-----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, LzBr0qLo79DIN9LW6k2tq+U0LOM+jXYqwC4yR7aDlhqm8I8D4XT1nHmZKu0VWV// XlDDZFCKhgKtofS2csiVWQ== 0000890566-98-000434.txt : 19980331 0000890566-98-000434.hdr.sgml : 19980331 ACCESSION NUMBER: 0000890566-98-000434 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAZOS SPORTSWEAR INC /DE/ CENTRAL INDEX KEY: 0000856711 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 911770931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18054 FILM NUMBER: 98577027 BUSINESS ADDRESS: STREET 1: 3860 VIRGINIA AVE CITY: CINCINNATI STATE: OH ZIP: 45227 BUSINESS PHONE: 5132723600 MAIL ADDRESS: STREET 1: 3860 VIRGINIA AVE CITY: CINCINNATI STATE: OH ZIP: 45227 FORMER COMPANY: FORMER CONFORMED NAME: SUN SPORTSWEAR INC DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________ COMMISSION FILE NUMBER: 0-18054 BRAZOS SPORTSWEAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 91-1770931 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 4101 FOUNDERS BLVD., BATAVIA, OHIO 45103 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 513-753-3400 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------------------------- ----------------------------------------- Common Stock, $.001 par value Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 23, 1998 was $11,800,000. As of March 23, 1998, there were 4,419,479 shares of the registrant's Common Stock, $.001 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Certain portions of the registrant's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated in Part III by reference. TABLE OF CONTENTS PAGE ---- PART I Item 1. Business................................ 1 Item 2. Properties.............................. 9 Item 3. Legal Proceedings....................... 9 Item 4. Submission of Matters to a Vote of Security Holders...................... 9 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................... 10 Item 6. Selected Financial Data................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 18 Item 8. Financial Statements and Supplementary Data.................................. 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 18 PART III Item 10. Directors and Executive Officers of the Registrant.............................. 18 Item 11. Executive Compensation.................. 18 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 18 Item 13. Certain Relationships and Related Transactions............................ 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 19 ( i ) PART I ITEM 1. BUSINESS GENERAL Brazos Sportswear, Inc. ("Brazos" or the "Company") is one of the leading designers, manufacturers and marketers of decorated sportswear in the United States. The Company offers extensive and diversified product lines of licensed, proprietary and private label sportswear consisting of T-shirts, fleecewear (sweatshirts) and other casual apparel products. Many of the Company's licensed products include creative applications of classic cartoon characters, including Disney's Mickey Mouse, Disney's Winnie the Pooh and various Warner Bros. Looney Tunes characters, such as Bugs Bunny and the Tasmanian Devil. The Company has entered into license agreements with Disney, Warner Bros., Chic by H.I.S., Major League Baseball, National Hockey League, Coca-Cola Company and most major colleges for the use of their characters and logos in developing the Company's products. The Company uses its in-house merchandising, design and art staff to create designs for the Company's proprietary product lines under numerous Company-owned brand names and labels, including Brazos Sportswear, Morning Sun, Top Stitch, Red Oak Sportswear, BAC, T.G.F.K. and Crable Sportswear. In addition, the Company designs private label products for its larger retail customers that are sold under particular customers' labels. The Company sells its products to a diverse customer base including (i) department stores such as J.C. Penney, May Co., Federated Department Stores and Mercantile Stores, (ii) mass merchandising stores such as Wal-Mart, Kmart and Target, (iii) specialty stores such as Kids "R" Us and Garden Ridge and (iv) other regional and national retail chains. The Company was formerly named Sun Sportswear, Inc. On March 14, 1997, the Company completed a merger with BSI Holdings, Inc. and was reincorporated in Delaware under the name Brazos Sportswear, Inc. In July 1997, the Company acquired Morning Sun, Inc. ("Morning Sun") and Premier Sports Group, Inc. ("Premier"). Morning Sun is a designer, manufacturer and marketer of imprinted and embroidered tops for women, and for fiscal 1996, Morning Sun had net sales of $54.8 million. Premier is an importer of high-quality, low-cost "fashion fleece" and other garments for domestic distributors and provides merchandising, design and sourcing services for apparel companies, and for fiscal 1996, Premier had net sales of $24.1 million, excluding sales to Brazos. The cash consideration for the Morning Sun and Premier acquisitions was financed from a portion of the proceeds from the sale in July 1997 of $100 million of the Company's 10 1/2% senior notes (the "Notes") due 2007. In September 1997, the Company acquired CS Crable Sportswear, Inc. ("Crable") for cash consideration of approximately $13.3 million. In connection with the acquisition, the Company agreed to lease Crable's 290,000 square foot manufacturing, distribution and office facility located in Batavia (Cincinnati), Ohio and has relocated its corporate headquarters to that facility. For additional information concerning the Company's 1997 acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to Consolidated Financial Statements. INDUSTRY TRENDS The Company competes in the decorated sportswear market which, based upon industry data, the Company believes accounted for approximately $14.3 billion of retail level sales in the United States in 1996, with a compounded annual growth rate of approximately 8.8% since 1991. The Company believes growth in the decorated sportswear market has resulted from: (i) an increased preference for comfortable apparel selections; (ii) more flexible dress codes, including greater acceptance of casual clothes in the workplace; (iii) a heightened emphasis on physical fitness, including increased participation in sports; (iv) improved characteristics that have enhanced consumer appeal, including improvements in fabric weight, blends and construction, and increased offerings of size, color and style; (v) the enhancement of screenprinted graphics and embroidered designs primarily resulting from more advanced manufacturing 1 equipment and processes; and (vi) the increased use of "attitude" apparel. The Company believes that these trends should continue to drive industry growth. BUSINESS STRATEGY The Company intends to enhance its position as one of the leading designers, manufacturers and marketers of decorated sportswear by continuing to pursue the following business strategies: o EXTENSIVE LINES OF QUALITY PRODUCTS. The Company offers extensive and diversified lines of licensed, proprietary, private label and blank products, which are intended to capitalize on retailers' desires to reduce purchasing and administrative costs by limiting the number of suppliers they use. LICENSED PRODUCTS. Licensed products are decorated with classic cartoon characters and logos that the Company's artists vary and refine using different lettering, poses, activities or dress. The Company acquires rights to use characters and logos on specified types of garments, pays each licensor royalties on products sold displaying the licensed character or logo, and typically guarantees a minimum annual royalty. BRANDED PRODUCTS. Proprietary Products. The Company develops its proprietary product lines for its exclusive use under numerous Company-owned brand names and labels, such as Morning Sun, Top Stitch, T.G.F.K., BAC and Crable Sportswear. Proprietary products are merchandized using graphic designs based on a wide variety of themes, including "attitude," recreational, outdoor, wildlife, western, sports, patriotic, humor and seasonal themes. Private Label Products. The Company manufactures private label products for certain of its larger retail customers. The Company designs each private label product by working closely with a customer, creating a unique decorated sportswear line that is sold under that customer's label. The Company's private label customers include Target, Wal-Mart and Sears. CONTRACT SERVICES. The Company provides merchandising, design and sourcing services for other apparel companies. These services include the purchase of blank garments from overseas manufacturing and production facilities in large quantities at prices that are typically lower than those charged by domestic mills and distributing such products to U.S. based customers. The Company also provides contract embroidery services from its Millersburg, Pennsylvania facility. BLANK PRODUCTS. The Company is a wholesale distributor of blank garments of recognized manufacturers such as Fruit of the Loom and Russell Corp., and sells these garments to over 13,000 customers that typically decorate the products for later sale. OTHER. Other products include custom manufactured athletic uniforms and custom designed products for corporate accounts. o INNOVATIVE MERCHANDISING AND DESIGN STAFF. The Company employs 14 in-house merchandising and design personnel and a staff of approximately 120 artists who work closely with customers to create designs for the Company's sportswear lines. The Company's merchandising and design staff has been recognized for its achievements by licensors and customers, and has received a number of awards, including the Vendor of the Year Award from J.C. Penney's Women's department, the Bugsy Award from Warner