation of the Exchange Offer: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed on behalf of the Company by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company confirming, as of the date thereof, the matters set forth in paragraphs (a) through (c) of Section 9 of the Purchase Agreement and such other similar matters as the Holders and/or underwriter(s) may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company, covering matters customarily covered in opinions requested in Underwritten Offerings and dated the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with Underwritten Offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement, without exception; 10 (B) set forth in full or incorporate by reference in the underwriting agreement, if any, in connection with any sale or resale pursuant to any Shelf Registration Statement the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by the selling Holders or the underwriter(s), if any, to evidence compliance with clause (A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company pursuant to this clause (x). The above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder, and if at any time the representations and warranties of the Company contemplated in (A)(1) above cease to be true and correct, the Company shall so advise the underwriter(s), if any, and selling Holders promptly and if requested by such Persons, shall confirm such advice in writing; (x) prior to any public offering of Transfer Restricted Notes, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Notes under the securities or Blue Sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Notes covered by the applicable Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xi) issue, upon the request of any Holder of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes, having an aggregate principal amount equal to the aggregate principal amount of Series A Notes surrendered to the Company by such Holder in exchange therefor or being sold by such Holder; such Series B Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Notes, as the case may be; in return, the Series A Notes held by such Holder shall be surrendered to the Company for cancellation; (xii) in connection with any sale of Transfer Restricted Notes that will result in such securities no longer being Transfer Restricted Notes, cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Notes to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Notes in such denominations and such names as the Holders or the underwriter(s), if any, may request at least two Business Days prior to such sale of Transfer Restricted Notes; (xiii) use its reasonable efforts to cause the disposition of the Transfer Restricted Notes covered by the Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Notes, subject to the proviso contained in clause (xi) above; 11 (xiv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Notes, the Prospectus will not contain 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; (xv) provide a CUSIP number for all Transfer Restricted Notes not later than the effective date of a Registration Statement covering such Transfer Restricted Notes and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Notes that are in a form eligible for deposit with the Depository Trust Company; (xvi) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its reasonable efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Notes to consummate the disposition of such Transfer Restricted Notes; (xvii) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xviii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders of Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xix) provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Note that, upon receipt of the notice referred to in Section 6(c)(i) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Notes pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (the "Advice"). If so directed by the Company, each Holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Notes that was current at the 12 time of receipt of either such notice. In the event the Company shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(i) or Section 6(c)(iii)(D) hereof to and including the date when each selling Holder covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made with the NASD and counsel fees in connection therewith); (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all printing expenses of printing (including printing certificates for the Series B Notes and printing of Prospectuses); (iv) all fees and disbursements of counsel for the Company and, in accordance with Section 7(b) below, the Holders of Transfer Restricted Notes; and (v) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. (b) In connection with any Shelf Registration Statement required by this Agreement, the Company will reimburse the Holders of Transfer Restricted Notes the distribution of which is being registered pursuant to the Shelf Registration Statement for the reasonable fees and disbursements of not more than one counsel chosen by the Holders of a majority of the principal amount of such Transfer Restricted Notes, which counsel shall be satisfactory to the Company in its sole discretion. 8. INDEMNIFICATION (a) The Company agrees to indemnify and hold harmless (i) each Holder and (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any Holder (any of the persons referred to in this clause (ii) being hereinafter referred to as a "con trolling person") and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or judgments (i) are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any of the Holders furnished in writing to the Company by or on behalf of any of the Holders expressly for use therein, (ii) with respect to the preliminary prospectus, result from the fact that the Holder sold Transfer Restricted Notes to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the prospectus, as amended or supplemented, if the 13 Company shall have previously furnished copies thereof to the Holder in accordance with this Agreement and the prospectus, as amended or supplemented, would have corrected such untrue statement or omission or (iii) are a result of the use by the Indemnified Holder of any prospectus, when, upon receipt of a notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof contemplated by the last paragraph of Section 6 hereof, the Indemnified Holder was not permitted to do so. In case any action or proceeding shall be brought against any of the Indemnified Holders with respect to which indemnity may be sought against the Company, such Indemnified Holder (or the Indemnified Holder controlled by such controlling person) shall promptly notify the Company in writing (provided, that the failure to give such notice shall not relieve the Company of its obligations pursuant to this Agreement). Such Indemnified Holder shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of the Indemnified Holder or such controlling person unless (i) the employment of such counsel shall have been specifically authorized in writing by the Company, (ii) the Company shall have failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnified Holder or such controlling person and the Company and the Indemnified Holder or such controlling person shall have been advised in writing by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company (in which case the Company shall not have the right to assume the defense of such action on behalf of the Indemnified Holder or such controlling person), it being understood, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for such Indemnified Holders, which firm shall be designated by the Holders and be reasonably satisfactory to the Company. The Company shall not be liable for any settlement of any such action or proceeding effected without the Company's prior written consent, which consent shall not be withheld unreasonably, but if settled with the Company's written consent, and the Company agrees to indemnify and hold harmless any Indemnified Holder from and against any loss or liability by reason of such settlement. The Company shall not, without the prior written consent of each Indemnified Holder effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Holder is or could have been a party and indemnity could have been sought hereunder by such Indemnified Holder, unless such settlement includes an unconditional release of such Indemnified Holder from all liability on claims that are the subject matter of such proceeding. (b) Each Holder of Transfer Restricted Notes agrees, severally and not jointly, to indemnify and hold harmless (i) the Company, (ii) any person controlling the Company (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) and (iii) the directors, officers, partners, employees, representatives, and agents of the Company to the same extent as the foregoing indemnity from the Company to each of the Indemnified Holders, but only with respect to information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person in respect of which indemnity may be sought against a Holder of Transfer Restricted Notes, such Holder shall have the rights and duties given the Company, and the Company or its directors or officers or such controlling person shall have the rights and duties given to each Holder by the preceding paragraph. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. 14 (c) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Holders on the other hand from their sale of Transfer Restricted Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company and each Holder of Transfer Restricted Notes agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, none of the Holders (and their related Indemnified Holders) shall be required to contribute, in the aggregate, any amount in excess of the amount by which the dollar amount of proceeds received by any such Holder upon the sale of Transfer Restricted Notes exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to con tribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Series A Notes held by each of the Holders hereunder and not joint. 9. RULE 144A The Company hereby agrees with each Holder, for so long as any Transfer Restricted Notes remain outstanding and during any period in which the Company is not subject to Section 13 or 15(d) of the Securities Exchange Act, to make available, upon request of any Holder of Transfer Restricted Notes, to any Holder or beneficial owner of Transfer Restricted Notes in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Notes designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Notes pursuant to Rule 144A. 15 10. UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Notes on the basis provided in customary underwriting arrangements entered into in connection therewith and (b) completes and executes all reasonable questionnaires, powers of attorney, lock-up letters and other documents required under the terms of such underwriting arrangements. 11. SELECTION OF UNDERWRITERS Subject to the Company's consent, for any Underwritten Offering, the investment banker or investment bankers and manager or managers for any Underwritten Offering that will administer such offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Notes included in such offering. Such investment bankers and managers are referred to herein as the "underwriters." 12. MISCELLANEOUS (a) Remedies. Each Holder, in addition to being entitled to exercise all rights provided herein, in the Indenture, the Purchase Agreement or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The Company has not previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. (c) Adjustments Affecting the Notes. The Company will not take any action, or voluntarily permit any change to occur, with respect to the Notes that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. (d) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Notes. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Notes subject to such Exchange Offer. 16 (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company: GFSI, Inc. 9700 Commerce Parkway Lenexa, KS 66219 Telecopier No.: (913) 752-3346 Attention: director of finance With copies to: The Jordan Company 9 West 57th Street 40th Floor New York, NY 10019 Telecopier No.: (212) 755-5263 Attention: Richard Caputo, Jr. Mayer, Brown & Platt 1675 Broadway New York, NY 10019 Telecopier No.: (212) 262-1910 Attention: James B. Carlson, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Notes; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Notes directly from such Holder at a time when such Holder could not transfer such Transfer Restricted Notes pursuant to a Shelf Registration Statement. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 17 (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement together with the other Operative Documents (as defined in the Purchase Agreement) is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Transfer Restricted Notes. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter [NEXT PAGE IS SIGNATURE PAGE] 18 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. GFSI, INC. By: /s/ Illegible --------------------------------------- Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------------- Name: Title: JEFFERIES & COMPANY, INC. By: ------------------------------- Name: Title: EX-4.5 12 SUBSCRIPTION AND STOCKHOLDERS AGREEMENT SUBSCRIPTION AND STOCKHOLDERS AGREEMENT THIS SUBSCRIPTION AND STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of the 27th day of February, 1997, is made and entered into by and among GFSI HOLDINGS, INC., a Delaware corporation whose address is 9 West 57th Street, Suite 4000, New York, New York 10019 (the "Company"), and the Persons whose names are set forth at the end of this Agreement. In order to capitalize the Company and to set forth certain rights and restrictions relating to the ownership of its securities, the parties hereto desire to enter into this Agreement. In consideration of the agreements, representations, warranties and indemnities hereinafter set forth, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS Unless otherwise defined herein, capitalized terms used herein shall have the meaning given such terms below: 1.1 "Acquisition" means GFSI, Inc., a Delaware corporation which shall be, immediately after consummation of the transactions contemplated by the Acquisition Agreement, a wholly-owned subsidiary of the Company, and its successors. 1.2 "Acquisition Agreement" means the Agreement for Purchase and Sale of Stock, dated January 24, 1997 (including all schedules and exhibits thereto) by and among the Company, Acquisition and all the shareholders of Winning Ways. 1.3 "Affiliate" means with respect to any Person (a) any Person which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person, (b) any member of such Person's family or any individual who is a director or an executive officer (i) of such Person, (ii) of any subsidiary of such Person or (iii) of any Person described in clause (a) above, or with respect to any Stockholder, the Company; provided, however, that any Affiliate of a corporation shall be deemed an Affiliate of such corporation's stockholders. For purposes of this definition, "control" of a Person shall mean the power, direct or indirect, (x) to vote or direct the voting of more than 50% of the outstanding shares of voting stock of such Person or (y) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. 1.4 "Bona Fide Offer" means a written offer from a Person (the "Offeror") to purchase some or all of the shares of Common Stock owned by a Stockholder. If the Offeror is a corporation, partnership, trust or other entity, all Persons having more than a 10 percent direct or beneficial ownership interest in such entity shall be identified in the offer. Notwithstanding anything to the contrary contained in the Bona Fide Offer, in connection with any proposed Transfer pursuant to a Bona Fide Offer, the Stockholder shall require the Offeror (i) to consummate the proposed Transfer no earlier than 60, nor later than 180, days following the date of the Bona Fide Offer and (ii) to furnish reasonable evidence of the Offeror's financial ability to consummate the terms of the proposed transaction. 1.5 "By-Laws" means the Company's By-Laws in the form of Exhibit A attached hereto. 1.6 "Cause" means (a) fraud, embezzlement or dishonesty committed by any Manager or a Manager's conviction of any felony or crime or other criminal offense involving monies or other property; (b) a Manager's engagement, directly or indirectly, in any business enterprise that conducts business with the Company or any Affiliate of the Company without the written consent of the Company's Board of Directors; (c) a Manager's violation of any non-competition agreement with the Company or with any Affiliate of the Company; (d) a Manager's breach of any of his or her fiduciary duties of loyalty or the making of a willful misrepresentation or omission, which breach, misrepresentation or omission reasonably might be expected to adversely affect the business, properties, assets or condition (financial or other) of the Company or any Affiliate of the Company; (e) a Manager's habitual intoxication which impairs his or her ability to perform his or her duties to the Company or any Affiliate of the Company; (f) the continued failure by a Manager to substantially perform his or her duties to the Company or any Affiliate of the Company (other than any such failure resulting from the Manager's incapacity due to illness or accident) provided that the Manager shall have received 30 days' written notice from the Company which specifically identifies the manner in which the Company believes the Manager has not substantially performed his or her duties and the Manager shall not have corrected such failure during such 30-day period; or (g) a Manager's repeated insubordination. 1.7 "Certificate of Incorporation" means the Company's Amended and Restated Certificate of Incorporation, as amended to date, in the form of Exhibit B attached hereto. 1.8 "Closing" means the Company's purchase of shares of Common Stock held by a Manager or a Manager Trust pursuant to (i) the Company's exercise of its "call" rights or (ii) a Manager's or Manager Trust's exercise of his, her or its "put" rights and the payment by the Company of the purchase price of such shares of 2 Common Stock required thereby, whether paid in cash or by the delivery of a Junior Note. 1.9 "Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. 1.10 "Common Stock" means the Series A Common Stock and the Series B Common Stock. 1.11 "Company Notice" means the written notice delivered by the Company to a Manager or Manager Trust to "call" the shares of Common Stock held by such Manager or Manager Trust, as set forth in Article 7. 1.12 "Cost" means the price actually paid, or the value of the consideration received by the Company, for the shares of Common Stock at the time such Common Stock was issued by the Company. 1.13 "Credit Agreement" means the Credit Agreement between Acquisition and The First National Bank of Chicago, as agent, dated as of the date hereof, as amended from time to time. 1.14 "Disability" means the inability of a Manager to substantially perform his or her duties and responsibilities to Acquisition by reason of a physical or mental disability or infirmity (a) for a continuous period of six months or (b) at such earlier time as a Manager submits satisfactory medical evidence that he or she has a physical or mental disability or infirmity which will likely prevent him or her from returning to the performance of his or her work duties for six months or longer. The effective date of such Disability shall be the last day of such six-month period or the date upon which the Manager submits such satisfactory medical evidence, as the case may be. A determination of Disability shall be made by an independent medical professional selected by the Board of Directors of Acquisition, whose decision shall be final, binding and non-appealable. 1.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.16 "Fair Market Value" means the Fair Market Value Per Share multiplied by the number of shares of Common Stock being "called" or "put," as the case may be, pursuant to the provisions of Article 7. 1.17 "Fair Market Value Per Share" means the per share value of the Common Stock (which shall be the same value for both the Series A Common Stock and the Series B Common Stock) that is 3 determined by the affirmative vote of at least five members of the Board of Directors of the Company, which value shall be evidenced by the execution of a certificate (the "Certificate of Fair Market Value") that will be included in the minute book of the Company. Such determination may be made every year at the annual meeting of the Board of Directors, with the first such determination being made on the date hereof, or at such other times as the Board of Directors of the Company deems necessary. If a Certificate of Fair Market Value is not executed for any year, the Fair Market Value Per Share shall be equal to the amount set forth in the most recent Certificate of Fair Market Value. The Stockholders agree that the Certificate of Fair Market Value that is executed by the Board of Directors on the date hereof shall be effective until December 31, 1998, or such later date as a new Certificate of Fair Market Value may be executed. 1.18 "FASB" means the Financial Accounting Standards Board. 1.19 "Financing Agreements" means each of the Credit Agreement, the Purchase Agreement and any and all of the Company's and Acquisition's agreements, instruments and documents executed in connection with the borrowing of money, whether executed before, on or after the date of this Agreement, as such agreements may be amended from time to time. 1.20 "Institutional Investors" means each of MCIT (Existing Pool) Limited and MCIT (New Pool) Limited, each a public company incorporated in England and a wholly owned subsidiary of MCIT, and shall include any Permitted Transferee(s) of an Institutional Investor. 1.21 "Junior Note" means the non-negotiable promissory note issued by the Company in the form of Exhibit C attached hereto. 1.22 "JZCC" means Jordan/Zalaznick Capital Company, a general partnership whose business address is 9 W. 57th Street, Suite 4000, New York, New York 10019. 1.23 "Lien" means any lien, mortgage, security interest, claim, restriction, encumbrance, pledge, hypothecation or interest of any Person, of any kind or nature. 1.24 "Management Consulting Agreement" means the Management Consulting Agreement, dated the date hereof, between TJC Management Corporation and the Company in the form of Exhibit D attached hereto. 1.25 "Manager" means each of the individuals listed on Exhibit E attached hereto, and shall include any Permitted Transferee(s) of such individuals. 4 1.26 "Manager Noncompetition Agreement" means the noncompetition agreement in the form of Exhibit F attached hereto. 1.27 "Manager Notice" means the written notice delivered by a Manager, his or her estate or a Manager Trust, as the case may be, to the Company to "put" the shares of Common Stock owned by such Manager or Manager Trust, as set forth in Article 7. 1.28 "Manager Trust" means a trust created by a Manager for his or her benefit or any immediate family member of such Manager. 1.29 "MCIT" means MCIT PLC. 1.30 "Permitted Transferee" means (a) in the case of any Series A Holder, the Company or any other Series A Holder, (b) in the case of any Series A Holder, any voting trust created, or agreement executed, for the purpose of voting the shares of Series A Common Stock held by such holder, (c) in the case of any Series B Holder, any other Series B Holder and any Person listed on Exhibit G attached hereto, (d) in the case of any individual Stockholder, any member of such Stockholder's immediate family (as defined in the regulations promulgated under Section 16 of the Exchange Act), including any child of a deceased or living spouse of a Stockholder or the child or children of any such child, (e) in the case of any individual Stockholder, any trust created for the benefit of such Stockholder or any of his or her family members, (f) in the case of any individual Stockholder, any legal representative and the testate or intestate distributee(s) to whom such Stockholder shall transfer any Common Stock at any time or from time to time, (g) in the case of any Stockholder that is an Affiliate of The Jordan Company, any Person listed on Exhibit G attached hereto and any other Person that is an Affiliate of The Jordan Company (including Jordan Industries, Inc. and its officers and directors) or any of its Affiliates, (h) with respect to JZCC, the Persons listed on Exhibit G attached hereto, (i) in the case of any Institutional Investor, any other Person that is an Affiliate of MCIT, and (j) in the case of any Institutional Investor, any Person to whom such Institutional Investor may grant a Lien by way of a pledge of the shares of Common Stock held by the Institutional Investor in connection with the borrowing of money from such Person. 1.31 "Person" means any individual, partnership, limited liability company, corporation, association, joint stock company, trust, joint venture, organization, and any governmental entity or any department, agency or subdivision thereof. 1.32 "Preferred Stock" means the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. 5 1.33 "Public Offering" means one, or the last in a series of, bona fide public offerings by the Company of its Common Stock pursuant to a registration statement or registration statements filed by the Company with the Commission, where the aggregate gross proceeds to the Company from such public offering, or from such series of public offerings, shall be not less than $50,000,000. 1.34 "Purchase Agreement" means the Purchase Agreement between the Company and MCIT, dated as of February 27, 1997, as amended from time to time. 1.35 "Registration Expenses" has the meaning set forth in Section 8.3. 1.36 "Restricted Stock" means all of the Common Stock of the Company. As to any particular Restricted Stock, such securities shall cease to be Restricted Stock after issuance when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) such securities shall have been distributed to the public pursuant to Rule 144 (or any successor provision) or are saleable pursuant to Rule 144(k) (or any successor provision) under the Securities Act, (c) such securities shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) such securities shall have ceased to be outstanding. 1.37 "Retirement" means the retirement by a Manager from employment with Acquisition after such Manager has reached the age of 65, or such lower age as may be set by the Board of Directors of the Company from time to time. 1.38 "Securities Act" means the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 1.39 "Senior Manager" means Robert M. Wolff, John L. Menghini, Robert G. Shaw, Larry D. Graveel and Michael H. Gary, as provided in the context of the Agreement. 1.40 "Series A Common Stock" means the Company's Series A Common Stock, par value $0.01 per share, having the terms set forth in the Certificate of Incorporation. 1.41 "Series A Holder" means each Stockholder who holds any shares of Series A Common Stock and shall include any Permitted 6 Transferee(s) of a Series A Holder. On the date hereof, all Series A Holders shall be a Manager or a Manager Trust. 1.42 "Series A Preferred Stock" means the Company's Series A 12% Cumulative Preferred Stock, par value $0.01 per share, having the terms set forth in the Certificate of Incorporation. 1.43 "Series B Common Stock" means the Company's Series B Common Stock, par value $0.01 per share, having the terms set forth in the Certificate of Incorporation. 1.44 "Series B Holder" means each Stockholder who holds any shares of Series B Common Stock and shall include any Permitted Transferee(s) of a Series B Holder. 1.45 "Series B Preferred Stock" means the Company's Series B 12% Cumulative Preferred Stock, par value $0.01 per share, having the terms set forth in the Certificate of Incorporation. 1.46 "Series C Holder" means each Stockholder who holds any shares of Series C Common Stock and shall include any Permitted Transferee(s) of a Series C Holder. 1.47 "Series C Preferred Stock" means the Company's Series C 12% Cumulative Preferred Stock, par value $0.01 per share, having the terms set forth in the Certificate of Incorporation. 1.48 "Shares" means, with respect to each Stockholder, the shares of Stock owned or held by such Stockholder. 1.49 "Stock" means the Common Stock and the Preferred Stock. 1.50 "Stockholder" means each of the parties to this Agreement and any Permitted Transferee(s) of such parties. 1.51 "Subscription Note" means the non-recourse promissory note executed by a Manager or Manager Trust and issued to the Company, as holder, in connection with such Manager's or Manager Trust's subscription of Stock hereunder. 1.52 "Subsidiary" means, as to any Person, a corporation of which the outstanding shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors of such corporation are at the time owned, directly or indirectly, through one or more intermediaries, or both, by such Person. 1.53 "Tax Sharing Agreement" means the Tax Sharing Agreement, dated the date hereof, by and between the Company and Acquisition in the form of Exhibit H attached hereto. 7 1.54 "Transfer" means any sale, transfer, assignment, pledge, hypothecation, gift, bequest, granting of a Lien, or other disposition or event of any kind that would (or could), directly or indirectly, by operation of law or otherwise, change in any manner the actual or beneficial ownership of any shares of Stock. Each Transfer must comply with all of the terms of this Agreement. 1.55 "Winning Ways" means Winning Ways, Inc., a Missouri corporation. ARTICLE 2 STOCK SUBSCRIPTIONS 2.1 Subscription for Stock. Each Stockholder hereto hereby subscribes for and agrees to purchase the number, series and type of shares of Stock set forth opposite his, her or its name on Exhibit I attached hereto, and herewith tenders to the Company for such Shares the consideration in the amount and type set forth opposite his, her or its name on Exhibit I against delivery of a certificate or certificates registered in the name of such Stockholder, respectively, for the shares of Stock hereby subscribed. The Stockholders acknowledge that the consideration for some of the shares of Stock will consist of (i) shares of common stock of Winning Ways and/or (ii) a Subscription Note. 2.2 Issuances of Shares. The Company hereby accepts the subscription of each Stockholder and agrees to issue and deliver to each of them, against payment by such Stockholder of the subscription price, a certificate or certificates registered in the name of such Stockholder evidencing the shares of Stock subscribed for by such Stockholder herein. ARTICLE 3 STOCKHOLDER ACKNOWLEDGEMENTS 3.1 Risk. Each Stockholder acknowledges to the Company and the other Stockholders that he, she or it understands and agrees as follows: THE STOCK HAS NOT BEEN REGISTERED UNDER FEDERAL OR STATE SECURITIES LAWS. THE STOCK IS VERY SPECULATIVE AND RISKY. THERE IS NO PUBLIC OR OTHER MARKET FOR THE STOCK NOR IS ANY LIKELY TO DEVELOP. THE COMPANY HAS NO PREVIOUS FINANCIAL HISTORY AND HAS BORROWED SUBSTANTIALLY ALL OF THE FUNDS AVAILABLE TO IT TO COMMENCE ITS BUSINESS. EACH STOCKHOLDER ACKNOWLEDGES THAT HE, SHE OR IT MAY AND CAN AFFORD TO LOSE HIS, HER OR ITS ENTIRE INVESTMENT AND THAT HE, SHE OR IT UNDERSTANDS THAT HE, SHE OR IT MAY HAVE TO HOLD THIS INVESTMENT INDEFINITELY. 8 3.2 Review of Documents. Each Stockholder acknowledges that he, she or it has had an ample opportunity to review and understand the current form of each of the following documents and has requested and received a copy of each such document, if so requested: (a) the Certificate of Incorporation and the organizational resolutions of the Board of Directors of the Company; (b) the By-Laws; (c) the Junior Note; (d) the Manager Noncompetition Agreement; (e) the Management Consulting Agreement; (f) the Tax Sharing Agreement; (g) the Subscription Note; (h) the Purchase Agreement; and (i) the Credit Agreement. 3.3 Information. Each Stockholder acknowledges that he, she or it has had the opportunity, prior to signing this Agreement and the purchase of any Stock hereunder, to ask questions of the officers of the Company concerning all aspects of the sale of the Stock and to obtain any additional information, to the extent the Company possesses such information or can acquire it without unreasonable effort or expense, desired by the Stockholder. 3.4 Other. Each Stockholder acknowledges that (i) in addition to the restrictions against Transfer contained in this Agreement, certain of the Financing Agreements may contain provisions which will result in an event of default under such instrument if any of the shares of Common Stock are Transferred to a transferee that is not a Permitted Transferee and (ii) shares of Series A Common Stock that are reserved for issuance to employees of Acquisition at such time as the Board of Directors may determine will, if such shares are issued, dilute each Stockholder's economic and equity interest in the Company in an amount equal to not more than five (5) percent of the total number of shares of Common Stock currently outstanding. 3.5 Employment. Each Stockholder who is a Manager or the settlor or beneficiary of a Manager Trust (other than Robert Wolff) acknowledges that he or she is an "at-will" employee of Acquisition and that as such, the employment of such person by 9 Acquisition is terminable by Acquisition at any time without notice and with or without Cause. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE COMPANY As a material inducement to the Stockholders to purchase shares of the Company's capital stock and to enter into and perform their obligations under this Agreement, the Company makes the representations and warranties set forth in this Article 4. 4.1 Organization, etc. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware. Since its date of incorporation, the Company has not engaged in any activities of any nature, except as contemplated by this Agreement, the Acquisition Agreement and the Financing Agreements. The Company has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. 4.2 Capital Stock. (a) The authorized capital stock of the Company consists of 1,105 shares of Series A Common Stock, 1,000 shares of which are currently issued and outstanding, 1,000 shares of Series B Common Stock, all of which are currently issued and outstanding, 13,500 shares of Series A Preferred Stock, all of which are issued and outstanding, 11,000 shares of Series B Preferred Stock, all of which are issued and outstanding, and 2,500 shares of Series C Preferred Stock, all of which are issued and outstanding. All of the shares of outstanding Stock have been duly authorized and are validly issued, fully paid and nonassessable. (b) The delivery by the Company of the certificate(s) to each Stockholder representing the shares of Stock to be issued to such Stockholder transfers and conveys to such Stockholder good and marketable title to such shares of Stock, free and clear of all Liens, except for the restrictions against Transfer set forth in this Agreement and in the legend set forth on the shares of Stock, and any restrictions arising under federal and state securities laws. (c) The Company has not issued, nor is there outstanding, any capital stock or securities convertible into or exchangeable for any shares of its capital stock. 4.3 Authority Relative to Agreement. The execution, delivery and performance by the Company of this Agreement and each agreement contemplated hereby and the issuance of the shares of 10 Stock have been duly authorized by the Company, and the Company has all necessary corporate power and authority to issue the shares of Stock and to execute, deliver and perform this Agreement and each agreement contemplated hereby to which the Company will be a party. This Agreement and each agreement contemplated hereby to which the Company will be a party constitutes a legal and valid obligation of the Company, enforceable against the Company in accordance with its respective terms. 4.4 No Breach; Consents. The execution, delivery and performance by the Company of this Agreement and each agreement contemplated hereby, the issuance of the shares of Stock, and the consummation of the transactions contemplated hereby and thereby do not and will not (i) conflict with or result in any breach of any of the provisions of, (ii) constitute a default under or (iii) result in a violation of the provisions of the Certificate of Incorporation or By-Laws of the Company, any indenture, mortgage, lease, loan agreement or other agreement or instrument to which the Company or its properties are subject, or any law, statute, rule or regulation to which the Company or its properties are subject. The execution, delivery and performance by the Company of this Agreement and each agreement contemplated hereby, the issuance of the shares of Stock, and the consummation of the transactions contemplated hereby and thereby do not and will not result in the creation of any Lien upon the Stock or the assets of the Company (other than the pledge by the Company of its stock in Acquisition), or require any authorization, consent, approval, exemption or other action by or notice (other than filings or notices, if applicable, pursuant to applicable "blue sky" or state securities laws) to any court or other governmental body. ARTICLE 5 REPRESENTATIONS OF EACH STOCKHOLDER As a material inducement to the Company to issue the Stock to each Stockholder, each Stockholder (except in Section 5.1 below) severally, and not jointly, represents and warrants to the Company for himself, herself or itself as follows: 5.1 Offering Memorandum. Each of the Senior Managers has reviewed the Offering Memorandum, dated February 20, 1997 (the "Offering Memorandum"), of Acquisition. Based on such review, none of the Senior Managers knows of any material misstatements or omissions in the Offering Memorandum, including but not limited to (i) any material transaction between Winning Ways and the Senior Manager or any Affiliate of such Senior Manager not already included in the section of the Offering Memorandum entitled "Certain Transactions" and (ii) any material risk factors relating to the operating history, financial position or the nature of the existing and planned business of Winning Ways that are not already 11 set forth in the section of the Offering Memorandum entitled "Risk Factors." 5.2 Investment Experience; Risk Factors. The Stockholder has such knowledge and experience in financial, investment and business matters that he, she or it is capable of evaluating the merits, risks and advisability of an investment in the Stock. The Stockholder acknowledges and understands that (a) the Company is newly formed and has no operating history, (b) the Company is unlikely to pay dividends in respect of the Stock, (c) payment of dividends and distributions in respect of the Stock is restricted by applicable law and by the Financing Agreements and may be restricted by future agreements or instruments binding on the Company or its properties, and (d) the Company will be significantly leveraged. The Stockholder has carefully reviewed Article 7 and acknowledges that the shares of Common Stock to be issued will be subject to the Transfer restrictions and provisions set forth in that Article. 5.3 Information. The Company has made available to the Stockholder its Certificate of Incorporation and By-Laws and all other documents and information that such Stockholder has requested relating to an investment in the Company. The Company has afforded such Stockholder the opportunity to discuss an investment in the Stock and to ask questions of representatives of the Company concerning the terms and conditions of the offering of the Stock, and such representatives have provided answers to all such questions concerning the offering of the Stock. Such Stockholder has examined or has had the opportunity to examine before the date hereof all information that he, she or it deems to be material to an understanding of the Company and Acquisition, the proposed business of the Company and Acquisition, and the offering of the Stock and has consulted with his, her or its financial advisors, accountants and his, her or its attorneys as he, she or it deemed appropriate with respect to an understanding of the Company and Acquisition, the proposed business of the Company and Acquisition and the offering of the Stock. 5.4 Investment. The Stockholder acknowledges that the Stock will be acquired solely by and for the account of such Stockholder for investment purposes only, and is not being purchased for subdivision, fractionalization, resale or distribution. Such Stockholder has no contract, undertaking, agreement or arrangement to Transfer any of the Stock which such Stockholder has acquired hereunder. Such Stockholder has no present plans or intentions to enter into any such contract, undertaking, agreement or arrangement. The Stockholder acknowledges that the Stock has not been registered or qualified for resale under applicable federal and state securities laws, and may not be sold except pursuant to a registration or qualification thereunder or an exemption therefrom. The Stockholder is capable of bearing the economic risk of investing in the Stock, can afford 12 a total loss of such investment, and the financial condition of such Stockholder is such that he, she or it has no need for liquidity with respect to his, her or its investment in the Stock and no present or foreseeable need to dispose of any portion of the Stock to satisfy any existing or contemplated undertaking or indebtedness. Such Stockholder has adequate means of providing for his, her or its current needs and possible contingencies. 5.5 Legend. Each certificate for shares of Stock will be imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT IS SUBJECT TO TRANSFER RESTRICTIONS, OBLIGATIONS AND OTHER CONDITIONS SPECIFIED IN THE SUBSCRIPTION AND STOCKHOLDERS AGREEMENT, DATED FEBRUARY 27, 1997 AMONG THE COMPANY, THE HOLDER HEREOF AND THE COMPANY'S STOCKHOLDERS. A COPY OF SUCH SUBSCRIPTION AND STOCKHOLDERS AGREEMENT WILL BE FURNISHED BY THE COMPANY WITHOUT CHARGE UPON WRITTEN REQUEST ADDRESSED TO THE COMPANY'S OFFICES AT 9 WEST 57TH STREET, SUITE 4000, NEW YORK, NEW YORK 10019, ATTENTION: A. RICHARD CAPUTO, JR. Each Stockholder acknowledges that the effect of this legend, among other things, is or may be to limit or destroy the value of the certificate for purposes of sale or for use as loan collateral. Each Stockholder consents that "stop transfer" instructions may be noted against the Stock. 5.6 Independent Decision. The decision of the Stockholder to acquire the Stock hereunder has been made by such Stockholder independent of any other Stockholder and independent of any statements, disclosures or judgments as to the properties, business, prospects or condition (financial or otherwise) of the Company which may have been made or given by any Stockholder or other Person. The Stockholder agrees and acknowledges that no other Stockholder or any Person has acted, is expected to act, or will act as the agent or representative of such Stockholder in connection with making, closing or monitoring of his, her or its investment hereunder. The foregoing to the contrary notwithstanding, the Institutional Investors have and will rely on the advice of Jordan/Zalaznick Advisers, Inc. as contemplated by the Investment Advisory Agreement, dated December 19, 1994. 5.7 Binding Agreement. This Agreement constitutes a legal and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms. 13 ARTICLE 6 OTHER AGREEMENTS AND COVENANTS 6.1 Survival. All representations and warranties contained herein or otherwise made in writing by any party in connection herewith will survive the execution and delivery of this Agreement and consummation of the transactions contemplated hereby, regardless of any investigation made by any party or on his, her or its behalf. 6.2 Voting Agreements and Rights. Until such time as the Company shall consummate a Public Offering and except as otherwise provided below, each Stockholder agrees to vote all shares of Common Stock owned of record or beneficially by such Stockholder, and to otherwise use his, her or its best efforts, to (i) maintain a Board of Directors of the Company and Acquisition consisting of seven members, three of whom shall be nominated and elected by the holders of the Series A Common Stock (the "Series A Directors"), three of whom shall be nominated and elected by the holders of the Series B Common Stock (the "Series B Directors") and one of whom shall be nominated and elected by all the holders of the Common Stock (the "Common Director"); (ii) not remove or permit the removal of any Series A Director from the Board of Directors of the Company or Acquisition without the consent of the holders who hold a majority of the number of shares of Series A Common Stock held by all the holders of Series A Common Stock; (iii) not remove or permit the removal of any Series B Director from the Board of Directors of the Company or Acquisition without the consent of the holders of a majority of the number of shares of Series B Common Stock and (iv) not remove or permit the removal of the Common Director from the Board of Directors of the Company or Acquisition without the consent of the holders of a majority of the number of shares of Common Stock. 6.3 Corporate Transactions. (a) Each Stockholder agrees that without the affirmative vote of at least five directors, neither the Board of Directors of the Company or Acquisition will: (i) recommend to the Stockholders the dissolution of the Company or Acquisition or cause or effect any other change to the Certificate of Incorporation or ByLaws of the Company or the certificate of incorporation or By-laws of Acquisition; (ii) increase the Board of Directors of the Company or Acquisition to more than seven members; 14 (iii) recommend to the Stockholders the merger or consolidation of the Company or Acquisition with or into, or the sale of substantially all of the assets of the Company or Acquisition, to any Person; (iv) authorize or approve (A) the issuance of any additional equity securities of the Company or Acquisition (including the issuance of any securities pursuant to a Public Offering) or options, warrants, rights, contracts, commitments, understandings or arrangements by which the Company or Acquisition may be bound to issue any additional securities or options to purchase securities of the Company or Acquisition, (B) the Company's or Acquisition's issuance of any indebtedness for borrowed money outside the ordinary course of business or (C) the execution by the Company or Acquisition of any capital lease outside the ordinary course of business; (v) authorize or approve the Company's or Acquisition's entry into any transactions with any Affiliate of the Company or Acquisition, as the case may be (excluding the Management Consulting Agreement and the Tax Sharing Agreement); (vi) other than as may be required by FASB, authorize or approve any change in accounting policies or methodologies; (vii) authorize or approve any change in the fiscal year from July 1 to June 30 of the following year; (viii) declare, cause to be declared, issue, or cause to be issued, any dividends or distributions, whether payable in stock, cash or other property; (ix) authorize or approve the acquisition of any capital stock or equity interests of any Person; (x) authorize or approve the acquisition of substantially all of the assets of any Person; (xi) guarantee any obligation of any Person, other than the obligations of Acquisition or any other Subsidiary; (xii) authorize or approve the termination or dismissal of Donnelly Meiners Jordan Kline PC or Deloitte & Touche LLP as the principal accounting firms of the Company or Acquisition; 15 (xiii) authorize or approve any change in the annual base compensation of any Series A Director who is an employee of the Company, Acquisition or any Subsidiary of the Company, or authorize or approve any change in the annual base compensation of the Common Director if he or she is an employee of the Company, Acquisition or any Subsidiary of the Company; (xiv) approve (A) the annual capital expenditure budget or (B) or authorize any capital expenditure in an amount greater than the amount set forth on such capital expenditure budget; or (xv) lower the age of Retirement to a year less than 65. (b) Each Stockholder agrees that, without the affirmative vote of (i) at least three directors who are not Series B Directors and (ii) two of the Series B Directors, neither the Board of Directors of the Company or Acquisition will, in any instance, terminate the employment of any Series A Director or the Common Director. (c) Each Stockholder agrees that, without the written approval of the Stockholders who hold at least 75 percent of the shares of Common Stock, the Stockholders will not in any instance: (i) approve the dissolution of the Company or any change to the Certificate of Incorporation or By-Laws; (ii) approve the merger or consolidation of the Company with or into, or the sale of substantially all of the assets of the Company to, any Person; or (iii) approve the expansion of the Board of Directors of the Company to more than seven members. 6.4 Non-Disclosure. Each Stockholder agrees that he, she or it will not, any time or in any manner, directly or indirectly, use or disclose to any party other than the Company or Acquisition any trade secrets or other Confidential Information (as defined below) learned or obtained by such Stockholder while a stockholder, officer, director or employee of the Company, Acquisition or Winning Ways. As used herein, the term "Confidential Information" means information disclosed to or known by a Stockholder as a consequence of such Stockholder's position with the Company or Acquisition or such Stockholder's previous position with Winning Ways and not generally known in the industry in which the Company, Acquisition or Winning Ways is engaged and that in any way relates to the Company's, Acquisition's or Winning Ways' products, processes, services, inventions (whether patentable or 16 not), formulas, techniques or know-how, including, but not limited to, information relating to distribution systems and methods, research, development, manufacturing, purchasing, accounting, engineering, marketing, merchandising and selling. Each Stockholder acknowledges that the release of any Confidential Information of the Company, Acquisition or Winning Ways to unauthorized persons would be extremely detrimental to the Company and Acquisition and each Stockholder agrees to use such Stockholder's best efforts to safeguard such Confidential Information from unauthorized persons. Upon termination of employment, or whenever any of the Company, Acquisition or Winning Ways shall request, each Stockholder shall deliver and return promptly to Acquisition all tangible embodiments (including all copies) of the Confidential Information in the possession or under the control of such Stockholder. 6.5 Inventions. Each Stockholder agrees that all inventions conceived of or developed by such Stockholder during the term of such Stockholder's employment with Acquisition, whether alone or jointly with others and whether during working hours or otherwise, which relate to the business currently conducted by the Company, Acquisition or Winning Ways, or any business or other company in which the Company or Acquisition, directly or indirectly, now or hereafter has an ownership interest, shall be Acquisition's exclusive property. Each Stockholder shall (i) promptly disclose in writing to Acquisition each invention conceived or developed by such Stockholder during the term of such Stockholder's employment with Acquisition, (ii) assign all rights to such inventions to Acquisition and (iii) assist Acquisition in every way to obtain and protect any patents on such inventions. 6.6 Affiliate Transactions. Except for the agreements between Winning Ways and each of Impact Design and Kansas Custom Embroidery, each Stockholder agrees that, for so long as such Stockholder or any member of such Stockholder's family is the beneficial owner of any Stock, neither such Stockholder, any member of such Stockholder's family, any Affiliate of such Stockholder nor any Permitted Transferee of such Stockholder shall engage, directly or indirectly, in any business transaction with the Company, Acquisition or any of their Affiliates without the prior written consent of the Board of Directors of the Company. ARTICLE 7 DISPOSITION RESTRICTIONS; CO-SALE; PUTS AND CALLS; ETC. 7.1 Restrictions on Sale of Stock. The terms of this Article 7 shall terminate upon consummation of a Public Offering. Any Shares included in a public offering shall not be subject to the restrictions set forth in this Article 7. 17 (a) Each Stockholder agrees that all shares of Common Stock and all other securities of the Company convertible into, exchangeable for or entitling the holder thereof to acquire shares of Common Stock now or hereafter owned by him, her or it or in which the Stockholder has any interest, legally or beneficially, shall be subject to the terms and conditions of this Article 7. No Stockholder may Transfer any shares of Common Stock unless (i) such Stockholder is in receipt of a Bona Fide Offer and (ii) all the terms and conditions of this Agreement have been satisfied. Any purported Transfer in violation of this Agreement shall be void. (b) Notwithstanding anything contained in this Agreement to the contrary, the shares of Common Stock held by a Stockholder may be Transferred to any Permitted Transferee, but the restrictions herein shall apply to any further Transfer by any such Permitted Transferee. It shall be a condition precedent to any Transfer permitted under the preceding sentence that the Permitted Transferee execute and deliver an agreement acknowledging that all shares so Transferred have been acquired for investment and not for distribution and are and shall remain subject to this Agreement. All references in this Agreement to shares of Common Stock held by a Stockholder shall include, without duplication, shares of Common Stock, if any, held by his, her or its Permitted Transferee. Whenever a Stockholder shall be obligated to sell shares of Common Stock held by him, her or it under this Agreement (as opposed to the right of a Stockholder to "put" shares of Common Stock to the Company), each Permitted Transferee of such Stockholder shall be obligated to sell all the shares of Common Stock which the Permitted Transferee holds, to the same purchaser(s) and on the same terms and conditions. 7.2 Company Termination. (a) If Acquisition terminates the employment of any Manager for Cause, the Company may elect, at its option, to repurchase all of the Common Stock owned by such Manager or the Manager Trust of which such Manager is the settlor or beneficiary. The Company's "call" option granted under this Section 7.2(a) shall be exercised by delivery of the Company Notice to such Manager within three hundred sixty (360) days from the date on which Acquisition terminated such Manager's employment for Cause. The "call" price of the Common Stock shall be an amount equal to the greater of (i) one-half of the Fair Market Value or (ii) two-thirds of the Cost; provided, however, if such Manager executes a Manager Noncompetition Agreement at the Closing, the "call" price shall be an amount equal to the Fair Market Value. The Closing for the Company's purchase of the shares of Common Stock held by a Manager or 18 Manager Trust pursuant to this Section 7.2(a) shall occur no later than sixty (60) days following the date the "call" option is exercised by the Company. (b) If Acquisition terminates the employment of any Manager for any reason other than Cause or Disability, including death, such Manager, his or her estate or the Manager Trust of which such Manager is the settlor or beneficiary, as the case may be, may elect, at his, her or its option, to have the Company repurchase all of the Common Stock owned by such Manager or Manager Trust. The "put" option granted under this Section 7.2(b) shall be exercised by delivery of the Manager Notice to the Company within thirty (30) days from the date on which Acquisition terminated such Manager's employment without Cause. The "put" price of the Common Stock owned by a Manager or Manager Trust shall be an amount equal to the Fair Market Value. The Closing for the Company's purchase of the shares of Common Stock held by a Manager or Manager Trust pursuant to this Section 7.2(b) shall occur no later than sixty (60) days following the date the "put" option is exercised by a Manager or Manager Trust. (c) If Acquisition terminates the employment of any Manager for Disability, such Manager, his or her estate or the Manager Trust of which such Manager is the settlor or beneficiary, as the case may be, may elect, at his, her or its option, to have the Company repurchase all of the Common Stock owned by such Manager or Manager Trust. The "put" option granted under this Section 7.2(b) shall be exercised by delivery of the Manager Notice to the Company within thirty (30) days from the date on which Acquisition terminated such Manager's employment without Cause. The "put" price of the Common Stock shall be an amount equal to the greater of (i) one-half of the Fair Market Value or (ii) two-thirds of the Cost; provided, however, if such Manager executes a Manager Noncompetition Agreement at the Closing, the "put" price shall be an amount equal to the Fair Market Value. The Closing for the Company's purchase of the shares of Common Stock held by a Manager or Manager Trust pursuant to this Section 7.2(c) shall occur no later than sixty (60) days following the date the "put" option is exercised by a Manager or Manager Trust. 7.3 Manager Termination. Subject to Section 7.4, if any Manager voluntarily terminates his or her employment with Acquisition for any reason or for no reason, the Company may elect, at its option, to repurchase all of the Common Stock owned by such Manager or the Manager Trust of which such Manager is the settlor or beneficiary. The Company's "call" option granted under this Section 7.3 shall be exercised by delivery of the Company Notice to such Manager within three hundred sixty (360) days from the date on which such Manager voluntarily terminated his or her employment with Acquisition. The "call" price of the Common Stock shall be an 19 amount equal to the greater of (i) one-half of the Fair Market Value or (ii) two-thirds of the Cost; provided, however, if the Manager executes a Manager Noncompetition Agreement at the Closing, the "call" price shall be an amount equal to the Fair Market Value. The Closing for the Company's purchase of the shares of Common Stock held by a Manager or Manager Trust pursuant to this Section 7.3 shall occur no later than sixty (60) days following the date of the exercise of the "call" option by the Company. 7.4 Retirement. Upon the Retirement of any Manager, such Manager may elect, as his or her option, to have the Company repurchase all of his or her Common Stock or the Common Stock held by a Manager Trust of which such Manager is the settlor or beneficiary. A Manager's or Manager Trust's "put" option granted under this Section 7.4 shall be exercised by delivery of the Manager Notice to the Company within thirty (30) days from the date of the Retirement of such Manager. In the event of the Retirement of any Manager, the "put" price of the Common Stock owned by a Manager or a Manager Trust shall be an amount equal to the greater of (i) one-half of the Fair Market Value or (ii) two-thirds of the Cost; provided, however, if such Manager executes a Manager Noncompetition Agreement at the Closing, the "put" price shall be an amount equal to the Fair Market Value. Notwithstanding anything contained in this Section to the contrary, the Company shall have no obligation to purchase any shares of Common Stock held by a Manager or Manager Trust until such time as such Manager executes a Manager Noncompetition Agreement. The Closing for the Company's purchase of the shares of Common Stock held by a Manager or Manager Trust pursuant to this Section 7.4 shall occur no later than sixty (60) days following the date of such Manager's Retirement from the Company, on a date to be set by the Company. 7.5 Payment. Any amounts payable to a Manager or Manager Trust pursuant to Sections 7.2, 7.3 or 7.4 shall be paid in cash and shall be delivered to the Manager or Manager Trust at the Closing; provided, however, the Company may elect, at its option, to defer payment of 75 percent of the "call" price or "put" price to be paid to such Manager or Manager Trust by executing and delivering a Junior Note to such Manager or Manager Trust at the Closing. Notwithstanding anything to the contrary contained in this Section, the Company shall use commercially reasonable efforts to make such payment in cash. 7.6 Restrictions on Payments by Company. Notwithstanding anything to the contrary contained in this Agreement, all payments and installments pursuant to this Article 7 shall be subject to (a) applicable restrictions contained in any applicable law, (b) restrictions contained in the Company's and its subsidiaries' debt and equity financing agreements and (c) the availability of cash to make any lump sum cash payments. If any such restrictions or unavailability prohibit any such payments or installments which the Company is otherwise entitled or required to 20 make, the time periods for making such payments or installments shall be tolled and the Company shall make such payments and installments as soon as it is permitted to do so under such restrictions. 7.7 Right of First Refusal. (a) Except for Transfers to a Permitted Transferee, if at any time any Stockholder receives and desires to accept a Bona Fide Offer to sell Common Stock (such Stockholder receiving the Bona Fide Offer is hereafter referred as a "Selling Stockholder"), then such Selling Stockholder shall deliver written notice of the Bona Fide Offer (the "ROFR Notice"), within 30 days of receipt of the Bona Fide Offer, to each of the other Stockholders and to the Company setting forth the number and series of shares of Common Stock proposed to be purchased in the Bona Fide Offer (the "Offered Securities") and the price and the other terms contained in the Bona Fide Offer. (b) Upon receipt of the ROFR Notice, the Company and the other Stockholders then shall have the right to purchase at the price and on the terms contained in the ROFR Notice all or, subject to Section 7.7(c), a portion of the Offered Securities in the following order of priority: (i) if the Selling Stockholder is a Series A Holder, then the other Series A Holders shall have the right to purchase the Offered Securities, pro rata among those Series A Holders so electing on the basis of the respective number of shares of Series A Common Stock owned by such Series A Holders (or in such other proportion as the Series A Holders may agree), then the Series B Holders shall have the second right to purchase the Offered Securities, pro rata among those Series B Holders so electing on the basis of the respective number of shares of Series B Common Stock owned by such Series B Holders (or in such other proportion as the Series B Holders may agree) and thereafter, the Company shall have the right to purchase the Offered Securities; and (ii) if the Selling Stockholder is a Series B Holder, the other Series B Holders shall have the first right to purchase the Offered Securities, pro rata among those Series B Holders so electing on the basis of the respective number of shares of Series B Common Stock owned by such Series B Holders (or in such other proportion as the other Series B Holders may agree), then the Series A Holders shall have the second right to purchase the Offered Securities, pro rata among those Series A Holders so electing on the basis of the respective number of shares of Series A Common Stock owned by such Series A Holders (or in such other proportion as the Series A Holders may agree) and thereafter, the Company shall have the right to purchase the Offered Securities. The rights of the parties pursuant to this Section 7.7(b) shall be exercisable by the delivery of written notice to the Selling 21 Stockholder (the "Notice of Exercise") within 30 calendar days from the date of delivery of the ROFR Notice. The Notice of Exercise shall state the number of shares and series of the Offered Securities each party is willing to purchase without regard to whether any other party purchases any shares of the Offered Securities. A copy of such Notice of Exercise also shall be delivered by each party to the Company. The rights of the parties pursuant to this Section 7.7(b) shall terminate if unexercised 30 calendar days after the date of delivery of the ROFR Notice. (c) If all notices required to be given pursuant to paragraphs (a) and (b) of this Section 7.7 have been duly given and the parties do not exercise their respective options to purchase all of the Offered Securities at the price and on the terms set forth in the Bona Fide Offer, and the Selling Stockholder does not desire to sell less than all of the Offered Securities, then the Selling Stockholder shall have the right, subject to compliance by the Selling Stockholder with all the other provisions of this Agreement, including, without limitation, the terms of Section 7.8, to consummate such transaction on the terms contemplated by the Bona Fide Offer. (d) Subject to Section 1.4 hereof, the closing of the purchase of the Offered Securities shall occur at the time and place (i) specified in the Bona Fide Offer in the event that the Offered Securities are purchased by the Offeror or (ii) mutually agreed upon by the Selling Stockholder and the Company and/or one or more other purchasers in the event that the Offered Securities are purchased pursuant to Section 7.7(b) hereof. 7.8 Right of Co-Sale. (a) Subject in each case to the rights of the parties set forth in Section 7.7 above, in the event a Selling Stockholder proposes to Transfer for value pursuant to a Bona Fide Offer any of the Common Stock owned of record or beneficially by him, her or it (the "Transfer Stock") to any Person (other than a Permitted Transferee) (a "Stockholder Transferee"), the Selling Stockholder shall require the Stockholder Transferee, as a condition precedent to the consummation of the Transfer of the Transfer Stock to the Stockholder Transferee, to irrevocably offer to acquire from each Stockholder, including the Selling Stockholder (collectively, the "Tag-Along Stockholders"), on the same terms as the proposed Transfer of the Transfer Stock, that number of shares of Common Stock equal to the product of (A) the total number of shares of Common Stock that constitute Transfer Stock multiplied by (B) a fraction, the numerator of which is the number of shares of Common Stock owned by such 22 Tag-Along Stockholder and the denominator of which is the total number of shares of Common Stock owned by all of the Tag-Along Stockholders (with respect to each Tag-Along Stockholder, such number of shares is hereinafter referred to as "Allocation Stock"). (b) The Selling Stockholder shall give written notice (the "Co-Sale Notice") to each other Stockholder which shall describe the material terms of the proposed Transfer, the number of shares of Transfer Stock to be transferred, the total number of shares of Common Stock held by such Selling Stockholder, the name and address of the Stockholder Transferee and the proposed closing date of the Transfer. Each other Stockholder shall have 30 days after receipt of the Co-Sale Notice to accept such offer as to all or a portion of the Allocation Stock and notify the Selling Stockholder in writing of the number of shares of Allocation Stock, if any, such other Stockholder wishes to Transfer to the Stockholder Transferee. The Selling Stockholder may not consummate the proposed Transfer to the Stockholder Transferee, except on the terms set forth in the Co-Sale Notice and unless (x) the sale of Allocation Stock pursuant to the right of co-sale of each other Stockholder who timely accepts the offer of the Stockholder Transferee is consummated simultaneously, or (y) each other Stockholder waives the right of co-sale as to all or part of the Allocation Stock, or (z) the irrevocable offer expires without acceptance by any other Stockholder during the 30 day period. 7.9 Obligation to Sell Stock. Notwithstanding any of the rights granted elsewhere in this Agreement, in the event Stockholders holding 75 percent of the Common Stock of the Company (the "Section 7.9 Holders") agree, in a bona fide arm's length transaction with an independent Person who is not an Affiliate of the Section 7.9 Holders, to Transfer for value all of the shares of Common Stock then held by them, then upon the written demand of the Section 7.9 Holders, which shall be given not less than 30 calendar days prior to the date of such proposed Transfer, all the other Stockholders shall Transfer all of the shares of Common Stock held by each of them as is proposed to be Transferred by the Section 7.9 Holders, at the same price and on the same terms and conditions as those set forth in the Section 7.9 Holders' written demand, to the buyer or transferee designated in the written demand. At the date set forth in the written demand from the Section 7.9 Holders, the other Stockholders shall (i) execute such documents as reasonably may be requested in the Section 7.9 Holders' demand notice and (ii) deliver certificate(s) for the shares of Common Stock to be sold, duly endorsed for transfer in the form required, with signatures guaranteed, to the Section 7.9 Holders or the buyer or other transferee at the Company's principal office or such other place as the Company or the Section 7.9 Holders shall select, and the Section 7.9 Holders shall cause the purchase price to be paid to 23 the other Stockholders in the same form and species as paid to the Section 7.9 Holders. In the event that any Stockholder fails to deliver the shares of Common Stock held by him, her or it, said Stockholder shall for all purposes be deemed no longer to be a stockholder of the Company, shall have no voting rights, shall not be entitled to any dividends or other distributions with respect to shares of Common Stock held by him, her or it, and shall have none of the rights or privileges granted to stockholders of the Company under this or any other agreement. If the Section 7.9 Holders fail to make demand on the other Stockholders to sell their shares of Common Stock, such other Stockholders shall have the rights set forth under Sections 7.7 and 7.8. 7.10 Failure to Give Notice; Waiver. For purposes of this Article 7, any Stockholder who has failed to give notice of the election of a right or option hereunder within the specified time period will be deemed to have waived his, her or its rights on the day after the last day of such period. Each Stockholder agrees and acknowledges that the Company may purchase or acquire shares of Common Stock pursuant to this Article 7, and approves such purchases and acquisitions, and waives any objection or claim relating thereto, whether against the Company, its Board of Directors or otherwise. ARTICLE 8 REGISTRATION RIGHTS 8.1 Piggyback Registration. If the Company, at any time after consummation of a Public Offering, proposes to register any of its Common Stock under the Securities Act for sale to the public (other than pursuant to a registration statement on forms S-4 or S- 8, or any successor forms), each such time the Company will give written notice to each Stockholder of its intention to do so. Upon the written request of a Stockholder received by the Company within 30 days after the giving of any such notice by the Company, to register such number of shares of Restricted Stock owned of record or beneficially by such Stockholder specified in such written request, the Company will use its best efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the shares of Common Stock to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the Transfer by each Stockholder (in accordance with his, her or its written request) of such Restricted Stock once so registered. In the event that any registration pursuant to this Section 8.1 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of shares of Restricted Stock requested to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the shares of Common Stock to be 24 sold by the Company or any other Person therein. In the event such a reduction is necessary, (1) the Stockholders requesting to sell Restricted Stock in the public offering shall bear the reduction on a pro rata basis, based on the number of shares of Restricted Stock each such Stockholder requested to offer for sale in the underwritten public offering, or (2) a Stockholder may elect to withdraw from such registration all shares of Restricted Stock held by him, her or it as to which registration was requested. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 8.1 without thereby incurring any liability to any Stockholder. 8.2 Registration Procedures. If and whenever the Company is required by the provisions of Section 8.1 hereof to use its best efforts to effect the registration of any shares of Restricted Stock under the Securities Act, the Company will promptly: (a) prepare and file with the Commission a registration statement (which shall be on any form of general applicability satisfactory to the managing underwriter with respect to such securities); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period of distribution and comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period; (c) furnish to each selling Stockholder and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such Persons reasonably may request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (d) use its best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as each selling Stockholder, or, in the case of an underwritten public offering, the managing underwriter reasonably shall request; provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; 25 (e) use its best efforts to list the Restricted Stock that is Common Stock covered by such registration statement with any securities exchange or the NASDAQ Stock Market National Market on which the Common Stock of the Company is then listed or quoted; (f) notify each selling Stockholder at any time when a prospectus relating to Restricted Stock is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and the Company will prepare a supplement or amendment to such prospectus (at the expense of the party making or omitting such material fact) so that, as thereafter delivered to the purchasers of such Restricted Stock, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided that the 180-day period described below will be tolled from the time a prospectus contains such a statement or omission until a prospectus correcting such statement or omission has been delivered to the Stockholder and may be delivered to the purchasers of such Restricted Stock in compliance with the Securities Act; (g) notify each selling Stockholder immediately, and confirm the notice in writing, (1) when the registration statement becomes effective, (2) of the issuance by the Commission of any stop order or of the initiation, or the written threat, of any proceedings for that purpose, (3) of the receipt by the Company of any notification with respect to the suspension of qualification of the Restricted Stock for sale in any jurisdiction or of the initiation, or the written threat, of any proceedings for that purpose, and (4) of the receipt of any comments, or requests for additional information, from the Commission or any state regulatory authority. If the Commission or any state regulatory authority shall enter such a stop order or order suspending qualification at any time, the Company will promptly use its best efforts to obtain the lifting of such order; and (h) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders as soon as reasonably practicable, but not later than 15 months after the effective date of the registration statement, an earnings statement covering a period of at least 12 months beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. 26 For purposes hereof, the period of distribution of Restricted Stock in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, and the period of distribution of Restricted Stock in any other registration shall be deemed to extend until the earlier of the sale of all Restricted Stock covered thereby or 180 days after the effective date thereof. In connection with each registration hereunder, each Stockholder will furnish to the Company in writing such information with respect to it as a stockholder as shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Section 8.1 hereof covering an underwritten public offering, the Company and each selling Stockholder agree to enter into a written agreement with the managing underwriter in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. 8.3 Expenses. All reasonable expenses incurred by the Company in complying with Section 8.1 or 8.2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance, and fees and disbursements of one counsel for the sellers of Restricted Stock, but excluding any Selling Expenses (as defined below), are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Restricted Stock are called "Selling Expenses." (a) The Company shall pay all Registration Expenses attributable to the shares of Restricted Stock of the Stockholder included in the registration in connection with each registration statement under Section 8.1 or 8.2 hereof. (b) All Selling Expenses in connection with each registration statement under Section 8.1 or 8.2 hereof shall be borne by the selling Stockholder in proportion to the number of shares of Common Stock sold by each Stockholder. 27 8.4 Indemnification and Contribution. (a) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 8.1 or 8.2 hereof, the Company will indemnify and hold harmless each Stockholder (provided any such Stockholder is a seller of Restricted Stock thereunder), each underwriter of such Restricted Stock thereunder, and each other Person, if any, who controls such Stockholder, its directors and its officers or underwriters within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Stockholder, such underwriter or such Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any shares of Restricted Stock were registered under the Securities Act pursuant to Section 8.1 or 8.2 hereof, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company (other than a violation arising from any action or inaction required of the Company by any applicable regulatory authority in connection with any registration, qualification or compliance), and will reimburse each such Stockholder, each such underwriter and each such Person for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by such Stockholder, such underwriter or such Person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the shares of Restricted Stock under the Securities Act pursuant to Section 8.1 or 8.2 hereof, each Stockholder including shares of Restricted Stock in such registration, severally but not jointly, will indemnify and hold harmless the Company, each Person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter, and each Person who controls any underwriter within the meaning of the Securities Act, against 28 all losses, claims, damages or liabilities, joint or several, to which such Person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which any shares of Restricted Stock were registered under the Securities Act pursuant to Section 8.1 or 8.2 hereof, any preliminary prospectus, or final prospectus contained therein, or any amendment hereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that each such Stockholder will be liable hereunder in any such case only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Stockholder, as such, respectively, furnished in writing to the Company by such Stockholder specifically for use in such registration statement or prospectus. In no event will any Stockholder be required to enter into any agreement or undertaking in connection with any registration under this Agreement providing for any indemnification or contribution obligation on the part of such Stockholder greater than any other Stockholder's obligation under this Section 8.4(b). (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Article 8 and shall only relieve it from any liability which it may have to such indemnified party under this Article 8 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be 29 liable to such indemnified party under this Article 8 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (1) any holder of Restricted Stock exercising rights under this Agreement, or any controlling Person of any such holder, makes a claim for indemnification pursuant to this Article 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration for time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Article 8 provides for indemnification in such case, or (2) contribution under the Securities Act may be required on the part of any such selling holder of Restricted Stock or any such controlling Person in circumstances for which indemnification is provided under this Article 8; then, and in each such case, the Company and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for the portion represented by the percentage that the public offering proceeds of its Restricted Stock offered by the registration statement bears to the public offering proceeds of all securities offered by such registration statement, and the Company shall be responsible for the remaining portion; provided, however, that, in any such case, (A) no such holder will be required to contribute any amount in excess of the proceeds received from the sale of Restricted Stock offered by such holder pursuant to such registration statement; and (B) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 30 8.5 Changes in Capital Structure. If, and as often as, there is any change in the capital structure of the Company by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the registration rights granted in this Article 8 shall continue with respect to the capital structure of the Company as so changed. 8.6 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of a Stockholder's Common Stock to the public without registration, at all times after 90 days after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each holder of Restricted Stock forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports as such Stockholder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Stockholder to sell any Restricted Stock without registration. ARTICLE 9 MISCELLANEOUS 9.1 Ratification of Prior Acts of Board of Directors of Company. Each of the Stockholders hereby adopts, ratifies and confirms all of the actions heretofore taken by the Board of Directors of the Company in all respects, including, without limitation, in respect to the Acquisition Agreement and the transactions contemplated thereby. 9.2 Amendments and Waivers. Each Stockholder agrees that no purported amendment of this Agreement, or waiver, discharge or termination of any obligation under it, shall be enforceable or admissible unless, and only to the extent, expressly set forth in 31 a writing signed by Stockholders who hold at least 66.67 percent of the shares of Common Stock then outstanding; provided, however, no purported amendment of Section 7.9 or Section 6.3(c) of this Agreement shall be enforceable unless expressly set forth in a writing signed by Stockholders who hold at least 75 percent of the shares of Common Stock then outstanding. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 9.3 Notices. Any and all notices, designations, consents, offers, acceptances, or any other communications provided for in this Agreement ("Notice") shall be given in writing by personal delivery, by facsimile with confirming original, by registered or certified mail (return receipt requested) or by overnight mail or courier service maintaining a record of receipt and delivery, which shall be addressed, in the case of the Company, c/o The Jordan Company, 9 West 57th Street, Suite 4000, New York, New York 10019, Attention: A. Richard Caputo, Jr.; and in the case of a Stockholder, to his, her or its address included on the signature page hereto, or in either case, to such other Persons or addresses as shall be furnished in writing by any party to the other parties hereto. A Notice shall be deemed to have been given as of the date (i) when personally delivered, (ii) when actually received, if by mail, (iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 9.4 Assignment. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties hereto and their respective successors and Permitted Transferees, except that neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by a Stockholder (except to another Stockholder or Stockholders) without the prior written consent of the Company. This Section 9.4 shall not be deemed to supersede or modify, in any manner, the provisions of Article 7. 9.5 Conflicts. In the event of any conflict between the provisions of the Certificate of Incorporation or the By-laws, the terms and provisions of this Agreement shall control. 9.6 Severability, Etc. This Agreement shall be governed by, construed, applied and enforced in accordance with the laws of the state of New York, except that no doctrine of choice of law shall be used to apply any law other than that of the state of New York, and no defense, counterclaim or right of set-off given or allowed by the laws of any other state or jurisdiction, or arising out of the enactment, modification or repeal of any law, 32 regulation, ordinance or decree of any foreign jurisdiction, shall be interposed in any action hereon. Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, the non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that (i) in any action for specific performance the parties hereto waive the defense that a remedy at law would be adequate and (ii) in addition to any other remedy to which they may be entitled at law or in equity, the parties hereto shall be entitled to compel specific performance of this Agreement. Each party waives personal service of process and agrees that a summons and complaint commencing an action or proceeding shall be properly served and shall confer personal jurisdiction if served by registered or certified mail to the party at the address set forth in this Agreement, or as otherwise provided by the laws of the state of New York or the United States. 9.7 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any Person. 9.8 Captions. The captions used in this Agreement are for convenience of reference only and do not constitute a part of this Agreement and will not be deemed to limit, characterize or in any way affect any provision of this Agreement, and all provisions of this Agreement will be enforced and construed as if no caption had been used in this Agreement. 9.9 Complete Agreement. This document and the documents referred to herein contain the complete agreement among the parties and supersedes any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 9.10 Counterparts. This Agreement may be executed in one or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. 9.11 Attorneys' Fees. If any legal action or other proceeding is commenced to enforce or interpret any provision of, or otherwise relating to, this Agreement, the losing party shall pay the prevailing party's reasonable expenses incurred in the investigation of any claim leading to the proceeding, preparation for and participation in the proceeding, any appeal or other post judgment motion, and any action to enforce or collect the judgment, including contempt, garnishment, levy, discovery and bankruptcy. "Expenses" shall include, without limitation, court or other proceeding costs and experts' and attorneys' fees and their expenses. The phrase "prevailing party" shall mean the party who 33 is determined in the proceeding to have prevailed and who prevails by dismissal, default or otherwise. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. GFSI HOLDINGS, INC. By: /s/ A. Richard Caputo, Jr. ---------------------------------- A. Richard Caputo, Jr. Vice President STOCKHOLDER SIGNATURES ON THE FOLLOWING PAGES MCIT PLC By /s/ James E. Jordan ----------------------------------- James E. Jordan, Director c/o Jordan/Zalaznick Advisers, Inc. 9 West 57th Street, Suite 4000 New York, New York 10019 EX-4.6 13 DEFERRED LIMITED INTEREST GUARANTY, DATED 2/27/97 [EXECUTION] DEFERRED LIMITED INTEREST GUARANTY THIS GUARANTY AGREEMENT, dated as of February 27, 1997, by GFSI, INC., a Delaware corporation (the "Guarantor"), to MCIT PLC (the "Purchaser"), for the benefit of itself, its Nominees and all other holders of Notes (such and all other capitalized terms being used herein with the meanings set forth in Article I) issued pursuant to the Purchase Agreement, W I T N E S S E T H: WHEREAS, the Guarantor was organized and is being capitalized by, and is a direct wholly-owned Subsidiary of, GFSI Holdings, Inc., a Delaware corporation (the "Company"); and WHEREAS, the Company has on the date hereof (a) pursuant to a purchase agreement, dated as of February 27, 1997 (together with all amendments and other modifications, if any, from time to time hereafter made thereto, the "Purchase Agreement"), between the Company and the Purchaser, obtained $36,050,000 in cash in the aggregate representing the proceeds from the sale by the Company to the Purchaser of the Notes for a purchase price of $25,000,000, Preferred Shares for a purchase price of $11,000,000 and Common Shares for a purchase price of $50,000, and (b) contributed all of such $36,050,000 in the aggregate of proceeds to the Guarantor as capital; and WHEREAS, as a condition to the Purchaser's making such purchases under the Purchase Agreement, the Guarantor is required to execute and deliver this Guaranty; and WHEREAS, the Guarantor has, in consideration of, among other things, receiving such capital contribution, duly authorized the execution, delivery and performance of this Guaranty; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Guarantor hereby agrees as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. Except as otherwise provided herein or as the context otherwise requires, the following terms (whether or not underscored) when used in this Guaranty shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Company" is defined in the first recital hereto. "Guarantor" is defined in the preamble hereto. "Interest Obligations" means all obligations of the Company to make payment of interest accrued from time to time on the Notes in accordance with the terms of the Purchase Agreement. "Note" shall mean each Note executed and delivered pursuant to the Purchase Agreement and each other promissory note of the Company accepted from time to time in substitution or replacement therefor. "Payment Default" is defined in of Section 2.2.2. "Performance Default" is defined in Section 2.2.3. "Performance Default Notice" is defined in Section 2.2.3. "Post-Petition Interest" means, relative to any Senior Indebtedness, all interest accrued or accruing on such Senior Indebtedness after the commencement of any insolvency or liquidation proceeding against the obligor under such Senior Indebtedness in accordance with and at the contract rate, including any rate applicable upon default, specified in the Instrument creating, evidencing or governing such Senior Indebtedness, whether or not, pursuant to applicable law or otherwise, the claim for such interest is allowed as a claim in such insolvency or liquidation proceeding. "Purchase Agreement" is defined in the second recital hereto. "Purchaser" is defined in the preamble hereto. "Senior Agent" means The First National Bank of Chicago (or any other financial institution succeeding to its responsibilities) as the contractual representative for the Senior Lenders pursuant to the Senior Credit Agreement. 2 "Senior Credit Agreement" means the credit agreement, dated as of February 27, 1997, among the Guarantor, the Senior Lenders and the Senior Agent as so originally executed. At all times after the date hereof, "Senior Credit Agreement" also means the Senior Credit Agreement as originally executed and delivered, together with (a) each successor Instrument pursuant to which the Guarantor obtains from other financial institutions loans to refinance Indebtedness outstanding and commitments to lend existing under the Senior Credit Agreement as in effect on the date of such refinancing; and (b) all amendments, supplements, modifications, extensions and renewals hereafter made to the Senior Credit Agreement or such successor Instrument; provided, however, that without the consent of the Required Noteholders, no such amendment or modification shall be made which (c) increases the maximum principal amount of Indebtedness permitted to be incurred pursuant thereto above the maximum principal amount of Indebtedness permitted by clause (c) of Section 6.2.2 of the Purchase Agreement to be outstanding pursuant thereto; (d) amends Section 6.2(M) or 6.3(F) of the Senior Credit Agreement or any other provision thereof as in effect on the date hereof in a manner adversely affecting the Guarantor's ability to make payments to the Company or adds any provisions thereto of a substantially duplicative nature; (e) extends the stated maturity of the Senior Loans or the effectiveness of the Senior Credit Agreement to a date less than 90 days prior to April 30, 2008 without amending Section 6.3(F) of the Senior Credit Agreement so that the Company may receive in accordance therewith "Restricted Payments" (as defined therein) in an amount sufficient to make all payments of principal of the Notes when due on such date; or (f) amends, supplements or otherwise modifies any other agreement, covenant or undertaking of the Senior Credit Agreement or any other Senior Loan Document applicable to the Company if the cumulative effect of such amendment or modification and all other such amendments and modifications, if any, becoming effective concurrently therewith shall make the Senior Credit Agreement or such 3 other Senior Loan Document materially more burdensome to the Company. "Senior Indebtedness" means all indebtedness, obligations and liabilities of the Guarantor (a) to the Senior Lenders, whether now existing or hereafter created arising out of or under the Senior Credit Agreement, including (x) all principal, interest (including Post-Petition Interest) and other amounts payable under any letter of credit reimbursement agreement, bankers acceptance, note or instrument issued thereunder and (y) all Hedging Liabilities owing to a Senior Lender or an Affiliate thereof; provided, however, that the aggregate principal amount of Senior Indebtedness under or in respect of the Senior Credit Agreement (excluding, however, the amount of all such Hedging Liabilities owing to a Senior Lender or an Affiliate thereof) shall not at any time exceed the maximum principal amount of Indebtedness permitted by clause (c) of Section 6.2.2 of the Purchase Agreement to be outstanding pursuant thereto; and (b) to the Senior Noteholders, whether now existing or hereafter created, arising out of or under the Senior Indenture, including all principal of and interest (including Post-Petition Interest) on the Notes and other amounts payable under the Senior Indenture; provided, however, that the aggregate principal amount of Senior Indebtedness under or in respect of the Senior Indenture shall not at any time exceed the maximum principal amount of Indebtedness permitted by clause (d) of Section 6.2.2 of the Purchase Agreement to be outstanding pursuant thereto. "Senior Indenture" means the indenture, dated as of February 20, 1997, between the Guarantor and the Senior Indenture Trustee. At all times after the date hereof, "Senior Indenture" also means the Senior Indenture as so originally executed and delivered, together with all amendments, supplements, modifications, extensions, and renewals; provided, however, that without the consent of the Required Noteholders, no such amendment or modification shall be made which (a) increases the maximum principal amount of Indebtedness permitted to be incurred and at any time be outstanding pursuant thereto above the maximum aggregate principal amount of Indebtedness then permitted to be outstanding thereunder by clause(d) of Section 6.2.2 of the Purchase Agreement; 4 (b) amends Section 4.05 of the Senior Indenture in a manner adversely affecting the Guarantor's ability to make payments to the Company; or (c) extend the stated maturity of the Senior Notes to a date less than 365 days prior to April 30, 2008 without amending Section 4.05 of the Senior Indenture so that the Company may receive in accordance therewith "Restricted Payments" (as defined therein) in an amount sufficient to make all payments of principal of the Notes when due on such date. "Senior Lender" means collectively all of the lending institutions which are or become parties to the Senior Credit Agreement. "Senior Indenture Trustee" means Fleet National Bank, as trustee under the Senior Indenture. "Senior Note" means each 9 5/8% note of the Guarantor issued pursuant to the Senior Indenture and each other note of the Guarantor accepted from time to time in substitution or replacement therefor. "Senior Noteholder" means each Person registered pursuant to the Senior Indenture as the holder of a Senior Note. SECTION 1.2. Purchase Agreement Terms. Except as otherwise provided herein or as the context otherwise requires, terms for which meanings are provided in the Purchase Agreement (including "Required Noteholders") shall have the same meanings when used in this Guaranty. ARTICLE II GUARANTY SECTION 2.1. Guaranty of Payment. The Guarantor hereby absolutely, unconditionally and irrevocably guarantees the full and prompt payment and performance on demand and all times thereafter of all Interest Obligations. The Guarantor also agrees to reimburse the Purchaser and the Noteholders for all costs and expenses, including reasonable attorneys' fees and disbursements, which the Purchaser expends or incurs in collecting, compromising or enforcing this Guaranty, whether or not suit is filed, expressly including all costs, expenses, reasonable attorneys' fees and other charges incurred in connection with any insolvency, bankruptcy, reorganization, liquidation, dissolution, arrangement or other similar 5 proceedings involving the Guarantor which in any way affect the exercise of rights, powers, remedies and privileges with respect to this Guaranty or the interest accrued and unpaid on the outstanding principal amount of the Notes. SECTION 2.2. Subordination. All indebtedness and liability of the Guarantor pursuant to this Guaranty shall be subordinate and junior in right of payment to Senior Indebtedness in the manner and with the effect provided in Sections 2.2.1 through 2.2.11, and each holder of a Note, by its acceptance thereof, agrees to be bound by such terms of subordination. SECTION 2.2.1. Payment Over Upon Dissolution, etc. In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the property, assets or business of the Guarantor, or the proceeds thereof, to any creditor or creditors of the Guarantor or upon any indebtedness of the Guarantor, by reason of any liquidation, dissolution or other winding up of the Guarantor or its business or by reason of any sale, receivership, insolvency or bankruptcy proceedings or assignment for the benefit of creditors or any proceeding by or against the Guarantor for any relief under any bankruptcy, reorganization or insolvency law or laws, federal or state, or any law, federal or state, relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension, then, and in any such event, any payment or distribution of any kind or character, whether in cash, property or securities which, but for the subordination provisions of this Guaranty, would otherwise be payable or deliverable upon or in respect of this Guaranty, shall instead be paid over or delivered (x) if any Senior Indebtedness is outstanding under the Senior Credit Agreement, to the Senior Agent for application to such Senior Indebtedness (y) after the payment in full of the Senior Indebtedness under the Senior Credit Agreement, to the Senior Agent and Senior Indenture Trustee for application to Senior Indebtedness in respect of the Senior Notes, and until the Senior Indebtedness has been repaid in full in cash, the Purchaser and the Noteholders shall not receive any such payment or distribution or benefit therefrom. The Senior Agent (and, in the event that the Senior Agent shall fail to file a proof of claim relating to the Interest Obligations within five days of the date required to be filed, the Senior Indenture Trustee) may in the name of the Noteholders or otherwise file, prove and vote in any such proceedings with respect to any and all claims of the Noteholders relating to the Interest Obligations. SECTION 2.2.2. Payment Block Upon Payment Defaults. Upon a default (a "Payment Default") in the payment of principal of, interest on, premium of or any other amount due under or in respect of any Senior Indebtedness referred to in clause (a) of 6 the definition thereof (or, after the payment in full in cash of any such Senior Indebtedness, the Senior Indebtedness referred to in clause (b) of the definition thereof) when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or otherwise, then, no direct or indirect payment in cash, property or securities by set-off or otherwise, shall be made or agreed to be made by the Guarantor on account of the Interest Obligations; provided, however, that if the maturity of the applicable Senior Indebtedness has not been accelerated prior to the expiration of the 180 day period referred to in clause (a) below (or if any such acceleration has been rescinded or annulled), such payments may be made on account of the Interest Obligations on or after (a) a date which is 180 consecutive days following the date on which such Payment Default shall have occurred (and without regard to whether one or more other Payment Defaults or any Performance Default shall have occurred and be continuing); or (b) if earlier, such Payment Default shall have been cured or waived or shall have ceased to exist. SECTION 2.2.3. Payment Block Upon Performance Defaults. Upon a default (a "Performance Default") by the Guarantor in the performance of any obligation (other than a Payment Default) with respect to any Senior Indebtedness under the Senior Credit Agreement as the result of which the holders thereof are entitled to accelerate the maturity thereof, then, if written notice of such Performance Default is given in the manner provided in the Senior Credit Agreement by the Senior Agent to the Guarantor (a "Performance Default Notice"), no direct or indirect payment in cash, property or securities, by set-off or otherwise, shall be made or agreed to be made by the Guarantor on account of any Interest Obligation unless and until (a) a date which is 180 consecutive days following the date on which such Performance Default shall have occurred (and without regard to whether one or more other Performance Defaults or any Payment Default shall have occurred and be continuing); or (b) if earlier, such Performance Default shall have been cured or waived or shall have ceased to exist. SECTION 2.2.4. Standstill. Upon the occurrence and during the continuation of any Performance Default with respect to any Senior Indebtedness as to which a Performance Default Notice shall have been given in accordance with Section 2.2.3 or of any Payment Default, neither the Purchaser nor any other Noteholder shall be entitled to 7 (a) demand payment of any Interest Obligation under this Guaranty, or (b) commence, pursue or participate in any judicial proceeding or take any other action to enforce any obligations of the Guarantor under or in respect of this Guaranty unless and until (c) a date which is 180 consecutive days following the date on which such Performance Default Notice shall have been given or 180 consecutive days following the date on which such Payment Default shall have occurred, or (d) if earlier, such Performance Default or Payment Default shall have been cured or waived or shall have ceased to exist, or (e) if earlier, the maturity of all or any part of the principal amount of any Senior Indebtedness shall have been accelerated in accordance with its terms. SECTION 2.2.5. Turnover. In the event that, notwithstanding the provisions of Section 2.2.1, 2.2.2 or 2.2.3, any such direct or indirect payment or distribution shall be received by the Purchaser, its Nominees or any other Noteholder from the Guarantor in contravention of the provisions of any such Section, such payments and distributions shall be held in trust for the benefit of, and upon receipt by such holder of written notice that such payment of distribution has been made in violation of such Section, shall be immediately paid over to, the holders of all Senior Indebtedness at the time outstanding or their representative for application to the pro rata payment of all such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full in cash, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. SECTION 2.2.6. Unconditional Obligation, etc. Nothing contained in this Section 2.2 or elsewhere in this Guaranty is intended to or shall impair, as between the Guarantor, its creditors (other than the holders of Senior Indebtedness) and the Purchaser, its Nominees and the other Noteholders, the obligation of the Guarantor, which is absolute and unconditional, to pay to the Purchaser, its Nominees and the other Noteholders all amounts owing under this Guaranty as and when such amounts become due and payable in accordance with the terms hereof, or to in any way affect the relative rights of the Purchaser, its Nominees or the other Noteholders and creditors of the Guarantor other than the holders of Senior Indebtedness. Subject to the payment in full 8 of all Senior Indebtedness, the Purchaser, its Nominees and the other Noteholders shall be subrogated to the rights of the holder of Senior Indebtedness to receive payments or distributions of assets of the Guarantor made on the Senior Indebtedness until all Interest Obligations shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the Senior Lenders of any cash, property or securities to which the Purchaser, its Nominees and the other Noteholders would be entitled except for these provisions shall, as between the Guarantor, its creditors (other than the Senior Lenders and the Purchaser, its Nominees and the other Noteholders, be deemed to be a payment by the Guarantor to or on account of Senior Indebtedness, it being understood that these provisions are and are intended solely for the purpose of defining the relative rights of the Purchaser, its Nominees and the other Noteholders, on the one hand, and the Senior Lenders on the other hand. SECTION 2.2.7. Waivers, etc. The Purchaser hereby waives any and all notice of renewal, extension or accrual of any of Senior Indebtedness, present or future, and agrees and consents that without notice to or assent by the Purchaser, its Nominees and the other Noteholders: (a) subject to the provisions of Sections 6.2.7 and 6.2.8 of the Purchase Agreement, the obligations and liabilities of the Guarantor or any other party or parties for or upon the Senior Indebtedness (and/or any promissory note(s), security document or guaranty evidencing or securing the same) may, from time to time, in whole or in part, be renewed, extended, modified, amended, accelerated, compromised, supplemented, terminated, sold, exchanged, waived or released, (b) the Senior Lenders and Senior Noteholders may exercise or refrain from exercising any right, remedy or power granted by the applicable Senior Indebtedness Instrument or any other document creating, evidencing or otherwise related to Senior Indebtedness or at law, in equity or otherwise, with respect to Senior Indebtedness or any collateral security or lien (legal or equitable) held, given or intended to be given therefor (including the right to perfect any lien or security interest created in connection therewith), (c) subject to the provisions of Sections 6.2.7 and 6.2.8 of the Purchase Agreement, any and all collateral security and/or liens (legal or equitable) at any time, present or future, held, given or intended to be given for Senior Indebtedness, and any rights or remedies of the Senior Lenders in respect thereof, may, from time to time, in whole or in part, be exchanged, sold, surrendered, 9 released, modified, waived or extended by the Senior Lenders or Senior Noteholders, and (d) any balance or balances of funds with the Senior Lenders at any time standing to the credit of the Guarantor or any guarantor of any Senior Indebtedness may, from time to time, in whole or in part, be surrendered or released, all as the Senior Lenders may deem advisable and all without impairing, abridging, diminishing, releasing or affecting the subordination to Senior Indebtedness provided for herein. Neither the Senior Lenders nor the Senior Noteholders shall be prejudiced in their right to enforce the subordination contained herein in accordance with the terms hereof by any act or failure to act on the part of the Guarantor. SECTION 2.2.8. Amendment of Subordination Provisions. The subordination provisions contained herein are for the benefit of the holders of Senior Indebtedness and may not be rescinded, cancelled, amended or modified in any way without the prior written consent thereto of the Senior Agent and Senior Indenture Trustee. SECTION 2.2.9. Notice to the Noteholders. The Guarantor shall give prompt written notice to the Purchaser, its Nominees and each other Noteholder of any fact known to the Guarantor which would prohibit the making of any payment to the Purchaser, its Nominees or any other Noteholder under this Guaranty. Notwithstanding the provisions of this Section 2.2 or any other provision of this Guaranty, the Purchaser (a) shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to the Purchaser, its Nominees or any other Noteholder under this Guaranty in respect of this Guaranty, unless and until the Purchaser, its Nominees or any other Noteholder shall have received written notice thereof from the Guarantor, the Senior Agent or a holder of Senior Indebtedness or from any trustee therefor (and, prior to the receipt of any such written notice, the Purchaser, its Nominees and each other Noteholder shall be entitled in all respects to assume that no such facts exist); and (b) shall be entitled to receive and retain all payments made by or on behalf of the Guarantor prior to receipt by the Purchaser under this Guaranty of any such written notice. All notices and other communications provided to the Purchaser under this Guaranty shall be in writing or by telecopy and addressed or delivered to it c/o Jordan/Zalaznick Advisers, Inc., 10 at 9 West 57th Street, New York, New York, 10019, Attn: James E. Jordan, Jr., or at such other address as may be designated by the Purchaser. Any notice, if mailed and properly addressed with postage prepaid, shall be deemed given when received; any notice, if transmitted by telecopy, shall be deemed given when transmitted. SECTION 2.2.10. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Guarantor referred to in this Section 2.2, the Purchaser, its Nominees and each other Noteholder shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Purchaser, its Nominees and each other Noteholder, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other Indebtedness of the Guarantor, the amount thereof or payable therein, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 2.2. SECTION 2.3. Obligations Absolute, Unconditional, etc. The Guarantor agrees that its obligations hereunder shall be absolute, unconditional and irrevocable, irrespective of the genuineness, validity, legality or enforceability of the Interest Obligations, the Notes, the Purchase Agreement or any other Purchase Document, or any other Instrument or collateral relating to or securing the payment, performance or observance thereof or any other circumstance which could otherwise constitute a legal or equitable discharge of a surety or guarantor, and the Purchaser may, in its discretion or at the direction of the Required Noteholders, proceed to enforce this Guaranty in respect of any Interest Obligations as and to the extent provided in Section 2.1. Neither the Purchaser, its Nominees nor any other Noteholder shall have any obligation to protect, secure, perfect or insure any collateral security document or property subject thereto at any time held as security for the Interest Obligations or this Guaranty. Except as herein otherwise expressly provided, the Guarantor hereby absolutely, unconditionally and irrevocably waives and agrees not to assert or take advantage of: (a) any right to require the Purchaser, its Nominees or any other Noteholder to proceed against the Company or any other Person, or to proceed against or exhaust any other security or collateral for the payment, performance or observance of the Interest Obligations, or to pursue any 11 other remedy whatsoever before proceeding against the Guarantor hereunder; (b) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any Person, or the failure of the Purchaser, its Nominees or any other Noteholder to file or enforce a claim against any estate (in administration, bankruptcy or any other proceedings) of any Person; (c) any defense based upon an election of remedies by the Purchaser, its Nominees or any other Noteholder, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or impairs any right of subrogation of the Guarantor or the right of the Guarantor to proceed against the Company or any other Person for reimbursement or both; (d) any other defense of the Company, or the cessation of the liability of the Company for any cause whatsoever, with respect to any Interest Obligations; (e) any other defense of any kind, whether now existing or arising hereafter, of the Guarantor to any action, suit or judicial or legal proceeding that may be instituted with respect to this Guaranty; (f) presentment, demand, protest and notice of any kind, including notice of the creation or non-payment or non-performance of all or any Interest Obligations, notice of dishonor or protest, notice of acceptance by the Purchaser, its Nominees or any other Noteholder of this Guaranty, notice of the existence, creation or incurrence of any new or additional indebtedness, obligation or other liability, and notice of action or non-action on the part of the Purchaser, its Nominees or any other Noteholder, the Company or the Guarantor or any other Person in connection with the Interest Obligations or otherwise; and (g) any duty on the part of the Purchaser, its Nominees or any other Noteholder or other Person to disclose to the Guarantor any facts or information any such Person may now or hereafter know or possess regarding the Company, the Interest Obligations or any other matter whatsoever, regardless of whether such Person has reason to believe that such facts or other information may materially increase the risk which the Guarantor intends to assume or has reason to believe that such facts or other information are unknown to the Guarantor or has a reasonable opportunity to communicate such facts or other information, it being understood and agreed that the Guarantor is fully and solely responsible 12 for being and keeping informed of the financial condition of the Company and of all other circumstances bearing on the risk of non-payment of any Interest Obligations. This Guaranty shall in all respects be a continuing, absolute, unconditional and irrevocable Guaranty of payment, and shall remain in full force and effect until all Interest Obligations have been fully paid, and may not be amended, modified or supplemented except in accordance with Section 8.1 of the Purchase Agreement and Section 2.2.8. This Guaranty shall continue to be effective, or to be reinstated, as the case may be, if at any time any payment, in whole or in part, of any Interest Obligations is rescinded or must otherwise be restored or returned by the Purchaser, its Nominees or any other Noteholder upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Guarantor or the Company, or upon or as a result of the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to the Guarantor or the Company or any part of either of its property, or otherwise, all as though such payments had never been made. SECTION 2.4. Waiver of All Defenses. Except as otherwise specified herein, the Purchaser, its Nominees or any other Noteholder may, from time to time, in their sole discretion and without notice to the Guarantor, take any or all of the following actions, all without in any way diminishing, impairing, releasing or affecting the liability or obligations of the Guarantor under or with respect to this Guaranty, and the Guarantor hereby irrevocably consents to any or all of the following actions by the Purchaser, its Nominees or any other Noteholder: (a) retain or obtain a security interest in any property to secure any Interest Obligation or any obligation hereunder; (b) retain or obtain the primary or secondary obligations with respect to any Interest Obligation; (c) extend or renew for one or more periods (whether or not longer than the original period), or alter or exchange, any Interest Obligation, or release or compromise any obligation of the Guarantor hereunder or any obligation of any nature of any other Person with respect to any Interest Obligation or amend or modify in any respect the Purchase Agreement or any Purchase Document; (d) waive, modify, subordinate, compromise or release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any Interest Obligation or any obligation hereunder, or extend or renew for one or more periods 13 (whether or not longer than the original period) or waive, release, subordinate, compromise, modify, alter or exchange any guaranty or other obligations of any nature of any obligor with respect to any such property; and (e) resort to the Guarantor for payment of any Interest Obligation, whether or not the Purchaser, its Nominees or any other Noteholder shall have resorted to or exhausted any other remedy or any other security or collateral for any obligation hereunder or shall have proceeded against the Company or any other Person primarily or secondarily obligated with respect to any Interest Obligation. The Guarantor absolutely, unconditionally and irrevocably agrees that, as long as any Interest Obligation has not been paid in full, the Guarantor shall not have and shall not enforce any right of subrogation, and the Guarantor waives any right to enforce any remedy which the Purchaser, its Nominees or any other Noteholder now has or may hereafter have against the Company or any other Person hereunder or pursuant hereto or under or pursuant to the Purchase Agreement, the Notes or any other Purchase Document, and any benefit of, and any right to participate in, any security for any Interest Obligation now or hereafter held by the Purchaser, its Nominees or any other Noteholder, as the case may be. The Guarantor absolutely, unconditionally and irrevocably agrees that the liability of the Guarantor hereunder, and the remedies for the enforcement of such liability, shall in no way be diminished or affected by: (f) the release or discharge of the Company or any other Person responsible for the payment, performance or observance of any Interest Obligation in any creditors', receivership, bankruptcy, reorganization, insolvency or other proceeding; (g) the rejection or disaffirmance in any such proceeding of any Instrument evidencing, securing, or executed in connection with, any Interest Obligation; or (h) the impairment, limitation or modification of any Interest Obligation resulting from the operation of any present or future provision of the federal bankruptcy code or any other statute or law of any kind or from the decision or order of any court. The Guarantor absolutely, unconditionally and irrevocably further agrees that the creation from time to time of any Interest Obligation and the application or allocation of amounts 14 received by the Purchaser, its Nominees or any Noteholder or any other Person to the payment of such Interest Obligation, and the creation, existence or enforcement from time to time of any security for the Interest Obligation, and the application and allocation of the proceeds of such security, shall in no way affect or impair the rights, remedies, powers and privileges of the Purchaser, its Nominees or any other Noteholder or the holder of any Note or the obligation of the Guarantor under this Guaranty. The Guarantor hereby expressly waives notice of the creation of all Interest Obligations and all diligence in collection or protection of or realization upon the Interest Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. ARTICLE III THE MEZZANINE AGENT SECTION 3.1. Actions. Each Noteholder authorizes the Mezzanine Agent to act at the direction of the Required Noteholders on behalf of such Noteholder under this Agreement, and to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Mezzanine Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Noteholder agrees to reimburse the Mezzanine Agent ratably for all reasonable out-of-pocket expenses (including attorneys' fees) incurred by the Mezzanine Agent hereunder or in connection herewith or therewith or in enforcing the obligations of the Company hereunder and for which the Mezzanine Agent is not reimbursed by the Company. The Mezzanine Agent shall not be required to take any action hereunder, or to prosecute or defend any suit in respect hereof, unless indemnified to its satisfaction by each Noteholder against loss, costs, liability and expense. If any indemnity furnished to the Mezzanine Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. SECTION 3.2. Exculpation. Neither the Mezzanine Agent nor any of its directors, officers, employees or agents shall be liable to any Noteholder for any action taken or omitted to be taken by it or them under this Agreement, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due authorization, execution or delivery of this Agreement, nor to make any inquiry respecting the performance by the Guarantor of its obligations hereunder. The Mezzanine Agent 15 shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which it believes to be genuine and to have been presented by a proper Person. SECTION 3.3. Status as Purchaser. The Mezzanine Agent shall have the same rights and powers with respect to the Notes held by it as any Noteholder and may exercise the same as if it were not the Mezzanine Agent, and the term "Noteholder" shall include the Mezzanine Agent in its individual capacity. SECTION 3.4. Credit Decisions. Each Noteholder acknowledges that it has, independently of the Mezzanine Agent and each other Noteholder and based on the financial information referred to in Section 5.4 of the Purchase Agreement and such other documents, information and investigations as it has deemed appropriate, made its own credit decision to purchase its Notes. Each Noteholder also acknowledges that it will, independently of the Mezzanine Agent and each other Noteholder and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement, any Note or any other Purchase Document. ARTICLE IV MISCELLANEOUS SECTION 4.1. Purchase Document. This Guaranty is a Purchase Document for purposes of the Purchase Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof, including Article VIII thereof. SECTION 4.2. Successors and Assigns; Assignment. This Guaranty shall be binding upon the Guarantor and its successors and assigns and shall inure to the benefit of the Purchaser, its Nominees and each other Noteholder and their respective successors and assigns, including any assignee of any Note and be enforceable by the Purchaser at the direction of the Required Noteholders; provided, however, that the Guarantor may not assign any of its obligations hereunder without the prior written consent of all Noteholders. Each Noteholder may, subject to the provisions of Section 4.6 of the Purchase Agreement, from time to time, without notice to the Guarantor assign or transfer any Note or any interest therein, and, notwithstanding any such transfer or assignment or any subsequent transfer or assignment thereof, such Note shall be and remain a Note for purposes of this Guaranty, and each and every immediate and successive transferee 16 or assignee of any Note or any interest therein shall, to the extent of the interest of such transferee or assignee in the Note, be entitled to the benefits of this Guaranty. 17 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed and delivered by its authorized officer as of the date first above written. GFSI, INC. By /s/ A. Richard Caputo, Jr. --------------------------- A. Richard Caputo, Jr. Vice President In connection with the merger of the Guarantor with Winning Ways, Inc., an Missouri, on this 27th day of February, 1997, GFSI Inc., the Delaware corporation surviving such merger, hereby absolutely and unconditionally assumes and agrees to pay, perform, observe and discharge all of the obligations of the Guarantor under the foregoing Guaranty. GFSI, INC. By /s/ A. Richard Caputo, Jr. --------------------------- A. Richard Caputo, Jr. Vice President 18 EX-5 14 OPINION OF MAYER, BROWN & PRATT [LETTERHEAD OF MAYER, BROWN & PLATT] EXHIBIT 5 --------- March 28, 1997 GFSI, INC. 9700 Commerce Parkway Lenexa, Kansas 66219 Re: 9 5/8% Series B Senior Subordinated Notes due 2007 Ladies and Gentlemen: We have acted as special counsel to GFSI, Inc., a Delaware corporation (the "Company"), in connection with the proposed exchange offering (the "Exchange Offering") of $125,000,000 aggregate principal amount of the Company's 9 5/8% Series B Senior Subordinated Notes due 2007 (the "Series B Notes") for any and all of its outstanding 9 5/8% Series A Senior Subordinated Notes due 2007. In this connection, we have examined such corporate and other records, instruments, certificates and documents as we have considered necessary to enable us to express this opinion. Based on the foregoing, it is our opinion that upon completion of the Exchange Offering, the Series B Notes will have been duly authorized for issuance. The Series B Notes, when delivered in accordance with the terms of the indenture in substantially the form filed as Exhibit 4.1 to the Registration Statement (the "Indenture") and the Purchase Agreement for the Exchange Offering in substantially the form filed as Exhibit 1 to the Registration Statement will be validly issued and enforceable in accordance with the Indenture. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the caption "Legal Matters". Very truly yours, /s/ Mayer, Brown & Platt MAYER, BROWN & PLATT EX-8 15 TAX OPINION EXHIBIT 8 [LETTERHEAD OF MAYER, BROWN & PLATT] March 28, 1997 GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Re: 9 5/8% Series B Senior Subordinated Notes due 2007 Ladies and Gentlemen: We have acted as special counsel and special tax counsel to GFSI, Inc., a Delaware corporation (the "Company"), in connection with the proposed exchange offering (the "Exchange Offering") of $125,000,000 aggregate principal amount of the Company's 9 5/8% Series B Senior Subordinated Notes due 2007 for any and all of its outstanding 9 5/8% Series A Senior Subordinated Notes due 2007. In this connection, we have examined such corporate and other records, instruments, certificates and documents as we have considered necessary to enable us to express this opinion. Based on the foregoing, we hereby confirm our opinion as to certain matters of law or legal conclusions as set forth under "Federal Income Tax Consequences" in the prospectus (the "Prospectus") forming a part of the registration statement (the "Registration Statement") prepared by the Company in connection with the Exchange Offering, and we consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to us under the headings "Legal Matters" in the Prospectus forming a part of the Registration Statement. Very truly yours, /s/ Mayer, Brown & Platt MAYER, BROWN & PLATT EX-10.1 16 CREDIT AGREEMENT DATED 2/27/97 BY AND AMONG GFSI EXECUTION COPY ================================================================================ CREDIT AGREEMENT Dated as of February 27, 1997 among GFSI, INC. THE INSTITUTIONS FROM TIME TO TIME PARTIES HERETO AS LENDERS and THE FIRST NATIONAL BANK OF CHICAGO, as Agent ================================================================================ TABLE OF CONTENTS ARTICLE I: DEFINITIONS...........................................................................................1 1.2 References....................................................................................36 1.3 Supplemental Disclosure.......................................................................36 ARTICLE II: THE CREDITS.........................................................................................37 (a) Term Loan A.........................................................................................37 (i) Amount of Term Loan A.....................................................................37 (ii) Borrowing Notice.........................................................................37 (iii) Making of Term Loans....................................................................37 (iv) Repayment of the A Term Loans............................................................37 (b) Term Loan B.........................................................................................39 (i) Amount of Term Loan B.....................................................................39 (ii) Borrowing Notice.........................................................................39 (iii) Making of Term Loans....................................................................39 (iv) Repayment of the B Term Loans............................................................39 2.2 Revolving Loans....................................................................................41 2.3 Swing Line Loans...................................................................................41 2.4 Rate Options for all Advances......................................................................43 2.5 Optional Payments; Mandatory Prepayments...........................................................43 (A) Optional Payments.........................................................................43 (B) Mandatory Prepayments.....................................................................43 2.6 Reduction of Commitments...........................................................................45 2.7 Method of Borrowing................................................................................46 2.8 Method of Selecting Types and Interest Periods for Advances........................................46 2.9 Minimum Amount of Each Advance.....................................................................46 2.10 Method of Selecting Types and Interest Periods for Conversion and Continuation of Advances.......................................................................46 (A) Right to Convert..........................................................................46 (B) Automatic Conversion and Continuation.....................................................46 (C) No Conversion Post-Default or Post-Unmatured Default......................................47 (D) Conversion/Continuation Notice............................................................47 2.11 Default Rate......................................................................................47 2.12 Collections Account Arrangements..................................................................47 2.13 Method of Payment.................................................................................47 2.14 Notes, Telephonic Notices.........................................................................48 2.15 Promise to Pay; Interest and Fees; Interest Payment Dates; Interest and Fee Basis; Taxes; Loan and Control Accounts..............................................................48 (A) Promise to Pay............................................................................48 (B) Interest Payment Dates....................................................................48 (C) Commitment Fees...........................................................................49
- i - (D) Interest and Fee Basis; Applicable Eurodollar Margin; Applicable Floating Rate Margin and Applicable Commitment Fee Percentage..................................49 (E) Taxes.....................................................................................51 (F) Loan Account..............................................................................54 (G) Control Account...........................................................................54 (H) Entries Binding...........................................................................54 2.16 Notification of Advances, Interest Rates, Prepayments and Aggregate Revolving Loan Commitment Reductions....................................................................54 2.17 Lending Installations.............................................................................54 2.18 Non-Receipt of Funds by the Agent.................................................................54 2.19 Termination Date..................................................................................55 2.20 Replacement of Certain Lenders....................................................................55 2.21 Letter of Credit Facility.........................................................................56 2.22 Letter of Credit Participation....................................................................57 2.23 Reimbursement Obligation..........................................................................58 2.24 Cash Collateral...................................................................................58 2.25 Letter of Credit Fees.............................................................................59 2.26 Indemnification; Exoneration......................................................................59 2.27 Issuing Lender Reporting Requirements.............................................................60 ARTICLE III: CHANGE IN CIRCUMSTANCES............................................................................60 3.1 Yield Protection...................................................................................60 3.2 Changes in Capital Adequacy Regulations............................................................61 3.3 Availability of Types of Advances..................................................................62 3.4 Funding Indemnification............................................................................62 3.5 Lenders' Duty to Mitigate; Lender Statements; Survival of Indemnity................................63 ARTICLE IV: CONDITIONS PRECEDENT................................................................................63 4.1 Initial Advances and Letters of Credit.............................................................63 4.2 Each Advance and Letter of Credit..................................................................65 ARTICLE V: REPRESENTATIONS AND WARRANTIES.......................................................................65 5.1 Organization; Corporate Powers....................................................................65 5.2 Authority.........................................................................................66 5.3 No Conflict; Governmental Consents................................................................66 5.4 Financial Statements..............................................................................67 5.5 No Material Adverse Change........................................................................67 5.6 Taxes.............................................................................................68 (A) Tax Examinations..........................................................................68 (B) Payment of Taxes..........................................................................68 5.7 Litigation; Loss Contingencies and Violations.....................................................68 5.8 Subsidiaries......................................................................................69 5.9 ERISA.............................................................................................69 5.10 Accuracy of Information...........................................................................70 5.11 Securities Activities.............................................................................70 5.12 Material Agreements...............................................................................71
- ii - 5.13 Compliance with Laws..............................................................................71 5.14 Assets and Properties.............................................................................71 5.15 Statutory Indebtedness Restrictions...............................................................71 5.16 Post-Retirement Benefits..........................................................................71 5.17 Insurance.........................................................................................71 5.18 Indebtedness of Target; Refinanced Indebtedness; Contingent Obligations...........................72 5.19 Labor Matters.....................................................................................72 5.20 The Stock Acquisition; Minimum Equity Contributions...............................................73 5.21 Environmental Matters.............................................................................73 5.22 Capitalization....................................................................................74 5.23 The Offering and Sale of the Senior Subordinated Notes............................................74 5.24 Solvency..........................................................................................75 ARTICLE VI: COVENANTS...........................................................................................75 6.1 Reporting..........................................................................................75 (A) Financial Reporting.......................................................................75 (B) Notice of Default.........................................................................77 (C) Lawsuits..................................................................................77 (D) Insurance.................................................................................78 (E) ERISA Notices.............................................................................78 (F) Labor Matters.............................................................................79 (G) Other Indebtedness........................................................................79 (H) Other Reports.............................................................................80 (I) Environmental Notices.....................................................................80 (J) Borrowing Base Certificate................................................................80 (K) Other Information.........................................................................80 6.2 Affirmative Covenants..............................................................................81 (A) Corporate Existence, Etc..................................................................81 (B) Corporate Powers; Conduct of Business.....................................................81 (C) Compliance with Laws, Etc.................................................................81 (D) Payment of Taxes and Claims; Tax Consolidation............................................81 (E) Insurance.................................................................................81 (F) Inspection of Property; Books and Records; Discussions....................................82 (G) Insurance and Condemnation Proceeds.......................................................82 (H) ERISA Compliance..........................................................................83 (I) Maintenance of Property...................................................................83 (J) Environmental Compliance..................................................................84 (K) Use of Proceeds...........................................................................84 (L) Hedging Agreements........................................................................84 (M) Separate Corporate Existence..............................................................84 (N) Future Liens on Real Property.............................................................85 (O) Appraisals; Title Policy Endorsements.....................................................86 6.3 Negative Covenants.................................................................................86 (A) Indebtedness..............................................................................86 (B) Sales of Assets...........................................................................88 (C) Liens.....................................................................................90
- iii - (D) Investments...............................................................................91 (E) Contingent Obligations....................................................................92 (F) Restricted Payments.......................................................................93 (G) Conduct of Business; Subsidiaries; Acquisitions...........................................96 (H) Transactions with Shareholders and Affiliates.............................................98 (I) Restriction on Fundamental Changes........................................................99 (J) Sales and Leasebacks; Off Balance Sheet Liabilities.......................................99 (K) Margin Regulations........................................................................99 (L) ERISA.....................................................................................99 (M) Issuance of Capital Stock................................................................100 (N) Corporate Documents......................................................................100 (O) Other Indebtedness.......................................................................101 (P) Fiscal Year..............................................................................102 (Q) Subsidiary Covenants.....................................................................102 (R) Hedging Obligations......................................................................102 (S) Change of Deposit Accounts...............................................................102 6.4 Financial Covenants...............................................................................102 (A) Defined Terms for Financial Covenants....................................................102 (B) Interest Expense Coverage Ratio..........................................................104 (C) Fixed Charge Coverage Ratio..............................................................105 (D) Maximum Leverage Ratio...................................................................106 ARTICLE VII: DEFAULTS..........................................................................................107 7.1 Defaults..........................................................................................107 ARTICLE VIII: ACCELERATION, DEFAULTING LENDERS; WAIVERS, AMENDMENTS AND REMEDIES................................................................................112 8.1 Termination of Commitments; Acceleration..........................................................112 8.2 Defaulting Lender.................................................................................112 8.3 Amendments........................................................................................114 8.4 Preservation of Rights............................................................................115 ARTICLE IX: GENERAL PROVISIONS.................................................................................115 9.1 Survival of Representations.......................................................................115 9.2 Governmental Regulation...........................................................................115 9.3 Performance of Obligations........................................................................115 9.4 Headings..........................................................................................116 9.5 Entire Agreement..................................................................................116 9.6 Several Obligations; Benefits of this Agreement...................................................116 9.7 Expenses; Indemnification.........................................................................116 (A) Expenses.................................................................................116 (B) Indemnity................................................................................117 (C) Waiver of Certain Claims; Settlement of Claims...........................................118 (D) Survival of Agreements...................................................................118 9.8 Accounting.......................................................................................118 9.9 Severability of Provisions.......................................................................118
- iv - 9.10 Nonliability of Lenders...........................................................................118 9.11 GOVERNING LAW.....................................................................................118 9.12 CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF BOND.......................................................................................119 (A) EXCLUSIVE JURISDICTION...................................................................119 (B) OTHER JURISDICTIONS......................................................................119 (C) SERVICE OF PROCESS; WAIVERS..............................................................119 (D) WAIVER OF BOND...........................................................................120 9.13 JURY TRIAL WAIVER; ADVICE OF COUNSEL..............................................................120 (A) WAIVER OF JURY TRIAL.....................................................................120 (B) ADVICE OF COUNSEL........................................................................120 9.14 Subordination of Intercompany Indebtedness.......................................................120 9.15 No Strict Construction...........................................................................121 ARTICLE X: THE AGENT...........................................................................................122 10.1 Appointment; Nature of Relationship.............................................................122 10.2 Powers..........................................................................................122 10.3 General Immunity................................................................................122 10.4 No Responsibility for Loans, Creditworthiness, Collateral, Recitals, Etc........................122 10.5 Action on Instructions of Lenders...............................................................123 10.6 Employment of Agents and Counsel................................................................123 10.7 Reliance on Documents; Counsel..................................................................123 10.8 The Agent's Reimbursement and Indemnification...................................................123 10.9 Rights as a Lender..............................................................................124 10.10 Lender Credit Decision..........................................................................124 10.11 Successor Agent.................................................................................124 10.12 Collateral Documents............................................................................124 ARTICLE XI: SETOFF; RATABLE PAYMENTS...........................................................................125 11.1 Setoff...........................................................................................125 11.2 Ratable Payments.................................................................................125 11.3 Application of Payments..........................................................................126 11.4 Relations Among Lenders..........................................................................127 ARTICLE XII: BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS........................................................................................127 12.1 Successors and Assigns...........................................................................127 12.2 Participations...................................................................................128 (A) Permitted Participants; Effect...........................................................128 (B) Voting Rights............................................................................128 (C) Benefit of Setoff........................................................................128 12.3 Assignments......................................................................................129 (A) Permitted Assignments....................................................................129 (B) Effect; Effective Date...................................................................129 (C) The Register.............................................................................130 12.4 Confidentiality..................................................................................130
- v - 12.5 Dissemination of Information.....................................................................130 ARTICLE XIII: NOTICES..........................................................................................131 13.1 Giving Notice....................................................................................131 13.2 Change of Address................................................................................131 ARTICLE XIV: COUNTERPARTS......................................................................................131
- vi - EXHIBITS AND SCHEDULES Exhibits EXHIBIT A -- Borrowing Base Certificate (Definitions) EXHIBIT B -- Commitments (Definitions) EXHIBIT C -- Form of Revolving Note (Definitions) EXHIBIT C-1 -- Form of Swing Line Note (Definitions) EXHIBIT D -- Stock Purchase Agreement for Stock Acquisition (Definitions) EXHIBIT E -- Form of Term Loan A Note (Definitions) EXHIBIT F -- Form of Term Loan B Note (Definitions) EXHIBIT G -- Form of Assignment Agreement (ss.ss. 2.19, 12.3) EXHIBIT H -- Form of Borrower's Counsel's Opinion (ss. 4.1) EXHIBIT I -- List of Closing Documents (ss. 4.1) EXHIBIT J -- Form of Officer's Certificate (ss.ss. 4.2, 6.1(A)(iv)) EXHIBIT K -- Pro Forma Financial Statements (ss. 5.4(A)) EXHIBIT L -- Money Transfer Instructions (ss. 4.1) EXHIBIT M -- Deferred Limited Interest Guaranty - vii - EXHIBIT N -- MCIT Turnover Agreement EXHIBIT O -- Jordan Management Agreement EXHIBIT P -- Tax Sharing Agreement EXHIBIT Q -- Form of Guaranty EXHIBIT R -- Form of Restricted Subsidiary Security Agreement EXHIBIT S -- Form of Pledge Agreement EXHIBIT T -- Holdings Turnover Agreement - viii - Schedules Schedule 1.1.1 -- Permitted Existing Contingent Obligations (Definitions) Schedule 1.1.2 -- Permitted Existing Indebtedness (Definitions) Schedule 1.1.3 -- Permitted Existing Investments (Definitions) Schedule 1.1.4 -- Permitted Existing Liens (Definitions) Schedule 1.1.5 -- Refinanced Indebtedness (Definitions) Schedule 5.3 -- Conflicts; Governmental Consents (ss.5.3) Schedule 5.7 -- Litigation; Loss Contingencies (ss.5.7) Schedule 5.8 -- Subsidiaries (ss.5.8) Schedule 5.17 -- Insurance (ss.ss.5.17, 6.2(E)) Schedule 5.18 -- Contingent Obligations (ss.ss.5.7, 5.18) Schedule 5.19 -- Labor Matters; Compensation Agreements (ss. 5.19) Schedule 5.21 -- Environmental Matters (ss.5.21) Schedule 6.3(H) -- Transactions with Shareholders and Affiliates - ix - CREDIT AGREEMENT This Credit Agreement dated as of February 27, 1997 is entered into among GFSI, Inc., a Delaware corporation, the institutions from time to time parties hereto as Lenders, whether by execution of this Agreement or an assignment and acceptance pursuant to Section 12.3, and The First National Bank of Chicago, in its capacity as contractual representative for itself and the other Lenders. The parties hereto agree as follows: ARTICLE I: DEFINITIONS 1.1 Certain Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms used in this Agreement shall have the following meanings, applicable both to the singular and the plural forms of the terms defined. As used in this Agreement: "Accommodation Obligations" is defined in the definition "Contingent Obligation" below. "Account Debtor" means the account debtor or obligor with respect to any of the Receivables and/or the prospective purchaser with respect to any contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with the Borrower. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which the Borrower or any of its Restricted Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency), a majority (by percentage of voting power), of the membership, ownership or other equity interests in a limited liability company or a majority (by percentage of voting power) of the outstanding partnership interests of a partnership. "Acquisition Documents" means the Stock Purchase Agreement and all other documents, instruments and agreements entered into by the Borrower or any of its Affiliates in connection with the Stock Acquisition. "Advance" means a borrowing hereunder consisting of the aggregate amount of the several Loans made by the Lenders to the Borrower of the same Type and, in the case of Eurodollar Rate Advances, for the same Interest Period. "Affected Lender" is defined in Section 2.20 hereof. "Affiliate" of any Person means any of the following: (i) any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person; (ii) any spouse, immediate family member or other relative who has the same principal residence as such Person or as any other affiliate of such Person; and (iii) any trust in which any such Persons described in clauses (i) or (ii) above has a beneficial interest. A Person shall be deemed to control another Person if the controlling Person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of greater than fifteen percent (15%) or more of any class of voting securities (or other voting interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of Capital Stock, by contract or otherwise. "Affiliate Notes" means collectively, (i) that certain promissory note in the original principal amount of $700,000, dated August 12, 1996, between Impact Design, Inc. and the Target, together with accrued interest thereon, and (ii) that certain promissory note in the original principal amount of $150,000, dated August 12, 1996, between Kansas Custom Embroidery and the Target, together with all accrued interest thereon. "Agent" means First Chicago in its capacity as contractual representative for itself and the Lenders pursuant to Article X hereof and any successor Agent appointed pursuant to Article X hereof. "Aggregate Acquisition and Investment Basket" means an initial amount equal to $15,000,000; provided, that if the Borrower shall have a Leverage Ratio of less than 4.25 to 1.0 for two consecutive fiscal quarters (as reflected in the financial statements (and corresponding compliance certificate) delivered pursuant to Section 6.1(A)(ii) or 6.1(A)(iii)), the Aggregate Acquisition and Investment Basket shall be increased effective as of the date of delivery of such financial statements to $30,000,000. "Aggregate Indebtedness Basket" means an initial amount equal to $7,500,000; provided if the Borrower shall have a Leverage Ratio of less than 4.25 to 1.0 for two consecutive fiscal quarters (as reflected in the financial statements (and corresponding compliance certificate) delivered pursuant to Section 6.1(A)(ii) or 6.1(A)(iii)), the Aggregate Indebtedness Basket shall be increased effective as of the date of delivery of such financial statements to $20,000,000. "Aggregate Revolving Loan Commitment" means the aggregate of the Revolving Loan Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. The initial Aggregate Revolving Loan Commitment is Fifty Million and 00/100 Dollars ($50,000,000.00). "Aggregate Term Loan A Commitment" means the aggregate of the Term Loan A Commitments of all the Lenders. The Aggregate Term Loan A Commitment is Forty Million and 00/100 Dollars ($40,000,000.00). -2- "Aggregate Term Loan B Commitment" means the aggregate of the Term Loan B Commitments of all the Lenders. The Aggregate Term Loan B Commitment is Twenty-Five Million and 00/100 Dollars ($25,000,000.00). "Agreement" means this Credit Agreement, as it may be amended, restated or otherwise modified and in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4(B)(1) hereof; provided, however, that with respect to the calculation of financial ratios and other financial tests (and each of the components thereof) utilized in or required by this Agreement, "Agreement Accounting Principles" means generally accepted accounting principles as in effect as of the date of this Agreement, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.4(B)(1) hereof. "Alternate Base Rate" means, for any day, a fluctuating rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of (a) the Federal Funds Effective Rate for such day and (b) one-half of one percent (0.5%) per annum. "Applicable Commitment Fee Percentage" means, as at any date of determination, the rate per annum then applicable in the determination of the amount payable under Section 2.15(C)(i) hereof determined in accordance with the provisions of Section 2.15(D)(ii) hereof. "Applicable Eurodollar Margin" means, as at any date of determination, the rate per annum then applicable to Eurodollar Rate Loans determined in accordance with the provisions of Section 2.15(D)(ii) hereof. "Applicable Floating Rate Margin" means, as at any date of determination, the rate per annum then applicable to Floating Rate Loans determined in accordance with the provisions of Section 2.15(D)(ii) hereof. "Applicable L/C Fee Percentage" means, as at any date of determination, a rate per annum: (i) for standby Letters of Credit, equal to the Applicable Eurodollar Margin for Revolving Loans in effect on such date and (ii) for commercial letters of credit, equal to the lesser of (y) one-half of the Applicable Eurodollar Margin for Revolving Loans in effect on such date and (z) one percent (1.00%) per annum. "Asset Sale" means, with respect to any Person, the sale, lease, conveyance, assignment, disposition or other transfer by such Person of any of its assets, whether owned as of the Closing Date or thereafter acquired (including by way of a sale-leaseback transaction and including the sale or other transfer of any of the Equity Interests of any Subsidiary of such Person). "A Term Loans" is defined in Section 2.1(a) hereof. -3- "Authorized Officer" means any of the Chairman, President, any Vice President, Treasurer, Controller and Secretary of the Borrower or, if applicable, any Restricted Subsidiary , and any other Person designated to the Agent in writing by any of the foregoing, acting individually on behalf of the Borrower. "Backstop Letter of Credit" means that certain Letter of Credit issued by First Chicago to Boatmen's National Bank on the Closing Date. "Benefit Plan" means a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) in respect of which the Borrower or any other member of the Controlled Group is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Borrower" means GFSI, Inc., a Delaware corporation, and its successors and assigns, including a debtor-in-possession on behalf of the Borrower. "Borrowing Base" means, as of any date of calculation, an amount, as set forth on the most current Borrowing Base Certificate delivered to the Agent, equal to: (i) eighty-five percent (85%) of the Gross Amount of Eligible Receivables; plus (ii) sixty-five percent ( 65%) of the Gross Amount of Eligible Inventory; minus (iii) such reserves as the Agent reasonably deems appropriate. The Agent shall give the Borrower commercially reasonable prior written notice, taking into account all facts and circumstances known by the Agent at such time, of the establishment by the Agent of any reserves hereunder which, in any such case, might decrease the amount of the Borrowing Base. "Borrowing Base Certificate" means a certificate, in substantially the form of Exhibit A attached hereto and made a part hereof, setting forth the Borrowing Base and the component calculations thereof. "Borrowing Date" means a date on which an Advance or Swing Line Loan is made hereunder. "Borrowing Notice" is defined in Section 2.8 hereof. "B Term Loans" is defined in Section 2.1(b) hereof. "Business Activity Report" means (A) a Notice of Business Activities Report from the State of Minnesota, Department of Revenue, (B) a Notice of Business Activities Report from the State of New Jersey, Division of Taxation, or (C) any similar report required by any other State relating to the ability of the Borrower or its Subsidiaries to enforce their accounts receivable claims against account debtors located in any such state. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Loans bearing interest at the Eurodollar Rate, a day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Illinois and New York, New York and on which dealings in Dollars are carried on in the London interbank market and (ii) for all other purposes a -4- day (other than a Saturday or Sunday) on which banks are open for business in Chicago, Illinois and New York, New York. "Capital Expenditures" is defined in Section 6.4(A) hereof. "Capitalized Lease" of a Person means any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) marketable direct obligations issued or unconditionally guaranteed by the United States government and backed by the full faith and credit of the United States government; (ii) domestic and Eurodollar certificates of deposit and time deposits, bankers' acceptances and floating rate certificates of deposit issued by any commercial bank organized under the laws of the United States, any state thereof, the District of Columbia, any foreign bank, or its branches or agencies (fully protected against currency fluctuations for any such deposits with a term of more than ten (10) days); (iii) shares of money market, mutual or similar funds having assets in excess of $100,000,000 and the investments of which are limited to investment grade securities (i.e., securities rated at least Baa by Moody's Investors Service, Inc. or at least BBB by Standard & Poor's Corporation); (iv) commercial paper of United States banks and bank holding companies and their subsidiaries and United States finance, commercial industrial or utility companies which, at the time of acquisition, are rated A-1 (or better) by Standard & Poor's Ratings Group or P-1 (or better) by Moody's Investors Services, Inc.; (v) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks having membership in the Federal Deposit Insurance Corporation in amounts not exceeding the lesser of $100,000 or the maximum amount of insurance applicable to the aggregate amount of Borrower's deposits at such institution; (vi) repurchase obligations with a term of not more than thirty days for underlying securities of the types described in clauses (i), (ii) and (iv) above entered into with any financial institution meeting the qualifications specified in clause (iv) above; (vii) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States or by any political subdivision or taxing authority of any such date, commonwealth or territory, the securities of which states, commonwealth, territory, political subdivision or taxing authority (as the case may be) are rated at least A by Standard & Poor's Corporation or A by Moody's Investors Service, Inc.; and (viii) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial -5- bank satisfying the requirements of clause (iv) above; provided that (other than as set forth in clause (iii)) the maturities of such Cash Equivalents shall not exceed 365 days. "Cash Flow Period" means each 12-month period ending on June 30 of each calendar year commencing with the year ending June 30, 1998. "Change" is defined in Section 3.2 hereof. "Change of Board" means any transaction or event as a result of which any Person or group (as defined in Section 13(d)(3) of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder) other than the holders as of the Closing Date of the Voting Stock of Holdings and their "Permitted Transferees" (as defined in the Stockholders Agreement) shall be entitled, by virtue of ownership of voting securities or by agreement or otherwise, to nominate directors of Holdings having, in the aggregate, at least a majority of the voting power at the time represented by all members of the Board of Directors of Holdings. "Change of Control" means any transaction or event as a result of which (i) the Jordan Stockholders shall cease to own of record and beneficially, in the aggregate, at least twenty percent (20%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of Holdings, (ii) the Management Stockholders, collectively, shall cease to own of record and beneficially , in the aggregate, at least twenty percent (20%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of Holdings, (iii) the Jordan Stockholders and the Management Stockholders shall cease to own, in the aggregate, more than fifty percent (50%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of Holdings, (iv) after the first sale of Voting Stock by Holdings pursuant to a registration statement under the Securities Act of 1933 that results in at least twenty percent (20%) of the then issued and outstanding Voting Stock of Holdings being held by the public, any Person or any group of affiliated Persons shall own, of record and beneficially, in the aggregate, an equal or greater percentage of the total shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of Holdings then owned, of record and beneficially, by the Jordan Stockholders and by the Management Stockholders, (v) a Change of Board shall have occurred, (vi) Holdings shall cease to own, of record and beneficially, with sole voting and dispositive power, 100% of the outstanding shares of Voting Stock of the Borrower or shall cease to have the power, directly or indirectly, to elect a majority of the board of directors of the Borrower, or (vii) any other event occurs which would constitute a Change of Control under and as defined in the Indenture or the Purchase Agreement with respect to the Holdings Subordinated Notes, each as in effect as of the date hereof or as amended. "Closing Date" means the date on which the Term Loans and the initial Revolving Loans are advanced hereunder. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time or any successor statute. -6- "Collateral" means all property and interests in property now owned or hereafter acquired by the Borrower or any of its Restricted Subsidiaries in or upon which a security interest, lien or mortgage is granted to the Agent, for the benefit of the Holders of Secured Obligations, or to the Agent, for the benefit of the Lenders, whether under the Security Agreement, under any of the other Collateral Documents or under any of the other Loan Documents. "Collateral Documents" means all agreements, instruments and documents executed in connection with this Agreement that are intended to create or evidence Liens to secure the Secured Obligations, including, without limitation, the Security Agreement, the Collection Account Agreement(s), the Guaranties, the Restricted Subsidiary Security Agreements, the Pledge Agreements, the Intellectual Property Agreements, the Mortgage and all other security agreements, mortgages, deeds of trust, guarantees, subordination agreements, pledges, assignments, leases and financing statements whether heretofore, now, or hereafter executed by or on behalf of the Borrower or any of its Restricted Subsidiaries and delivered to the Agent or any of the Lenders, together with all agreements and documents referred to therein or contemplated thereby. "Collection Account" means each lock-box and blocked depository account maintained by the Borrower, subject to a Collection Account Agreement, for the collection of Receivables and other proceeds of Collateral. "Collection Account Agreement" means a written agreement among the Borrower, the Agent or any Restricted Subsidiary, and, as applicable, each of the banks at which the Borrower or any Restricted Subsidiary maintains a Collection Account, in form and substance acceptable to the Agent. "Collection Account Blockage Date" means the date, following the occurrence of a Default on which the Agent or the Required Lenders, in the Agent's or the Required Lenders' sole discretion, instruct(s) any financial institution party to a Collection Account Agreement as described in the application Collection Account Agreement to remit, during the continuance of such Default, all amounts deposited in the Collection Account to the Agent or as the Agent shall direct. "Commission" means the United States Securities and Exchange Commission and any Person succeeding to the functions thereof. "Commitment" means, for each Lender, collectively, such Lender's Revolving Loan Commitment and Term Loan Commitments. "Contaminant" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum-derived substance or waste, asbestos, polychlorinated biphenyls ("PCBs"), or any constituent of any such substance or waste, and includes but is not limited to these terms as defined in Environmental, Health or Safety Requirements of Law. -7- "Contingent Obligation", as applied to any Person, means any Contractual Obligation, contingent or otherwise, of that Person with respect to any Indebtedness of another, including, without limitation, any such Indebtedness of another directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including Contractual Obligations (contingent or otherwise) arising through any agreement to purchase, repurchase, or otherwise acquire such Indebtedness or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances or otherwise), or to maintain solvency, assets, level of income, or other financial condition, or to make payment other than for value received (such obligations under this definition being sometimes referred to as "Accommodation Obligations"). The amount of any Contingent Obligation or Accommodation Obligation with respect to any Person shall be limited to an amount equal to the stated or determinable amount of such Person's share of the obligation in respect of such Contingent Obligation or Accommodation Obligation is made or, if not stated or determinable, the maximum liability in respect thereof (assuming such Person is required to fully perform thereunder). "Contractual Obligation", as applied to any Person, means any provision of any equity or debt securities issued by that Person or any indenture, mortgage, deed of trust, security agreement, pledge agreement, guaranty, contract, undertaking, agreement or instrument, in any case in writing, to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject. "Controlled Group" means the group consisting of (i) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower; (ii) a partnership or other trade or business (whether or not incorporated) which is under common control (within the meaning of Section 414(c) of the Code) with the Borrower; and (iii) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Borrower, any corporation described in clause (i) above or any partnership or trade or business described in clause (ii) above. "Conversion/Continuation Notice" is defined in Section 2.10(D) hereof. "Corporate Base Rate" means the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. "Cure Loan" is defined in Section 8.2(iii) hereof. "Customary Permitted Liens" means: (i) Liens (other than Environmental Liens and Liens in favor of the IRS or the PBGC) with respect to the payment of taxes, assessments or governmental charges in all cases which are not yet due or (if foreclosure, distraint, sale or other similar proceedings shall not have been commenced) which are being contested in good faith by appropriate proceedings properly instituted and diligently conducted and with respect to which -8- adequate reserves or other appropriate provisions are being maintained in accordance with Agreement Accounting Principles; (ii) statutory Liens of landlords and Liens of suppliers, mechanics, carriers, materialmen, warehousemen or workmen and other similar Liens imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings properly instituted and diligently conducted and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with Agreement Accounting Principles; (iii) Liens (other than Environmental Liens and Liens in favor of the IRS or the PBGC) incurred or deposits made in the ordinary course of business in connection with worker's compensation, unemployment insurance or other types of social security benefits or to secure the performance of bids, tenders, sales, contracts (other than for the repayment of borrowed money), surety, appeal and performance bonds; provided that (A) all such Liens do not in the aggregate materially detract from the value of the Borrower's or such Restricted Subsidiary's assets or property taken as a whole or materially impair the use thereof in the operation of the businesses taken as a whole, and (B) all Liens securing bonds to stay judgments or in connection with appeals do not secure at any time an aggregate amount exceeding $2,500,000; (iv) Liens arising with respect to zoning restrictions, easements, licenses, reservations, covenants, rights-of-way, utility easements, building restrictions and other similar charges or encumbrances on the use of real property which do not in any case or in the aggregate materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Restricted Subsidiaries; (v) Liens of attachment or judgment with respect to judgments, writs or warrants of attachment, or similar process against the Borrower or any of its Restricted Subsidiaries which do not constitute a Default under Section 7.1(h); (vi) any interest or title of the lessor in the property subject to any operating lease entered into by the Borrower or any of its Restricted Subsidiaries in the ordinary course of business; (vii) Liens arising from leases or subleases granted to others which do not interfere in any material respect with the business of the Borrower and its Subsidiaries taken as a whole; and (viii) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods. "Decision Period" is defined in Section 6.2(G) hereof. "Decision Reserve" is defined in Section 6.2(G) hereof. -9- "Default" means an event described in Article VII hereof. "Deferred Limited Interest Guaranty" means that certain Deferred Limited Interest Guaranty, dated as of February 27, 1997, executed by the Borrower for the benefit of the holders of the Holdings Subordinated Notes and to which each Restricted Subsidiary shall become a party, a copy of which is attached hereto as Exhibit M. "Designated Default" means Default under Sections 7.1(a), 7.1(e), 7.1(f), 7.1(g), 7.1(m), 7.1(r), 7.1(t), 7.1(u) or 7.1(v) or any breach by the Borrower of any of the terms or provisions of Sections 6.3(A) (Indebtedness), 6.3(B) (Sales of Assets), 6.3(D) (Investments), 6.3(F) (Distributions), 6.3(H) (Transactions with Affiliates), 6.3(O) (Other Indebtedness) or 6.4 (Financial Covenants). "Designated Prepayment" is defined in Section 2.5(B)(i)(e) hereof. "DOL" means the United States Department of Labor and any Person succeeding to the functions thereof. "Dollar" and "$" means dollars in the lawful currency of the United States. "EBITDA" is defined in Section 6.4(A) hereof. "Eligible Inventory" means Inventory of the Borrower which is held for sale or lease or furnished under any contract of service by or under the direction of the Borrower other than the Inventory described in the next sentence. The following inventory is not Eligible Inventory: (i) Inventory which is obsolete, not in good condition, not either currently usable or currently saleable in the ordinary course of the Borrower's business or does not meet all material standards imposed by any Governmental Authority having regulatory authority over such item of Inventory, its use or its sale; (ii) Inventory consisting of packaging material, supplies, raw materials involved in the embroidery, silk screening or other finishing of blank items of clothing and work in process; (iii) Inventory which (a) is consigned to a third party for sale, unless the Agent shall have received from such consignee a lien waiver agreement in substantially the form attached to the Security Agreement, or such other documentation (including UCC-1 financing statements naming such consignee as debtor/consignee, the Borrower as secured party/consignor and reflecting the assignment of such UCC to the Agent as secured party) reasonably deemed necessary by the Agent, so that the Agent has a valid and perfected first priority security interest in such consigned Inventory, or (b) is on consignment from a third party to the Borrower for sale; (iv) Inventory which consists of goods in transit, but only to the extent such Inventory exceeds in the aggregate $7,500,000; (v) Inventory which is subject to a Lien in favor of any Person other than the Agent other than Customary Permitted Liens; (vi) Inventory with respect to which the Agent does not have a first and valid fully-perfected security interest; (vii) Inventory (other than Inventory which consists of goods in transit) which is not located either (a) on the Borrower's owned premises in the United States listed on Schedule 2 to the Security Agreement or (b) in other owned or leased premises, warehouses or with bailees in the United States not listed on Schedule 2 to the Security Agreement permitted to be established under the Security Agreement or in connection with a Permitted Acquisition, in connection with which the -10- Agent shall have received to the extent required by the Security Agreement landlord, mortgagee, bailee and/or warehousemen's access and lien waiver agreements, as applicable, in each case in form and substance acceptable to the Agent, but only to the extent such Inventory exceeds in the aggregate $500,000; (viii) Inventory which is evidenced by a Receivable; and (ix) Inventory which is not in conformity in all material respects with the representations and warranties made by the Borrower to the Agent with respect thereto whether contained in this Agreement or the Security Agreement. Without limiting the foregoing, Inventory of the Borrower which is acquired pursuant to a Permitted Acquisition shall be treated as Eligible Inventory unless the Agent, after concluding any due diligence it reasonably deems necessary prior to the closing of the Permitted Acquisition (it being understood and agreed that the Borrower shall permit the Agent and/or its authorized representatives to conduct such due diligence no later than thirty (30) days prior to the closing of any such Permitted Acquisition), shall not be reasonably satisfied as to the condition thereof and that such Inventory would otherwise be ineligible under the ineligibility standards set forth herein (including, without limitation, each of perfection and priority of the Agent's security interests in such Inventory) but for the fact that they were acquired by the Borrower outside the ordinary course of business. "Eligible Receivables" means Receivables created by the Borrower in the ordinary course of its business arising out of the sale of goods or rendition of services by the Borrower other than the Receivables described in the next sentence. The following Receivables are not Eligible Receivables: (i) Receivables which remain unpaid (a) ninety (90) days after the date such Receivables are due or (b) one-hundred and twenty (120) days after the date of the original applicable invoice; (ii) all Receivables owing by a single Account Debtor (including a Receivable which remains unpaid fewer than ninety (90) days after the date such Receivables are due or one-hundred and twenty (120) days after the date of the original applicable invoice) if thirty percent (30%) of the balance owing by such Account Debtor calculated without taking into account any credit balances of such Account Debtor, remains unpaid (a) ninety (90) days after the date such Receivables are due or (b) one-hundred and twenty (120) days after the date of the original applicable invoice or has otherwise become, or has been determined by the Agent to be ineligible, but only if the aggregate of all such Receivables exceeds $500,000; (iii) with respect to Receivables from any single Account Debtor and its Affiliates which otherwise constitute Eligible Receivables, the excess of such Receivables over twenty percent (20%) of all Eligible Receivables; (iv) Receivables with respect to which the Account Debtor is a director, officer, employee, Subsidiary or Affiliate (other than Receivables arising under an arm's length transaction with an Affiliate) of the Borrower; -11- (v) Receivables with respect to which the Account Debtor is any federal Governmental Authority, the United States of America, or, in each case, any department, agency or instrumentality thereof, unless with respect to any such Account, the Borrower has complied to the Agent's satisfaction with the provisions of the Federal Assignment of Claims Act or other applicable statutes, including, without limitation, executing and delivering to Agent all statements of assignment and/or notification which are in form and substance acceptable to Agent and which are deemed necessary by Agent to effectuate the assignment to the Agent of such Accounts on behalf of the Lenders; provided, however, notwithstanding the foregoing such Receivables up to an aggregate amount not to exceed $7,500,000 shall be Eligible Receivables provided no Default has occurred and is continuing; provided, further, however, after the occurrence and during the continuance of a Default, all such Receivables in connection with which the Borrower has not so complied with the Federal Assignment of Claims Act or other applicable statutes shall not be Eligible Receivables; (vi) Receivables with respect to which the Account Debtor is any state or municipal Governmental Authority or any agency or instrumentality thereof, unless with respect to any such Account, the Borrower has complied to the Agent's satisfaction with the provisions of any applicable state or local assignment of claims act or other applicable statutes, including, without limitation, executing and delivering to Agent all statements of assignment and/or notification which are in form and substance acceptable to Agent and which are deemed necessary by Agent to effectuate the assignment to the Agent of such Accounts on behalf of the Lenders; provided, however, notwithstanding the foregoing such Receivables up to an aggregate amount not to exceed $2,500,000 shall be Eligible Receivables provided no Default has occurred and is continuing; provided, further, however, after the occurrence and during the continuance of a Default, all such Receivables in connection with which the Borrower has not so complied with the applicable state or local assignment of claims act or other applicable statutes shall not be Eligible Receivables; (vii) Receivables not denominated in U.S. Dollars or Receivables with respect to which the Account Debtor is neither a resident of the United States nor one of the Provinces of Canada other than Quebec (other than Receivables from Account Debtors located in Quebec up to an aggregate amount not to exceed $1,000,000), but only to the extent such Receivables exceed in the aggregate $1,000,000, unless the Account Debtor has supplied the Borrower with an irrevocable letter of credit, issued by a financial institution satisfactory to the Agent, sufficient to cover such Receivable in form and substance satisfactory to the Agent; (viii) Receivables with respect to which the Account Debtor has (a) asserted a counterclaim, (b) a right of setoff or (c) a receivable owing from the Borrower but only to the extent of such counterclaim, setoff or receivable and only to the extent such counterclaims, setoffs or receivables exceed, in the aggregate, $250,000; (ix) Receivables with respect to which the Agent does not have a first and valid fully perfected and enforceable security interest unless the Account Debtor has supplied -12- the Borrower with an irrevocable standby letter of credit, issued by a financial institution satisfactory to the Agent, sufficient to cover such Receivable in form and substance satisfactory to the Agent and such letter of credit has been delivered to the Agent; (x) Receivables with respect to which the Account Debtor is the subject of bankruptcy or a similar insolvency proceeding or has made an assignment for the benefit of creditors or whose assets have been conveyed to a receiver, trustee or assignee for the benefit of creditors; (xi) Receivables with respect to which the Account Debtor's obligation to pay the Receivable is conditional upon the Account Debtor's approval or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval (except with respect to Receivables in connection with which Account Debtors are entitled to return Inventory on the basis of the quality of such Inventory) or consignment basis; (xii) Receivables with respect to which the Account Debtor is located in New Jersey or Minnesota (or any other jurisdiction which adopts a statute or other requirement with respect to which any Person that obtains business from within such jurisdiction or is otherwise subject to such jurisdiction's tax law requiring such Person to file a Business Activity Report or make any other required filings in a timely manner in order to enforce its claims in such jurisdiction's courts or arising under such jurisdiction's laws); provided, however, such Receivables shall nonetheless be eligible if the Borrower has filed a Business Activity Report (or other applicable report) with the applicable state office or is qualified to do business in such jurisdiction and, within ninety (90) days of the date the Receivable was created, was qualified to do business in such jurisdiction or had on file with the applicable state office a current Business Activity Report (or other applicable report); (xiii) Receivables with respect to which the Account Debtor's obligation does not constitute its legal, valid and binding obligation, enforceable against it in accordance with its terms; (xiv) Receivables with respect to which the Borrower has not yet shipped the applicable goods, performed the applicable service or issued the applicable invoice; (xv) any Receivable which is not in conformity in all material respects with the representations and warranties made by the Borrower to the Agent with respect thereto whether contained in this Agreement or the Security Agreement; (xvi) Receivables in connection with which the Borrower has not complied with all material requirements contained in the charter and by-laws or other organizational or governing documents of the Borrower, and any law, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon the Borrower or any of its property or to which the Borrower or any of its property is subject, including, without limitation, all laws, rules, regulations and orders of -13- any Governmental Authority or judicial authority relating to truth in lending, billing practices, fair credit reporting, equal credit opportunity, debt collection practices and consumer debtor protection, applicable to such Receivable (or any related contracts) or affecting the collectibility of such Receivables; and (xvii) Receivables in connection with which the Borrower or any other party to such Receivable, is in default in the performance or observance of any of the terms thereof in any material respect. Without limiting the foregoing, Receivables of the Borrower which are acquired pursuant to a Permitted Acquisition shall be treated as Eligible Receivables unless the Agent, after concluding any due diligence it reasonably deems necessary prior to the closing of the Permitted Acquisition (it being understood and agreed that the Borrower shall permit the Agent and/or its authorized representatives to conduct such due diligence no later than thirty (30) days prior to the closing of any such Permitted Acquisition), shall not be reasonably satisfied as to the quality and creditworthiness thereof and that such Receivables would otherwise be ineligible under the ineligibility standards set forth herein (including, without limitation, lack of perfection and priority of the Agent's security interests in such Receivables) but for the fact that they were acquired by the Borrower outside of the ordinary course of business. "Employment Agreements" means each of (i) that certain Employment Agreement, dated as of February 27, 1997, between the Borrower and Robert M. Wolff, and (ii) that certain Noncompetition Agreement, dated as of February 27, 1997, between Holdings and Robert M. Wolff, respectively, as in effect on the date hereof. "Environmental, Health or Safety Requirements of Law" means all Requirements of Law derived from or relating to federal, state and local laws or regulations relating to or addressing pollution or protection of the environment, or protection of worker health or safety, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq., the Occupational Safety and Health Act of 1970, 29 U.S.C. ss. 651 et seq., and the Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq., in each case including any amendments thereto, any successor statutes, and any regulations or guidance promulgated thereunder, and any state or local equivalent thereof. "Environmental Lien" means a lien in favor of any Governmental Authority for (a) any liability under Environmental, Health or Safety Requirements of Law, or (b) damages arising from, or costs incurred by such Governmental Authority in response to, a Release or threatened Release of a Contaminant into the environment. "Environmental Property Transfer Act" means any applicable requirement of law that conditions, restricts, prohibits or requires any notification or disclosure triggered by the closure of any property or the transfer, sale or lease of any property or deed or title for any property for environmental reasons, including, but not limited to, any so-called "Industrial Site Recovery Act" or "Responsible Property Transfer Act." -14- "Equipment" means all of the Borrower's present and future (i) equipment, including, without limitation, machinery, manufacturing, distribution, selling, data processing and office equipment, assembly systems, tools, molds, dies, fixtures, appliances, furniture, furnishings, vehicles, vessels, aircraft, aircraft engines, and trade fixtures, (ii) other tangible personal property (other than the Borrower's Inventory), and (iii) any and all accessions, parts and appurtenances attached to any of the foregoing or used in connection therewith, and any substitutions therefor and replacements, products and proceeds thereof. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding (i) any debt security that is convertible into, or exchangeable for, Capital Stock and (ii) any other Indebtedness or Obligation); provided, however, that Equity Interests will not include any Incentive Arrangements or any obligations or payments thereunder. "Equity Offering" means, with respect to any Person, a public or private offering by such Person for cash of Equity Interests and all warrants, options or other rights to acquire Capital Stock, other than an offering of Redeemable Stock or Incentive Arrangements or obligations or payments thereunder. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "Eurodollar Base Rate" means, with respect to a Eurodollar Rate Loan for the relevant Interest Period, the rate determined by the Agent to be the rate at which deposits in Dollars are offered by First Chicago to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of First Chicago's relevant Eurodollar Rate Loan and having a maturity approximately equal to such Interest Period, as adjusted for Reserves. "Eurodollar Rate" means, with respect to a Eurodollar Rate Loan for the relevant Interest Period, the Eurodollar Base Rate applicable to such Interest Period plus the then Applicable Eurodollar Margin, changing when and as the Applicable Eurodollar Margin changes. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Eurodollar Rate Advance" means an Advance which bears interest at the Eurodollar Rate. "Eurodollar Rate Loan" means a Loan, or portion thereof, which bears interest at the Eurodollar Rate. "Excess Cash Flow" means, for any Cash Flow Period, an amount, calculated without duplication, equal to the Borrower's and its Subsidiaries' consolidated (i) Net Income for such period plus (ii) non-cash amortization expense for such period, to the extent deducted in computing Net Income, including, without limitation, amortization of goodwill and other -15- intangible assets, plus (iii) depreciation for such period, to the extent deducted in computing Net Income, plus (iv) all other non-cash charges (including without limitation, those charges relating to purchase accounting adjustments), to the extent deducted in computing Net Income for such period, minus (v) Capital Expenditures, whether paid in cash or accrued during such period, minus (vi) payments made during such period in connection with Permitted Acquisitions, minus (vii) Investments during such period permitted pursuant to Section 6.3(D)(ix), minus (viii) principal payments made on the Term Loans (excluding mandatory prepayments made from Excess Cash Flow) and principal payments made on all other Indebtedness of the Borrower and its Subsidiaries (other than the Obligations) and principal prepayments on all Indebtedness of the Borrower and its Subsidiaries (except to the extent Net Income is increased by such prepayment) during such period, plus (ix) the net reduction, if any, in Working Capital as of the last day of the applicable period from the Working Capital as of the end of the preceding fiscal year, minus (x) the net increase, if any, in Working Capital as of the last day of the applicable period from the Working Capital as of the end of the preceding fiscal year, minus (xi) the aggregate amount (without duplication) of (y) cash dividends or cash redemptions paid during such period with respect to the Borrower's Capital Stock, and (z) Restricted Payments paid during such period pursuant to Section 6.3(F). All such amounts shall be calculated in accordance with Agreement Accounting Principles and assuming that the Borrower has conducted its business in the ordinary course and in accordance with past practices. "Excluded Asset Sales" means Asset Sales permitted under clauses (i) through (xv) of Section 6.3(B) and, solely with respect to assets acquired after the Closing Date which do not constitute replacements or substitutions for assets existing on the Closing Date, Asset Sales permitted under clause (xvi) of Section 6.3(B). "Excluded Proceeds" is defined in Section 6.2(G) hereof. "Existing First Chicago Hedging Agreement" is defined in Section 6.3(R) hereof. "Existing Letters of Credit" is defined in Section 2.21(b). "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Fees" is defined in Section 6.4(A) hereof. "Financing" means, with respect to any Person, the consummation by such Person of an Equity Offering or the issuance or sale by such Person of any Indebtedness consisting of debt securities of such Person pursuant to a registered offering or private placement. -16- "First Chicago" means The First National Bank of Chicago, in its individual capacity, and its successors. "Fixed Charge Coverage Ratio" is defined in Section 6.4(C) hereof. "Floating Rate" means, for any day for any Loan, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the then Applicable Floating Rate Margin applicable to such Loan, changing when and as the Alternate Base Rate and/or Applicable Floating Rate Margin changes. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "Floating Rate Loan" means a Loan, or portion thereof, which bears interest at the Floating Rate. "Foreign Employee Benefit Plan" means a plan which would be a Benefit Plan except that such plan is maintained or contributed to by an entity which is not a U.S. business entity. "Governmental Acts" is defined in Section 2.26(a) hereof. "Governmental Authority" means any nation or government, any federal, state, local or other political subdivision thereof, any self-regulatory authority and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Gross Amount of Eligible Inventory" means Eligible Inventory valued at the lower of cost determined on a first-in-first-out basis (determined in accordance with Agreement Accounting Principles, consistently applied) or market value. "Gross Amount of Eligible Receivables" means the outstanding face amount of Eligible Receivables, determined in accordance with Agreement Accounting Principles, consistently applied, less fifty percent (50%) of the amount of all accrued advertising incentives. "Gross Negligence" means the absence of care or the disregard of consequences. Gross Negligence does not mean the absence of ordinary care or diligence, or an inadvertent act or inadvertent failure to act. If the term "gross negligence" is used with respect to the Agent or any Lender or any Indemnitee in any of the other Loan Documents, it shall have the meaning set forth herein. "Guaranty" means each of those certain Guaranties executed from time to time by each of the Restricted Subsidiaries in favor of the Agent for the benefit of itself and the Holders of Secured Obligations and in favor of the Trustee for the benefit of itself and the holders of the Senior Subordinated Notes, pursuant to Section 6.3(G)(ii) of this Agreement as amended, restated or otherwise modified from time to time in substantially the form of Exhibit P attached hereto. -17- "Hedging Agreements" is defined in Section 6.3(R) hereof. "Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency, interest rate options, puts and warrants or any similar derivative agreement, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any of the foregoing. "Holders of Secured Obligations" means the holders of the Secured Obligations from time to time and shall refer to (i) each Lender in respect of its Loans, (ii) the Issuing Lender in respect of Reimbursement Obligations, (iii) the Agent, the Lenders, the Swing Line Bank and the Issuing Lender in respect of all other present and future obligations and liabilities of the Borrower, any of its Subsidiaries or Holdings of every type and description arising under or in connection with this Agreement or any other Loan Document, (iv) each Indemnitee in respect of the obligations and liabilities of the Borrower to such Person hereunder, (v) each Lender (or affiliate thereof), in respect of all Hedging Obligations of the Borrower to such Lender (or such affiliate) as exchange party or counterparty under any Hedging Agreement, and (vi) their respective successors, transferees and assigns. "Holdings" means GSFI Holdings, Inc., a Delaware corporation, and its successors and assigns, including a debtor-in-possession on behalf of Holdings. "Holdings Subordinated Debt" means all indebtedness represented by the Holdings Subordinated Notes. "Holdings Subordinated Notes" means the 12.0% Subordinated Notes due April 30, 2008 of Holdings issued as of the date of this Agreement to MCIT in the original aggregate principal amount of Twenty-Five Million and 00/100 Dollars ($25,000,000.00) issued pursuant to the Purchase Agreement, dated as of February 27, 1997, between Holdings and MCIT, and all substitutions, modifications and renewals therefor provided such substitutions, modifications or renewals would be permitted under the terms of Section 6.3(O) as if such Section were applicable thereto (with all references therein to the Borrower and the Restricted Subsidiaries being instead to Holdings, the Borrower and the Restricted Subsidiaries). "Holdings Turnover Agreement" means the Holdings Turnover Agreement, dated as of February 27, 1997 executed by Holdings in favor of the Agent and Holders of Secured Obligations and the Trustee and the holders of the Senior Subordinated Notes in the form of Exhibit T hereto. "Incentive Arrangements" means any earn-out agreements, stock appreciation rights, "phantom" stock plans, employment agreements, non-competition agreements, subscription and -18- stockholders agreements and other incentive and bonus plans and similar arrangements made in connection with acquisitions of Persons by the Borrower or the Restricted Subsidiaries or the retention of consultants, executives, officers or employees by Holdings, the Borrower or any such Restricted Subsidiary. "Incentive Compensation Plan" means the incentive compensation plan for providing annual cash bonuses that the Borrower expects to adopt following consummation of the Stock Acquisition. "Indebtedness" of any Person means without duplication: (i) any indebtedness of such Person, contingent or otherwise, in respect of borrowed money including all principal, interest, fees and expenses with respect thereto (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof provided, that if the amount of recourse to such Person is determinable, such Indebtedness shall be limited to the lesser of recourse to such Person or the amount of such Indebtedness), or evidenced by bonds, notes, acceptances, debentures or other instruments or letters of credit (or reimbursement obligations with respect thereto, including, in the case of the Borrower, Reimbursement Obligations under the Letters of Credit) or representing the balance deferred and unpaid of the purchase price of any property (including pursuant to Capitalized Leases) or services, if and to the extent any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person prepared in accordance with Agreement Accounting Principles (except that any such balance that constitutes a trade payable and/or an accrued liability arising in the ordinary course of business shall not be considered Indebtedness); (ii) to the extent not otherwise included, (a) interest accruing after the commencement of any bankruptcy, insolvency, receivership or similar proceedings and other interest that would have accrued but for the commencement of such proceedings, (b) any Capitalized Lease Obligations, (c) the maximum fixed repurchase price of any Redeemable Stock, (d) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (e) Contingent Obligations (whether or not such items would appear upon such balance sheet) and (f) Hedging Obligations. For purposes of the preceding sentence, the maximum fixed repurchase price of any Redeemable Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to this Agreement, provided that if such Redeemable Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock. The amount of Indebtedness of any Person at any date shall be without duplication (i) the lesser of (x) the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any such Contingent Obligations, and (y) if determinable, the amount of Indebtedness for which such Person is liable at such date and (ii) in the case of Indebtedness of others secured by a Lien to which the property or assets owned or held by such Person is subject, the lesser of the fair market value at such date of any asset subject to a Lien securing the Indebtedness of others and the amount of the Indebtedness secured. "Indemnified Matters" is defined in Section 9.7(B) hereof. "Indemnitees" is defined in Section 9.7(B) hereof. -19- "Indenture" means that certain Indenture dated as of February 27, 1997, between the Borrower and Fleet National Bank, as Trustee, as amended, supplemented or modified in accordance with Section 6.3(O) hereof. "Intellectual Property Agreements" means the Trademark Security Agreement of even date herewith executed by the Borrower in favor of the Agent for the benefit of the Holders of Secured Obligations and each trademark, patent, copyright or other intellectual property agreement executed from time to time by any of the Restricted Subsidiaries in favor of the Agent for the benefit of the Holders of Secured Obligations, in each case as amended, restated or otherwise modified from time to time. "Interest Expense" is defined in Section 6.4(A) hereof. "Interest Expense Coverage Ratio" is defined in Section 6.4(B) hereof. "Interest Period" means, with respect to a Eurodollar Rate Loan, a period of one (1), two (2), three (3) months, six (6) months or such other period as may be agreed to by the Borrower, the Agent and all of the Lenders commencing on a Business Day selected by the Borrower pursuant to this Agreement; provided, however, notwithstanding anything in this Agreement to the contrary for the period from the Closing Date to the earlier of (y) the date that is 90 days after the Closing Date and (z) the date upon which the Agent confirms that the loan syndication process has been complete (the "Syndication Period"), "Interest Period" means, with respect to a Eurodollar Rate Loan, a period of seven (7) days. Other than during the Syndication Period, such Interest Period shall end on (but exclude) the day which corresponds numerically to such date one, two, three, six months or such other agreed upon period thereafter; provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month or the end of such other agreed upon period. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "Inventory" shall mean any and all goods, including, without limitation, goods in transit, wheresoever located, whether now owned or hereafter acquired by the Borrower, which are held for sale or lease, furnished under any contract of service or held as raw materials, work in process or supplies, and all materials used or consumed in the Borrower's business, and shall include all right, title and interest of Borrower in any property the sale or other disposition of which has given rise to Receivables and which has been returned to or repossessed or stopped in transit by the Borrower. "Investment" means, with respect to any Person, (i) any purchase or other acquisition by that Person of any Indebtedness, Equity Interests or other securities, or of a beneficial interest in any Indebtedness, Equity Interests or other securities, issued by any other Person, (ii) any purchase by that Person of all or substantially all of the assets of a business conducted by another Person, and (iii) any loan, advance (other than deposits with financial institutions available for -20- withdrawal on demand, prepaid expenses, accounts receivable, advances to employees and similar items made or incurred in the ordinary course of business) or capital contribution by that Person to any other Person, including all Indebtedness to such Person arising from a sale of property by such Person other than in the ordinary course of its business. "IRS" means the Internal Revenue Service and any Person succeeding to the functions thereof. "Issuing Lender" is defined in Section 2.21 hereof. "Jordan Stockholders" means The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT, and their respective affiliates, principals, employees, and partners, family members of any of the foregoing, and trusts for the benefit of any of the foregoing (including, without limitation, Leucadia National Corporation and Jordan Industries, Inc. and their respective subsidiaries. "Jordan Management Agreement" means that certain Management Consulting Agreement, dated as of February 27, 1997 between TJC Management Corporation, a Delaware corporation and Holdings in the form attached hereto as Exhibit O. "Knowledge" means, at anytime and relative to any matter, knowledge which the Authorized Officers of Holdings, the Borrower or any Restricted Subsidiary would reasonably be expected to have regarding such matter. "L/C Documents" is defined in Section 2.21. "L/C Draft" means a draft drawn on an Issuing Lender pursuant to a Letter of Credit. "L/C Interest" is defined in Section 2.22. "L/C Obligations" means, without duplication, an amount equal to the sum of (i) the aggregate of the amount then available for drawing under each of the Letters of Credit, (ii) the face amount of all outstanding L/C Drafts corresponding to the Letters of Credit, which L/C Drafts have been accepted by the applicable Issuing Lender, (iii) the aggregate outstanding amount of all Reimbursement Obligations at such time and (iv) the aggregate face amount of all Letters of Credit requested by the Borrower but not yet issued (unless the request for an unissued Letter of Credit has been denied). "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "Letter of Credit" means the letters of credit issued by the Issuing Lenders pursuant to Section 2.21 hereof. -21- "Leverage Ratio" is defined in Section 6.4(D) below. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Loan(s)" means, with respect to a Lender, such Lender's portion of any Advance made pursuant to Section 2.1 or Section 2.2, as applicable, and in the case of the Swing Line Bank, any Swing Line Loan made pursuant to Section 2.23 hereof, and collectively all Term Loans, Revolving Loans and Swing Line Loans, whether made or continued as or converted to Floating Rate Loans or Eurodollar Rate Loans. "Loan Account" is defined in Section 2.15(F) hereof. "Loan Documents" means this Agreement, the Notes, the Guaranty, the L/C Documents, the Collateral Documents and all other documents, instruments and agreements executed in connection therewith or contemplated thereby, as the same may be amended, restated or otherwise modified and in effect from time to time. "Management" means those employees or former employees of the Target holding Equity Interests of Holdings or the Borrower as of the Closing Date and from time to time thereafter. "Management Notes" means those certain promissory notes in the original aggregate principal amount not to exceed $900,000 and all accrued interest thereon issued by certain members of Management to Holdings in connection with the Acquisition. "Management Stockholders" means the officers, directors and employees of the Borrower on the Closing Date and their family members and trusts for the benefit of any of the foregoing. "Margin Stock" shall have the meaning ascribed to such term in Regulation U. "Material Adverse Effect" means a material adverse effect upon (a) the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower, or the Borrower and its Restricted Subsidiaries, taken as a whole, (b) the ability of the Borrower or any of its Restricted Subsidiaries to perform their respective obligations under the Loan Documents in any material respect, or (c) the ability of the Lenders or the Agent to enforce in any material respect the Obligations or their rights with respect to the Collateral. "Maximum Revolving Credit Amount" means, at any particular time: (i) the lesser of (A) the Aggregate Revolving Loan Commitment at such time minus the aggregate outstanding L/C Obligations at such time and (B) the Borrowing Base at such time minus the aggregate outstanding L/C Obligations in respect of standby Letters of Credit at such time minus (ii) the amount of any Decision Reserve in effect at such time. -22- "MCIT" means MCIT PLC, a public company incorporated in England. "MCIT Turnover Agreement" means the Turnover Agreement, dated as of February 27, 1997, executed by the holders of the Holdings Subordinated Debt in favor of the Agent and Holders of Secured Obligations and the Trustee and the holders of the Senior Subordinated Notes in the form of Exhibit N hereto. "Merger" means the merger of the Target with and into the Borrower with the Borrower as the surviving corporation. "Minimum Equity Contributions" is defined in Section 5.22 hereof. "Mortgage" means that certain Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases of even date herewith executed by the Borrower in favor of the Agent as amended, restated or otherwise modified from time to time. "Multiemployer Plan" means a "Multiemployer Plan" as defined in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by either the Borrower or any member of the Controlled Group. "Net Cash Proceeds" means, with respect to any Asset Sale of any Person, (a) cash (freely convertible into U.S. Dollars) received by such Person or any Subsidiary of such Person from such Asset Sale (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale), after (i) provision for all income or other taxes measured by or resulting from such Asset Sale, (ii) payment of all reasonable and customary brokerage commissions, sales commissions, legal, accounting, management, investment banking, advisory and other fees and expenses related to such Asset Sale, (iii) all amounts used to repay Indebtedness secured by a Lien on any asset disposed of in such Asset Sale or which is or may be required (by the express terms of the instrument governing such Indebtedness) to be repaid in connection with such Asset Sale (including payments made to obtain or avoid the need for the consent of any holder of such Indebtedness), (iv) deduction of appropriate amounts to be provided by such Person or a Subsidiary of such Person as a reserve, determined in good faith in accordance with Agreement Accounting Principles, against any liabilities associated with the assets sold or disposed of in such Asset Sale and retained by such Person or a Subsidiary of such Person after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities and liabilities related to environmental matters or against any indemnification and other contractual obligations associated with the assets sold or disposed of in such Asset Sale, (v) deduction of cash expenses, including the payment of principal, interest and premium on Indebtedness (other than the Obligations or the Senior Subordinated Notes) required to be paid as a result of such Asset Sale, and relocation and other similar expenses incurred in connection with such Asset Sale and (vi) deduction of amounts payable by such Person with respect to relocation expenses and pension, severance and shutdown costs incurred as a result of such Asset Sale; and (b) cash payments in respect of any Indebtedness, Capital Stock or other consideration received by such Person or any Subsidiary of such Person from such Asset Sale upon receipt of such cash payments by such Person or such Subsidiary. -23- "Net Income" is defined in Section 6.4(A) hereof. "New Subsidiary" is defined in Section 6.3(G)(ii) hereof. "Non Pro Rata Loan" is defined in Section 8.2 hereof. "Non-Restricted Subsidiary" means any Subsidiary of the Borrower other than a Restricted Subsidiary. "Notes" means the Revolving Notes, the Term Notes, and the Swing Line Note. "Notice of Assignment" is defined in Section 12.3(B) hereof. "Obligations" means all Loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Agent, any Lender, any Affiliate of the Agent or any Lender, or any Indemnitee, of any kind or nature, present or future, arising under this Agreement, the Notes, the L/C Documents, the Collateral Documents, any other Loan Document, whether or not evidenced by any note, guaranty or other instrument, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification, or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto), charges, expenses, fees, attorneys' fees and disbursements, paralegals' fees (in each case whether or not allowed), and any other sum chargeable to the Borrower under this Agreement or any other Loan Document. "Off Balance Sheet Liabilities" of a Person means (a) any repurchase obligation or liability of such Person or any of its Subsidiaries with respect to accounts or notes receivable sold by such Person or any of its Subsidiaries, (b) any liability under any so-called "synthetic" lease transaction, or (c) any obligations arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheets of such Person and its Subsidiaries. "Offering Memorandum" shall mean the Offering Memorandum, dated February 20, 1997, relating to the Borrower's offering and placement of the Senior Subordinated Notes. "Officer's Certificate" is defined in Section 6.1(A)(iv) hereof. "Other Taxes" is defined in Section 2.15(E)(ii) hereof. "Parent" is defined in Section 6.2(M) hereof. "Participants" is defined in Section 12.2(A) hereof. "Payment Date" means the last Business Day of each calendar quarter. -24- "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" is defined in Section 6.3(G). "Permitted Existing Contingent Obligations" means the Contingent Obligations of the Borrower and its Restricted Subsidiaries identified as such on Schedule 1.1.1 to this Agreement. "Permitted Existing Indebtedness" means the Indebtedness of the Borrower and its Restricted Subsidiaries identified as such on Schedule 1.1.2 to this Agreement. "Permitted Existing Investments" means the Investments of the Borrower and its Restricted Subsidiaries identified as such on Schedule 1.1.3 to this Agreement. "Permitted Existing Liens" means the Liens on assets of the Borrower or any of its Restricted Subsidiaries identified as such on Schedule 1.1.4 to this Agreement. "Permitted Holdings Indebtedness" means the following Indebtedness of Holdings: (a) the Holdings Subordinated Debt (which, for purposes of this definition, includes all indebtedness represented by promissory notes issued by Holdings in favor of the holders of the Holdings Subordinated Notes in lieu of any payment of accrued interest on the Holding Subordinated Notes in cash, which promissory notes are in an amount not exceeding the amount of such accrued interest in the form of the Holdings Subordinated Notes); (b) Indebtedness in respect of taxes, assessments, and governmental charges, to the extent that non-payment thereof does not result in a Default under Section 7.1(w). (c) Indebtedness with respect to dividends due on the Preferred Stock at rates no higher than the rates in effect on the Closing Date; (d) Indebtedness with respect to directors' fees not to exceed $150,000 plus out-of-pocket expenses in any fiscal year of Borrower and other obligations of Holdings under the Jordan Management Agreement; (e) Indebtedness with respect to Transaction Costs; (f) Indebtedness with respect to the Employment Agreements as in effect on the Closing Date; (g) Indebtedness to any shareholder of Holdings incurred at a time when no Default has occurred and is continuing in connection with the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Holdings ("Repurchase Indebtedness") owned by any member of the Borrower's management, pursuant to the Stockholders Agreement as in effect on the Closing Date or any similar agreement entered into after the Closing Date with members of the management of the -25- Borrower or any Restricted Subsidiary acquired after the Closing Date, provided, that such Indebtedness shall be subordinated to the Secured Obligations and Indebtedness evidenced by the Senior Subordinated Notes on terms and conditions reasonably acceptable to the Agent and the Required Lenders (it being understood and agreed that the subordination terms contained in the Non-Negotiable Promissory Notes attached as Exhibit C to the Stockholders Agreement as in effect as of the date hereof shall be acceptable); (h) Indebtedness in respect of Plans maintained by Holdings which are established and maintained in accordance with the covenants set forth in this Agreement; (i) Indebtedness under the Holdings Turnover Agreement; and (j) other Indebtedness incurred for the purpose of financing amounts payable in respect of Indebtedness permitted under clauses (a) through (j) above, the payment of which is subordinated to the payment of the Secured Obligations to the written satisfaction of the Agent and the Required Lenders and the terms (including, without limitation, with respect to amount, maturity, amortization, interest rate, premiums, fees, covenants, subordination terms, events of default and remedies) of which are reasonably acceptable to the Agent and the Required Lenders; provided, however, no such Indebtedness shall constitute Permitted Holdings Indebtedness unless such Indebtedness is nonrecourse to the Borrower and its Restricted Subsidiaries and the Borrower and its Restricted Subsidiaries have no direct or Contingent Obligations with respect to such Indebtedness. "Permitted Purchase Money Indebtedness" is defined in Section 6.3(A)(x) hereof. "Permitted Refinancing Indebtedness" means any replacement, renewal, refinancing or extension of any Indebtedness (other than the Senior Subordinated Notes) permitted by this Agreement that (i) does not exceed the aggregate principal amount including unused commitments, of the Indebtedness being replaced, renewed, refinanced or extended (plus accrued interest and any applicable premium and associated fees and expenses), (ii) does not have a Weighted Average Life to Maturity at the time of such replacement, renewal, refinancing or extension that is less than the Weighted Average Life to Maturity of the Indebtedness being replaced, renewed, refinanced or extended, (iii) does not rank at the time of such replacement, renewal, refinancing or extension senior to the Indebtedness being replaced, renewed, refinanced or extended, and (iv) does not contain terms (including, without limitation, terms relating to security, amortization, interest rate, premiums, fees, covenants, subordination, events of default and remedies) materially less favorable to the Borrower, taken as a whole, or less favorable in any respect to the interests of the Lenders than those applicable to the Indebtedness being replaced, renewed, refinanced or extended. "Permitted Subordinated Indebtedness" means Subordinated Indebtedness permitted pursuant to Section 6.3(A)(v). -26- "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee benefit plan defined in Section 3(3) of ERISA in respect of which the Borrower or any member of the Controlled Group is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreements" means the Pledge Agreements to be executed by the Borrower (or if such Restricted Subsidiary is to be acquired or established by another Restricted Subsidiary, executed by the applicable Restricted Subsidiary) as of the acquisition or establishment of any Restricted Subsidiary pursuant to the terms of Section 6.3(G)(ii), in favor of the Agent for the benefit of the Holders of Secured Obligations as amended, restated or otherwise modified from time to time, pursuant to which the Borrower and its Restricted Subsidiaries will pledge to the Agent, for the benefit of the Holders of Secured Obligations, all of the issued and outstanding Capital Stock of each Restricted Subsidiary of the Borrower. "Preferred Stock" means (a) the Series A 12% Cumulative Preferred Stock, $0.01 par value of Holdings issued to each of the holders of the Series A 12% Cumulative Preferred Stock listed on Schedule 5.8 attached hereto and (b) the Series B 12% Cumulative Preferred Stock $0.01 par value of Holdings issued to each of the holders of the Series B 12% Cumulative Preferred Stock listed on Schedule 5.8 attached hereto. "Pro Rata Share" means, with respect to any Lender, (i) at any time prior to the Closing Date, the percentage obtained by dividing (A) such Lender's Commitments at such time (in each case, as adjusted from time to time in accordance with the provisions of this Agreement) by (B) the sum of the Aggregate Term Loan A Commitments, Aggregate Term Loan B Commitments and the Aggregate Revolving Loan Commitments at such time and (ii) at any time after the Closing Date, the percentage obtained by dividing (A) the sum of such Lender's Term Loans and Revolving Loan Commitment at such time (in each case, as adjusted from time to time in accordance with the provisions of this Agreement) by (B) the sum of the aggregate amount of all of the Term Loans and the Aggregate Revolving Loan Commitment at such time; provided, however, if all of the Commitments are terminated pursuant to the terms of this Agreement, then "Pro Rata Share" means the percentage obtained by dividing (x) the sum of such Lender's Term Loans, Revolving Loans and participations in any outstanding Letters of Credit and, in the case of the Swing Line Bank, Swing Line Loans, by (y) the aggregate amount of all Term Loans, Revolving Loans, Swing Line Loans and L/C Obligations. "Purchasers" is defined in Section 12.3(A) hereof. "Rate Option" means the Eurodollar Rate or the Floating Rate. "Receivable(s)" means and includes all of the Borrower's presently existing and hereafter arising or acquired accounts, accounts receivable, and all present and future rights of the Borrower to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether or not they have been earned by performance, and all -27- rights in any merchandise or goods which any of the same may represent, and all rights, title, security and guaranties with respect to each of the foregoing, including, without limitation, any right of stoppage in transit. "Redeemable Stock" means 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, matures or is mandatorily redeemable (other than in connection with an Equity Offering), in whole or in part, pursuant to a sinking fund obligation or otherwise, prior to the maturity of the Obligations (including any extensions thereof contemplated by this Agreement), or is, by its terms or upon the happening of any event, redeemable pursuant to a sinking fund obligation or otherwise, at the option of the holder thereof, in whole or in part, prior to the maturity of the Obligations (including any extensions thereof contemplated by this Agreement). "Refinanced Indebtedness" means the all of the outstanding Indebtedness of the Target as of the Closing Date which is being discharged as of the Closing Date as more specifically set forth on Schedule 1.1.5 hereto. "Register" is defined in Section 12.3(C) hereof. "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by nonbank, nonbroker lenders for the purpose of purchasing or carrying margin stock (as defined therein). "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by and to brokers and dealers of securities for the purpose of purchasing or carrying margin stock (as defined therein). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying Margin Stock applicable to member banks of the Federal Reserve System. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the obtaining of credit by borrowers for the purpose of purchasing or carrying margin stock (as defined therein). "Reimbursement Obligation" is defined in Section 2.23 hereof. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, -28- including the movement of Contaminants through or in the air, soil, surface water or groundwater. "Replacement Lender" is defined in Section 2.20 hereof. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days after such event occurs, provided, however, that a failure to meet the minimum funding standards of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Repurchase Indebtedness" is defined in the definitions of Permitted Holdings Indebtedness above. "Required Lenders" means Lenders whose Pro Rata Shares, in the aggregate, are equal to or greater than sixty-six and two-thirds percent (66-2/3%); provided, however, that, if any of the Lenders shall have failed to fund its Pro Rata Share of any Revolving Loan requested by the Borrower, or any Swing Line Loan as requested by the Agent, which such Lenders are obligated to fund under the terms of this Agreement and any such failure has not been cured, then for so long as such failure continues, "Required Lenders" means Lenders (excluding all Lenders whose failure to fund their respective Pro Rata Shares of such Revolving Loans or Swing Line Loans has not been so cured) whose Pro Rata Shares represent sixty-six and two-thirds percent (66-2/3%) or greater of the aggregate Pro Rata Shares of such Lenders; provided, further, however, that, if the Commitments have been terminated pursuant to the terms of this Agreement, "Required Lenders" means Lenders (without regard to such Lenders' performance of their respective obligations hereunder) whose ratio of (x) the sum of such Lenders' Term Loans, Revolving Loans and participations in outstanding Letters of Credit, and, in the case of the Swing Line Bank, the Swing Line Loans to (y) the aggregate amount of all Term Loans, Revolving Loans, Swing Line Loans and L/C Obligations is equal to or greater than sixty-six and two-thirds percent (66-2/3%). "Requirements of Law" means, as to any Person, the charter and by-laws or other organizational or governing documents of such Person, and any law, 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 including, without limitation, the Securities Act of 1933, the Securities Exchange Act of 1934, Regulations G, T, U and X, ERISA, the Fair Labor Standards Act, the Worker Adjustment and Retraining Notification Act, Americans with Disabilities Act of 1990, and any certificate of occupancy, zoning ordinance, building, environmental or land use requirement or Permit or environmental, labor, employment, occupational safety or health law, rule or regulation, including Environmental, Health or Safety Requirements of Law. "Reserves" shall mean the maximum reserve requirement, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) with respect to "Eurocurrency -29- liabilities" or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents. "Restricted Payment" means: (i) any dividend or other distribution, direct or indirect, on account of any now or hereafter outstanding Equity Interests of the Borrower or any Restricted Subsidiary, except a dividend payable solely in shares of that class of Equity Interest or in any junior class of Equity Interest to the holders of that class; (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Equity Interests of the Borrower or any of its Restricted Subsidiaries now or hereafter outstanding; (iii) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to any Permitted Subordinated Indebtedness and the Indebtedness evidenced by the Senior Subordinated Notes; (iv) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding Equity Interests of the Borrower or any of its Restricted Subsidiaries now or hereafter outstanding; (v) any payment of a claim for the rescission of the purchase or sale of, or for material damages arising from the purchase or sale of any Permitted Subordinated Indebtedness, any Indebtedness evidenced by the Senior Subordinated Notes, any Holdings Subordinated Debt or any Equity Interests of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries or of a claim for reimbursement, indemnification or contribution arising out of or related to any such claim for damages or rescission; and (vi) any payment of management, consulting or investment banking fees (or other fees of a similar nature) (A) by the Borrower or any Restricted Subsidiary to Holdings or (B) by the Borrower to any Jordan Stockholder, or MCIT, or any of their respective Affiliates, any holder of any Senior Subordinated Note, any holder of the Holdings Subordinated Debt or Equity Interests of Holdings or any member of Management or their Affiliates. "Restricted Subsidiary" means: (a) any Subsidiary of the Borrower incorporated under the laws of one of the states of the United States and all of the assets and operations of which are in the United States or which generated EBITDA during the immediately preceding twelve months in -30- excess of an amount equal to ten percent (10%) of the Borrower's EBITDA during the immediately preceding twelve months; (b) any other Subsidiary of the Borrower incorporated under the laws of one of the states of the United States resulting from a Permitted Acquisition after the Closing Date substantially all the assets and operations of which are in the United States and that is designated a "Restricted Subsidiary" by the Borrower pursuant to a resolution approved by a majority of the Board of Directors of the Borrower and delivered to the Agent and the Lenders. "Restricted Subsidiary Security Agreements" shall mean each of those certain Security Agreements substantially in the form attached hereto as Exhibit R executed by each Restricted Subsidiary in favor of the Agent for the benefit of the Holders of Secured Obligations, executed pursuant to Section 6.3(G)(ii) of this Agreement, in each case as they may be amended, modified, supplemented or restated and in effect from time to time. "Revolving Credit Availability" means, at any particular time, the lesser of (a) (i) the Aggregate Revolving Loan Commitment at such time minus (ii) the Revolving Credit Obligations outstanding at such time and (b) (i) the Borrowing Base at such time, minus (ii) the principal amount of the Revolving Loans outstanding at such time, minus (iii) the principal amount of Swing Line Loans outstanding at such time and minus (iv) the L/C Obligations with respect to standby Letters of Credit (other than the Backstop Letter of Credit) outstanding at such time. "Revolving Credit Obligations" means, at any particular time, the sum of (i) the outstanding principal amount of the Revolving Loans at such time, plus (ii) the outstanding principal amount of the Swing Line Loans at such time, plus (iii) the L/C Obligations at such time. "Revolving Loan" is defined in Section 2.2. "Revolving Loan Commitment" means, for each Lender, the obligation of such Lender to make Revolving Loans and to purchase participations in Letters of Credit not exceeding the amount set forth on Exhibit B to this Agreement opposite its name thereon under the heading "Revolving Loan Commitment" or on Schedule 1 to the Assignment and Acceptance by which it became a Lender, as such amount may be modified from time to time pursuant to the terms of this Agreement or to give effect to any applicable Assignment and Acceptance. "Revolving Loan Termination Date" means December 31, 2002. "Revolving Note" means a promissory note, in substantially the form of Exhibit C hereto, duly executed by the Borrower and payable to the order of a Lender in the amount of its Revolving Loan Commitment, including any amendment, restatement modification, renewal or replacement of such Revolving Note. "Risk-Based Capital Guidelines" is defined in Section 3.2 hereof. -31- "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with intent to lease such Property as lessee. "Secured Obligations" means, collectively, (i) the Obligations and (ii) all Hedging Obligations owing under Hedging Agreements to any Lender or any affiliate of any Lender. "Security Agreement" means that certain Security Agreement of even date herewith executed by the Borrower in favor of the Agent for the benefit of the Holders of Secured Obligations as amended, restated or otherwise modified from time to time. "Sellers" is defined in the definition of Stock Acquisition below. "Senior Subordinated Notes" means those certain 9 5/8% Senior Subordinated Notes due 2007, issued by the Borrower in the aggregate principal amount of $125,000,000 pursuant to the Indenture, as amended, supplemented or modified in accordance with Section 6.3(O) hereof. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Solvent", when used with respect to any Person, means that at the time of determina tion: (i) the fair market value (i.e., the value of the consideration obtainable in a sale of assets on a going-concern basis in the open market, assuming a sale by a willing seller to a willing purchaser dealing at arm's length and arranged in an orderly manner over a reasonable period of time, each having reasonable knowledge of the nature and characteristics of such assets, neither being under any compulsion to act, determined in good faith) of its assets is in excess of the total amount of its liabilities (including, without limitation, contingent liabilities); (ii) the present fair saleable value of its assets (as determined on a going-concern basis) is greater than its probable liability on its existing debts as such debts become absolute and matured; (iii) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and (iv) it has capital sufficient to carry on its business as conducted and as proposed to be conducted. "Stock Acquisition" means the acquisition by the Borrower of all of the issued and outstanding Capital Stock of the Target on the terms and conditions set forth in that certain Agreement for Purchase and Sale of Stock ("Stock Purchase Agreement") dated as of January 24, 1997 by and among the Borrower, Holdings and all of the shareholders of the Target (collectively, the "Sellers", and each individually being sometimes referred to herein as "Seller"), in the form attached as Exhibit D hereto. "Stock Purchase Agreement" is defined in the definition of Stock Acquisition above. "Stockholders Agreement" means that certain Subscription and Stockholders Agreement, dated as of February 27, 1997, among Holdings and each of the "Stockholders" parties thereto, as in effect on the Closing Date. -32- "Subordinated Indebtedness" means (a) the Indebtedness evidenced by the Senior Subordinated Notes and (b) any other Indebtedness of the Borrower or any Subsidiary of the Borrower, the payment of which is subordinated to payment of the Secured Obligations to the written satisfaction of the Agent and the Required Lenders. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Swing Line Bank" means the Agent or any successor Agent. "Swing Line Commitment" means the obligation of the Swing Line Bank to make Swing Line Loans up to a maximum principal amount of Two Million and 00/100 Dollars ($2,000,000) at any one time outstanding. "Swing Line Loan" means a loan made available to the Borrower by the Swing Line Bank pursuant to Section 2.3 hereof. "Swing Line Note" means a promissory note, in substantially the form of Exhibit C-1 hereto, duly executed by the Borrower and payable to the order of the Swing Line Bank in the amount of its Swing Line Commitment, including any amendment, restatement, modification, renewal or replacement of such Swing Line Note. "Syndication Period" is defined in the definition of Interest Period above. "Target" means Winning Ways, Inc., a Missouri corporation, prior to the consummation of the Merger. "Tax Sharing Agreement" means that certain Tax Sharing Agreement, dated as of February 27, 1997 initially between Holdings and the Borrower and to which each Restricted Subsidiary shall become a party in the form attached hereto as Exhibit P. "Taxes" is defined in Section 2.15(E)(i) hereof. "Termination Date" means the earlier of (a) the Revolving Loan Termination Date and (b) the date of termination of the Commitments pursuant to Section 2.6 or Section 8.1. "Termination Event" means (i) a Reportable Event with respect to any Benefit Plan; (ii) the withdrawal of the Borrower or any member of the Controlled Group from a Benefit Plan during a plan year in which the Borrower or such Controlled Group member was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the imposition of an obligation on the Borrower or any member of the Controlled Group under Section 4041 of ERISA to provide -33- affected parties written notice of intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit Plan; (v) any event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan; or (vi) the partial or complete withdrawal of the Borrower or any member of the Controlled Group from a Multiemployer Plan. "Term Loan A" is defined in Section 2.1(a). "Term Loan A Commitment" means, for each Lender, the obligation of such Lender to make its Term Loan A pursuant to the terms and conditions of this Agreement, and which shall not exceed the principal amount set forth on Exhibit B to this Agreement opposite its name thereon under the heading "Term Loan A Commitment", as such amount may be modified from time to time pursuant to the terms hereof. "Term Loan A Note" means a promissory note, in substantially the form of Exhibit E hereto, duly executed by the Borrower and payable to the order of a Lender in the amount of its Term Loan A Commitment, including any amendment, restatement modification, renewal or replacement of such Term Loan A Note. "Term Loan A Termination Date" means December 31, 2002. "Term Loan B" is defined in Section 2.1(b). "Term Loan B Commitment" means, for each Lender, the obligation of such Lender to make its Term Loan B pursuant to the terms and conditions of this Agreement, and which shall not exceed the principal amount set forth on Exhibit B to this Agreement opposite its name thereon under the heading "Term Loan B Commitment", as such amount may be modified from time to time pursuant to the terms hereof. "Term Loan B Note" means a promissory note, in substantially the form of Exhibit F hereto, duly executed by the Borrower and payable to the order of a Lender in the amount of its Term Loan B Commitment, including any amendment, restatement modification, renewal or replacement of such Term Loan B Note. "Term Loan B Termination Date" means March 31, 2004. "Term Loans" means, collectively, the A Term Loans and B Term Loans. "Term Notes" means collectively the Term Loan A Notes and Term Loan B Notes, including any amendment, restatement modification, renewal or replacement of such Term Notes. "The Jordan Company" means The Jordan Company, a New York general partnership. -34- "Transaction Costs" means the fees, costs and expenses payable by the Borrower in connection with the execution, delivery and performance of the Transaction Documents, the consummation of the Stock Acquisition and the offer and sale of the Senior Subordinated Notes. "Transaction Documents" means the Loan Documents, the Indenture, the Senior Subordinated Notes, the documents evidencing the Holdings Subordinated Debt, including, without limitation, the Deferred Limited Interest Guaranty, the MCIT Turnover Agreement, the Holdings Turnover Agreement, the Management Notes, the Jordan Management Agreement, the Tax Sharing Agreement and the Acquisition Documents. "Transferee" is defined in Section 12.5 hereof. "Type" means, with respect to any Loan, its nature as a Floating Rate Loan or a Eurodollar Rate Loan. "Unfunded Liabilities" means (i) in the case of Single Employer Plans, the amount (if any) by which the present value of all vested nonforfeitable benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans, and (ii) in the case of Multiemployer Plans, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from all Multiemployer Plans. "Unmatured Default" means an event which, but for the lapse of time or the giving of notice, or both, would constitute a Default. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have, at the time of determination, the general voting power under ordinary circumstances to elect the board of directors (or similar governing body). "Weighted Average Life to Maturity" means when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Working Capital" means, as at any date of determination, the excess, if any, of (i) the Borrower's and its Restricted Subsidiaries' consolidated current assets, except cash and Cash Equivalents, over (ii) the Borrower's and its Restricted Subsidiaries' consolidated current liabilities, except current maturities of long-term debt and Revolving Credit Obligations as of such date and all accrued interest, associated costs and fees in connection therewith as of such date. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Any accounting terms used in this Agreement which are not -35- specifically defined herein shall have the meanings customarily given them in accordance with Agreement Accounting Principles. 1.2 References. The existence throughout the Agreement of references to the Borrower's Subsidiaries is for a matter of convenience only. Any references to Subsidiaries of the Borrower set forth herein shall not shall not in any way be construed as consent by the Agent or any Lender to the establishment, maintenance or acquisition of any Subsidiary. All representations and warranties made on and as of the Closing Date to the Borrower shall also be and be deemed to include a reference to the Target after taking into effect the consummation of the Merger. 1.3 Supplemental Disclosure. At any time at the reasonable request of the Agent and at such additional times as the Borrower determines, the Borrower shall supplement each schedule or representation herein or in the other Loan Documents with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such schedule or as an exception to such representation or which is necessary to correct any information in such schedule or representation which has been rendered inaccurate thereby. Unless any such supplement to such schedule or representation discloses the existence or occurrence of events, facts or circumstances which are not prohibited by the terms of this Agreement or any other Loan Documents, such supplement to such schedule or representation shall not be deemed an amendment thereof unless expressly consented to in writing by Agent and the Required Lenders, and no such amendments, except as the same may be consented to in a writing which expressly includes a waiver, shall be or be deemed a waiver by the Agent or any Lender of any Default disclosed therein. Any items disclosed in any such supplemental disclosures shall be included in the calculation of any baskets, limits or similar restrictions contained in this Agreement or any other Loan Document. ARTICLE II: THE CREDITS 2.1. Term Loans. (a) Term Loan A. (i) Amount of Term Loan A. Subject to the terms and conditions set forth in this Agreement, each Lender on the Closing Date severally and not jointly agrees to make on the Closing Date, a term loan, in Dollars, to the Borrower in an amount equal to such Lender's Term Loan A Commitment (each individually, a "Term Loan A" and, collectively, the "A Term Loans"). All A Term Loans shall be made by the Lenders on the Closing Date simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Term Loan A hereunder nor shall the Term Loan A Commitment of any Lender be increased or decreased as a result of any such failure. (ii) Borrowing Notice. The Borrower shall deliver to the Agent a Borrowing Notice, signed by it, on the Closing Date. Such Borrowing Notice shall specify (i) the aggregate amount of the A Term Loans and (ii) instructions for the disbursement of the proceeds of the A Term Loans. The A Term Loans shall initially be Floating Rate Loans -36- (unless otherwise agreed between the Borrower and the Lenders) and thereafter may be continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the manner provided in Section 2.10 and subject to the other conditions and limitations therein set forth and set forth in this Article II. Any Borrowing Notice given pursuant to this Section 2.1(a)(ii) shall be irrevocable. (iii) Making of Term Loans. Promptly after receipt of the Borrowing Notice under Section 2.1(a)(ii) in respect of the A Term Loans, the Agent shall notify each Lender by telex or telecopy, or other similar form of transmission, of the proposed Advance. Each Lender shall deposit an amount equal to its Pro Rata Share of the A Term Loans with the Agent at its office in Chicago, Illinois, in immediately available funds, on the Closing Date specified in the Borrowing Notice. Subject to the fulfillment of the conditions precedent set forth in Sections 4.1 and 4.2, the Agent shall make the proceeds of such amounts received by it available to the Borrower at the Agent's office in Chicago, Illinois on such Closing Date and shall disburse such proceeds in accordance with the Borrower's disbursement instructions set forth in such Borrowing Notice. The failure of any Lender to deposit the amount described above with the Agent on the Closing Date shall not relieve any other Lender of its obligations hereunder to make its Term Loan A on the Closing Date. (iv) Repayment of the A Term Loans. (A) The A Term Loans shall be repaid in twenty-two (22) consecutive quarterly installments payable on the last day of each calendar quarter commencing September 30, 1997 and continuing thereafter until the Term Loan A Termination Date, and the A Term Loans shall be permanently reduced by the amount of each installment on the date payment thereof is required to be made hereunder. The installments shall be in the aggregate amounts set forth below:
Installment Date Installment Amount ---------------- ------------------ September 30, 1997 $1,062,500 December 31, 1997 $1,062,500 March 31, 1998 $1,062,500 June 30, 1998 $1,062,500 September 30, 1998 $1,187,500 December 31, 1998 $1,187,500 March 31, 1999 $1,187,500 June 30, 1999 $1,187,500 September 30, 1999 $1,562,500 December 31, 1999 $1,562,500 March 31, 2000 $1,562,500 June 30, 2000 $1,562,500
-37- September 30, 2000 $1,937,500 December 31, 2000 $1,937,500 March 31, 2001 $1,937,500 June 30, 2001 $1,937,500 September 30, 2001 $2,437,500 December 31, 2001 $2,437,500 March 31, 2002 $2,437,500 June 30, 2002 $2,437,500 September 30, 2002 $3,625,000 December 31, 2002 $3,625,000
Notwithstanding the foregoing, the final installment shall be in the amount of the then outstanding principal balance of the A Term Loans. In addition, the then outstanding principal balance of the A Term Loans, if any, shall be due and payable on the Termination Date. No installment of any Term Loan A shall be reborrowed once repaid. (B) In addition to the scheduled payments on the A Term Loans, the Borrower (i) may make the voluntary prepayments described in Section 2.5(A) for credit against the scheduled payments on the A Term Loans pursuant to Section 2.5(A) and (ii) shall make the mandatory prepayments prescribed in Section 2.5(B), for credit against such scheduled payments on the A Term Loans pursuant to Section 2.5(B). (b) Term Loan B. (i) Amount of Term Loan B. Subject to the terms and conditions set forth in this Agreement, each Lender on the Closing Date severally and not jointly agrees to make on the Closing Date, a term loan, in Dollars, to the Borrower in an amount equal to such Lender's Term Loan B Commitment (each individually, a "Term Loan B" and, collectively, the "B Term Loans"). All B Term Loans shall be made by the Lenders on the Closing Date simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Term Loan B hereunder nor shall the Term Loan B Commitment of any Lender be increased or decreased as a result of any such failure. (ii) Borrowing Notice. The Borrower shall deliver to the Agent a Borrowing Notice, signed by it, on the Closing Date. Such Borrowing Notice shall specify (i) the aggregate amount of the B Term Loans and (ii) instructions for the disbursement of the proceeds of the B Term Loans. The B Term Loans shall initially be Floating Rate Loans (unless otherwise agreed between the Borrower and the Lenders) and thereafter may be continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the manner provided in Section 2.10 and subject to the other conditions and limitations therein set -38- forth and set forth in this Article II. Any Borrowing Notice given pursuant to this Section 2.1(b)(ii) shall be irrevocable. (iii) Making of Term Loans. Promptly after receipt of the Borrowing Notice under Section 2.1(b)(ii) in respect of the B Term Loans, the Agent shall notify each Lender by telex or telecopy, or other similar form of transmission, of the proposed Advance. Each Lender shall deposit an amount equal to its Pro Rata Share of the B Term Loans with the Agent at its office in Chicago, Illinois, in immediately available funds, on the Closing Date specified in the Borrowing Notice. Subject to the fulfillment of the conditions precedent set forth in Sections 4.1 and 4.2, the Agent shall make the proceeds of such amounts received by it available to the Borrower at the Agent's office in Chicago, Illinois on such Closing Date and shall disburse such proceeds in accordance with the Borrower's disbursement instructions set forth in such Borrowing Notice. The failure of any Lender to deposit the amount described above with the Agent on the Closing Date shall not relieve any other Lender of its obligations hereunder to make its Term Loan B on the Closing Date. (iv) Repayment of the B Term Loans. (A) The B Term Loans shall be repaid in twenty-seven (27) consecutive quarterly installments payable on the last day of each calendar quarter commencing September 30, 1997 and continuing thereafter until the Term Loan B Termination Date, and the B Term Loans shall be permanently reduced by the amount of each installment on the date payment thereof is required to be made hereunder. The installments shall be in the aggregate amounts set forth below:
Installment Date Installment Amount ---------------- ------------------ September 30, 1997 $ 62,500 December 31, 1997 $ 62,500 March 31, 1998 $ 62,500 June 30, 1998 $ 62,500 September 30, 1998 $ 62,500 December 31, 1998 $ 62,500 March 31, 1999 $ 62,500 June 30, 1999 $ 62,500 September 30, 1999 $ 62,500 December 31, 1999 $ 62,500 March 31, 2000 $ 62,500 June 30, 2000 $ 62,500 September 30, 2000 $ 62,500 December 31, 2000 $ 62,500
-39- March 31, 2001 $ 62,500 June 30, 2001 $ 62,500 September 30, 2001 $ 62,500 December 31, 2001 $ 62,500 March 31, 2002 $ 62,500 June 30, 2002 $ 62,500 September 30, 2002 $ 62,500 December 31, 2002 $ 62,500 March 31, 2003 $ 3,562,500 June 30, 2003 $ 3,562,500 September 30, 2003 $ 4,125,000 December 31, 2003 $ 4,125,000 March 31, 2004 $ 8,250,000
Notwithstanding the foregoing, the final installment shall be in the amount of the then outstanding principal balance of the B Term Loans. In addition, the then outstanding principal balance of the B Term Loans, if any, shall be due and payable on the Termination Date. No installment of any Term Loan B shall be reborrowed once repaid. (B) In addition to the scheduled payments on the B Term Loans, the Borrower (i) may make the voluntary prepayments described in Section 2.5(A) for credit against the scheduled payments on the B Term Loans pursuant to Section 2.5(A) and (ii) shall make the mandatory prepayments prescribed in Section 2.5(B), for credit against such scheduled payments on the B Term Loans pursuant to Section 2.5(B). 2.2 Revolving Loans. Upon the satisfaction of the conditions precedent set forth in Sections 4.1 and 4.2 hereof, from and including the date of this Agreement and prior to the Termination Date, each Lender severally and not jointly agrees, on the terms and conditions set forth in this Agreement, to make revolving loans to the Borrower from time to time, in Dollars, in an amount not to exceed such Lender's Pro Rata Share of Revolving Credit Availability at such time (each individually, a "Revolving Loan" and, collectively, the "Revolving Loans"). Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Revolving Loans at any time prior to the Termination Date. The Revolving Loans made on the Closing Date shall initially be Floating Rate Loans (unless otherwise agreed between the Borrower and the Lenders) and thereafter may be continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the manner provided in Section 2.10 and subject to the other conditions and limitations therein set forth and set forth in this Article II. On the Termination Date, the Borrower shall repay in full the outstanding principal balance of the Revolving Loans. Each Advance under this Section 2.2 shall consist of Revolving Loans made by each Lender ratably in proportion to such Lender's respective Pro Rata Share. Each Advance under this -40- Section 2.2 shall consist of Revolving Loans made by each Lender ratably in proportion to such Lender's respective Pro Rata Share. 2.3 Swing Line Loans. (a) Amount of Swing Line Loans. Upon the satisfaction of the conditions precedent set forth in Section 4.1 and 4.2, from and including the date of this Agreement and prior to the Termination Date, the Swing Line Bank agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower from time to time, in Dollars, in an amount not to exceed the lesser of (a) the Swing Line Commitment minus the outstanding principal amount of all Swing Line Loans (after giving effect to any concurrent repayment of Loans) and (b) Revolving Credit Availability at such time (each, individually, a "Swing Line Loan" and collectively, the "Swing Line Loans"); provided, however, at no time shall the Revolving Credit Obligations exceed the Aggregate Revolving Loan Commitment, and, provided, further, that at no time shall the Revolving Credit Obligations (other than L/C Obligations in respect of commercial Letters of Credit) exceed the Borrowing Base; and provided, further, that at no time shall the sum of (a) the outstanding amount of the Swing Line Loans, plus (b) the outstanding amount of Revolving Loans made by the Swing Line Bank pursuant to Section 2.2 (after giving effect to any concurrent repayment of Loans), exceed the Swing Line Bank's Revolving Loan Commitment at such time. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Swing Line Loans (including from the proceeds of another Swing Line Loan) at any time prior to the Termination Date. (b) Borrowing Notice. The Borrower shall deliver to the Agent and the Swing Line Bank a Borrowing Notice, signed by it, not later than 11:00 a.m. (Chicago time) on the Borrowing Date of each Swing Line Loan, specifying (i) the applicable Borrowing Date (which shall be a Business Day), and (ii) the aggregate amount of the requested Swing Line Loan. The Swing Line Loans shall at all times be Floating Rate Loans, which shall be an amount not less than $10,000 (and in multiples of $10,000 if in excess thereof). The Agent shall promptly notify each Lender of such request. (c) Making of Swing Line Loans. Promptly after receipt of the Borrowing Notice under Section 2.3(b) in respect of Swing Line Loans, the Agent shall notify the Swing Line Lender by telex or telecopy, or other similar form of transmission, of the requested Swing Line Loan. Not later than 2:00 p.m. (Chicago time) on the applicable Borrowing Date, the Swing Line Bank shall make available its Swing Line Loan, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. The Agent will promptly make the funds so received from the Swing Line Bank available to the Borrower at the Agent's aforesaid address. (d) Repayment of Swing Line Loans. The Swing Line Loans shall be evidenced by the Swing Line Note, and each Swing Line Loan shall be paid in full by the Borrower on or before the fifth Business Day after the Borrowing Date for such Swing Line Loan. The Borrower may at any time pay, without penalty or premium, all outstanding Swing Line Loans or, in a minimum amount of $10,000, any portion of the outstanding Swing Line Loans, upon notice to the Agent and the Swing Line Bank. In addition, the Agent (i) may at any time in its sole discretion with respect to any outstanding Swing Line Loan, or (ii) shall on the fifth Business Day after the Borrowing Date of any Swing Line Loan, require each Lender (including the -41- Swing Line Bank) with a Revolving Loan Commitment greater than zero to make a Revolving Loan in the amount of such Lender's Pro Rata Share of such Swing Line Loan, for the purpose of repaying such Swing Line Loan. Not later than 2:00 p.m. (Chicago time) on the date of any notice received pursuant to this Section 2.3(d), each Lender with a Revolving Loan Commitment greater than zero shall make available its required Revolving Loan or Revolving Loans, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. Revolving Loans made pursuant to this Section 2.3(d) shall initially be Floating Rate Loans and thereafter may be continued as Floating Rate Loans or converted into Eurodollar Rate Loans in the manner provided in Section 2.10 and subject to the other conditions and limitations therein set forth and set forth in this Article II. Unless a Lender shall have notified the Swing Line Bank, prior to its making any Swing Line Loan, that any applicable condition precedent set forth in Sections 4.1 and 4.2 had not then been satisfied, such Lender's obligation to make Revolving Loans pursuant to this Section 2.3(d) to repay Swing Line Loans shall be unconditional, continuing, irrevocable and absolute and shall not be affected by any circumstances, including, without limitation, (A) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Agent, the Swing Line Bank or any other Person, (B) the occurrence or continuance of a Default or Unmatured Default, (C) any adverse change in the condition (financial or otherwise) of the Borrower, or (D) any other circumstances, happening or event whatsoever. In the event that any Lender fails to make payment to the Agent of any amount due under this Section 2.3(d), the Agent shall be entitled to receive, retain and apply against such obligation the principal and interest otherwise payable to such Lender hereunder until the Agent receives such payment from such Lender or such obligation is otherwise fully satisfied. In addition to the foregoing, if for any reason any Lender fails to make payment to the Agent of any amount due under this Section 2.3(d), such Lender shall be deemed, at the option of the Agent, to have unconditionally and irrevocably purchased from the Swing Line Bank, without recourse or warranty, an undivided interest and participation in the applicable Swing Line Loan in the amount of such Revolving Loan, and such interest and participation may be recovered from such Lender together with interest thereon at the Federal Funds Effective Rate for each day during the period commencing on the date of demand and ending on the date such amount is received. On the Termination Date, the Borrower shall repay in full the outstanding principal balance of the Swing Line Loans. 2.4 Rate Options for all Advances. The Advances may be Floating Rate Advances or Eurodollar Rate Advances, or a combination thereof, selected by the Borrower in accordance with Section 2.10. The Borrower may select, in accordance with Section 2.10, Rate Options and Interest Periods applicable to portions of the Revolving Loans and the Term Loans; provided that there shall be no more than ten (10) Interest Periods in effect with respect to all of the Loans at any time and; provided, further, however, notwithstanding anything herein to the contrary, the Borrower may not select Interest Periods for Eurodollar Rate Advances made during the Syndication Period which exceed seven days and the Interest Periods with respect to all such Eurodollar Rate Advances made during the Syndication Period shall be required to expire on the same date. The Swing Line Loans shall at all times be Floating Rate Loans. -42- 2.5 Optional Payments; Mandatory Prepayments. (A) Optional Payments. The Borrower may from time to time repay or prepay, without penalty or premium all or any part of outstanding Floating Rate Advances, provided that the Borrower may not so prepay Floating Rate Advances consisting of Term Loans unless it shall have provided to the Agent of such prepayment at least one Business Day prior to the making thereof. Eurodollar Rate Advances may be voluntarily repaid or prepaid prior to the last day of the applicable Interest Period, subject to the indemnification provisions contained in Section 3.4, provided, that the Borrower may not so prepay Eurodollar Rate Advances unless it shall have provided at least three Business Days' written notice to the Agent of such prepayment. Unless the aggregate outstanding principal balance thereof is being paid in full, repayments or prepayments of Floating Rate Advances (including as a result of any reduction of the Aggregate Revolving Loan Commitment pursuant to Section 2.6) shall be in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess thereof. Unless the aggregate outstanding principal balance thereof is being paid in full, prepayments of Eurodollar Rate Advances (including as a result of any reduction of the Aggregate Revolving Loan Commitment pursuant to Section 2.6) shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in excess thereof. Each voluntary prepayment of the Term Loans shall be applied pro rata to the unpaid installments of the Term Loans, on a ratable basis based on the respective amounts of such installments. (B) Mandatory Prepayments. (i) Mandatory Prepayments of Term Loans. (a) Within one-hundred and eighty (180) days after the Borrower's or any Restricted Subsidiary's receipt of any Net Cash Proceeds from any Asset Sale (other than Excluded Asset Sales) which when aggregated with the Net Cash Proceeds from other Asset Sales (other than Excluded Asset Sales) consummated during the preceding twelve-month period are greater than $500,000, the Borrower shall make or cause to be made a mandatory prepayment of the Obligations in an amount equal to one hundred percent (100%) of such Net Cash Proceeds in excess of $500,000 for such twelve-month period; provided, however, that the Net Cash Proceeds which the Borrower or such Restricted Subsidiary shall, within one-hundred and eighty (180) days of the receipt thereof, use to acquire assets of a like nature to those sold in such Asset Sale in replacement thereof shall not be included in determining the Net Cash Proceeds for such Fiscal Year. Notwithstanding the foregoing, during the existence of a Default, if the Borrower or any Subsidiary shall consummate any Asset Sale (other than an Excluded Asset Sale) in which the sale price exceeds $100,000, or shall not have so reinvested proceeds of any such Asset Sale consummated prior to the occurrence of such a Default, then the Borrower shall immediately make or cause to be made a mandatory prepayment in an amount equal to 100% of such Net Cash Proceeds. (b) Within thirty (30) days after the required date for delivery of the annual audited financial statements required to be delivered pursuant to Section 6.1(A)(iii) for each Cash Flow Period, the Borrower shall calculate Excess Cash Flow for such Cash - 43 - Flow Period and shall make a mandatory prepayment in an amount equal to (i) seventy-five percent (75%) of such Excess Cash Flow in excess of $250,000 if Level 1, Level 2 or Level 3 pricing shall be applicable as of the end of such Cash Flow Period determined by reference to the table set forth in Section 2.15(D)(ii), and (ii) fifty percent (50%) of such Excess Cash Flow in excess of $250,000 if Level 4, Level 5 or Level 6 pricing shall be applicable as of the end of such Cash Flow Period determined by reference to the table set forth in Section 2.15(D)(ii). (c) Notwithstanding anything contained in the foregoing Section 2.5(B)(i)(a), upon the consummation of any Financing by any Restricted Subsidiary, the Borrower shall immediately upon such Restricted Subsidiary's receipt of Net Cash Proceeds from such Financing, make a mandatory prepayment of the Obligations in an amount equal to the lesser of (1) one hundred percent (100%) of such Net Cash Proceeds minus amounts from such Net Cash Proceeds utilized to repay or prepay Indebtedness of such Restricted Subsidiary (other than Indebtedness which is subordinated to the claims of the Lenders with respect to such Restricted Subsidiary) minus the fair market value of any assets acquired with the proceeds of such Financing and (2) the amount of the Borrower's Investment in such Restricted Subsidiary minus the fair market value of any assets acquired with the proceeds of such Financing. (d) Nothing in this Section 2.5(B)(i) shall be construed to constitute the Lenders' consent to any transaction referred to in clause (a) above which is not expressly permitted by Section 6.3(B). (e) Each mandatory prepayment required by clauses (a), (b) and (c) of this Section 2.5(B) and Section 6.2(G) shall be referred to herein as a "Designated Prepayment". Designated Prepayments shall be allocated and applied to the Obligations as follows: (I) the amount of each Designated Prepayment shall be applied pro rata to the unpaid installments of the Term Loans, on a ratable basis based upon the respective amounts of such installments; and (II) following the payment in full of the Term Loans, the amount of each Designated Prepayment shall be applied to repay all outstanding Swing Line Loans and then to repay Revolving Loans and following the payment in full of the Revolving Loans, the amount of each Designated Prepayment shall be applied first to interest on the Reimbursement Obligations, then to principal on the Reimbursement Obligations, then to fees on account of Letters of Credit and then, to the extent any L/C Obligations are contingent, deposited with the Agent as cash collateral in respect of such L/C Obligations; and (III) following the payment in full of the amounts set forth in clauses (I) and (II) above, the excess remaining amount, if any, shall be returned to the Borrower. - 44 - (ii) Mandatory Prepayments of Revolving Loans. In addition to repayments under Section 2.5(B)(i)(e)(II), if at any time and for any reason (A) the Revolving Credit Obligations are greater than the Aggregate Revolving Loan Commitment or (B) the Revolving Credit Obligations (other than L/C Obligations in respect of commercial Letters of Credit) are greater than the Borrowing Base, the Borrower shall immediately make a mandatory prepayment of the Obligations in an amount equal to such excess. (iii) Subject to the preceding provisions of this Section 2.5(B), all of the mandatory prepayments made under this Section 2.5(B) shall be applied first to Floating Rate Loans and to any Eurodollar Rate Loans maturing on such date. The Agent shall hold the remaining portion of such mandatory prepayment as cash collateral in an interest bearing deposit account and shall apply funds from such account to subsequently maturing Eurodollar Rate Loans in order of maturity. 2.6 Reduction of Commitments. The Borrower may permanently reduce the Aggregate Revolving Loan Commitment in whole, or in part ratably among the Lenders, in an aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in excess of that amount (unless the Aggregate Revolving Loan Commitment is reduced in whole), upon at least three Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction; provided, however, that the amount of the Aggregate Revolving Loan Commitment may not be reduced below the aggregate principal amount of the outstanding Revolving Credit Obligations; and provided, further, that in addition to the minimum amounts and integrals stated above, if as a result of any such reduction of the Aggregate Revolving Loan Commitment prepayments of the Revolving Loans must be made then unless all of the Revolving Credit Obligations are being paid in full, such prepayments of Floating Rate Advances shall be in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess thereof and such prepayments of Eurodollar Rate Advances shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in excess thereof. 2.7 Method of Borrowing. Not later than 12:00 p.m. (Chicago time) on each Borrowing Date, each Lender shall make available its Revolving Loan or Revolving Loans, in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII hereof. The Agent will promptly make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. 2.8 Method of Selecting Types and Interest Periods for Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Rate Advance, the Interest Period applicable to each Advance from time to time. The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 11:00 a.m. (Chicago time) on the Borrowing Date of each Floating Rate Advance and not later than 11:00 a.m. (Chicago time) three Business Days before the Borrowing Date for each Eurodollar Rate Advance, specifying: (i) the Borrowing Date (which shall be a Business Day) of such Advance; (ii) the aggregate amount of such Advance; (iii) the Type of Advance selected; and (iv) in the case of each Eurodollar Rate Advance, the Interest Period applicable thereto. Each Floating Rate Advance and all Obligations other than Loans shall bear interest from and including the date of the making of such Advance to (but not including) the date of repayment thereof at the Floating Rate, changing when and as - 45 - such Floating Rate changes. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Loan will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Rate Advance shall bear interest from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Eurodollar Rate Advance, changing (only as to the Applicable Eurodollar Margin portion thereof) with each change in the Applicable Eurodollar Margin. 2.9 Minimum Amount of Each Advance. Each Eurodollar Rate Advance shall be in the minimum amount of $1,000,000 (and in multiples of $100,000 if in excess thereof), and each Floating Rate Advance (other than an Advance to repay Swing Line Loans pursuant to Section 2.3(d) or a Reimbursement Obligation pursuant to Section 2.23) shall be in the minimum amount of $100,000 (and in multiples of $100,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the unused Revolving Credit Availability. 2.10 Method of Selecting Types and Interest Periods for Conversion and Continuation of Advances. (A) Right to Convert. The Borrower may elect from time to time, subject to the provisions of Section 2.4 and this Section 2.10, to convert all or any part of a Loan of any Type into any other Type or Types of Loans; provided that any conversion of any Eurodollar Rate Advance shall be made on, and only on, the last day of the Interest Period applicable thereto. (B) Automatic Conversion and Continuation. Floating Rate Loans shall continue as Floating Rate Loans unless and until such Floating Rate Loans are converted into Eurodollar Rate Loans. Eurodollar Rate Loans shall continue as Eurodollar Rate Loans until the end of the then applicable Interest Period therefor, at which time such Eurodollar Rate Loans shall be automatically converted into Floating Rate Loans unless the Borrower shall have given the Agent notice in accordance with Section 2.10(D) requesting that, at the end of such Interest Period, such Eurodollar Rate Loans continue as a Eurodollar Rate Loan. (C) No Conversion Post-Default or Post-Unmatured Default. Notwithstanding anything to the contrary contained in Section 2.10(A) or Section 2.10(B), no Loan may be converted into or continued as a Eurodollar Rate Loan (except with the consent of the Required Lenders) when any Default or Unmatured Default has occurred and is continuing. (D) Conversion/Continuation Notice. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Loan into a Eurodollar Rate Loan or continuation of a Eurodollar Rate Loan not later than 11:00 a.m. (Chicago time) three Business Days prior to the date of the requested conversion or continuation, specifying: (1) the requested date (which shall be a Business Day) of such conversion or continuation; (2) the amount and Type of the Loan to be converted or continued; and (3) the amount of Eurodollar Rate Loan(s) into which such Loan is to be converted or continued and the duration of the Interest Period applicable thereto. - 46 - 2.11 Default Rate. After the occurrence and during the continuance of a Default, at the option of the Agent or at the direction of the Required Lenders, the interest rate(s) applicable to any outstanding Loan shall be the greater of (i) two percent (2.0%) per annum above the Alternate Base Rate in effect from time to time and (ii) the Eurodollar Rate applicable to such Loans at such time plus two percent (2.0%) per annum. 2.12 Collections Account Arrangements. All collections of Receivables included in the Collateral and other proceeds of Collateral shall be deposited in a Collection Account which is subject to a Collection Account Agreement or pursuant to another similar arrangement for the collection of such amounts established by the Borrower and Agent and shall be transferred in accordance with the provisions of the respective Collection Account Agreements. On or prior to the Closing Date, the Borrower shall have entered into and shall thereafter maintain lock-box services agreements with banks which are parties to Collection Account Agreements and to which lock-boxes Account Debtors shall directly remit all payments on Receivables. Any of the foregoing collections received by the Borrower and not so deposited, shall be deemed to have been received by the Borrower as the Agent's trustee and, upon the Borrower's receipt thereof, the Borrower shall immediately transfer all such amounts into a Collection Account in their original form. Such deposits shall be remitted to the Agent, the Borrower or as the Agent may direct, all in accordance with the provisions of the Collection Account Agreements; provided, however, that any provision in any Loan Document (including the Collection Account Agreements) to the contrary notwithstanding, the Agent shall not give Notice (as defined under the Collection Account Agreements) or exercise any remedies under the Collection Account Agreements unless a Designated Default shall have occurred and be continuing. 2.13 Method of Payment. All payments of principal, interest, and fees hereunder shall be made, without setoff, deduction or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by 2:00 p.m. (Chicago time) on the date when due and shall be made ratably among the Lenders (unless such amount is not to be shared ratably in accordance with the terms hereof). Payments received by the Agent after such time shall be deemed to have been received on the next Business Day. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds which the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Borrower authorizes the Agent to charge the account of the Borrower maintained with First Chicago for each payment of principal, interest, fees and other Obligations as it becomes due hereunder. 2.14 Notes, Telephonic Notices. Each Lender is authorized to record the principal amount of each of its Loans and each repayment with respect to its Loans on the schedule attached to its respective Notes; provided, however, that the failure to so record shall not affect the Borrower's obligations under any such Note. The Borrower authorizes the Lenders and the Agent to extend Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly to the Agent a written confirmation, signed by an Authorized Officer, if such confirmation is requested by the - 47 - Agent or any Lender, of each telephonic notice. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, (i) the telephonic notice shall govern absent manifest error and (ii) the Agent or the Lender, as applicable, shall promptly notify the Authorized Officer who provided such confirmation of such difference. 2.15 Promise to Pay; Interest and Fees; Interest Payment Dates; Interest and Fee Basis; Taxes; Loan and Control Accounts. (A) Promise to Pay. The Borrower unconditionally promises to pay when due the principal amount of each Loan and all other Obligations incurred by it, and to pay all unpaid interest accrued thereon, in accordance with the terms of this Agreement and the Notes. (B) Interest Payment Dates. Interest shall accrue on each Floating Rate Loan and shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Loan is prepaid, whether due to acceleration or otherwise, and at maturity (whether by acceleration or otherwise). Interest shall accrue on each Eurodollar Rate Loan and shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Rate Loan is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Rate Loan having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest accrued on the principal balance of all other Obligations shall be payable in arrears (i) on the last day of each calendar month, commencing on the first such day following the incurrence of such Obligation, (ii) upon repayment thereof in full or in part, and (iii) if not theretofore paid in full, at the time such other Obligation becomes due and payable (whether by acceleration or otherwise). (C) Commitment Fees. (i) The Borrower shall pay to the Agent, for the account of the Lenders in accordance with their Pro Rata Shares, (a) with respect to the Term Loan A Commitments and Term Loan B Commitments, from and after the date of this Agreement until the date on which the Term Loans are funded and (b) with respect to the Aggregate Revolving Loan Commitments, from and after the date of this Agreement until the date on which the Aggregate Revolving Loan Commitment shall be terminated in whole, a commitment fee accruing at the rate of the then Applicable Commitment Fee Percentage, on (1) the Term Loan A Commitments and Term Loan B Commitments and (2) the amount by which (A) the Aggregate Revolving Loan Commitment in effect from time to time exceeds (B) the Revolving Credit Obligations in effect from time to time. All such commitment fees payable under this clause (C) shall be payable quarterly in arrears on the last day of each calendar quarter occurring after the Closing Date. (ii) The Borrower agrees to pay to the Agent for the sole account of the Agent and its affiliates the fees set forth in the letter agreement between the Agent and the Borrower dated January 3, 1997, as amended, payable at the times and in the amounts set forth therein. (D) Interest and Fee Basis; Applicable Eurodollar Margin; Applicable Floating Rate Margin and Applicable Commitment Fee Percentage. - 48 - (i) All computations of interest based on the Alternate Base Rate which are computed by reference to the Corporate Base Rate shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and all other computations of interest and fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Obligation is incurred but not for the day of any payment on the amount paid if payment is received prior to 2:00 p.m. (Chicago time) at the place of payment. If any payment of principal of or interest on a Loan or any payment of any other Obligations shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. (ii) The Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage shall be determined from time to time by reference to the table set forth below, on the basis of the then applicable Leverage Ratio as described in this Section 2.15(D)(ii):
==================================================================================================================================== APPLICABLE MARGINS/FEES FOR OBLIGATIONS - ------------------------------------------------------------------------------------------------------------------------------------ LEVERAGE RATIO APPLICABLE APPLICABLE APPLICABLE APPLICABLE APPLICABLE FLOATING EURODOLLAR FLOATING EURODOLLAR COMMITMENT RATE MARGIN RATE MARGIN RATE RATE MARGIN FEE FOR FOR MARGIN FOR B TERM PERCENTAGE OBLIGATIONS OBLIGATIONS FOR B LOANS OTHER THAN B OTHER THAN B TERM TERM LOANS TERM LOANS LOANS - ------------------------------------------------------------------------------------------------------------------------------------ LEVEL 1 > 5.0 to 1.0 1.25% 2.25% 1.75% 2.75% 0.50% - - ------------------------------------------------------------------------------------------------------------------------------------ > 4.50 to 1.00 - LEVEL 2 and < 5.00 to 1.00% 2.00% 1.50% 2.50% 0.375% 1.00 - ------------------------------------------------------------------------------------------------------------------------------------ > 4.00 to 1.00 - LEVEL 3 and < 4.50 to 0.75% 1.75% 1.25% 2.25% 0.375% 1.00 - ------------------------------------------------------------------------------------------------------------------------------------ > 3.50 to 1.00 - LEVEL 4 and < 4.00 to 0.50% 1.50% 1.25% 2.25% 0.25% 1.00 - ------------------------------------------------------------------------------------------------------------------------------------ > 3.00 to 1.00 - LEVEL 5 and < 3.50 to 0.25% 1.25% 1.25% 2.25% 0.25% 1.00 - ------------------------------------------------------------------------------------------------------------------------------------ LEVEL 6 < 3.00 to 1.00 0.00% 1.00% 1.25% 2.25% 0.25% ====================================================================================================================================
- 49 - Except as set forth in clause (iii) below, for purposes of this Section 2.15(D)(ii), the Leverage Ratio shall be determined as of the last day of each fiscal quarter on a basis consistent with the calculation under Section 6.4. Upon receipt of the financial statements delivered pursuant to Section 6.1(A)(ii), the Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage shall be adjusted, such adjustment being effective five (5) Business Days following the Agent's receipt of such financial statements and the Officer's Certificate required to be delivered in connection therewith pursuant to Section 6.1(A)(iv); provided, that if the Borrower shall not have timely delivered its financial statements in accordance with Section 6.1(A)(ii), then commencing on the date upon which such financial statements should have been delivered and continuing until such financial statements are actually delivered, it shall be assumed for purposes of determining the Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage that the Leverage Ratio was greater than 5.0 to 1.0 and the Level 1 pricing shall be applicable. (iii) Notwithstanding anything herein to the contrary, the initial Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage shall be at the Level 1 pricing level and no adjustment which would otherwise be made during the period from the Closing Date through August 27, 1997 shall be made but the Level 1 pricing shall remain in effect for such period. On August 27, 1997, the Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage shall be based upon the Borrower's Leverage Ratio as at the end of the fiscal quarter ended June 30, 1997, which Applicable Eurodollar Margin, Applicable Floating Rate Margin and Applicable Commitment Fee Percentage shall remain in effect until adjusted pursuant to the provisions of this Section 2.15 set forth above. (E) Taxes. (i) Except as provided below, any and all payments by the Borrower hereunder shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings or any liabilities with respect thereto including those arising after the date hereof as a result of the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a Governmental Authority or any change in the interpretation or application thereof by a Governmental Authority but excluding, in the case of each Lender and the Agent, such taxes (including income taxes, franchise taxes and branch profit taxes) as are imposed on or measured by such Lender's or Agent's, as the case may be, net income by the United States of America or any Governmental Authority of the jurisdiction under the laws of which such Lender or Agent, as the case may be, is organized (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities which the Agent or a Lender determines to be applicable to this Agreement, the other Loan Documents, the Revolving Loan Commitments, the Loans or the Letters of Credit being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the other Loan Documents to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15(E)) such Lender or the Agent (as the case may be) - 50 - receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. If a withholding tax of the United States of America or any other Governmental Authority shall be or become applicable (y) after the date of this Agreement, to such payments by the Borrower made to the Lending Installation or any other office that a Lender may claim as its Lending Installation, or (z) after such Lender's selection and designation of any other Lending Installation, to such payments made to such other Lending Installation, such Lender shall use reasonable efforts to make, fund and maintain its Loans through another Lending Installation of such Lender in another jurisdiction so as to reduce the Borrower's liability hereunder, if the making, funding or maintenance of such Loans through such other Lending Installation of such Lender does not, in the judgment of such Lender, otherwise adversely affect such Loans, or obligations under the Revolving Loan Commitments or such Lender. (ii) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder, from the issuance of Letters of Credit hereunder, or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the other Loan Documents, the Revolving Loan Commitments, the Loans or the Letters of Credit (hereinafter referred to as "Other Taxes"). (iii) The Borrower indemnifies each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any Governmental Authority on amounts payable under this Section 2.15(E)) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days after the date such Lender or the Agent (as the case may be) makes written demand therefor. If the Taxes or Other Taxes with respect to which an indemnification payment has been made hereunder are subsequently refunded to the Lenders, the Lenders will return to the Borrower an amount equal to the lesser of the indemnification payment or the refunded amount. A certificate as to any additional amount payable to any Lender or the Agent under this Section 2.15(E) submitted to the Borrower and the Agent (if a Lender is so submitting) by such Lender or the Agent shall show in reasonable detail the amount payable and the calculations used to determine such amount and shall, absent manifest error, be final, conclusive and binding upon all parties hereto. With respect to such deduction or withholding for or on account of any Taxes and to confirm that all such Taxes have been paid to the appropriate Governmental Authorities, the Borrower shall promptly (and in any event not later than thirty (30) days after receipt) furnish to each Lender and the Agent such certificates, receipts and other documents as may be required (in the judgment of such Lender or the Agent) to establish any tax credit to which such Lender or the Agent may be entitled. - 51 - (iv) Within thirty (30) days after the date of any payment of Taxes or Other Taxes by the Borrower, the Borrower shall furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof. (v) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.15(E) shall survive the payment in full of principal and interest hereunder, the termination of the Letters of Credit and the termination of this Agreement. (vi) Without limiting the obligations of the Borrower under this Section 2.15(E), each Lender that is not created or organized under the laws of the United States of America or a political subdivision thereof shall deliver to the Borrower and the Agent on or before the Closing Date, or, if later, the date on which such Lender becomes a Lender pursuant to Section 12.3 hereof, a true and accurate certificate executed in duplicate by a duly authorized officer of such Lender, in a form satisfactory to the Borrower and the Agent, to the effect that such Lender is capable under the provisions of an applicable tax treaty concluded by the United States of America (in which case the certificate shall be accompanied by two executed copies of Form 1001 of the IRS) or under Section 1442 of the Code (in which case the certificate shall be accompanied by two copies of Form 4224 of the IRS) of receiving payments of interest hereunder without deduction or withholding of United States federal income tax. Each such Lender further agrees to deliver to the Borrower and the Agent from time to time a true and accurate certificate executed in duplicate by a duly authorized officer of such Lender substantially in a form satisfactory to the Borrower and the Agent, before or promptly upon the occurrence of any event requiring a change in the most recent certificate previously delivered by it to the Borrower and the Agent pursuant to this Section 2.15(E)(vi). Further, each Lender which delivers a certificate accompanied by Form 1001 of the IRS covenants and agrees to deliver to the Borrower and the Agent within fifteen (15) days prior to January 1, 1998, and every third (3rd) anniversary of such date thereafter on which this Agreement is still in effect, another such certificate and two accurate and complete original signed copies of Form 1001 (or any successor form or forms required under the Code or the applicable regulations promulgated thereunder), and each Lender that delivers a certificate accompanied by Form 4224 of the IRS covenants and agrees to deliver to the Borrower and the Agent within fifteen (15) days prior to the beginning of each subsequent taxable year of such Lender during which this Agreement is still in effect, another such certificate and two accurate and complete original signed copies of IRS Form 4224 (or any successor form or forms required under the Code or the applicable regulations promulgated thereunder). Each such certificate shall certify as to one of the following: (a) that such Lender is capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax; (b) that such Lender is not capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax as specified therein but is capable of - 52 - recovering the full amount of any such deduction or withholding from a source other than the Borrower and will not seek any such recovery from the Borrower; or (c) that, as a result of the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a Governmental Authority or any change in the interpretation or application thereof by a Governmental Authority after the date such Lender became a party hereto, such Lender is not capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax as specified therein and that it is not capable of recovering the full amount of the same from a source other than the Borrower. To the extent that any Lender shall receive a refund of any Taxes or Other Taxes, or its shall be determined by such Lender that the amount of any Taxes or other Taxes paid by the Borrower was greater than the amount payable by such Lender to the Applicable Governmental Authority, such Lender shall promptly remit such refund, or such excess, as applicable, to the Borrower. Each Lender shall promptly furnish to the Borrower and the Agent such additional documents as may be reasonably required by the Borrower or the Agent to establish any exemption from or reduction of any Taxes or Other Taxes required to be deducted or withheld and which may be obtained without undue expense to such Lender. (F) Loan Account. Each Lender shall maintain in accordance with its usual practice an account or accounts (a "Loan Account") evidencing the Obligations of the Borrower to such Lender owing to such Lender from time to time, including the amount of principal and interest payable and paid to such Lender from time to time hereunder and under the Notes. (G) Control Account. The Register maintained by the Agent pursuant to Section 12.3(C) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Advance made hereunder, the type of Loan comprising such Advance and any Interest Period applicable thereto, (ii) the effective date and amount of each assignment and acceptance delivered to and accepted by it and the parties thereto pursuant to Section 12.3, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder or under the Notes, (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender's share thereof, and (v) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. (H) Entries Binding. The entries made in the Register and each Loan Account shall be conclusive and binding for all purposes, absent manifest error, unless the Borrower objects to information contained in the Register and each Loan Account within thirty (30) days of the Borrower's receipt of such information. - 53 - 2.16 Notification of Advances, Interest Rates, Prepayments and Aggregate Revolving Loan Commitment Reductions. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Revolving Loan Commitment reduction notice, Borrowing Notice, Continuation/Conversion Notice, and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Rate Loan promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.17 Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Notes shall be deemed held by each Lender for the benefit of such Lending Installation. Each Lender may, by written or facsimile notice to the Agent and the Borrower, designate a Lending Installation through which Loans will be made by it and for whose account Loan payments are to be made. 2.18 Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Lender, the Federal Funds Effective Rate for such day or (ii) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.19 Termination Date. This Agreement shall be effective until the payment in full of all Obligations (other than contingent indemnity obligations) including without limitation, all principal, interest and fees due under this Agreement. Notwithstanding the termination of this Agreement on the Termination Date, until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied, all financing arrangements among the Borrower and the Lenders shall have been terminated and all of the Letters of Credit shall have expired, been canceled or terminated, all of the rights and remedies under this Agreement and the other Loan Documents shall survive and the Agent shall be entitled to retain its security interest in and to all existing and future Collateral for the benefit of itself and the Holders of Secured Obligations. 2.20 Replacement of Certain Lenders. In the event a Lender ("Affected Lender") shall have: (i) failed to fund its Pro Rata Share of any Advance requested by the Borrower, or to fund a Revolving Loan in order to repay Swing Line Loans pursuant to Section 2.3(d), which such Lender is obligated to fund under the terms of this Agreement and which failure has not been cured, (ii) requested compensation from the Borrower under Sections 2.15(E), 3.1 or 3.2 to recover Taxes, Other Taxes or other additional costs incurred by such Lender which are not - 54 - being incurred generally by the other Lenders, (iii) delivered a notice pursuant to Section 3.3 claiming that such Lender is unable to extend Eurodollar Rate Loans to the Borrower for reasons not generally applicable to the other Lenders or (iv) has invoked Section 9.2, then, in any such case, the Borrower or the Agent may make written demand on such Affected Lender (with a copy to the Agent in the case of a demand by the Borrower and a copy to the Borrower in the case of a demand by the Agent) for the Affected Lender to assign, and such Affected Lender shall use its best efforts to assign pursuant to one or more duly executed assignment and acceptance agreements in substantially the form of Exhibit G five (5) Business Days after the date of such demand, to one or more financial institutions that comply with the provisions of Section 12.3(A) (and, if selected by the Borrower is reasonably acceptable to the Agent) which the Borrower or the Agent, as the case may be, shall have engaged for such purpose ("Replacement Lender"), all of such Affected Lender's rights and obligations under this Agreement and the other Loan Documents (including, without limitation, its Revolving Loan Commitment, all Loans owing to it, all of its participation interests in existing Letters of Credit, and its obligation to participate in additional Letters of Credit hereunder) in accordance with Section 12.3. The Agent agrees, upon the occurrence of such events with respect to an Affected Lender and upon the written request of the Borrower, to use its reasonable efforts to obtain the commitments from one or more financial institutions to act as a Replacement Lender. The Agent is authorized to execute one or more of such assignment agreements as attorney-in-fact for any Affected Lender failing to execute and deliver the same within five (5) Business Days after the date of such demand. Further, with respect to such assignment the Affected Lender shall have concurrently received, in cash, all amounts due and owing to the Affected Lender hereunder or under any other Loan Document, including, without limitation, the aggregate outstanding principal amount of the Loans owed to such Lender, together with accrued interest thereon through the date of such assignment, amounts payable under Sections 2.15(E), 3.1, and 3.2 with respect to such Affected Lender and compensation payable under Section 2.15(C) in the event of any replacement of any Affected Lender under clause (ii) or clause (iii) of this Section 2.20; provided that upon such Affected Lender's replacement, such Affected Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15(E), 3.1, 3.2, 3.4, and 9.7, as well as to any fees accrued for its account hereunder and not yet paid, and shall continue to be obligated under Section 10.8. Upon the replacement of any Affected Lender pursuant to this Section 2.20, the provisions of Section 8.2 shall continue to apply with respect to Borrowings which are then outstanding with respect to which the Affected Lender failed to fund its Pro Rata Share and which failure has not been cured. 2.21 Letter of Credit Facility. (a) Subject to the terms and conditions of this Agreement and in reliance upon the representations, warranties and covenants set forth herein, (i) First Chicago shall issue commercial letters of credit and (ii) First Chicago shall issue or any other Lender, in its sole discretion, may issue standby letters of credit, in each case for the account of the Borrower (First Chicago and each such other Lender in such capacity being referred to as an "Issuing Lender"), on terms as are satisfactory to such Issuing Lender upon three (3) days' notice and receipt of duly executed applications for such Letter of Credit, and such other customary documents, instructions and agreements as may be required pursuant to the terms thereof (all such applications, documents, instructions, and agreements being referred to herein as the "L/C Documents") as the applicable Issuing Lender may require; provided, however, that no Letter of Credit will be issued (or amended) for the account of the Borrower by an Issuing - 55 - Lender if on the date of issuance, before or after taking such Letter of Credit into account, (A) the Revolving Loan Obligations at such time would exceed the Aggregate Revolving Loan Commitment at such time, (B) the Revolving Loan Obligations (other than L/C Obligations in respect of commercial Letters of Credit) at such time would exceed the Borrowing Base at such time, (C) aggregate outstanding amount of the L/C Obligations in respect of standby Letters of Credit exceeds $5,000,000 plus the amount outstanding under the Backstop Letter of Credit only so long as the Backstop Letter of Credit remains outstanding, or (C) the aggregate outstanding amount of the L/C Obligations in respect of commercial Letters of Credit exceeds $40,000,000; and provided, further, that no Letter of Credit shall be issued (or amended) which has an expiration date later than the date which is the earlier of one (1) year after the date of issuance thereof or five (5) Business Days immediately preceding the Termination Date. There shall be no Issuing Lender other than the Agent with respect to commercial Letters of Credit. The designation of any Lender as an Issuing Lender after the date hereof with respect to standby Letters of Credit shall be subject to the prior written consent of the Agent. If the Borrower applies for a standby Letter of Credit from any Lender other than First Chicago, the Borrower shall simultaneously notify the Agent of the proposed amount, expiration date and nature of such Letter of Credit. The Agent shall promptly notify the Lender to which such application has been made and the Borrower whether the issuance of such Letter of Credit would comply with the terms of this Section 2.21. Each Issuing Lender shall be entitled to assume that the applicable conditions set forth in Article IV hereof have been satisfied unless it shall have received notice to the contrary from the Agent or such Issuing Lender has knowledge that the applicable conditions have not been met. To the extent that any provision of any L/C Document cannot reasonably be construed to be consistent with this Agreement, requires greater collateral security or imposes additional obligations not reasonably related to customary letter of credit arrangements, such provision shall be invalid and this Agreement shall control. All references in the expense, indemnity and similar provisions of this Agreement to the Lenders shall include First Chicago and any other Lender in its capacity as an Issuing Lender. No Issuing Lender shall extend or amend any Letter of Credit unless the requirements of this Section 2.21 are met as though a new Letter of Credit was being requested and issued. (b) Schedule 2.21(b) contains a schedule of certain letters of credit issued for the account of the Borrower prior to the Closing Date by First Chicago (the "Existing Letters of Credit"). Subject to the satisfaction of the conditions contained in Sections 4.1 and 4.2, from and after the Closing Date the Existing Letters of Credit shall be deemed to be Letters of Credit issued pursuant to Section 2.21(a). 2.22 Letter of Credit Participation. On the Closing Date with respect to the Existing Letters of Credit and immediately upon the issuance of each other Letter of Credit hereunder, each Lender with a Revolving Loan Commitment greater than zero shall be deemed to have automatically, irrevocably and unconditionally purchased and received from the applicable Issuing Lender an undivided interest and participation in and to such Letter of Credit, the obligations of the Borrower in respect thereof, and the liability of the applicable Issuing Lender thereunder (collectively, an "L/C Interest") in an amount equal to the amount available for drawing under such Letter of Credit multiplied by such Lender's Pro Rata Share. The Agent will notify each Lender (or in the case of an Issuing Lender other than First Chicago, such Issuing Lender shall notify the Agent who in turn will notify each Lender) with a Revolving Loan - 56 - Commitment greater than zero promptly upon presentation to it of an L/C Draft or upon any other draw under a Letter of Credit. On or before the Business Day on which the applicable Issuing Lender makes payment of each such L/C Draft or, in the case of any other draw on a Letter of Credit, on demand of the Agent, each Lender with a Revolving Loan Commitment greater than zero shall make payment to the Agent, for the account of the applicable Issuing Bank, in immediately available funds, in an amount equal to such Lender's Pro Rata Share of the amount of such payment or draw. Any Issuing Lender may direct the Agent to make such a request with respect to Letters of Credit issued by such Issuing Lender. Upon the Agent's receipt of funds as a result of an Issuing Lender's payment on an L/C Draft or any other draw on a Letter of Credit issued by such Issuing Lender, the Agent shall promptly pay such funds to the Issuing Lender. If an Issuing Lender has not directed the Agent to make such a request and the Borrower fails to repay the amount of any draft in accordance with Section 2.23, then, upon direction from the Issuing Lender, the Agent shall notify each Lender with a Revolving Loan Commitment greater than zero of such failure, and each such Lender shall promptly make payment to the Agent, in immediately available funds, in an amount equal to such Lender's Pro Rata Share of the amount of such payment or draw. The obligation of each such Lender to reimburse the Agent under this Section 2.22 shall be unconditional, continuing, irrevocable and absolute. In the event that any Lender fails to make payment to the Agent of any amount due under this Section 2.22, the Agent shall be entitled to receive, retain and apply against such obligation the principal and interest otherwise payable to such Lender hereunder until the Agent receives such payment from such Lender or such obligation is otherwise fully satisfied; provided, however, that nothing contained in this sentence shall relieve such Lender of its obligation to reimburse the applicable Issuing Lender for such amount in accordance with this Section 2.22. 2.23 Reimbursement Obligation. The Borrower agrees unconditionally, irrevocably and absolutely to pay immediately to the Agent, for the account of the applicable Issuing Lenders or the account of Lenders, as the case may be, the amount of each advance which may be drawn under or pursuant to a Letter of Credit issued for its account or an L/C Draft related thereto (such obligation of the Borrower to reimburse the Issuing Lender or the Agent for an advance made under a Letter of Credit or L/C Draft being hereinafter referred to as a "Reimbursement Obligation" with respect to such Letter of Credit or L/C Draft). If the Borrower at any time fails to repay a Reimbursement Obligation pursuant to this Section 2.23, the Borrower shall be deemed to have elected to borrow a Revolving Loan from the Lenders with a Revolving Loan Commitment greater than zero, as of the date of the advance giving rise to the Reimbursement Obligation equal in amount to the amount of the unpaid Reimbursement Obligation. Such Revolving Loan shall be made as of the date of the payment giving rise to such Reimbursement Obligation, automatically, without notice and without any requirement to satisfy the conditions precedent otherwise applicable to an Advance of Revolving Loans. Such Revolving Loan shall constitute a Floating Rate Advance, the proceeds of which Advance shall be used to repay such Reimbursement Obligation. If, for any reason, the Borrower fails to repay a Reimbursement Obligation on the day such Reimbursement Obligation arises and, for any reason, the Lenders are unable to make or have no obligation to make a Revolving Loan, then such Reimbursement Obligation shall bear interest from and after such day, until paid in full, at the interest rate applicable to a Floating Rate Advance. - 57 - 2.24 Cash Collateral. Notwithstanding anything to the contrary herein or in any application for a Letter of Credit, after the occurrence and during the continuance of a Default, the Borrower shall, at the request of the Required Lenders, deliver to the Agent for the benefit of the Lenders and the Issuing Lenders, cash, or other collateral of a type satisfactory to the Required Lenders, having a value, as determined by such Lenders, equal to the aggregate outstanding L/C Obligations. Any such collateral shall be held by the Agent in a separate interest bearing account appropriately designated as a cash collateral account in relation to this Agreement and the Letters of Credit and retained by the Agent for the benefit of the Lenders and the Issuing Lenders as collateral security for the Borrower's obligations in respect of this Agreement and each of the Letters of Credit and L/C Drafts. Such amounts (plus interest which has accrued thereon) shall be applied to reimburse the Agent or each Issuing Lender, as the case may be, for drawings or payments under or pursuant to Letters of Credit or L/C Drafts, or if no such reimbursement is required, to payment of such of the other Obligations as the Agent shall determine. If no Default shall be continuing, amounts remaining in any cash collateral account established pursuant to this Section 2.24 which are not to be applied to reimburse the Agent for amounts actually paid or to be paid by the Agent in respect of a Letter of Credit or L/C Draft, shall be returned promptly to the Borrower (after deduction of the Agent's expenses incurred in connection with such cash collateral account). 