Bros. and the Vendor of the Year Award for Girls 4-14 from Target. o UNIQUE COMBINATION OF SALES AND MARKETING PROGRAMS. The Company believes it uses a unique combination of sales and marketing programs designed to address the differing needs of its customer base. Key sales programs include: BOOKING PROGRAM. The Company works with its larger retail customers to custom design and merchandise a spring and fall product line of "fashion-basic," longer lead time products. The product line consists primarily of high quality, low price foreign sourced products. The Company's 30 in-house account executives work closely with customers to determine volume needs based on the current years' product line and past sales history. The Company books orders under this program prior to committing to overseas production. Production lead times vary by product but typically range from 60 to 180 days. 2 CALENDAR GRAPHICS PROGRAM. The Company offers a calendar graphics program designed to provide customers with an extensive selection of graphics and a wide variety of garments and size mixes but with shorter lead times than under the booking program. Under the calendar graphics program, graphic designs are printed and available on a pre-scheduled basis throughout the year. The Company batches orders from numerous customers to gain production economies of scale to keep product costs competitive. Therefore, customers can order in minimum quantities of two to four dozen while gaining the pricing advantages of much larger runs. Production lead times generally range from three to four weeks. SHELF STOCK PROGRAM. The Company also offers a shelf stock program that consists of preprinted inventory it delivers to customers on short lead times, typically within five days of receipt of an order. Products are sold through this program by independent sales representatives who call on individual customer stores. In addition, the Company uses an electronic data interchange system ("EDI") through which customers place orders to replenish their stock with weekly shipments of products that are selling well. The program also provides the Company with information that enables it to assess market trends and to respond promptly to the success of individual products or graphics. The shelf stock program allows major retailers to tailor their buying to the specific needs of each store and reduces the guesswork and risks of the "corporate buy" allocation approach. In order to minimize the Company's investment in inventory, the Company limits the graphics under this program to only a portion of those the Company offers in its calendar graphics program. However, the program is attractive to many of the Company's customers because it consists of the Company's most popular graphics, and new concepts are added periodically as less popular designs are phased out. o DIVERSE CUSTOMER BASE. Unlike many of the Company's competitors that concentrate marketing efforts on a limited segment of the sportswear market, the Company sells its decorated sportswear products to a diverse customer base including department stores, mass merchandising stores and specialty and other stores. This marketing strategy allows the Company to cover a significant portion of the retail market while reducing its exposure to any one market segment. In addition, the Company believes that the breadth of its customer base aids its efforts to obtain new licenses from licensors seeking to introduce their products through multiple distribution channels. o EXPANSION AND ENHANCEMENT OF CUSTOMER RELATIONSHIPS. The expansion of the Company's product lines and license portfolio has provided cross-selling opportunities by increasing the number of departments within a retailer that may sell the Company's products. In addition, the Company maintains a staff of 30 in-house account executives and approximately 140 independent sales representatives to pursue additional large customers. The Company has also established a telemarketing program to market its products to local and regional retailers. o FLEXIBLE AND EFFICIENT MANUFACTURING. Many of the Company's competitors do not operate production facilities of their own and, therefore, must contract with third parties to provide the value-added decorating process. The Company believes that operating its own production facilities allows it (i) to focus on increasing manufacturing and production efficiencies, (ii) the flexibility to shift production among various facilities and (iii) to better control quality, delivery and costs. In addition, the Company's shelf stock and calendar graphics programs could not be implemented as effectively without in-house production capabilities. o COMMITMENT TO LOW COST STRUCTURE. The Company is committed to controlling costs and improving operating efficiencies. The Company's recent acquisitions have resulted in improvements in the Company's purchasing power and certain economies of scale in manufacturing, marketing, distribution and administration. In addition, the Company concentrates on the high value-added production processes of custom design, screen printing and embroidery at its manufacturing facilities and outsources the capital intensive process of manufacturing undecorated blanks to a network of domestic and foreign manufacturers. o INTERNATIONAL OPPORTUNITIES. The Company recently obtained a license from Walt Disney Enterprises of Japan, Ltd. to export and distribute Disney's classic cartoon character products directly to Japan. The 3 Company's current marketing plans include sales to several major retail outlets in Japan. The Company also is evaluating opportunities to sell its products in other countries. o STRATEGIC ACQUISITIONS. The Company maintains an acquisition strategy focused on acquiring busi-nesses that provide products or services that complement those offered by the Company. The criteria for identifying an attractive acquisition candidate is not limited to the revenue potential of the acquisition target, but also include such factors as (i) expanding the Company's product lines, (ii) increasing manufacturing, production and other cost efficiencies, (iii) diversifying and expanding the Company's customer base and (iv) gaining access to the talents of key management, sales and design personnel. The Company or its predecessors made nine acquisitions since 1990 that have brought significant strategic advantages to its business. PRODUCTS The Company provides extensive and diversified product lines of licensed, proprietary and private label sportswear consisting primarily of T-shirts and fleecewear (sweatshirts) imprinted or embroidered to display cartoon characters, brands, logos and designs that are enhanced or created by the Company's in-house merchandising, design and art staff. The products are sold in a variety of styles, including basic pocket, long-sleeved and oversized T-shirts, night shirts and sweat pants. T-shirts are available in solid, stripe, roll sleeve, weathered natural and micro-stripe styles and range in fiber content from 50% cotton/50% polyester to 100% cotton. Fleecewear products range from seven ounces to 12 ounces in weight. The Company's products also include windsuits, denim jackets, parkas, shorts and knit shirts and more detailed fashion-oriented garments, all of which are available in a variety of colors, styles and fabric weights. The Company develops screen print and embroidery designs based on industry trends, visits to fashion and trade shows and frequent meetings with apparel label owners and major customers. Sales managers work closely with the Company's merchandisers, designers and artists to develop appropriate styles and color shades. The design process is interactive, requiring the creation and delivery of numerous samples for customer feedback and further changes. For larger customers, the design staff typically incorporates minor styling changes to a basic design to create a unique product line for the customer. The product development process also involves (i) production feasibility studies, (ii) analysis and documentation of garment and art trends, as well as cost and structure, (iii) prototype preparation for customers and trade shows, and (iv) limited test sales. LICENSES AND TRADEMARKS LICENSES. The Company obtains non-exclusive licenses to manufacture and market products with classic cartoon characters and other images. Many of the Company's license agreements limit sales of products to certain market categories. The Company's material licenses generally are for a term of one to three years but can be terminated on 30 days' notice. Typically, the licensor may terminate the license if specified minimum levels of annual net sales for licensed products are not met or for a failure by the Company to comply with the material terms of the license. In the ordinary course of its business, the Company continues to produce products under expired licenses based on letter agreements or oral representations from licensors to the effect that continued production will be permitted pending negotiation of new licenses. Accordingly, the Company's licensing arrangements are dependent primarily upon maintaining a good relationship between the Company and its licensors. The license agreements (i) generally require minimum annual payments and certain quality control procedures and (ii) give the licensor the right to approve products licensed by the Company. The Company believes it has good relationships with its licensors and has generally been able to obtain renewals of expired licenses and to obtain the required approvals for licensed products. 4 PROPRIETARY TRADEMARKS. The Company has registered, or has applied for registration for, a variety of trademarks under which it sells a number of its products, including Brazos Sportswear, Morning Sun, Top Stitch, Red Oak Sportswear, Xenogenesis, BAC, T.G.F.K. and Name of the Game. The level of copyright and trademark protection available to the Company for proprietary designs and characters varies depending on several factors, including the degree of originality and the distinctiveness of the associated trademarks and designs. SALES AND MARKETING SALES FORCE. As of December 27, 1997, the Company had a sales force of 30 in-house account executives who concentrate on national retail accounts and approximately 140 independent sales representatives who sell one or more of the Company's product lines. The in-house account executives work with large accounts and buyers for major retailers to tailor programs specifically for the needs of each customer. The independent sales representatives cover the entire United States and call on chain stores and individual retailers. Management believes that its combination of in-house and independent sales representatives gives the Company a broad coverage of the retail marketplace. The Company compensates key account executives through a combination of salary and bonus incentives tied to sales and profitability. The Company compensates independent sales representatives on a commission-only basis, with rates ranging from 1% to 10% of net sales, and determines their territories by geographic location, market categories covered and products sold. OTHER SALES EFFORTS. The Company also maintains a presence in New York City's garment district, where the Company has (i) a 4,400 square foot apparel showroom for women's, men's and boys' apparel and (ii) a 2,400 square foot showroom for girls' apparel. The Company also presents its products at trade shows, including the semi-annual MAGIC Show and operates a telemarketing group that focuses on small customers who might otherwise not be covered by a sales representative. CUSTOMERS. The Company's primary distribution channels are through: (i) department stores such as J.C. Penney, May Co. and Mercantile Stores; (ii) mass merchandisers such as Wal-Mart, Kmart and Target; and (iii) specialty stores such as Kids "R" Us and Garden Ridge. In fiscal 1997, the Company's sales to Wal-Mart, J.C. Penney, Kmart and Target accounted for approximately 14.3%, 12.0%, 5.2% and 3.1% of its sales, respectively. SOURCING OF GARMENTS The Company sources blank garments from a network of domestic and foreign manufacturers. Suppliers are selected based on the product's design, style, quality specifications, price and required lead times. A majority of the Company's blank garments are sourced through large domestic mills and independently owned contractors with manufacturing facilities in the United States, China, Guatemala, Pakistan and Mexico. Blank garments requiring short delivery times generally are purchased from domestic suppliers, while products that require greater finishing detail or allow longer delivery times generally are purchased overseas. The Company typically uses foreign sources for large orders of blank garments. The Company anticipates that the percentage of blank garments that are imported will increase because of the Company's increased focus on decorated sportswear sales, the increasing size of its customers' orders and the acquisition of Premier which was completed in July 1997. The relative proportion of blank garments purchased from domestic and foreign suppliers may vary from time to time depending on the factors described above and other competitive factors. The Company believes that its sources of blank garments are sufficient to satisfy its current requirements. Generally, each supplier agrees to produce finished garments in accordance with samples and specifications the Company provides. The Company's representatives regularly visit the facilities of both foreign and domestic suppliers to ensure quality and compliance with the Company's specifications. The Company also conducts quality control inspections that include testing for shrinkage, dye and finish consistency, color fastness, size specification adherence, construction strength and uniformity. 5 From time-to-time, the Company uses sourcing agents who assist in selecting and overseeing foreign third-party manufacturers and monitoring quotas and other trade regulations. The Company's production staff and sourcing agents oversee all aspects of apparel manufacturing and production. The Company and its sourcing agents separately negotiate with suppliers for the purchase of fabrics, which are then purchased either by the Company or its suppliers. The Company generally does not enter into long-term contracts with its suppliers. The Company believes that its relationships with its suppliers are good. PRODUCTION AND MANUFACTURING The Company is committed to controlling costs and improving operating efficiencies. Recent acquisitions have resulted in improvements in the Company's purchasing power and certain economies of scale in manufacturing, marketing, distribution and administration. In addition, the Company concentrates on the high value-added production processes of custom design, screen printing and embroidery at its manufacturing facilities and outsources the capital intensive process of manufacturing undecorated blanks to a network of domestic and foreign manufacturers. Production of the Company's products requires applying garment decorations through screen printing or embroidery. SCREEN PRINTING. The screen printing process begins with the preparation of a design by the Company's artists. The Company tests new designs for printability and color dynamics and produces sales and production samples. The Company also stocks over 140 pigment colors and numerous ink bases, which allows for in-house development of new ink applications and techniques. In the printing process, screens are positioned in automatic printing presses where inks are pressed through the screen to duplicate the design on the garment. Garments bearing designs on different portions of the garment may move through the printing process several times. Following printing, the garments are dried, making the printed design permanent and washable. The Company operates 50 automatic screen printing presses. Most of the screen printing presses are color printing presses with eight to twelve color printing capability, which can print either spot designs or overall print designs. Each press is operated by a team of employees. The Company believes that this approach contributes to the flexibility, quality and speed of its production process. The Company believes that its capacity is sufficient for its needs and that during seasonal peaks sufficient sources of outside production are available to the Company to meet its production needs, if necessary. EMBROIDERY. The embroidery process begins with the preparation of a design by the Company's artists. The Company tests new designs for embroiderability as it relates primarily to stitch count and color selection and produces sales and production samples. After all designs are approved, the design that is to be embroidered is formatted onto a computer disk, which is then programmed into the embroidery machine. Each embroidery machine has multiple sewing heads, permitting six to 18 garments to be embroidered at one time. Garments are trimmed, packed in the Company's warehouse and shipped directly to the customer or to other Company facilities for distribution to the customer. The Company operates 67 fully automated, multi-head embroidery machines. QUALITY CONTROL. The Company maintains quality control departments responsible for monitoring phases of production and ensuring that purchased garments meet the Company's quality standards. The Company develops and inspects prototypes of each product type, establishes fittings based on the prototype, inspects samples and, through its employees or sourcing agents, inspects fabric before cutting. The Company or its sourcing agents inspect the final product before shipment to the Company's facilities. PRODUCT SHIPMENT. The Company believes responding quickly to customer requirements and meeting delivery schedules consistently are important factors in its business. Although customers often place orders for garment styles as long as 20 weeks in advance, customers generally select the specific art designs to be printed on ordered garments periodically for delivery within as few as two days following the design selection. 6 The Company can place garments on hangers before shipping, affix price tags and other product information, and can ship garments polybagged or folded. These services reduce the time required to prepare the garments for display and thereby enable customers to stock their racks and shelves more quickly. The Company's customers generally bear all shipping costs. REGULATION The Company is subject to federal, state and local environmental laws and regulations, including laws relating to employee knowledge of, exposure to, and disposal of inks, dyes, photographic chemicals and cleaning solvents. The Company believes that its operations comply in all material respects with applicable environmental laws and regulations. Although the Company continues to make capital expenditures for environmental protection, it does not anticipate that significant expenditures will be required to remain in compliance with environmental requirements. There can be no assurance, however, that future changes in such laws and regulations will not have a material effect on the Company's operations. COMPETITION The apparel industry is highly competitive. The Company competes with numerous apparel vendors, including those with their own retail stores and those whose merchandise displays licensed cartoon characters and logos of professional sports teams and colleges and universities. The Company also competes through a combination of graphics, decorating techniques, packaging and retail presentation. Competitive factors include product quality, access to popular licenses, price, ability to meet delivery requirements and other aspects of customer service, changes in styles and consumer preferences, and the limited availability of customer shelf and rack space. BACKLOG The Company typically receives purchase orders several months in advance of delivery. A majority of these purchase orders typically can be canceled without penalty or cancelation charges. At December 27, 1997, the Company's backlog of orders was approximately $38.4 million, compared with $13.7 million at December 28, 1996. Such backlog consisted of commitments believed to be firm, all of which is expected to be shipped in fiscal 1998. EMPLOYEES At December 27, 1997, the Company employed approximately 1,800 full-time employees. The Company believes that its employee relations are good. EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth certain information regarding the executive officers and directors of the Company:
NAME AGE POSITION - ------------------------------------- ---- ---------------------------------------------- Randall B. Hale...................... 35 Chairman of the Board and Director J. Ford Taylor....................... 40 President, Chief Executive Officer and Director F. Clayton Chambers.................. 38 Vice President, Chief Financial Officer, Treasurer, Secretary and Director Robert C. Klein...................... 47 President -- Branded Products Division Deborah S. Williams.................. 39 President -- Licensed Products Division Samuel T. McKnight................... 53 President -- Wholesale Distribution Division Steven P. Ratterman.................. 28 Controller and Assistant Secretary Nolan Lehmann........................ 53 Director Michael S. Chadwick.................. 46 Director Alan Elenson......................... 48 Director
7 RANDALL B. HALE. Mr. Hale has been a director and chairman of the board of the Company or its predecessors since 1992. He has served as a vice president of Equus II Incorporated ("Equus II") and Equus Capital Management Company ("Equus") since 1992 and a director of Equus since 1996. From 1985 to 1992, he was employed by Andersen Worldwide. Mr. Hale is a director of American Residential Services, Inc. and is also a director of numerous privately-owned companies. Mr. Hale is a certified public accountant. J. FORD TAYLOR. Mr. Taylor has been president, chief executive officer and a director of the Company or its predecessors since 1996. He was president of the decorated sportswear operations from 1995 until 1996 and vice president -- operations of the decorated sportswear operations from 1993 until 1995. Mr. Taylor served as president of the CC Creations and Red Oak facility in College Station, Texas from 1990 to 1993. He founded CC Creations in 1982 which he owned and operated before its acquisition by the Company. F. CLAYTON CHAMBERS. Mr. Chambers has been a director of the Company or its predecessors since 1989. He has served as vice president, chief financial officer, treasurer and secretary of the Company since January 1995, and previously served as a consultant to the Company beginning in May 1994. Mr. Chambers was a principal in the firm of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm located in Houston, Texas, from 1988 until 1994. He was employed by Lovett Mitchell Webb & Garrison, an investment banking firm, from 1986 until 1987. ROBERT C. KLEIN. Mr. Klein has served as president of Morning Sun since 1993 and has served as president -- branded products division since November 1997. From 1978 until 1993, Mr. Klein served in a variety of positions within manufacturing, merchandising and sales at Jantzen, Inc., a division of VF Corp., and was vice president of womenswear before he left Jantzen to join Morning Sun. DEBORAH S. WILLIAMS. Ms. Williams has been president of the Licensed Products Division since 1996. She served as vice president of purchasing from 1994 until 1996. From 1990 to 1994 Ms. Williams served as director of purchasing at the Company's Cincinnati facility and from 1982 to 1990 was a buyer at the same facility. SAMUEL T. MCKNIGHT. Mr. McKnight has been president of the Wholesale Distribution Division since 1974. He founded Gulf Coast Sportswear, the predecessor of the Company, in 1974. From 1972 to 1974 Mr. McKnight served as president of M & M Designs, a shirt printing company. STEVEN P. RATTERMAN. Mr. Ratterman has served as controller and assistant secretary of the Company since May 1996. From 1991 to 1996, he was employed by Andersen Worldwide. Mr. Ratterman is a certified public accountant. NOLAN LEHMANN. Mr. Lehmann has been a director of the Company or its predecessors since 1989. He has served as a director and president of Equus since 1980, and as a director and president of Equus II since inception. Before joining Equus, Mr. Lehmann served in a number of executive management positions with Service Corporation International from 1973 to 1980. Mr. Lehmann is also a director of Allied Waste Industries, Inc., American Residential Services, Inc., Drypers Corporation and Garden Ridge Corporation. In addition, he serves as a director of several privately-owned companies. Mr. Lehmann is a certified public accountant. MICHAEL S. CHADWICK. Mr. Chadwick has been a director of the Company or its predecessors since 1989. He is a senior vice president and a managing director of the corporate finance department of Sanders Morris Mundy, a Houston-based financial services and investment banking firm. From 1988 to 1994, Mr. Chadwick served as president of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm located in Houston, Texas. Mr. Chadwick presently serves on the board of directors of Watermarc Food Management Company and Blue Dolphin Energy Company, publicly traded corporations, and Moody-Price, Inc., a privately-owned corporation. ALAN ELENSON. Mr. Elenson has been a director of Brazos or its predecessors since August 1996. He founded Plymouth Mills, Inc. ("Plymouth") in 1975 and owned and operated Plymouth prior to its acquisition by the Company in August 1996. 8 ITEM 2. PROPERTIES Set forth below is a brief description of each of the Company's manufacturing facilities:
SQUARE OWNED/ LOCATION EQUIPMENT FEET LEASED - ------------------------------------- -------------------------------------------- ------- ------- Batavia (Cincinnati), OH............. 17 automatic screen printing presses; 290,000 Leased 23 embroidery machines Staten Island, NY.................... 14 automatic screen printing presses; 153,000 Leased 250 yards of cutting tables College Station, TX.................. 12 automatic screen printing presses; 88,625 Leased 5 embroidery machines Millersburg, PA...................... 23 embroidery machines 54,000 Owned Tacoma, WA........................... 7 automatic screen printing presses; 171,000 Leased 16 embroidery machines
The Company distributes blank garments from nine warehouses located throughout the United States. The Company also maintains a cut and sew facility in Dallas, Texas, two showrooms in the garment district of New York City and an administrative office in Clute, Texas. ITEM 3. LEGAL PROCEEDINGS The Company is subject to legal proceedings in the ordinary course of business. While the outcome of lawsuits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition, results of operations or cash flow of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1997. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "BRZS." The Company was reincorporated in Delaware in March 1997 immediately subsequent to the merger with BSI Holdings, Inc., and at that time, the Company effected a one-for-five reverse stock split. The Common Stock began trading on a post-reverse split basis under the name Brazos Sportswear, Inc. on March 14, 1997, and, the high and low per share prices are presented below as adjusted for the reverse stock split. FISCAL YEAR HIGH LOW - ------------------------------------- --------- --------- 1996 First Quarter................... 15.625 12.50 Second Quarter.................. 18.125 13.125 Third Quarter................... 17.50 10.00 Fourth Quarter.................. 14.375 8.75 1997 First Quarter................... 13.125 11.00 Second Quarter.................. 11.00 8.50 Third Quarter................... 11.00 8.75 Fourth Quarter.................. 10.00 8.00 All of the foregoing reflect interdealer quotations, without retail markups, markdowns or commissions. On March 23, 1998, the last reported sale price for the Common Stock, as quoted by the Nasdaq National Market, was $7.50 per share. As of the same date, there were approximately 120 holders of record of the Common Stock, and the Company estimates that there are over 1,500 beneficial owners of Common Stock. DIVIDEND POLICY The Company has never declared or paid cash dividends on the Common Stock. The Company intends to retain any future earnings for reinvestment in its business and does not intend to pay cash dividends in the foreseeable future. Furthermore, the Company is prohibited from declaring or paying cash dividends on its capital stock under the terms of certain of the Company's indebtedness. RECENT SALES OF UNREGISTERED SECURITIES The following table reflects sales by the Company of unregistered securities during the fiscal year ended December 27, 1997. Except as otherwise disclosed, the issuances by the Company of the securities sold in the transactions referenced below were not registered under the Securities Act of 1933, as amended, pursuant to the exemptions contemplated in Section 4(2) thereof, or Regulation D thereunder, for transactions not involving a public offering. The consideration paid to the Company in respect of each issuance was cash, unless otherwise indicated.