2.25 Letter of Credit Fees. (a) The Borrower shall pay to the Agent, for the ratable account of the Lenders, based upon the Lenders' respective Pro Rata Shares, a fee with respect to each Letter of Credit, for the period from the issuance date thereof to and including the final expiration date thereof, at a rate per annum equal to the Applicable L/C Fee Percentage on the average daily outstanding face amount available for drawing under all Letters of Credit during such period. The Letter of Credit fees shall be due and payable in arrears on each Payment Date and, to the extent any such fees are then due and unpaid, on the Termination Date. The Agent shall promptly remit such Letter of Credit fees, when paid, to the other Lenders in accordance with their Pro Rata Shares thereof. (b) The Borrower shall pay to the Agent for the benefit of each Issuing Lender, all reasonable out-of-pocket costs of issuing and servicing Letters of Credit, any and all customary fees and other issuance, amendment, document examination, negotiation and presentment expenses and related charges and commissions in connection with the issuance, amendment, and presentation of Letters of Credit (and L/C Drafts related thereto) and the like, customarily charged by such Issuing Lenders with respect to standby and commercial Letters of Credit, payable at the time of invoice of such amounts. 2.26 Indemnification; Exoneration. (a) In addition to amounts payable as elsewhere provided in this Agreement, the Borrower agrees to protect, indemnify, pay and save harmless the Agent, each Issuing Lender and each Lender from and against any and all liabilities and costs which the Agent, such Issuing Lender or any Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit other than, in the case of the issuer thereof, as a result of its Gross Negligence or willful misconduct, as determined by the final judgment of a court of competent jurisdiction, or (ii) the failure of the applicable Issuing Lender to honor a drawing under such Letter of Credit as a result of any act or omission, whether - 58 - rightful or wrongful, of any present or future de jure or de facto Governmental Authority (all such acts or omissions herein called "Governmental Acts"). (b) As among the Borrower, the Lenders, the Issuing Lenders and the Agent, the Borrower assumes all risks of the acts and omissions of, or misuse of such Letter of Credit by, the beneficiary of any Letter of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications and Letter of Credit reimbursement agreements executed by the Borrower at the time of request for any Letter of Credit, neither the Agent, any Issuing Lenders nor any of the Lenders shall be responsible (in the absence of Gross Negligence or willful misconduct in connection therewith, as determined by the final judgment of a court of competent jurisdiction): (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, or other similar form of teletransmission or otherwise; (v) for errors in interpretation of technical trade terms; (vi) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; and (viii) for any consequences arising from causes beyond the control of the Agent, the Issuing Lenders and the Lenders including, without limitation, any Governmental Acts. None of the above shall affect, impair, or prevent the vesting of any Issuing Lenders' rights or powers under this Section 2.26. (c) In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit or any related certificates shall not, in the absence of Gross Negligence or willful misconduct, as determined by the final judgment of a court of competent jurisdiction, put the applicable Issuing Lender, the Agent or any Lender under any resulting liability to the Borrower or relieve the Borrower of any of its obligations hereunder to any such Person. (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.26 shall survive the payment in full of all principal and interest hereunder, the termination of the Letters of Credit and the termination of this Agreement. 2.27 Issuing Lender Reporting Requirements. Each Issuing Lender other than the Agent shall give the Agent written or telex notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of any Letter of Credit, provided, however, that the failure to provide such notice shall not result in any liability on the part of such Issuing Lender. Each Issuing Lender shall, no later than the tenth Business Day following the last day of each month, provide to the Agent, upon the Agent's request, schedules, in form and substance reasonably satisfactory - 59 - to the Agent, showing the date of issue, account party, amount, expiration date and the reference number of each Letter of Credit issued by such Issuing Lender and outstanding at any time during such month and the aggregate amount payable by the Borrower during such month. In addition, upon the request of the Agent, each Issuing Lender shall furnish to the Agent copies of any Letter of Credit and any application for or reimbursement agreement with respect to a Letter of Credit to which the Issuing Lender is party and such other documentation as may reasonably be requested by the Agent. Upon the request of any Lender, the Agent will provide to such Lender information concerning such Letters of Credit. ARTICLE III: CHANGE IN CIRCUMSTANCES 3.1 Yield Protection. If any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) adopted after the date of this Agreement and having general applicability to all banks within the jurisdiction in which such Lender operates (excluding, for the avoidance of doubt, the effect of and phasing in of capital requirements or other regulations or guidelines passed prior to the date of this Agreement), or any interpretation or application thereof by any Governmental Authority charged with the interpretation or application thereof, or the compliance of any Lender therewith, (i) subjects any Lender or any applicable Lending Installation to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding federal taxation of the overall net income of any Lender or applicable Lending Installation and any state taxation based on the income of any Lender assessed by the State in which the Lender maintains its principal office), or changes the basis of taxation of payments to any Lender in respect of its Loans, its L/C Interests, the Letters of Credit or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Rate Loans) with respect to its Loans, L/C Interests or the Letters of Credit, or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining the Loans, the L/C Interests or the Letters of Credit or reduces any amount received by any Lender or any applicable Lending Installation in connection with Loans or Letters of Credit, or requires any Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Loans or L/C Interests held or interest received by it or by reference to the Letters of Credit, by an amount deemed material by such Lender; and the result of any of the foregoing is to increase the cost to that Lender of making, renewing or maintaining its Loans, L/C Interests or Letters of Credit or to reduce any amount received - 60 - under this Agreement, then, within 15 days after receipt by the Borrower of written demand by such Lender pursuant to Section 3.5, the Borrower shall pay such Lender that portion of such increased expense incurred or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining its Loans, L/C Interests, Letters of Credit and its Revolving Loan Commitment. A certificate as to an additional amount payable to any Lender or the Agent under this Section 3.1 submitted to the Borrower and the Agent (if a Lender is so submitting) by such Lender or the Agent shall show in reasonable detail the amount payable and the calculations used to determine such amount and shall, absent manifest error, be final, conclusive and binding upon all parties hereto. 3.2 Changes in Capital Adequacy Regulations. If a Lender determines (i) the amount of capital required or expected to be maintained by such Lender, any Lending Installation of such Lender or any corporation controlling such Lender is increased as a result of a "Change" (as defined below), and (ii) such increase in capital will result in an increase in the cost to such Lender of maintaining its Loans, L/C Interests, the Letters of Credit or its obligation to make Loans hereunder, then, within 15 days after receipt by the Borrower of written demand by such Lender pursuant to Section 3.5, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans, its L/C Interests, the Letters of Credit or its obligation to make Loans hereunder (after taking into account such Lender's policies as to capital adequacy). A certificate as to an additional amount payable to any Lender or the Agent under this Section 3.2 submitted to the Borrower and the Agent (if a Lender is so submitting) by such Lender or the Agent shall show in reasonable detail the amount payable and the calculations used to determine such amount and shall, absent manifest error, be final, conclusive and binding upon all parties hereto. "Change" means (i) any change after the date of this Agreement in the "Risk-Based Capital Guidelines" (as defined below) excluding, for the avoidance of doubt, the effect of any phasing in of such Risk-Based Capital Guidelines or any other capital requirements passed prior to the date hereof, or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement and having general applicability to all banks and financial institutions within the jurisdiction in which such Lender operates which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement. 3.3 Availability of Types of Advances. If (i) any Lender determines that maintenance of its Eurodollar Rate Loans at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, or (ii) the Required Lenders determine that (x) deposits of a type and maturity appropriate to match fund Eurodollar Rate Advances are not available or (y) the interest rate applicable to a Type of Advance does not - 61 - accurately reflect the cost of making or maintaining such an Advance, then the Agent shall suspend the availability of the affected Type of Advance and, in the case of any occurrence set forth in clause (i) require any Advances of the affected Type to be repaid. 3.4 Funding Indemnification. If any payment of a Eurodollar Rate Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment, or otherwise, or a Eurodollar Rate Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower indemnifies each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Rate Advance. In connection with any assignment by First Chicago of any portion of the Loans made during the Syndication Period and if, notwithstanding the provisions of Section 2.4, the Borrower has requested and the Agent has consented to the use of an Interest Period in excess of seven days or the expiration of which does not correspond to expiration date of the other Eurodollar Rate Advances, then the Borrower shall be deemed to have repaid all outstanding Eurodollar Rate Advances as of the effective date any such assignment and reborrowed such amount as a Floating Rate Advance and/or Eurodollar Rate Advance (chosen in accordance with the provisions of Section 2.4) and the indemnification provisions under this Section 3.4 shall apply. 3.5 Lenders' Duty to Mitigate; Lender Statements; Survival of Indemnity. If reasonably possible, each Lender shall (subject to overall policy considerations of such Lender) designate an alternate Lending Installation with respect to its Eurodollar Rate Loans to reduce any liability of the Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the unavailability of a Type of Advance under Section 3.3; provided that such designation is made on such terms that such Lender and its Lending Installation suffer no economic, legal or regulatory disadvantage. Each Lender requiring compensation pursuant to Section 2.15(E) or to this Article III shall use its best efforts to notify the Borrower and the Agent in writing of any Change, law, policy, rule, guideline or directive giving rise to such demand for compensation not later than ninety (90) days following the date upon which the responsible account officer of such Lender knows or should have known of such Change, law, policy, rule, guideline or directive. Any demand for compensation pursuant to this Article III shall be in writing and shall state the amount due, if any, under Section 3.1, 3.2 or 3.4 and shall set forth in reasonable detail the calculations upon which such Lender determined such amount. Such written demand shall be rebuttably presumed correct for all purposes. Notwithstanding anything in this Agreement to the contrary, the Borrower shall not be obligated to pay any amount or amounts under Section 2.15(E) or this Article III to the extent such amount or amounts result from a Change, law, policy, rule, guideline or directive which took effect more than ninety (90) days prior to the date of delivery of the notice described above; provided, that such ninety (90) day period shall run from the date of passage of such Change, law, policy, rule, guideline or directive without giving effect to any retroactive application thereof. Determination of amounts payable under such Sections in connection with a Eurodollar Rate Loan shall be calculated as though each Lender funded its Eurodollar Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. The obligations of the Borrower under Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and termination of this Agreement. - 62 - ARTICLE IV: CONDITIONS PRECEDENT 4.1 Initial Advances and Letters of Credit. The Lenders shall not be required to make the initial Loans, issue any Letters of Credit or purchase any participations therein unless: (a) such Loans are made not later than March 31, 1997; (b) the Stock Acquisition has been consummated and all documents necessary to consummate the Merger have been signed and submitted for filing; (c) all of the conditions precedent set forth in that certain Term Sheet, dated January 3, 1997 among First Chicago, First Chicago Capital Markets, Inc., Holdings and the Borrower shall have been met to the satisfaction of the Agent and each of the Lenders; (d) the Senior Subordinated Notes have been issued and the Borrower has received the net proceeds thereof; (e) the Holdings Subordinated Notes have been issued and Holdings has received the net proceeds thereof; (f) the Borrower shall have received from Holdings a capital contribution to the common equity of the Borrower in an amount not less than $51,300,000; (g) the Borrower shall have made all necessary arrangements for the payment in full of all Indebtedness and liabilities in connection with the Refinanced Indebtedness and release of all Liens in connection therewith pursuant to payoff, estoppel and release documentation reasonably acceptable to the Agent; and (h) the Borrower has furnished to the Agent each of the following, with sufficient copies for the Lenders: (1) Copies of the Certificate of Incorporation for each of Holdings, the Borrower and the Target (including, without limitation, the proposed articles of merger with respect to the Merger), together with all amendments and a certificate of good standing, both certified by the appropriate governmental officer in its jurisdiction of incorporation; (2) Copies, certified by the Secretary or Assistant Secretary of Holdings, the Borrower and the Target, of its By-Laws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Lender) authorizing the execution of the Transaction Documents; (3) An incumbency certificate, executed by the Secretary or Assistant Secretary of Holdings, the Borrower and the Target, which shall identify by name and title and bear the signature of the officers of such entities authorized to sign the Transaction Documents and, with respect to the Borrower, to make borrowings hereunder, upon - 63 - which certificate the Lenders shall be entitled to rely until informed of any change in writing by the Borrower; (4) An Officer's Certificate, in form and substance satisfactory to the Agent, signed by the chief financial officer of the Borrower, stating that on Closing Date no Default or Unmatured Default has occurred and is continuing; (5) A written opinion of the Borrower's counsel, addressed to the Lenders addressing the issues identified in Exhibit H hereto containing such assumptions and qualifications and otherwise in form and substance reasonably acceptable to the Agent and the Lenders; (6) Notes payable to the order of each of the Lenders; (7) Written money transfer instructions in substantially the form of Exhibit L hereto, addressed to the Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Agent may have reasonably requested; and (8) Such other documents as the Agent or any Lender or its counsel may have reasonably requested, including, without limitation all of the documents reflected on the List of Closing Documents attached as Exhibit I to this Agreement. 4.2 Each Advance and Letter of Credit. The Lenders shall not be required to make any Advance, issue any Letter of Credit or purchase any participation therein, unless on the applicable Borrowing Date, or in the case of a Letter of Credit, the date on which the Letter of Credit is to be issued: (i) There exists no Default or Unmatured Default; and (ii) The representations and warranties contained in Article V are true and correct as of such Borrowing Date except for changes in the Schedules to this Agreement reflecting transactions permitted by this Agreement as set forth in Section 1.3 above. Each Borrowing Notice with respect to each such Advance and the letter of credit application with respect to a Letter of Credit shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(i) and (ii) have been satisfied. The Agent may require a duly completed Officer's Certificate in substantially the form of Exhibit J hereto as a condition to making an Advance. ARTICLE V: REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Lenders to enter into this Agreement and to make the Loans and the other financial accommodations to the Borrower and to issue or participate the Letters of Credit described herein, the Borrower represents and warrants as follows to each - 64 - Lender and the Agent as of the Closing Date, giving effect to the Stock Acquisition and the Merger and the consummation of the other transactions contemplated by the Transaction Documents, and thereafter on each date as required by Section 4.2: 5.1 Organization; Corporate Powers. The Borrower and each of its Restricted Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which failure to be so qualified and in good standing could reasonably be expected to have a Material Adverse Effect, (iii) has filed and maintained effective (unless exempt from the requirements for filing) a current Business Activity Report with the appropriate Governmental Authority in the States in which it is required to do so and (iv) has all requisite corporate power and authority to own, operate and encumber its property and to conduct its business as presently conducted giving effect to the Stock Acquisition and the Merger and as proposed to be conducted in connection with and following the consummation of the transactions contemplated by this Agreement. 5.2 Authority. (A) The Borrower and each of its Restricted Subsidiaries has the requisite corporate power and authority (i) to execute, deliver and perform each of the Transaction Documents which are to be executed by it in connection with the Stock Acquisition and the Merger or which have been executed by it as required by this Agreement on or prior to Closing Date and (ii) to file the Transaction Documents which must be filed by it in connection with the Stock Acquisition and Merger or which have been filed by it as required by this Agreement on or prior to the Closing Date with any Governmental Authority. (B) The execution, delivery, performance and filing, as the case may be, of each of the Transaction Documents which must be executed or filed by the Borrower or any of its Restricted Subsidiaries in connection with the Stock Acquisition or Merger or which have been executed or filed as required by this Agreement on or prior to the Closing Date and to which the Borrower or any of its Restricted Subsidiaries is party, and the consummation of the transactions contemplated thereby, have been duly approved by the respective boards of directors and, if necessary, the shareholders of the Borrower and its Restricted Subsidiaries, and such approvals have not been rescinded. No other corporate action or proceedings on the part of the Borrower or its Restricted Subsidiaries are necessary to consummate such transactions. (C) Each of the Transaction Documents to which the Borrower or any of its Restricted Subsidiaries is a party has been duly executed, delivered or filed, as the case may be, by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law) or, to the extent imposed by applicable law, by an implied covenant of good faith and fair dealing), is in full force and effect and no material term or condition thereof has been amended, modified or waived from the terms and conditions contained in the Transaction Documents delivered to the Agent pursuant to Section 4.1 without the prior written consent of - 65 - the Required Lenders, and the Borrower and its Restricted Subsidiaries have, and, to the best of the Borrower's and its Restricted Subsidiaries' Knowledge, all other parties thereto have, performed and complied with all the terms, provisions, agreements and conditions set forth therein and required to be performed or complied with by such parties on or before the Closing Date, and no unmatured default, default or breach of any covenant by any such party exists thereunder. 5.3 No Conflict; Governmental Consents. The execution, delivery and performance of each of the Loan Documents and, to the Borrower's Knowledge, the other Transaction Documents to which the Borrower or any of its Restricted Subsidiaries is a party do not and will not (i) conflict with the certificate or articles of incorporation or by-laws of the Borrower or any such Restricted Subsidiary, (ii) constitute a tortious interference with any Contractual Obligation of any Person or conflict with, result in a breach of or constitute (with or without notice or lapse of time or both) a default under any Requirement of Law (including, without limitation, any Environmental Property Transfer Act) or Contractual Obligation of the Borrower or any such Restricted Subsidiary, or require termination of any Contractual Obligation, except such interference, breach, default or termination which individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect, (iii) with respect to the Loan Documents and, to the Borrower's and its Restricted Subsidiaries' Knowledge with respect to the other Transaction Documents, result in or require the creation or imposition of any Lien whatsoever upon any of the property or assets of the Borrower or any such Restricted Subsidiary, other than Liens permitted by the Loan Documents, or (iv) require any approval of the Borrower's or any such Subsidiary's shareholders except such as have been obtained. Except as set forth on Schedule 5.3 to this Agreement, the execution, delivery and performance of each of the Transaction Documents to which the Borrower or any of its Restricted Subsidiaries is a party do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by any Governmental Authority, including under any Environmental Property Transfer Act, except (i) filings, consents or notices which have been made, obtained or given, or which, if not made, obtained or given, individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect, and (ii) filings necessary to create or perfect security interests in the Collateral. 5.4 Financial Statements. (A) The pro forma financial statements of the Borrower and its Subsidiaries, copies of which are attached hereto as Exhibit K, present on a pro forma basis the financial condition of the Borrower and such Subsidiaries as of such date, and reflect on a pro forma basis those liabilities reflected in the notes thereto and resulting from consummation of the Stock Acquisition, the offer and sale of the Senior Subordinated Notes and the transactions contemplated by this Agreement, and the payment or accrual of all Transaction Costs payable on the Closing Date with respect to any of the foregoing. The projections and assumptions expressed in the pro forma financials referenced in this Section 5.4(A) were prepared in good faith and represent management's opinion based on the information available to the Borrower at the time so furnished. - 66 - (B) Complete and accurate copies of the following financial statements and the following related information have been delivered to the Agent: (1) the audited balance sheets of the Target as at the fiscal years ended June 30, 1996 and 1995 and the related statements of income, changes in stockholders' equity and cash flow of the Target for such fiscal years and the audit report of Donnelly Meiners Jordan Kline related thereto; and (2) the unaudited balance sheets of the Target as at the end of the fiscal quarter ended December 31, 1996 and the related statements of income of the Target for such fiscal quarters. 5.5 No Material Adverse Change. Since December 31, 1996 (tested by reference to the audited financial statements of the Target as of such date) other than the consummation of the Stock Acquisition, the incurrence of the Indebtedness under the Indenture and under this Agreement to be incurred in connection with the Stock Acquisition and the related transactions contemplated in connection therewith, and the issuance by the Target of cash dividends in an aggregate amount equal to $20,600,000 to the shareholders of the Target as of February 25, 1997, there has occurred no change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Target, the Borrower, or the Borrower and its Subsidiaries taken as a whole which has had or could reasonably be expected to have a Material Adverse Effect. 5.6 Taxes. (A) Tax Examinations. All deficiencies which have been asserted against the Holdings, Target, Borrower or any of the Borrower's Subsidiaries as a result of any federal, state, local or foreign tax examination for each taxable year in respect of which an examination has been conducted have been fully paid or finally settled or are being contested in good faith by appropriate proceedings properly instituted and diligently conducted, and as of the Closing Date no issue has been raised by any taxing authority in any such examination which, by application of similar principles, reasonably can be expected to result in assertion by such taxing authority of a material deficiency for any other year not so examined which has not been reserved for in Holdings' or the Borrower's consolidated financial statements to the extent, if any, required by Agreement Accounting Principles. Except as permitted pursuant to Section 6.2(D), none of Holdings, the Borrower nor any of the Borrower's Subsidiaries anticipates any material tax liability with respect to the years which have not been closed pursuant to applicable law and which have not been reserved for in accordance with Agreement Accounting Principles in Holdings' or the Borrower's financial statements. (B) Payment of Taxes. All tax returns and reports of each of, Holdings, the Target, the Borrower and the Borrower's Subsidiaries required to be filed have been timely filed, and all taxes, assessments, fees and other governmental charges thereupon and upon their respective property, assets, income and franchises which are shown in such returns or reports to be due and payable have been paid except those items which are being contested in good faith by appropriate proceedings properly instituted and diligently conducted and have been reserved for in accordance with Agreement Accounting Principles. The Borrower has no Knowledge of any proposed tax assessment against Holdings, the Borrower or any of the Borrower's Subsidiaries that will have or could reasonably be expected to have a Material Adverse Effect. - 67 - 5.7 Litigation; Loss Contingencies and Violations. Except as set forth in Schedules 5.7 and 5.18 to this Agreement, there is no action, suit, proceeding, investigation of which the Borrower has Knowledge or arbitration before or by any Governmental Authority or private arbitrator pending or, to the Knowledge of the Borrower or any of its Restricted Subsidiaries, threatened against the Target, the Borrower or any of its Restricted Subsidiaries or any property of any of them (i) challenging the validity or the enforceability of any material provision of the Transaction Documents or (ii) which if resolved in a manner adverse to the Target, the Borrower or any Restricted Subsidiary of the Borrower will have or could reasonably be expected to have a Material Adverse Effect. There is no material loss contingency within the meaning of Agreement Accounting Principles which has not been reflected in the financial statements delivered pursuant to Section 5.4 or the consolidated financial statements of the Borrower prepared and delivered pursuant to Section 6.1(A) for the fiscal period during which such material loss contingency was incurred. Neither the Borrower nor any of its Restricted Subsidiaries is (A) in violation of any applicable Requirements of Law which violation will have or could reasonably be expected to have a Material Adverse Effect, or (B) subject to or in default with respect to any final judgment, writ, injunction, restraining order or order of any nature, decree, rule or regulation of any court or Governmental Authority which will have or could reasonably be expected to have a Material Adverse Effect. 5.8 Subsidiaries. Schedule 5.8 to this Agreement (i) contains a description of the corporate structure of Holdings, the Borrower, its Subsidiaries and any other Person in which Holdings, the Borrower or any of its Subsidiaries holds an Equity Interest (in flow chart form) after taking into account the consummation of the Stock Acquisition; and (ii) accurately sets forth (A) the correct legal name, the jurisdiction of incorporation and the jurisdictions in which each of the Borrower and the direct and indirect Subsidiaries of the Borrower is qualified to transact business as a foreign corporation, (B) the authorized, issued and outstanding shares of each class of Capital Stock of Holdings, the Borrower and each of its Subsidiaries and the owners of such shares (both as of the Closing Date and on a fully-diluted basis), and (C) a summary of the direct and indirect Equity Interests, if any, of Holdings, the Borrower and each Subsidiary of the Borrower in any Person that is not a corporation. None of the issued and outstanding Capital Stock of the Borrower or any of its Subsidiaries is subject to any vesting, redemption, or repurchase agreement, and there are no warrants or options outstanding with respect to such Capital Stock. The outstanding Capital Stock of the Borrower and each of its Subsidiaries is duly authorized, validly issued, fully paid and nonassessable and is not Margin Stock. The Borrower has no Subsidiaries other than those permitted to be created pursuant to Section 6.3(G) in connection with a Permitted Acquisition. 5.9 ERISA. No Benefit Plan has incurred any accumulated funding deficiency (as defined in Sections 302(a)(2) of ERISA and 412(a) of the Code) whether or not waived. Neither the Borrower nor any member of the Controlled Group has incurred any liability to the PBGC which remains outstanding other than the payment of premiums, and there are no premium payments which have become due which are unpaid. Neither the Borrower nor any member of the Controlled Group after such member became a part of the Controlled Group has (i) failed to make a required contribution or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan which could subject the Borrower to liability, individually or in the aggregate, together with all other - 68 - amounts under this Section 5.9, in excess of $2,500,000. Neither the Borrower nor any member of the Controlled Group has failed to make a required installment or any other required payment under Section 412 of the Code on or before the due date for such installment or other payment. Neither the Borrower nor any member of the Controlled Group (after such member became a part of the Controlled Group) is required to provide security to a Benefit Plan under Section 401(a)(29) of the Code due to a Plan amendment that results in an increase in current liability for the plan year. Each Plan which is intended to be qualified under Section 401(a) of the Code as currently in effect has been determined by the IRS to be so qualified or an application for determination of tax-qualified status will be made to the IRS prior to the applicable remedial amendment period under Section 401(b) of the Code. The Borrower and all Restricted Subsidiaries are in compliance in all respects with the responsibilities, obligations and duties imposed on them by ERISA and the Code with respect to all Plans, except where such noncompliance could not reasonably be expected to subject the Borrower to liability, individually or in the aggregate, together with all other amounts under this Section 5.9, in excess of $2,500,000. Neither the Borrower nor any of its Restricted Subsidiaries nor any fiduciary of any Plan has engaged in a nonexempt prohibited transaction described in Sections 406 of ERISA or 4975 of the Code which could reasonably be expected to subject the Borrower to liability, individually or in the aggregate, together with all other amounts under this Section 5.9, in excess of $2,500,000. Neither the Borrower nor any member of the Controlled Group has taken or failed to take any action which would constitute or result in a Termination Event, which could reasonably be expected to subject the Borrower to liability, individually or in the aggregate, together with all other amounts under this Section 5.9, in excess of $2,500,000. Neither the Borrower nor any Restricted Subsidiary is subject to, and no other member of the Controlled Group is subject to, any liability under Sections 4063, 4064, 4069, 4204 or 4212(c) of ERISA which could reasonably be expected to subject the Borrower to liability, individually or in the aggregate, together with all other amounts under this Section 5.9, in excess of $2,500,000. Neither the Borrower nor any of its Restricted Subsidiaries has, by reason of the transactions contemplated hereby, any obligation to make any payment to any employee pursuant to any Plan or existing contract or arrangement which payment, individually or in the aggregate with all other such payments, together with all other amounts under this Section 5.9, in excess of $2,500,000. 5.10 Accuracy of Information. (a) All factual information (other than projections) heretofore or contemporaneously furnished by or on behalf of the Target or the Borrower in writing to the Agent or to any Lender for purposes or in connection with the Loan Documents or any transaction contemplated thereby (including (i) the representations and warranties of the Borrower and its Subsidiaries contained in the Loan Documents, (ii) all certificates and documents delivered to the Agent and the Lenders pursuant to the terms thereof and (iii) the Offering Memorandum) is collectively, and all other such factual information (other than projections) hereafter furnished by or on behalf of the Company or any of its Subsidiaries to the Purchaser will be individually, true and accurate in every material respect on the date as of which such information is dated or certified, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. - 69 - (b) The projections supplied in connection with the factual information referred to in clause (a) above were or are based on good faith estimates and assumptions believed to be fair and reasonable at the time made, given historical financial performance and current and reasonably foreseeable business conditions, and to the Borrower's knowledge, there are no facts or circumstances presently existing which singly or in the aggregate, would cause a material change in such projections, it being recognized and agreed by the Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results and that the differences may be material. 5.11 Securities Activities. Neither the Borrower nor any of its Restricted Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 5.12 Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which will have or could reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries has received notice or has knowledge that (i) it is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation applicable to it, or (ii) any condition exists which, with the giving of notice or the lapse of time or both, would constitute a default with respect to any such Contractual Obligation, in each case, except where such default or defaults, if any, will not have or are not reasonably likely to have a Material Adverse Effect. 5.13 Compliance with Laws. The Borrower and its Subsidiaries are in compliance with all Requirements of Law applicable to them and their respective businesses, in each case where the failure to so comply individually or in the aggregate will have or could reasonably be expected to have a Material Adverse Effect. 5.14 Assets and Properties. The Target, the Borrower and each of the Borrower's Restricted Subsidiaries has good and marketable title to all of its assets and properties (tangible and intangible, real or personal) owned by it or a valid leasehold interest in all of its leased assets (except insofar as marketability may be limited by any laws or regulations of any Governmental Authority affecting such assets), and all such assets and property are free and clear of all Liens, except Liens securing the Secured Obligations and Liens permitted under Section 6.3(C). Substantially all of the assets and properties owned by, leased to or used by the Target, the Borrower and/or each such Restricted Subsidiary of the Borrower are in adequate operating condition and repair, ordinary wear and tear excepted. To the Borrower's and its Restricted Subsidiary's Knowledge, except for Liens granted to the Agent for the benefit of the Agent and the Holders of Secured Obligations, neither this Agreement nor any other Transaction Document, nor any transaction contemplated under any such agreement, will affect any right, title or interest of the Target, the Borrower or such Restricted Subsidiary in and to any of such assets in a manner that would have or could reasonably be expected to have a Material Adverse Effect. - 70 - 5.15 Statutory Indebtedness Restrictions. Neither the Borrower, nor any of its Restricted Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, or the Investment Company Act of 1940, or any other federal or state statute or regulation which limits its ability to incur indebtedness or its ability to consummate the transactions contemplated hereby or in connection with Stock Acquisition. 5.16 Post-Retirement Benefits. As of the Closing Date the Target, the Borrower and its Subsidiaries have no expected cost of post-retirement medical and insurance benefits payable by the Target, the Borrower and its Restricted Subsidiaries to its employees and former employees, as estimated in accordance with Financial Accounting Standards Board Statement No. 106. 5.17 Insurance. Schedule 5.17 to this Agreement accurately sets forth as of the Closing Date all material insurance policies and programs currently in effect with respect to the respective properties and assets and business of the Target, the Borrower and its Restricted Subsidiaries, specifying for each such policy and program, (i) the amount thereof, (ii) the risks insured against thereby, (iii) the name of the insurer and each insured party thereunder, (iv) the policy or other identification number thereof, (v) the expiration date thereof, (vi) the annual premium with respect thereto and (vii) describes any reserves, relating to any self-insurance program that is in effect. Such insurance policies and programs reflect coverage that is reasonably consistent with prudent industry practice. 5.18 Indebtedness of Target; Refinanced Indebtedness; Contingent Obligations. Schedule 1.1.5 sets forth all Indebtedness of the Target and all Indebtedness to be discharged in connection with the consummation of the Stock Acquisition under the heading "Refinanced Indebtedness." The Refinanced Indebtedness and all accrued and unpaid interest thereon has been paid in full or provision for payment has been made such that, in accordance with the express provisions of the instruments governing such Indebtedness. The Target has been or will be upon payment in full of the Refinanced Indebtedness irrevocably released from all liability and Contractual Obligations with respect thereto other than customary continuing indemnities provided for in the Contractual Obligation evidencing such Refinanced Indebtedness, a copy of which has been delivered to the Lenders. Any and all Liens securing the Refinanced Indebtedness have been released or provision for release of such Liens satisfactory to the Agent has been made. Except as set forth on Schedule 5.18 to this Agreement, neither the Target, the Borrower nor any of its Subsidiaries has any Contingent Obligation, contingent liability, long-term lease or commitment, not reflected in its audited financial statements delivered to the Agent on or prior to the Closing Date or otherwise disclosed to the Agent and the Lenders in the other Schedules to this Agreement, which could reasonably be expected to subject the Borrower to liability, individually or in the aggregate, in excess of $500,000. 5.19 Labor Matters. (A) Except as listed on Schedule 5.19 to this Agreement, there are on the Closing Date no collective bargaining agreements, other labor agreements or Multiemployer Plans covering any of the employees of the Target, the Borrower or any of its Restricted Subsidiaries. As of the Closing Date, no attempt to organize the employees of the Target, the Borrower or any of its - 71 - Restricted Subsidiaries, and no labor disputes, strikes or walkouts affecting the operations of the Target, the Borrower or any of its Restricted Subsidiaries, is pending, or, to the Borrower's or its Restricted Subsidiaries' Knowledge, threatened, planned or contemplated. (B) Set forth in Schedule 5.19 to this Agreement is a list, as of the Closing Date, of all material consulting agreements, executive compensation plans, deferred compensation agreements, employee pension plans or retirement plans, employee profit sharing plans, employee stock purchase and stock option plans, severance plans, group life insurance, hospitalization insurance or other plans or arrangements of Holdings, the Borrower and its Restricted Subsidiaries providing for benefits for employees of Holdings, the Borrower and its Restricted Subsidiaries. 5.20 The Stock Acquisition; Minimum Equity Contributions. (A) As of the Closing Date and immediately prior to the making of the initial Loans: (i) the Acquisition Documents are in full force and effect, no material breach, default or waiver of any term or provision of any of the Acquisition Documents by Holdings, the Borrower or any of its Subsidiaries or, to the Borrower's Knowledge, the other parties thereto has occurred (except for such breaches, defaults and waivers, if any, consented to in writing by the Agent and the Required Lenders) and no action has been taken by any competent authority which restrains, prevents or imposes any material adverse condition upon, or seeks to restrain, prevent or impose any material adverse condition upon, the Stock Acquisition; (ii) the representations and warranties of each of Holdings, the Borrower and the Borrower's Subsidiaries contained in the Acquisition Documents, if any, are true and correct in all material respects; (iii) all conditions precedent to, and all consents necessary to permit, the Stock Acquisition pursuant to the Acquisition Documents have been satisfied or waived with the prior written consent of the Agent and the Required Lenders, and simultaneously with the funding of the initial Loan under this Agreement, the Stock Acquisition will be consummated in accordance with the Acquisition Documents and the Borrower will obtain at such time good and marketable title to all of the outstanding Equity Interests of the Target free and clear of any Liens other than Liens permitted under Section 6.3(C). (B) As of the Closing Date and immediately prior to the making of the initial Loans the Minimum Equity Contributions have been made and Holdings and the Borrower has received the proceeds thereof. - 72 - 5.21 Environmental Matters. (a) Except as disclosed on Schedule 5.21 to this Agreement (i) the operations of the Target, the Borrower and its Restricted Subsidiaries comply in all material respects with Environmental, Health or Safety Requirements of Law; (ii) the Target, the Borrower and its Restricted Subsidiaries have all permits, licenses or other authorizations required under Environmental, Health or Safety Requirements of Law and are in material compliance with such permits; (iii) neither the Target, the Borrower, any of its Restricted Subsidiaries nor any of their respective present property or operations, or, to the Borrower's or any of its Subsidiaries' Knowledge, any of their respective past property or operations, are subject to or the subject of, any investigation of which the Borrower or any of its Subsidiaries has Knowledge, any judicial or administrative proceeding, order, judgment, decree, settlement or other agreement respecting: (A) any material violation of Environmental, Health or Safety Requirements of Law; (B) any remedial action; or (C) any material claims or liabilities arising from the Release or threatened Release of a Contaminant into the environment; (iv) there is not now, nor to the best of the Borrower's or any of its Restricted Subsidiaries' Knowledge has there ever been on or in the property of the Target, the Borrower or any of its Subsidiaries any landfill, waste pile, underground storage tanks, aboveground storage tanks, surface impoundment or hazardous waste storage facility of any kind, any polychlorinated biphenyls (PCBs) used in hydraulic oils, electric transformers or other equipment, or any asbestos containing material; and (v) neither the Target, the Borrower nor any of its Restricted Subsidiaries has any material Contingent Obligation in connection with any Release or threatened Release of a Contaminant into the environment. (b) For purposes of this Section 5.21 "material" means any noncompliance or basis for liability which could reasonably be likely to subject the Borrower to liability, individually or in the aggregate, in excess of $1,000,000. 5.22 Capitalization. As of the Closing Date and immediately prior to the initial funding of the Loans, (A) the investors listed on Schedule 5.8 have contributed to the capital of Holdings, in compliance with all applicable Requirements of Law, not less than $52,200,000 comprised of $27,200,000 with allocations of cash and non-cash investments for common and preferred stock as set forth on Schedule 5.8 and $25,000,000 in cash for the Holdings Subordinated Notes and 11,000 Series B Preferred Shares and 500 Series B Common Shares purchased by MCIT; and (B) Holdings has contributed to the capital of the Borrower, in compliance with all applicable Requirements of Law, not less than $51,300,000 in cash (such contributions, collectively, being referred to herein as the "Minimum Equity Contributions"). All of the Secured Obligations of the Borrower to the Lenders (whether in respect of the principal of and interest on Loans, L/C - 73 - Obligations, Hedging Obligations or reimbursement or indemnity Obligations) constitute "Senior Indebtedness" as such term is defined in each of the Deferred Limited Interest Guaranty and the Holdings Subordinated Notes and the subordination provisions of the Holdings Subordinated Notes are enforceable against the holders of the Holdings Subordinated Notes. 5.23 The Offering and Sale of the Senior Subordinated Notes. (a) As of the Closing Date, the offering and sale of the Senior Subordinated Notes has been consummated in compliance with the provisions of the Securities Act, as amended, any other federal securities law, state securities or "Blue Sky" law or applicable general corporation law, and, in each case, the rules and regulations thereunder. (b) As of the Closing Date, all conditions precedent to, and all consents necessary to permit, the offering and sale of the Senior Subordinated Notes have been satisfied or delivered, or, to the extent material to the Lenders, waived with the prior written consent of the Agent, and no action has been taken by any competent authority which restrains, prevents or imposes material adverse conditions upon, or seeks to restrain, prevent or impose material adverse conditions upon, the offering or sale of the Senior Subordinated Notes. (c) As of the Closing Date, the offering and sale of the Senior Subordinated Notes has been consummated, the Senior Subordinated Notes in an aggregate original principal amount of $125,000,000 have been issued and the Borrower has received the proceeds thereof and applied such proceeds as provided in the Offering Memorandum. (d) All of the Secured Obligations of the Borrower to the Holders of Secured Obligations (whether in respect of the principal of and interest on Loans, L/C Obligations, Hedging Obligations or reimbursement or indemnity Obligations) constitute "Senior Indebtedness" as such term is defined in the Indenture. 5.24 Solvency. As of the Closing Date, after giving effect to the (i) Loans to be made on the Closing Date, (ii) the disbursement of the proceeds of such Loans pursuant to the instructions of the Borrower, (iii) the proceeds received and disbursed pursuant to the terms of the Indenture, (iv) the proceeds received and disbursed in connection with the Minimum Equity Contributions, and (v) consummation of the Stock Acquisition and the Merger, the Borrower is Solvent. ARTICLE VI: COVENANTS The Borrower covenants and agrees that so long as any Commitments are outstanding and thereafter until payment in full of all of the Obligations (other than contingent indemnity obligations), unless the Required Lenders shall otherwise give prior written consent: 6.1 Reporting. The Borrower shall maintain a system of accounting established and administered in accordance with Agreement Accounting Principles and shall: (A) Financial Reporting. Furnish to the Lenders: - 74 - (i) Monthly Reports. As soon as practicable, and in any event within thirty (30) days after the end of each calendar month, the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such period and the related consolidated and consolidating statements of income and statement of cash flow of the Borrower and its Subsidiaries for such calendar month, certified by the chief financial officer of the Borrower on behalf of the Borrower as fairly presenting the consolidated and consolidating financial position of the Borrower and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the calendar months indicated in accordance with Agreement Accounting Principles, subject to normal year end adjustments. (ii) Quarterly Reports. Without in any way limiting the requirements set forth in Section 6.1(A)(i), as soon as practicable, and in any event within forty-five (45) days after the end of each of the first three fiscal quarters in each fiscal year, the consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such period and the related consolidated and consolidating statements of income, and cash flow of the Borrower and its Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, certified by the chief financial officer of the Borrower and its Restricted Subsidiaries on behalf of the Borrower and its Restricted Subsidiaries as fairly presenting the consolidated and consolidating financial position of the Borrower and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in accordance with Agreement Accounting Principles, subject to normal year end adjustments. (iii) Annual Reports. As soon as practicable, and in any event within ninety (90) days after the end of each fiscal year, (a) the consolidated balance sheets of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, stockholders' equity and cash flow of the Borrower and its Subsidiaries for such fiscal year, and in comparative form the corresponding figures for the previous fiscal year along with consolidating schedules in form and substance sufficient to calculate the financial covenants set forth in Section 6.4, (b) a schedule from the Borrower setting forth for each item in clause (a) hereof, the corresponding figures from the consolidated financial budget for the current fiscal year delivered pursuant to Section 6.1(A)(v), and (c) an audit report on the items listed in clause (a) hereof of independent certified public accountants of recognized national standing, which audit report shall be unqualified and shall state that such financial statements fairly present the consolidated and consolidating financial position of the Borrower and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in conformity with Agreement Accounting Principles and that the examination by such accountants in connection with such consolidated and consolidating financial statements has been made in accordance with generally accepted auditing standards. The deliveries made pursuant to this clause (iii) shall be accompanied by (y) any management letter prepared by the above-referenced accountants and (z) a certificate of such accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default, or if, - 75 - in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof. (iv) Officer's Certificate. Together with each delivery of any financial statement (or otherwise if requested pursuant to the terms of Section 4.2) an officer's certificate substantially in the form of Exhibit J hereto (an "Officer's Certificate") (a) stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof for each such Officer's Certificate accompanying the financial statements delivered pursuant to clauses (i), (ii) and (iii) of this Section 6.1(A), and (b) in addition for each such Officer's Certificate accompanying the financial statements delivered pursuant to clauses (ii) and (iii) of this Section 6.1(A), setting forth calculations for the period then ended for Section 2.5(B), if applicable, setting forth the Borrower's calculations reflecting the applicable pricing level under Section 2.15(D) which the Borrower has determined to be the applicable level, and which demonstrate compliance, when applicable, with the provisions of Section 6.4, in each case such Officer's Certificate to be signed by the Borrower's chief financial officer or treasurer. (v) Budgets; Business Plans; Financial Projections. As soon as practicable and in any event not later than sixty (60) days after the beginning of each fiscal year, a copy of the plan and forecast (including a projected balance sheet, income statement and funds flow statement) of the Borrower and its Subsidiaries for such fiscal year prepared in such detail as shall be reasonably satisfactory to the Agent. (B) Notice of Default. Promptly upon any of the chief executive officer, chief operating officer, chief financial officer, treasurer, controller or other Authorized Officer of the Borrower obtaining knowledge (i) of any condition or event which constitutes a Default or an Unmatured Default which is then continuing, or becoming aware that any Lender or Agent has given any written notice with respect to a claimed Default or Unmatured Default under this Agreement, or (ii) that any Person has given any written notice to the Borrower or any Restricted Subsidiary of the Borrower or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 7.1(e), deliver to the Agent and the Lenders an Officer's Certificate specifying (a) the nature and period of existence of any such claimed default, Default, Unmatured Default, condition or event, (b) the notice given or action taken by such Person in connection therewith, and (c) what action the Borrower has taken, is taking and proposes to take with respect thereto. (C) Lawsuits. (i) Promptly upon the Knowledge of the Borrower or any Restricted Subsidiary of the institution of, or the written threat of, any action, suit, proceeding, governmental investigation or arbitration against or affecting the Borrower or any of its Restricted Subsidiaries or any property of the Borrower or any of its Restricted Subsidiaries not previously disclosed pursuant to Section 5.7, which action, suit, proceeding, governmental investigation or arbitration exposes, or in the case of multiple actions, suits, proceedings, governmental investigations or arbitrations arising out of the same general allegations or circumstances which expose, in the Borrower's reasonable judgment, the Borrower or any of its Restricted Subsidiaries to liability, individually or in the aggregate, in an amount aggregating $1,000,000 or more (exclusive of claims covered by insurance policies of the Borrower or any of - 76 - its Subsidiaries unless the insurers of such claims have disclaimed coverage or reserved the right to disclaim coverage on such claims and exclusive of claims covered by the indemnity of a financially responsible indemnitor in favor of the Borrower or any of its Restricted Subsidiaries (unless the indemnitor has disclaimed or reserved the right to disclaim coverage thereof), give written notice thereof to the Agent and the Lenders and provide such other information as may be reasonably available to enable each Lender and the Agent and its counsel to evaluate such matters; and (ii) in addition to the requirements set forth in clause (i) of this Section 6.1(C), upon request of the Agent or the Required Lenders, promptly give written notice of the status of any action, suit, proceeding, governmental investigation or arbitration covered by a report delivered pursuant to clause (i) above and provide such other information as may be reasonably available to it that would not violate any attorney-client privilege by disclosure to the Lenders to enable each Lender and the Agent and its counsel to evaluate such matters. (D) Insurance. As soon as practicable and in any event within ninety (90) days of the end of each fiscal year commencing with fiscal year ending June 30, 1997, deliver to the Agent and the Lenders (i) a report in form and substance reasonably satisfactory to the Agent and the Lenders outlining all material insurance coverage maintained as of the date of such report by the Borrower and its Subsidiaries and the duration of such coverage and (ii) an insurance broker's statement that all premiums with respect to such coverage have been paid when due. (E) ERISA Notices. Deliver or cause to be delivered to the Agent and the Lenders, at the Borrower's expense, the following information and notices as soon as reasonably possible, and in any event: (i) (a) within ten (10) Business Days after the Borrower or any Restricted Subsidiary obtains Knowledge that a Termination Event has occurred which could reasonably be expected to subject the Borrower or such Restricted Subsidiary to a liability, individually or in the aggregate in excess of $1,000,000, a written statement of the chief financial officer of the Borrower or such Restricted Subsidiary describing such Termination Event and the action, if any, which the Borrower has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the IRS, DOL or PBGC with respect thereto and (b) within ten (10) Business Days after any member of the Controlled Group obtains Knowledge that a Termination Event has occurred which could reasonably be expected to subject the Borrower or such Restricted Subsidiary to liability, individually or in the aggregate, in excess of $1,000,000, a written statement of the chief financial officer of the Borrower or such Restricted Subsidiary describing such Termination Event and the action, if any, which the member of the Controlled Group has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the IRS, DOL or PBGC with respect thereto; (ii) within ten (10) Business Days after the Borrower or any of its Subsidiaries obtains Knowledge that a prohibited transaction (defined in Sections 406 of ERISA and Section 4975 of the Code) has occurred which could reasonably be expected to subject the Borrower or such Restricted Subsidiary to a liability, individually or in the aggregate in excess of $1,000,000, a statement of the chief financial officer of the Borrower - 77 - describing such transaction and the action which the Borrower or such Restricted Subsidiary has taken, is taking or proposes to take with respect thereto; (iii) within ten (10) Business Days after the Borrower or any of its Subsidiaries receives notice from the IRS that a Plan is being disqualified under Section 401(a) of the Code, copies of each such letter; and (iv) within ten (10) Business Days after a request by the Agent, copies of the most recent annual report (form 5500 series), including Schedule B thereto, filed with respect to each Benefit Plan; (v) within ten (10) Business Days after a request by the Agent, copies of the most recent actuarial report for any Benefit Plan or Multiemployer Plan or if later ten (10) Business Days after receipt of such report by Borrower or any member of the Controlled Group; (vi) within ten (10) Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and thereafter all communications received by the Borrower or a member of the Controlled Group with respect to such request; (vii) within ten (10) Business Days after receipt by the Borrower or any member of the Controlled Group of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice; (viii) within ten (10) Business Days after receipt by the Borrower or any member of the Controlled Group of a notice from a Multiemployer Plan regarding the imposition of withdrawal liability, copies of each such notice; (ix) within ten (10) Business Days after the Borrower or any member of the Controlled Group fails to make a required installment or any other required payment under Section 412 of the Internal Revenue Code on or before the due date for such installment or payment, a notification of such failure; and (x) within ten (10) Business Days after the Borrower or any member of the Controlled Group knows or has reason to know that (a) a Multiemployer Plan has been terminated, (b) the administrator or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan. For purposes of this Section 6.1(E), the Borrower, any of its Restricted Subsidiaries and any member of the Controlled Group shall be deemed to know all facts known by the Administrator of any Plan (other than a Multiemployer Plan) of which the Borrower or any member of the Controlled Group or such Subsidiary is the plan sponsor. - 78 - (F) Labor Matters. Notify the Agent and the Lenders in writing, promptly upon the Borrower's learning thereof, of (i) any labor disputes to which the Borrower or any of its Subsidiaries may become a party, including, without limitation, any strikes, lockouts or other disputes relating to such Persons' plants and other facilities which individually, or in the aggregate, could be reasonably expected to have Material Adverse Effect, and (ii) any Worker Adjustment and Retraining Notification Act liability incurred with respect to the closing of any plant or other facility of the Borrower or any of its Restricted Subsidiaries. (G) Other Indebtedness. Deliver to the Agent (i) a copy of each regular report, notice or communication regarding potential or actual defaults (including any accompanying officers' certificate) delivered by or on behalf of the Borrower to the holders of or trustee for the holders of funded Indebtedness (including without limitation the Senior Subordinated Notes) pursuant to the terms of the agreements governing such Indebtedness, such delivery to be made at the same time and by the same means as such notice or other communication is delivered to such holders or trustee, and (ii) a copy of each notice or other communication received by the Borrower from the holders of or trustee for the holders of funded Indebtedness (including, without limitation, the Senior Subordinated Notes) pursuant to the terms of such Indebtedness, such delivery to be made promptly after such notice or other communication is received by the Borrower. (H) Other Reports. Deliver or cause to be delivered to the Agent and the Lenders copies of all financial statements, reports and notices, if any, sent or made available generally by the Borrower to its public securities holders (including without limitation the holders of the Senior Subordinated Notes) or pursuant to Section 6.1.2(d) of the Purchase Agreement, dated as of February 27, 1997, in respect of the Holdings Subordinated Notes, filed with the Commission or delivered pursuant to the Indenture by the Borrower, all press releases made available generally by the Borrower or any of the Borrower's Subsidiaries to the public concerning material developments in the business of the Borrower or any such Subsidiary and all notifications received from the Commission by the Borrower or its Subsidiaries pursuant to the Securities Exchange Act of 1934 and the rules promulgated thereunder. (I) Environmental Notices. As soon as possible and in any event within ten (10) days after receipt by the Borrower, a copy of (i) any notice or claim to the effect that the Borrower or any of its Restricted Subsidiaries is or may be liable to any Person as a result of the Release by the Borrower, any of its Restricted Subsidiaries, or any other Person of any Contaminant into the environment, and (ii) any notice alleging any violation of any Environmental, Health or Safety Requirements of Law by the Borrower or any of its Restricted Subsidiaries if, in either case, such notice or claim relates to an event which could reasonably be expected to subject the Borrower or any Restricted Subsidiary to liability, individually or in the aggregate, in excess of $1,000,000. (J) Borrowing Base Certificate. As soon as practicable, and in any event within thirty (30) days after the close of each calendar month (and more often if reasonably requested by the Agent or the Required Lenders), the Borrower shall provide the Agent and the Lenders with a Borrowing Base Certificate, together with such supporting documents as the Agent reasonably deems desirable, all certified as being true and correct by the chief financial officer or treasurer of the Borrower. The Borrower may update the Borrowing Base Certificate and supporting - 79 - documents more frequently than monthly and the most recently delivered Borrowing Base Certificate shall be the applicable Borrowing Base Certificate for purposes of determining the Borrowing Base at any time. (K) Other Information. Promptly upon receiving a request therefor from the Agent, prepare and deliver to the Agent and the Lenders such other information with respect to Holdings, the Borrower, any of its Subsidiaries, or the Collateral, including, without limitation, schedules identifying and describing the Collateral and any dispositions thereof or any Asset Sale (and the use of the Net Cash Proceeds thereof), as from time to time may be reasonably requested by the Agent. 6.2 Affirmative Covenants. (A) Corporate Existence, Etc. The Borrower shall, and shall cause each of its Restricted Subsidiaries (if any) to, at all times maintain its corporate existence and preserve and keep, or cause to be preserved and kept, in full force and effect its rights and franchises material to its businesses. (B) Corporate Powers; Conduct of Business. The Borrower shall, and shall cause each of its Restricted Subsidiaries to, qualify and remain qualified to do business in each jurisdiction in which the nature of its business requires it to be so qualified and where the failure to be so qualified will have or could reasonably be expected to have a Material Adverse Effect. The Borrower will, and will cause each Restricted Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted. (C) Compliance with Laws, Etc. The Borrower shall, and shall cause its Restricted Subsidiaries to, (a) comply with all Requirements of Law and all restrictive covenants affecting such Person or the business, properties, assets or operations of such Person, and (b) obtain as needed all Permits necessary for its operations and maintain such Permits in good standing unless failure to comply or obtain could not reasonably be expected to have a Material Adverse Effect. (D) Payment of Taxes and Claims; Tax Consolidation. The Borrower shall pay and the Borrower shall cause each of its Subsidiaries to pay, (i) all taxes, assessments and other governmental charges imposed upon it or on any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and (ii) all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien (other than a Lien permitted by Section 6.3(C)) upon any of the Borrower's or such Restricted Subsidiary's property or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided, however, that no such taxes, assessments and governmental charges referred to in clause (i) above or claims referred to in clause (ii) above (and interest, penalties or fines relating thereto) need be paid if being contested in good faith by appropriate proceedings diligently instituted and conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with Agreement Accounting Principles shall have been made - 80 - therefor. The Borrower will not, nor will it permit any of its Restricted Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person other than Holdings. (E) Insurance. The Borrower shall maintain for itself and its Restricted Subsidiaries, or shall cause each of its Restricted Subsidiaries to maintain in full force and effect the insurance policies and programs listed on Schedule 5.17 to this Agreement or substantially similar policies and programs or other policies and programs as reflect coverage that is reasonably consistent with prudent industry practice. The Borrower shall deliver to the Agent endorsements (y) to all "All Risk" physical damage insurance policies on all of the Borrower's' tangible real and personal property and assets and business interruption insurance policies naming the Agent loss payee, and (z) to all general liability and other liability policies naming the Agent an additional insured. In the event the Borrower or any of its Restricted Subsidiaries, at any time or times hereafter shall fail to obtain or maintain any of the policies or insurance required herein or to pay any premium in whole or in part relating thereto, then the Agent, without waiving or releasing any obligations or resulting Default hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which the Agent deems advisable. All sums so disbursed by the Agent shall constitute part of the Obligations, payable as provided in this Agreement. (F) Inspection of Property; Books and Records; Discussions. The Borrower shall permit, and cause each of the Borrower's Restricted Subsidiaries to permit, any authorized representative(s) designated by either the Agent or any Lender having a Pro Rata Share that is equal to or greater than five percent (5%) to visit and inspect any of the properties of the Borrower or any of its Restricted Subsidiaries, to examine, audit, check and make copies of their respective financial and accounting records, books, journals, orders, receipts and any correspondence and other data relating to their respective businesses or the transactions contemplated hereby and by the Stock Acquisition (including, without limitation, in connection with environmental compliance, hazard or liability), and to discuss their affairs, finances and accounts with their officers and independent certified public accountants, all upon reasonable notice, at reasonable intervals and at such reasonable times during normal business hours, as often as may be reasonably requested (unless a Default shall have occurred and be continuing in which case no such prior notice shall be required); provided that each Lender shall coordinate such visits through the Agent. The Borrower shall keep and maintain, and cause Holdings and each of the Borrower's Subsidiaries to keep and maintain, in all material respects, proper books of record and account in which entries in conformity with Agreement Accounting Principles shall be made of all dealings and transactions in relation to their respective businesses and activities, including, without limitation, transactions and other dealings with respect to the Collateral. (G) Insurance and Condemnation Proceeds. The Borrower directs (and, if applicable, shall cause its Restricted Subsidiaries to direct) all insurers under policies of property damage, boiler and machinery and business interruption insurance and payors of any condemnation claim or award relating to the property to pay all proceeds payable under such policies or with respect to such claim or award for any loss with respect to the Collateral directly to the Agent, for the benefit of the Agent and the Holders of the Secured Obligations; provided, however, so long as - 81 - no Designated Default shall have occurred and be continuing or unless as a result thereof the Borrower would be required pursuant to the terms of the Indenture to make an offer to holders of the Senior Subordinated Notes to purchase any of the outstanding principal thereunder, the Agent shall remit such proceeds to the Borrower; provided, however, that for up to 180 days from the date of any loss, the Borrower shall commit such proceeds to restore, rebuild or replace the property subject to any insurance payment or condemnation award; and, provided, further, that at the end of such 180 day period the Borrower shall remit to the Agent any proceeds (other than proceeds that are less than $2,500,000 in connection with any single insurable event ("Excluded Proceeds")) not committed according to the preceding proviso, and the Agent shall, upon receipt of such proceeds and at the Borrower's direction, either apply the same to the principal amount of the Loans outstanding at the time of such receipt and create a corresponding reserve against Revolving Credit Availability in an amount equal to such application (the "Decision Reserve") or hold them as cash collateral for the Obligations. Each such policy shall contain a long-form loss-payable endorsement naming the Agent as loss payee, which endorsement shall be in form and substance acceptable to the Agent. For up to 180 days from the date of the Borrower remitting such proceeds to the Agent (the "Decision Period"), the Borrower may notify the Agent that it intends to restore, rebuild or replace the property subject to any insurance payment or condemnation award and shall, as soon as practicable thereafter, provide the Agent detailed information, including a construction schedule and cost estimates. Should a Default occur at any time during the Decision Period, should the Borrower notify the Agent that it has decided not to rebuild or replace such property during the Decision Period, or should the Borrower fail to notify the Agent of the Borrower's decision during the Decision Period, then the amounts held as cash collateral pursuant to this Section 6.2(G) or as the Decision Reserve shall upon the Required Lenders' direction be applied as a Designated Prepayment of the Obligations pursuant to Section 2.5(B). Proceeds held as cash collateral pursuant to this Section 6.2(G) or constituting the Decision Reserve shall be disbursed as payments for restoration, rebuilding or replacement of such property become due; provided, however, should a Default occur after the Borrower has notified the Agent that it intends to rebuild or replace the property, the Decision Reserve or amounts held as cash collateral may, or shall, upon the Required Lenders' direction, be applied as a Designated Prepayment of the Obligations pursuant to Section 2.5(B). In the event the Decision Reserve is to be applied as a mandatory prepayment to the Obligations, the Borrower shall be deemed to have requested Revolving Loans in an amount equal to the Decision Reserve, and such Loans shall be made regardless of any failure of the Borrower to meet the conditions precedent set forth in Article IV. Upon completion of the restoration, rebuilding or replacement of such property, the unused proceeds shall constitute Net Cash Proceeds of an Asset Sale and shall be applied as a Designated Prepayment of the Term Loans pursuant to Section 2.5(B). (H) ERISA Compliance. The Borrower shall, and shall cause each of the Borrower's Restricted Subsidiaries to, and, to the extent the Borrower has joint and several liability therefor, shall cause Holdings to establish, maintain and operate all Plans to comply in all respects with the provisions of ERISA, the Code, all other applicable laws, and the regulations and interpretations thereunder and the respective requirements of the governing documents for such Plans, except where such noncompliance, individually or in the aggregate, could not reasonably be expected to subject the Borrower to liability in excess of $2,500,000. - 82 - (I) Maintenance of Property. The Borrower shall cause all property used or useful in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 6.2(I) shall prevent the Borrower from discontinuing the operation or maintenance of any of such property if such discontinuance is, in the judgment of the Borrower, desirable in the conduct of its business or the business of any Restricted Subsidiary and not disadvantageous in any material respect to the Agent or the Lenders. (J) Environmental Compliance. The Borrower and its Subsidiaries shall comply with all Environmental, Health or Safety Requirements of Law, except where noncompliance will not have or is not reasonably likely to subject the Borrower or any Restricted Subsidiary to liability, individually or in the aggregate, in excess of $2,500,000. (K) Use of Proceeds. The Borrower shall use the proceeds of the Revolving Loans (i) to effect the Stock Acquisition and the payment of Transaction Costs, (ii) to provide funds for the repayment of the Refinanced Indebtedness, (iii) to provide funds for the working capital needs and other general corporate purposes of the Borrower, (iv) subject to the limitations contained in this Agreement, to provide funds for the working capital needs and other general corporate purposes of its Restricted Subsidiaries and (v) to repay outstanding Loans. The Borrower shall use the proceeds of the Term Loans solely for the purpose of facilitating the Stock Acquisition and paying Transaction Costs. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Loans to purchase or carry any "Margin Stock" or to make any Acquisition, other than the Stock Acquisition and any Permitted Acquisition pursuant to Section 6.3(G). (L) Hedging Agreements. Within one-hundred and twenty (120) days after the Closing Date, the Borrower shall enter into, and shall thereafter maintain, Hedging Agreements on terms and with counterparties determined by the Borrower and reasonably acceptable to the Agent by which the Borrower is protected against increases in interest rates from and after the date of such contracts as to notional amount not less than forty percent (40%) of the aggregate outstanding amount of the Term Loans (the notional amount which is the subject of the First Chicago Hedging Agreement being counted toward such amount so long as such agreement remains in place) for the first two years during the term of this Agreement. In addition to the Obligations of the Borrower under the Existing First Chicago Hedging Agreement, in the event a Lender elects to enter into any Hedging Agreement with the Borrower required under this Section 6.2(L) or permitted under the terms of Section 6.3(R), the obligations of the Borrower with respect to such Hedging Agreement shall be Secured Obligations secured by the Collateral. - 83 - (M) Separate Corporate Existence. The Borrower shall take all reasonable steps (including, without limitation, all steps which the Agent may from time to time reasonably request) to maintain its and its Restricted Subsidiaries' identity as separate legal entities and to make it apparent to third parties that Borrower and such Restricted Subsidiaries are each an entity with assets and liabilities distinct from those of Holdings and any of Holdings' Affiliates (other than the Borrower and its Subsidiaries) (each of Holdings and such of Holdings' Affiliates are referred to in this Section 6.2(M), as the "Parent"). Without limiting the generality of the foregoing, the Borrower shall: (i) require that all full-time employees of the Borrower and each of its Restricted Subsidiaries identify themselves as such and not as employees of its Parent; (ii) compensate all employees, consultants, investment bankers, accountants, lawyers and agents directly, from the Borrower's or such Restricted Subsidiary's applicable bank accounts, for services provided to the Borrower or such Restricted Subsidiary by such employees, consultants, investment bankers and agents and, if any employee, consultant, investment banker or agent of the Borrower or any of its Restricted Subsidiaries is also an employee, consultant, investment banker or agent of Parent, allocate the compensation of such employee, consultant, investment banker or agent between the Borrower or the Restricted Subsidiary, as applicable, and the Parent on the basis of actual use of the services so rendered to the extent practicable and, to the extent such allocation is not practical, on a basis reasonably related to actual use of such services; (iii) allocate all overhead expenses (including, without limitation, telephone and other utility charges and lease and office expenses) for items shared between the Borrower or any Restricted Subsidiary of the Borrower and Parent on the basis of actual use to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use; (iv) cause the Borrower and each Restricted Subsidiary of the Borrower to be named as an insured on the insurance policy covering its property, or enter into an agreement with the holder of such policy whereby in the event of a loss in connection with such property, proceeds are paid to the Borrower or applicable Restricted Subsidiary; (v) maintain the Borrower's and its Restricted Subsidiaries' books and records complete and separate from those of the Parent; (vi) ensure that any of the Borrower's or Parent's consolidated financial statements or other public information for the Borrower and its Affiliates on a consolidated basis contain appropriate disclosures concerning the Borrower's separate existence; - 84 - (vii) not maintain bank accounts or other depository accounts to which the Parent is an account party, into which the Parent makes deposits or from which the Parent has the power to make withdrawals; (viii) not permit the Parent to pay any of the Borrower's operating expenses (except when paid and charged pursuant to an allocation based upon actual use, to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use); and (ix) not pay dividends or make distributions, loans or other advances to Parent except to the extent duly authorized by its board of directors and in accordance with applicable corporate law. (N) Future Liens on Real Property. Subject to such exceptions as are set forth in the Security Agreement with respect to leases, the Borrower shall, and shall cause each of its Restricted Subsidiaries to, execute and deliver to the Agent for the benefit of the Holders of Secured Obligations, contemporaneously with its acquisition or leasing of any real property after the Closing Date, a mortgage, deed of trust, collateral assignment or other appropriate instrument evidencing a Lien upon any such acquired property, lease or interest, to be in form and substance reasonably acceptable to the Agent and subject only to such Liens as otherwise shall be permitted by this Agreement. (O) Appraisals; Title Policy Endorsements. (i) If requested by the Agent at any time during the Syndication Period, the Borrower shall cooperate with the Agent in promptly obtaining (and shall reimburse the Agent for all costs and expenses in connection therewith) written appraisals of all of the Borrower's property, plant, equipment and fixed assets, which appraisals shall contain such information and be in such detail as is satisfactory to the Agent and which appraisals shall meet the guidelines established by the regulatory institutions having jurisdiction over banks and other financial institutions and shall be from an appraiser or appraisers satisfactory to the Agent and who meet the competency and independence guidelines established by such regulatory institutions. (ii) Within thirty (30) days of the Closing Date the Borrower shall deliver, or cause to be delivered, to the Agent an endorsement to the title policy in respect of the Mortgage removing any survey exception contained in such title policy. 6.3 Negative Covenants. (A) Indebtedness. Neither the Borrower nor any of its Restricted Subsidiaries shall directly or indirectly create, incur, assume or otherwise become or remain directly or indirectly liable with respect to any Indebtedness or Off Balance Sheet Liabilities, except: (i) the Obligations; (ii) the Transaction Costs; - 85 - (iii) the Indebtedness evidenced by the Senior Subordinated Notes; (iv) Permitted Existing Indebtedness and Permitted Refinancing Indebtedness; (v) other Subordinated Indebtedness the terms (including, without limitation, with respect to amount, maturity, amortization, interest rate, premiums, fees, covenants, subordination terms, events of default and remedies) of which are acceptable to the Required Lenders when issued and Permitted Refinancing Indebtedness in respect thereof; provided, however, the aggregate outstanding principal amount of such Subordinated Indebtedness together with the aggregate outstanding principal amount of Indebtedness permitted under clauses (xv) and (xvi) below shall not at any time exceed the then applicable Aggregate Indebtedness Basket; (vi) Indebtedness in respect of taxes, assessments, governmental charges and claims for labor, materials or supplies, to the extent that payment thereof is not required pursuant to Section 6.2(D); (vii) Indebtedness constituting Contingent Obligations permitted by Section 6.3(E); (viii) Indebtedness arising from intercompany loans (a) from any Non-Restricted Subsidiary to the Borrower or to any Restricted Subsidiary, (b) from any Restricted Subsidiary to another Restricted Subsidiary, and (c) from the Borrower to any Restricted Subsidiary provided the aggregate amount of such Indebtedness under this clause (c) would constitute an Investment permitted under the terms of Section 6.3(D); (ix) Indebtedness in respect of Hedging Agreements permitted under Section 6.3(R); (x) secured or unsecured purchase money Indebtedness (including Capitalized Leases) or Indebtedness or Off Balance Sheet Liabilities in connection with sale and leaseback transactions, synthetic lease transactions, capital expenditures or similar financing transactions incurred by the Borrower or any of its Restricted Subsidiaries after the Closing Date to finance the acquisition of fixed assets, if (1) at the time of such incurrence, no Default or Unmatured Default has occurred and is continuing or would result from such incurrence, (2) such Indebtedness has a scheduled maturity and is not due on demand, (3) all such Indebtedness of the Borrower and its Restricted Subsidiaries does not exceed $7,500,000 in the aggregate outstanding at any time, and (4) any Lien securing such Indebtedness is permitted under Section 6.3(C) (such Indebtedness being referred to herein as "Permitted Purchase Money Indebtedness"); (xi) Indebtedness with respect to performance, surety, statutory, appeal or similar bonds obtained by the Borrower or any of its Restricted Subsidiaries in the ordinary course of business; - 86 - (xii) Indebtedness incurred for ordinary administrative expenses, franchise taxes, accounting expenses, legal expenses, employee expenses, lease and office expenses, consultant expenses, investment banker expenses incurred by Holdings on behalf of the Borrower or any Restricted Subsidiary provided the allocation and payment of which complies with the terms of Section 6.2(M) above and Section 6.3(F) below; (xiii) unsecured Indebtedness with respect to management fees, consulting fees or investment banking fees (or other fees of a similar nature), to the extent that payment thereof would not be prohibited by Section 6.3(F); (xiv) Indebtedness in connection with the Deferred Limited Interest Guaranty; (xv) Indebtedness incurred by the Borrower or any Restricted Subsidiary to the Seller in any Permitted Acquisition as part of the consideration therefor, provided that the aggregate outstanding principal amount of such Indebtedness (including any Contingent Obligations incurred in connection therewith) together with the aggregate outstanding principal amount of Indebtedness permitted under clause (v) above and clause (xvi) below shall not at any time exceed the then applicable Aggregate Indebtedness Basket; (xvi) provided no Default has occurred and is continuing at the time of the incurrence thereof, any other Indebtedness which when aggregated with the outstanding principal amount of Indebtedness permitted under clauses (v) and (xv) above does not exceed the then applicable Aggregate Indebtedness Basket in the aggregate at any time; (xvii) Indebtedness incurred by any Non-Restricted Subsidiary so long as (a) such Indebtedness is nonrecourse to the Borrower and its Restricted Subsidiaries and the Borrower and its Restricted Subsidiaries have no direct or Contingent Obligations with respect to such Indebtedness and (b) the direct or indirect Indebtedness or Contingent Obligation of the Borrower and its Restricted Subsidiaries in respect thereof is permitted pursuant to clause (xvi) above; (xviii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts, which will not be, and will not be deemed to be, inadvertent) drawn against insufficient funds in the ordinary course of business; and (xix) Indebtedness in connection with agreements providing for indemnification and purchase price adjustments in connection with the sale or disposition of any of the Borrower's or any Restricted Subsidiary's business, properties or assets permitted under the terms of Section 6.3(B); provided, however, neither the Borrower nor any of its Subsidiaries shall create, incur, assume or otherwise become or remain directly or indirectly liable with respect to such Indebtedness if all such Indebtedness plus the unfunded portion of the Aggregate Revolving Loan Commitment, if funded, would cause the Borrower to exceed the limitation on Indebtedness contained in Section 4.07 of the Indenture (as amended, waived or modified from time to time) or which would render - 87 - any portion of the Secured Obligations (assuming such Aggregate Revolving Loan Commitment was fully funded) unqualified as "Senior Indebtedness" as defined in the Indenture (as amended, waived or modified from time to time). (B) Sales of Assets. Neither the Borrower nor any of its Restricted Subsidiaries shall consummate any Asset Sale except: (i) the sale, lease, conveyance, disposition or other transfer of any Inventory in the ordinary course of business; (ii) the sale or other disposition of property in respect of ordinary course cash management related transactions in the ordinary course of business with respect to cash and Cash Equivalents; (iii) sale, lease, conveyance, disposition or other transfer of Equipment, Receivables or other assets in the ordinary course of the Borrower's business consistent with past practice (with reference to the Target's past practices for periods prior to the Closing Date); (iv) the surrender or waiver of contract rights or the settlement, release or surrender of contract, tort, or other similar claims of any kind; (v) the grant in the ordinary course of business of any non-exclusive license of patents, trademarks, registration therefor and other similar intellectual property; (vi) subject to the limitations set forth in Section 6.3(D), transfer of assets by the Borrower or any of its Subsidiaries to any of the Borrower or a Restricted Subsidiary; (vii) any Equity Offering by any Restricted Subsidiary, provided, that (a) the proceeds therefrom are used to repay the Obligations or any Indebtedness of such Restricted Subsidiary and (b) after consummation of such Equity Offering, the Borrower shall be the beneficial owner of at least eighty percent (80%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of the applicable Restricted Subsidiary; (viii) the sale or disposition of obsolete equipment or other obsolete assets; (ix) the exchange of assets for other non-cash assets that (A) are useful in the business of the Borrower and its Restricted Subsidiaries and (B) have a fair market value at least equal to the fair market value of the assets being exchanged (as determined by the Board of Directors of the Borrower in good faith); (x) the disposition of obsolete Equipment in the ordinary course of business; (xi) transfers of assets (a) from any Non-Restricted Subsidiary to the Borrower or any Restricted Subsidiary, (b) from any Restricted Subsidiary to another Restricted - 88 - Subsidiary and (c) from the Borrower to any Restricted Subsidiary provided the aggregate amount of assets transferred under this clause (c) would constitute an Investment permitted under the terms of Section 6.3(D); (xii) transfers of assets constituting Investments permitted by Section 6.3(D) and Restricted Payments permitted by Section 6.3(F); (xiii) the sale, lease, conveyance or other disposition of all or substantially all of the assets of a Restricted Subsidiary in connection with a transaction permitted under Section 6.3(I); (xiv) the sale of the corporate aircraft owned by the Company on the Closing Date to Robert M. Wolff or his designees; (xv) the sale, transfer and/or termination of the officers' life insurance policies in effect as of the Closing Date; (xvi) Sale and Leaseback Transactions or other transactions permitted pursuant to Section 6.3(J); and (xvii) sales, assignments, transfers, leases, conveyances or other dispositions of other assets, provided that any such transaction (a) is for all cash consideration, (b) is for not less than fair market value (as determined by the board of directors of the Borrower in good faith, whose determination shall be conclusive evidence thereof and shall be evidenced by a resolution of such board of directors set forth in an Authorized Officer's certificate delivered to the Agent or such other evidence as shall be reasonably acceptable to the Agent), (c) if applicable, the provisions of Section 2.5(B)(i) are complied with and (d) when combined with all such other transactions pursuant to this clause (xvii) (each such transaction being valued at book value) (1) during the immediately preceding twelve-month period, represents the disposition of not greater than ten percent (10.0%) of the Borrower's and its Restricted Subsidiaries' consolidated fixed assets at the end of the fiscal year immediately preceding that in which such transaction is proposed to be entered into, and (2) during the period from the Closing Date to the date of such proposed transaction, represents the disposition of not greater than twenty percent (20.0%) of the Borrower's and its Restricted Subsidiaries' consolidated fixed assets at the end of the fiscal year immediately preceding that in which such transaction is proposed to be entered into. Not fewer than five (5) Business Days prior to the consummation of any transaction permitted by clause (xvi) above, the Borrower shall deliver to the Agent a certificate of an Authorized Officer certifying compliance with the requirements of clause (xvi) and showing in reasonable detail the calculations on which such certification is based. (C) Liens. Neither the Borrower nor any of its Restricted Subsidiaries shall directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any of their respective property or assets except: - 89 - (i) Liens created by the Loan Documents or otherwise securing the Secured Obligations; (ii) Permitted Existing Liens and Liens securing Permitted Refinancing Indebtedness (provided such Liens are subordinated to the Liens created by the Loan Documents or otherwise securing the Secured Obligations); (iii) Customary Permitted Liens; (iv) purchase money Liens (including the interest of a lessor under a Capitalized Lease and Liens to which any property is subject at the time of the Borrower's or any Restricted Subsidiary's acquisition thereof) securing Permitted Purchase Money Indebtedness; provided that such Liens shall not apply to any property of the Borrower or its Restricted Subsidiaries other than that purchased or subject to such Capitalized Lease; (v) Liens securing Indebtedness permitted under Section 6.3(A)(viii) provided such Liens are subordinated to the Liens created by the Loan Documents or otherwise securing the Secured Obligations; (vi) Environmental Liens and Liens in favor of the IRS or the PBGC provided the Indebtedness so secured does not at any time exceed $2,500,000 in the aggregate; (vii) Liens with respect to the property or assets of any Restricted Subsidiary in favor of the Borrower or any other Restricted Subsidiary; and (viii) other Liens securing Indebtedness of the Borrower or its Restricted Subsidiaries provided the Indebtedness so secured does not at any time exceed $2,000,000 in the aggregate. In addition, neither the Borrower nor any or its Restricted Subsidiaries shall become a party to any agreement, note, indenture or other instrument, or take any other action, which would prohibit the creation of a Lien on any of its properties or other assets in favor of the Agent for the benefit of itself and the Holders of Secured Obligations, as additional Collateral for the Obligations; provided that any agreement, note, indenture or other instrument in connection with Permitted Purchase Money Indebtedness (including Leases) may prohibit the creation of a Lien in favor of the Agent for the benefit of itself and the Holders of the Secured Obligations on the items of property obtained with the proceeds of such Permitted Purchase Money Indebtedness. Without in any way limiting the foregoing, other than Liens pursuant to the Pledge Agreement, no Liens on any Equity Interests of the Restricted Subsidiaries shall be permitted. - 90 - (D) Investments. Neither the Borrower nor any of its Restricted Subsidiaries shall directly or indirectly make or own any Investment except: (i) Investments in Cash Equivalents; (ii) Permitted Existing Investments in an amount not greater than the amount thereof on the Closing Date; (iii) Investments constituting securities or instruments received in connection with the bankruptcy restructuring or reorganization of suppliers and customers and in settlement of delinquent trade or other claims of, and other disputes with, customers and suppliers arising in the ordinary course of business; (iv) Investments consisting of deposit accounts maintained by the Borrower or any Restricted Subsidiary in connection with its cash management system, provided funds deposited in such deposit accounts (a) are subject to a Collection Account Agreement or (b) do not exceed $150,000 individually or $250,000 in the aggregate for all such other deposit accounts; (v) Investments of the Borrower in the Target pursuant to the consummation of the Stock Acquisition in an amount not in excess of the amounts required to be paid pursuant to the Stock Purchase Agreement as in effect as of the date hereof; (vi) Investments by any Non-Restricted Subsidiary in the Borrower or any Restricted Subsidiary; (vii) Investments by any Restricted Subsidiary in any other Restricted Subsidiary; (viii) Investments by any Restricted Subsidiary in the Borrower; (ix) Investments by the Borrower in any Restricted Subsidiary; and (x) Investments by the Borrower or any Restricted Subsidiary in other Persons which do not in the aggregate exceed the applicable Aggregate Acquisition and Investment Basket at any time. (E) Contingent Obligations. Neither the Borrower nor any of its Restricted Subsidiaries shall directly or indirectly create or become or be liable with respect to any Contingent Obligation, except: (i) recourse obligations resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (ii) Permitted Existing Contingent Obligations and any extensions, renewals or replacements thereof, provided that any such extension, renewal or replacement is not greater than the Indebtedness under, and shall be on terms no less favorable to the - 91 - Borrower or such Restricted Subsidiary than the terms of, the Permitted Existing Contingent Obligation being extended, renewed or replaced; (iii) obligations, warranties, and indemnities, not relating to Indebtedness of any Person, which have been or are undertaken or made in the ordinary course of business and not for the benefit of or in favor of an Affiliate of the Borrower or such Restricted Subsidiary; (iv) Contingent Obligations arising under the Transaction Documents; (v) Contingent Obligations with respect to surety and performance bonds obtained by borrower or any subsidiary in the ordinary course of business; (vi) Contingent Obligations with respect to the Deferred Limited Interest Guaranty; (vii) Contingent Obligations pursuant to the Incentive Compensation Plan; (viii) Contingent Obligations of the Restricted Subsidiaries pursuant to the Guaranties; and (ix) additional Contingent Obligations, including, without limitation, Contingent Obligations in respect of Indebtedness permitted pursuant to Section 6.3(A), which do not exceed an amount in the aggregate