SHARES OR PRINCIPAL UNDERWRITERS AND OTHER DESCRIPTION/DATE AMOUNT CONSIDERATION PURCHASERS - ------------------------------------- ---------- ------------- -------------------------------- COMMON STOCK July 2, 1997......................... 73,171 (1) Robert C. Klein PREFERRED STOCK August 7, 1998....................... 146,641(2) (5) Equus II Incorporated 49,871(3) (5) 24,457(4) (5) 7,894(2) (5) J. Ford Taylor 10 SHARES OR PRINCIPAL UNDERWRITERS AND OTHER DESCRIPTION/DATE AMOUNT CONSIDERATION PURCHASERS - ------------------------------------- ---------- ------------- -------------------------------- 3,114(3) (5) 1,186(4) (5) 4,349(2) (5) F. Clayton Chambers 2,075(3) (5) 1,186(4) (5) 4,349(2) (5) Michael S. Chadwick 4,154(3) (5) 1,186(4) (5) 10,975(2) (5) Samuel T. McKnight 3,114(3) (5) 10,975(2) (5) George Warny 3,114(3) (5) 1,186(4) (5) 12,466(3) (5) Don A. Sanders 5,698(4) (5) 8,311(3) (5) Katherine U. Sanders 3,799(4) (5) 4,154(3) (5) George L. Ball 1,899(4) (5) 8,311(3) (5) John Drury 3,799(4) (5) 1,036(3) (5) Ben T. Morris 478(4) (5) 620(3) (5) Andrew Whitman Chambers 1996 Trust 412(3) (5) David Mitchell Chambers 1996 Trust 2,075(3) (5) William M. DeArman 949(4) (5) 237(4) (5) Charles Davis 237(4) (5) John Malanga 237(4) (5) David Biederman 237(4) (5) Deborah S. Williams October 1, 1998 .......................... 76,352(2) (5) Equus II Incorporated 25,966(3) (5) 21,262(4) (5) 4,111(2) (5) J. Ford Taylor 1,622(3) (5) 1,032(4) (5) 2,265(2) (5) F. Clayton Chambers 11 SHARES OR PRINCIPAL UNDERWRITERS AND OTHER DESCRIPTION/DATE AMOUNT CONSIDERATION PURCHASERS - ------------------------------------- ---------- ------------- -------------------------------- 1,081(3) (5) 1,032(4) (5) 2,265(2) (5) Michael S. Chadwick 2,163(3) (5) 1,032(4) (5) 5,714(2) (5) Samuel T. McKnight 1,622(3) (5) 5,714(2) (5) George Warny 1,622(3) (5) 1,032(4) (5) 6,491(3) (5) Don A. Sanders 4,954(4) (5) 4,327(3) (5) Katherine U. Sanders 3,302(4) (5) 2,163(3) (5) George L. Ball 1,651(4) (5) 4,327(3) (5) John Drury 3,302(4) (5) 540(3) (5) Ben T. Morris 412(4) (5) 324(3) (5) Andrew Whitman Chambers 1996 Trust 216(3) (5) David Mitchell Chambers 1996 Trust 206(4) (5) Charles Davis 206(4) (5) John Malanga 206(4) (5) David Biederman 206(4) (5) Deborah S. Williams 1,081(3) (5) William M. DeArman 825(4) (5) CONVERTIBLE SUBORDINATED NOTE July 2, 1997......................... $ 1,500,000 (6) Premier Sports Group, Inc. SENIOR NOTES July 2, 1997......................... $100,000,000 $99,240,000 Various institutional investors(7)
- ------------ (1) Partial consideration for shares of Morning Sun acquired from the purchaser at deemed price of $10.25 per share. (2) Series B-1 Redeemable Convertible Preferred Stock. (3) Series B-2 Redeemable Convertible Preferred Stock. (4) Series B-3 Redeemable Convertible Preferred Stock. (5) Issued as payment-in-kind dividends under terms of preferred stock designation. (6) Partial consideration for assets of Premier. The note is payable only through the issuance of 136,364 shares of Common Stock. (7) Dillon, Read & Co. Inc. and SBC Warburg Inc. acted as placement agents in this private offering. 12 ITEM 6. SELECTED FINANCIAL DATA The following selected financial information as of and for the five years ended December 27, 1997 has been derived from the audited financial statements of the Company. The selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the notes thereto included elsewhere herein.
FISCAL YEAR ENDED ------------------------------------------------------------- DEC. 27, DEC. 28, DEC. 30, DEC. 31, DEC. 31, 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............................... $ 284,487 $ 169,452 $ 131,020 $ 76,754 $ 60,850 Cost of goods sold...................... 212,334 127,971 106,576 64,846 51,640 --------- --------- --------- --------- --------- Gross profit............................ 72,153 41,481 24,444 11,908 9,210 Operating expenses...................... 64,665 32,548 25,549 10,221 7,285 --------- --------- --------- --------- --------- Operating income (loss)................. 7,488 8,933 (1,105) 1,687 1,925 Interest expense........................ 9,996 4,332 3,695 1,663 1,153 Other expense (income), net............. 84 (220) (22) -- 89 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item.................... (2,592) 4,821 (4,778) 24 683 Provision (benefit) for income taxes.... (731) 789 (338) 99 254 --------- --------- --------- --------- --------- Net income (loss) before extraordinary item.................................. (1,861) 4,032 (4,440) (75) 429 Extraordinary gain (loss)............... (192) -- 500 -- -- --------- --------- --------- --------- --------- Net income (loss)....................... (2,053) 4,032 (3,940) (75) 429 Dividends and accretion on preferred stock................................. 905 245 -- -- -- --------- --------- --------- --------- --------- Net income (loss) available for common shareholders.......................... $ (2,958) $ 3,787 $ (3,940) $ (75) $ 429 BASIC EARNINGS PER SHARE Earnings (loss) per share............... $ (.70) $ 1.54 $ (1.95) $ (.04) $ .22 Weighted average shares................. 4,226,416 2,466,025 2,015,719 2,015,719 1,987,466 DILUTED EARNINGS PER SHARE Earnings (loss) per share............... $ (.70) $ 1.15 $ (1.95) $ (.04) $ .21 Weighted average shares................. 4,226,416 3,300,248 2,015,719 2,015,719 2,018,571 AS OF THE YEAR ENDED ------------------------------------------------------------- DEC. 27, DEC. 28, DEC. 30, DEC. 31, DEC. 31, 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital......................... $ 53,241 $ 4,667 $ (1,592) $ 5,927 $ 1,409 Total assets............................ 185,310 82,682 47,070 45,049 20,565 Total debt.............................. 134,023 50,549 29,836 28,506 11,538 Mandatorily redeemable preferred stock................................. -- 7,613 945 -- -- Mandatorily redeemable convertible preferred stock....................... 8,577 -- -- -- -- Shareholders' equity (deficit).......... $ 8,655 $ 3,229 $ (689) $ 3,221 $ 2,654
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THE FOLLOWING DISCUSSION REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY, AND PLANS OF MANAGEMENT FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. ACQUISITIONS 1997. On March 14, 1997, BSI Holdings, Inc. ("Holdings") merged (the "Merger") with Sun Sportswear, Inc. ("Sun"), and in the Merger, the shareholders of Holdings acquired 86% of the capital stock of Sun. The Merger has been accounted for as a reverse acquisition with Sun being the surviving legal entity and Holdings being the acquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in Delaware under the name Brazos Sportswear, Inc. The purchase price of Sun was approximately $12.7 million. The Merger expanded the Company's presence in the character license and proprietary and private label markets. On July 2, 1997, the Company acquired (i) Morning Sun, Inc. ("Morning Sun") for approximately $31.3 million and (ii) the assets of Premier Sports Group, Inc. ("Premier") for approximately $3.5 million. On the same date, the Company also completed the private placement of $100 million in Senior Notes (the "Notes"). Brazos utilized the net proceeds from the Notes primarily to pay the cash portion of the purchase price of these acquisitions and to repay certain outstanding and assumed indebtedness. Morning Sun is a designer, manufacturer and marketer of moderately-priced imprinted and embroidered tops for women age 35 and over. Morning Sun sells its products under proprietary brand names and various private labels to major department store chains, catalogue companies and specialty stores. Premier is an importer of high quality, low cost "fashion fleece" and other garments for domestic distributors and provides merchandising, design and sourcing services for apparel companies. The Morning Sun and Premier acquisitions have broadened Brazos' product lines and expanded and diversified its customer base. On September 29, 1997, the Company acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), for approximately $13.3 million. Crable is a designer, embroiderer and marketer of licensed apparel primarily for colleges and professional sports teams. The Crable products are sold to major department store chains and to specialty shops. The Crable acquisition has expanded the Company's embroidery capabilities and presence in the collegiate and professional sports markets with new licenses for embroidered product lines. In connection with the acquisition, the Company entered into a ten year lease for the Crable facility and relocated its corporate headquarters to that facility in the fourth quarter of 1997. The completion of the Crable acquisition enabled the Company to initiate its restructuring plan. See, " -- Restructuring of Operations." 1996. Effective August 2, 1996, the Company acquired certain assets and assumed certain liabilities of Plymouth Mills, Inc. ("Plymouth") for approximately $33.6 million. The acquisition provided access to proprietary and private label markets and strengthened the Company's sales, marketing and sourcing capabilities. 1995. Effective December 1, 1995, a wholly-owned subsidiary of the Company, Brazos Embroidery, Inc. ("BEI"), acquired certain assets and assumed certain liabilities of Needleworks, Inc. ("Needleworks") for approximately $2.7 million. The acquisition of Needleworks, a contract embroidery operation, improved costs and quality control in the Company's embroidery product line. 14 See Note 3 of the Notes to Consolidated Financial Statements for further information on these acquisitions (the "Acquisitions"). RESTRUCTURING OF OPERATIONS In the fourth quarter of 1997, the Company implemented a plan to reduce costs and improve operating efficiencies and recorded a one-time, pre-tax restructuring charge of approximately $5.7 million. The principal elements of the restructuring plan are the closure and consolidation of two manufacturing facilities into one existing facility and the divestiture of the Company's athletic uniform manufacturing business. The restructuring, which will result in an elimination of approximately 250 administrative staff and manufacturing positions, will be completed by the middle of 1998 and is expected to reduce operating costs by $4.5 million annually. However, management believes that its gross margins and operating expenses may be negatively impacted by the implementation of the restructuring plan during the first quarter of 1998. See Note 1(b) of the Notes to Consolidated Financial Statements for further discussion of the Company's restructuring of operations. The Company is also realigning its sales, mechanising and management structure to coincide with its major product categories -- licensed products, branded products, wholesale distribution, and contract services. Further, the Company is establishing a centralized product sourcing operation to coordinate the procurement of garments for all divisions. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of Brazos' statements of operations expressed as a percentage of net sales on a historical basis.