at any time equal to $2,500,000; provided, that if the Borrower shall have a Leverage Ratio of less than 4.25 to 1.0 for two consecutive fiscal quarters (as reflected in the financial statements (and corresponding compliance certificate) delivered pursuant to Section 6.1(A)(ii) or 6.1(A)(iii), such amount shall be increased effective as of the date of delivery of such financial statements to $5,000,000. (F) Restricted Payments. Neither the Borrower nor any of its Restricted Subsidiaries shall declare or make any Restricted Payment, except: (i) the Borrower may make (a) payments to Holdings sufficient to fund Holdings' payments under the Jordan Management Agreement as in effect as of the Closing Date for (1) consulting, financial, management and investment banking fees plus (2) out of pocket expenses and indemnities, provided that the obligations in respect of such fees under the Jordan Management Agreement shall be subordinated expressly to the Secured Obligations and (b) distributions to Holdings sufficient to fund Holdings' payment of directors' fees and indemnities (whether or not Holdings applies the funds to the payment of such directors' fees) provided that such Restricted Payments shall not exceed $150,000 plus out of pocket expenses in any fiscal year of the Borrower; (ii) so long as Holdings files consolidated income tax returns that include the Borrower, on the Business Day immediately preceding the date on which Holdings shall be required to make any tax related payment to any Governmental Authority, the Borrower may make distributions to Holdings to fund Holdings' payment of tax - 92 - obligations, from funds legally available for such purpose, in an amount not to exceed the amount calculated pursuant to the Tax Sharing Agreement attached hereto as Exhibit P; provided, Holdings shall in turn utilize such amount thereof as is necessary to pay its consolidated tax obligations; provided, further, that after the occurrence and during the continuance of any Default or Unmatured Default, the amount permitted to be paid to Holdings shall not exceed the lesser of (1) the amount calculated pursuant to the Tax Sharing Agreement, (2) the "Consolidated Tax" (as defined in the Tax Sharing Agreement as in effect on the Closing Date) and (3) the "Calculated Tax" of the "Acquisition Group" (each as defined in the Tax Sharing Agreement as in effect on the Closing Date); and provided, further, any amount otherwise permitted to be paid under this clause (ii) shall be reduced by the amount of any tax related payments made directly by the Borrower or any Subsidiary to any Governmental Authority. (iii) the Borrower may make distributions to Holdings to fund (a) payments required to be made by and actually made by Holdings in respect of interest due on an unaccelerated basis on the Holdings Subordinated Debt, unless such payments are prohibited by the subordination terms applicable to such Indebtedness; provided, however, the Borrower may make such distributions with respect to the Holdings Subordinated Debt only on March 1 and September 1 of each year (or the Business Day immediately prior thereto if such date is not a Business Day); (b) (1) payments made by Holdings to repurchase its common stock made pursuant to Section 7.2, 7.3 or 7.4 of the Stockholders Agreement as in effect on the Closing Date and (2) payments required to be made by and actually made by Holdings in respect of amounts due on an unaccelerated basis on the Repurchase Indebtedness unless such payments are prohibited by the subordination terms applicable to such Repurchase Indebtedness in an aggregate amount for all such payments under clauses (1) and (2) not to exceed $4,000,000, such distributions to be made not earlier than one Business Day prior to the date on which Holdings is to make such payments; provided, that, Holdings shall first satisfy any such payment obligation by canceling Indebtedness under the Management Note, if any, of the Person to whom Holdings is obligated to make such payment; and (c) mandatory payments of dividends due on the Preferred Stock to the extent Indebtedness for such payments is Permitted Holdings Indebtedness under clause (c) of the definition thereof, such distributions to be made not earlier than one Business Day prior to the date on which Holdings is required to make such payments; (iv) the Borrower may make payments to Robert M. Wolff or to Holdings sufficient to make payment of amounts due under the Employment Agreements without taking into account any amendment, modification, supplement or restatement thereof or the adjustment of any such amount pursuant to the terms thereof resulting from a change of facts and circumstances after the date of this Agreement (other than increases in base salary approved pursuant to Section 2 of the Employment Agreement) unless the Agent and the Required Lenders shall have consented to the terms thereof if the effect of such amendment, modification, supplement, restatement or adjustment is to increase the amount or accelerate the time of payment of such amounts; - 93 - (v) the Borrower may make mandatory payments of interest, principal or premium, if any, when due on the Permitted Subordinated Indebtedness unless such payments are prohibited by the terms of such Indebtedness or the subordination agreements related thereto; (vi) any Restricted Subsidiary may make distributions to the Borrower or to a Restricted Subsidiary; (vii) the Borrower or any Restricted Subsidiary may defease, redeem or repurchase Permitted Subordinated Indebtedness with the net cash proceeds from an issuance of Permitted Refinancing Indebtedness; (viii) any Restricted Subsidiary may defease, redeem or repurchase Permitted Subordinated Indebtedness with the net cash proceeds from the substantially concurrent sale (other than to the Borrower or any subsidiary of the Borrower) of Equity Interests of such Restricted Subsidiary (other than Redeemable Stock); (ix) payments in connection with the Stock Acquisition and related financing transactions as described under the "The Transactions" and "Use of Proceeds" provisions contained in the Offering Memorandum; (x) payments to Holdings in respect of accounting, legal or other professional or administrative expenses or reimbursements or franchise or similar taxes and governmental charges (other than income taxes which shall be governed by clause (ii) above) incurred by it relating to the business, operations or finances of the Borrower and its Restricted Subsidiaries and in respect of fees and related expenses associated with any registration statements relating to the Senior Subordinated Notes filed with the United States Securities and Exchange Commission and subsequent ongoing public reporting requirements with respect to the Notes; and (xi) mandatory payments, if any, relating to any purchase price adjustment pursuant to the terms of the Stock Purchase Agreement; provided, however, that: (a) the Restricted Payments by the Borrower described in clause (iii)(a) above shall not be permitted if at the date of declaration or payment thereof either the Borrower was not in compliance with the financial covenants set forth in Section 6.4 as of the most recently completed fiscal quarter or if a Default under Section 7.1(a) shall have occurred and be continuing as of such date; (b) the Restricted Payments described in clauses (i)(a)(1), (iii)(b), (iii)(c) and (v) above shall not be permitted if either a Default or an Unmatured Default shall have occurred and be continuing at the date of declaration or payment thereof or would result therefrom; - 94 - (c) if a Restricted Payment described in clause (i) above shall not be permitted to be made in the period prescribed above, then it cannot be made thereafter until after the Agent's and the Lenders' subsequent receipt of the audited financial statements to be delivered pursuant to Section 6.1(A)(iii), which financial statements shall reflect that no Default or Unmatured Default existed as of the date of such financial statements and the Agent's and the Lender's receipt of quarterly financial statements delivered pursuant to Section 6.1(A)(ii), which financial statements shall reflect that, for two consecutive quarters subsequent to the period in which the Borrower was not permitted to make the Restricted Payment described in clause (i) above, no Default or Unmatured Default existed as of the date of such financial statements; and (d) if a Restricted Payment described in clause (iii)(a) above with respect to the Holdings Subordinated Notes shall not be permitted to be made as of one of the dates prescribed above, but the Borrower is subsequently in compliance with the financial covenants in Section 6.4 (and would be in compliance assuming payment of scheduled interest payments on the Holdings Subordinated Debt) and is not in Default under Section 7.1(a), then Borrower may distribute to Holdings and Holdings may pay the interest payments that were not paid when due or a portion of such interest payments to the extent that after such payment Borrower would not be in Default under Section 7.1(a) or Section 7.1(b) with respect to Section 6.4. (G) Conduct of Business; Subsidiaries; Acquisitions. (i) Neither the Borrower nor any of its Restricted Subsidiaries shall engage in any business other than the businesses engaged in by the Borrower on the date hereof and any business or activities which are substantially similar, related or incidental thereto. (ii) The Borrower may create, acquire and/or capitalize any Subsidiary organized under the laws of any state of the United States (a "New Subsidiary") after the date hereof pursuant to any transaction that is permitted by or not otherwise prohibited by this Agreement, provided that: (1) each New Subsidiary (other than any Non-Restricted Subsidiary) shall execute a Guaranty of the Obligations, (2) each New Subsidiary (other than any Non-Restricted Subsidiary) shall grant to the Agent, for the benefit of Holders of Secured Obligations, Liens on all of its assets, pursuant to documentation (including, without limitation, a Restricted Subsidiary Security Agreement, the various agreements referenced in the Restricted Subsidiary Security Agreement, UCC financing statements and, to the extent applicable Mortgages and Intellectual Property Agreements) in each case in form and substance satisfactory to the Agent, (3) all of the Equity Interests in each New Subsidiary owned by the Borrower or any other Restricted Subsidiary shall be pledged to the Agent, for the - 95 - benefit of Holders of Secured Obligations, pursuant to the Pledge Agreement and other documentation in form and substance satisfactory to the Agent, (4) each New Subsidiary (other than a Non-Restricted Subsidiary) shall become a party to a contribution agreement among all of the Restricted Subsidiaries, pursuant to which each party thereto shall be entitled to contribution and indemnification from, and to be reimbursed by, each of the other parties thereto for certain amounts, such contribution agreement to be in form and substance satisfactory to the Agent, (5) the Agent and the Lenders shall have been provided with opinions of counsel to the Borrower and the New Subsidiary in connection with the Acquisition and the documentation to be executed and delivered by the New Subsidiary in scope, form and substance reasonably acceptable to the Agent and the Required Lenders, (6) each New Subsidiary shall become a party to the Tax Sharing Agreement, (7) each New Subsidiary (other than a Non-Restricted Subsidiary) shall become a party to the Deferred Limited Interest Guaranty, (8) upon the creation of any such New Subsidiary, the Borrower shall deliver to the Lenders a revised Schedule 5.8 listing such new Subsidiary, and such revised Schedule shall replace the old Schedule and shall be deemed to have become part of the Agreement, and (9) on and after the date the Borrower or any Restricted Subsidiary shall create, acquire and/or capitalize any New Subsidiary (other than a Non-Restricted Subsidiary), the Borrower or any Restricted Subsidiary shall own of record and beneficially, with sole voting and dispositive power, at least 80% of the outstanding shares of Voting Stock of each such New Subsidiary, and shall have the power, directly or indirectly, to elect a majority of the board of directors of each such New Subsidiary. (iii) Neither the Borrower nor any Restricted Subsidiary shall make any Acquisitions, other than Acquisitions meeting the following requirements (each such Acquisition constituting a "Permitted Acquisition"): (1) no Default or Unmatured Default shall have occurred and be continuing or would result from such Acquisition or the incurrence of any Indebtedness in connection therewith; (2) in the case of an Acquisition of Equity Interests of an entity, such Acquisition shall be of at least eighty percent (80%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of such entity; - 96 - (3) the businesses being acquired shall be substantially similar, related or incidental to the businesses or activities engaged in by the Borrower on the Closing Date; (4) the aggregate gross purchase price paid (including cash, non-cash consideration and assumption of Indebtedness) in connection with all of such Permitted Acquisitions shall not exceed the Aggregate Acquisitions and Investment Basket; (5) prior to each such Acquisition, the Borrower shall deliver to the Agent and the Lenders a certificate from one of the Authorized Officers, demonstrating to the reasonable satisfaction of the Agent and the Required Lenders that after giving effect to such Acquisition and the incurrence of any Indebtedness permitted by Section 6.3(A) in connection therewith, on a pro forma basis using unadjusted historical audited and reviewed unaudited financial statements obtained from the seller, broken down by fiscal quarter in the Borrower's reasonable judgment, as if the Acquisition and such incurrence of Indebtedness had occurred on the first day of the twelve-month period ending on the last day of the Borrower's most recently completed fiscal quarter, the Borrower would have been in compliance with all of the financial covenants contained in Section 6.4 for such four fiscal quarters and the Borrower shall deliver to the Agent consolidating pro forma projections for the four quarter period including the quarter in which such Acquisition is to be consummated for the subsequent 3 fiscal quarters which projections shall indicate that the Borrower shall be able to meet all of its financial covenants during such period; (6) the Acquisition is consummated pursuant to a negotiated acquisition agreement and consummated on a non-hostile basis and is one for which the board of directors or other governing body of such Person being acquired has approved the terms of such Acquisition (if such Acquisition is a tender offer for the securities of a Person that is required to file periodic reports under the Exchange Act, or if by the terms of such Acquisition such board or other governing body approval is required) or for which (in any other case) the board of directors or other governing body of the Person owning the stock or assets being acquired (as the case may be) has approved the terms of such Acquisition; (7) in the case of the Acquisition by the Borrower or any Restricted Subsidiary of assets in connection with any Permitted Acquisition, the Borrower or Restricted Subsidiary shall have provided to the Agent, prior to the consummation of such Acquisition, updated schedules to the Security Agreement or Restricted Subsidiary Security Agreement, as applicable, and all UCC financing statements and other documentation required pursuant to such Security Agreement or Restricted Subsidiary Security Agreement in connection with the perfection and priority of the Agent's Liens; (8) prior to each such Acquisition, the Borrower shall provide the Agent and the Lenders with (a) financial information with respect to the target of such Acquisition (including historical financial statements, to the extent available) and (b) a description of the target of such Acquisition; and - 97 - (9) effective as of the date of each such Acquisition (taking into account the effect of such purchase and any Indebtedness incurred in connection therewith), the Borrower shall deliver to the Agent a Borrowing Base Certificate, which Borrowing Base Certificate shall demonstrate that Revolving Credit Availability shall not be less than $5,000,000. (H) Transactions with Shareholders and Affiliates. Except for the transactions contemplated by the agreements, including performance by the applicable parties of the Obligations thereunder, set forth on Schedule 6.3(H) as such agreements are in effect as of the date hereof or any amendment permitted by the terms of this Agreement(provided any payments thereunder shall be governed by the terms of Section 6.3(F)) and except as otherwise permitted herein, neither the Borrower nor any of its Restricted Subsidiaries shall directly or indirectly (i) pay any management fees, consulting fees, investment banking fees or other similar fees or compensation to any of the Jordan Stockholders, Management, MCIT or any other holder or holders of the Borrower's or Holdings' Equity Securities, other than wages, salaries and bonuses of employees who are also stockholders of the Borrower in the ordinary course and consistent with past practices or (ii) enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any Jordan Stockholder, Management, MCIT or holder or holders of any of its equity securities of the Borrower or Holdings, or with any Affiliate of the Borrower (other than Holdings, the Borrower and its Subsidiaries) which is not its Restricted Subsidiary, on terms that are less favorable to the Borrower or any of its Restricted Subsidiaries, as applicable, than those that might be obtained in an arm's length transaction at the time from Persons who are not such a holder, Affiliate or MCIT (each such transaction or series of related transactions that are part of a common plan, an "Affiliate Transaction"), except to the extent that such Affiliate Transactions involve aggregate payments or other transfers in an aggregate amount not to exceed $2,500,000 for all such transactions from and after the date hereof. Without in any way limiting the foregoing, without the prior written consent of the Required Lenders, the Borrower shall not agree to any modification of, nor shall it permit, any modification to be made to the Affiliate Notes, nor shall it forgive any amounts payable thereunder, delay the date for payment of any amounts payable thereunder, reduce the interest payable thereunder or accept any non-cash consideration in payment of amounts payable thereunder. (I) Restriction on Fundamental Changes. Except for transactions permitted under Sections 6.3(B), 6.3(D) and 6.3(G), neither the Borrower nor any of its Restricted Subsidiaries shall enter into any merger or consolidation, or liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or substantially all of the Borrower's or any such Restricted Subsidiary's business or property, whether now or hereafter acquired, except that (i) the Borrower and the Target may consummate the Merger, (ii) a Restricted Subsidiary of the Borrower may be merged into or consolidated with the Borrower (in which case the Borrower shall be the surviving corporation) or another Restricted Subsidiary of the Borrower. (J) Sales and Leasebacks; Off Balance Sheet Liabilities. The Borrower will not, nor will it permit any Restricted Subsidiary to, enter into or suffer to exist any (i) Sale and Leaseback Transaction or (ii) any other transaction pursuant to which it incurs or has incurred Off Balance - 98 - Sheet Liabilities (other than Rate Hedging Obligations permitted to be incurred under the terms of Section 6.3(R) below) unless the aggregate amount, without duplication, of Indebtedness and Off Balance Sheet Liabilities incurred in connection therewith shall be permitted pursuant to Section 6.3(A)(x). (K) Margin Regulations. Neither the Borrower nor any of its Subsidiaries, shall use all or any portion of the proceeds of any credit extended under this Agreement to purchase or carry Margin Stock. (L) ERISA. The Borrower shall not (i) engage, or permit any of its Subsidiaries to engage, in any prohibited transaction described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the DOL if such prohibited transaction, could result in liability, individually or in the aggregate, together with all other amounts under this Section 6.3(L) in excess of $2,500,000; (ii) permit to exist any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Internal Revenue Code), with respect to any Benefit Plan, that has not been waived and that could give rise to a lien under Section 302(f) of ERISA; (iii) fail, or permit any Controlled Group member to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan where such failure could give rise to a lien under Section 302(f) of ERISA; (iv) terminate, or permit any Controlled Group member to terminate in a distress termination under Section 4041(c) of ERISA, any Benefit Plan which would result in any liability of the Borrower or any Controlled Group member under Title IV of ERISA; (v) fail to make any contribution or payment to any Multiemployer Plan which the Borrower or any Controlled Group member may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto if such failure could result in liability, individually or in the aggregate, together with all other amounts under this Section 6.3(L) in excess of $2,500,000; (vi) fail, or permit any Controlled Group member to fail, to pay any required installment or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment where such failure could give rise to a lien under Section 302(f) of ERISA; or (vii) amend, or permit any Controlled Group member to amend, a Plan resulting in an increase in current liability for the plan year such that the Borrower or any Controlled group member is required to provide security to such Plan under Section 401(a)(29) of the Code. - 99 - (M) Issuance of Capital Stock. Neither the Borrower nor any of its Restricted Subsidiaries shall issue any Voting Stock other than the issuance of common stock of a Restricted Subsidiary the Net Cash Proceeds of which are utilized in accordance with the requirements of Section 2.5 and provided that the Borrower shall at all times own of record and beneficially, in the aggregate, at least eighty percent (80%) of the shares of the issued and outstanding Voting Stock (measured by voting power rather than number of shares) of each Restricted Subsidiary. (N) Corporate Documents. Other than in connection with the Merger, neither the Borrower nor any of its Restricted Subsidiaries shall amend, modify or otherwise change any of the terms or provisions in any of their respective corporate documents (other than the by-laws and, in the case of by-laws, any of the material terms or provisions thereof) as in effect on the date hereof in any manner adverse to the interests of the Lenders in any material respect without the prior written consent of the Required Lenders (which consent shall not be unreasonably withheld). (O) Other Indebtedness. The Borrower shall not amend, modify or supplement, or permit any Restricted Subsidiary of the Borrower to amend, modify or supplement (or consent to any amendment, modification or supplement of), any document, agreement or instrument evidencing the Senior Subordinated Notes or any Permitted Subordinated Indebtedness (or any replacements, substitutions or renewals thereof) or pursuant to which the Senior Subordinated Notes or any Permitted Subordinated Indebtedness is issued or make any payment required as a result of such an amendment, modification or supplement, where such amendment, modification or supplement provides for the following or which has any of the following effects: (i) increases the overall principal amount of any such Indebtedness or increases the amount of any single scheduled installment of principal or interest or how much of such a payment must be paid in cash instead of accrued or paid in kind; (ii) shortens or accelerates the date upon which any installment of principal or interest becomes due or adds any additional mandatory redemption provisions; (iii) shortens the final maturity date of such Indebtedness or otherwise accelerates the amortization schedule with respect to such Indebtedness; (iv) increases the rate of interest accruing on such Indebtedness; (v) provides for the payment of additional fees or increases existing fees; (vi) amends or modifies any financial or negative covenant (or covenant which prohibits or restricts the Borrower or a Restricted Subsidiary of the Borrower from taking certain actions), or event of default, in either case, in a manner which is more onerous or more restrictive to the Borrower (or any Restricted Subsidiary of the Borrower) or which is otherwise materially adverse to the Borrower and/or the Lenders or, in the case of adding covenants, which places additional restrictions on the Borrower or a Restricted Subsidiary of the Borrower or which requires the Borrower or any such Restricted Subsidiary to comply with more restrictive - 100 - financial ratios or which requires the Borrower or any Restricted Subsidiary of the Borrower to better its financial performance from that set forth in the existing financial covenants; (vii) amends, modifies or adds any affirmative covenant in a manner which, when taken as a whole, is materially adverse to the Borrower and/or the Lenders; (viii) amends, modifies or supplements the subordination provisions thereof; or (ix) modifies the Persons obligated with respect to such Indebtedness. Neither Holdings, the Borrower nor any of its Subsidiaries shall make any payment or prepayment of principal, interest, fees or other charges on or with respect to, or any redemption, purchase, repurchase, retirement, defeasance, sinking fund or payment on any claim for damages or rescission with respect to the Holdings Subordinated Debt, the Indebtedness evidenced by the Senior Subordinated Notes or any other Permitted Subordinated Debt. (P) Fiscal Year. Neither Holdings, the Borrower nor any of its consolidated Subsidiaries shall change its fiscal year for accounting or tax purposes from a period consisting of the 12- month period ending on June 30 of each calendar year. (Q) Subsidiary Covenants. Except as permitted by Section 6.3(G), the Borrower will not, and will not permit any Restricted Subsidiary to, create or otherwise become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to pay dividends or make any other distribution on its stock, or make any other Restricted Payment, pay any Indebtedness or other Obligation owed to the Borrower or any other Restricted Subsidiary, make loans or advances or other Investments in the Borrower or any other Restricted Subsidiary, or sell, transfer or otherwise convey any of its property to the Borrower or any other Restricted Subsidiary. (R) Hedging Obligations. The Borrower shall not and shall not permit any of its Restricted Subsidiaries to enter into any interest rate, commodity or foreign currency exchange, swap, collar, cap or similar agreements other than interest rate, foreign currency or commodity exchange, swap, collar, cap or similar agreements entered into by the Borrower pursuant to Section 6.2(L) hereof or pursuant to which the Borrower has hedged its actual interest rate, foreign currency or commodity exposure (such hedging agreements are sometimes referred to herein as "Hedging Agreements"). All references in this Agreement to Hedging Agreements with the Lenders shall be deemed to include, without limitation, that certain Confirmation of Interest Rate Swap dated as of November 16, 1993 between the Target and First Chicago, in the notional amount of $7,000,000 (the "Existing First Chicago Hedging Agreement"), and all references in such Existing First Chicago Hedging Agreement to the Credit Agreement dated as of January 28, 1994 among the Target, the lenders parties thereto and First Chicago as agent for such lenders shall instead be references to this Agreement. (S) Change of Deposit Accounts. The Borrower shall not, and shall not permit any Restricted Subsidiary to, establish or maintain any deposit account with any bank or other financial institution other than those which have entered into a Collection Account Agreement in - 101 - form and substance acceptable to the Agent or in connection with which the deposit account constitutes a permitted Investment under Section 6.3(D). 6.4 Financial Covenants. The Borrower shall comply with the following: (A) Defined Terms for Financial Covenants. The following terms used in this Agreement shall have the following meanings (such meanings to be applicable, except to the extent otherwise indicated in a definition of a particular term, both to the singular and the plural forms of the terms defined): "Capital Expenditures" means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including Capitalized Leases and Permitted Purchase Money Indebtedness) by the Borrower and its Restricted Subsidiaries during that period that, in conformity with Agreement Accounting Principles, are required to be included in or reflected by the property, plant, equipment or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower and its Restricted Subsidiaries, other than Capital Expenditures in connection with Permitted Acquisitions. "Consolidated Net Income" means, for any given period and Person, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with Agreement Accounting Principles; provided, however, that: (i) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such Acquisition shall be excluded and (ii) Consolidated Net Income of any Person will not include, without duplication, any deduction for: (A) any increased amortization or depreciation resulting from the write-up of assets pursuant to Account Principles Board Opinion Nos. 16 and 17 as amended or supplemented from time to time, (B) the amortization of all intangible assets (including amortization attributable to inventory write-ups, goodwill, Transaction Costs, debt and financing costs, and Incentive Arrangements), (c) any non-capitalized transaction costs incurred in connection with actual or proposed Financings, Acquisitions or Asset Sale (including, but not limited to financing and refinancing fees), (D) any extraordinary or nonrecurring charges related to any premium or penalty paid, write-off or deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (E) any charges or expenses in respect of restructuring or consolidating any business, operations or facilities, any compensation or headcount reduction, or any other cost savings, of any persons or businesses either alone or together with the Borrower or any Restricted Subsidiary as permitted by Agreement Accounting Principles or Regulation S-X under the Securities Act of 1933. "EBITDA" means, for any period, on a consolidated basis for the Borrower and its consolidated Restricted Subsidiaries, and, for the limited purpose of calculating the financial covenants set forth in this Section 6.4, on a consolidated basis for the Target and its consolidated Subsidiaries for any applicable period prior to the Closing Date, the sum, without duplication, of the amounts (without duplication) for such period of (i) Consolidated Net Income, plus (ii) charges against income for foreign, federal, state and local taxes and, without duplication, Restricted Payments paid in respect of such taxes pursuant to Section 6.3(F)(ii), plus (iii) Interest Expense to the extent deducted in computing Consolidated Net Income, plus (iv) Fees to the - 102 - extent deducted in computing Consolidated Net Income, plus (v) depreciation expense and other non-cash charges, plus (vi) expenses for the applicable period associated with the Target's corporate aircraft and the Target's shareholder insurance policies, plus (vii) interest income to the extent not already included in Consolidated Net Income, plus (viii) to the extent deducted in computing Consolidated Net Income, all dividend payments on preferred stock, whether or not paid in cash, plus (ix) to the extent deducted in computing Consolidated Net Income, any extraordinary or nonrecurring charge or expense arising out of the implementation of SFAS 106 or SFAS 109, plus (x) to the extent deducted in computing Consolidated Net Income, accruals in respect of the Incentive Compensation Plan, minus (xi) the portion of Consolidated Net Income attributable to the minority investments in other Persons, except the amount of such portion received in cash by the Company or its Restricted Subsidiaries, plus or minus (xii) extraordinary losses from Asset Sales to the extent deducted in computing Consolidated Net Income or extraordinary gains from Asset Sales (and any unusual gains arising in or outside of the ordinary course of business not included in extraordinary gains determined in accordance with Agreement Accounting Principles which have been included in the determination of Net Income). "Fees" means fees (including, without limitation, agency and unused commitment fees) and discounts with respect to (i) Letters of Credit and (ii) Indebtedness evidenced by this Agreement. "Interest Expense" means, for any period, (i) the total interest expense of the Borrower and its consolidated Restricted Subsidiaries, whether paid or accrued (including the interest component of Capitalized Leases), but excluding interest expense not payable in cash (including amortization of discount), plus (ii) any Restricted Payments made to Holdings in accordance with the provisions of Section 6.3(F)(iii)(a), all as determined in conformity with Agreement Accounting Principles. "Net Income" means, for any period, the net earnings (or loss) after taxes of the Borrower and its Restricted Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with Agreement Accounting Principles excluding, however, any gain or loss (together with any related provision for taxes, realized in connection with any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions). (B) Interest Expense Coverage Ratio. The Borrower shall maintain a ratio (the "Interest Expense Coverage Ratio") of (i) EBITDA to (ii) Interest Expense for the applicable period of at least: (1) 1.20 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending on June 30, 1997 through the fiscal quarter ending on December 31, 1997; (2) 1.30 to 1.00 for the fiscal quarter ended on March 31, 1998; (3) 1.35 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending June 30, 1998 through the fiscal quarter ending December 31, 1998; - 103 - (4) 1.40 to 1.00 for the fiscal quarter ending on March 31, 1999; (5) 1.45 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending June 30, 1999 through the fiscal quarter ending December 31, 1999; (6) 1.50 to 1.00 for the fiscal quarter ending on March 31, 2000; (7) 1.55 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending June 30, 2000 through the fiscal quarter ending September 30, 2000; (8) 1.60 to 1.00 for the fiscal quarter ending on December 31, 2000; (9) 1.65 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending on March 31, 2001 through the fiscal quarter ending June 30, 2001; (10) 1.70 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending on September 30, 2001 through the fiscal quarter ending December 31, 2001; and (11) 1.75 to 1.00 for each fiscal quarter thereafter until the Termination Date. In each case the Interest Coverage Ratio shall be determined as of the last day of each fiscal quarter for the four-quarter period ending on such day (provided, however, (a) for the fiscal quarter ending June 30, 1997, the Interest Coverage Ratio shall be calculated using Interest Expense for the fiscal quarter ending June 30, 1997 multiplied by four (4) and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on June 30, 1997, (b) for the fiscal quarter ending September 30, 1997, the Interest Coverage Ratio shall be calculated using Interest Expense for the two fiscal quarters ending September 30, 1997 multiplied by two (2) and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on September 30, 1997, and (c) for the fiscal quarter ending December 31, 1997, the Interest Coverage Ratio shall be calculated using Interest Expense for the three fiscal quarters ending December 31, 1997 multiplied by four-thirds (4/3) and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on December 31, 1997; provided, further, that the Interest Coverage Ratio shall be calculated with respect to Permitted Acquisitions, on a pro forma basis using unadjusted historical audited and reviewed unaudited financial statements obtained from the seller, broken down by fiscal quarter in the Borrower's reasonable judgement). (C) Fixed Charge Coverage Ratio. The Borrower shall maintain a ratio ("Fixed Charge Coverage Ratio") of: (i) EBITDA minus Capital Expenditures to (ii) the sum of the amounts, without duplication of (a) Interest Expense, plus (b) Fees, plus (c) Taxes, plus (d) Restricted Payments of the type referred to in clauses (i), (ii), (iii) and (iv) of the definition of Restricted Payments, plus (e) cash payments under the Incentive Compensation Plan, plus (f) scheduled amortization of the principal portion of the Term Loans and scheduled amortization of the - 104 - principal portion of all other Indebtedness of the Borrower and its Restricted Subsidiaries during such period of at least: (1) 1.00 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending on June 30, 1997 through the fiscal quarter ending on March 31, 1998; (2) 1.01 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ended on June 30, 1998 through the fiscal quarter ending September 30, 1998; (3) 1.02 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending December 31, 1998 through the fiscal quarter ending September 30, 1999; (4) 1.03 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ending December 31, 1999 through the fiscal quarter ending June 30, 2000; (5) 1.04 to 1.00 for each fiscal quarter for the period commencing with the fiscal quarter ended September 30, 2000 through the fiscal quarter ending December 31, 2000; (6) 1.05 to 1.00 for the fiscal quarter ending March 31, 2001; and (7) 1.02 to 1.00 for each fiscal quarter thereafter until the Termination Date. In each case the Fixed Charge Coverage Ratio shall be determined as of the last day of each fiscal quarter for the four-quarter period ending on such day (provided, however, (a) for the fiscal quarter ending June 30, 1997, the Fixed Charge Coverage Ratio shall be calculated using Interest Expense, Fees and schedule amortization for the fiscal quarter ending June 30, 1997 multiplied by four (4) and Capital Expenditures and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on June 30, 1997, (b) for the fiscal quarter ending September 30, 1997, the Fixed Charge Coverage Ratio shall be calculated using Interest Expense, Fees and schedule amortization for the two fiscal quarters ending September 30, 1997 multiplied by two (2) and Capital Expenditures and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on September 30, 1997, and (c) for the fiscal quarter ending December 31, 1997, the Fixed Charge Coverage Ratio shall be calculated using Interest Expense, Fees and schedule amortization for the three fiscal quarters ending December 31, 1997 multiplied by four-thirds (4/3) and Capital Expenditures and EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period ending on December 31, 1997; provided, further, that the Fixed Charge Coverage Ratio shall be calculated with respect to Permitted Acquisitions, on a pro forma basis using unadjusted historical audited and reviewed unaudited financial statements obtained from the seller, broken down by fiscal quarter in the Borrower's reasonable judgement). (D) Maximum Leverage Ratio. The Borrower shall not permit the ratio ("Leverage Ratio") of (i) Indebtedness and Off Balance Sheet Liabilities incurred pursuant to Section 6.3(J) - 105 - (other than Indebtedness in respect of commercial Letters of Credit) of the Borrower and its Restricted Subsidiaries (calculated on a consolidated basis) for borrowed money to (ii) EBITDA to exceed the ratio set forth below at the end of the fiscal quarter ending on the corresponding date set forth below:
Period Ending Maximum Leverage Ratio ------------- ---------------------- June 30, 1997 6.5 to 1.00 September 30, 1997 6.5 to 1.00 December 31, 1997 6.5 to 1.00 March 31, 1998 6.25 to 1.00 June 30, 1998 5.95 to 1.00 September 30, 1998 5.90 to 1.00 December 31, 1998 5.85 to 1.00 March 31, 1999 5.75 to 1.00 June 30, 1999 5.75 to 1.00 September 30, 1999 5.50 to 1.00 December 31, 1999 5.50 to 1.00 March 31, 2000 5.25 to 1.00 June 30, 2000 4.95 to 1.00 September 30, 2000 4.90 to 1.00 December 31, 2000 4.75 to 1.00 March 31, 2001 4.75 to 1.00 June 30, 2001 4.75 to 1.00 September 30, 2001 and each quarter thereafter 4.50 to 1.00
The Leverage Ratio shall be calculated, in each case, determined as of the last day of each fiscal quarter based upon (A) for Indebtedness, Indebtedness as of the last day of each such fiscal quarter; and (B) for EBITDA, the actual amount for the four-quarter period ending on such day (provided, however, for the first four of such calculations, the Leverage Ratio shall be calculated using EBITDA of the Target (for the period prior to the Closing Date) and the Borrower (for the period commencing on the Closing Date and thereafter) for the four-quarter period then ending; provided, further, that EBITDA shall be calculated with respect to Permitted Acquisitions on a pro forma basis using unadjusted historical audited and reviewed unaudited financial statements obtained from the Seller, broken down by fiscal quarter in the Borrower's reasonable judgment). ARTICLE VII: DEFAULTS - 106 - 7.1 Defaults. Each of the following occurrences shall constitute a Default under this Agreement: (a) Failure to Make Payments When Due. The Borrower shall (i) fail to pay when due any of the Obligations consisting of principal with respect to the Loans or (ii) shall fail to pay within five (5) days of the date when due any of the other Obligations under this Agreement or the other Loan Documents. (b) Breach of Certain Covenants. The Borrower shall fail duly and punctually to perform or observe any agreement, covenant or obligation binding on the Borrower under: (i) Sections 6.1(C) (Lawsuits), 6.1(D) (Insurance), 6.1(E) (ERISA Notices), 6.1(F) (Labor Matters), 6.1(G) (Other Indebtedness), 6.1(H) (Other Reports), 6.1(I) (Environmental Notices), 6.1(K) (Other Information), 6.2(B) (Corporate Powers), 6.2(F) (Inspection of Property), 6.3(L) (ERISA), 6.3(M) (Issuance of Capital Stock), 6.3(N) (Corporate Documents), 6.3(R) (Hedging Obligations) or 6.3(S) (Deposit Accounts) and such failure shall continue unremedied for thirty (30) days; (ii) Section 6.1(A) (Financial Reporting), 6.1(B) (Notice of Default) or 6.1(J) (Borrowing Base Certificate) and such failure shall continue unremedied for five (5) Business Days; or (iii) Section 6.3(A) (Indebtedness), 6.3(C) (Liens), 6.3(D) (Investments), 6.3(E) (Contingent Obligations), 6.3(F) (Restricted Payments), 6.3(G) (Conduct of Business, Subsidiaries, Acquisitions), 6.3(H) (Affiliate Transactions), 6.3(I) (Fundamental Changes), 6.3(J) (Sale/Leaseback), 6.3(K) (Margin Regulations), 6.3(O) (Other Indebtedness), 6.3(P) (Fiscal Year), or 6.3(Q) (Subsidiary Covenants), or 6.4(B) (Interest Expense Coverage Ratio), 6.4(C) (Fixed Charge Coverage Ratio), or 6.4(D) (Maximum Leverage Ratio). (c) Breach of Representation or Warranty. Any representation or warranty made or deemed made by the Borrower to the Agent or any Lender herein or by the Borrower or any of its Restricted Subsidiaries in any of the other Loan Documents or in any statement or certificate at any time given by any such Person pursuant to any of the Loan Documents shall be false or misleading in any material respect on the date as of which made (or deemed made). (d) Other Defaults. The Borrower shall default in the performance of or compliance with any material term contained in this Agreement (other than as covered by paragraphs (a), (b) or (c) of this Section 7.1), or the Borrower or any of its Restricted Subsidiaries shall default in the performance of or compliance with any material term contained in any of the other Loan Documents, and such default shall continue for thirty (30) days after the occurrence thereof. (e) Default as to Other Indebtedness; Operating Leases. The Borrower or any of its Restricted Subsidiaries shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) with respect to any Indebtedness (other than the Obligations) the outstanding principal amount of which - 107 - Indebtedness is in excess of $5,000,000; or any breach, default or event of default shall occur, or any other condition shall exist under any instrument, agreement or indenture pertaining to any such Indebtedness, if the effect thereof is to cause an acceleration, mandatory redemption, a requirement that the Borrower or Restricted Subsidiary, as applicable, offer to purchase such Indebtedness or other required repurchase of such Indebtedness, or permit the holder(s) of such Indebtedness to accelerate the maturity of any such Indebtedness or require a redemption or other repurchase of such Indebtedness; or any such Indebtedness shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed or otherwise repurchased by the Borrower or any of its Restricted Subsidiaries (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof. (f) Involuntary Bankruptcy; Appointment of Receiver, Etc. (i) An involuntary case shall be commenced against Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries and the petition shall not be dismissed, stayed, bonded or discharged within sixty (60) days after commencement of the case; or a court having jurisdiction in the premises shall enter a decree or order for relief in respect of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries in an involuntary case, under any applicable bankruptcy, insolvency or other similar law now or hereinafter in effect; or any other similar relief shall be granted under any applicable federal, state, local or foreign law. (ii) A decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries or over all or a substantial part of the property of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries shall be entered; or an interim receiver, trustee or other custodian of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries or of all or a substantial part of the property of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries shall be appointed or a warrant of attachment, execution or similar process against any substantial part of the property of Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries shall be issued and any such event shall not be stayed, dismissed, bonded or discharged within sixty (60) days after entry, appointment or issuance. (g) Voluntary Bankruptcy; Appointment of Receiver, Etc. Holdings, the Borrower or any of the Borrower's Restricted Subsidiaries shall (i) commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, (iii) consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property, (iv) make any assignment for the benefit of creditors or (v) take any corporate action to authorize any of the foregoing. - 108 - (h) Judgments and Attachments. Any money judgment(s) (other than a money judgment covered by insurance as to which the insurance company has not disclaimed or reserved the right to disclaim coverage), writ or warrant of attachment, or similar process against the Borrower or any of its Restricted Subsidiaries or any of their respective assets involving in any single case or in the aggregate an amount in excess of $2,500,000 is (are) entered and shall remain undischarged, unvacated, unbonded or unstayed for a period of forty-five (45) days. (i) Dissolution. Any order, judgment or decree shall be entered against the Borrower decreeing its involuntary dissolution or split up and such order shall remain undischarged and unstayed for a period in excess of sixty (60) days; or the Borrower shall otherwise dissolve or cease to exist except as specifically permitted by this Agreement. (j) Loan Documents; Failure of Security. At any time, for any reason, (i) any Loan Document as a whole that materially affects the ability of the Agent, or any of the Lenders to enforce the Obligations or enforce their rights against the Collateral ceases to be in full force and effect (other than a partial or full release in accordance with the terms thereof or as a result of any act or omission of the Agent or any Lender) or the Borrower or any of the Borrower's Restricted Subsidiaries party thereto seeks to repudiate its obligations thereunder and the Liens intended to be created thereby are, or the Borrower or any such Restricted Subsidiary seeks to render such Liens, invalid and unperfected, or (ii) Liens on Collateral in favor of the Agent contemplated by the Loan Documents shall, at any time, for any reason, be invalidated or otherwise cease to be in full force and effect (other than as a result of any Customary Permitted Lien or a partial or full release in accordance with the terms thereof or as a result of any act or omission of the Agent or any Lender), or such Liens shall not have the priority contemplated by this Agreement or the Loan Documents (other than a partial or full release in accordance with the terms thereof or as a result of any act or omission of the Agent or any Lender). (k) Termination Event. Any Termination Event occurs which the Required Lenders believe could reasonably be expected to subject the Borrower to liability, individually or in the aggregate, in excess of $2,500,000. (l) Waiver of Minimum Funding Standard. If the plan administrator of any Plan applies under Section 412(d) of the Code for a waiver of the minimum funding standards of Section 412(a) of the Code and any Lender believes the substantial business hardship upon which the application for the waiver is based could reasonably be expected to subject either the Borrower or any Controlled Group member to liability, individually or in the aggregate, in excess of $2,500,000. (m) Change of Control. A Change of Control shall occur. (n) Hedging Agreements. Nonpayment by the Borrower of any obligation within five (5) Business Days of the date when due under any Hedging Agreements entered into with any Lender or the breach by the Borrower of any term, provision or condition contained in any such Hedging Agreements. - 109 - (o) Environmental Matters. The Borrower or any of its Restricted Subsidiaries shall be the subject of any proceeding or investigation pertaining to (i) the Release by the Borrower or any of its Restricted Subsidiaries of any Contaminant into the environment, (ii) the liability of the Borrower or any of its Restricted Subsidiaries arising from the Release by any other Person of any Contaminant into the environment, or (iii) any violation of any Environmental, Health or Safety Requirements of Law which by the Borrower or any of its Restricted Subsidiaries, which, in any case, has or could reasonably be expected to subject the Borrower or any Restricted Subsidiary to liability, individually or in the aggregate, in excess of $2,500,000. (p) Guarantor Revocation. Any guarantor of the Obligations shall terminate or revoke any of its obligations under the applicable guarantee agreement or breach any of the terms of such guarantee agreement. (q) Failure of Subordination. The subordination provisions of the documents and instruments evidencing the Senior Subordinated Notes, the Deferred Limited Interest Guaranty, the MCIT Turnover Agreement, the Holdings Turnover Agreement, the Jordan Management Agreement, any Permitted Subordinated Indebtedness, Holdings Subordinated Debt or any other Permitted Holdings Indebtedness shall, at any time, be invalidated or otherwise cease to be in full force and effect. (r) Holdings Indebtedness. Holdings shall incur any Indebtedness other than Permitted Holdings Indebtedness or Holdings shall fail to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) with respect to any Permitted Holdings Indebtedness the outstanding principal amount of which Indebtedness is in excess of $5,000,000 or any breach, default or event of default shall occur, or any other condition shall exist under any instrument, agreement or indenture pertaining to any such Permitted Holdings Indebtedness, if the effect thereof is to cause an acceleration, mandatory redemption, a requirement that Holdings offer to purchase such Indebtedness or other required repurchase of such Indebtedness, or permit the holder(s) of such Indebtedness to accelerate the maturity of any such Indebtedness or require a redemption or other repurchase of such Indebtedness; or any such Indebtedness shall be otherwise declared to be due and payable (by acceleration or otherwise) or required to be prepaid, redeemed or otherwise repurchased by Holdings (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof. (s) Holding Company Investments and Activities. Holdings shall (i) make any Investment other than (w) Investments in the Borrower, (x) Investments in the Management Notes, (y) other loans to employees and (z) Investments in Cash Equivalents; (ii) engage directly or indirectly (other than indirectly as a result of its ownership of the Equity Interests of the Borrower) in any operating business enterprise or other activities other than the ownership of the Equity Interests of the Borrower and the activities incidental thereto; or (iii) create, capitalize or acquire any Subsidiary other than the Borrower and its Subsidiaries. (t) Turnover by Holdings of Restricted Payments. In the event that any Restricted Payments are made by Borrower to Holdings in violation of Section 6.3(F), such Restricted Payment shall not be paid over by Holdings to the Agent for application to or as collateral for the - 110 - payment of the Obligations promptly but in any event within five (5) days of request therefor by the Agent or any Lender or any other material default or breach shall have occurred under the terms of the Holdings Turnover Agreement. (u) MCIT Turnover. Any material default or breach shall have occurred under the terms of the MCIT Turnover Agreement. (v) Pledge of Borrower's Equity Interests. Holdings shall pledge, hypothecate, encumber or otherwise create, incur, assume or suffer to exist any Lien (other than any Customary Permitted Lien) upon or with respect to any Equity Interests of the Borrower. (w) Holdings shall fail to pay all taxes, assessments and other governmental charges within thirty (30) days following the imposition thereof upon it or on any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon; provided, however, that no such taxes, assessments and governmental charges (and interest, penalties or fines relating thereto) need be paid if being contested in good faith by appropriate proceedings diligently instituted and conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with Agreement Accounting Principles shall have been made therefor. (x) Title Policy Endorsement. A Default shall be deemed "continuing" until cured or until waived in writing in accordance with Section 8.3. ARTICLE VIII: ACCELERATION, DEFAULTING LENDERS; WAIVERS, AMENDMENTS AND REMEDIES 8.1 Termination of Commitments; Acceleration. If any Default described in Section 7.1(f) or 7.1(g) occurs with respect to the Borrower, Holdings or any Restricted Subsidiary the obligations of the Lenders to make Loans hereunder and the obligation of the Agent to issue Letters of Credit hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs and shall be continuing, the Required Lenders may terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation of the Agent to issue Letters of Credit hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower expressly waives; provided that if such Default is cured or waived by the Required Lenders (or all of the Lenders if required pursuant to Section 8.3), the obligation of the Lenders to make Loans shall be reinstated. 8.2 Defaulting Lender. In the event that any Lender fails to fund its Pro Rata Share of any Advance requested or deemed requested by the Borrower which such Lender is obligated to fund under the terms of this Agreement (the funded portion of such Advance being hereinafter referred to as a "Non Pro Rata Loan"), until the earlier of such Lender's cure of such failure and the termination of the Revolving Loan Commitments, the proceeds of all amounts thereafter repaid to the Agent by the Borrower and otherwise required to be applied to such Lender's share - 111 - of all other Obligations pursuant to the terms of this Agreement shall be advanced to the Borrower by the Agent on behalf of such Lender to cure, in full or in part, such failure by such Lender, but shall nevertheless be deemed to have been paid to such Lender in satisfaction of such other Obligations. Notwithstanding anything in this Agreement to the contrary: (i) the foregoing provisions of this Section 8.2 shall apply only with respect to the proceeds of payments of Obligations and shall not affect the conversion or continuation of Loans pursuant to Section 2.10; (ii) any such Lender shall be deemed to have cured its failure to fund its Pro Rata Share of any Advance at such time as an amount equal to such Lender's original Pro Rata Share of the requested principal portion of such Advance is fully funded to the Borrower, whether made by such Lender itself or by operation of the terms of this Section 8.2, and whether or not the Non Pro Rata Loan with respect thereto has been repaid, converted or continued; (iii) amounts advanced to the Borrower to cure, in full or in part, any such Lender's failure to fund its Pro Rata Share of any Advance ("Cure Loans") shall bear interest at the rate applicable to Floating Rate Loans in effect from time to time, and for all other purposes of this Agreement shall be treated as if they were Floating Rate Loans; (iv) regardless of whether or not a Default has occurred or is continuing, and notwithstanding the instructions of the Borrower as to its desired application, all repayments of principal which, in accordance with the other terms of this Agreement, would be applied to the outstanding Floating Rate Loans shall be applied first, ratably to all Floating Rate Loans constituting Non Pro Rata Loans, second, ratably to Floating Rate Loans other than those constituting Non Pro Rata Loans or Cure Loans and, third, ratably to Floating Rate Loans constituting Cure Loans; (v) for so long as and until the earlier of any such Lender's cure of the failure to fund its Pro Rata Share of any Advance and the termination of the Revolving Loan Commitments, the term "Required Lenders" for purposes of this Agreement shall mean Lenders (excluding all Lenders whose failure to fund their respective Pro Rata Shares of such Advance have not been so cured) whose Pro Rata Shares represent equal to or greater than sixty-six and two thirds percent (66-2/3%) of the aggregate Pro Rata Shares of such Lenders; and (vi) for so long as and until any such Lender's failure to fund its Pro Rata Share of any Advance is cured in accordance with Section 8.2(ii), (A) such Lender shall not be entitled to (and the Borrower shall not be obligated to make any payment in respect of) any commitment fees with respect to its Revolving Loan Commitment and (B) such Lender shall not be entitled to (and the Borrower shall not be obligated to make any payment in respect of) any letter of credit fees. - 112 - 8.3 Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender affected thereby: (i) Postpone or extend the Revolving Loan Termination Date, either Term Loan Termination Date or any other date fixed for any payment of principal of, or interest on, the Loans, the Reimbursement Obligations or any fees or other amounts payable to such Lender (except with respect to (a) any modifications of the provisions relating to prepayments of Loans and other Obligations, provided that any modification of the last sentence of Section 2.5(A) or the provisions of Section 2.5(B)(i)(e) which reduces the percentage of any prepayment to the Term Loan A Lenders or Term Loan B Lenders shall require the consent of (1) those Lenders whose aggregate A Term Loans are greater than or equal to 662/3 of the aggregate A Term Loans, if the Term Loan A Lenders' prepayment percentage is reduced, or (2) those Lenders whose aggregate B Term Loans are greater than or equal to 662/3 of the aggregate B Term Loans, if the Term Loan B Lenders' prepayment percentage is reduced and (b) a waiver of the application of the default rate of interest pursuant to Section 2.11 hereof). (ii) Reduce the principal amount of any Loans or L/C Obligations or the rate of interest thereon or any fees or other amounts payable to such Lender. (iii) Reduce the percentage specified in the definition of Required Lenders or any other percentage of Lenders specified to be the applicable percentage in this Agreement to act on specified matters. (iv) Increase the amount of the Revolving Loan Commitment or any Term Loan Commitment of any Lender hereunder (except with respect to an increase in the amount, or other modification to the terms or components, of the Borrowing Base). (v) Permit the Borrower to assign its rights under this Agreement. (vi) Amend this Section 8.3. (vii) Release any guarantor (including without limitation any Restricted Subsidiary) of the Obligations or all or substantially all of the Collateral. No amendment of any provision of this Agreement relating to (a) the Agent shall be effective without the written consent of the Agent or (b) Swing Line Loans shall be effective without the written consent of the Swing Line Bank. The Agent may waive payment of the fee required under Section 12.3(B) without obtaining the consent of any of the Lenders. 8.4 Preservation of Rights. No delay or omission of the Lenders or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of - 113 - any Default or an acquiescence therein, and the making of a Loan or the issuance of a Letter of Credit notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Loan or issuance of such Letter of Credit shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.3, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent and the Lenders until the Obligations have been paid in full. ARTICLE IX: GENERAL PROVISIONS 9.1 Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall only be deemed to be made on the Closing Date and each Borrowing Date and shall survive delivery of the Notes and the making of the Loans herein contemplated. 9.2 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3 Performance of Obligations. The Borrower agrees that the Agent may, but shall have no obligation to (i) at any time, pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against any Collateral and (ii) after the occurrence and during the continuance of a Default make any other payment or perform any act required of the Borrower under any Loan Document or take any other action which the Agent in its discretion deems necessary or desirable to protect or preserve the Collateral, including, without limitation, any action to (y) effect any repairs or obtain any insurance called for by the terms of any of the Loan Documents and to pay all or any part of the premiums therefor and the costs thereof and (z) pay any rents payable by the Borrower which are more than 30 days past due, or as to which the landlord has given notice of termination, under any lease. The Agent shall use its best efforts to give the Borrower notice of any action taken under this Section 9.3 prior to the taking of such action or promptly thereafter provided the failure to give such notice shall not affect the Borrower's obligations in respect thereof. The Borrower agrees to pay the Agent, upon demand, the principal amount of all funds advanced by the Agent under this Section 9.3, together with interest thereon at the rate from time to time applicable to Floating Rate Loans from the date of such advance until the outstanding principal balance thereof is paid in full. If the Borrower fails to make payment in respect of any such advance under this Section 9.3 within one (1) Business Day after the date the Borrower receives written demand therefor from the Agent, the Agent shall promptly notify each Lender and each Lender agrees that it shall thereupon make available to the Agent, in Dollars in immediately available funds, the amount equal to such Lender's Pro Rata Share of such advance. If such funds are not made available to the Agent by such Lender within one (1) Business Day after the Agent's demand therefor, the Agent will be entitled to recover any such amount from such Lender together with interest - 114 - thereon at the Effective Federal Funds Rate for each day during the period commencing on the date of such demand and ending on the date such amount is received. The failure of any Lender to make available to the Agent its Pro Rata Share of any such unreimbursed advance under this Section 9.3 shall neither relieve any other Lender of its obligation hereunder to make available to the Agent such other Lender's Pro Rata Share of such advance on the date such payment is to be made nor increase the obligation of any other Lender to make such payment to the Agent. All outstanding principal of, and interest on, advances made under this Section 9.3 shall constitute Obligations secured by the Collateral until paid in full by the Borrower. 9.4 Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.5 Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent and the Lenders relating to the subject matter thereof. 9.6 Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other Lender (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns. 9.7 Expenses; Indemnification. (A) Expenses. The Borrower shall reimburse the Agent for any reasonable and documented costs, internal charges and out-of-pocket expenses (including attorneys' and paralegals' fees and time charges of attorneys and paralegals for the Agent, which attorneys and paralegals may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, negotiation, execution, delivery, syndication, amendment and modification of the Loan Documents. The Borrower also agrees to reimburse the Agent and the Lenders for any reasonable and documented costs, internal charges and out-of-pocket expenses (including attorneys' and paralegals' fees and time charges of attorneys and paralegals for the Agent and the Lenders, which attorneys and paralegals may be employees of the Agent or the Lenders) paid or incurred by the Agent or any Lender in connection with the collection of the Obligations and enforcement (whether by legal proceedings, negotiation, or otherwise) of the Loan Documents. In addition to expenses set forth above, the Borrower agrees to reimburse the Agent, promptly after the Agent's request therefor, for each audit, collateral analysis or other business analysis performed by the Agent or any of its agents for the benefit of the Lenders in connection with this Agreement or the other Loan Documents in an amount equal to the Agent's then customary charges for each person employed to perform such audit or analysis, plus all costs and expenses (including without limitation, travel expenses) incurred by the Agent in the performance of such audit or analysis (provided, however, that the Borrower's obligation to reimburse the Agent for such expenses incurred at a time when no Default has occurred and is continuing shall be limited - 115 - in each fiscal year to the audit expense annual cap amount separately agreed to in the letter dated February 27, 1997 from the Agent to the Borrower). Agent shall provide the Borrower with a detailed statement of all reimbursements requested under this Section 9.7(A). (B) Indemnity. The Borrower further agrees to defend, protect, indemnify, and hold harmless the Agent and each and all of the Lenders and each of their respective Affiliates, and each of such Agent's, Lender's, or Affiliate's respective officers, directors, employees, attorneys and agents (including, without limitation, those retained in connection with the satisfaction or attempted satisfaction of any of the conditions set forth in Article IV) (collectively, the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto), imposed on, incurred by, or asserted against such Indemnitees in any manner relating to or arising out of: (i) this Agreement, the other Loan Documents or any of the Transaction Documents, or any act, event or transaction related or attendant thereto or to the Stock Acquisition or Merger, the making of the Loans, and the issuance of and participation in Letters of Credit hereunder, the management of such Loans or Letters of Credit, the use or intended use of the proceeds of the Loans or Letters of Credit hereunder, or any of the other transactions contemplated by the Transaction Documents; or (ii) any liabilities, obligations, responsibilities, losses, damages, personal injury, death, punitive damages, economic damages, consequential damages, treble damages, intentional, willful or wanton injury, damage or threat to the environment, natural resources or public health or welfare, costs and expenses (including, without limitation, attorney, expert and consulting fees and costs of investigation, feasibility or remedial action studies), fines, penalties and monetary sanctions, interest, direct or indirect, known or unknown, absolute or contingent, past, present or future relating to violation of any Environmental, Health or Safety Requirements of Law arising from or in connection with the past, present or future operations of Holdings, the Borrower, its Subsidiaries or any of their respective predecessors in interest, or, the past, present or future environmental, health or safety condition of any respective property of the Borrower or its Subsidiaries, the presence of asbestos-containing materials at any respective property of the Borrower or its Subsidiaries or the Release or threatened Release of any Contaminant into the environment (collectively, the "Indemnified Matters"); provided, however, the Borrower shall have no obligation to an Indemnitee hereunder with respect to Indemnified Matters caused solely by or resulting solely from (x) a dispute among the Lenders or a dispute between any Lender and the Agent, (y) a dispute between the Agent or any Lender and any participant or among them or (z) the willful misconduct or Gross Negligence of such Indemnitee or breach of contract by such Indemnitee with respect to the Loan Documents, in each case, as determined by the final non-appealed judgment of a court of competent jurisdiction. If the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower - 116 - shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnitees. (C) Waiver of Certain Claims; Settlement of Claims. The Borrower further agrees to assert no claim against any of the Indemnitees on any theory of liability for consequential, special, indirect, exemplary or punitive damages. No settlement shall be entered into by Holdings, the Borrower or any if its Subsidiaries with respect to any claim, litigation, arbitration or other proceeding relating to or arising out of the transaction evidenced by this Agreement, the other Loan Documents or in connection with the Stock Purchase Acquisition (whether or not the Agent or any Lender or any Indemnitee is a party thereto) unless such settlement releases all Indemnitees from any and all liability with respect thereto. (D) Survival of Agreements. The obligations and agreements of the Borrower under this Section 9.7 shall survive the termination of this Agreement. 9.8 Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles. 9.9 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10 Nonliability of Lenders. The relationship between the Borrower and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. 9.11 GOVERNING LAW. THE AGENT ACCEPTS THIS AGREEMENT, ON BEHALF OF ITSELF AND THE LENDERS, AT CHICAGO, ILLINOIS BY ACKNOWLEDGING AND AGREEING TO IT THERE. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. WITHOUT LIMITING ANY OF THE FOREGOING, ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT, ANY LENDER, OR ANY OTHER HOLDER OF SECURED OBLIGATIONS ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. - 117 - 9.12 CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF BOND. (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH OF THE PARTIES HERETO AGREES THAT ALL DISPUTES AMONG THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO, ILLINOIS. (B) OTHER JURISDICTIONS. THE BORROWER AGREES THAT THE AGENT, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS SHALL HAVE THE RIGHT TO PROCEED AGAINST THE BORROWER OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO (1) OBTAIN PERSONAL JURISDICTION OVER THE BORROWER OR (2) REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY SUCH PERSON TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PERSON. (C) SERVICE OF PROCESS; WAIVERS. THE BORROWER WAIVES PERSONAL SERVICE OF ANY PROCESS UPON IT AND, IRREVOCABLY APPOINTS THE CORPORATION TRUST COMPANY, THE BORROWER'S REGISTERED AGENT, WHOSE ADDRESS IS CORPORATION TRUST CENTER, 1209 ORANGE STREET, WILMINGTON, DELAWARE 19801, AS THE BORROWER'S AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE AND EACH OF THE OTHER PARTIES HERETO WAIVES IN ALL DISPUTES BROUGHT PURSUANT TO SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (D) WAIVER OF BOND. THE BORROWER WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO REALIZE ON THE COLLATERAL (INCLUDING, WITHOUT LIMITATION, THE REAL PROPERTY COLLATERAL) OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE ANY JUDGMENT OR - 118 - OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. 9.13 JURY TRIAL WAIVER; ADVICE OF COUNSEL (A) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO 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 PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR 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. (B) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 9.13, WITH ITS COUNSEL. 9.14 Subordination of Intercompany Indebtedness. The Borrower agrees that any and all claims of the Borrower against any Restricted Subsidiary, any endorser, obligor or any other guarantor of all or any part of the Secured Obligations, or against any of its properties shall be subordinate and subject in right of payment to the prior payment, in full and in cash, of all Secured Obligations. Notwithstanding any right of the Borrower to ask, demand, sue for, take or receive any payment from any Subsidiary Guarantor all rights, liens and security interests of the Borrower, whether now or hereafter arising and howsoever existing, in any assets of any Restricted Subsidiary (whether constituting part of Collateral given to any Holder of Secured Obligations or the Agent to secure payment of all or any part of the Secured Obligations or otherwise) shall be and are subordinated to the rights of the Holders of Secured Obligations and the Agent in those assets. The Borrower shall have no right to possession of any such asset or to foreclose upon any such asset, whether by judicial action or otherwise, unless and until all of the Secured Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied and all financing arrangements among the Borrower and the Holders of Secured Obligations have been terminated. If all or any part of the assets of any Restricted Subsidiary, or the proceeds thereof, are subject to any distribution, division or application to the creditors of any Restricted Subsidiary, whether partial or complete, voluntary or involuntary, and whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors or any other action or proceeding, or if the business of any Restricted Subsidiary is dissolved or if substantially all of the assets of any Restricted Subsidiary are sold, then, and in any such event, any payment or distribution of any kind or character, either in cash, securities or other property, which shall be payable or deliverable upon or with respect to any indebtedness of - 119 - any Subsidiary Guarantor to the Borrower ("Intercompany Indebtedness") shall be paid or delivered directly to the Agent for application on any of the Secured Obligations, due or to become due, until such Secured Obligations (other than contingent indemnity obligations) shall have first been fully paid and satisfied. The Borrower irrevocably authorizes and empowers the Agent to demand, sue for, collect and receive every such payment or distribution and give acquittance therefor and to make and present for and on behalf of the Borrower such proofs of claim and take such other action, in the Agent's own name or in the name of the Borrower or otherwise, as the Agent may deem necessary or advisable for the enforcement of this Section 9.14. The Agent may vote such proofs of claim in any such proceeding, receive and collect any and all dividends or other payments or disbursements made thereon in whatever form the same may be paid or issued and apply the same on account of any of the Secured Obligations. Should any payment, distribution, security or instrument or proceeds thereof be received by the Borrower upon or with respect to the Intercompany Indebtedness prior to the satisfaction of all of the Secured Obligations (other than contingent indemnity obligations) and the termination of all financing arrangements among the Borrowers and the Holders of Secured Obligations, the Borrower shall receive and hold the same in trust, as trustee, for the benefit of the Holders of Secured Obligations and shall forthwith deliver the same to the Agent, for the benefit of the Holders of Secured Obligations, in precisely the form received (except for the endorsement or assignment of the Borrower where necessary), for application to any of the Secured Obligations, due or not due, and, until so delivered, the same shall be held in trust by the Borrower as the property of the Holders of Secured Obligations. If the Borrower fails to make any such endorsement or assignment to the Agent, the Agent or any of its officers or employees are irrevocably authorized to make the same. The Borrower agrees that until the Secured Obligations (other than the contingent indemnity obligations) have been paid in full (in cash) and satisfied and all financing arrangements among the Borrower and the Holders of Secured Obligations have been terminated, the Borrower will not assign or transfer to any Person (other than the Agent) any claim the Borrower has or may have against any Restricted Subsidiary. 9.15 No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. ARTICLE X: THE AGENT 10.1 Appointment; Nature of Relationship. The First National Bank of Chicago is appointed by the Lenders as the Agent hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Holder of Secured Obligations by reason of this Agreement and that the Agent is merely - 120 - acting as the representative of the Holders of Secured Obligations with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the contractual representative of the Holders of Secured Obligations, the Agent (i) does not assume any fiduciary duties to any of the Holders of Secured Obligations, (ii) is a "representative" of the Holders of Secured Obligations within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders, for itself and on behalf of its affiliates as Holders of Secured Obligations, agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Holder of Secured Obligations waives. 10.2 Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties or fiduciary duties to the Lenders, or any obligation to the Lenders to take any action hereunder or under any of the other Loan Documents except any action specifically provided by the Loan Documents required to be taken by the Agent. 10.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is found in a final judgment by a court of competent jurisdiction to have arisen solely from (i) the Gross Negligence or willful misconduct of such Person or (ii) breach of contract by such Person with respect to the Loan Documents. 10.4 No Responsibility for Loans, Creditworthiness, Collateral, Recitals, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (i) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document; (iii) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Agent; (iv) the existence or possible existence of any Default or (v) the validity, effectiveness or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith. The Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or in any of the other Loan Documents, for the perfection or priority of any of the Liens on any of the Collateral, or for the execution, effectiveness, genuineness, validity, legality, enforceability, collectibility, or sufficiency of this Agreement or any of the other Loan Documents or the transactions contemplated thereby, or for the financial condition of any guarantor of any or all of the Obligations, Holdings, the Borrower or any of their respective Subsidiaries. 10.5 Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders and on - 121 - all holders of Notes. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6 Employment of Agents and Counsel. The Agent may execute any of its duties as the Agent hereunder and under any other Loan Document by or through employees, agents, and attorney-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent's duties hereunder and under any other Loan Document. 10.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.8 The Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Pro Rata Shares (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby, or the enforcement of any of the terms thereof or of any such other documents, provided that no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have arisen solely from the Gross Negligence or willful misconduct of the Agent. 10.9 Rights as a Lender. With respect to its Revolving Loan Commitment, its Term Loan Commitment, Loans made by it and the Notes issued to it, the Agent shall have the same rights and powers hereunder and under any other Loan Document as any Lender and may exercise the same as through it were not the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which such Person is not prohibited hereby from engaging with any other Person. 10.10 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements - 122 - prepared by Holdings and the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.11 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, and the Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty days after the retiring Agent's giving notice of resignation, then the retiring Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. Notwithstanding anything herein to the contrary, so long as no Default has occurred and is continuing, each such successor Agent shall be subject to approval by the Borrower, which approval shall not be unreasonably withheld. Such successor Agent shall be a commercial bank having capital and retained earnings of at least $500,000,000. Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article X shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. 10.12 Collateral Documents. (a) Each Lender authorizes the Agent to enter into each of the Collateral Documents to which it is a party and to take all action contemplated by such documents. Each Lender agrees that no Holder of Secured Obligations other than the Agent shall have the right individually to seek to realize upon the security granted by any Collateral Document, it being understood and agreed that such rights and remedies may be exercised solely by the Agent for the benefit of the Holders of Secured Obligations upon the terms of the Collateral Documents. (b) In the event that any Collateral is hereafter pledged by any Person as collateral security for the Obligations, the Agent is hereby authorized to execute and deliver on behalf of the Holders of Secured Obligations any Loan Documents necessary or appropriate to grant and perfect a Lien on such Collateral in favor of the Agent on behalf of the Holders of Secured Obligations. (c) The Lenders hereby authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations (other than contingent indemnity obligations) at any time arising under or in respect of this Agreement or the Loan Documents or the transactions contemplated hereby or thereby; (ii) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (iii) if approved, authorized or - 123 - ratified in writing by the Required Lenders, unless such release is required to be approved by all of the Lenders hereunder. Upon request by the Agent at any time, the Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this Section 10.12(c). (d) Upon any sale or transfer of assets constituting Collateral which is permitted pursuant to the terms of any Loan Document, or consented to in writing by the Required Lenders or all of the Lenders, as applicable, and upon at least five Business Days' prior written request by the Borrower, the Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Agent for the benefit of the Holders of Secured Obligations herein or pursuant hereto upon the Collateral that was sold or transferred; provided, however, that (i) the Agent shall not be required to execute any such document on terms which, in the Agent's opinion, would expose the Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Secured Obligations or any Liens upon (or obligations of the Borrower or any Subsidiary in respect of) all interests retained by the Borrower or any Subsidiary, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the Collateral. ARTICLE XI: SETOFF; RATABLE PAYMENTS 11.1 Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if any Designated Default occurs and is continuing, any indebtedness from any Lender to the Borrower (including all account balances, whether provisional or final and whether or not collected or available) may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.2 Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Sections 3.1, 3.2 or 3.4) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Loans held by the other Lenders so that after such purchase each Lender will hold its ratable proportion of Loans. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligation or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to the obligations owing to them. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. 11.3 Application of Payments. Subject to the provisions of Section 2.5 and Section 8.2, the Agent shall, unless otherwise specified at the direction of the Required Lenders which direction shall be consistent with the last sentence of this Section 11.3, apply all payments and prepayments in respect of any Obligations and all proceeds of Collateral in the following order: - 124 - (A) first, to pay interest on and then principal of any portion of the Loans which the Agent may have advanced on behalf of any Lender for which the Agent has not then been reimbursed by such Lender or the Borrower; (B) second, to pay interest on and then principal of any advance made under Section 9.3 for which the Agent has not then been paid by the Borrower or reimbursed by the Lenders; (C) third, to pay Obligations in respect of any fees, expense reimbursements or indemnities then due to the Agent; (D) fourth, to pay Obligations in respect of any fees, expenses, reimbursements or indemnities then due to the Lenders and the issuer(s) of Letters of Credit; (E) fifth, to pay interest due in respect of Swing Line Loans; (F) sixth, to pay interest due in respect of Loans (other than Swing Line Loans) and L/C Obligations; (G) seventh, to the ratable payment or prepayment of principal outstanding on Swing Line Loans; (H) eighth, to the ratable payment or prepayment of principal outstanding on Loans (other than Swing Line Loans), Reimbursement Obligations and Hedging Obligations under Hedging Agreements with any Lender (or affiliate thereof) in such order as the Agent may determine in its sole discretion; (I) ninth, to provide required cash collateral if any pursuant to Section 2.24; and (J) tenth, to the ratable payment of all other Obligations. Unless otherwise designated (which designation shall only be applicable prior to the occurrence of a Default) by the Borrower, all principal payments in respect of Loans (other than Swing Line Loans) shall be applied first, to the outstanding Revolving Loans and, second, to the outstanding Term Loans, in each case, first, to repay outstanding Floating Rate Loans, and then to repay outstanding Eurodollar Rate Loans with those Eurodollar Rate Loans which have earlier expiring Interest Periods being repaid prior to those which have later expiring Interest Periods. The order of priority set forth in this Section 11.3 and the related provisions of this Agreement are set forth solely to determine the rights and priorities of the Agent, the Lenders, the issuer(s) of Letters of Credit and other Holders of Secured Obligations as among themselves. The order of priority set forth in clauses (D) through (H) of this Section 11.3 may at any time and from time to time be changed by the Required Lenders without necessity of notice to or consent of or approval by the Borrower, or any other Person; provided, that the order of priority of payments in respect of Swing Line Loans may be changed only with the prior written consent of the Swing Line Bank. The order of priority set forth in clauses (A) through (C) of this Section 11.3 may be changed only with the prior written consent of the Agent. - 125 - 11.4 Relations Among Lenders. (a) Except with respect to the exercise of set-off rights of any Lender in accordance with Section 11.1, the proceeds of which are applied in accordance with this Agreement each Lender agrees that it will not take any action, nor institute any actions or proceedings, against the Borrower or any other obligor hereunder or with respect to any Collateral or Loan Document, without the prior written consent of the Required Lenders or, as may be provided in this Agreement or the other Loan Documents, at the direction of the Agent. (b) The Lenders are not partners or co-venturers, and no Lender shall be liable for the acts or omissions of, or (except as otherwise set forth herein in case of the Agent) authorized to act for, any other Lender. Notwithstanding the foregoing, and subject to Section 11.2, any Lender shall have the right to enforce on an unsecured basis the payment of the principal of and interest on any Loan made by it after the date such principal or interest has become due and payable pursuant to the terms of this Agreement. ARTICLE XII: BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1 Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3 hereof. Notwithstanding clause (ii) of this Section 12.1, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank; provided, however, that no such assignment shall release the transferor Lender from its obligations hereunder. The Agent may treat the payee of any Note as the owner thereof for all purposes hereof unless and until such payee complies with Section 12.3 hereof in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of a Note agrees by acceptance thereof to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 12.2 Participations. (A) Permitted Participants; Effect. Subject to the terms set forth in this Section 12.2, any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Revolving Loan Commitment of such Lender, any L/C Interest of such Lender or any other interest of such Lender under the Loan Documents on a pro-rata or non pro-rata basis; provided that without the prior consent of the Agent the amount of such participation shall not be for less than $5,000,000. Notice of such participation to the Borrower and the Agent shall be required prior to any participation becoming - 126 - effective with respect to a Participant which is not a Lender or an Affiliate thereof. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents except that, for purposes of Section 2.15(E) and Article III hereof, the Participants shall be entitled to the same rights and duties as if they were Lenders. Any provision hereof to the contrary notwithstanding, no Participant shall be entitled to receive any greater payment under Section 2.15(E) or Article III than the Lender from which such Participant purchased its participation would have been entitled to receive had no such participation taken place. (B) Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Revolving Loan Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable pursuant to the terms of this Agreement with respect to any such Loan or Revolving Loan Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Revolving Loan Commitment, or releases all or substantially all of the Collateral, if any, securing any such Loan. (C) Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 hereof in respect to its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 hereof with respect to the amount of participating interests sold to each Participant except to the extent such Participant exercises its right of set off. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1 hereof, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. 12.3 Assignments. (A) Permitted Assignments. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("Purchasers") all or a portion of its rights and obligations under this Agreement (including, without limitation, its Revolving Loan Commitment, all or any portion of the Loans owing to it, all or any portion of its participation interests in existing Letters of Credit, and its obligation to participate in additional Letters of Credit hereunder) in accordance with the provisions of this Section 12.3 on a pro rata or non-pro rata basis; provided, however that no such assignment to a Purchaser which is not a Lender or Affiliate thereof shall be permitted without the Borrower's prior written consent (which consent shall not be unreasonably withheld provided it shall be - 127 - deemed reasonable grounds for denying such consent, without limitation, if the Borrower determines that such assignment may reasonably be expected to result in the payment by the Borrower of amounts under Section 2.15(E) or Article III greater than would be payable if such assignment were not consummated and the proposed assignee is not willing to waive such amounts). Each assignment shall be of a constant, and not a varying, ratable percentage of all of the assigning Lender's rights and obligations under this Agreement. Such assignment shall be substantially in the form of Exhibit G hereto and shall not be permitted hereunder unless such assignment is either for all of such Lender's rights and obligations under the Loan Documents or, without the prior written consent of the Agent, involves Loans and Commitments in an aggregate amount of at least $5,000,000. Notice to the Agent and consent of the Agent (which consent shall not be unreasonably withheld) shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof. (B) Effect; Effective Date. Upon (i) delivery to the Agent of a notice of assignment, substantially in the form attached as Appendix I to Exhibit G hereto (a "Notice of Assignment"), together with any consent required by Section 12.3(A) hereof, and (ii) payment of a $3,500 fee by the assignee or assignor (as agreed) to the Agent for processing such assignment, such assignment shall become effective on the effective date specified in such Notice of Assignment. The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment, Loans and L/C Obligations under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser, if not already a Lender, shall for all purposes be a Lender party to this Agreement and any other Loan Documents executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Revolving Loan Commitment, Loans and Letter of Credit participations assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3(B), the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Revolving Loan Commitment and their Term Loans, as adjusted pursuant to such assignment. (C) The Register. The Agent shall maintain at its address referred to in Section 13.1 a copy of each assignment delivered to and accepted by it pursuant to this Section 12.3 and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Revolving Loan Commitment of and principal amount of the Loans owing to, each Lender from time to time and whether such Lender is an original Lender or the assignee of another Lender pursuant to an assignment under this Section 12.3. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower and each of its Subsidiaries, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. - 128 - 12.4 Confidentiality. Subject to Section 12.5, the Agent and the Lenders shall hold all nonpublic information obtained pursuant to the requirements of this Agreement in accordance with such Person's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being agreed that such confidential information and other information are intended to be used solely in connection with evaluation of the performance of the Borrower and its Restricted Subsidiaries by the Lenders under the Loan Documents and the enforcement of rights and obligations under the Loan Documents, and are not to be used for any other purpose, including in connection with extending of credit to, analyzing or advising any competitor of the Borrower; provided, however, any Lender may make disclosure as required or requested by any Governmental Authority or representative thereof or pursuant to legal process. In no event shall the Agent or any Lender be obligated or required to return any materials furnished by the Borrower. 12.5 Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the Holdings, the Borrower and its Subsidiaries and the Collateral; provided that prior to any such disclosure, such prospective Transferee shall agree to preserve in accordance with Section 12.4 the confidentiality of any confidential information described therein; and provided, further, each prospective Transferee shall be required to agree that if it does not become a participant or assignee it shall return all materials furnished to it in connection with this Agreement.. ARTICLE XIII: NOTICES 13.1 Giving Notice. Except as otherwise permitted by Section 2.14 with respect to borrowing notices, all notices and other communications provided to any party hereto under this Agreement or any other Loan Documents shall be in writing or by facsimile and addressed or delivered to such party at its address set forth below its signature hereto or at such other address as may be designated by such party in a notice to the other parties; provided, however, that borrowing notices shall be delivered to the Agent at One First National Plaza, Suite 0173, Chicago, Illinois 60670-0088, Attention: Nathan L. Bloch, Telephone No.: 312/732-2243, Facsimile No.: 312/732-1117. Any notice, if mailed and properly addressed with postage prepaid, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. 13.2 Change of Address. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. - 129 - ARTICLE XIV: COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders and each party has notified the Agent by telex or telephone, that it has taken such action. [Remainder of This Page Intentionally Blank] - 130 - IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written. GFSI, INC., as the Borrower By: /s/ A. Richard Caputo, Jr. -------------------------------------------- Name: A. Richard Caputo, Jr. Title: Vice President Address: 9700 Commerce Parkway Lenexa, KS 66219 Attention: Robert Shaw Telephone No.: 913/888-0445 Facsimile No.: 913/752-3346 with a copy to: The Jordan Company 9 West 57th Street, 40th Floor New York, New York 10019 Attention: A. Richard Caputo, Jr. Telephone: 212/572-0800 Facsimile No.: 212/755-5263 THE FIRST NATIONAL BANK OF CHICAGO, as Agent, as the Swing Line Bank and as a Lender By: /s/ Nathan L. Bloch -------------------------------------------- Name: Nathan L. Bloch Title: First Vice President Address: One First National Plaza Suite 0088 Chicago, Illinois 60670-0173 Attention: Nathan L. Bloch Telephone No.: 312/732-2243 Facsimile No.: 312/732-1117 Signature Page to GFSI Credit Agreement dated as of February 27, 1997 EX-10.2 17 SECURITY AGREEMENT ================================================================================ SECURITY AGREEMENT Dated as of February 27, 1997 between GFSI, INC. AND THE FIRST NATIONAL BANK OF CHICAGO, as Agent ================================================================================ TABLE OF CONTENTS ----------------- SECTION 1. Defined Terms...................................................................................... 1 SECTION 2. Grant of Security.................................................................................. 2 SECTION 3. Authorization...................................................................................... 4 SECTION 4. Grantor Remains Liable............................................................................. 4 SECTION 5. Representations and Warranties..................................................................... 4 SECTION 6. Perfection and Maintenance of Security Interest and Lien........................................... 5 SECTION 7. Financing Statements............................................................................... 6 SECTION 8. Filing Costs....................................................................................... 6 SECTION 9. Schedule of Collateral............................................................................. 6 SECTION 10. Equipment and Inventory............................................................................ 6 SECTION 11. Accounts........................................................................................... 7 SECTION 12. Leased Real Property............................................................................... 8 SECTION 13. General Covenants.................................................................................. 8 SECTION 14. Agent Appointed Attorney-in-Fact................................................................... 8 SECTION 15. Agent May Perform................................................................................... 9 SECTION 16. Agent's Duties...................................................................................... 9 SECTION 17. Remedies............................................................................................ 9 SECTION 18. Exercise of Remedies............................................................................... 10 SECTION 19. License............................................................................................ 10 SECTION 20. Injunctive Relief.................................................................................. 11 SECTION 21. Interpretation and Inconsistencies; Merger; No Strict Construction................................. 11 SECTION 22. Expenses........................................................................................... 11
SECTION 23. Amendments, Etc.................................................................................... 11 SECTION 24. Notices............................................................................................ 11 SECTION 25. Continuing Security Interest; Termination.......................................................... 11 SECTION 26. Severability....................................................................................... 12 SECTION 27. GOVERNING LAW...................................................................................... 12 SECTION 28. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL............................................ 12 (A) EXCLUSIVE JURISDICTION................................................................... 12 (B) OTHER JURISDICTIONS...................................................................... 12 (C) SERVICE OF PROCESS....................................................................... 13 (D) WAIVER OF JURY TRIAL..................................................................... 13 (E) WAIVER OF BOND........................................................................... 13 (F) ADVICE OF COUNSEL........................................................................ 13
EXHIBITS AND SCHEDULES ---------------------- Exhibits -------- EXHIBIT A-1 -- Form of Landlord Agreement EXHIBIT A-2 -- Form of Mortgagee Agreement EXHIBIT B-1 -- Form of Landlord Lien Waiver Agreement EXHIBIT B-2 -- Form of Bailee Letter EXHIBIT C -- Form of Restricted Account Agreement Schedules --------- Schedule 1 -- Pledged Debt Schedule 2 -- Locations of Collateral Schedule 2-A -- Third Party Locations Schedule 2-B -- Financing Statement Filing Locations Schedule 3 -- Trade Names Schedule 4 -- Deposit Accounts SECURITY AGREEMENT This SECURITY AGREEMENT ("Agreement"), dated as of February 27, 1997 is made by GFSI, INC., a Delaware corporation ("Grantor"), in favor of THE FIRST NATIONAL BANK OF CHICAGO (the "Agent"), for its benefit and for the benefit of the "Holders of Secured Obligations" (as defined below) who are, or may hereafter become, parties to the Credit Agreement referred to below. All references in this agreement to Grantor shall include its successors and assigns, including a debtor-in-possession on behalf of Grantor. PRELIMINARY STATEMENT Grantor has entered into a certain Credit Agreement of even date herewith among Grantor, the institutions from time to time party thereto as lenders (the "Lenders") and the Agent, as the contractual representative for the Lenders (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), providing for the making of loans, advances and other financial accommodations (including, without limitation issuing letters of credit) (all such loans, advances and other financial accommodations being hereinafter referred to collectively as the "Loans") to or for the benefit of Grantor. It is a condition precedent to the making of the Loans under the Credit Agreement that Grantor shall have granted the security interest contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined, and the following terms shall have the following meanings (such meanings being equally applicable to both the singular and the plural forms of the terms defined): "Agreement" shall mean this Security Agreement, as the same may from time to time be amended, restated, modified or supplemented, and shall refer to this Agreement as the same may be in effect at the time such reference becomes operative. "Collateral" shall mean all property and rights in property now owned or hereafter at any time acquired by Grantor in or upon which a Lien is granted in favor of the Agent by Grantor or a Subsidiary of Grantor under this Agreement, including, without limitation, the property described in Section 2. Notwithstanding any provision to the contrary contained in this Agreement or any other Loan Document, license agreements under which Grantor is licensee shall be excluded from the Collateral. "Embroidery Affiliate Notes" shall mean, collectively, that certain promissory note in the original principal amount of $700,000 dated August 12, 1996 between Impact Design, Inc. and Winning Ways, Inc. and that certain promissory note in the original principal amount of $150,000 dated August 12, 1996 between Kansas Custom Embroidery and Winning Ways, Inc. "Restricted Account" shall mean (i) any deposit account that is maintained with the Agent, or (ii) any deposit account listed on Schedule 4 with respect to which the Grantor has entered into a Restricted Account Agreement in the form of Exhibit C hereto with the financial institution at which such deposit account is maintained. "UCC" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of Illinois; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Agent's and the Holders of Secured Obligations' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. SECTION 2. Grant of Security. To secure the prompt and complete payment, observance and performance of the Secured Obligations, Grantor hereby assigns and pledges to Agent, for the benefit of itself and the Holders of Secured Obligations, and hereby grants to Agent, for the benefit of itself and the Holders of Secured Obligations, a security interest in all of Grantor's right, title and interest in and to the following, whether now owned or existing or hereafter arising or acquired and wheresoever located: ACCOUNTS: All "accounts" as such term is defined in Section 9-106 of the UCC, whether now owned or hereafter acquired or arising; Grantor intends that the term "accounts", as used herein, be construed in its broadest sense, and such term shall include, without limitation, all present and future accounts, accounts receivable and other rights of Grantor to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether now existing or here after arising and wherever arising, and whether or not they have been earned by performance (collectively, "Accounts"); INVENTORY: All "inventory" as defined in Section 9-109(4) of the UCC, whether now owned or hereafter acquired or arising; Grantor intends that the term "inventory", as used herein, be construed in its broadest sense, and such term shall include, without limitation, all goods now owned or hereafter acquired by Grantor (wherever located, whether in the possession of Grantor or of a bailee or other person for sale, storage, transit, processing, use or otherwise and whether consisting of whole goods, spare parts, components, supplies, materials, or consigned, returned or repossessed goods) which are held for sale or lease, which are to be furnished (or have been furnished) under any contract of service or which are raw materials, work in process or materials used or consumed in Grantor's business (collectively, "Inventory"); EQUIPMENT: All "equipment" as such term is defined in Section 9-109(2) of the UCC, whether now owned or hereafter acquired or arising; Grantor intends that the term "equipment", as used herein, be construed in its broadest sense, and such term shall include, without limitation, all machinery, all manufacturing, distribution, selling, data processing and office equipment, all furniture, furnishings, appliances, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels, trucks, buses, motor vehicles and all other goods of every type and description (other than Inventory), in each instance whether now owned or hereafter acquired by Grantor and wherever located (collectively, "Equipment"); GENERAL INTANGIBLES: All "general intangibles" as defined in Section 9-106 of the UCC, whether now owned or hereafter acquired or arising; Grantor intends that the term "general intangibles", as used herein, be construed in its broadest sense, and such term shall include, without limitation, all rights, interests, choses in action, causes of actions, claims and all other intangible property of Grantor of every -2- kind and nature (other than Accounts), in each instance whether now owned or hereafter acquired by Grantor and however and whenever arising, including, without limitation, all corporate and other business records; all loans, royalties, and other obligations receivable; customer lists, credit files, correspondence, and advertising materials; firm sale orders, other contracts and contract rights; all interests in partnerships and joint ventures; all tax refunds and tax refund claims; all right, title and interest under leases, subleases, licenses and concessions and other agreements relating to real or personal property; all payments due or made to Grantor in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property by any person or governmental authority; all deposit accounts (general or special) with any bank or other financial institution, including, without limitation, any deposits or other sums at any time credited by or due to Grantor from any of the Holders of Secured Obligations or any of their respective Affiliates with the same rights therein as if the deposits or other sums were credited by or due from such Holder of Secured Obligations; all credits with and other claims against carriers and shippers; all rights to indemnification; all patents, and patent applications (including all reissues, divisions, continuations and extensions); all service marks and service mark applications; all trade secrets and inventions; all copyrights and copyright applications (including all computer software and related documentation); all rights and interests in and to trademarks, trademark registrations and applications therefor, trade names, corporate names, brand names, slogans, all goodwill associated with the foregoing; all license agreements and franchise agreements, all reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interest in trusts; all proceeds of insurance of which Grantor is beneficiary; and all letters of credit, guaranties, liens, security interests and other security held by or granted to Grantor; and all other intangible property, whether or not similar to the foregoing; LAB PROCESSING AND ENGINEERING INFORMATION: All rights and interests in and to processes, lab journals, and notebooks, data, trade secrets, know-how, product formulae and information, manufacturing, engineering and other drawings and manuals, technology, blueprints, research and development reports, agency agreements, technical information, technical assistance, engineering data, design and engineering specifications, and similar materials recording or evidencing expertise used in or employed by Grantor (including any license for the foregoing); CONTRACT RIGHTS: All rights and interests in and to any pending or executory contracts, requests for quotations, invitations for bid, agreements, leases and arrangements of which Grantor is a party to or in which Grantor has an interest, excluding any license agreement under which the Grantor is the licensee, but including, without limitation, all right and interest to receive monies due, or to become due, under that certain Agreement for Purchase and Sale of Stock dated as of January 24, 1997 made by and among GFSI Holdings, Inc., the Grantor and certain parties thereto as "Sellers"; CHATTEL PAPER, INSTRUMENTS AND DOCUMENTS: All chattel paper, leases, all instruments, including, without limitation, the notes and debt instruments described in Schedule 1 (the "Pledged Debt"), but excluding the Management Notes and the Embroidery Affiliate Notes, and all payments thereunder and instruments and other property from time to time delivered in respect thereof or in exchange therefor, and all bills of sale, bills of lading, warehouse receipts and other documents of title, in each instance whether now owned or hereafter acquired by Grantor; INTEREST AND CURRENCY CONTRACTS: Any and all interest rate, commodity or currency exchange agreements or derivative agreements, including without limitation, cap, collar, floor, forward or similar agreements or other rate, currency or price protection arrangements; and -3- OTHER PROPERTY: All property or interests in property now owned or hereafter acquired by Grantor which now may be owned or hereafter may come into the possession, custody or control of Agent or any of the Holders of Secured Obligations or any agent or Affiliate of any of them in any way and for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise); and all rights and interests of Grantor, now existing or hereafter arising and however and wherever arising, in respect of any and all (i) notes, drafts, letters of credit, stocks, bonds, and debt and equity securities, whether or not certificated, investment property (as defined in Section 9-115(1)(f) of the UCC) and warrants, options, puts and calls and other rights to acquire or otherwise relating to the same; (ii) money; (iii) proceeds of loans, including, without limitation, loans made under the Credit Agreement; and (iv) insurance proceeds and books and records relating to any of the property covered by this Agreement; together, in each instance, with all accessions and additions thereto, substitutions therefor, and replacements, proceeds and products thereof. SECTION 3. Authorization. Grantor hereby authorizes Agent to retain and each Holder of Secured Obligations, and each Affiliate of Agent and of each Holder of Secured Obligations, to pay or deliver to Agent, for the benefit of the Holders of Secured Obligations, without any necessity on any Holder of Secured Obligation's part to resort to other security or sources of reimbursement for the Secured Obligations, at any time following the occurrence and during the continuance of any Designated Default, and without further notice to Grantor (such notice being expressly waived), any of the deposits referred to in Section 2 (whether general or special, time or demand, provisional or final) or other sums or property held by such Person, for application against any portion of the Secured Obligations, irrespective of whether any demand has been made or whether such portion of the Secured Obligations is mature. Agent will promptly notify Grantor of Agent's receipt of such funds or other property for application against the Secured Obligations, but failure to do so will not affect the validity or enforceability thereof. Agent may give notice of the above grant of security interest and assignment of the aforesaid deposits and other sums, and authorization, to, and make any suitable arrangements with, any such Holder of Secured Obligations for effectuation thereof, and Grantor hereby irrevocably appoints Agent as its attorney to collect, following the occurrence and during the continuance of a Designated Default, any and all such deposits or other sums to the extent any such payment is not made to Agent by such Holder of Secured Obligations or Affiliate thereof. SECTION 4. Grantor Remains Liable. Anything herein to the contrary notwithstanding, (a) Grantor shall remain solely 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 Agent of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) neither Agent nor the Holders of Secured Obligations shall have any responsibility, obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Agent or the Holders of Secured Obligations be required or obligated, in any manner, to (i) perform or fulfill any of the obligations or duties of Grantor thereunder, (ii) make any payment, or make any inquiry as to the nature or sufficiency of any payment received by Grantor or the sufficiency of any performance by any party under any such contract or agreement or (iii) present or file any claim, or take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. Representations and Warranties. Grantor represents and warrants, as of the date of this Agreement and as of each date hereafter (except for changes permitted or contemplated by this Agreement) until termination of this Agreement pursuant to Section 25: -4- (a) The correct corporate name of Grantor is set forth in the first paragraph of this Agreement. The locations listed on Schedule 2 constitute all locations at which Inventory and/or Equipment is located and Grantor has exclusive possession and control of such Equipment and Inventory, except in each case for such Inventory and Equipment which is (i) temporarily in transit between such locations, or (ii) tem porarily stored with third parties or held by third parties for storage, processing, manufacturing, engineering, evaluation, or repair, the value of which does not exceed in the aggregate at any one time $500,000, the proper corporate names of which third parties, the location of such Inventory and/or Equipment, and the nature of the relationship between Grantor and such third parties is set forth in Schedule 2-A. Schedule 2-A may be amended to reflect additional locations. The chief place of business and chief executive office of Grantor are located at the address of Grantor set forth below the Grantor's signature on the Credit Agreement. All records concerning any Accounts and all originals of all chattel paper which evidence any Account are located at the addresses listed on Schedule 2 and none of the Accounts is evidenced by a promissory note or other instrument except for such notes and other instru ments delivered to Agent as Pledged Debt listed on Schedule 1. (b) Grantor is the legal and beneficial owner of the Collateral free and clear of all Liens except for Liens permitted by the Credit Agreement. Grantor currently conducts business under the name GFSI, Inc. and, in certain areas and for certain operations, the trade names listed on Schedule 3. The Grantor uses no trade names or fictitious names, except as set forth on Schedule 3. (c) This Agreement creates in favor of Agent a legal, valid and enforceable security interest in the Collateral. When financing statements have been filed in the appropriate offices against Grantor in the locations listed on Schedule 2-B, Agent will have a fully perfected first priority lien on, and security interest in, the Collateral in which a security interest may be perfected by such filing, subject only to Liens permitted by the Credit Agreement. (d) No authorization, approval or other action by, and no notice to or filing with, any Governmental Authority that has not already been taken or made and which is in full force and effect, is required (i) for the grant by Grantor of the security interest in the Collateral granted hereby; (ii) for the execution, delivery or performance of this Agreement by Grantor; or (iii) for the exercise by Agent of any of its rights or remedies hereunder. (e) The Pledged Debt issued by any Affiliate of Grantor, and to the best of Grantor's knowledge, all other Pledged Debt, has been duly authorized, issued and delivered, and is the legal, valid, binding and enforceable obligation of the respective issuer thereof. (f) Schedule 4 contains a complete list of all of the deposit accounts of Grantor as of the Closing Date and Grantor will amend and update Schedule 4 by delivering supplemental reports to Agent promptly following the establishment of any additional deposit accounts in accordance with the terms of Section 6.3(D)(iv) and 6.3(S) of the Credit Agreement, and at any time requested by Agent. Each deposit account so scheduled is a Restricted Account or a deposit account permitted by the terms of the Credit Agreement. SECTION 6. Perfection and Maintenance of Security Interest and Lien. Grantor agrees that until all of the Secured Obligations (other than contingent indemnity Obligations) have been fully satisfied and the Credit Agreement has been terminated, Agent's security interests in and Liens on and against the Collateral and all proceeds and products thereof, shall continue in full force and effect. Grantor shall perform any and all steps reasonably requested by Agent to perfect, maintain and protect Agent's security interests in and Liens on and against the Collateral granted or purported to be granted hereby or to enable -5- Agent to exercise its rights and remedies hereunder with respect to any Collateral, including, without limitation, (i) executing and filing financing or continuation statements, or amendments thereof, in form and substance reasonably satisfactory to Agent, (ii) executing and filing all Intellectual Property Agreements in form and substance reasonably satisfactory to the Agent, (iii) delivering to Agent all certificates, notes and other instruments (including, without limitation, all letters of credit on which Grantor is named as a beneficiary) representing or evidencing Collateral, which certificates, notes and other instruments have been duly endorsed and are accompanied by duly executed instruments of transfer or assignment, including, but not limited to, note powers, all in form and substance satisfactory to Agent, (iv) delivering to Agent warehouse receipts covering that portion of the Collateral, if any, located in warehouses and for which warehouse receipts are issued, (v) after the occurrence and during the continuance of a Designated Default, transferring Inventory and Equipment to warehouses designated by Agent or taking such other steps as are reasonably deemed necessary by Agent to maintain Agent's control of the Inventory and Equipment, (vi) obtaining with respect to clauses (a), (b) and (c) below, and using commercially reasonable efforts to obtain with respect to clause (d) below: (a) waivers of Liens and access agreements in substantially the form of Exhibit A-1 hereto (or such other form as may be agreed to by Agent) from landlords with respect to Grantor's leased premises where the Agent reasonably determines that the value of the leasehold in respect of the premises leased by Grantor from such landlord is material to the operations of Grantor or (2) deem such leased premises to be integral to the Grantor's day-to-day operations, (b) mortgagee agreements in substantially the form of Exhibit A-2 hereto (or such other form as may be agreed to by Agent) from mortgagees with respect to all leases executed after the Closing Date where the Agent reasonably determines such leasehold to be material based on the value of the leasehold or such leased premises is integral to Grantor's day-to-day operations, (c) waivers of Liens and access agreements in substantially the form of Exhibit B-1 hereto (or such other form as may be agreed to by Agent) from landlords and waivers of Liens and access agreements in substantially the form of Exhibit B-2 hereto (or such other form as may be agreed to by Agent) from the appropriate Person with respect to all arrangements pursuant to which Inventory will be temporarily held by third parties for storage, processing, engineering, evaluation, or repair after the Closing Date (in connection with which Grantor shall be permitted to and hereby required to update Schedule 2-A ) where: (1) the Equipment located at any one premises owned or operated by any such Person has a value in the aggregate of $500,000 or greater or (2) the aggregate value of the Equipment located at all premises owned or operated by any such Person is $2,500,000 or greater, and (d) waivers of Liens and access agreements in substantially the form of Exhibit B-1 hereto (or such other form as may be agreed to by Agent) from landlords and waivers of Liens and access agreements in substantially the form of Exhibit B-2 hereto (or such other form as may be agreed to by Agent) from the appropriate Person with respect to all arrangements pursuant to which Inventory will be temrporarily held by third parties for storage, processing, engineering, evaluation, or repair after the Closing Date (in connection with which Grantor shall be permitted to and hereby required to update Schedule 2-A) where: (1) the Inventory and Equipment located at any one premises owned or operated by any such Person has a value in the aggregate of $500,000 or greater or (2) the aggregate value of the Equipment located at all premises owned or operated by any such Person is $2,500,000 or greater, and (vii) executing and delivering all further instruments and documents, and taking all further action, as Agent may reasonably request. SECTION 7. Financing Statements. To the extent permitted by applicable law, Grantor hereby authorizes Agent to file one or more financing or continuation statements and amendments thereto, disclosing the security interest granted to Agent under this Agreement without Grantor's signature appearing thereon and Agent agrees to notify Grantor when such a filing has been made. Grantor agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing -6- statement is sufficient as a financing statement. If any Inventory or Equipment is in the possession or control of any warehouseman or Grantor's agents or processors, Grantor shall, upon Agent's written request, notify such warehouseman, agent or processor of Agent's security interest in such Inventory and Equipment and, upon Agent's request, instruct them to hold all such Inventory or Equipment for Agent's account and subject to Agent's instructions. SECTION 8. Filing Costs. Grantor shall pay the costs of, or incidental to, all recordings or filings of all financing statements, including, without limitation, any filing expenses incurred by Agent pursuant to Section 7. SECTION 9. Schedule of Collateral. Grantor shall, at the written request of the Agent, furnish to Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Agent may reasonably request, all in reasonable detail. SECTION 10. Equipment and Inventory. Grantor covenants and agrees with Agent that from the date of this Agreement and until termination of this Agreement, including pursuant to Section 25, Grantor shall: (a) Keep the Equipment and Inventory (other than Equipment or Inventory sold or disposed of as permitted by the Credit Agreement or in the ordinary course of business) at the places specified in Section 5(a), except for Equipment and Inventory (i) temporarily in transit between such locations or (ii) temporarily held by third parties for storage, processing, engineering, manufacturing, evaluation, or repair and set forth on Schedule 2-A in amounts not in excess of $500,000 and in connection with which the Grantor has complied with the requirements set forth in Section 6, and deliver written notice to Agent at least thirty (30) days prior to establishing any other location at which or third party with which it reasonably expects to maintain Inventory and/or Equipment in which location or with which third party all action required by this Agreement shall have been taken with respect to all such Equipment and Inventory; (b) Maintain or cause to be maintained in good repair, working order and condition, excepting ordinary wear and tear and damage due to casualty, all of the Equipment, and make or cause to be made all appropriate repairs, renewals and replacements thereof, as quickly as practicable after the occurrence of any loss or damage thereto which are necessary or desirable to such end; and (c) Comply with the terms of the Credit Agreement with respect to such Equipment and Inventory, including, without limitation, the maintenance and insurance provisions set forth in Section 6.2(E), (G) and (I) of the Credit Agreement. SECTION 11. Accounts. Grantor covenants and agrees with Agent that from and after the date of this Agreement and until termination of this Agreement, including pursuant to Section 25, Grantor shall: (a) Keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts at its address set forth below the Grantor's signature on the Credit Agreement, and keep the offices where it keeps all originals of all chattel paper which evidence Accounts at the locations therefor specified in Section 5(a) or, upon thirty (30) days' prior written notice to Agent, at such other locations within the United States in a jurisdiction where all actions required by Section 6 shall have been taken with respect to the Accounts. Grantor will hold and preserve such records (in accordance -7- with Grantor's usual document retention practices) and chattel paper and will permit representatives of Agent, during normal business hours and on reasonable notice, to inspect and make abstracts from such records and chattel paper in accordance with the provisions of Section 6.3(F) of the Credit Agreement; and (b) In any suit, proceeding or action brought by Agent under any Account comprising part of the Collateral, Grantor will save, indemnify and keep each of the Holders of Secured Obligations harmless from and against all reasonable and documented expenses, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever of the obligor thereunder, arising out of a breach by Grantor of any obligation or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such Holder of Secured Obligations from Grantor, and all such obligations of Grantor shall be and shall remain enforceable against and only against Grantor and shall not be enforceable against any of the Holders of Secured Obligations. (c) When Grantor or any of its Subsidiaries (or any Affiliates, shareholders, directors, officers, employees, agents or those Persons acting for or in concert with Grantor or a Subsidiary of Grantor) shall receive or come into the possession or control of any monies, checks, notes, drafts or any other payment relating to, or proceeds of, Grantor's Accounts or other property constituting Collateral hereunder (individually, a "Payment Item", and, collectively, "Payment Items"), then, except as otherwise permitted in a writing signed by Agent, Grantor shall, or shall cause such Subsidiary or such other Person to, deposit the same, in kind in precisely the form in which such Payment Item was received (with all Payment Items endorsed if necessary for collection) into a Restricted Account except as permitted by the Credit Agreement. The Grantor further agrees that it will not, during the term of this Agreement, without the written consent of the Agent, transfer any funds from a Restricted Account to any deposit account that is not a Restricted Account or other deposit account permitted by the Credit Agreement. SECTION 12. Leased Real Property. Grantor covenants and agrees with Agent that from and after the date of this Agreement and until termination of this Agreement, including pursuant to Section 25, that: (a) Promptly following, but not later than ninety (90) days after entering into any leases meeting the criteria set forth in Section 6(vi), Grantor will furnish to Agent a report certified to be true and correct by Grantor setting forth a description of the leased premises related thereto; the name or names of all owners; rentals being paid; and whether Grantor has obtained waivers of Liens and access agreements from landlords and mortgagees with respect to such premises in accordance with Section 6; (b) Grantor agrees that, from and after the occurrence and continuance of a Designated Default, Agent may, but need not, make any payment or perform any act hereinbefore required of Grantor with respect to the Grantor's leased premises in any form and manner deemed expedient. All money paid for any of the purposes herein authorized and all other moneys advanced by Agent to protect the lien hereof shall be additional Secured Obligations secured hereby and shall become immediately due and payable without notice and shall bear interest thereon at the then applicable default interest rate with respect to Floating Rate Loans as provided in Section 2.11 of the Credit Agreement until paid to Agent in full; and (c) Grantor agrees that it will not amend any lease in a manner that materially adversely affects the interests of the Holders of Secured Obligations without the Agent's prior written consent (such consent not to be unreasonably withheld). -8- SECTION 13. General Covenants. Grantor covenants and agrees with Agent that from and after the date of this Agreement and until termination of this Agreement, including pursuant to Section 25, Grantor shall: (a) Keep and maintain at Grantor's own cost and expense reasonably satisfactory and reasonably complete records of Grantor's Collateral in a manner consistent with Grantor's current business practice, including, without limitation, a record of all payments received and all credits granted with respect to such Collateral. Grantor shall, for Agent's further security, deliver and turn over to Agent or Agent's designated representatives at any time following the occurrence and during the continuation of a Designated Default, any such books and records (including, without limitation, any and all computer tapes, programs and source and object codes relating to such Collateral in which Grantor has an interest or any part or parts thereof); and (b) Grantor will not create, permit or suffer to exist, and will defend the Collateral against, and take such other action as is necessary to remove, any Lien on such Collateral other than Liens permitted under the Credit Agreement, and will defend the right, title and interest of Agent in and to Grantor's rights to such Collateral, including, without limitation, the proceeds and products thereof, against the claims and demands of all Persons whatsoever. (c) Grantor will not, and will not permit any Restricted Subsidiary to, create or otherwise become effective any consensual encumbrance or restriction of any kind on or in respect of (i) any license agreement to which Grantor is a licensee, (ii) the Management Notes or (iii) the Embroidery Affiliate Notes. SECTION 14. Agent Appointed Attorney-in-Fact. Upon the occurrence and during the continuance of a Designated Default, Grantor hereby irrevocably appoints Agent as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor or otherwise, from time to time in Agent's discretion, to take any action and to execute any instrument which Agent may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, (a) following the occurrence and during the continuance of a Designated Default, to: (i) obtain and adjust insurance required to be paid to the Agent or any Holders of Secured Obligations pursuant to the Credit Agreement; (ii) ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (i) or (ii) above; and (iv) file any claims or take any action or institute any proceedings which Agent may deem necessary or desirable for the collection of any of the Collateral, or otherwise to enforce the rights of Agent with respect to any of the Collateral; provided, however, that the Grantor irrevocably appoints Agent as Grantor's attorney-in-fact, with full authority in place and stead of Grantor and in the name of the Grantor or otherwise, from time to time in -9- Agent's discretion, at any time, to take any reasonable action and to execute any instrument which the Agent may reasonably deem necessary or advisable, to: (i) obtain access to records maintained for Grantor by computer services companies and other service companies or bureaus; (ii) send requests under Grantor's, the Agent's or a fictitious name to Grantor's customers or account debtors for verification of Accounts provided that the Agent gives the Grantor written notice prior to initiating any such verifications; and (iii) do all other things consistent with the terms of this Agreement as may be reasonably necessary to carry out the terms hereof. SECTION 15. Agent May Perform. If Grantor fails to perform any agreement contained herein or in the Credit Agreement, Agent may, upon three days prior written notice to the Grantor, perform, or cause performance of, such agreement, and the reasonable and documented expenses of Agent incurred in connection therewith shall be payable by Grantor under Section 22. SECTION 16. Agent's Duties. The powers conferred on Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Agent shall not have any duty as to any Collateral. Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Agent accords its own property, it being understood that Agent shall be under no obligation to take any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral, but may do so at its option, and all reasonable expenses incurred in connection therewith shall be for the sole account of Grantor and shall be added to the Secured Obligations. SECTION 17. Remedies. (a) If any Designated Default shall have occurred and be continuing: (i) Agent shall have, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the UCC (whether or not the UCC applies to the affected Collateral) and further, Agent may, without notice, demand or legal process of any kind (except as may be required by law), all of which Grantor waives, at any time or times, (x) enter Grantor's owned or leased premises and take physical possession of the Collateral and maintain such possession on Grantor's owned or leased premises, at no cost to Agent or any of the Holders of Secured Obligations, or remove the Collateral, or any part thereof, to such other place(s) as Agent may desire, (y) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Agent forthwith, assemble all or any part of the Collateral as directed by Agent and make it available to Agent at a place to be designated by Agent which is reasonably convenient to Agent and (z) without notice except as specified below, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof at public or private sale, at any exchange, broker's board or at any of the offices of Agent or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Agent may deem commercially reasonable. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Agent may adjourn any public or -10- private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (ii) Agent shall apply all cash proceeds received by Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral (after payment of any amounts payable to Agent pursuant to Section 22), for the benefit of the Holders of Secured Obligations, against all or any part of the Secured Obligations in such order as may be required by the Credit Agreement or, to the extent not specified therein, as is determined by the Required Lenders. Any surplus of such cash or cash proceeds held by Agent and remaining after payment in full of all the Secured Obligations shall be paid over to Grantor or to whomsoever may be lawfully entitled to receive such surplus; (b) Grantor waives all claims, damages and demands against Agent arising out of the repossession, retention or sale of any of the Collateral or any part or parts thereof, except any such claims, damages and awards arising out of the Gross Negligence or willful misconduct of Agent or any of the Holders of Secured Obligations, as the case may be, as determined in a final non-appealed judgment of a court of competent jurisdiction; and (c) The rights and remedies provided under this Agreement are cumulative and may be exercised singly or concurrently and are not exclusive of any rights and remedies provided by law or equity. SECTION 18. Exercise of Remedies. In connection with the exercise of its remedies pursuant to Section 17, Agent may, (i) exchange, enforce, waive or release any portion of the Collateral and any other security for the Secured Obligations; (ii) apply such Collateral or security and direct the order or manner of sale thereof as Agent may, from time to time, determine; and (iii) settle, compromise, collect or otherwise liquidate any such Collateral or security in any manner following the occurrence of a Designated Default, without affecting or impairing Agent's right to take any other further action with respect to any Collateral or security or any part thereof. SECTION 19. License. Agent is hereby granted a license or other right to use, following the occurrence and during the continuance of a Designated Default, without charge, (a) Grantor's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, customer lists and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral, provided that Agent uses quality standards at least substantially equivalent to those of Grantor for the manufacture, advertising, sale and distribution of Grantor's products and services and (b) Grantor's rights under all licenses where Grantor is licensor, except to the extent such licenses by their terms prohibit the granting of such rights, and all franchise agreements shall inure to Agent's benefit. Notwithstanding any provision to the contrary contained in this Agreement or any other Loan Document, license agreements under which Grantor is licensee shall be excluded from the Collateral. SECTION 20. Injunctive Relief. Grantor recognizes that in the event Grantor fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to the Holders of Secured Obligations; therefore, Grantor agrees that the Holders of Secured Obligations, if Agent so determines and requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. SECTION 21. Interpretation and Inconsistencies; Merger; No Strict Construction. -11- (a) The rights and duties created by this Agreement shall, in all cases, be interpreted consistently with, and shall be in addition to (and not in lieu of), the rights and duties created by the Credit Agreement and the other Loan Documents. In the event that any provision of this Agreement shall be inconsistent with any provision of any other Loan Document, such provision of the other Loan Document shall govern. (b) Except as provided in subsection (a) above, this Agreement represents the final agreement of the Grantor and the Agent with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or subsequent oral agreements, between the Grantor and the Agent or any other Holder of Secured Obligations. (c) The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. SECTION 22. Expenses. Grantor will upon demand pay to Agent and/or the Holders of Secured Obligations the amount of any and all reasonable and documented expenses, including the reasonable fees and disbursements of their counsel and of any experts and agents, as provided in Section 9.7 of the Credit Agreement. SECTION 23. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by Grantor herefrom shall in any event be effective unless the same shall be in writing and signed by Agent and Grantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 24. Notices. All notices and other communications provided for hereunder shall be delivered in the manner set forth in Section 13.1 of the Credit Agreement. SECTION 25. Continuing Security Interest; Termination. (a) Except as provided in Section 25(b), this Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the later of the payment or satisfaction in full of the Secured Obligations (other than contingent indemnity obligations) and the termination of the Credit Agreement, (ii) be binding upon Grantor, its successors and assigns and (iii) except to the extent that the rights of any transferor, or assignor are limited by the terms of the Credit Agreement, inure, together with the rights and remedies of Agent hereunder, to the benefit of Agent and any of the Holders of Secured Obligations. Nothing set forth herein or in any other Loan Document is intended or shall be construed to give any other Person any right, remedy or claim under, to or in respect of this Agreement or any other Loan Document or any Collateral. Grantor's successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession thereof or therefor. (b) Upon the payment in full in cash of the Secured Obligations (other than contingent indemnity obligations) and the termination of the Credit Agreement, this Agreement and the security interest granted hereby shall automatically terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination of security interest, Grantor shall be entitled to the return, upon its request and at its expense, of such of the Collateral held by Agent as shall not have been sold or otherwise applied pursuant to the terms hereof and Agent will, at Grantor's expense, promptly execute and deliver to Grantor such other documents as Grantor shall reasonably request to evidence such termination. In connection with any sales of assets permitted under the Credit Agreement, the liens and security interests granted under this -12- Agreement will automatically release and terminate with respect to such assets and the Agent shall promptly make all filings necessary to reflect such release and termination. SECTION 26. Severability. It is the parties' intention that this Agreement be interpreted in such a way that it is valid and effective under applicable law. However, if one or more of the provisions of this Agreement shall for any reason be found to be invalid or unenforceable, the remaining provisions of this Agreement shall be unimpaired. SECTION 27. GOVERNING LAW. THE AGENT ACCEPTS THIS AGREEMENT, ON BEHALF OF ITSELF AND THE LENDERS, AT CHICAGO, ILLINOIS BY ACKNOWLEDGING AND AGREEING TO IT THERE. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ILLINOIS. WITHOUT LIMITING THE FOREGOING, ANY DISPUTE BETWEEN THE GRANTOR AND THE AGENT, ANY LENDER, OR ANY OTHER HOLDER OF SECURED OBLIGATIONS ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE INTERNAL LAWS (WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS. SECTION 28. CONSENT TO JURISDICTION; SERVICE OF PROCESS; JURY TRIAL. (A) EXCLUSIVE JURISDICTION. EXCEPT AS PROVIDED IN SUBSECTION (B), EACH OF THE PARTIES HERETO AGREES THAT ALL DISPUTES BETWEEN THEM ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, WHETHER ARISING IN CONTRACT, TORT, EQUITY, OR OTHERWISE, SHALL BE RESOLVED EXCLUSIVELY BY STATE OR FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS, BUT THE PARTIES HERETO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CHICAGO, ILLINOIS. (B) OTHER JURISDICTIONS. GRANTOR AGREES THAT THE AGENT, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS SHALL HAVE THE RIGHT TO PROCEED AGAINST GRANTOR OR ITS PROPERTY IN A COURT IN ANY LOCATION TO ENABLE SUCH PERSON TO (1) OBTAIN PERSONAL JURISDICTION OVER THE GRANTOR OR (2) REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PERSON. GRANTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY SUCH PERSON TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF SUCH PERSON. (C) SERVICE OF PROCESS. GRANTOR WAIVES PERSONAL SERVICE OF ANY PROCESS UPON IT AND, AS ADDITIONAL SECURITY FOR THE OBLIGATIONS, IRREVOCABLY APPOINTS THE CORPORATION TRUST COMPANY, THE GRANTOR'S REGISTERED AGENT, WHOSE ADDRESS IS CORPORATION TRUST CENTER 1209 ORANGE STREET, WILMINGTON, -13- DELAWARE 19801, AS GRANTOR'S AGENT FOR THE PURPOSE OF ACCEPTING SERVICE OF PROCESS ISSUED BY ANY COURT. GRANTOR IRREVOCABLY WAIVES ANY OBJECTION (INCLUDING, WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH IN ANY JURISDICTION SET FORTH ABOVE AND EACH OF THE OTHER PARTIES HERETO WAIVES IN ALL DISPUTES BROUGHT PURSUANT TO SUBSECTION (A) ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT CONSIDERING THE DISPUTE. (D) WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH. EACH OF THE PARTIES HERETO 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 PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR 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) WAIVER OF BOND. GRANTOR WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF ANY PARTY HERETO IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO REALIZE ON THE COLLATERAL (INCLUDING, WITHOUT LIMITATION, THE REAL PROPERTY COLLATERAL) OR ANY OTHER SECURITY FOR THE SECURED OBLIGATIONS OR TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF SUCH PARTY, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER, PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. (F) ADVICE OF COUNSEL. EACH OF THE PARTIES REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF THIS SECTION 28, WITH ITS COUNSEL. -14- IN WITNESS WHEREOF, Grantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. GFSI, INC. By: /s/ Illegible --------------------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, as AGENT By: /s/ Illegible --------------------------------- Name: Title: Signature Page to Security Agreement dated February 27, 1997 EXHIBIT A-1 To Security Agreement Form of Landlord Agreement -------------------------- The First National Bank of Chicago, as Agent One First National Plaza Suite 0173 Chicago, Illinois 60670-0173 Attention: Nathan L. Bloch Ladies and Gentlemen: GFSI, Inc., a Delaware corporation ("Borrower"), as successor by merger in interest to Winning Ways, Inc., a Missouri corporation (the "Original Lessee"), is the lessee under that certain lease dated ___________________ between the Original Lessee, and the undersigned, covering certain premises owned by the undersigned and located at _________________ (the "Premises") more fully described in the lease attached hereto as Exhibit A (the "Lease"). Borrower has certain of its assets located on the Premises. Borrower has entered into certain financing arrangements with a group of lenders ("Lenders") including The First National Bank of Chicago, as contractual representative for the Lenders (the "Agent") and the Agent and the Lenders require, among other things, that Borrower grant liens in favor of the Agent for the benefit of itself and the Lenders on all of Borrower's property located on the Premises ("Collateral") [and that the Borrower grant a mortgage ("Leasehold Mortgage") in favor of the Agent covering the Borrower's leasehold estate created under the Lease]. [To induce the Agent and the Lenders (together with their respective agents, successors and assigns) to enter into said financing arrangements, [and for other good and valuable consideration,] the undersigned hereby agrees] [By its signature below, the undersigned agrees] that: [(i) the undersigned has consented to the assignment (by operation of merger) of the Lease from the Original Lessee to the Borrower;] (ii) the Lease is in full force and effect in the form attached hereto as Exhibit A and represents the full and complete agreement between Borrower and the undersigned concerning the Premises [and the Lease shall not be amended or modified in any material respect without Agent's prior written consent, which consent shall not be unreasonably withheld]; (iii) it will not assert against any of Borrower's assets any statutory or possessory liens, including, without limitation, rights of levy or distraint for rent, all of which it hereby waives [and hereby subordinates to the lien of the Leasehold Mortgage]; (iv) none of the Collateral located on the Premises shall be deemed to be fixtures; (v) it will allow Agent thirty (30) days from the Agent's receipt of notice in which to cure or cause Borrower to cure any defaults on Borrower's lease obligations to the undersigned; provided if such default cannot reasonably be cured within the thirty (30) day period, and provided the Agent is diligently pursuing a cure, then Agent shall have a reasonable period to cure such default; [(vi) if, for any reason whatsoever, the undersigned either deems itself entitled to redeem or to take possession of the Premises during the term of Borrower's lease or intends to sell or otherwise transfer all or any part of its interest in the Premises, the undersigned will notify Agent five (5) days before taking such action;] (vii) if Borrower defaults on its obligations to the Agent or any Lender and, as a result, the Agent undertakes to enforce its security interest in the Collateral, the undersigned will cooperate with the Agent in its efforts to assemble all of the Collateral located on the Premises, will permit Agent to remain on the Premises for ninety (90) days after the Agent gives the undersigned notice of default, provided Agent pays the rental payments due under the Lease for the period of time Agent uses the Premises, or, at Agent's option, to remove the Collateral from the Premises within a reasonable time, not to exceed ninety (90) days after the Agent gives the undersigned notice of default, provided Agent pays the rental payments due under the Lease for the period of time Agent uses the Premises, and will not hinder Agent's actions in enforcing its liens on the Collateral; (viii) the undersigned shall accept performance by the Agent of the Borrower's obligations under the Lease as though the same had been performed by the holder of the Borrower's interest therein at the time of such performance. Upon the cure of any such default, any notice of Landlord advising of any default or any action of the undersigned to terminate the Lease or to interfere with the occupancy, use or enjoyment of the Premises by reason thereof, which action has not been completed, shall be deemed rescinded and the Lease shall continue in full force and effect. The undersigned shall not be required to continue any possession or continue any action to obtain possession upon the cure of any such default; [(ix) if Borrower defaults on its obligations to the Lenders and the Agent undertakes to enforce its security interest in the Collateral [and/or to foreclose on Borrower's leasehold estate pursuant to the Leasehold Mortgage], the Agent may, at its option and by written notice to the undersigned, (1) lease the Premises from the undersigned on the same terms as set forth in the Lease and exercise the other rights as lessee thereunder as described therein and/or (2) assign the Lease and/or the attornment rights hereunder to, or enter into a sublease with, a purchaser of the Collateral which purchaser is reasonably acceptable to the undersigned, and the undersigned shall cooperate with any such enforcement action or foreclosure and consent to the assumption of the Lease, the sublet of the Premises or foreclosure sale of the leasehold estate]; and [(x) in the event that Borrower shall become a debtor under the Federal Bankruptcy Code (or any similar state law proceeding) and, in connection therewith, Borrower shall reject the Lease as an executory contract, then within thirty (30) days following such rejection, upon the written request by the Agent, the undersigned shall enter into a new lease of the Premises with the Agent or its designee (who shall be reasonably acceptable to the undersigned), for the benefit of the Lenders which new lease (1) shall be effective as of the date of the termination of the Lease, (2) shall be for a term expiring as of the last day of the term of the Lease, and (3) shall be on substantially the same terms and conditions as the Lease (including any provisions for renewal or extension of the term of the Lease); provided that the Lender or such designee, as the case may be, shall be required, as a condition to the effectiveness of such new lease, to pay the Lessor any amount equal to any rent remaining unpaid by Borrower under the Lease.] Any notice(s) required or desired to be given hereunder shall be directed to the party to be notified at the address stated herein. The agreements contained herein shall continue in force until all of Borrower's obligations and liabilities to the Agent and the Lenders are paid and satisfied in full and all financing arrangements among the Agent, the Lenders and Borrower have been terminated. The undersigned will notify all successor owners, transferees, purchasers and mortgagees of the existence of this waiver. The agreements contained herein may not be modified or terminated orally and shall be binding upon the successors, assigns and personal representatives of the undersigned, upon any successor owner or transferee of the Premises, and upon any purchasers, including any mortgagee, from the undersigned. [The undersigned consents to the granting of the Leasehold Mortgage to the Agent and to the liens, security interests and encumbrances created by and resulting from the Leasehold Mortgage or other documents collateral thereto in the form attached hereto as Exhibit B.] The undersigned agrees that nothing contained in this waiver shall be construed as an assumption by the Agent or any of the other lenders of any obligations of Borrower contained in the Lease. Executed and delivered this _____ day of __________ , 199_, at ____________________ . THIS WAIVER SHALL NOT IMPAIR OR OTHERWISE AFFECT BORROWER'S OBLIGATIONS TO PAY RENT AND ANY OTHER SUMS PAYABLE BY BORROWER OR TO OTHERWISE PERFORM ITS OBLIGATIONS TO THE LESSOR PURSUANT TO THE TERMS OF THE LEASE. [Name of Lessor] By:__________________________ Title:_______________________ Address: _____________________ _____________________ _____________________ AGREED & ACKNOWLEDGED: GFSI, INC. By: _____________________________ Title: __________________________ Address: ________________________ ________________________ [ACKNOWLEDGMENT (CORPORATE) STATE OF ) ) SS. COUNTY OF ) Before me, a Notary Public in and for said County, personally appeared __________ , a __________ corporation, by the __________ of such corporation, who acknowledged that (s)he did sign the foregoing instrument on behalf of said corporation and that said instrument is the voluntary act and deed of said corporation and his/her voluntary act and deed as such officer of said corporation. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed my official seal this __________ day of __________ , 199_ at ____________ , ___________________ . __________________________________ Notary Public My Commission Expires:] (Notarial Seal) [ACKNOWLEDGMENT (CORPORATE) STATE OF ) ) SS. COUNTY OF ) Before me, a Notary Public in and for said County, personally appeared GFSI, Inc., a Delaware corporation, by the __________ of such corporation, who acknowledged that (s)he did sign the foregoing instrument on behalf of said corporation and that said instrument is the voluntary act and deed of said corporation and his/her voluntary act and deed as such officer of said corporation. IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed my official seal this __________ day of __________ , 199_ at ____________ , ___________________ . __________________________________ Notary Public My Commission Expires:] (Notarial Seal) EXHIBIT A to Landlord Agreement Lease (attached hereto) [EXHIBIT B to Landlord Agreement Leasehold Mortgage (attached hereto)] EXHIBIT A-2 To Security Agreement Form of Mortgagee Agreement The First National Bank of Chicago, as Agent One First National Plaza Suite 0173 Chicago, Illinois 60670-0173 Attention: Nathan L. Bloch Ladies and Gentlemen: GFSI, Inc., a Delaware corporation ("Borrower"), as successor by merger in interest to Winning Ways, Inc., a [__________] corporation (the "Original Lessee"), is the lessee under that certain lease dated between the Original Lessee, and ____________________ (the "Landlord[s]"), covering certain premises located at _________________ (the "Premises") as more fully described on Exhibit A 1 attached hereto (the "Lease"). The undersigned is the mortgagee under a mortgage between the Landlord[s] and the undersigned covering the Premises (the "Mortgage"). The undersigned is the sole mortgagee of the Premises. Borrower has certain of its assets located on the Premises. Borrower has entered into certain financing arrangements with a group of lenders ("Lenders") including The First National Bank of Chicago, as contractual representative for the Lenders (the "Agent") and the Agent and the Lenders require, among other things, that Borrower grant liens in favor of the Agent for the benefit of itself and the Lenders on all of Borrower's property located on the Premises ("Collateral") [and that the Borrower grant a mortgage ("Leasehold Mortgage") in favor of the Agent covering the Borrower's leasehold estate created under the Lease]. [To induce the Agent and the Lenders (together with their respective agents, successors and assigns) to enter into said financing arrangements, and for other good and valuable consideration, the undersigned hereby agrees] [By its signature below, the undersigned agrees] that: [(i) it consents to the merger referred to in the first paragraph hereof and agrees that such merger shall not in any way be deemed to be a default under the Mortgage;] (ii) it will not assert against any of the Collateral any statutory or possessory liens, including, without limitation, rights of levy or distraint for rent, all of which it hereby waives; (iii) none of the Collateral located on the Premises shall be deemed to be fixtures; (iv) it will allow Agent thirty (30) days from the Agent's receipt of notice in which to cure or cause Borrower to cure any such defaults on its mortgage obligations; provided - -------- 1 Please attach legal description of premises for recordation purposes. if such default cannot reasonably be cured within the thirty (30) day period, and provided the Agent is diligently pursuing a cure, then Agent shall have a reasonable period to cure such default; [(v) if, for any reason whatsoever, the undersigned either deems itself entitled to take possession of the Premises during the term of the Mortgage or intends to sell or otherwise transfer all or any part of its interest in the Premises, the undersigned will notify Agent five (5) days before taking such action;] (vi) if Borrower defaults on its obligations to the Agent or any Lender and, as a result, the Agent undertakes to enforce its security interest in the Collateral, the undersigned will cooperate with the Agent in its efforts to assemble all of the Collateral located on the Premises, will permit Agent to remain on the Premises for ninety (90) days after Agent gives the undersigned notice of default, provided Agent pays the Lease payments to the Landlord[s] due under the Lease for the period of time Agent uses the Premises, or, at Agent's option, to remove the Collateral from the Premises within a reasonable time, not to exceed ninety (90) days after Agent gives the undersigned notice of default, provided Agent pays the rental payments to the Landlord[s] due under the Lease for the period of time Agent uses the Premises, and will not hinder Agent's actions in enforcing its liens on the Collateral; and Any notice(s) required or desired to be given hereunder shall be directed to the party to be notified at the address stated herein. The agreements contained herein shall continue in force until all of Borrower's obligations and liabilities to the Agent and the Lenders are paid and satisfied in full and all financing arrangements among the Agent, the Lenders and Borrower have been terminated. The undersigned will notify all successor owners, transferees, purchasers and mortgagees of the existence of this waiver. The agreements contained herein may not be modified or terminated orally and shall be binding upon the successors, assigns and personal representatives of the undersigned, upon any successor owner or transferee of the Premises, and upon any purchasers, including any mortgagee, from the undersigned. [The undersigned consents to the granting of the Leasehold Mortgage to the Agent and to the liens, security interests and encumbrances created by and resulting from the Leasehold Mortgage or other documents collateral thereto in the form attached hereto as Exhibit B.] The undersigned agrees that nothing contained in this waiver shall be construed as an assumption by the agent or any of the other lenders of any obligations of the landlord contained in the mortgage. Executed and delivered this ____ day of __________ , 199_, at __________ . THIS WAIVER SHALL NOT IMPAIR OR OTHERWISE AFFECT BORROWER'S OBLIGATIONS TO PAY RENT AND ANY OTHER SUMS PAYABLE BY BORROWER OR TO OTHERWISE PERFORM ITS OBLIGATIONS TO THE LANDLORD PURSUANT TO THE TERMS OF THE LEASE. [Name of Mortgagee] By:__________________________ Title:_______________________ Address: _____________________ _____________________ _____________________ AGREED & ACKNOWLEDGED: GFSI, INC. By:___________________ Title:________________ Address: ________________________ ________________________ [STATE OF ________ ) ) SS COUNTY OF ________ ) The foregoing letter agreement was acknowledged before me this ___ day of _____________, 199_, by _____________________, a _______________ of __________________, a ____________________, on behalf of such __________________. ______________________________ Notary Public ________ County, _____________ My commission expires:_______] EXHIBIT A to Mortgagee Agreement Lease (attached hereto) [EXHIBIT B to Mortgagee Agreement Leasehold Mortgage (attached hereto)] EXHIBIT B TO SECURITY AGREEMENT Form of Bailee Letter The First National Bank of Chicago, as Agent One First National Plaza Suite 0173 Chicago, Illinois 60670-0173 Attention: Nathan L. Bloch Ladies and Gentlemen: GFSI, Inc., a Delaware corporation and the successor by merger to Winning Ways, Inc., a [____________] corporation ("Borrower"), now does or hereafter may store certain of its merchandise, inventory, or other of its personal property at premises located at _______________ (the "Premises") owned or leased by the undersigned. Borrower has entered into certain financing arrangements with a group of lenders (the "Lenders") including The First National Bank of Chicago, as contractual representative for the Lenders (the "Agent") and the Agent and the Lenders require, among other things, that Borrower grant liens in favor of the Agent for the benefit of itself and the Lenders on all of Borrower's property located on the Premises ("Collateral"). [To induce the Agent and the Lenders (together with their respective agents, successors and assigns) to enter into said financing arrangements, [and for other good and valuable consideration,] the undersigned hereby agrees] [By its signature below, the undersigned agrees] that: (i) it will not assert against any of Borrower's assets any statutory or possessory liens, including, without limitation, rights of levy or distraint for rent, all of which it hereby waives; (ii) the Collateral shall be identifiable as being owned by Borrower and kept reasonably separate and distinct from other property in our possession; (iii) if Borrower defaults on its obligations to the Lenders or the Agent and, as a result, the Agent undertakes to enforce its security interest in the Collateral, the undersigned will cooperate with the Agent in its efforts to assemble all of the Collateral located on the Premises and will permit the Agent to either remain on the Premises for ninety (90) days after the Agent gives the undersigned notice of default or, at the Agent's option, to remove the Collateral from the Premises within a reasonable time, not to exceed ninety (90) days after the Agent gives the undersigned notice of default, provided that the Agent leaves the Premises in the same condition as existed immediately prior to such ninety (90) day period, and shall indemnify the undersigned for any damages arising solely out of its occupancy of the Premises, and this will not hinder the Agent's actions in enforcing its liens on the Collateral. Any notice(s) required or desired to be given hereunder shall be directed to the party to be notified at the address stated herein. The agreements contained herein shall continue in force until all of Borrower's obligations and liabilities to the Agent and Lenders are paid and satisfied in full and all financing arrangements among the Agent, the Lenders and Borrower have been terminated. The undersigned will notify all successor owners, transferees, purchasers and mortgagees of the existence of this agreement. The agreements contained herein may not be modified or terminated orally and shall be binding upon the successors, assigns and personal representatives of the undersigned, upon any successor owner or transferee of any of the Premises, and upon any purchasers, including any mortgagee, from the undersigned. Executed and delivered this ____ day of __________, 199_, at _______________________. [Name and Address of Warehouseman/Bailee/Consignee] (By)_______________________ EXHIBIT C To Security Agreement Form of Restricted Account Agreement TO: The First National Bank of Chicago as contractual representative (the "Agent") under that certain Credit Agreement, dated as of February 27, 1997 (the "Credit Agreement"), among GFSI, Inc., a Delaware corporation (the "Borrower"), the Agent and those financial institutions from time to time parties thereto (the "Holders of Secured Obligations"). Ladies and Gentlemen: You have advised us that the Borrower has entered or will enter into the Credit Agreement and that in connection therewith the Borrower has granted to the Agent, for its benefit and the benefit of the Holders of Secured Obligations, a lien on and security interest in substantially all of the assets of the Borrower, including all of the accounts receivable and inventory of the Borrower. This will confirm that the Borrower and the undersigned collection bank (the "Bank") have agreed as follows with respect to (i) the account[s] identified on Schedule 1 attached hereto (the "Account[s]") [and (ii) the lock box[es] identified on Schedule 2 attached hereto, to which the Borrower's customers and other persons and entities obligated to the Borrower deliver checks and other items of payment (said [lock box is] [lock boxes are] hereinafter referred to [collectively] as the "Lock Box[es]")]: 1. The Borrower and the Bank acknowledge and confirm that although the Account[s] [and Lock Box[es]] shall remain in the name of the Borrower, all funds now or at any time hereafter deposited to the Account[s] [and Lock Box[es]] and all of the Borrower's rights regarding such Account[s] [and Lock Box[es]] constitute part of the collateral in which the Borrower has granted a security interest to the Agent, to secure the Borrower's obligations under the Credit Agreement and the other instruments, documents and agreements executed in connection therewith, and that during a "Notification Period" (as defined below), the Bank shall not be permitted to follow the Borrower's directions as to disbursements and deposits with respect thereto. [The Bank's authorized representatives will have access to the Lock Box[es], under the authority given by the Borrower to the appropriate Post Office, and will make regular pick-ups from the Lock Box[es] timed to gain the maximum benefit of early presentation and availability of funds. Upon the Bank's receipt thereof, checks and other items of payment so received will be processed and, where possible, started on their way through the regular channels for payment upon receipt by the Bank. Subject to final collection, credit for such items will be given in total on the Bank's books relating to the [appropriate] Account. The Bank will supply the Borrower's endorsement on checks received by it by endorsing them "Credited to the account of the within payee" and will present them for payment through the customary collection procedures and subject to the terms of the Bank's by-laws covering the handling of items deposited with it.] 2 2. The Bank will not exercise, and hereby releases, any banker's lien upon and any right of set off against checks or other items of payment [remitted to the Lock Box[es]] and/or deposited in the Account[s], except (i) with respect to the Bank's normal fees and charges for operating the Account[s] and (ii) for amounts previously credited to Borrower's Account[s] which the Bank subsequently determines are uncollectible items. Checks returned unpaid because of uncollected or insufficient funds shall be redeposited without advice. 3. From and after the date on which the Agent notifies the Bank, in writing, that it is exercising its rights under this Collection Account Agreement (the "Notice") until the date on which the Agent notifies the Bank that it is withdrawing such Notice (such period being referred to herein as a "Notification Period"), the Bank, the Borrower and the Agent agree that, unless the Agent otherwise instructs the Bank in writing: A. The Bank will not honor drafts, demands, withdrawal requests or remittance instructions by the Borrower. B. The Bank will hold solely for account of the Agent all funds which may be on deposit in the Account[s] and the Agent shall have the exclusive right to direct the Bank as to the disposition of all checks, other items of payment and amounts deposited in the Account[s] [and remitted to the Lock Box[es]]. C. The Bank will remit all such funds directly to the Agent, as soon as the funds are collected, by electronic transfer of immediately available funds in accordance with the Agent's written wire-transfer instructions given from time to time to the Bank. D. The Bank shall be entitled to rely upon any notice or other writing received from the Agent and the Borrower waives any claim of, and releases the Bank from any liability for, complying with the terms of this Collection Account Agreement. 4. [The Borrower will receive a receipted copy of the activity relating to the Lock Box[es] for its records.] The Bank will not close the Account[s] without giving the Agent at least thirty (30) days' prior written notice at the address set forth below or such other address as the Agent may from time to time indicate by written notice to the Bank, the Bank will send to the Agent at such address a copy of each periodic statement for the Account, as and when the statement is sent to the Borrower. 5. Any notice (including, without limitation, any Notice) required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered (i) three (3) business days after deposit in the United States mails, with proper postage prepaid, (ii) when sent after receipt of confirmation if sent by telecopy, (iii) one (1) business day after deposit with a reputable overnight courier with all charges prepaid, or (iv) when delivered, if hand delivered by messenger. - -------- 2 The last three sentences of this Section and the last sentence of the following Section may be substituted with a cross reference to the applicable cash-management or lock-box services agreement, if one exists. 6. This Collection Account Agreement shall be binding upon the Bank and the Borrower and their respective successors and assigns and shall inure to the benefit of the Agent, each of the Holders of Secured Obligations and their respective successors and assigns. This Collection Account Agreement may not be modified without the Agent's prior written consent, but may be terminated by the Agent or the Bank upon thirty (30) days' prior written notice to the other parties hereto. This Collection Account Agreement shall be deemed effective as of [_____________, 1997] upon execution hereof by the Bank. [Insert full name of Bank]: By:_________________________ Name: Title: Address: ____________________________ ____________________________ Attn:_______________________ Telecopy No.:_______________ Confirmation No.:___________ Acknowledged and agreed to as of this ___ day of ________, 1997: GFSI, Inc. By:_______________________ Name: Title: Address: [_________________________ __________________________] Attn: [______________________] Telecopy No.: [______________________] Confirmation No.: [_____________________] Acknowledged and agreed to as of this ___ day of ______, 1997 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:_____________________________ Name: Title: Address: One First National Plaza Suite 0173 Chicago, Illinois 60670-0173 Attn: Nathan L. Bloch Telecopy No.: 312-732-5161 Confirmation No.: 312-732-1117 SCHEDULE 1 TO SECURITY AGREEMENT Pledged Debt: SCHEDULE 2 TO SECURITY AGREEMENT Locations of Collateral: SCHEDULE 2-A TO SECURITY AGREEMENT Third Party Locations:
Corporate Name of Description Maximum Third Party Address of Relationship Amount - ----------- ------- --------------- ------
SCHEDULE 2-B TO SECURITY AGREEMENT Financing Statement Filing Locations: SCHEDULE 3 TO SECURITY AGREEMENT Trade Names: SCHEDULE 4 TO SECURITY AGREEMENT Deposit Accounts: EX-10.3 18 TRADEMARK SECURITY AGREEMENT TRADEMARK SECURITY AGREEMENT THIS TRADEMARK SECURITY AGREEMENT ("Agreement") is made as of February 27, 1997, by and between GFSI, Inc., a Delaware corporation ("Borrower"), and The First National Bank of Chicago, as contractual representative (the "Agent") for its benefit and the benefit of the "Holders of Secured Obligations" (as such term is defined in the "Credit Agreement" defined below). W I T N E S S E T H: WHEREAS, Borrower, the Agent and certain financial institutions from time to time party thereto (the "Lenders") are parties to that certain Credit Agreement of even date herewith (as the same may hereafter be modified, amended, restated or supplemented from time to time, the "Credit Agreement"), pursuant to which the Lenders may, from time to time, extend credit to Borrower; and WHEREAS, Borrower and the Agent are parties to that certain Security Agreement of even date herewith (as the same may hereafter be modified, amended, restated or supplemented from time to time, the "Security Agreement"), pursuant to which Borrower has granted a security interest in certain of its assets to the Agent for the benefit of the Agent and the Holders of Secured Obligations; and WHEREAS, the Lenders have required Borrower to execute and deliver this Agreement (i) in order to secure the prompt and complete payment, observance and performance of all of the "Secured Obligations" (as defined in the Credit Agreement) and (ii) as a condition precedent to any extension of credit under the Credit Agreement; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower agrees as follows: 1. Defined Terms. (a) Unless otherwise defined herein, each capitalized term used herein that is defined in the Credit Agreement shall have the meaning specified for such term in the Credit Agreement. Unless otherwise defined herein or in the Credit Agreement, each capitalized term used herein that is defined in the Security Agreement shall have the meaning specified for such term in the Security Agreement. (b) The words "hereof," "herein" and "hereunder" and words of like 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. (c) All terms defined in this Agreement in the singular shall have comparable meanings when used in the plural, and vice versa, unless otherwise specified. 2. Incorporation of Premises. The premises set forth above are incorporated into this Agreement by this reference thereto and are made a part hereof. 3. Incorporation of the Credit Agreement. The Credit Agreement and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. 4. Security Interest in Trademarks. To secure the complete and timely payment, performance and satisfaction of all of the Secured Obligations, Borrower hereby grants to the Agent, for the benefit of the Holders of Secured Obligations, a security interest in, as and by way of a first mortgage and security interest having priority over all other security interests, with power of sale to the extent permitted by applicable law, all of Borrower's now owned other than such as have been abandoned or not maintained by the Borrower as of the Closing Date or existing and hereafter acquired or arising: (i) trademarks, registered trademarks, trademark applications, service marks, registered service marks and service mark applications, including, without limitation, the trademarks, registered trademarks, trademark applications, service marks, registered service marks and service mark applications listed on Schedule A attached hereto and made a part hereof, and (a) all renewals thereof, (b) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, including, without limitation, and damages and payments for past or future infringements or dilutions thereof, (c) the right (subject to Section 11) to sue for past, present and future infringements and dilutions thereof, (d) the goodwill of Borrower's business symbolized by the foregoing and connected therewith, and (e) all of Borrower's rights corresponding thereto throughout the world (all of the foregoing trademarks, registered trademarks and trademark applications, and service marks, registered service marks and service mark applications, together with the items described in clauses (a)-(e) in this paragraph 4(i), are sometimes hereinafter individually and/or collectively referred to as the "Trademarks"); and (ii) rights under or interest in any trademark license agreements or service mark license agreements with any other party where Borrower is a licensor under any such license agreement, including, without limitation, those trademark license agreements and service mark license agreements listed on Schedule B attached hereto and made a part hereof, together with any goodwill connected with and symbolized by any such trademark license agreements or service mark license agreements, and the right after the occurrence and continuance of a Designated Default to prepare for sale and sell any and all Inventory now or hereafter owned by Borrower and now or hereafter covered by such licenses (all of the foregoing are hereinafter referred to collectively as the "Licenses"). Notwithstanding the foregoing provisions of this Section 4 or any provision to the contrary in this Agreement, the Licenses shall not include (i) any license agreement in effect as of the date hereof which by its terms prohibits the grant of the security contemplated by this Agreement, provided, however, that upon the termination of such prohibitions for any reason whatsoever, the provisions of this Section 4 shall be deemed to apply thereto automatically or (ii) any license agreement where Borrower is the licensee under such license agreement. 5. Restrictions on Future Agreements. Borrower will not, without the Agent's prior written consent, enter into any agreement, including, without limitation, any license agreement, which is inconsistent with this Agreement, and Borrower further agrees that it will not take any action, and will use its best efforts not to permit any action to be taken by others, including, without limitation, licensees, or fail to take any action, which would materially affect the validity or enforcement of the rights transferred to the Agent under this Agreement or the rights associated with the Trademarks or Licenses. 6. New Trademarks and Licenses. Borrower represents and warrants that, from and after the Closing Date, (a) the Trademarks listed on Schedule A include all of the trademarks, registered trademarks, trademark applications, service marks, registered service marks and service mark applications now owned or held by Borrower, (b) the Licenses listed on Schedule B include all of the trademark license agreements and service mark license agreements under which Borrower is the licensor and (c) no liens, claims or security interests in such Trademarks and Licenses have been granted by Borrower to any Person other than the Agent. If, prior to the termination of this Agreement, Borrower shall (i) obtain rights to any new trademarks, registered trademarks, trademark applications, service marks, registered service marks or service mark applications, (ii) become entitled to the benefit of any trademarks, registered trademarks, trademark applications, trademark licenses, trademark license renewals, service marks, registered service marks, service mark applications, service mark licenses or service mark license renewals as licensor, or (iii) enter into any new trademark license agreement or service mark license agreement as licensor, the provisions of paragraph 4 above shall automatically, subject to the final sentence of Section 4(ii), apply thereto. Borrower shall give to the Agent written notice of events described in clauses (i), (ii) and (iii) of the preceding sentence reasonably promptly after the occurrence thereof. Borrower hereby authorizes the Agent to modify this Agreement unilaterally (after giving written prior notice of such modification to the Borrower) (i) by amending Schedule A to include any future trademarks, registered trademarks, trademark applications, service marks, registered service marks and service mark applications and by amending Schedule B to include any future trademark license agreements and service mark license agreements, which are Trademarks or Licenses under paragraph 4 above or under this paragraph 6, and (ii) by filing, in addition to and not in substitution for this Agreement, a duplicate original of this Agreement containing on Schedule A or B thereto, as the case may be, such future Trademarks or Licenses. 7. Royalties. Borrower hereby agrees that the use by the Agent of the Trademarks and Licenses as authorized hereunder in connection with the Agent's exercise of its rights and remedies under paragraph 15 or pursuant to Section 17 of the Security Agreement shall be coextensive with Borrower's rights thereunder and with respect thereto and without any liability for royalties or other related charges from the Agent or the other Holders of Secured Obligations to Borrower. 8. Right to Inspect; Further Assignments and Security Interests. The Agent shall have access to, examine, audit, make copies (at Borrower's expense) and extracts from and inspect Borrower's premises and examine Borrower's books, records and operations relating to the Trademarks and Licenses subject to and in accordance with the provisions of Section 6.2(F) of the Credit Agreement; provided, that in conducting such inspections and examinations, the Agent shall use reasonable efforts not to disturb unnecessarily the conduct of Borrower's ordinary business operations. From and after the occurrence of a Designated Default, Borrower agrees that the Agent, or a conservator appointed by the Agent, shall have the right to establish such reasonable additional product quality controls as the Agent or such conservator may deem reasonably necessary to assure maintenance of the quality of products sold by Borrower under the Trademarks and the Licenses or in connection with which such Trademarks and Licenses are used. Borrower agrees (i) not to sell or assign its respective interests in, or grant any exclusive license under, the Trademarks or the Licenses without the prior and express written consent of the Agent (such consent not to be unreasonably withheld), (ii) use commercially reasonable efforts to maintain the quality of such products as of the date hereof, and (iii) not to change the quality of such products in any material respect without the Agent's prior and express written consent. 9. Nature and Continuation of the Agent's Security Interest; Termination of the Agent's Security Interest. This Agreement is made for collateral security purposes only. This Agreement shall create a continuing security interest in the Trademarks and Licenses and shall terminate when the Secured Obligations have been paid in full in cash and the Credit Agreement and the Security Agreement have been terminated. When this Agreement has terminated, the security interests created hereby shall automatically terminate and the Agent shall promptly execute and deliver to Borrower, at Borrower's expense, all termination statements and other instruments as may be necessary or desirable to terminate the Agent's security interest in the Trademarks and the Licenses, subject to any disposition thereof which may have been made by the Agent pursuant to this Agreement or the Security Agreement. 10. Duties of Borrower. Borrower shall have the duty, to the extent desirable in the normal conduct of Borrower's business, to: (i) prosecute diligently any trademark application or service mark application that is part of the Trademarks pending as of the date hereof or hereafter until the termination of this Agreement, and (ii) make application for trademarks or service marks. Borrower further agrees (i) not to abandon any Trademark or License without the prior written consent of the Agent (such consent not to be unreasonably withheld), and (ii) to use commercially reasonable efforts to maintain in full force and effect the Trademarks and the Licenses that are or shall be necessary or economically desirable in the operation of Borrower's business. Any reasonable and documented expenses incurred in connection with the foregoing shall be borne by Borrower. Neither the Agent nor any of the Holders of Secured Obligations shall have any duty with respect to the Trademarks and Licenses. Without limiting the generality of the foregoing, neither the Agent nor any of the Holders of Secured Obligations shall be under any obligation to take any steps necessary to preserve rights in the Trademarks or Licenses against any other parties, but the Agent may do so at its option from and after the occurrence of a Default, and all reasonable and documented expenses incurred in connection therewith shall be for the sole account of Borrower and shall be added to the Secured Obligations secured hereby. 11. The Agent's Right to Sue. From and after the occurrence and during the continuance of a Designated Default, the Agent shall have the right, but shall not be obligated, to bring suit in its own name to enforce the Trademarks and the Licenses and, if the Agent shall commence any such suit, Borrower shall, at the request of the Agent, do any and all lawful acts and execute any and all proper documents reasonably required by the Agent in aid of such enforcement. Borrower shall, upon demand, promptly reimburse the Agent for all reasonable and documented costs and expenses incurred by the Agent in the exercise of its rights under this paragraph 11 (including, without limitation, reasonable fees and expenses of attorneys and paralegals for the Agent). 12. Waivers. The Agent's failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Agent thereafter to demand strict compliance and performance therewith nor shall any course of dealing between Borrower and the Agent have such effect. No single or partial exercise of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other right. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement shall be deemed to have been suspended or waived by the Agent unless such suspension or waiver is in writing signed by an officer of the Agent and directed to Borrower specifying such suspension or waiver. 13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but the provisions of this Agreement are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part hereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 14. Modification. This Agreement cannot be altered, amended or modified in any way, except as specifically provided in paragraph 6 hereof or by a writing signed by the parties hereto. 15. Cumulative Remedies; Power of Attorney. Upon the occurrence and during the continuance of a Designated Default Borrower hereby irrevocably designates, constitutes and appoints the Agent (and all Persons designated by the Agent in its sole and absolute discretion) as Borrower's true and lawful attorney-in-fact, and authorizes the Agent and any of the Agent's designees, in Borrower's or the Agent's name, to take any action and execute any instrument which the Agent reasonably deems necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, after the giving by the Agent of notice to Borrower of the Agent's intention to enforce its rights and claims against Borrower, including, without limitation, to (i) endorse Borrower's name on all applications, documents, papers and instruments necessary or desirable for the Agent in the use of the Trademarks or the Licenses, (ii) assign, pledge, convey or otherwise transfer title in or dispose of the Trademarks or the Licenses to anyone on commercially reasonable terms, and (iii) grant or issue any exclusive or nonexclusive license under the Trademarks or, to the extent permitted, under the Licenses, to anyone on commercially reasonable terms; provided, however, that the Borrower hereby irrevocably designates constitutes and appoints the Agent as Borrower's true and lawful attorney -in-fact and authorizes the Agent, at any time, to take any other actions with respect to the Trademarks or the Licenses as the Agent deems reasonably necessary to protect its own or the Holders of Secured Obligations' interests under the Credit Agreement consistent with the terms of this Agreement. Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable until all of the Secured Obligations shall have been paid in full in cash and the Credit Agreement shall have been terminated. Borrower acknowledges and agrees that this Agreement is not intended to limit or restrict in any way the rights and remedies of the Agent or the other Holders of Secured Obligations under the Security Agreement, but rather is intended to facilitate the exercise of such rights and remedies. The Agent shall have, in addition to all other rights and remedies given it by the terms of this Agreement, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction in which the Trademarks or the Licenses may be located or deemed located. Upon the occurrence and during the continuance of a Designated Default and the election by the Agent to exercise any of its remedies under Section 9-504 or Section 9-505 of the Uniform Commercial Code with respect to the Trademarks and Licenses, Borrower agrees to assign, convey and otherwise transfer title in and to the Trademarks and the Licenses to the Agent or any transferee of the Agent and to execute and deliver to the Agent or any such transferee all such agreements, documents and instruments as may reasonably be necessary, in the Agent's sole discretion, to effect such assignment, conveyance and transfer. All of the Agent's rights and remedies with respect to the Trademarks and the Licenses, whether established hereby, by the Security Agreement, by any other agreements or by law, shall be cumulative and may be exercised separately or concurrently. Notwithstanding anything set forth herein to the contrary, it is hereby expressly agreed that upon the occurrence and during the continuance of a Designated Default, the Agent may exercise any of the rights and remedies provided in this Agreement, the Security Agreement and any of the other Loan Documents. Borrower agrees that any notification of intended disposition of any of the Trademarks and Licenses required by law shall be deemed reasonably and properly given if given at least ten (10) days before such disposition; provided, however, that the Agent may give any shorter notice that is commercially reasonable under the circumstances. 16. Successors and Assigns. This Agreement shall be binding upon Borrower and its successors and assigns, and shall inure to the benefit of each of the Holders of Secured Obligations and its nominees, successors and assigns, as permitted and subject to the Credit Agreement. Borrower's successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession of or for Borrower; provided, however, that Borrower shall not voluntarily assign or transfer its rights or obligations hereunder without the Agent's prior written consent. 17. Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws (without regards to conflicts of law provisions) and decisions of the State of Illinois. 18. Notices. All notices or other communications hereunder shall be given in the manner and to the addresses set forth in the Credit Agreement. 19. Section Titles. The section titles herein are for convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 20. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 21. Merger. This Agreement represents the final agreement of the Borrower and the Agent with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or subsequent oral agreements, between the Borrower and the Agent or any Holder of Secured Obligations. 22. Interpretation and Inconsistencies. The rights and duties created by this Agreement shall, in all cases, be interpreted consistently with, and shall be in addition to (and not in lieu of), the rights and duties created by the Credit Agreement and the other Loan Documents. In the event that any provision of this Agreement shall be inconsistent with any provision of any other Loan Document, such provision of the other Loan Document shall govern. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. GFSI, INC. By: /s/ Illegible ------------------------------- Title: ATTEST: By: /s/ Illegible ------------------------- Title: Asst. Secretary Accepted and agreed to as of the day and year first above written. THE FIRST NATIONAL BANK OF CHICAGO, as Agent By: /s/ Illegible -------------------------------- First Vice President Signature Page to Trademark Security Agreement dated as of February 27, 1997 Schedule A to Trademark Security Agreement Dated as of February 27, 1997 Trademarks I. U.S. Trademarks and Trademark Applications. None, except:
Trademark Registration Registration Date Trademark - ------------ ----------------- --------- [1,887,563 04/04/95 TANDEM MARKETING] 1,797,387 10/05/93 BIG COTTON 1,665,340 11/19/91 NO NAME SAYS YOUR NAME LIKE OUR NAME 1,677,151 02/25/92 GEAR FOR SPORTS 1,675,150 02/11/92 GEAR FOR SPORTS and Design 1,675,149 02/11/92 GEAR FOR SPORTS and Design 1,674,293 02/04/92 GEAR FOR SPORTS 1,447,605 07/14/87 ABOVE AND BEYOND and Design 1,080,667 12/27/77 SPORTHREADS 1,016,367 07/22/75 WINNING WAYS
Trademark Application Application Date Trademark - ----------- ---------------- --------- 75-166,714 09/16/96 PROJECT WARMTH and design 75-146,544 08/07/96 GS and design 75-145,742 08/06/96 GS and design 73-409,637 01/03/83 STREET SMARTS
Trademark and Service Mark Applications None, except:
Trademark Registration Registration Date Trademark - ------------ ----------------- ---------
II. Foreign Trademarks and Trademark Applications. None, except:
Serial Registra- Country tion No. Registration Date Trademark - ------- -------- ----------------- --------- Switzerland 426,873 10/26/94 GEAR FOR SPORTS Switzerland 423,902 10/26/94 GEAR FOR SPORTS Denmark VR 2194 4/3/92 GEAR FOR SPORTS and Design
Country Appln. No. Appln. Date Trademark - ------- ---------- ----------- --------- Italy 91 1312 4/10/91 GEAR FOR SPORTS
United Kingdom 1,589,028 10/26/94 GEAR FOR SPORTS