FISCAL YEAR ENDED ----------------------------------------------- DECEMBER 27, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------- ------------- ------------- Net sales ........................... 100.0% 100.0% 100.0% Cost of goods sold................... 74.6 75.5 81.3 ------------- ------------- ------------- Gross profit.................. 25.4 24.5 18.7 Operating expenses................... 20.8 19.2 19.5 Restructuring charge................. 2.0 -- -- ------------- ------------- ------------- Operating income (loss)....... 2.6 5.3 (.8) Other expense (income)............... Interest expense.............. 3.5 2.6 2.8 Other, net.................... -- (.1) -- ------------- ------------- ------------- Net income (loss) before income taxes and extraordinary item............. (.9) 2.8 (3.6) Income tax provision (benefit)....... (.3) .5 (.3) ------------- ------------- ------------- Net income (loss) before extraordinary item................... (.7) 2.4 (3.4) Extraordinary gain (loss) on extinguishment of debt............... (.1) -- .4 ------------- ------------- ------------- Net income (loss).................... (.7)% 2.4% (3.0)% ============= ============= =============
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED WITH FISCAL YEAR ENDED DECEMBER 28, 1996 Brazos' net sales increased $115.0 million, or 67.9%, from $169.5 million in 1996 to $284.5 million in 1997. This increase was attributable to the four acquisitions completed by the Company during the year. Acquisitions contributed $125.8 million of sales during the period. Excluding Acquisitions during the period, sales declined $10.8 million, or 6.3%, principally as a result of a decrease in licensed apparel sales, partially offset by an increase in wholesale distribution sales. 15 The Company's gross profit increased $30.7 million, or 73.9%, from $41.5 million in 1996 to $72.2 million in 1997, primarily due to the increase in sales attributable to the Acquisitions during the period. Overall gross margin as a percentage of net sales increased to 25.4% in 1997 from 24.5% in 1996, primarily as a result of a more favorable sales mix of higher margin screen-printed products compared to lower margin undecorated products. Operating expenses increased $32.1 million, or 98.7%, from $32.5 million in 1996 to $64.7 million in 1997. The increase in operating expenses was directly attributable to the Acquisitions during the period, which added $25.1 million for the period, as well as a one-time restructuring charge of $5.7 million in the fourth quarter of 1997. Excluding the restructuring charge, as a percentage of net sales, operating expenses increased from 19.2% in 1996 to 20.8% in 1997. The increase in operating expenses resulted primarily from an increase in bad debt expense attributable to the Chapter 11 reorganization of several customers, an increase in royalty rates on licensed product sales and an increase in professional fees directly attributable to the Acquisitions during the year. These increases were partially offset by reduced commission expense. Interest expense increased $5.7 million, or 130.7%, from $4.3 million in 1996 to $10.0 million in 1997, primarily due to increased borrowings resulting from issuance of the Notes. The Company's tax benefit in 1997 is approximately 28% of pre-tax losses, which is lower than the Company's statutory tax rate due to non-deductible goodwill amortization and pension plan costs recorded in 1997. In 1996, income tax expense was partially offset by the reversal of a valuation allowance on the Company's net deferred tax assets, most of which related to a net operating loss carryforward. During the current period, a portion of the proceeds from the Notes were used to repay subordinated debt that was issued at a discount in connection with the Plymouth acquisition. The Company expensed the unamortized discount associated with the early extinguishment of a $3.5 million note with a carrying amount of $3.2 million. The extraordinary loss was $0.3 million before income taxes, and $0.2 million net of taxes. FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30, 1995 Brazos' net sales increased approximately $38.4 million, or 29.3%, from $131.0 million in 1995 to $169.5 million in 1996. The acquisition of Plymouth on August 2, 1996 contributed $14.8 million of sales during this period. Excluding Plymouth, net sales increased $23.6 million primarily as a result of increased customer demand for Mickey Mouse and Winnie the Pooh products. The Company's gross profit increased $17.0 million, or 69.7%, from $24.4 million in 1995 to $41.5 million in 1996, principally as a result of the increase in decorated product sales. Overall gross margin increased to 24.5% in 1996 from 18.7% in 1995, primarily as a result of: (i) increased sales volume, which resulted in improved operating efficiencies; (ii) improved sourcing and manufacturing, which resulted in lower cost of goods sold as a percent of net sales; (iii) improved pricing for Brazos' imported fleece product line; and (iv) reduced embroidery production costs as a result of Brazos' acquisition of Needleworks. Operating expenses increased $7.0 million, or 27.4%, from $25.5 million in 1995 to $32.5 million in 1996. The increase resulted principally from higher commission and royalty expense due to increased decorated product sales and additional administrative costs as a result of the Needleworks and Plymouth acquisitions. Additionally, in 1996 Brazos recorded increased compensation expense pursuant to its incentive compensation plan. As a percentage of net sales, operating expenses decreased from 19.5% in 1995 to 19.2% in 1996. Interest expense increased $0.6 million, or 17.2%, from $3.7 million in 1995 to $4.3 million in 1996, primarily as a result of increased borrowings under Brazos' credit facility to fund its increased working capital requirements and borrowings incurred in connection with the Plymouth acquisition. Income tax expense of $0.8 million was recorded in 1996 which reflects the reversal of a valuation allowance on the Company's net deferred tax assets, most of which is related to net operating loss carryforwards. 16 LIQUIDITY AND CAPITAL RESOURCES Brazos has financed its acquisitions and sales growth through borrowings under its bank lines of credit, private placements of debt and equity securities, seller financing and operating cash flow. The Company's cash requirements consist of its general working capital needs, capital expenditures, and obligations under its leases. On July 2, 1997, Brazos completed the sale of $100 million of 10.5% Senior Notes due 2007. The Notes were issued at a discount of $0.8 million. The net proceeds of the Notes were used to pay the cash portion of the aggregate purchase price of the Morning Sun and Premier acquisitions and to repay certain outstanding and assumed indebtedness. Interest on the Notes is payable semi-annually on January 1 and July 1 of each year, which payments commenced January 1, 1998. The Notes contain certain covenants, including covenants restricting the Company from incurring certain additional indebtedness and consummating mergers, consolidations and sales of assets. At any time prior to July 1, 2000, Brazos may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net proceeds of one or more public equity offerings, at a redemption price of 110.5% of the principal amount thereof. In addition, on or after July 1, 2002, Brazos may redeem at its option, in whole or in part, at various premiums depending on when the redemption occurs, any or all of the Notes outstanding. On July 2, 1997, the Company entered into a Third Amended and Restated Loan and Security Agreement with its primary lender, which makes a revolving line of credit (the "Credit Facility") available to its principal operating subsidiary, Brazos, Inc. (the "Borrower"), in an aggregate principal amount of up to $50.0 million, subject to collateral limitations. Advances under this line are based on a percentage of the Borrower's inventory and receivables and various other reserves established from time to time by the lenders. Interest on the line of credit is payable at prime plus .25% or the Eurodollar base rate plus 2.00%. The Credit Facility includes certain covenants applicable to the Borrower, including requirements that the Borrower comply with certain financial ratios. The Credit Facility has an initial term of three years, subject to extension, and borrowings under the Credit Facility are guaranteed by the Company. On September 29, 1997, in connection with the Crable acquisition, the Borrower amended the Credit Facility to provide a revolving line of credit in an aggregate principal amount of up to $70.0 million, subject to collateral limitations. Interest on the line of credit was