Schedule B to Trademark Security Agreement Dated as of February 27, 1997 License Agreements None, except: 1. The License Agreement dated April 1, 1994 between Winning Ways, Inc., as Licensor, and Software Athletics, Inc., as Licensee, whereby Licensor granted Licensee the right to use the trademarks "GEAR FOR SPORTS" and "BIG COTTON", and the rights associated with those trademarks, in Canada. STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) On this 26th day of February, 1997, before me personally came Nathan L. Bloch, to me known, who being by me duly sworn, did depose and say that he is First Vice President of The First National Bank of Chicago, the national banking association described in and which executed the foregoing instrument, and that he signed his name thereto on the date hereof by order of said national banking association. /s/ Keith D. Arnold ----------------------------- Notary Public KEITH D. ARNOLD Notary Public, State of New York No 01AR5050761 Qualified in New York County Commission Expires Oct. 16, 1997 STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) On this 26th day of February, 1997, before me personally came A. Richard Caputo, Jr., to me known, who being by me duly sworn, did depose and say that he is Vice President of GFSI, INC., the Delaware corporation described in and which executed the foregoing instrument, and that he signed his name thereto on the date hereof by order of said corporation. /s/ Keith D. Arnold ----------------------------- Notary Public KEITH D. ARNOLD Notary Public, State of New York No 01AR5050761 Qualified in New York County Commission Expires Oct. 16, 1997 EX-10.4 19 MORTGAGE SECURITY AGMT, FINANCING STATEMENTS Kansas MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND ASSIGNMENT OF RENTS AND LEASES THIS MORTGAGE, SECURITY AGREEMENT, FINANCING STATEMENT AND ASSIGNMENT OF RENTS AND LEASES ("Mortgage") entered into as of the 27th day of February, 1997, by GFSI, INC., a Delaware corporation ("Mortgagor"), having its chief executive office at 9700 Commerce Parkway, Lenexa, Kansas 66219 in favor of THE FIRST NATIONAL BANK OF CHICAGO ("Mortgagee"), having an office at One First National Plaza, Chicago, Illinois 60670, as contractual representative for its benefit and for the benefit of the "Holders of Secured Obligations" as defined in that certain Credit Agreement (as amended, restated, modified, supplemented or substituted from time to time, the "Credit Agreement"), dated of even date herewith, by and among Mortgagor, Mortgagee and the institutions from time to time a party thereto as Lenders. The term "Holders of Secured Obligations" shall include those who are, and those who may hereafter become, parties to the Credit Agreement in such capacity. Except as otherwise provided herein, all capitalized terms used but not defined herein shall have the respective meanings given to them in the Credit Agreement, which is hereby incorporated herein by reference. WITNESSETH: WHEREAS, pursuant to and upon satisfaction of the conditions set forth in the Credit Agreement, the Lenders have agreed to make certain A Term Loans, B Term Loans, Revolving Loans and Swing Line Loans and Mortgagee and Lenders have agreed to extend certain other financial accommodations from time to time to Mortgagor, all in an aggregate principal amount not to exceed One Hundred Fifteen Million and no/100 Dollars ($115,000,000.00); and WHEREAS, pursuant to the provisions of the Credit Agreement, Mortgagor has executed and delivered to Lenders, to further evidence the Loans, (i) those certain Term Loan A Notes, dated of even date herewith, in the aggregate principal amount of This document was prepared by and after recording should be returned to: James L. Marovitz Sidley & Austin One First National Plaza Chicago, Illinois 60603 Forty Million and no/100 Dollars ($40,000,000.00), (ii) those certain Term Loan B Notes, dated of even date herewith, in the aggregate principal amount of Twenty Five Million and no/100 Dollars ($25,000,000.00), (iii) those certain Revolving Notes, dated of even date herewith, in the aggregate principal amount of Fifty Million and no/100 Dollars ($50,000,000.00) and (iv) that certain Swing Line Note, dated of even date herewith, in the aggregate principal amount of One Million and no/100 Dollars ($1,000,000)(the Term Loan A Notes, the Term Loan B Notes, the Revolving Notes and the Swing Line Note, and any and all renewals, extensions for any period, increases or rearrangements thereof are jointly referred to as the "Notes"); and WHEREAS, as a condition to Mortgagee's and Lenders' extension of such credit and financial accommodations to Mortgagor including, without limitation, the extension of credit evidenced by the Notes and pursuant to the Credit Agreement, Mortgagee and Lenders have required that Mortgagor enter into this Mortgage and grant to Mortgagee, for itself and as Agent, the liens and security interests referred to herein to secure, subject to the limitation as to amount as hereinafter provided, (i) the payment of the principal amount evidenced by the Notes together with interest thereon; (ii) payment of all L/C Obligations; (iii) payment of the principal amount, together with interest thereon, of all present and future advances of money made by Mortgagee or Holders of Secured Obligations to Mortgagor, including without limitation, the reborrowing of principal previously repaid pursuant to the Credit Agreement, as well as all other Secured Obligations of Mortgagor to Mortgagee or Holders of Secured Obligations; and (iv) other payment and performance obligations related to this Mortgage (the aforesaid Secured Obligations of Mortgagor to Mortgagee, together with the obligations evidenced by the Notes plus interest and other payment and performance obligations being hereinafter referred to collectively as the "Liabilities"); and WHEREAS, the Liabilities secured hereby shall not exceed an aggregate principal amount, at any one time outstanding of Thirteen Million Two Hundred Thousand and no/100 Dollars ($13,200,000.00), provided, that the foregoing limitation shall apply only to the lien upon the real property created by this Mortgage, and it shall not in any manner limit, affect or impair any grant of a security interest or other right in favor of the Mortgagee under the provisions of the Credit Agreement or under any other security agreement at any time executed by Mortgagor; NOW, THEREFORE, in consideration of the premises contained herein and to secure payment of the Liabilities and in consideration of One Dollar ($1.00) in hand paid, the receipt and - 2 - sufficiency whereof are hereby acknowledged, Mortgagor does hereby grant, remise, release, alien, convey, mortgage and warrant to Mortgagee, its successors and assigns, the following described real estate (the "Land") in Johnson County, Kansas, and does further grant a security interest to Mortgagee in all Mortgaged Property (as defined below) as may be secured under the Uniform Commercial Code (the "Code") in effect in the State of Kansas (the "State"): See Exhibit A attached hereto and by this reference made a part hereof for the legal description of the Land which Land, together with all right, title and interest, if any, which Mortgagor may now have or hereafter acquire in and to all improvements, buildings and structures now or hereafter located thereon of every nature whatsoever, is herein called the "Premises". TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Mortgagor may now have or hereafter acquire in and to (a) all easements, rights of way, gores of land or any lands occupied by streets, ways, alleys, passages, sewer rights, water courses, water rights and powers, and public places adjoining said Land, and any other interests in property constituting appurtenances to the Premises, or which hereafter shall in any way belong, relate or be appurtenant thereto, and (b) all hereditaments, gas, oil, minerals (with the right to extract, sever and remove such gas, oil and minerals), and easements, of every nature whatsoever, located in or on the Premises and all other rights and privileges thereunto belonging or appertaining and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the rights and interests described in subparagraphs (a) and (b) above (hereinafter the "Property Rights"). TOGETHER WITH all right, title and interest, if any, including any after-acquired right, title and interest, and including any right of use or occupancy, which Mortgagor may now or hereafter acquire in and to all fixtures and appurtenances of every nature whatsoever now or hereafter located in, on or attached to, and used or intended to be used in connection with, or with the operation of, the Premises, including, but not limited to (a) all apparatus, machinery and equipment of Mortgagor and (b) all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of any of the foregoing (the items described in the foregoing - 3 - clauses (a) and (b) being the "Fixtures"). It is mutually agreed, intended and declared that the Premises and all of the Property Rights and Fixtures owned by Mortgagor (referred to collectively herein as the "Real Property") shall, so far as permitted by law, be deemed to form a part and parcel of the Land and for the purpose of this Mortgage to be real estate and covered by this Mortgage. It is also agreed that if any of the property herein mortgaged is of a nature so that a security interest therein can be perfected under the Code in effect in the State, this instrument shall constitute a security agreement, fixture filing and financing statement, and Mortgagor agrees to execute, deliver and file or refile any financing statement, continuation statement, or other instruments Mortgagee may reasonably require from time to time to perfect or renew such security interest under the Code. To the extent permitted by law, (i) all of the Fixtures are or are to become fixtures on the Land and (ii) this instrument, upon recording or registration in the real estate records of the proper office, shall constitute a "fixture-filing" within the meaning of Sections 9-313 and 9-402 of the Code. Subject to the terms and conditions of the Credit Agreement, the remedies for any violation of the covenants, terms and conditions of the agreements herein contained shall be as prescribed herein or by general law, or, as to that part of the security in which a security interest may be perfected under the Code, by the specific statutory consequences now or hereafter enacted and specified in the Code, all at Mortgagee's sole election. TOGETHER WITH all the estate, right, title and interest of the Mortgagor in and to (i) all judgments, insurance proceeds, awards of damages and settlements resulting from condemnation proceedings or the taking of the Real Property, or any part thereof, under the power of eminent domain or for any damage (whether caused by such taking or otherwise) to the Real Property, or any part thereof, or to any rights appurtenant thereto, and all proceeds of any sales or other dispositions of the Real Property or any part thereof; and (except as otherwise provided herein or in the Credit Agreement) the Mortgagee is hereby authorized to collect and receive said awards and proceeds and to give proper receipts and acquittances therefor, and to apply the same as provided in the Credit Agreement; and (ii) all contract rights, general intangibles, actions and rights in action relating to the Real Property including, without limitation, all rights to insurance proceeds and unearned premiums arising from or relating to damage to the Real Property; and (iii) all proceeds, products, replacements, additions, substitutions, renewals and accessions of and to the Real Property. (The rights and interests described in this paragraph shall hereinafter be called the "Intangibles".) - 4 - As additional security for the Liabilities secured hereby, Mortgagor (i) does hereby pledge and assign to Mortgagee from and after the date hereof (including any period of redemption), primarily and on a parity with the Real Property, and not secondarily, all the rents, issues and profits of the Real Property and all rents, issues, profits, revenues, royalties, bonuses, rights and benefits due, payable or accruing (including all deposits of money as advance rent, for security or as earnest money or as down payment for the purchase of all or any part of the Real Property) (the "Rents") under any and all present and future leases, contracts or other agreements relative to the ownership or occupancy of all or any portion of the Real Property, and (ii) except to the extent such a transfer or assignment is not permitted by the terms thereof, does hereby transfer and assign to Mortgagee all such leases and agreements (including all Mortgagor's rights under any contracts for the sale of any portion of the Mortgaged Property and all revenues and royalties under any oil, gas and mineral leases relating to the Real Property) (the "Leases"). Mortgagee hereby grants to Mortgagor the right to collect and use the Rents as they become due and payable under the Leases, but not more than one (1) month in advance thereof, unless a Designated Default shall have occurred provided that the existence of such right shall not operate to subordinate this assignment to any subsequent assignment, in whole or in part, by Mortgagor, and any such subsequent assignment shall be subject to the rights of the Mortgagee under this Mortgage. Mortgagor further agrees to execute and deliver such assignments of leases or assignments of land sale contracts as Mortgagee may from time to time request. In the event of a Designated Default (1) the Mortgagor agrees, upon demand, to deliver to the Mortgagee all of the Leases with such additional assignments thereof as the Mortgagee may request and agrees that the Mortgagee may assume the management of the Real Property and collect the Rents, applying the same upon the Liabilities in the manner provided in the Credit Agreement, and (2) the Mortgagor hereby authorizes and directs all tenants, pur chasers or other persons occupying or otherwise acquiring any interest in any part of the Real Property to pay the Rents due under the Leases to the Mortgagee upon request of the Mortgagee. Mortgagor hereby appoints Mortgagee as its true and lawful attorney in fact to manage said property and collect the Rents, with full power to bring suit for collection of the Rents and possession of the Real Property, giving and granting unto said Mortgagee and unto its agent or attorney full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in the protection of the security hereby conveyed; provided, however, that (i) this power of attorney and assignment of rents shall not be construed as an obligation upon said Mortgagee to make or cause to be made any - 5 - repairs that may be needful or necessary and (ii) Mortgagee agrees that until such Designated Default as aforesaid, Mortgagee shall permit Mortgagor to perform the aforementioned management responsibilities. Upon Mortgagee's receipt of the Rents, at Mortgagee's option, it may use the proceeds of the Rents to pay: (1) reasonable charges for collection thereof, costs of necessary repairs and other costs requisite and necessary during the continuance of this power of attorney and assignment of rents, (2) general and special taxes, insurance premiums, and (3) any or all of the Liabilities pursuant to the provisions of the Credit Agreement. This power of attorney and assignment of rents shall be irrevocable until this Mortgage shall have been satisfied and released of record and the releasing of this Mortgage shall act as a revocation of this power of attorney and assignment of rents. Mortgagee shall have and hereby expressly reserves the right and privilege (but assumes no obligation) to demand, collect, sue for, receive and recover the Rents, or any part thereof, now existing or hereafter made, and apply the same in accordance with the provisions of the Credit Agreement. All of the property described above, and each item of property therein described, not limited to but including the Land, the Premises, the Property Rights, the Fixtures, the Real Property, the Intangibles, the Rents and the Leases, is herein referred to as the "Mortgaged Property." Nothing herein contained shall be construed as constituting the Mortgagee a mortgagee-in-possession in the absence of the taking of actual possession of the Mortgaged Property by the Mortgagee. Nothing contained in this Mortgage shall be construed as imposing on Mortgagee any of the obligations of the lessor under any Lease of the Mortgaged Property in the absence of an explicit assumption thereof by Mortgagee. In the exercise of the powers herein granted the Mortgagee, except as provided in the Credit Agreement, no liability shall be asserted or enforced against the Mortgagee, all such liability being expressly waived and released by Mortgagor. TO HAVE AND TO HOLD the Mortgaged Property, properties, rights and privileges hereby conveyed or assigned, or intended so to be, unto Mortgagee, its beneficiaries, successors and assigns, forever for the uses and purposes herein set forth. Mortgagor hereby releases and waives all rights under and by virtue of the Homestead Exemption Laws, if any, of the State and Mortgagor hereby covenants, represents and warrants that, at the time of the ensealing and delivery of these presents, Mortgagor is well seised of the Mortgaged Property in fee simple and with lawful authority to sell, assign, convey and mortgage the Mortgaged - 6 - Property, and that the title to the Mortgaged Property is free and clear of all encumbrances, except as described on Exhibit B attached hereto and made a part hereof, and that, except for the encumbrances set forth on Exhibit B, Mortgagor will forever defend the same against all lawful claims. The following provisions shall also constitute an integral part of this Mortgage: 1. Payment of Taxes on the Mortgage. Without limiting any of the provisions of the Credit Agreement, Mortgagor agrees that, if the United States or any department, agency or bureau thereof or if the State or any of its subdivisions having jurisdiction shall at any time require documentary stamps to be affixed to this Mortgage or shall levy, assess, or charge any tax, assessment or imposition upon this Mortgage or the credit or indebtedness secured hereby or the interest of Mortgagee in the Premises or upon Mortgagee by reason of or as holder of any of the foregoing then, Mortgagor shall pay for such documentary stamps in the required amount and deliver them to Mortgagee or pay (or reimburse Mortgagee for) such taxes, assessments or impositions. Mortgagor agrees to exhibit to Mortgagee, at any time upon request, official receipts showing payment of all taxes, assessments and charges which Mortgagor is required or elects to pay under this paragraph. Mortgagor agrees to indemnify Mortgagee against liability on account of such documentary stamps, taxes, assessments or impositions, whether such liability arises before or after payment of the Liabilities and regardless of whether this Mortgage shall have been released. 2. Leases Affecting the Real Property. Mortgagor agrees faithfully to perform all of its obligations under all present and future Leases at any time assigned to Mortgagee as additional security, and to refrain from any action or inaction which would result in termination of any such Leases or in the diminution of the value thereof or of the Rents due thereunder. All future lessees under any Lease made after the date of recording of this Mortgage shall, at Mortgagee's option and without any further documentation, attorn to Mortgagee as lessor if for any reason Mortgagee becomes lessor thereunder, and, upon demand, pay rent to Mortgagee, and Mortgagee shall not be responsible under such Lease for matters arising prior to Mortgagee becoming lessor thereunder. 3. Use of the Real Property. Mortgagor agrees that it shall not permit the public to use the Real Property in any manner that might tend, in Mortgagee's reasonable judgment, to impair Mortgagor's title to such property or any portion thereof, - 7 - or to make possible any claim or claims of easement by prescription or of implied dedication to public use. 4. Indemnification. Mortgagor shall not use or permit the use of any part of the Real Property for an illegal purpose, including, without limitation, the violation of any environmental laws, statutes, codes, regulations or practices. Without limiting any indemnification Mortgagor has granted in the Credit Agreement, Mortgagor agrees to indemnify and hold harmless Mortgagee from and against any and all losses, suits, liabilities, fines, damages, judgments, penalties, claims, charges, costs and expenses (including reasonable attorneys' and paralegals' fees, court costs and disbursements) which may be imposed on, incurred or paid by or asserted against the Real Property by reason or on account of or in connection with (i) the construction, reconstruction or alteration of the Real Property, (ii) any negligence or misconduct of Mortgagor, any lessee of the Real Property, or any of their respective agents, contractors, subcontractors, servants, employees, licensees or invitees, (iii) any accident, injury, death or damage to any person or property occurring in, on or about the Real Property or any street, drive, sidewalk, curb or passageway adjacent thereto, or (iv) any other transaction arising out of or in any way connected with the Mortgaged Property. 5. Insurance. Mortgagor shall, at its sole expense, obtain for, deliver to, assign and maintain for the benefit of Mortgagee, until the Liabilities are paid in full, insurance policies as specified in the Credit Agreement. In the event of a casualty loss, the net insurance proceeds from such insurance policies shall be paid and applied as specified in the Credit Agreement. 6. Condemnation Awards. Mortgagor hereby assigns to Mortgagee, as additional security, all awards of damage resulting from condemnation proceedings or the taking of or injury to the Real Property for public use, and Mortgagor agrees that the proceeds of all such awards shall be paid and applied as specified in the Credit Agreement. 7. Remedies. Subject to the provisions of the Credit Agreement, upon the occurrence of a Designated Default under the terms of the Credit Agreement, in addition to any rights and remedies provided for in the Credit Agreement, and to the extent permitted by applicable law, the following provisions shall apply: (a) Mortgagee's Power of Enforcement. It shall be lawful for Mortgagee to (i) immediately sell the Mortgaged - 8 - Property either in whole or in separate parcels, as prescribed by the State law, under power of sale, which power is hereby granted to Mortgagee to the full extent permitted by the State law, and thereupon, to make and execute to any purchaser(s) thereof deeds of conveyance pursuant to applicable law or (ii) immediately foreclose this Mortgage by judicial action. The court in which any proceeding is pending for the purpose of foreclosure of this Mortgage may, at once or at any time thereafter, either before or after sale, without notice and without requiring bond, and without regard to the solvency or insolvency of any person liable for payment of the Liabilities secured hereby, and without regard to the then value of the Mortgaged Property or the occupancy thereof as a homestead, appoint a receiver (the provisions for the appointment of a receiver and assignment of rents being an express condition upon which the Loan hereby secured is made) for the benefit of Mortgagee, with power to collect the Rents, due and to become due, during such foreclosure suit and the full statutory period of redemption notwithstanding any redemption. The receiver, out of the Rents when collected, may pay costs incurred in the management and operation of the Real Property, prior and subordinate liens, if any, and taxes, assessments, water and other utilities and insurance, then due or thereafter accruing, and may make and pay for any necessary repairs to the Real Property, and may pay all or any part of the Liabilities or other sums secured hereby or any deficiency decree entered in such foreclosure proceedings. Upon or at any time after the filing of a suit to foreclose this Mortgage, the court in which such suit is filed shall have full power to enter an order placing Mortgagee in possession of the Real Property with the same power granted to a receiver pursuant to this subparagraph and with all other rights, privileges and obligations of a mortgagee-in-possession under applicable law. (b) Mortgagee's Right to Enter and Take Possession, Operate and Apply Income. Mortgagee shall, at its option, have the right, acting through its agents or attorneys, either with or without process of law, forcibly or otherwise, to enter upon and take possession of the Real Property, expel and remove any persons, goods, or chattels occupying or upon the same, to collect or receive all the Rents, and to manage and control the same, and to lease the same or any part thereof, from time to time, and, after deducting all reasonable attorneys' fees and expenses, and all reasonable expenses incurred in the protection, care, maintenance, management and operation of the Real Property, distribute and apply the remaining net income in accordance with the terms of the Credit Agreement or upon any deficiency decree entered in any foreclosure proceedings. - 9 - 8. Application of the Rents or Proceeds from Fore closure or Sale. In any foreclosure of this Mortgage by judicial action, or any sale of the Mortgaged Property by advertisement, in addition to any of the terms and provisions of the Credit Agreement, there shall be allowed (and included in the decree for sale in the event of a foreclosure by judicial action) to be paid out of the Rents or the proceeds of such foreclosure proceeding and/or sale: (a) Liabilities. All of the Liabilities and other sums secured hereby which then remain unpaid; and (b) Other Advances. All other items advanced or paid by Mortgagee pursuant to this Mortgage; and (c) Costs, Fees and Other Expenses. All court costs, reasonable and documented attorneys' and paralegals' fees and expenses, appraiser's fees, advertising costs, filing fees and transfer taxes, notice expenses, expenditures for documentary and expert evidence, stenographer's charges, publication costs, and costs (which may be estimated as to items to be expended after entry of the decree) of procuring all abstracts of title, title searches and examinations, title guarantees, title insurance policies, Torrens certificates and similar data with respect to title which Mortgagee in the reasonable exercise of its judgment may deem necessary. All such expenses shall become additional Liabilities secured hereby when paid or incurred by Mortgagee in connection with any proceedings, including but not limited to probate and bankruptcy proceedings, to which Mortgagee shall be a party, either as plaintiff, claimant or defendant, by reason of this Mortgage or any indebtedness hereby secured or in connection with the preparations for the commencement of any suit for the foreclosure, whether or not actually commenced, or sale by advertisement. The proceeds of any sale (whether through a foreclosure proceeding or Mortgagee's exercise of the power of sale) shall be distributed and applied in accordance with the terms of the Credit Agreement. 9. Cumulative Remedies; Delay or Omission Not a Waiver. Each remedy or right of Mortgagee shall not be exclusive of but shall be in addition to every other remedy or right now or hereafter existing at law or in equity. No delay in the exercise or omission to exercise any remedy or right accruing on the occurrence or existence of any Default shall impair any such remedy or right or be construed to be a waiver of any such Default or acquiescence therein, nor shall it affect any subsequent Default of the same or different nature. Every such remedy or right may be exercised concurrently or independently and when and as often as may be deemed expedient by Mortgagee. - 10 - 10. Mortgagee's Remedies against Multiple Parcels. If more than one property, lot or parcel is covered by this Mortgage, and if this Mortgage is foreclosed upon, or judgment is entered upon any Liabilities secured hereby, or if Mortgagee exercises its power of sale, execution may be made upon or Mortgagee may exercise its power of sale against any one or more of the properties, lots or parcels and not upon the others, or upon all of such properties or parcels, either together or separately, and at different times or at the same time, and execution sales or sales by advertisement may likewise be conducted separately or concurrently, in each case at Mortgagee's election. 11. No Merger. In the event of a foreclosure of this Mortgage or any other mortgage or deed of trust securing the Liabilities, the Liabilities then due the Mortgagee shall not be merged into any decree of foreclosure entered by the court, and Mortgagee may concurrently or subsequently seek to foreclose one or more mortgages or deeds of trust which also secure said Liabilities. 12. Notices. All notices and other communications provided to any party hereto under this Mortgage shall be in writing or by telex or by facsimile and addressed or delivered to such party at its address set forth below or at such other address as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid, shall be deemed given when received; any notice, if transmitted by telex or facsimile, shall be deemed given when transmitted (answerback confirmed in the case of telexes). if to Mortgagor: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attn: Robert Shaw Telecopy No.: 913/752-3346 with copies to: The Jordan Company 9 West 57th Street 40th Floor New York, New York 10019 Attn: A. Richard Caputo, Jr. Telecopy No.: 212/755-5263 and - 11 - Mayer, Brown & Platt 1675 Broadway, Suite 1900 New York, New York 10019 Attn: James Carlson Telecopy No.: 212/262-1910 if to Mortgagee: The First National Bank of Chicago One First National Plaza Suite 0088 Chicago, Illinois 60670-0088 Attn: Nathan L. Bloch Telecopy No.: 312/732-1117 with a copy to: Sidley & Austin One First National Plaza Chicago, Illinois 60603 Attn: Sara Elizabeth Bartlett Telecopy No. 312/853-7036 13. Extension of Payments. Mortgagor agrees that, without affecting the liability of any person for payment of the Liabilities secured hereby or affecting the lien of this Mortgage upon the Mortgaged Property or any part thereof (other than persons or property explicitly released as a result of the exercise by Mortgagee of its rights and privileges hereunder), Mortgagee may at any time and from time to time, on request of the Mortgagor, without notice to any person liable for payment of any Liabilities secured hereby, but otherwise subject to the provisions of the Credit Agreement, extend the time, or agree to alter or amend the terms of payment of such Liabilities. Mortgagor further agrees that any part of the security herein described may be released with or without consideration without affecting the remainder of the Liabilities or the remainder of the security. 14. Governing Law. Mortgagor agrees that this Mortgage is to be construed, governed and enforced in accordance with the laws of the State. Wherever possible, each provision of this Mortgage shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Mortgage shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the - 12 - remainder of such provision or the remaining provisions of this Mortgage. 15. Satisfaction of Mortgage. Upon full payment of all the Liabilities, at the time and in the manner provided in the Credit Agreement, or upon satisfaction of the conditions set forth in the Credit Agreement for release of the Mortgaged Property from this Mortgage, this conveyance or lien shall be null and void and, upon demand therefor following such payment or satisfaction of the conditions set forth in the Credit Agreement for release of the Mortgaged Property, as the case may be, a satisfaction of mortgage or reconveyance of the Mortgaged Property shall promptly be provided by Mortgagee to Mortgagor. 16. Successors and Assigns Included in Parties. This Mortgage shall be binding upon the Mortgagor and upon the suc cessors, assigns and vendees of the Mortgagor and shall inure to the benefit of the Mortgagee's successors and assigns; all references herein to the Mortgagor and to the Mortgagee shall be deemed to include their respective successors and assigns. Mort gagor's successors and assigns shall include, without limitation, a receiver, trustee or debtor in possession of or for the Mort gagor. Wherever used, the singular number shall include the plural, the plural shall include the singular, and the use of any gender shall be applicable to all genders. 17. Waiver of Appraisement, Valuation, Stay, Extension and Redemption Laws. Mortgagor agrees, to the full extent permitted by law, that at all times following a Designated Default, neither Mortgagor nor anyone claiming through or under it shall or will set up, claim or seek to take advantage of any appraisement, valuation, stay, or extension laws now or hereafter in force, in order to prevent or hinder the enforcement or fore closure of this Mortgage or the absolute sale of the Mortgaged Property or the final and absolute putting into possession thereof, immediately after such sale, of the purchaser thereat; and Mortgagor, for itself and all who may at any time claim through or under it, hereby waives, to the full extent that it may lawfully so do, the benefit of all such laws and any and all right to have the assets comprising the Mortgaged Property marshaled upon any foreclosure of the lien hereof and agrees that Mortgagee or any court having jurisdiction to foreclose such lien may sell the Mortgaged Property in part or as an entirety. To the full extent permitted by law, Mortgagor hereby waives any and all statutory or other rights of redemption from sale under any order or decree of foreclosure of this Mortgage, on its own behalf and on behalf of each and every person acquiring any interest in or title to the Mortgaged Property subsequent to the date hereof. - 13 - 18. Interpretation with Other Documents. Notwith standing anything in this Mortgage to the contrary, in the event of a conflict or inconsistency between the Mortgage and the Credit Agreement, the provisions of the Credit Agreement shall govern. 19. Future Advances. This Mortgage is given for the purpose of securing future advances which the Mortgagee may make to or for Mortgagor pursuant and subject to the terms and provisions of the Credit Agreement, provided that the maximum amount of principal indebtedness secured by the lien of this Mortgage shall not exceed, at any one time, the sum of $13,200,000.00. The parties hereto intend that, in addition to any other debt or obligation secured hereby, this Mortgage shall secure unpaid balances of loan advances made after this Mortgage is delivered to the Register of Deeds, Johnson County, Kansas, whether made pursuant to an obligation of Mortgagee or otherwise, and in such event, such advances up to the maximum principal amount of $13,200,000.00 shall be secured to the same extent as if such future advances were made on the date hereof, although there may be no advance made at the time of execution hereof and although there may be no indebtedness outstanding at the time any advance is made. Such loan advances may or may not be evidenced by notes executed pursuant to the Credit Agreement. 20. Invalid Provisions to Affect No Others. In the event that any of the covenants, agreements, terms or provisions contained in this Mortgage shall be invalid, illegal or unen forceable in any respect, the validity of the remaining covenants, agreements, terms or provisions contained herein or in the Credit Agreement shall not be in any way affected, prejudiced or disturbed thereby. In the event that the application of any of the covenants, agreements, terms or provisions of this Mortgage is held to be invalid, illegal or unenforceable, those covenants, agreements, terms and provisions shall not be in any way affected, prejudiced or disturbed when otherwise applied. 21. Changes. Neither this Mortgage nor any term hereof may be changed, waived, discharged or terminated orally, or by any action or inaction, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. To the extent permitted by law, any agreement hereafter made by Mortgagor and Mortgagee relating to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance. 22. Time of Essence. Time is of the essence with respect to the provisions of this Mortgage. - 14 - 23. Further Assurances. Mortgagor agrees, upon request of the Mortgagee, from time to time, to execute, acknowledge, deliver and cause to be recorded (if so requested) all such additional documents and further assurances of title and do or cause to be done all such further acts as may be reasonably necessary to preserve the liens and security interests created hereby, including the priority thereof. 24. No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Mortgage. In the event an ambiguity or question of intent or interpretation arises, this Mortgage shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Mortgage. IN WITNESS WHEREOF, this instrument is executed as of the day and year first above written by the person or persons identified below on behalf of Mortgagor (and said person or persons hereby represent that they possess full power and authority to execute this instrument). THE MORTGAGOR HEREBY DECLARES AND ACKNOWLEDGES THAT THE MORTGAGOR HAS RECEIVED, WITHOUT CHARGE, A TRUE COPY OF THIS MORTGAGE. MORTGAGOR: GFSI, INC. By /s/ John L. Menghini --------------------------------- Its ______ President - 15 - State of Kansas County of Johnson This instrument was acknowledged to me on February 25, 1997 by John L. Menghini as President of GFSI, Inc., a Delaware corporation. Kristi L. Wallace ------------------------------ Notary Public (Seal) My Commission Expires: 2-14-99 - 16 - Commercial Johnson County, Kansas EXHIBIT A Legal Description All of Lot 9 and part of Lot 13 and 15, "KANSAS COMMERCE CENTER", a subdivision of Lenexa, Johnson County, Kansas, all being more particularly described as follows: Beginning at the Southerlymost corner of said Lot 9; thence North 56 degrees 00 minutes 00 seconds East along the Southeasterly line of said Lot 9, a distance of 175.00 feet; thence in a Northeasterly and Northerly direction, continuing along said Southeasterly line and along a curve to the left, tangent to the last described course, having a radius of 420.00 feet and a central angle of 58 degrees 15 minutes 44 seconds, an arc distance of 427.08 feet; thence North 2 degrees 15 minutes 44 seconds West along the East line of said Lot 9 and tangent to said curve, a distance of 135.00 feet; thence in a Northerly, Northwesterly and Westerly direction along the Northeasterly line of said Lot 9 and along a curve to the left, tangent to the last described course, having a radius of 320.00 feet and a central angle of 89 degrees 56 minutes 05 seconds, an arc distance of 502.29 feet; thence South 87 degrees 48 minutes 11 seconds West, along the Northerly line of said Lot 9, and tangent to the last said curve, a distance of 60.00 feet; thence in a Westerly, Southwesterly and Southerly direction along the Northwesterly line of said Lot 9 and along a curve to the left, tangent to the last described course, having a radius of 320.00 feet and a central angle of 80 degrees 06 minutes 00 seconds, an arc distance of 447.36 feet; thence South 7 degrees 42 minutes 11 seconds West along the Westerly line of said Lot 9 and tangent to the last described curve, a distance of 60.79 feet; thence in a Southerly and Southwesterly distance of 60.79 feet; thence in a Southerly and Southwesterly direction along the Westerly line of said Lot 9 and along the Northwesterly line of said Lot 13 and along a curve to the right, tangent to the last described course, have a radius of 380.00 feet and a central angle of 54 degrees 17 minutes 38 seconds, an arc distance of 360.09 feet; thence South 2 degrees 18 minutes 17 seconds East, a distance of 149.44 feet; thence North 87 degrees 48 minutes 11 seconds East, a distance of 375.21 feet to a point on the Northeasterly line of said Lot 15 that is South 66 degrees 05 minutes 00 seconds East, a distance of 95.00 feet from the Northerlymost corner thereof; thence South 66 degrees 05 minutes 00 seconds East along the last said Northeasterly line, a distance of 155.00 feet to an angle point therein; thence South 34 degrees 00 minutes 00 seconds East along the Northeasterly line of said Lot 15, a distance of 100.00 feet to the point of beginning. 110th Street Johnson County, Kansas EXHIBIT A Legal Description A tract of land in the South 1/2 of Section 8, Township 13, Range 24, City of Lenexa, Johnson County, Kansas said tract being more particularly described as follows: Commencing at the Southeast corner of the Southeast 1/4 of Section 8, Township 13, Range 24, City of Lenexa, Johnson County, Kansas; thence North 02(degree) 13' 25" West on the East line of the Southeast 1/4 of Section 8, Township 13, Range 24, 614.97 feet to a point; thence South 88(degree) 02' 50" West, 2460.01 feet on the existing Northerly Right-of-Way Line of 110th Street and its Westerly prolongation to a point; said point being on the existing Westerly Right-of-Way Line of Lakeview Avenue and also being the True Point of Beginning; thence continuing South 88(degree) 02' 50" West, 726.00 feet to a point; thence North 02(degree) 13' 25" West, 360.00 feet to a point; thence North 88(degree) 02' 50" East, 726.00 feet to a point on the existing Westerly Right-of-Way Line of Lakeview Avenue, thence South 02(degree) 13' 25" East, on the existing Westerly Right-of-Way Line of Lakeview Avenue, 360.00 feet to the True Point of Beginning. Commercial EXHIBIT B Permitted Exceptions Those title exceptions listed on the certain "marked-up" title commitment/policy no. 97-1233, dated ____________, issued by Chicago Title Insurance Company for the property described on Exhibit A hereto. Commercial EXHIBIT B Permitted Exceptions Those title exceptions listed on that certain "marked-up" title commitment/policy no. 97-1233, dated ______________, issued by Chicago Title Insurance Company for the property described on Exhibit A hereto. EX-10.5(A) 20 RESTRICTED ACCT AGMTS (BOATMEN'S NATIONAL) Execution Copy RESTRICTED ACCOUNT AGREEMENT ---------------------------- TO: The First National Bank of Chicago as contractual representative (the "Agent") under that certain Credit Agreement, dated as of February 27, 1997 (the "Credit Agreement"), among GFSI, Inc., a Delaware corporation (the "Borrower"), the Agent and those financial institutions from time to time parties thereto (the "Holders of Secured Obligations"). Ladies and Gentlemen: You have advised us that the Borrower has entered or will enter into the Credit Agreement and that in connection therewith the Borrower has granted to the Agent, for its benefit and the benefit of the Holders of Secured Obligations, a lien on and security interest in substantially all of the assets of the Borrower, including all of the accounts receivable and inventory of the Borrower. This will confirm that the Borrower and the undersigned collection bank (the "Bank") have agreed as follows with respect to (i) the accounts identified on Schedule 1 attached hereto (the "Accounts") and (ii) the lock box identified on Schedule 2 attached hereto, to which the Borrower's customers and other persons and entities obligated to the Borrower deliver checks and other items of payment (said lock box is hereinafter referred to as the "Lock Box"): 1. The Borrower and the Bank acknowledge and confirm that although the Accounts and Lock Box shall remain in the name of the Borrower, all funds now or at any time hereafter deposited to the Accounts and Lock Box and all of the Borrower's rights regarding such Accounts and Lock Box constitute part of the collateral in which the Borrower has granted a security interest to the Agent, to secure the Borrower's obligations under the Credit Agreement and the other instruments, documents and agreements executed in connection therewith, and that during a "Notification Period" (as defined below), the Bank shall not be permitted to follow the Borrower's directions as to disbursements and deposits with respect thereto. The Bank's authorized representatives will have access to the Lock Box, under the authority given by the Borrower to the appropriate Post Office, and will make regular pick-ups from the Lock Box timed to gain the maximum benefit of early presentation and availability of funds. Upon the Bank's receipt thereof, checks and other items of payment so received will be processed in accordance with the terms of the most current lock box agreement between the Bank and the Borrower. 2. The Bank will not exercise, and hereby releases, any banker's lien upon and any right of set off against checks or other items of payment remitted to the Lock Box and/or deposited in the Accounts, except (i) with respect to the Bank's normal fees and charges for operating the Accounts and (ii) for amounts previously credited to Borrower's Accounts which the Bank subsequently determines are uncollectible items. Checks returned unpaid because of uncollected or insufficient funds shall be handled in accordance with the most current lock box agreement between the Bank and the Borrower. 3. From and after the date on which the Agent notifies the Bank, in writing, that it is exercising its rights under this Collection Account Agreement (the "Notice") until the date on which the Agent notifies the Bank that it is withdrawing such Notice (such period being referred to herein as a "Notification Period"), the Bank, the Borrower and the Agent agree that, unless the Agent otherwise instructs the Bank in writing: A. The Bank will not honor drafts, demands, withdrawal requests or remittance instructions by the Borrower. B. The Bank will hold solely for account of the Agent all funds which may be on deposit in the Accounts and the Agent shall have the exclusive right to direct the Bank as to the disposition of all checks, other items of payment and amounts deposited in the Accounts and remitted to the Lock Box. C. The Bank will remit all such funds directly to the Agent, as soon as the funds are collected, by electronic transfer of immediately available funds in accordance with the Agent's written wire-transfer instructions given from time to time to the Bank. D. The Bank shall be entitled to rely upon any notice or other writing received from the Agent and the Borrower waives any claim of, and releases the Bank from any liability for, complying with the terms of this Collection Account Agreement. 4. The Borrower will receive a receipted copy of the activity relating to the Lock Box for its records. The Bank will not close the Account without giving the Agent at least thirty (30) days' prior written notice at the address set forth below or such other address as the Agent may from time to time indicate by written notice to the Bank, the Bank will send to the Agent at such address a copy of each periodic statement for the Account, as and when the statement is sent to the Borrower. 5. Any notice (including, without limitation, any Notice) required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered (i) three (3) business days after deposit in the United States mails, with proper postage prepaid, (ii) when sent after receipt of confirmation if sent by telecopy, (iii) one (1) business day after deposit with a reputable overnight courier with all charges prepaid, or (iv) when delivered, if hand delivered by messenger. -2- 6. This Collection Account Agreement shall be binding upon the Bank and the Borrower and their respective successors and assigns and shall inure to the benefit of the Agent, each of the Holders of Secured Obligations and their respective successors and assigns. This Collection Account Agreement may not be modified without the Agent's prior written consent, but may be terminated by the Agent or the Bank upon thirty (30) days' prior written notice to the other parties hereto. The Bank reserves the right to debit any of the Accounts for reasonable and customary fees relating to the services performed. This Collection Account Agreement shall be deemed effective as of February 27, 1997, upon execution hereof by the Bank. BOATMEN'S NATIONAL BANK: By: Name: Steven O. Stoecker Title: Senior Vice President Address: 14 West 10th Street Kansas City, Missouri 64105 Attn: Steven O. Stoecker Ann Mauzy Telecopy No.: 816-979-7174 Confirmation No.: 816-979-7149 -3- Acknowledged and agreed to as of this 27th day of February, 1997: GFSI, Inc., as Borrower By: /s/ Illegible -------------------------- Name: Title: Address: 9700 Commerce Parkway Lenexa, KS 66219 Attn: Robert Shaw Telecopy No.: 913/752-3346 Confirmation No.: 913/888-0445 Acknowledged and agreed to as of this 27th day of February, 1997 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By: /s/ Nathan L. Bloch -------------------------- Name: Nathan L. Bloch Title: First Vice President Address: One First National Plaza Suite 0088 Chicago, Illinois 60670-0088 Attn: Nathan L. Bloch Telecopy No.: 312-732-1117 Confirmation No.: 312-732-2243 -4- EX-10.5(B) 21 RESTRICTED ACCT AGMT (HILLCREST BANK) RESTRICTED ACCOUNT AGREEMENT SIDLEY & AUSTIN TO: The First National Bank of Chicago as contractual representative (the "Agent") under that certain Credit Agreement, dated as of LONDON February 27, 1997 (the "Credit Agreement"), ------ among GFSI, Inc., a Delaware corporation SINGAPORE (the "Borrower"), the Agent and those financial ------ institutions from time to time parties thereto TOKYO (the "Holders of Secured Obligations"). Ladies and Gentlemen: You have advised us that the Borrower has entered or will enter into the Credit Agreement and that in connection therewith the Borrower has granted to the Agent, for its benefit and the benefit of the Holders of Secured Obligations, a lien on and security interest in substantially all of the assets of the Borrower, including all of the accounts receivable and inventory of the Borrower. This will confirm that the Borrower and the undersigned bank (the "Bank") have agreed as follows with respect to the accounts identified on Schedule 1 attached hereto (the "Accounts") to which the Borrower deposits funds: 1. The Borrower and the Bank acknowledge and confirm that although the Accounts shall remain in the name of the Borrower, all funds now or at any time hereafter deposited to the Accounts and all of the Borrower's rights regarding such Accounts constitute part of the collateral in which the Borrower has granted a security interest to the Agent, to secure the Borrower's obligations under the Credit Agreement and the other instruments, documents and agreements executed in connection therewith, and that during a "Notification Period" (as defined below), the Bank shall not be permitted to follow the Borrower's directions as to disbursements and deposits with respect thereto. 2. The Bank will not exercise, and hereby releases, any banker's lien upon and any right of set off against any checks or other items of payment deposited in the Accounts, except (i) with respect to the Bank's normal fees and charges for operating the Accounts and (ii) for amounts previously credited to Borrower's Accounts which the Bank subsequently determines are uncollectible items. Checks returned unpaid because of uncollected or insufficient funds shall be redeposited without advice. 3. From and after the date on which the Agent notifies the Bank, in writing, that it is exercising its rights under this Collection Account Agreement (the "Notice") until the date on which the Agent notifies the Bank that it is withdrawing such Notice (such period being referred to herein as a "Notification Period"), the Bank, the Borrower and the Agent agree that, unless the Agent otherwise instructs the Bank in writing: A. The Bank will not honor drafts, demands, withdrawal requests or remittance instructions by the Borrower. B. The Bank will hold solely for account of the Agent all funds which may be on deposit in the Accounts and the Agent shall have the exclusive right to direct the Bank as to the disposition of all checks, other items of payment and amounts deposited in the Accounts. C. The Bank will remit all such funds directly to the Agent, as soon as the funds are collected, by electronic transfer of immediately available funds in accordance with the Agent's written wire-transfer instructions given from time to time to the Bank. D. The Bank shall be entitled to rely upon any notice or other writing received from the Agent and the Borrower waives any claim of, and releases the Bank from any liability for, complying with the terms of this Collection Account Agreement. 4. The Bank will not close the Accounts without giving the Agent at least thirty (30) days' prior written notice at the address set forth below or such other address as the Agent may from time to time indicate by written notice to the Bank, the Bank will send to the Agent at such address a copy of each periodic statement for the Account, as and when the statement is sent to the Borrower. 5. Any notice (including, without limitation, any Notice) required or desired to be served, given or delivered hereunder shall be in writing and shall be deemed to have been validly served, given or delivered (i) three (3) business days after deposit in the United States mails, with proper postage prepaid, (ii) when sent after receipt of confirmation if sent by telecopy, (iii) one (1) business day after deposit with a reputable overnight courier with all charges prepaid, or (iv) when delivered, if hand delivered by messenger. 6. This Collection Account Agreement shall be binding upon the Bank and the Borrower and their respective successors and assigns and shall inure to the benefit of the Agent, each of the Holders of Secured Obligations and their respective successors and assigns. This Collection Account Agreement may not be modified without the Agent's prior written consent, but may be terminated by the Agent or the Bank upon thirty (30) days' prior written notice to the other parties hereto. This Collection Account Agreement shall be deemed effective as of February 27,1997 upon execution hereof by the Bank. HILL CREST BANK: By: /s/ Marvin Szneler ---------------------------- Name: Marvin Szneler Title: Vice President Address: 11111 W. 95th Overland Park, KS 66214 Attn: ______________ Telecopy No.: Confirmation No.: ___ -2- Acknowledged and agreed to as of this 27th day of February, 1997: GFSI, Inc., as Borrower By: /s/ Illegible --------------------------- Name: Title: Address: 9700 Commerce Parkway Lenexa, KS 66219 Attn: Robert Shaw Telecopy No.: 913/752-3346 Confirmation No.: 913/888-0445 Acknowledged and agreed to as of this 27th day of February, 1997 THE FIRST NATIONAL BANK OF CHICAGO, as Agent By: /s/ Nathan L. Bloch --------------------------- Name: Nathan L. Bloch Title: First Vice President Address: One First National Plaza Suite 6173 Chicago, Illinois 60670-6173 Attn: Nathan L. Bloch Telecopy No.: 312-732-1117 Confirmation No.: 312-732-2243 -3- EX-10.6 22 TAX SHARING AGREEMENT TAX SHARING AGREEMENT THIS TAX SHARING AGREEMENT (this "Agreement"), made as of the 27th day of February, 1997, is entered into by and between GFSI HOLDINGS, INC., a Delaware corporation ("Holdings"), and GFSI, INC., a Delaware corporation ("Acquisition"). W I T N E S S E T H : WHEREAS, Holdings is the parent corporation of an affiliated group or groups of corporations, including Acquisition; WHEREAS, both parties desire to file consolidated federal income tax returns pursuant to the Internal Revenue Code of 1986, as amended, and any successor thereto; and WHEREAS, the parties hereto desire to provide that Acquisition shall pay to Holdings with respect to taxable years commencing on or after February 27, 1997, the amounts which Acquisition and/or the Acquisition Group (as defined below) would have been required to pay as federal income taxes if the Acquisition Group had not been included in a consolidated federal income tax return filed for an affiliated group of which Holdings is the parent corporation for the taxable year under consideration; NOW, THEREFORE, intending to be legally bound, the parties hereto agree as follows: 1. Definitions. The following terms shall have the following meanings when used herein: (a) "Acquisition Group" means Acquisition and all corporations which would be includible in an Affiliated Group of which Acquisition would be the parent corporation were Acquisition not included in the Holdings Affiliated Group. If there is no other corporation part of an Affiliated Group of which Acquisition is the common parent, "Acquisition Group" shall mean Acquisition. (b) "Affiliated Group" has the meaning set forth in Section 1504 of the Code. (c) "Agreement" has the meaning set forth in the Preamble hereto. (d) "Bank" means The First National Bank of Chicago. (e) "Calculated Tax" means the amount of federal income tax (including alternate minimum tax and any interest, penalties and additions to tax) which the Holdings Group or the Acquisition Group, as the case may be, would have been required to pay had it not been included in the Consolidated Return of the Holdings Affiliated Group. Such Calculated Tax shall be computed in accordance with the methods of tax accounting utilized by the Holdings Affiliated Group for federal income tax purposes by: (1) allowing each Group its proportionate share of the Holdings Affiliated Group's bracket amount under Section 11(b) of the Code and tax credits, if any, which such Group would have been entitled to were it filing its own (i) Consolidated Return and were such Group a separate and distinct controlled group with no member a member of another controlled group or (ii) Separate Return; (2) allowing each Group its net operating loss, capital loss, and tax credit carryforwards, if any, which such Group would have been entitled to were it filing its own Consolidated Return (or, if applicable, its own Separate Return); and (3) treating all intercompany dividends received as qualifying dividends within the meaning of Code Section 243(a)(3). (f) "Code" means the Internal Revenue Code of 1986, as amended, and any successor thereto. (g) "Consolidated Return" means the consolidated federal income tax return or amended consolidated federal income tax return filed by an Affiliated Group pursuant to Section 1501 of the Code. (h) "Consolidated Tax" means the amount of federal income tax (including alternate minimum tax and any interest, penalties and additions to tax) due and payable by the Holdings Affiliated Group for a taxable year, shown on the Consolidated Return as filed with respect to a taxable year or as readjusted due to a Final Determination. (i) "Credit Agreement" means the Credit Agreement between Acquisition and The First National Bank of Chicago, dated the date hereof. (j) "Final Determination" means any agreement reached with the Internal Revenue Service under which Holdings and the Internal Revenue Service agree to the Consolidated Tax for the Holdings Affiliated Group or any final administrative or judicial decision determining the amount of such Consolidated Tax which is either non-appealable or which Acquisition and Holdings have agreed to in writing that Holdings should no longer dispute. (k) "Group" means the Holdings Group or the Acquisition Group, as the context requires. 2 (l) "Holdings Affiliated Group" means the Holdings Group and the Acquisition Group. (m) "Holdings Group" means Holdings and all corporations includible in the Holdings Affiliated Group other than members of the Acquisition Group. If there is no other corporation part of the Affiliated Group of which Holdings is the common parent (excluding any member of the Acquisition Group for this purpose), then the "Holdings Group" shall mean Holdings. (n) "Reference Rate" means the rate of interest publicly announced by the Bank in Chicago, Illinois as its "reference rate." (o) "Separate Return" means an income tax return filed by a C corporation without including another corporation that is part of an Affiliated Group. 2. Consolidated Returns. Holdings and Acquisition shall both be included in Consolidated Returns filed for the Holdings Affiliated Group for so long as they remain members of the Holdings Affiliated Group. 3. Consolidated Tax. If in any taxable year commencing on or after February 27, 1997, there is Consolidated Tax for the Holdings Affiliated Group, Holdings shall be responsible for payment of the Consolidated Tax. 4. Allocation of Tax. The Consolidated Tax, including estimated Consolidated Tax payments, shall be apportioned among the members of the Holdings Affiliated Group under the applicable provisions of Section 1552(a)(1) of the Code and the income tax regulations thereunder. The chief financial officer of Holdings shall determine the amount of the estimated Consolidated Tax or the Consolidated Tax and his determination shall be final and conclusive, provided such determination of Consolidated Tax or estimated Consolidated Tax is not arbitrary or unreasonable. Acquisition shall pay to Holdings the Acquisition Group's allocated portion of Consolidated Tax or estimated Consolidated Tax under the provisions of this paragraph and such payment shall be made within ten (10) business days of the date upon which it has been notified of such allocated portion. 5. Additional Tax Payments. In addition to amounts payable by Acquisition to Holdings pursuant to Paragraph 4 hereof, Acquisition shall also pay to Holdings pursuant to Paragraph 6 the difference between (i) the Acquisition Group's Calculated Tax and (ii) amounts paid pursuant to Paragraph 4 hereof for taxable years commencing on or after February, 1997. If the difference between (i) and (ii) is negative, Holdings shall pay to Acquisition the amount of such difference. The intent of this provision is that Acquisition shall pay to Holdings, in the aggregate, an amount 3 equal to the Acquisition Group's Calculated Tax for the taxable year at issue. 6. Calculation of Tax. As soon as reasonably possible after the end of each taxable year, the chief financial officer of Holdings shall determine the Calculated Tax for that taxable year and his determination shall be final and conclusive, provided such determination of Calculated Tax has been reviewed by an independent public accountant, including the independent public accountant regularly used by Holdings, in connection with the annual audit of the Holdings Affiliated Group and provided such determination of reduction in tax liability is not arbitrary or unreasonable. Within thirty (30) days after such chief financial officer's determination, one hundred percent (100%) of the amount determined under Paragraph 5 for the taxable year shall be paid to Holdings. 7. Adjustments. The Consolidated Tax, the apportionment of such Consolidated Tax, the Calculated Tax, and the amounts due under Paragraph 5 shall be subject to further adjustment from time to time in accordance with any Final Determination of Consolidated Tax or any filing of an amended consolidated return. If as a result of such adjustment there is an increase or decrease in Acquisition Group's allocated portion of Consolidated Tax or the amounts due under Paragraph 5, the amount of such increase or decrease shall be paid by Acquisition to Holdings, or Holdings to Acquisition, as the case may be, within thirty (30) days of the date of such Final Determination or filing of an amended Consolidated Return. 8. Losses. If for any taxable year the Acquisition Group sustains a net operating loss or becomes entitled to a tax credit which could otherwise be applied to reduce the Calculated Tax of a prior taxable year beginning on or after February 27, 1997, during which the Acquisition Group was a member of the Holdings Affiliated Group, the Acquisition Group's Calculated Tax for such prior taxable year shall be adjusted in accordance with Paragraph 7 to reflect such carryback. To the extent that Holdings receives a refund for such prior taxable year as a result of the application of such carryback, the amount of such refund, including interest thereon, shall be paid by Holdings to Acquisition within thirty (30) days of the receipt of such refund by Holdings. If the application of such carryback results in a decrease in Acquisition Group's Calculated Tax for such prior taxable year but Holdings does not receive a refund equal to such decrease, the amount of such decrease, less any payments to Acquisition on account of such decrease under the previous sentence, shall be treated as an indebtedness of Holdings to Acquisition and may be used to offset any future amounts Acquisition is required to pay under this Agreement. 9. Refunds. If Holdings receives a tax refund or credit in respect of any taxable year commencing on or after 4 February 27, 1997, in which the Acquisition Group was a member of the Holdings Affiliated Group, such refund or credit, including interest thereon, if any, shall be allocated to the member of the Holdings Affiliated Group in a manner consistent with the adjustments made pursuant to Paragraphs 7 and 8. The portion of the amount of the tax refund or credit, including interest thereon, if any, allocable to the Acquisition Group in conformity with such recomputation shall be paid to Acquisition by Holdings within thirty (30) days of the receipt of such refund. 10. Interest on Payments. In the event Acquisition or Holdings fails to remit an amount required to be paid under Paragraphs 4 through 9, such amount shall be due with interest determined each month using the Reference Rate in effect at the close of business on the bank day immediately preceding the first day of that month. 11. Allocation of Liability. As between Holdings and Acquisition, the provisions of this Agreement shall fix the liability of Acquisition to Holdings or Holdings to Acquisition, as the case may be, as to the matters covered, even if such provisions are not controlling for federal income tax or other purposes. 12. Other Taxes. To the extent state, local and other income taxes of jurisdictions within and outside the United States in which the Holdings Affiliated Group (and/or a member thereof) files income tax returns on a combined, consolidated or unitary basis or based on principles of income tax reporting consistent with the principles of income tax reporting contained in Sections 1501 through 1504 of the Code and regulations thereunder, this Agreement shall apply to the payment of such state, local and other income taxes. This Agreement shall apply by modifying its terms only so as to permit this Agreement to account for such income taxes. 13. Suspension of Payments. No payments shall be made or due under this Agreement for any tax period commencing on or after the occurrence of any of the following: (a) The date with respect to which Acquisition gives notice of termination of this Agreement to Holdings pursuant to authorization of Acquisition's Board of Directors, which notice may be given at any time, if (i) Holdings shall have been adjudicated a bankrupt, (ii) a receiver or trustee of Holdings or of all or substantially all of its property shall have been appointed and not discharged within sixty (60) days of such appointment, (iii) Holdings shall have voluntarily filed a petition in bankruptcy under the provisions of 11 U.S.C. ss.ss. 101 et. seq. (the "Federal Bankruptcy Act") or any other law for the relief of debtors, (iv) Holdings shall have made a general assignment for the benefit of creditors or shall have admitted in writing its inability to pay its debts generally as they become due, (v) 5 Holdings shall have consented to the appointment of a receiver or a trustee of Holdings or of all or substantially all of its property, or (vi) at any time the affairs of Holdings shall have been placed in the hands of a creditors committee or similar group; or (b) The date with respect to which Holdings gives notice of termination of this Agreement to Acquisition pursuant to authorization of Holdings' Board of Directors, which notice may be given at any time, if (i) Acquisition shall have been adjudicated a bankrupt, (ii) a receiver or trustee of Acquisition or of all or substantially all of its property shall have been appointed and not discharged within sixty (60) days of such appointment, (iii) Acquisition shall have voluntarily filed a petition in bankruptcy under the provisions of the Federal Bankruptcy Act or any other law for the relief of debtors, (iv) Acquisition shall have made a general assignment for the benefit of creditors or shall have admitted in writing its inability to pay its debts generally as they become due, (v) Acquisition shall have consented to the appointment of a receiver or a trustee of Acquisition or of all or substantially all of its property, or (vi) at any time the affairs of Acquisition shall have been placed in the hands of a creditors committee or similar group. 14. Right to Suspend Payments. During any period when an involuntary petition under the Federal Bankruptcy act or any similar act for the relief of debtors is pending against either Holdings or Acquisition, Acquisition or Holdings, respectively, may, at its option, suspend payments to the other party without terminating this Agreement. 15. Credit Agreement Restrictions. Except for payments under Paragraph 3 of this Agreement, to the extent any payments due hereunder are not permitted to be made under the terms of the Credit Agreement, such amounts shall be suspended and paid when permitted under the Credit Agreement. 16. Governing Law. This Agreement is made under the laws of the state of New York, which law shall be controlling in all matters relating to the interpretation, construction or enforcement hereof. 17. Termination of Agreement. This Agreement shall terminate on the date Acquisition is no longer included as a member of the Holdings Affiliated Group; provided, however, such termination shall not relieve any party of its obligation hereunder with respect to taxable years ending on or before such termination. 18. Amendment. This Agreement may be amended, at any time and from time to time hereafter, by the written agreement of the parties hereto at the time of such amendment, and may also be 6 terminated at any time by the mutual written consent by the parties hereto. 19. Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be given in writing and shall be given by personal delivery or certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If Holdings, at: GFSI Holdings, Inc. Suite 4000 9 West 57th Street New York, New York 10019 Attention: A. Richard Caputo, Jr. If Acquisition, at: GFSI, Inc. Suite 4000 9 West 57th Street New York, New York 10019 Attention: A. Richard Caputo, Jr. [THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, all as of the day and year first written above. HOLDINGS: GFSI HOLDINGS, INC., a Delaware Corporation By: /s/ A. Richard Caputo, Jr. -------------------------------- A. Richard Caputo, Jr., Vice President ACQUISITION: GFSI, INC., a Delaware Corporation By: /s/ A. Richard Caputo, Jr. -------------------------------- A. Richard Caputo, Jr., Vice President 8 EX-10.7 23 MANAGEMENT CONSULTING AGREEMENT MANAGEMENT CONSULTING AGREEMENT THIS MANAGEMENT CONSULTING AGREEMENT ("Agreement"), is executed as of the 27th day of February, 1997, by and between TJC MANAGEMENT CORPORATION, a Delaware corporation (the "Consultant"), and GFSI HOLDINGS, INC., a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Consultant has and/or has access to personnel who are highly skilled in the field of rendering advice to business concerns such as the Company; and WHEREAS, the Company desires to retain the Consultant to provide business and financial advice to the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein set forth, the parties hereto agree as follows: 1. The Company hereby retains the Consultant, through the Consultant's own personnel or through personnel available to the Consultant, to render consulting services from time to time to the Company and its subsidiaries (whether now existing or hereafter acquired) in connection with their financial and business affairs, their relationships with their lenders, stockholders and other third-party associates or affiliates and the expansion of their businesses. The term of this Agreement shall commence on the date hereof and continue until February 28, 2007 unless extended, or sooner terminated, as provided in Section 5 below. The Consultant's personnel shall be reasonably available to the Company's managers, auditors and other personnel for consultation and advice, subject to the Consultant's reasonable convenience and scheduling. Services may be rendered at the Consultant's offices or at such other locations selected by the Consultant as the Company and the Consultant shall from time to time agree. 2. During the term of this Agreement, the Company shall pay the Consultant: (i) an annual fee equal to, (x) during the first two (2) years of this Agreement, $500,000, (y) during the third, fourth and fifth years of this Agreement, the greater of $500,000 or one and one-half percent (1.5%) of the Company's earnings before extraordinary income or losses, interest expense, interest income, other non-operating income and expense, income taxes, and transaction-related amortization for the preceding fiscal year ("EBITA"), but in no event more than $750,000 in any year, and (z) after the fifth anniversary of this Agreement, the greater of $500,000 or one and one-half percent (1.5%) of the Company's EBITA, but in no event more than $1,000,000 in any year, with such fee being payable in quarterly installments each year commencing on March 31, 1997; (ii) an investment banking and sponsorship fee of up to two percent (2%) of the aggregate consideration paid (including noncompetition and similar payments) by the Company and/or its subsidiaries in connection with the acquisition by the Company and/or its subsidiaries of all or substantially all of the outstanding capital stock, warrants, options or other rights to acquire capital stock, or all or substantially all of the assets of another individual, corporation, partnership or other business entity; and (iii) a financial consulting fee not to exceed one percent (1%) of the amount of money obtained or made available pursuant to any financing (including, without limitation, any refinancing) by the Company with the assistance of the Consultant; provided, however, if in connection with any transaction the Consultant has earned a fee under clause (ii) above, the Consultant shall not be entitled to a fee under clause (iii) for the same transaction. All fees and expenses payable under clauses (ii) and (iii) above shall be subject to the approval of the Company's Board of Directors. Notwithstanding the foregoing to the contrary, the Company shall pay the Consultant a fee under clauses (ii) and (iii) above in the aggregate amount of $3,250,000 in connection with the acquisition of all the capital stock of Winning Ways, Inc., a Missouri corporation, such amount to be paid to the Consultant on the date hereof. 3. Reasonable out-of-pocket expenses incurred by the Consultant and its personnel in performing services hereunder to the Company and its subsidiaries shall be promptly reimbursed to it by the Company upon the Consultant's rendering of a statement therefor, together with such supporting data as the Company shall reasonably require. 4. Notwithstanding the foregoing, the Company shall not be required to pay the fees under Section 2 (without limiting the fees, reimbursements and payments provided under Sections 3, 8 and 9 of this Agreement which shall be due and payable in all events) (a) if and to the extent expressly prohibited by the provisions of any credit, stock, financing or other agreements or instruments binding upon the Company, its subsidiaries or properties, (b) if the Company has not paid interest on any interest payment date or has postponed or not made any principal payments with respect to any of its indebtedness on any scheduled payment dates, or (c) if the Company has not paid dividends on any dividend payment date as set forth in its certificate of incorporation (unless such 2 dividends are accrued) or as declared by its Board of Directors, or has postponed or not made any redemptions on any redemption date as set forth in its certificate of incorporation or any certificate of designation with respect to its preferred stock, if any. Any payments otherwise owed hereunder, which are not made for any of the above-mentioned reasons, shall not be cancelled but rather shall accrue, and shall be payable by the Company promptly when, and to the extent that, the Company is no longer prohibited from making such payments, the Company has become current with respect to such principal or interest payments, the Company has become current with respect to such dividends and has made such redemptions with respect to such preferred stock, if any. Any payment required hereunder which is not paid when due shall bear interest at the rate of six percent (6.0%) per annum. 5. This Agreement shall be automatically renewed for successive one-year terms unless either party hereto, within sixty (60) days prior to the scheduled renewal date, notifies the other party as to its election to terminate this Agreement. Notwithstanding the foregoing, this Agreement may be terminated by not less than ninety (90) days' prior written notice from the Company to the Consultant at any time after (i) substantially all of the stock or substantially all of the assets of the Company or all of its subsidiaries are sold, or (ii) the Company is merged or consolidated into another entity unaffiliated with the Consultant and/or a majority of the Company's stockholders immediately prior to such merger and the Company is not the survivor of such transaction. 6. The Consultant shall have no liability to the Company on account of (i) any advice which it renders to the Company, provided the Consultant believed in good faith that such advice was useful or beneficial to the Company at the time it was rendered, (ii) the Consultant's inability to obtain financing or achieve other results desired by the Company or the Consultant's failure to render services to the Company at any particular time or from time to time, or (iii) the failure of any acquisition to meet the financial, operating or other expectations of the Company. 7. Notwithstanding anything contained in this Agreement to the contrary, the Company agrees and acknowledges that the Consultant and its shareholders, employees, directors and affiliates intend to engage and participate in acquisitions and business transactions outside the scope of the relationship created by this Agreement and neither the Consultant nor any of its shareholders, employees, directors or affiliates shall be under any obligation whatsoever to make such acquisitions or business transactions through the Company or offer such acquisitions or business transactions to the Company. 3 8. The Company will, to the fullest extent permitted by applicable law, indemnify and hold harmless the Consultant, its affiliates and associates, and each of the respective owners, partners, officers, directors, employees and agents of each of the foregoing, from and against any loss, liability, damage, claim or expenses (including the fees and expenses of counsel) (collectively "Damages") arising as a result of or in connection with this Agreement, the Consultant's services hereunder or other activities on behalf of the Company and its subsidiaries, unless such Damages resulted from Consultant's lack of good faith at the time it rendered any advice to the Company. 9. a. This Agreement sets forth the entire understanding of the parties with respect to the Consultant's rendering of services to the Company. This Agreement may not be modified, waived, terminated or amended except expressly by an instrument in writing signed by the Consultant and the Company. b. This Agreement may not be assigned by either party without the consent of the other party, but shall be binding upon and inure to the benefit of the parties and their respective successors and assigns upon such permitted assignment. c. In the event that any provision of this Agreement shall be held to be void or unenforceable in whole or in part, the remaining provisions of this Agreement and the remaining portion of any provision held void or unenforceable in part shall continue in full force and effect. d. Except as otherwise specifically provided herein, notice given hereunder shall be deemed sufficient if delivered personally or sent by registered or certified mail to the address of the party for whom intended at the principal executive offices of such party, or at such other address as such party may hereinafter specify by written notice to the other party. e. No waiver by either party of any breach of any provision of this Agreement shall be deemed a continuing waiver or a waiver of any preceding or succeeding breach of such provision or of any other provision herein contained. f. The Consultant and its personnel shall, for purposes of this Agreement, be independent contractors with respect to the Company. g. This Agreement shall be governed by the internal laws (and not the law of conflicts) of the state of New York. (Signatures on next page) 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CONSULTANT: TJC MANAGEMENT CORPORATION, a Delaware corporation By: /s/ David W. Zalaznick ------------------------------------- David W. Zalaznick President COMPANY: GFSI HOLDINGS, INC., a Delaware corporation By: /s/ A. Richard Caputo, Jr. ------------------------------------- A. Richard Caputo, Jr. Vice President 5 EX-10.8 24 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 27th day of February, 1997, is made by and between GFSI, INC., a Delaware corporation (the "Company"), and ROBERT M. WOLFF, an individual ("Executive"). W I T N E S S E T H: WHEREAS, Executive has been actively involved in the business of Winning Ways, Inc., a Missouri corporation ("Winning Ways"), as an employee, stockholder, officer and member of the Board of Directors; and WHEREAS, the Company and GFSI Holdings, Inc., a Delaware corporation ("Holdings"), collectively, have agreed to purchase all of the issued and outstanding shares of capital stock of Winning Ways pursuant to an Agreement for Purchase and Sale of Stock, dated January 24, 1997 (the "Purchase Agreement"), by and among the Company, Holdings and all the stockholders of Winning Ways; WHEREAS, in connection with the transactions contemplated by the Purchase Agreement, Winning Ways will be merged with and into the Company, with the Company as the surviving entity; WHEREAS, the Company desires to retain the services of Executive and Executive desires to be retained by the Company; NOW, THEREFORE, in consideration of the premises, the covenants and the agreements contained herein, the parties hereto agree as follows: 1. Employment. The Company hereby retains the Executive as the Chairman of the Company, and the Executive hereby agrees to serve as the Chairman of the Company, for a term commencing as of the date of this Agreement and ending on the tenth 10th) anniversary of the date of this Agreement. The Executive shall be accessible to the Company and shall undertake and perform such services as are reasonably requested by the Company's Board of Directors, including, without limitation, assisting in any transition necessitated by the sale of the stock of Winning Ways and fostering the Company's relationships with its suppliers and customers. Notwithstanding the foregoing, the Company acknowledges that the Executive has historically taken, and will continue to take, frequent and lengthy vacations. According, the Company understands that the Executive will not undertake a full-time work schedule. 2. Salary. During the term of this Agreement, the Company will pay Executive an annual salary (the "Salary") as set forth on Exhibit A attached hereto, payable in substantially equal monthly or more frequent installments. 3. Benefits. During the term of this Agreement, the Executive will receive the benefits set forth on Exhibit B attached hereto. Such benefits will be essentially the same as Executive received while employed by Winning Ways, including (x) a secretary, (y) an assistant and (z) the use of three automobiles of a type similar to the makes and models provided by Winning Ways to the Executive prior to the date hereof; provided, however, the Executive shall not receive any (i) stock options or (ii) bonuses. 4. Expenses. The Company shall reimburse the Executive for such ordinary, necessary and reasonable business expenses as are advanced by him in the performance of his services hereunder; but such expenses shall be substantiated by the Executive in writing to the reasonable satisfaction of the Company. Notwithstanding the preceding sentence, the Company shall not reimburse the Executive for any commuting expenses to or from the Company or any of its facilities. 5. Termination. (a) The Company may terminate this Agreement, all of the Company's obligations under this Agreement, and Executive's employment hereunder for "cause," upon the delivery of written notice to Executive, following the occurrence of any one of the following events on the part of Executive: 1. Conviction of any felony; 2. Executive's violation of any non-competition agreement with the Company or with any Affiliate (as defined in the Purchase Agreement) of the Company. 3. Total or partial disability of Executive that has continued for at least 12 months; 4. Frequent drunkenness on the job; or 5. The death of Executive. (b) In the event that this Agreement is terminated by the Company for "cause" or voluntarily terminated by Executive, the Company shall pay any amounts earned by Executive under Section 2 hereof up to the date of termination. (c) If the Company terminates this Agreement for "cause," but the Executive contests such termination, the Company shall continue to make all payments required by Section 2 of this Agreement after the date of such termination until and unless a final judgment is rendered in favor of the Company and against the 2 Executive. For purposes of this section, a final judgment means a judgment from which there is no possibility of further appeal. 6. Inventions, Etc. The Executive agrees that all inventions conceived of or developed by the Executive during the term of his employment with the Company, whether alone or jointly with others and whether during working hours or otherwise, which relate to the business or interests of the Company, or any business or other company in which the Company or Holdings now or hereafter has an ownership interest, shall be the Company's exclusive property. The Executive shall (i) promptly disclose in writing to the Company each invention, conceived or developed by the Executive during the term of his employment with the Company, (ii) assign all rights to such inventions to the Company and (iii) assist the Company in every way to obtain and protect any patents, trademarks or copyrights on such inventions. 7. Notices. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service for next day delivery, with delivery confirmed, or (iv) telecopied, with receipt confirmed, addressed as follows: a. If to Executive: Robert M. Wolff 6432 Aberdeen Prairie Village, Kansas 66208 with a copy to: Leonard Rose, Esq. Rose, Brouillette & Shapiro, P.C. 4900 Main Street, 11th Floor Kansas City, MO 64112 Telecopier: 816-756-1639 b. If to the Company to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: John L. Menghini Telecopier: 913-752-3336 with copies to: GFSI Holdings, Inc. 9 West 57th Street, Suite 4000 3 New York, New York 10019 Attention: A. Richard Caputo, Jr. Telecopier: 212-750-5263 G. Robert Fisher, Esq. Bryan Cave LLP 1200 Main Street, Suite 3500 Kansas City, Missouri 64105 Telecopier: 816-391-7600 or such other persons or addresses as shall be furnished in writing by either party to the other party. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) three days after the date when deposited with the United States mail properly addressed, (iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 8. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by Executive. 9. Attorneys' Fees. If any legal action or other proceeding is commenced to enforce or interpret any provision of, or otherwise relating to, this Agreement, the losing party shall pay the prevailing party's reasonable expenses incurred in the investigation of any claim leading to the proceeding, preparation for and participation in the proceeding, any appeal or other post judgment motion, and any action to enforce or collect the judgment, including contempt, garnishment, levy, discovery and bankruptcy. "Expenses" shall include, without limitation, court or other proceeding costs and experts' and attorneys' fees and their expenses. The phrase "prevailing party" shall mean the party who is determined in the proceeding to have prevailed and who prevails by dismissal, default or otherwise. 10. Governing Law. This Agreement shall be governed by the law of the State of Missouri as to all matters, including, but not limited to, matters of validity, construction, effect and performance, except that no doctrine of choice of law shall be used to apply any law other than of Missouri. 11. Severability. The Company and Executive believe the covenants contained in this Agreement are reasonable and fair in all respects, and are necessary to protect the interests of the Company and Executive. However, in case any one or more of the 4 provisions or parts of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or any other jurisdiction, but this Agreement shall be reformed and construed in any such jurisdiction as if such invalid, illegal or unenforceable provision or part of a provision had never been contained herein and such provision or part shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted in such jurisdiction. 12. Neutral Interpretation. This Agreement constitutes the product of the negotiation of the parties hereto and the enforcement hereof shall be interpreted in a neutral manner, and not more strongly for or against either party based upon the source of the draftsmanship hereof. 13. Miscellaneous. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein and may not be modified orally, but only by a writing subscribed by the party charged therewith. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings (whether oral or written) between the parties with respect to such subject matter. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, the parties hereto have made and entered into this Agreement the date first hereinabove set forth. COMPANY: GFSI, INC. By /s/ John L. Menghini ----------------------------- John L. Menghini, President EXECUTIVE: /s/ Robert M. Wolff -------------------------------- Robert M. Wolff 6 EXHIBIT A --------- SALARY ------
YEAR SALARY - ---- ------ March 1, 1997 - February 28, 1998 $140,000 March 1, 1998 - February 28, 1999 $155,000 March 1, 1999 - February 29, 2000 $170,000 March 1, 2000 - February 28, 2001 $190,000 March 1, 2001 - February 28, 2002 $205,000 March 1, 2002 - February 28, 2003 $225,000 March 1, 2003 - February 29, 2004 $245,000 March 1, 2004 - February 28, 2005 $265,000 March 1, 2005 - February 28, 2006 $285,000 March 1, 2006 - February 28, 2007 $305,000
7 EXHIBIT B --------- BENEFITS -------- 8 EX-10.9 25 NONCOMPETITION AGREEMENT NONCOMPETITION AGREEMENT THIS NONCOMPETITION AGREEMENT (this "Agreement"), dated this 27th day of February, 1997, is made by and between GFSI HOLDINGS, INC., a Delaware corporation ("Holdings"), and ROBERT M. WOLFF, an individual ("Seller"). W I T N E S S E T H: WHEREAS, the Seller has been actively involved in the business of Winning Ways, Inc., a Missouri corporation (the "Company"), as an employee, substantial stockholder, officer and member of the Board of Directors of the Company; and WHEREAS, Holdings and GFSI, Inc., a Delaware corporation ("GFSI"), have agreed to purchase all of the issued and outstanding shares of capital stock of the Company (the "Shares") pursuant to an Agreement for Purchase and Sale of Stock dated January 24, 1997, by and among GFSI, Holdings and all of the stockholders of the Company (the "Purchase Agreement"); and WHEREAS, the continued involvement by the Seller in a business in competition with the Company would diminish the value of the Shares to be purchased by Holdings; and WHEREAS, as an inducement to Holdings to consummate its purchase of the Shares, the Seller has agreed not to compete with Holdings and to refrain from making disclosures to the extent set forth below; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto agree as follows: 1. Restrictive Covenants. In consideration of the annual sum of Two Hundred Fifty Thousand Dollars ($250,000) to be paid in monthly installments by Holdings to the Seller during the ten (10) year period following the date hereof, the Seller agrees that for a period of ten (10) years from the date hereof, the Seller shall not: a. directly or indirectly, either individually or as a principal, partner, agent, employee, employer, consultant, stockholder, joint venturer, or investor, or as a director or officer of any corporation or association, or in any other manner or capacity whatsoever, engage in, assist or have any active interest in a business located anywhere in the United States that (i) manufactures, distributes or markets custom imprinted and embroidered activewear or that otherwise competes with or is similar in concept, design or format to the business conducted by Holdings or the Company on the date hereof or at any time during the term of this covenant, or (ii) sells to, supplies, provides goods or services to, purchases from, or does business in any manner with Holdings or the Company. Notwithstanding the above, this paragraph shall not be construed to prohibit the Seller from owning shares of Holdings or from owning less than ten percent (10%) of the securities of a corporation which is publicly traded on a securities exchange or over-the-counter; or b. directly or indirectly, either individually, or as a principal, partner, agent, employee, employer, consultant, stockholder, joint venturer, or investor, or as a director or officer of any corporation or association, or in any other manner or capacity whatsoever, (i) divert or attempt to divert from Holdings or the Company any business with any customer or account with which the Seller had any contact or association, which was under the supervision of the Seller, or the identity of which was learned by the Seller as a result of the Seller's employment with Holdings or the Company, or (ii) induce any salesperson, distributor, supplier, vendor, manufacturer, representative, agent, jobber or other person transacting business with Holdings or the Company to terminate their relationship or association with Holdings or the Company, or to represent, distribute or sell services or products in competition with services or products of Holdings or the Company, or (iii) induce or cause any employee of Holdings or the Company to leave the employ of Holdings or the Company; provided, however, nothing contained in this clause (iii) shall prohibit the Seller from voting to terminate the employ of any officer of the Company in connection with the performance of the Seller's obligations as a member of the Board of Directors of Holdings or any affiliate of Holdings. 2. Non-Disclosure. The Seller shall not at any time or in any manner, directly or indirectly, use or disclose to any party other than Holdings any trade secrets or other Confidential Information (as defined below) learned or obtained by him while a stockholder, officer or director of Holdings or the Company. As used herein, the term "Confidential Information" means information disclosed to or known by the Seller as a consequence of his position with Holdings or the Company and not generally known in the industry in which Holdings or the Company is engaged and that in any way relates to the Company's or Holdings' products, processes, services, inventions (whether patentable or not), formulas, techniques or know-how, including, but not limited to, information relating to distribution systems and methods, research, development, manufacturing, purchasing, accounting, engineering, marketing, merchandising and selling. 3. Affiliate Transactions. For as long as the Seller or any member of his family is the beneficial owner of any stock of Holdings, neither the Seller, any member of his family nor any Affiliate (as defined in the Purchase Agreement) of the Seller shall engage, directly or indirectly, in any business transaction 2 with Holdings, the Company or any Affiliate of Holdings. 4. Specific Performance. The Seller acknowledges and agrees that Holdings' rights hereunder are special and unique and that any violation of this Agreement by the Seller would not be adequately compensated by money damages, and the Seller hereby grants Holdings the right to specifically enforce (including injunctive relief where appropriate) the terms of this Agreement. 5. Termination. The obligation of Holdings to deliver to the Seller the payments required by Section 1 shall terminate upon the occurrence of any of the following events: a. Total or partial disability of the Seller that has continued for at least 12 months; b. Conviction of a felony; c. Frequent drunkenness on the job; d. The death of Seller; or e. The Seller's breach of the terms of this Agreement. If Holdings terminates this Agreement for "cause," but the Seller contests such termination, Holdings shall continue to make all payments required by Section 1 of this Agreement after the date of such termination until and unless a final judgment is rendered in favor of Holdings and against the Seller. For purposes of this section, a final judgment means a judgment from which there is no possibility of further appeal. If Holdings terminates the payments to the Seller under Section 1 as a result of the occurrence of any of such events, the covenants of the Seller under Section 1 shall remain in full force and effect. 6. Notices. Any notice, request, consent or communication (collectively a "Notice") under this Agreement shall be effective only if it is in writing and (i) personally delivered, (ii) sent by certified or registered mail, return receipt requested, postage prepaid, (iii) sent by a nationally recognized overnight delivery service, with delivery confirmed, or (iv) telecopied, with receipt confirmed, addressed as follows: a. If to the Seller: Robert M. Wolff 6432 Aberdeen Prairie Village, Kansas 66208 3 with a copy to: Leonard Rose, Esq. Rose, Brouillette & Shapiro, P.C. 4900 Main Street, 11th Floor Kansas City, MO 64112 Telecopier: (816) 756-1639 b. If to Holdings to: GFSI Holdings, Inc. 9 West 57th Street, Suite 4000 New York, New York 10019 Attention: A. Richard Caputo, Jr. Telecopier 212-755-5263 with copies to: GFSI, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: John Menghini Telecopier 913-752-3336 G. Robert Fisher, Esq. Bryan Cave LLP 1200 Main Street, Suite 3500 Kansas City, Missouri 64105 Telecopier 816-391-7600 or such other persons or addresses as shall be furnished in writing by any party to the other party. A Notice shall be deemed to have been given as of the date when (i) personally delivered, (ii) five (5) days after the date when deposited with the United States mail properly addressed, (iii) when receipt of a Notice sent by an overnight delivery service is confirmed by such overnight delivery service, or (iv) when receipt of the telecopy is confirmed, as the case may be, unless the sending party has actual knowledge that a Notice was not received by the intended recipient. 7. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Seller. 8. Governing Law. This Agreement shall be governed by the law of the State of Missouri as to all matters, including, but not limited to, matters of validity, construction, effect and performance, except that no doctrine of choice of law shall be used to apply any law other than of Missouri. 4 9. Severability. Holdings and the Seller believe the covenants against competition contained in this Agreement are reasonable and fair in all respects, and are necessary to protect the interests of Holdings. However, in case any one or more of the provisions or parts of a provision contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or any other jurisdiction, but this Agreement shall be reformed and construed in any such jurisdiction as if such invalid or illegal or unenforceable provision or part of a provision had never been contained herein and such provision or part shall be reformed so that it would be valid, legal and enforceable to the maximum extent permitted in such jurisdiction. 10. Neutral Interpretation. This Agreement constitutes the product of the negotiation of the parties hereto and the enforcement hereof shall be interpreted in a neutral manner, and not more strongly for or against any party based upon the source of the draftsmanship hereof. 11. Attorneys' Fees. If any legal action or other proceeding is commenced to enforce or interpret any provision of, or otherwise relating to, this Agreement, the losing party shall pay the prevailing party's reasonable expenses incurred in the investigation of any claim leading to the proceeding, preparation for and participation in the proceeding, any appeal or other post judgment motion, and any action to enforce or collect the judgment, including contempt, garnishment, levy, discovery and bankruptcy. "Expenses" shall include, without limitation, court or other proceeding costs and experts' and attorneys' fees and their expenses. The phrase "prevailing party" shall mean the party who is determined in the proceeding to have prevailed and who prevails by dismissal, default or otherwise. 12. Miscellaneous. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein and may not be modified orally, but only by a writing subscribed by the party charged therewith. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings (whether oral or written) between the parties with respect to such subject matter. 5 IN WITNESS WHEREOF, the parties hereto have made and entered into this Agreement the date first hereinabove set forth. HOLDINGS: GFSI HOLDINGS, INC. By /s/ A. Richard Caputo, Jr. ---------------------------- A. Richard Caputo, Jr. Vice President SELLER: /s/ Robert M. Wolff ------------------------------- Robert M. Wolff 6 EX-10.10 26 FORM OF INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT, dated as of February 27, 1997 ("this Agreement"), is executed by and among GFSI HOLDINGS, INC., a Delaware corporation ("Holdings"), GFSI, INC., a Delaware corporation ("GFSI"), and _________________________ ("Indemnitee"). Collectively, GFSI and Holdings shall be referred to from time to time as the "Companies." WITNESSETH WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors, executive officers, or in other capacities unless they are provided with adequate protection through insurance and indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and WHEREAS, the current difficulties or virtual impossibility of obtaining adequate insurance and uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; and WHEREAS, the Board of Directors of each of the Companies has determined that the inability to attract and retain such persons is detrimental to the best interests of each Company's stockholders and that the Companies should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, it is reasonable, prudent and necessary for each of the Companies to obligate themselves contractually to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve each of the Companies free from undue concern that they will not be so indemnified; and WHEREAS, GFSI is the wholly-owned subsidiary of Holdings; and WHEREAS, (i) the stockholders of Holdings have adopted the Amended and Restated Certificate of Incorporation ("Holdings' Certificate") and Bylaws ("Holdings' Bylaws") providing for the indemnification of the directors, officers, agents and employees of Holdings to the full extent permitted by the General Corporation Law of the State of Delaware (the "Act") and (ii) Holdings' Certificate, Holdings' Bylaws and the Act specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between Holdings and the members of its Board of Directors and its executive officers with respect to indemnification of such directors and executive officers; and WHEREAS, (i) the stockholders of GFSI have adopted the Certificate of Incorporation ("GFSI's Certificate") and Bylaws ("GFSI's Bylaws") providing for the indemnification of the directors, officers, agents and employees of GFSI to the full extent permitted by the Act and (ii) GFSI's Certificate, GFSI's Bylaws and the Act specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between GFSI and the members of its Board of Directors and its executive officers with respect to indemnification of such directors and executive officers; and WHEREAS, this Agreement is being entered into as part of Indemnitee's total compensation for serving as a director and/or an executive officer of each of the Companies, as the case may be; and NOW THEREFORE, in consideration of the premises and the covenants contained herein, the Companies and Indemnitee do hereby covenant and agree as follows: SECTION 1. Service by Indemnitee. Indemnitee agrees to serve as a director of each of the Companies and/or an executive officer of each of the Companies if so appointed by its Board of Directors, and agrees to the indemnification provisions provided for herein. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or other obligation imposed by operation of law), in which event neither of the Companies shall have any obligation under this Agreement to continue the employment of Indemnitee in any such position. SECTION 2. Indemnification. Each of the Companies shall indemnify Indemnitee to the fullest extent permitted by applicable law in effect on the date hereof, notwithstanding that such indemnification is not specifically authorized by this Agreement, Holdings' Certificate, Holdings' Bylaws, GFSI's Certificate, GFSI's Bylaws, the Act or otherwise. In the event of any change after the date of this Agreement in any applicable law, statute or rule regarding the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent that they would expand Indemnitee's rights hereunder, shall be within the scope of Indemnitee's rights and each of the Company's obligations hereunder, and, to the extent that they would narrow Indemnitee's rights hereunder, shall be excluded from this Agreement; provided, however, that any change that is required by applicable laws, statutes or rules to be applied to this Agreement shall be so applied regardless of whether the effect of such change is to narrow Indemnitee's rights hereunder. Without diminishing the scope of the indemnification provided by this Section 2, the rights of indemnification of Indemnitee provided hereunder shall include 2 indemnification in respect of GFSI's proposed offering of $125 million of senior subordinated debt securities to certain institutional investors pursuant to the terms of an Offering Memorandum, dated February 20, 1997, except to the extent expressly prohibited by applicable law. SECTION 3. Action or Proceeding Other Than an Action By or In the Right of the Companies. Indemnitee shall be entitled to the indemnification rights provided in this Section 3 if he is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of either Company, by reason of the fact that he is or was a director, officer, employee, agent or fiduciary of either Company or is or was serving at the request of either Company as a director, officer, employee, agent, partner, trustee or fiduciary of any other entity (a "Related Company") or by reason of anything done or not done by him in any such capacity. Pursuant to this Section 3, Indemnitee shall be indemnified against reasonable costs and expenses (including, but not limited to, reasonable counsel fees, costs, judgments, penalties, fines, ERISA excise taxes, and amounts paid in settlement) (collectively, "Damages") actually and reasonably incurred by him in connection with such action, suit or proceeding (including, but not limited to, the investigation, defense or appeal thereof), if, in the case of conduct in his official capacity with either Company, he acted in good faith and in the respective Company's best interests, and in all other cases, he acted in good faith and was at least not opposed to such Company's best interests, and with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged to be liable for (i) negligence or misconduct in the performance of his duty to either Company unless and only to the extent that the court in which such action or suit was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper, or (ii) the indemnification does not relate to any liability arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, or any of the rules or regulations promulgated thereunder. Notwithstanding the foregoing, each Company shall be required to indemnify its officers or directors in connection with an action, suit or proceeding initiated by such person only if such action, suit or proceeding was authorized by the Board of Directors of such Company or a committee thereof. No indemnity pursuant to this Agreement shall be provided by either Company for Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of 3 directors' and officers' liability insurance maintained by such Company. SECTION 4. Actions By or In the Right of the Companies. Indemnitee shall be entitled to the indemnification rights provided in this Section 4 if he is or was made a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative brought by or in the right of either Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, agent or fiduciary of either Company or is or was serving at the request of either Company as a director, officer, employee, agent, partner, trustee or fiduciary of any other entity by reason of anything done or not done by him in any such capacity. Pursuant to this Section 4, Indemnitee shall be indemnified against Damages (as defined in Section 3) actually and reasonably incurred by him in connection with such action or suit (including, but not limited to the investigation, defense, settlement or appeal thereof) if, in the case of conduct in his official capacity with either Company, he acted in good faith and in such Company's best interests, and in all other cases, he acted in good faith and was at least not opposed to such Company's best interests, except that no indemnification shall be made in respect of any claim, issue or matter as to which (i) Indemnitee shall have been finally adjudged to be liable for negligence or misconduct in the performance of his duty to such Company unless and only to the extent that the court in which such action or suit was brought, or any other court of competent jurisdiction, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper or (ii) the indemnification does not relate to any liability arising under Section 16(b) of the Securities Exchange Act of 1934, as amended, or any of the rules or regulations promulgated thereunder. Notwithstanding the foregoing, each Company shall be required to indemnify its officers or directors in connection with any action, suit or proceeding initiated by such person only if such action, suit or proceeding was authorized by its Board of Directors or a committee thereof. No indemnity pursuant to this Agreement shall be provided by either Company for Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by such Company. SECTION 5. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Agreement, to the extent that Indemnitee has served as a witness on behalf of either Company or has been successful, on the merits or otherwise, 4 including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Section 3 and Section 4 hereof, or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all reasonable costs, charges, and expenses (including counsel fees) actually and reasonably incurred by him or on his behalf in connection therewith. SECTION 6. Partial Indemnification. If Indemnitee is only partially successful in the defense, investigation, settlement or appeal of any action, suit, investigation or proceeding described in Section 3 or Section 4 hereof, and as a result is not entitled under Section 5 hereof to indemnification by either Company for the total amount of reasonable Damages actually and reasonably incurred by him, each Company, without duplication of payment, shall nevertheless indemnify Indemnitee, as a matter of right pursuant to Section 5 hereof, to the extent Indemnitee has been partially successful. SECTION 7. Determination of Entitlement to Indemnification. Upon written request by Indemnitee for indemnification pursuant to Section 3 or Section 4 hereof, the entitlement of Indemnitee to indemnification pursuant to the terms of this Agreement shall be determined by the following person or persons who shall be empowered to make such determination: (a) the Board of Directors of each Company by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined); or (b) if such a quorum is not obtainable or, even if obtainable, if the Board of Directors by the majority vote of Disinterested Directors so directs, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (c) by the stockholders, but shares owned by or voted under the control of directors, including the Indemnitee, who are at the time parties to the proceeding may not be voted on the determination. Such Independent Counsel shall be selected by the Board of Directors and reasonably approved by Indemnitee. Upon failure of either Company's Board of Directors to so select such Independent Counsel or upon failure of Indemnitee to so approve, such Independent Counsel shall be selected by the Chancellor of the State of Delaware or such other person as the Chancellor shall designate to make such selection. Such determination of entitlement to indemnification shall be made no later than sixty (60) days after receipt by the respective Company of a written request for indemnification. Such request shall include documentation or information which is necessary for such determination and which is reasonably available to Indemnitee. Any Damages incurred by Indemnitee in connection with his request for indemnification hereunder shall be borne by such Company. Each Company hereby jointly and severally indemnifies and agrees to hold 5 Indemnitee harmless therefrom irrespective of the outcome of the determination of Indemnitee's entitlement to indemnification. If the person making such determination shall determine that Indemnitee is entitled to indemnification as to part (but not all) of the application for indemnification, such person shall reasonably prorate such partial indemnification among such claims, issues or matters. SECTION 8. Presumptions and Effect of Certain Proceedings. The Secretary of each of the Companies shall, promptly, upon receipt of Indemnitee's request for indemnification, advise in writing the Board of Directors of such Company or such other person or persons empowered to make the determination as provided in Section 7 that Indemnitee has made such request for indemnification. Indemnitee shall be presumed to be entitled to indemnification hereunder and each of the Companies shall have the burden of proof in the making of any determination contrary to such presumption. If the person or persons so empowered to make such determination shall have failed to make the requested indemnification within 60 days after receipt by either Company of such request, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be absolutely entitled to such indemnification, absent actual and material fraud in the request for indemnification. The termination of any action, suit, investigation or proceeding described in Section 3 or Section 4 hereof by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself (a) create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of such Company, and, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful or (b) otherwise adversely affect the rights of Indemnitee to indemnification except as may be provided herein. SECTION 9. Advancement of Expenses and Costs. All reasonable expenses and costs incurred by Indemnitee as a result of being a party to any proceeding (including counsel fees, retainers and advances of disbursements required of Indemnitee) (collectively, the "Expense Advance") shall be paid by each Company in advance of the final disposition of such action, suit or proceeding at the request of Indemnitee within twenty (20) days after the receipt by either Company of a statement or statements from Indemnitee requesting such advance or advances from time to time. Such statement or statements shall reasonably evidence the expenses and costs incurred by him in connection therewith. Each Company's obligation to provide an Expense Advance is subject to the following conditions: (i) if the proceeding 6 arose in connection with Indemnitee's service as a director and/or executive officer of either Company (and not in any other capacity in which Indemnitee rendered service, including service to any Related Company), then the Indemnitee or his representative shall have executed and delivered to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee to repay all Expense Advance if and to the extent that it shall ultimately be determined by a final, unappealable decision rendered by a court having jurisdiction over the parties and the question whether Indemnitee is entitled to be indemnified for such Expense Advance under this Agreement or otherwise; (ii) Indemnitee shall give the Company such information and cooperation as it may reasonably request and as shall be within Indemnitee's power; and (iii) Indemnitee shall furnish, upon request by the Company and if required under applicable law, a written affirmation of Indemnitee's good faith belief that any applicable standards of conduct have been met by Indemnitee. Indemnitee's entitlement to an Expense Advance shall include those incurred in connection with any proceeding by Indemnitee seeking an adjudication pursuant to this Agreement. In the event that a claim for an Expense Advance is made hereunder and is not paid in full by the Company receiving such claim within twenty (20) days after its receipt of such claim, Indemnitee may, but need not, at any time thereafter, bring suit against such Company to recover the unpaid amount of the claim. SECTION 10. Remedies of Indemnitee in Cases of Determination Not to Indemnify or to Advance Expenses. In the event that a determination is made that Indemnitee is not entitled to indemnification hereunder or if payment has not been timely made following a determination of entitlement to indemnification pursuant to Section 7 and 8, or if expenses are not advanced pursuant to Section 9, Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Delaware or any other court of competent jurisdiction of his entitlement to such indemnification or advance. Neither Company shall oppose Indemnitee's right to seek any such adjudication or any other claim. Such judicial proceeding shall be made de novo and Indemnitee shall not be prejudiced by reason of a determination (if so made) that he is not entitled to indemnification. If a determination is made or deemed to have been made pursuant to the terms of Section 7 or Section 8 hereof that Indemnitee is entitled to indemnification, each Company shall be bound by such determination and is precluded from asserting that such determination has not been made or that the procedure by which such determination was made is not valid, binding and enforceable. Each Company further agrees to stipulate in any such court that such Company is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. If the court shall determine that Indemnitee is entitled to any indemnification hereunder, each Company shall be jointly and severally liable to 7 pay all reasonable Damages actually incurred by Indemnitee in connection with such adjudication (including, but not limited to, any appellate proceedings). SECTION 11. Other Rights to Indemnification. The indemnification and advancement of expenses (including counsel fees) and costs provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may now or in the future be entitled under any provision of Holdings' Certificate, Holdings's Bylaws, GFSI's Certificate, GFSI's Bylaws, any vote of stockholders or Disinterested Directors, any provision of law or otherwise. SECTION 12. Counsel Fees and Other Expenses to Enforce Agreement. In the event that Indemnitee is subject to or intervenes in any proceeding in which the validity or enforceability of this Agreement is at issue or seeks an adjudication or award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee, if he prevails in whole or in part in such action, shall be entitled to recover from the Companies, and shall be jointly and severally indemnified by each Company against, any reasonable expenses for counsel fees and disbursements actually and reasonably incurred by him. SECTION 13. Duration of Agreement. This Agreement shall continue until and terminate upon the later of (a) 10 years after Indemnitee has ceased to occupy any of the positions or have any of the relationships described in Section 3 or Section 4 of this Agreement or (b) the final termination of all pending or threatened actions, suits, proceedings or investigations with respect to Indemnitee. This Agreement shall be binding upon each Company and its successors and assigns and shall inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors, administrators and other legal representatives. SECTION 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any 8 paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. SECTION 15. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original, but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. SECTION 16. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. SECTION 17. Definitions. For purposes of this Agreement: (a) "Disinterested Director" shall mean a director of Holdings or GFSI, as the case may be, who is not or was not a party to the action, suit, investigation or proceeding in respect of which indemnification is being sought by Indemnitee. (b) "Independent Counsel" shall mean a law firm or a member of a law firm that neither is presently nor in the past five years has been retained to represent (i) either Company or Indemnitee in any matter material to either such party or (ii) any other party to the action, suit, investigation or proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either Company or Indemnitee in an action to determine Indemnitee's right to indemnification under this Agreement. SECTION 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 9 SECTION 19. Mutual Acknowledgment. Holdings, GFSI and Indemnitee each acknowledges that, in certain instances, federal law or public policy may override applicable state law and prohibit the Companies from indemnifying Indemnitee under this Agreement or otherwise. For example, the Companies and Indemnitee acknowledge that the United States Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Furthermore, Indemnitee understands and acknowledges that each Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of such Company's obligation under public policy to indemnify Indemnitee. SECTION 20. NOTICE BY INDEMNITEE. Indemnitee agrees to notify each Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification covered hereunder, either civil, criminal or investigative. SECTION 21. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) when delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) if mailed by certified or registered mail with postage prepaid on the third business day after the date on which it is so mailed, to the following addresses: (a) to Indemnitee: (b) to either Company: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: President with a copy to 10 GFSI Holdings, Inc. c/o The Jordan Company 9 West 57th Street, Suite 4000 New York, New York 10019 Attention: A. Richard Caputo, Jr. or to such other address as may have been furnished to Indemnitee by either Company or to either Company by Indemnitee, as the case may be. SECTION 22. Other Agreements. This Agreement restates and supersedes, but does not limit or negate, any indemnification, rights or interests of Indemnitee under any prior agreements between either Company and Indemnitee. SECTION 23. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. GFSI HOLDINGS, INC. By: /s/ John Menghini ------------------------------------- John Menghini President GFSI, INC. By: /s/ John Menghini ------------------------------------- John Menghini President INDEMNITEE: /s/ ---------------------------------------- 11 EX-12 27 STATEMENT RE: COMPUTATION OF RATIOS
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Exhibit 12 Twelve Months Ended Six Months Ended December Fiscal Years Ended June 30, December 31, 31, ----------------------------------------------------- ------------------- -------- 1992 1993 1994 1995 1996 1995 1996 1996 ------- ------- ------- ------- ------- ------- ------- ------- HISTORICAL Registrant's pretax income from continuing operations $ 18,077 $ 20,055 $ 22,105 $ 26,220 $ 30,226 $ 19,203 $20,697 $ 31,720 Interest 2,757 2,473 2,455 2,522 2,608 1,476 1,465 2,597 Amortization of debt expense and discount or premium 9 9 9 9 9 5 5 9 ------- ------- ------- ------- ------- ------- ------- ------- Total fixed charges 2,766 2,482 2,464 2,531 2,617 1,481 1,470 2,606 ------- ------- ------- ------- ------- ------- ------- ------- Total earnings and fixed charges $ 20,843 $ 22,537 $ 24,569 $ 28,751 $ 32,843 $ 20,684 $ 22,167 $ 34,326 ------- ------- ------- ------- ------- ------- ------- ------- Total fixed charges $ 2,766 $ 2,482 $ 2,464 $ 2,531 $ 2,617 $ 1,481 $ 1,470 $ 2,606 ------- ------- ------- ------- ------- ------- ------- ------- Ratio 7.5x 9.1x 10.0x 11.4x 12.5x 14.0x 15.1x 13.2x ======== ======== ======== ======== ======== ======== ======= ======== PRO FORMA Pretax income from continuing operations $14,175 $12,949 $15,592 Interest 19,034 9,525 19,040 ------- ------- ------- Total earnings and fixed charges $33,209 $22,474 $34,632 ======= ======= ======= Total fixed charges $19,034 $ 9,525 $19,040 ------- ------- ------- Pro forma ratio 1.8x 2.4x 1.8x ======= ======= =======
EX-23.1 28 CONSENT OF MAYER, BROWN & PRATT Securities and Exchange Commission 450 Fifth Street N.W. Washington, DC 20549 Gentlemen: As stated in the Registration Statement of GFSI, Inc. on Form S-4, in connection with our audit of the financial statements of Winning Ways, Inc. as of and for each of the two years in the period ended June 30, 1995 and during the interim period through December 31, 1996, we have had no disagreements with the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to our satisfaction would have caused us to make reference thereto in our report on the financial statements for such periods. DONNELLY MEINERS JORDAN KLINE Kansas City, Missouri March 28, 1997 EX-23.2 29 CONSENT OF DELOITTE & TOUCHE Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of GFSI, Inc. on Form S-4 of our report dated January 24, 1997 on the financial statements of Winning Ways, Inc. as of and for the year ended June 30,1996, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the use in this Registration Statement of GFSI, Inc. on Form S-4 of our report dated January 24, 1997 on the balance sheet of GFSI, Inc. as of January 23, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the use in this Registration Statement of GFSI, Inc. on Form S-4 of our report dated January 24, 1997 on the balance sheet of GFSI Holdings, Inc. as of January 23, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings, "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Kansas City, Missouri March 28, 1997 EX-23.3 30 CONSENT OF DONNELLY MEINERS JORDAN KLINE INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Registration Statement of GFSI, Inc. on Form S-4 of our report dated July 26, 1996 on the financial statements of Winning Ways, Inc. as of and for each of the two years in the period ended June 30, 1995 appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Financial Data", Selected Financial Data" and "Experts" in such Prospectus. DONNELLY MEINERS JORDAN KLINE Kansas City, Missouri March 28, 1997 EX-25 31 STATEMENT OF TRUSTEE ELIGIBILITY CERTIFICATE OF FLEET NATIONAL BANK The undersigned, Fleet National Bank (the "Trustee"), does hereby certify as follows: 1. It is the Trustee under the indenture dated as of February 27, 1997 among GFSI. Inc., as issuer (the "Company") and the guarantors listed therein and Fleet National Bank, as trustee (the "Trustee") relating to the issuance by the Company of $125,000 aggregate principal amount of its 9 5/8% Senior Subordinated Notes due 2007 (the "Indenture"). 2. The Indenture has been duly executed and delivered in the name of and on behalf of the Trustee by Michael M. Hopkins, one of its Vice Presidents, and the Trustee's corporate seal has been duly affixed thereto. 3. The signature appearing below opposite the name of Michael M. Hopkins is the authentic signature of such officer referred to in item 2 above. Name Office Signature ---- ------ --------- Michael M. Hopkins Vice President /s/ 4. Pursuant to the provisions of Section 2.02 of the Indenture, the Trustee has duly authenticated and delivered to the Company certificates representing $125,000,000 aggregate principal amount of its 9 5/8% Senior Subordinated Notes due 2007 (collectively, the "Notes"). The Trustee has examined the form of Notes so authenticated and delivered and has found the same to be in the form called for by the Indenture. 5. Each of the persons named in Part I of Schedule A attached hereto was on the effective date of the Indenture, and is on the date hereof, a duly qualified and acting officer of the Trustee, holding the office set opposite his or her name and the signature set opposite his or her name is the genuine signature of such officer. 6. Each of the persons named in Part I of Schedule A attached hereto is authorized: (a) to execute and deliver on the Trustee, individually or as Trustee, the Indenture; (b) to attest on behalf of the Trustee, individually or as Trustee, both the seal of the Trustee and any signature of any other officer of the Trustee; and (c) to take any action on behalf of the Trustee, individually or as Trustee, contemplated by the Indenture. 7. Attached hereto, as Exhibits A and B respectively, are true and correct copies of the Articles of Incorporation and By-Laws of the Trustee, which at the date hereof are still in full force and effect, giving the requisite authority to said officer. IN WITNESS WHEREOF, Fleet National Bank has caused this Certificate to be executed by one of its Vice Presidents and its corporate seal to be hereunto affixed as of this ___ day of February, 1997. FLEET NATIONAL BANK, as Trustee By: /s/ --------------------------- Name: ELIZABETH C. HAMMER Title: VICE PRESIDENT SCHEDULE A (Attached to the Trustee's Certificates) of FLEET NATIONAL BANK Part I. Officer of Fleet National Bank
Name Title Signature ---- ----- --------- Robin Belanger Corporate Trust Officer /s/ Robin Belanger Shelley Bergennoitz Corporate Trust Officer /s/ Shelley Bergennoitz Arthur Blakeslee Assistant Vice President /s/ Arthur Blakeslee Bryan R. Calder Senior Vice President /s/ Bryan R. Calder Steven Cimalore Vice President /s/ Steven Cimalore Debra A. Colon Corporate Trust Officer /s/ Debra A. Colon Jacqueline Connor Assistant Vice President /s/ Jacqueline Connor Man-Elna DeGuia Assistant Vice President /s/ Man-Elna DeGuia Rinette Elovecky Vice President /s/ Rinette Elovecky Dennis Fisher Assistant Vice President /s/ Dennis Fisher Robin A. Bodell Fisher Vice President /s/ Robin A. Bodell Fisher Mark A. Forgetta Vice President /s/ Mark A. Forgetta Gilman N. Gauvin Vice President /s/ Gilman N. Gauvin David Goldsholl Senior Vice President /s/ David Goldsholl Lynnette Hamilton Vice President /s/ Lynnette Hamilton Elizabeth C. Hammer Vice President /s/ Elizabeth C. Hammer Michael M. Hopkins Vice President /s/ Michael M. Hopkins Vito J. Iacovazzi Vice President /s/ Vito J. Iacovazzi Debra A. Johnson Corporate Trust Officer /s/ Debra A. Johnson Philip G. Kane, Jr. Vice President /s/ Philip G. Kane, Jr. Susan T. Keller Vice President /s/ Susan T. Keller Kathy A. Lanmore Assistant Vice President /s/ Kathy A. Lanmore Jeffrey D. Masi Assistant Vice President /s/ Jeffrey D. Masi Deborah L. McDonald Vice President /s/ Deborah L. McDonald Frank McDonald Vice President /s/ Frank McDonald Laurel Melody-Casasanta Assistant Vice President /s/ Laurel Melody-Casasanta Susan C. Merker Assistant Vice President /s/ Susan C. Merker Robert L. Reynolds Vice President /s/ Robert L. Reynolds Rockwell J. Spalding Vice President /s/ Rockwell J. Spalding Donnee C. Taylor Corporate Trust Officer /s/ Donnee C. Taylor Andrea F. Turto Vice President /s/ Andrea F. Turto
Part II. Trustee Administrators (authorized only to attest the Seal of Fleet National Bank and signature of any officer named in Part I hereof):
Name Title Signature ---- ----- --------- Karen R. Felt Trustee Administrator /s/ Karen R. Felt Dawn P. Heintz Trustee Administrator /s/ Dawn P. Heintz William Kotkosky Trustee Administrator /s/ William Kotkosky Eileen D. Pepe Trustee Administrator /s/ Eileen D. Pepe Cheryl Sowers Trustee Administrator /s/ Cheryl Sowers Anna M. Vignuolo Trustee Administrator /s/ Anna M. Vignuolo
As of 04/01/96 ARTICLES OF ASSOCIATION OF FLEET NATIONAL BANK FIRST. The title of this Association, which shall carry on the business of banking under the laws of the United States, shall be "Fleet National Bank." SECOND. The main office of the Association shall be in Springfield, Hampden County, Commonwealth of Massachusetts. The general business of the Association shall be conducted at its main office and its branches. THIRD. The board of directors of this Association shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number of directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the board of directors for any reason, including an increase in the number thereof, may be filled by action of the board of directors. FOURTH. The annual meeting of the shareholders for the election of directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the board of directors may designate, on the day of each year specified therefor in the bylaws, but if no election is hold on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the board of directors. FIFTH. The authorized amount of capital stock of this Association shall be eight million five hundred thousand (8,500,000) shares of which three million five hundred thousand (3,500,000) shares shall be common stock with a par value of six and 25/100 dollars ($6.25) each and of which five million (5,000,000) shares without par value shall be preferred stock. The capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the Association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the Association, whether now or hereafter authorized, or to any obligations convertible into stock of the Association, issued or sold, nor any right of subscription to any thereof other than such, if any, as the board of directors, in its discretion, may from time to time determine and at such price as the board of directors may from time to time fix. The board of directors of the Association is authorized, subject to limitations prescribed by law and the provisions of this Article, to provide for the issuance from time to time in one or more series of any number of the preferred shares, and to establish the number of shares to be included in each such series, and to fix the designation, relative rights, preferences, qualifications and limitations of the shares of each such series. The authority of the board of directors with respect to each series shall include, but not be limited to, determination of the following: a. The number of shares constituting that series and the distinctive designation of that series; b. The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and whether they shall be payable in preference to, or in another relation to, the dividends payable to any other class or classes or series of stock; c. Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; d. Whether that series shall have conversion or exchange privileges, and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the board of directors shall determine; e. Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; f. Whether that series shall be entitled to the benefit of a sinking fund to be applied to the purchase or redemption of shares of that series, and, if so, the terms and amounts of such sinking fund; g. The rights of the shares of that series to the benefit of conditions and restrictions upon the creation of indebtedness of the Association or any subsidiary, upon the issue of any additional stock (including additional shares of such series or of any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Association or any subsidiary of any outstanding stock of the Association; h. The right of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Association and whether such rights shall be in preference to, or in another relation to, the comparable rights of any other class or classes or series of stock; and i. Any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of that series. Shares of any series of preferred stock which have been redeemed (whether through the operation of a sinking fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes shall have the status of authorized and unissued shares of preferred stock of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of preferred stock to be created by resolution or resolutions of the board of directors or as part of any other series of preferred stock, all subject to the conditions and the restrictions adopted by the board of directors providing for the issue of any series of preferred stock and by the provisions of any applicable law. Subject to the provisions of any applicable law, or except as otherwise provided by the resolution or resolutions providing for the issue of any series of preferred stock, the holders of outstanding shares of common stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of common stock being entitled to one vote for each share of common stock standing in his name on the books of the Association. Except as otherwise provided by the resolution or resolutions providing for the issue of any series of preferred stock, after payment shall have been made to the holders of preferred stock of the full amount of dividends to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of preferred stock, the holders of common stock shall be entitled, to the exclusion of the holders of preferred stock of any and all series, to receive such dividends as from time to time may be declared by the borad of directors. Except as otherwise provided by the resolution or resolutions for the issue of any series of preferred stock, in the event of any liquidation, dissolution or winding up of the Association, whether voluntary or involuntary, after payment shall have been made to the holders of preferred stock of the full amount to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of preferred stock the holders of common stock shall be entitled, to the exclusion of the holders of preferred stock of any and all series, to share, ratable according to the number of shares of common stock held by them, in all remaining assets of the Association available for distribution to its shareholders. The number of authorized shares of any class may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Association entitled to vote. SIXTH. The board of directors shall appoint one of its members president of this Association, who shall be chairman of the board, unless the board appoints another director to be the chairman. The board of directors shall have the power to appoint one or more vice presidents; and to appoint a secretary and such other officers and employees as may be required to transact the business of this Association. The board of directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all bylaws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a board of directors to do and perform. SEVENTH. The board of directors shall have the power to change the location of the main office to any other place within the limits of the City of Hartford, Connecticut, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency; and shall have the power to establish or change the location of any branch or branches of the Association to any other location, without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The board of directors of this Association, or any three or more shareholders owning, in the aggregate, not less than ten percent (10%) of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first class mail, postage prepaid, mailed at least ten (10) days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director, officer or employee of the Association or is or was serving at the request of the Association as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, or other enterprise, including service with respect to an employee benefit plan, shall be indemnified and held harmless by the Association to the fullest extent authorized by the law of the state in which the Association's ultimate parent company is incorporated, except as provided in subsection (b). The aforesaid indemnity shall protect the indemnified person against all expense, liability and loss (including attorney's fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) reasonably incurred by such person in connection with such a proceeding. Such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors, and administrators, but shall only cover such person's period of service with the Association. The Association may, by action of its Board of Directors, grant rights to indemnification to agents of the Association and to any director, officer, employee or agent of any of its subsidiaries with the same scope and effect as the foregoing indemnification of directors and officers. (b) Restrictions on Indemnification. Notwithstanding the foregoing, (i) no person shall be indemnified hereunder by the Association against expenses, penalties, or other payments incurred in an administrative proceeding or action instituted by a federal bank regulatory agency which proceeding or action results in a final order assessing civil money penalties against that person, requiring affirmative action by that person in the form of payments to the Association, or removing or prohibiting that person from service with the Association, and any advancement of expenses to that person in that proceeding must be repaid; and (ii) no person shall be indemnified hereunder by the Association and no advancement of expenses shall be made to any person hereunder to the extent such indemnification or advancement of expenses would violate or conflict with any applicable federal statute now or hereafter in force or any applicable final regulation or interpretation now or hereafter adopted by the Office of the Comptroller of the Currency ("OCC") or the Federal Deposit Insurance Corporation ("FDIC"). The Association shall comply with any requirements imposed on it by any such statute or regulation in connection with any indemnification or advancement of expenses hereunder by the Association. With respect to proceedings to enforce a claimant's rights to indemnification, the Association shall indemnify any such claimant in connection with such a proceeding only as provided in subsection (d) hereof. (c) Advancement of Expenses. The conditional right to indemnification conferred in this section shall be a contract right and shall include the right to be paid by the Association the reasonable expenses (including attorney's fees) incurred in defending a proceeding in advance of its final disposition (an "advancement of expenses"); provided, however, that an advancement of expenses shall be made only upon (i) delivery to the Association of a binding written undertaking by or on behalf of the person receiving the advancement to repay all amounts so advanced if it is ultimately determined that such person is not entitled to be indemnified in such proceeding, including if such proceeding results in a final order assessing civil money penalties against that person, requiring affirmative action by that person in the form of payments to the Association, or removing or prohibiting that person from service with the Association, and (ii) compliance with any other actions or determinations required by applicable law, regulation or OCC or FDIC interpretation to be taken or made by the Board of Directors of the Association or other persons prior to an advancement of expenses. The Association shall cease advancing expenses at any time its Board of Directors believes that any of the prerequisites for advancement of expenses are no longer being met. (d) Right of Claimant to Bring Suit. If a claim under subsection (a) of the section is not paid in full by the Association within thirty (30) days after written claim has been received by the Association, the claimant may at any time thereafter bring suit against the Association to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the claimant shall be entitled to be paid also the expense of prosecuting or defending such claim. It shall be a defense to any such action brought by the claimant to enforce a right to indemnification hereunder (other than an action brought to enforce a claim for an advancement of expenses where the required undertaking, if any, has been tendered to the Association) that the claimant has not met any applicable standard for indemnification under the law of the state in which the Association's ultimate parent company is incorporated. In any suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the Association shall be entitled to recover such expenses upon a final adjudication that the claimant has not met any applicable standard for indemnification standard for indemnification under the law of the state in which the Association's ultimate parent company is incorporated. (e) Non-Exclusivity of Rights.The rights to indemnification and the advancement of expenses conferred in this section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, agreement, vote of stockholders or disinterested directors or otherwise. (f) Insurance. The Association may purchase, maintain, and make payment or reimbursement for reasonable premiums on, insurance to protect itself and any director, officer, employee or agent of the Association or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Association would have the power to indemnify such person against such expense, liability or loss under the law of the state in which the Association's ultimate parent company is incorporated; provided, however, that such insurance shall explicitly exclude insurance coverage for a final order of a federal bank regulatory agency assessing civil money penalties against an Association director, officer, employee or agent. ELEVENTH. These articles of association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The notice of any shareholders' meeting at which an amendment to the articles of association of this Association is to be considered shall be given as hereinabove set forth. I hereby certify that the articles of association of this Association, in their entirety, are listed above in items first through eleventh. /s/ __________________ Secretary/Assistant Secretary Dated at Boston, MA, as of 3/28/96. Revision of February 15, 1996 --- Board Mtg. Approval. As amended and restated on April 25, 1996. AMENDED AND RESTATED BY-LAWS OF FLEET NATIONAL BANK ARTICLE I Meetings of Shareholders Section 1. Annual Meeting. The regular annual meeting of the shareholders for the election of Directors and the transaction of any other business that may properly come before the meeting shall be held at the Main Office of the Association, or such other place as the Board of Directors may designate, on the fourth Thursday of April in each year at 1:15 o'clock in the afternoon unless some other hour of such day is fixed by the Board of Directors. If, from any cause, an election of Directors is not made on such day, the Board of Directors shall order the election to be held on some subsequent day, of which special notice shall be given in accordance with the provisions of law, and of these bylaws. Section 2. Special Meetings. Special meetings of the shareholders may be called at any time by the Board of Directors, the President, or any shareholders owning not less than twenty-five percent (25%) of the stock of the Association. Section 3. Notice of Meetings of Shareholders. Except as otherwise provided by law, notice of the time and place of annual or special meetings of the shareholders shall be mailed, postage prepaid, at least ten (10) days before the date of the meeting of each shareholder of record entitled to vote thereat at his address as shown upon the books of the Association; but any failure to mail such notice to any shareholder or any irregularity therein, shall not affect the validity of such meeting or of any of the proceedings thereat. Notice of a special meeting shall also state the purpose of the meeting. Section 4. Quorum: Adjourned Meetings. Unless otherwise provided by law, a quorum for the transaction of business at every meeting of the shareholders shall consist of not less than two-fifths (2/5) of the outstanding capital stock represented in person or by proxy; less than such quorum may adjourn the meeting to a future time. No notice need be given of an adjourned annual or special meeting of the shareholders if the adjournment be to a definite place and time. Section 5. Votes and Proxies. At every meeting of the shareholders, each share of the capital stock shall be entitled to one vote except as otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association or these By-laws. Shareholders may vote by proxies duly authorized in writing and filed with the Cashier, but not officer, clerk, teller or bookkeeper of the Association may act as a proxy. Section 6. Nominations to Board of Directors. At any meeting of shareholders held for the election of Directors, nominations for election to the Board of Directors may be made, subject to the provisions of this section, by any shareholder of record of any outstanding class of stock of the Association entitled to vote for the election of Directors. No person other than those whose names are stated as proposed nominees in the proxy statement accompanying the notice of the meeting may be nominated at such meeting unless a shareholder shall have given to the President of the Association and to the Comptroller of the Currency, Washington, DC written notice of intention to nominate such other person mailed by certified mail or delivered not less than fourteen (14) days nor more than fifty (50) days prior to the meeting of shareholders at which such nomination is to be made; provided, however, that if less than twenty-one (21) days' notice of such meeting is given to shareholders, such notice of intention to nominate shall be mailed by certified mail or delivered to said President and said Comptroller on or before the seventh day following the day on which the notice of such meeting was mailed. Such notice of intention to nominate shall contain the following information to the extent known to the notifying shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of shares of capital stock of the Association that will be voted for each proposed nominee; (d) the name and residence address of the notifying shareholder; and (e) the number of shares of capital stock of the Association owned by the notifying shareholder. In the event such notice is given, the proposed nominee may be nominated either by the shareholder giving such notice or by any other shareholder present at the meeting at which such nomination is to be made. Such notice may contain the names or more than one proposed nominee, and if more than one is named, any one or more of those named may be nominated. Section 7. Action Taken Without a Shareholder Meeting. Any action requiring shareholder approval or consent may be taken without a meeting and without notice of such meeting by written consent of the shareholders. ARTICLE II Directors Section 1. Number. The Board of Directors shall consist of such number of shareholders, not less than five (5) nor more than twenty-five (25), as from time to time shall be determined by a majority of the votes to which all of its shareholders are at the time entitled, or by the Board of Directors as hereinafter provided. Section 2. Mandatory Retirement for Directors. No person shall be elected a director who has attained the age of 68 and no person shall continue to serve as a director after the date of the first meeting of the stockholders of the Association held on or after the date on which such person attains the age of 68; provided, however, that any director serving on the Board as of December 15, 1995 who has attained the age of 65 on or prior to such date shall be permitted to -2- continue to serve as a director until the date of the first meeting of the stockholders of the Association held on or after the date on which such person attains the age of 70. Section 3. General Powers. The Board of Directors shall exercise all the corporate powers of the Association, except as expressly limited by law, and shall have the control, management, direction and disposition of all its property and affairs. Section 4. Annual Meeting. Immediately following a meeting of shareholders held for the election of Directors, the Cashier shall notify the directors-elect who may be present of their election and they shall then hold a meeting at the Main Office of the Association, or such other place as the Board of Directors may designate, for the purpose of taking their oaths, organizing the new Board, electing officers and transacting any other business that may come before such meeting. Section 5. Regular Meeting. Regular meetings of the Board of Directors shall be held without notice at the Main Office of the Association, or such other place as the Board of Directors may designate, at such dates and times as the Board shall determine. If the date designated for a regular meeting falls on a legal holiday, the meeting shall be held on the next business day. Section 6. Special Meetings. A special meeting of the Board of Directors may be called at any time upon the written request of the Chairman of the Board, the President, or of two Directors, stating the purpose of the meeting. Notice of the time and place shall be given not later than the day before the date of the meeting, by mailing a notice to each Director at his last known address, by delivering such notice to him personally, or by telephoning. Section 7. Quorum; Votes. A majority of the Board of Directors at the time holding office shall constitute a quorum for the transaction of all business, except when otherwise provided by law, but less than a quorum may adjourn a meeting from time to time, and the meeting may be held, as adjourned, without further notice. If a quorum is present when a vote is taken, the affirmative vote of a majority of Directors present is the act of the Board of Directors. Section 8. Action by Directors Without a Meeting. Any action requiring Director approval or consent may be taken without a meeting and without notice of such meeting by written consent of all the Directors. Section 9. Telephonic Participation in Directors' Meetings. A Director or member of a Committee of the Board of Directors may participate in a meeting of the Board or of such Committee may participate in a meeting of the Board or of such Committee by means of a conference telephone or similar communications equipment enabling all Directors participating in the meeting to hear one another, and participation in such a meeting shall constitute presence in person at such a meeting. -3- Section 10. Vacancies. Vacancies in the Board of Directors may be filled by the remaining members of the Board at any regular or special meeting of the Board. Section 11. Interim Appointments. The Board of Directors shall, if the shareholders at any meeting for the election of Directors have determined a number of Directors less than twenty-five (25), have the power, by affirmative vote of the majority of all the Directors, to increase such number of Directors to not more than twenty-five (25) and to elect Directors to fill the resulting vacancies and to serve until the next annual meeting of shareholders or the next election of Directors; provided, however, that the number of Directors shall not be so increased by more than two (2) if the number last determined by shareholders was fifteen (15) or less, or increased by more than four (4) if the number last determined by shareholders was sixteen (16) or more. Section 12. Fees. The Board of Directors shall fix the amount and direct the payment of fees which shall be paid to each Director for attendance at any meeting of the Board of Directors or of any Committees of the Board. ARTICLE III Committees of the Board Section 1. Executive Committee. The Board of Directors shall appoint from its members an Executive Committee which shall consist of such number of persons as the Board of Directors shall determine; the Chairman of the Board and the President shall be members ex-officio of the Executive Committee with full voting power. The Chairman of the Board or the President may from time to time appoint from the Board of Directors as temporary additional members of the Executive Committee, with full voting powers, not more than two members to serve for such periods as the Chairman of the Board or the President may determine. The Board of Directors shall designate a member of the Executive Committee to serve as Chairman thereof. A meeting of the Executive Committee may be called at any time upon the written request of the Chairman of the Board, the President, or the Chairman of the Executive Committee, stating the purpose of the meeting. Not less than twenty-four hours' notice of said meeting shall be given to each member of the Committee personally, by telephoning, or by mail. The Chairman of the Executive Committee or, in his absence, a member of the Committee chosen by a majority of the members present shall preside at meetings of the Executive Committee. The Executive Committee shall possess and may exercise all the powers of the Board when the Board is not in session except such as the Board, only, by law, is authorized to exercise; it shall keep minutes of its acts and proceedings and cause same to be presented and reported at every regular meeting and at any special meeting of the Board including specifically, all its actions relating to loans and discounts. -4- All acts done and powers and authority conferred by the Executive Committee, from time to time, within the scope of its authority, shall be deemed to be, and may be certified as being, the acts of and under the authority of the Board. Section 2. Risk Management Committee. The Board shall appoint from its members a risk Management Committee which shall consist of such number as the Board shall determine. The Board shall designate a member of the Risk Management Committee to serve as Chairman thereof. It shall be the duty of the Risk Management Committee to (a) service as the channel of communication with management and the Board of Directors of Fleet Financial Group, Inc. to assure that formal processes supported by management information systems are in place for the identification, evaluation and management of significant risks inherent in or associated with lending activities, the loan portfolio, asset-liability management, the investment portfolio, trust and investment advisory activities, the sale of nondeposit investment products and new products and services and such additional activities or functions as the Board may determine from time to time; (b) assure the formulation and adoption of policies approved by the Risk Management Committee or Board governing lending activities, management of the loan portfolio, the maintenance of an adequate allowance for loan and lease losses, asset-liability management, the investment portfolio, the retail sale of nondeposit investment products, new products and services and such additional activities or functions as the Board may determine from time to time; (c) assure that a comprehensive independent loan review program is in place for the early detection of problem loans and review significant reports of the loan review department, management's responses to those reports and the risk attributed to unresolved issues; (d) subject to control of the Board, exercise general supervision over trust activities, the investment of trust funds, the disposition of trust investments and the acceptance of new trusts and the terms of such acceptance; and (e) perform such additional duties and exercise such additional powers of the Board as the Board may determine from time to time. Section 3. Audit Committee. The Board shall appoint from its members an Audit Committee which shall consist of such number as the Board shall determine, no one of whom shall be an active officer or employee of the Association or Fleet Financial Group, Inc. or any of its affiliates. In addition, members of the Audit Committee must not (i) have served as an officer or employee of the Association or any of its affiliates at any time during the year prior to their appointment; or (ii) own, control, or have owned or controlled at any time during the year prior to appointment, ten percent (10%) or more of any outstanding class of voting securities of the Association. At least two (2) members of the Audit Committee must have significant executive, professional, educational or regulatory experience in financial, auditing, accounting, or banking matters. No member of the Audit Committee may have significant direct or indirect credit or other relationships with the Association, the termination of which would materially adversely affect the Association's financial condition or results of operations. The Board shall designate a member of the Audit Committee to serve as Chairman thereof. It shall be the duty of the Audit Committee to (a) cause a continuous audit and examination to be made on its behalf into the affairs of the Association and to review the results -5- of such examination; (b) review significant reports of the internal auditing department, management's responses to those reports and the risk attributed to unresolved issues; (c) review the basis for the reports issued under Section 112 of The Federal Deposit Insurance Corporation Improvement Act of 1991; (d) consider, in consultation with the independent auditor and an internal auditing executive, the adequacy of the Association's internal controls, including the resolution of identified material weaknesses and reportable conditions; (e) review regulatory communications received from any federal or state agency with supervisory jurisdiction or other examining authority and monitor any needed corrective action by management; (f) ensure that a formal system of internal controls is in place for maintaining compliance with laws and regulations; (g) cause an audit of the Trust Department at least once during each calendar year and within 15 months of the last such audit or, in lieu thereof, adopt a continuous audit system and report to the Board each calendar year and within 15 months of the previous report on the performance of such audit function; and (h) perform such additional duties and exercise such additional powers of the Board as the Board may determine from time to time. The Audit Committee may consult with internal counsel and retain its own outside counsel without approval (prior or otherwise) from the Board or management and obligate the Association to pay the fees of such counsel. Section 4. Community Affairs Committee. The Board shall appoint from its members a Community Affairs Committee which shall consist of such number as the Board shall determine. The Board shall designate a member of the Community Affairs Committee to serve as Chairman thereof. It shall be the duty of the Community Affairs Committee to (a) oversee compliance by the Association with the Community Reinvestment Act of 1977, as amended, and the regulations promulgated thereunder; and (b) perform such additional duties and exercise such additional powers of the Board as the Board may determine from time to time. Section 5. Regular Meetings. Except for the Executive Committee which shall meet on an ad hoc basis as set forth in Section of this Article, regular meetings of the Committees of the Board of Directors shall be held, without notice, at such time and place as the Committee or the Board of Directors may appoint and as often as the business of the Association may require. Section 6. Special Meetings. A Special Meeting of any of the Committees of the Board of Directors may be called upon the written request of the Chairman of the Board or the President, or of any two members of the respective Committee, stating the purpose of the meeting. Not less than twenty-four hours' notice of such special meeting shall be given to each member of the Committee personally, by telephoning, or by mail. Section 7. Emergency Meetings. An Emergency Meeting of any of the Committees of the Board of Directors may be called at the request of the Chairman of the Board or the President, who shall state that an emergency exists, upon not less than one hour's notice to each member of the Committee personally or by telephoning. -6- Section 8. Action Taken Without a Committee Meeting. Any Committee of the Board of Directors may take action without a meeting and without notice of such meeting by resolution assented to in writing by all members of such Committee. Section 9. Quorum. A majority of a Committee of the Board of Directors shall constitute a quorum for the transaction of any business at any meeting of such Committee. If a quorum is not available, the Chairman of the Board or the President shall have power to make temporary appointments to a Committee of-members of the Board of Directors, to act in the place and stead of members who temporarily cannot attend any such meeting; provided, however, that any temporary appointment to the Audit Committee must meet the requirements for members of that Committee set forth in Section 3 of this Article. Section 10. Record. The Committees of the Board of Directors shall keep a record of their respective meetings and proceedings which shall be presented at the regular meeting of the Board of Directors held in the calendar month next following the meetings of the Committees. If there is no regular Board of Directors meeting held in the calendar month next following the meeting of a Committee, then such Committee's records shall be presented at the next regular Board of Directors meeting held in a month subsequent to such Committee meeting. Section 11. Changes and Vacancies. The Board of Directors shall have power to change the members of any Committee at any time and to fill vacancies on any Committee; provided, however, that any newly appointed member of the Audit Committee must meet the requirements for members of that Committee set forth in Section 3 of this Article. Section 12. Other Committees. The Board of Directors may appoint, from time to time, other committees of one or more persons, for such purposes and with such powers as the Board may determine. ARTICLE IV Waiver of Notice of Meetings Section 1. Waiver. Whenever notice is required to be given to any shareholder, Director, or member of a Committee of the Board of Directors, such notice may be waived in writing either before or after such meeting by any shareholder, Director or Committee member respectively, as the case may be, who may be entitled to such notice; and such notice will be deemed to be waived by attendance at any such meeting. -7- ARTICLE V Officers and Agents Section 1. Officers. The Board shall appoint a Chairman of the Board and a President, and shall have the power to appoint one or more Executive Vice Presidents, one or more Senior Vice presidents, one or more Vice Presidents, a Cashier, a Secretary, an auditor, a Controller, one or more Trust Officers and-such other officers as are deemed necessary or desirable for the proper transaction of business of the Association. The Chairman of the Board and the President shall be appointed from members of the Board of Directors. Any two or more offices, except those of President and Cashier or Secretary, may be held by the same person. The Board may, from time to time, by resolution passed by a majority of the entire Board, designate one or more officers of the Association or of an affiliate or of Fleet Financial Group, Inc. with power to appoint one or more Vice Presidents and such other officers of the Association below the level of Vice President as the officer or officers designated in such resolution deem necessary or desirable for the proper transaction of the business of the Association. Section 2. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors. Subject to definition by the Board of Directors, he shall have general executive powers and such specific powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. Section 3. President. The President shall preside at all meetings of the Board of Directors if there be no Chairman or if the Chairman be absent. Subject to definition by the Board of Directors, he shall have general executive powers and such specific powers and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. Section 4. Cashier and Secretary. The Cashier shall be the Secretary of the Board and of the Executive Committee, and shall keep accurate minutes of their meetings and of all meetings of the shareholders. He shall attend to the giving of all notices required by these By-laws. He shall be custodian of the corporate seal, records, documents and papers of the Association. He shall have such powers and perform such duties as pertain by law or regulation to the office of Cashier, or as are imposed by these By-laws, or as may be delegated to him from time to time by the Board of Directors, the Chairman of the Board or the President. Section 5. Auditor. The Auditor shall be the chief auditing officer of the Association. He shall continuously examine the affairs of the Association and from time to time shall report to the Board of Directors. He shall have such powers and perform such duties as are conferred upon, or assigned to him by these By-laws, or as may be delegated to him from time to time by the Board of Directors. Section 6. Officers Seriatim. The Board of Directors shall designate from time to time not less than two officers who shall in the absence or disability of the Chairman or President or -8- both, succeed seriatim to the duties and responsibilities of the Chairman and President respectively. Section 7. Clerks and Agents. The Board of Directors may appoint, from time to time, such clerks, agents and employees as it may deem advisable for the prompt and orderly transaction of the business of the Association, define their duties, fix the salaries to be paid them and dismiss them. Subject to the authority of the Board of Directors, the Chairman of the Board or the president, or any other officer of the Association authorized by either of them may appoint and dismiss all or any clerks, agents and employees and prescribe their duties and the conditions of their employment, and from time to time fix their compensation. Section 8. Tenure. The Chairman of the Board of Directors and the President shall, except in the case of death, resignation, retirement or disqualification under these By-laws, or unless removed by the affirmative vote of at least two-thirds of all of the members of the Board of Directors, hold office for the term of one year or until their respective successors are appointed. Either of such officers appointed to fill a vacancy occurring in an unexpired term shall serve for such unexpired term of such vacancy. All other officers, clerks, agents, attorneys-in-fact and employees of the Association shall hold office during the pleasure of the Board of Directors or of the officer or committee appointing them respectively. ARTICLE VI Trust Department Section 1. General Powers and Duties. All fiduciary powers of the Association shall be exercised through the Trust Department, subject to such regulations as the Comptroller of the Currency shall from time to time establish. The Trust Department shall be placed under the management and immediate supervision of an officer or officers appointed by the Board of Directors. The duties of all officers of the Trust Department shall be to cause the policies and instructions of the Board and the Risk Management Committee with respect to the trusts under their supervision to be carried out, and to supervise the due performance of the trusts and agencies entrusted to the Association and under their supervision, in accordance with law and in accordance with the terms of such trusts and agencies. ARTICLE VII Branch Offices Section 1. Establishment. The Board of Directors shall have full power to establish, to discontinue, or, from time to time, to change the location of any branch office, subject to such limitations as may be provided by law. -9- Section 2. Supervision and Control. Subject to the general supervision and control of the Board of Directors, the affairs of branch offices shall be under the immediate supervision and control of the President or of such other officer or officers, employee or employees, or other individuals as the Board of Directors may from time to time determine, with such powers and duties as the Board of Directors may confer upon or assign to him or them. ARTICLE VIII Signature Powers Section 1. Authorization. The power of officers, employees, agents and attorneys to sign on behalf of and to affix the seal of the Association shall be prescribed by the Board of Directors or by the Executive Committee or by both; provided that the President is authorized to restrict such power of any officer, employee, agent or attorney to the business of a specific department or departments, or to a specific branch office or branch offices. Facsimile signatures may be authorized. ARTICLE IX Stock Certificates and Transfers Section 1. Stock Records. The Trust Department shall have the custody of the stock certificate books and stock ledgers of the Association, and shall make all transfers of stock, issue certificates thereof and disburse dividends declared thereon. Section 2. Form of Certificate. Every shareholder shall be entitled to a certificate conforming to the requirements of law and otherwise in such form as the Board of Directors may approve. The certificates shall state on the face thereof that the stock is transferable only on the books of the Association and shall be signed by such officers as may be prescribed from time to time by the Board of Directors or Executive Committee. Facsimile signatures may be authorized. Section 3. Transfers of Stock. Transfers of stock shall be made only the books of the Association by the holder in person, or by attorney duly authorized in writing, upon surrender of the certificate therefor properly endorsed, or upon the surrender of such certificate accompanied by a properly executed written assignment of the same, or a written power of attorney to sell, assign or transfer the same or the shares represented thereby. Section 4. Lost Certificate. The Board of Directors or Executive Committee may order a new certificate to be issued in place of a certificate lost or destroyed, upon proof of such loss or destruction and upon tender to the Association by the shareholder, of a bond in such amount and with or without surety, as may be ordered, indemnifying the Association against all liability, loss, cost and damage by reason of such loss or destruction and the issuance of a new certificate. -10- Section 5. Closing Transfer Books. The Board of Directors may close the transfer books for a period not exceeding thirty days preceding any regular or special meeting of the shareholders, or the day designated for the payment of a dividend or the allotment of rights. In lieu of closing the transfer books the Board of Directors may fix a day and hour not more than thirty days prior to the day of holding any meeting of the shareholders, or the day designated for the payment of a dividend, or the day designated for the allotment of rights, or the day when any change of conversion or exchange of capital stock is to go into effect, as the day as of which shareholders entitled to notice of and to vote at such meetings or entitled to such dividend or to such allotment of rights or to exercise the rights in respect of any such change, conversion or exchange of capital stock, shall be determined, and only such shareholders as shall be shareholders of record on the day and hour so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be. ARTICLE X The Corporate Seal Section 1. Seal. The following is an impression of the seal of the Association adopted by the Board of Directors. ARTICLE XI Business Hours Section 1. Business Hours. The main office of this Association and each branch office thereof shall be open for business on such days, and for such hours as the Chairman, or the President, or any Executive Vice President, or such other officer as the Board of Directors shall from time to time designate, may determine as to each office to conform to local custom and convenience, provided that any one or more of the main and branch offices or certain departments thereof may be open for such hours as the President, or such other officer as the Board of Directors shall from time to time designate, may determine as to each office or department on any legal holiday on which work is not prohibited by law, and provided further that any one or more of the main and branch offices or certain departments thereof may be ordered closed or open on any day for such hours as to each office or department as the President, or such other officer as the Board of Directors shall from time to time designate, subject to applicable laws and regulations, may determine when such action may be required by reason of disaster or other emergency condition. -11- EX-27 32 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the fiscal 996 financial statements of GFS, Inc. and is qualified in its entirety by reference to such financial statements. 0 1,000 U.S. Dollars Year JUN-30-1996 JUL-01-1995 JUN-30-1996 0 140 0 22,583 0 27,783 51,309 37,558 14,522 78,711 23,615 20,618 0 0 149 36,631 78,711 169,321 169,321 97,308 136,487 0 0 2,608 19,203 0 0 0 0 0 19,203 12.88 0 Not applicable. Not applicable. Not applicable. All figures for GFSI, Inc. are in U.S. dollars. Figure for receivables is net of allowances for doubtful accounts. Includes prepaid expenses of 802. Includes cash surrender of key persons life insurance policies of $4,268. Includes short-term borrowings of $7,000 and current portion of long-term debt of $1,658. Includes outstanding debt (including current portion) as of December 30, 1996 of (i) $4,286 under a bank credit agreement, (ii) $8,000 under a line of credit, (iii) $9,550 under a mortgage and (iv) $440 in industrial revenue bonds. As of December 30, 1996, GFSI had 1,491,000 shares of common stock, $.10 par value per share, outstanding. Consists of $1,586 of additional paid in capital and $35,045 of retained earnings. In fiscal 1996, GFSI's total costs consisted of (i) $97,308 of cost of goods sold, (ii) $16,963 of selling expenses and (iii) $22,216 of general and administrative expenses. GFSI, Inc.'s predecessor, Winning Ways, Inc., was a subchapter S corporation and paid no income tax in fiscal 1996. Earnings per share for fiscal 1996 were 12.88.
EX-99 33 FORM OF LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL FOR TENDERS OF $125,000,000 Aggregate Principal Amount of 95/8% Series A Senior Subordinated Notes due 2007 GFSI, INC. Pursuant to the Prospectus dated ________ __, 1997 of GFSI, Inc. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON THE EARLIER OF ________ __, 1997 (UNLESS EXTENDED) OR THE DATE ON WHICH 100% OF THE OLD NOTES ARE VALIDLY TENDERED AND NOT WITHDRAWN (THE "EXPIRATION DATE"). TENDERED OLD NOTES MAY BE WITHDRAWN AT ANY TIME ON OR PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER. - -------------------------------------------------------------------------------- Deliver to: Fleet National Bank, Exchange Agent:
By Mail: By Overnight Courier: By Hand: Fleet National Bank Fleet National Bank Fleet National Bank Mail Code: CTOPT06D Mail Code: CTOPT06D Corporate Trust Operations Corporate Trust Operations Corporate Trust Operations Department Department Department Customer Service Window P.O. Box 1440 1 Talcott Plaza, 6th Floor 1 Talcott Plaza, 5th Floor Hartford, Connecticut 06143 Hartford, Connecticut 06120 Hartford, Connecticut 06120 By Facsimile: (860) 986-7908
Delivery of this instrument to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. The undersigned (the "Holder") acknowledges that he or she has received the Prospectus, dated ________ __, 1997 (the "Prospectus"), of GFSI, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal, which may be amended from time to time (this "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $125,000,000 of its 95/8% Series B Senior Subordinated Notes due 2007 (the "New Notes") for a like principal amount of the issued and outstanding 95/8% Series A Senior Subordinated Notes due 2007 (the "Old Notes") of the Company from the holders thereof. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. The New Notes will bear interest from the most recent date to which interest has been paid on the Old Notes or, if no interest has been paid on the Old Notes, from February 27, 1997. Accordingly, registered holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid or, if no interest has been paid, from February 27, 1997. Old Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange will not receive any payment in respect of interest on such Old Notes otherwise payable on any interest payment date the record date for which occurs on or after consummation of the Exchange Offer. This Letter is to be used: (i) by all Holders who are not members of the Automated Tender Offering Program ("ATOP") at the Depository Trust Company ("DTC"), (ii) by Holders who are ATOP members but choose not to use ATOP or (iii) if the Old Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 2. Delivery of this Letter to DTC does not constitute delivery to the Exchange Agent. Notwithstanding anything to the contrary in the registration rights agreement dated February 27, 1997 among the Company and the original purchasers of Old Notes (the "Registration Rights Agreement"), the Company will accept for exchange any and all Old Notes validly tendered on or prior to 5:00 p.m., New York City time, on the earlier of _________ __, 1997 (unless the Exchange Offer is extended by the Company) or the date on which 100% of the Old Notes are validly tendered and not withdrawn (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. IMPORTANT: HOLDERS WHO WISH TO TENDER OLD NOTES IN THE EXCHANGE OFFER MUST COMPLETE THIS LETTER OF TRANSMITTAL AND TENDER THE OLD NOTES TO THE EXCHANGE AGENT AND NOT TO THE COMPANY. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain conditions. Please see the Prospectus under the section titled "The Exchange Offer -- Conditions to the Exchange Offer." The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, Holders of Old Notes in any jurisdiction in which the making or acceptance of the Exchange Offer would not be in compliance with the laws of such jurisdiction. The instructions included with this Letter of Transmittal must be followed in their entirety. Questions and request for assistance or for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address listed above. -2- APPROPRIATE SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY LADIES AND GENTLEMEN: The undersigned hereby tenders to the Company the principal amount of Old Notes indicated below under "Description of Old Notes," in accordance with and upon the terms and subject to the conditions set forth in the Prospectus, receipt of which is hereby acknowledged, and in this Letter of Transmittal, for the purpose of exchanging each $1,000 principal amount of Old Notes designated herein held by the undersigned and tendered hereby for $1,000 principal amount of the New Notes. New Notes will be issued only in integral multiples of $1,000 to each tendering Holder of Old Notes whose Old Notes are accepted in the Exchange Offer. Holders may tender all or a portion of their Old Notes pursuant to the Exchange Offer. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered herewith in accordance with the terms of the Exchange Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to all such Old Notes that are being tendered hereby and that are being accepted for exchange pursuant to the Exchange Offer. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as the agent of the Company), with respect to the Old Notes tendered hereby and accepted for exchange pursuant to the Exchange Offer with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to deliver the Old Notes tendered hereby to the Company (together with all accompanying evidences of transfer and authenticity) for transfer or cancellation by the Company. All authority conferred or agreed to be conferred in this Letter of Transmittal shall not be affected by, and shall survive, the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, executors, administrators, legal representatives, successors and assigns of the undersigned. Any tender of Old Notes hereunder may be withdrawn only in accordance with the procedures set forth in the instructions contained in this Letter of Transmittal. See Instruction 4 hereto. The undersigned hereby represents and warrants that he or she has full power and authority to tender, exchange, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the assignment and transfer of the Old Notes tendered. The undersigned has read and agrees to all of the terms of the Exchange Offer. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal Rights" section of the Prospectus. The name(s) and address(es) of the registered Holder(s) should be printed herein under "Description of Old Notes" (unless a label setting forth such information appears thereunder), exactly as they appear on the Old Notes tendered hereby. The certificate number(s) and the principal amount of Old Notes to which this Letter of Transmittal relates, together with the principal amount of such Old Notes that the undersigned wishes to tender, should be indicated in the appropriate boxes herein under "Description of Old Notes." -3- The undersigned agrees that acceptance of any tendered Old Notes by the Company and the issuance of New Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that, upon the issuance of the New Notes, the Company will have no further obligations or liabilities thereunder. The undersigned understands that the tender of Old Notes pursuant to one of the procedures described in the Prospectus under "The Exchange Offer -- Procedures for Tendering Old Notes" and the Instructions hereto will constitute the tendering Holder's acceptance of the terms and the conditions of the Exchange Offer. The undersigned hereby represents and warrants to the Company that the New Notes to be acquired by such Holder pursuant to the Exchange Offer are being acquired in the ordinary course of such Holder's business, that such Holder has no arrangement or understanding with any person to participate in the distribution of the New Notes. The Company's acceptance for exchange of Old Notes tendered pursuant to the Exchange Offer will constitute a binding agreement between the tendering Holder and the Company upon the terms and subject to the conditions of the Exchange Offer. THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT IT IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION OF THE NEW NOTES. The undersigned also acknowledges that this Exchange Offer is being made based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") which lead the Company to believe that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly from the Company solely in order to resell pursuant to Rule 144A of the Securities Act or any other available exemption under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes as a result of market making or other trading activities), without further compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders are not participating and have no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If any holder is an affiliate of the Company or is engaged in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange of Old Notes, it represents that the Old Notes to be exchanged for the New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned understands that the New Notes issued in consideration of Old Notes accepted for exchange, and/or any principal amount of Old Notes not tendered or not accepted for exchange, will only be issued in the name of the Holder(s) appearing herein under "Description of Old Notes." Unless otherwise indicated under "Special Delivery Instructions," please mail the New Notes issued in consideration of Old Notes accepted for exchange, and/or any principal amount of Old Notes not tendered or not accepted for exchange (and accompanying documents, as appropriate), to the Holder(s) at the address(es) appearing herein under "Description of Old Notes." In the event that the Special Delivery Instructions are completed, please mail the New Notes issued in consideration of Old Notes accepted for exchange, and/or any Old Notes for any principal -4- amount not tendered or not accepted for exchange, in the name of the Holder(s) appearing herein under "Description of Old Notes," and send such New Notes and/or Old Notes to, the address(es) so indicated. Any transfer of Old Notes to a different holder must be completed, according to the provisions on transfer of Old Notes contained in the Indentures. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX BELOW. -5- INSTRUCTIONS Forming Part of the Terms and Conditions of the Exchange Offer 1. Guarantee of Signatures. Signatures on this Letter of Transmittal or notice of withdrawal, as the case may be, must be guaranteed by an institution which falls within the definition of "eligible guarantor institution" contained in Rule 17Ad-15 as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (hereinafter, an "Eligible Institution") unless (i) the Old Notes tendered hereby are tendered by the Holder(s) of the Old Notes who has (have) not completed the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) the Old Notes are tendered for the account of an Eligible Institution. 2. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery Procedures. This Letter of Transmittal is to be used: (i) by all Holders who are not ATOP members, (ii) by Holders who are ATOP members but choose not to use ATOP or (iii) if the Old Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer Guaranteed Delivery Procedures." To validly tender Old Notes, a Holder must physically deliver a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and all other required documents to the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to the Expiration Date (as defined below) or the Holder must properly complete and duly execute an ATOP ticket in accordance with DTC procedures. Otherwise, the Holder must comply with the guaranteed delivery procedures set forth in the next paragraph. Notwithstanding anything to the contrary in the Registration Rights Agreement, the term "Expiration Date" means 5:00 p.m., New York City time, on the earlier of _________ __, 1997 (or such later date to which the Company may, in its sole discretion, extend the Exchange Offer) or the date on which 100% of the Old Notes are validly tendered and not withdrawn. If this Exchange Offer is extended, the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company expressly reserves the right, at any time or from time to time, to extend the period of time during which the Exchange Offer is open by giving oral (confirmed in writing) or written notice of such extension to the Exchange Agent and by making a public announcement of such extension prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. LETTERS OF TRANSMITTAL SHOULD NOT BE SENT TO THE COMPANY OR TO DTC. If a Holder of the Old Notes desires to tender such Old Notes and time will not permit such Holder's required documents to reach the Exchange Agent before the Expiration Date, a tender may be effected if (a) the tender is made through an Eligible Institution, (b) on or prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery (by telegram, facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the Expiration Date, any documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) all other documents required by the Letter of Transmittal are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. See "The Exchange Offer - Guaranteed Delivery Procedures" as set forth in the Prospectus. Only a Holder of Old Notes may tender Old Notes in the Exchange Offer. The term "Holder" as used herein with respect to the Old Notes means any person in whose name Old Notes are registered on the books of the Trustee. If the Letter of Transmittal or any Old Notes are signed by trustees, executors, -6- administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be so submitted. Any beneficial Holder whose Old Notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to validly surrender those Old Notes in the Exchange Offer should contact such registered Holder promptly and instruct such registered Holder to tender on his behalf. If such beneficial Holder wishes to tender on his own behalf, such beneficial Holder must, prior to completing and executing the Letter of Transmittal, make appropriate arrangements to register ownership of the Old Notes in such beneficial holder's name. It is the responsibility of the beneficial holder to register ownership in his own name if he chooses to do so. The transfer of record ownership may take considerable time. The method of delivery of this Letter of Transmittal (or facsimile hereof) and all other required documents is at the election and risk of the exchanging Holder, but, except as otherwise provided below, the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If sent by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery to the Exchange Agent before the Expiration Date. No Letters of Transmittal or Old Notes should be sent to the Company. No alternative, conditional or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile hereof), waive any right to receive notice of acceptance of their Old Notes for exchange. 3. Inadequate Space. If the space provided herein is inadequate, the certificate numbers and principal amount of the Old Notes to which this Letter of Transmittal relates should be listed on a separate signed schedule attached hereto. 4. Withdrawal of Tender. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To be effective, a written or facsimile transmission notice of withdrawal must (i) be received by the Exchange Agent at the address set forth herein prior to 5:00 p.m., New York City time, on the Expiration date, (ii) specify the name of the person having tendered the Old Notes to be withdrawn, (iii) identify the Old Notes to be withdrawn and (iv) be (a) signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or (b) accompanied by evidence satisfactory to the Company that the Holder withdrawing such tender has succeeded to beneficial ownership of such Old Notes. If Old Notes have been tendered pursuant to the ATOP procedure with DTC, any notice of withdrawal must otherwise comply with the procedures of DTC. Old Notes properly withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer; provided, however, that withdrawn Old Notes may be retendered by again following one of the procedures described herein at any time prior to 5:00 p.m., New York City time, on the Expiration Date. All questions as to the validity, form and eligibility (including time of receipt) of notice of withdrawal will be determined by the Company, whose determinations will be final and binding on all parties. Neither the Company, the Exchange Agent, nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. The Exchange Agent intends to use reasonable efforts to give notification of such defects and irregularities. 5. Partial Tenders; Pro Rata Effect. Tenders of the Old Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount evidenced by any Old Notes is to be tendered, fill in the principal amount that is to be tendered in the box entitled "Principal Amount Tendered" -7- below. The entire principal amount of all Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 6. Signatures on this Letter of Transmittal; Bond Powers and Endorsements. If this Letter of Transmittal is signed by the registered Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name as written on the face of the certificate representing such Old Notes without alteration, enlargement or any change whatsoever. If any of the Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the Old Notes tendered hereby are registered in different names, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary accompanying documents as there are different registrations. When this Letter of Transmittal is signed by the Holder(s) of Old Notes listed and tendered hereby, no endorsements or separate bond powers are required. If this Letter of Transmittal is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. 7. Special Delivery Instructions. Tendering Holders should indicate in the applicable box the name and address to which New Notes issued in consideration of Old Notes accepted for exchange, or Old Notes for principal amounts not exchanged or not tendered, are to be sent, if different from the name and address of the person signing this Letter of Transmittal. 8. Waiver of Conditions. The Company reserves the absolute right to waive any of the specified conditions in the Exchange Offer, in whole at any time or in part from time to time, in the case of any Old Notes tendered hereby. See "The Exchange Offer - Conditions to the Exchange Offer" in the Prospectus. 9. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes for principal amounts not exchanged are to be delivered to any person other than the Holder of the Old Notes or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted, the amount of such transfer taxes will be billed directly to such tendering Holder. 10. Irregularities. All questions as to validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be resolved by the Company, in its sole discretion, whose determination shall be final and binding. The Company reserves the absolute right to reject any or all tenders of any particular Old Notes that are not in proper form, or the acceptance of which would, in the opinion of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defect, irregularity or condition of tender with regard to any particular Old Notes. The Company's interpretation of the terms of, and conditions to, the Exchange Offer (including the instructions herein) will be final and binding. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Company shall determine. Neither the Company nor the Exchange Agent shall be under any duty to give notification of defects in such tenders or shall incur any liability for failure to give such notification. The Exchange Agent intends to use reasonable efforts to give notification of such defects and -8- irregularities. Tenders of Old Notes will not be deemed to have been made until all defects and irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder, unless otherwise provided by this Letter of Transmittal, as soon as practicable following the Expiration Date. 11. Interest on Exchanged Old Notes. Holders whose Old Notes are accepted for exchange will not receive accrued interest thereon on the date of exchange. Instead, interest accruing from November 7, 1996 through the Expiration Date will be payable on the New Notes on May 15, 1997, in accordance with the terms of the New Notes. See "The Exchange Offer-Acceptance of Old Notes for Exchange; Delivery of New Notes" and "Description of Senior Notes." 12. Mutilated, Lost, Stolen or Destroyed Certificates. Holders whose certificates for Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), TOGETHER WITH ALL REQUIRED DOCUMENTS, OR A NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. IMPORTANT TAX INFORMATION Under Federal income tax laws, a registered Holder of Old Notes or New Notes is required to provide the Trustee (as payer) with such Holder's correct TIN on Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such Holder is an individual, the TIN is his social security number. If the Trustee is not provided with the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and payments made to such Holder with respect to Old Notes or New Notes may be subject to backup withholding. Certain Holders (including, among others, all corporations and certain foreign persons) are not subject to these backup withholding and reporting requirements. Exempt Holders should indicate their exempt status on Substitute Form W-9. A foreign person may qualify as an exempt recipient by submitting to the Trustee a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can be obtained from the Trustee. If backup withholding applies, the Trustee is required to withhold 31% of any payments made to the Holder or other payee. Backup withholding is not an additional Federal income tax. Rather, the Federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. Purpose of Substitute Form W-9 To prevent backup withholding on payments made with respect to Old Notes or New Notes the Holder is required to provide the Trustee with: (i) the Holder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (A) such Holder is exempt from backup withholding, (B) the Holder has not been notified by the Internal Revenue Service that the Holder is subject to backup withholding as a result of failure to report all interest or dividends or (C) the Internal Revenue Service has notified the Holder that the Holder is no longer subject to backup withholding; and (ii) if applicable, an adequate basis for exemption. -9-
- ------------------------------------------------------------------------------------------------------------------------ PAYER'S NAME: FLEET NATIONAL BANK - ------------------------------------------------------------------------------------------------------------------------ SUBSTITUTE Part 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND Social Security Number CERTIFY BY SIGNING AND DATING BELOW Form W-9 Department of the Treasury-Internal OR______________________ Revenue Service Employer Identification Number - ------------------------------------------------------------------------------------------------------------------------ Part 2 - Certification - Under penalties of perjury, I certify that: Payer's Request for (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting Taxpayer for a number to be issued to me); and Identification (2) I am not subject to backup withholding because (i) I am exempt from backup withholding, Number ("TIN") (ii) I have not been notifiedby the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or (iii) the IRS has notified me that I am no longer subject to backup withholding. Certificate instruction -- You must cross out item 2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of under reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). --------------------------------------------------------------------------------------------------- Part 3 SIGNATURE....................................DATE........., 1997 Awaiting TIN |_| NAME (Please Print)....................................... - ------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (i) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (ii) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within 60 days, 31% of all reportable payments made to me thereafter will be withheld until I provide a number. Signature................................................Date................... Name (Please Print)............................................................. - -------------------------------------------------------------------------------- -10- PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY ================================================================================ SPECIAL DELIVERY INSTRUCTIONS (See Instructions 1 and 7) To be completed ONLY if the New Notes issued in consideration of Old Notes exchanged, or certificates for Old Notes in a principal amount not surrendered for exchange are to be mailed to someone other than the undersigned or to the undersigned at an address other than that below. Mail to: Name:___________________________________________________________________________ (Please Print) Address:________________________________________________________________________ (Zip Code) ================================================================================
DESCRIPTION OF OLD NOTES (See Instructions 2 and 7) ==================================================================================================================================== Name(s) and Address(es) of Certificate(s) Registered Holder(s) (Attach additional signed list, if necessary) (Please fill in, in blank) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Aggregate Principal Amount of Principal Amount of Old Certificate Number(s)(1) Old Notes Evidenced by Notes Tendered(2) (must be Certificate(s) integral multiples of $1,000) ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------ Total ====================================================================================================================================
- -------- (1) Need not be completed if Old Notes are being tendered by book-entry transfer. (2) Unless otherwise indicated, the entire principal amount of Old Notes evidenced by any certificate will be deemed to have been tendered. -11- (Boxes below to be checked by Eligible Institutions only) |_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution DTC Account Number Transaction Code Number |_| CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) Window Ticket Number (if any) Date of Execution of Notice of Guaranteed Delivery Name of Institution which Guaranteed Delivery If Guaranteed Delivery is to be made by Book-Entry Transfer: Name of Tendering Institution DTC Account Number Transaction Code Number |_| CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE. |_| CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name Address -12- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY - -------------------------------------------------------------------------------- PLEASE SIGN HERE WHETHER OR NOT OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY X X Signature(s) of Owner(s) Dated of Authorized Signatory Area Code and Telephone Number: This box must be signed by registered holder(s) of Old Notes as their name(s) appear(s) on certificate(s) for Old Notes hereby tendered or on a security position listing, or by any person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Letter (including such opinions of counsel, certifications and other information as may be required by the Company or the Trustee for the Old Notes to comply with the restrictions on transfer applicable to the Old Notes). If signature is by an attorney-in-fact, trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. Name(s) (Please Print) Capacity (full title) Address (Include Zip Code) Tax Identification or Social Security Number(s) Guarantee of Signature(s) (See Instructions 1 and 6 to determine if required) Authorized Signature Name Name of Firm Title Address Area Code and Telephone Number Dated - -------------------------------------------------------------------------------- -13- GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Guidelines for Determining the Proper Identification Number to Give the Payer. Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.
----------------------------------------------------------------- -------------------------------------------------------- For this type Give the SOCIAL For this type Give the EMPLOYER of account: SECURITY number of account: IDENTIFICATION of-- number of-- ----------------------------------------------------------------- -------------------------------------------------------- 1. Individual The individual 6. Sole proprietorship The owner(1) 2. Two or more individuals (joint The actual owner of the account 7. A valid trust, estate, or pens Legal entity (3) account) or, if combined funds, the first trust individual on the account.(2) 8. Corporate The corporation 3. Custodian account of a minor The minor(4) 9. Association, club, religious, The organization (Uniform Gift to Minors Act) charitable, educational or other tax-exempt organization 10. Partnership The partnership 4.a. The usual revocable savings The grantor-trustee 11. A broker or registered nominee The broker or nominee trust (grantor is also trustee) b. So-called trust account that is The actual owner 12. Account with the Department of The public entity not a legal or valid trust Agriculture in the name of a under State law public entity (such as a State or local government, school 5. Sole proprietorship The owner(1) district, or prison) that receives agricultural program payments
- -------- (1) You must show your individual name, but you may also enter your business or "doing business as" name. You may use either your SSN or EIN. (2) List first and circle the name of the person whose number you furnish. (3) List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.) (4) Circle the minor's name and furnish the minor's social security number. -14- GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 Obtaining a Number If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. Payees Exempt from Backup Withholding The following is a list of payees exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except item (9). For broker transactions, payees listed in items (1) through (13) and a person registered under the Investment Advisers Act of 1940 U.C. who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in items (1) through (7), except a corporation that provides medical and health care services or bills and collects payments for such services is not exempt from backup withholding or information reporting. Only payees described in items (2) through (6) are exempt from backup withholding for barter exchange transactions, patronage dividends, and payments by certain fishing boat operators. (1) A corporation. (2) An organization exempt from tax under section 501(a), or an individual retirement plan or custodial account under section 403(b)(7). (3) The United States or any agency or instrumentality thereof. (4) A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. (5) A foreign government, a political subdivision of a foreign government, or an agency or instrumentality thereof. (6) An international organization or any agency or instrumentality thereof. (7) A foreign central bank of issue. (8) A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. (9) A futures commission merchant registered with the Commodity Futures Trading Commission. (10) A real estate investment trust. (11) An entity registered at all times under the Investment Company Act of 1940. (12) A common trust fund operated by a bank under section 584(a). (13) A financial institution. (14) A middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Secretaries, Inc. Nominee List. (15) An exempt charitable remainder trust, or a non-exempt trust described in section 4947. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: o Payments to nonresident aliens subject to withholding under section 1441. o Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. o Payments of patronage dividends not paid in money. o Payments made by certain foreign organizations. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. o Payments of tax-exempt interest (including exempt-interest dividends under section 852). o Payments described in section 6049(b)(5) to nonresident aliens. o Payments on tax-free covenant bonds under section 1451. o Payments made by certain foreign organizations. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER. WRITE "EXEMPT" ON THE FACE OF THE FORM AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, royalties, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. Privacy Act Notice. Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. Penalties (1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Failure to Report Certain Dividend and Interest Payments. If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under-payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) Civil Penalty for False Information with Respect to Withholding. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) Criminal Penalty for Falsifying Information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -15- -----END PRIVACY-ENHANCED MESSAGE-----