reduced to prime plus .25% or the Eurodollar base rate plus 1.75%. Under the amended Credit Facility, as of December 27, 1997 Brazos had an aggregate borrowing base under its line of credit of $65.9 million, based on existing collateral. Of its borrowing base, $34.4 million remained unused at December 27, 1997. Management believes that funds available under its principal credit facility, together with cash generated from operations, will be sufficient to meet the Company's anticipated cash requirements for the foreseeable future. FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED WITH FISCAL YEAR ENDED DECEMBER 28, 1996 Brazos used $4.6 million of cash from operating activities in 1997 versus cash provided by operating activities in 1996 of $6.1 million. Contributing to the use of cash in 1997 were: (i) a net loss of approximately $2.1 million; and (ii) working capital investments of $5.7 million, offset by depreciation and amortization of $3.8 million. Brazos invested $49.1 million of cash in 1997 to acquire Sun, Morning Sun, Premier and Crable and $20.3 million of cash in 1996 to acquire Plymouth Mills. The Company incurred capital expenditures net of disposals of $2.0 million in 1997 and $1.1 million in 1996. Financing activities provided net cash of $57.8 million in 1997 principally through the issuance of $99.2 million of Notes. Proceeds from the Notes were used to repay a portion of the Company's existing credit facility, existing subordinated debt and deferred financing costs associated with the issuance of the Notes. Additional proceeds were acquired through the issuance of $2.0 million in preferred stock with detachable common stock purchase warrants. In 1996, net borrowings of debt amounted to $15.1 million. 17 FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30, 1995 Net cash provided by the Company's operating activities in 1996 and 1995 were $6.1 million and $0.7 million, respectively. Principal working capital changes in 1996 included a $4.3 million decrease in inventory, a $1.0 million increase in prepaid expenses, a $0.8 million increase in other non-current assets and a $2.0 million decrease in accounts payable and accrued liabilities. Net cash used by the Company's investing activities was $21.4 million and $0.5 million during 1996 and 1995, respectively. Brazos' investing activities during 1996 included $20.3 million utilized in the acquisition of Plymouth and $1.1 million of capital expenditures. Net cash generated by the Company's financing activities was $15.1 million and $0.4 million in 1996 and 1995, respectively. Net cash provided by financing activities in 1996 primarily included $12.6 million of net borrowings and $2.5 million for the sale of preferred stock with detachable common stock purchase warrants. Net cash provided by financing activities in 1995 principally related to net borrowings of $0.4 million. YEAR 2000 The Company expects its financial systems to become Year 2000 compliant during the second quarter of 1998. The Company has not completed an assessment of its current operating systems. However, in 1997 the Company began the implementation of a new operating software package as part of a reorganization and consolidation of the Company's numerous operating systems. The software package being implemented is Year 2000 compliant. The Company is implementing the new software in phases and expects the process to be complete by the end of the second quarter of fiscal 1999. In addition, the Company has not completed an assessment of the effects on the Company of Year 2000 issues at third party suppliers, vendors and customers. SEASONALITY The Company's sales levels are generally higher in the second and third quarters of each year. During these periods, spring, summer, back-to-school and pre-holiday season products are produced and sold. The Company expects that the seasonal nature of apparel sales will continue in future periods. INFORMATION REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that such expectations will be achieved. Other factors could cause actual results to differ materially from those in the forward-looking statements herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, together with the report thereon by Arthur Andersen LLP dated March 23, 1998, including the information required by Item 302 of Regulation S-K, are set forth on pages F-1 through F-25 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Part III (Items 10 through 13) is omitted since the Company expects to file with the Securities and Exchange Commission within 120 days following December 27, 1997, definitive proxy materials pursuant to Regulation 14A under the Securities Exchange Act of 1934 involving the annual election of directors and certain other matters. If for any reason such a statement is not so filed, this Report will be appropriately amended. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE See financial statements at pages F-1 to F-25 (A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 2.1 -- Agreement and Plan of Merger ("Merger Agreement") dated as of November 13, 1996, as amended, by and between the Registrant and BSI Holdings, Inc. (filed as an appendix to Form S-4 Registration Statement (No. 333-17871) and incorporated herein by reference.) 2.2 -- Plan and Agreement of Merger with respect to reincorporation in Delaware (filed as an appendix to Form S-4 Registration Statement (No. 333-17871) and incorporated herein by reference.) 3.1 -- Amended and Restated Certificate of Incorporation of the Registrant (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 3.2 -- Certificate of Amendment to Restated Certificate of Incorporation (filed as an exhibit to Form 10-Q for the quarter ended September 27, 1997 and incorporated herein by reference). 3.3 -- Certificate of Amendment of Certificate of Incorporation (filed as Exhibit A to Definitive Information Statement of the Registrant dated August 25, 1997). 3.4 -- Bylaws of the Registrant, as amended (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 4.1 -- See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and Bylaws of the Registrant defining the rights of holders of common and preferred stock. 10.1 -- Brazos Sportswear, Inc. 1997 Incentive Plan, (filed as Appendix A to Definitive Proxy Statement of the Registrant dated August 29, 1997). 10.2 -- Annual Incentive Compensation Plan -- Brazos, Inc. (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.3 -- Employment Agreement dated October 1, 1996, between Brazos, Inc. and J. Ford Taylor (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 -- Employment Agreement dated October 1, 1996, between Brazos, Inc. and F. Clayton Chambers (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). *10.5 -- Employment Agreement dated July 2, 1997 between Morning Sun, Inc. and Robert C. Klein (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.6 -- Asset Purchase Agreement dated August 2, 1996, with respect to acquisition of Plymouth Mills, Inc. 10.7 -- Stock Purchase Agreement with respect to the acquisition of capital stock of Morning Sun, Inc. (formerly, SolarCo., Inc.) (filed as an exhibit to Form 8-K filed July 16, 1997 and incorporated herein by reference). 10.8 -- Asset Purchase Agreement with respect to the acquisition of assets of Premier Sports Group, Inc. (filed as an exhibit to Form 8-K filed July 16, 1997 and incorporated herein by reference). 10.9 -- Asset Purchase Agreement with respect to acquisition of assets of CS Crable Sportswear, Inc. (filed as an exhibit to Form 8-K filed October 14, 1997 and incorporated herein by reference). 19 EXHIBIT NO. DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ *10.10 -- Third Amended and Restated Loan and Security Agreement dated July 2, 1997, as amended, by and between Brazos, Inc., The First National Bank of Boston and Fleet Capital. 10.11 -- First Amendment to Third Amended and Restated Loan Agreement dated September 29, 1997 (filed as an exhibit to Form 8-K filed October 14, 1997 and incorporated herein by reference). 10.12 -- Loan Agreement assumed by Brazos Embroidery, Inc. (filed as an exhibit to Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.13 -- Indenture dated July 2, 1997 relating to Senior Notes between the Company and Norwest Bank Minnesota, National Association (filed as an exhibit to Registration Statement on Form S-4 (333-31345) and incorporated herein by reference). 10.14 -- Registration Rights Agreement with respect to the Senior Notes among the Company and Dillon Read & Co. Inc. and SBC Warburg Inc. (filed as an exhibit to Registration Statement on Form S-4 (333-31345) and incorporated herein by reference). *21.1 -- Subsidiaries of the Registrant. *23.1 -- Consent of Arthur Andersen LLP. *27.1 -- Financial Data Schedule.
- ------------ * Filed herewith. (B) REPORTS ON FORM 8-K (1) Form 8-K filed October 14, 1997 with respect to the acquisition of the assets of CS Crable Sportswear, Inc. ("Crable"). (2) Form 8-K/A-1 filed December 15, 1997, with respect to financial statements required to be filed in connection with the acquisition of the Crable assets. 20 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 26TH DAY OF MARCH, 1998. BRAZOS SPORTSWEAR, INC. BY /S/ J. FORD TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED ON THE 26TH DAY OF MARCH, 1998. SIGNATURE TITLE - ----------------------------------------------------------------------------- /S/ RANDALL B. HALE Director and Chairman of the Board /S/ J. FORD TAYLOR Director, President and Chief Executive Officer /S/ F. CLAYTON CHAMBERS Director and Principal Financial Officer /S/ MICHAEL S. CHADWICK Director /S/ NOLAN LEHMANN Director ____________________ Director Alan Elenson /S/ STEVEN P. RATTERMAN Controller and Principal Accounting Officer 21 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Public Accountants ................................. F-2 Consolidated Balance Sheets as of December 27, 1997 and December 28, 1996 F-3 Consolidated Statements of Operations for the Years ended December 27, 1997, December 28, 1996 and December 30, 1995 .......................... F-5 Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 27, 1997, December 28, 1996 and December 30, 1995 ................................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 27, 1997, December 28, 1996 and December 30, 1995 .......................... F-7 Notes to Consolidated Financial Statements ............................... F-8 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Brazos Sportswear, Inc.: We have audited the accompanying consolidated balance sheets of Brazos Sportswear, Inc. (a Delaware corporation) and subsidiaries as of December 27, 1997 and December 28, 1996 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 27, 1997, December 28, 1996 and December 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, the financial statements referred to above present fairly, in all material respects, the financial position of Brazos Sportswear, Inc. and subsidiaries as of December 27, 1997 and December 28, 1996, and the results of their operations and their cash flows for the years ended December 27, 1997, December 28, 1996 and December 30, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cincinnati, Ohio March 23, 1998 F-2 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 27, 1997 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS) 1997 1996 ---------- --------- ASSETS CURRENT ASSETS: Cash............................ $ 2,679 $ 561 Accounts receivable, net of allowance for doubtful accounts of $7,930 and $2,760, respectively (Note 4).......... 41,989 22,118 Inventory (Notes 2(e) and 4).... 55,551 25,338 Prepaid expenses................ 8,861 1,786 Income tax receivable........... 2,841 -- Deferred tax assets (Note 5).... 4,649 1,797 ---------- --------- Total current assets....... 116,570 51,600 ---------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2(f) and 4): Land............................ 90 90 Buildings....................... 687 670 Leasehold improvements.......... 1,523 300 Machinery and equipment......... 10,055 6,168 Office furniture, fixtures and equipment...................... 4,609 2,823 Construction in progress........ 1,593 154 ---------- --------- 18,557 10,205 Less -- accumulated depreciation................... (5,221) (3,332) ---------- --------- 13,336 6,873 ---------- --------- INTANGIBLE ASSETS (Note 2(g)): Costs in excess of fair value of assets acquired................ 50,869 21,476 Less -- accumulated amortization................... (1,655) (653) ---------- --------- 49,214 20,823 ---------- --------- Other........................... 7,661 3,357 Less -- accumulated amortization................... (1,740) (911) ---------- --------- 5,921 2,446 ---------- --------- Total intangible assets.... 55,135 23,269 ---------- --------- OTHER ASSETS......................... 269 940 ---------- --------- $ 185,310 $ 82,682 ========== ========= The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 27, 1997 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS) 1997 1996 ---------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement (Note 4)......... $ 31,504 $ 23,524 Current portion of other debt (Note 4)................................ 947 3,419 Payable to former owners of businesses acquired (Note 3)...... 1,161 2,950 Accounts payable................... 13,902 9,998 Current portion of accrued restructuring charge (Note 1 (b)).............................. 2,910 -- Accrued liabilities................ 12,905 7,042 ---------- --------- Total current liabilities..... 63,329 46,933 ---------- --------- LONG-TERM OBLIGATIONS -- LESS SCHEDULED MATURITIES (Note 4): Borrowings pursuant to revolving credit agreement.................. -- 8,800 Senior notes payable............... 99,277 -- Notes payable...................... -- 41 Subordinated debt due to related parties........................... 1,500 13,590 Capital lease liability............ 795 1,175 ---------- --------- Total long-term obligations... 101,572 23,606 ---------- --------- DEFERRED INCOME TAXES PAYABLE (Note 5).................................... 1,141 934 ACCRUED RESTRUCTURING CHARGE (Note 1 (b)).................................. 1,674 -- OTHER LIABILITIES....................... 362 367 MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7).............................. -- 7,613 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 7).............. 8,577 -- COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY (Note 6): Common stock, $.001 par value, 15,000,000 shares authorized and 4,412,655 and 3,676,008 shares issued and outstanding at December 27, 1997 and December 28, 1996, respectively...................... 4 5 Additional paid-in capital......... 11,312 2,927 Retained earnings (deficit)........ (2,661) 297 ---------- --------- Total shareholders' equity.... 8,655 3,229 ---------- --------- $ 185,310 $ 82,682 ========== ========= The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-4 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 ----------- ----------- ----------- NET SALES............................... $ 284,487 $ 169,452 $ 131,020 COST OF GOODS SOLD...................... 212,334 127,971 106,576 ----------- ----------- ----------- Gross profit.................. 72,153 41,481 24,444 OPERATING EXPENSES: Selling, general and administrative expenses......................... 57,162 31,849 25,264 Restructuring charge (Note 1 (b))............................. 5,651 -- -- Amortization of intangible assets and non-compete payments......... 1,852 699 285 ----------- ----------- ----------- Total operating expenses...... 64,665 32,548 25,549 Operating income (loss)....... 7,488 8,933 (1,105) OTHER EXPENSE (INCOME): Interest expense................... 9,996 4,332 3,695 Other, net......................... 84 (220) (22) ----------- ----------- ----------- Income (loss) before provision (credit) for income taxes and extraordinary item..... (2,592) 4,821 (4,778) PROVISION (CREDIT) FOR INCOME TAXES (Note 5).............................. (731) 789 (338) ----------- ----------- ----------- Net income (loss) before extraordinary item......... (1,861) 4,032 (4,440) EXTRAORDINARY ITEM: Gain (loss) on extinguishment of debt, net of income tax benefit of $128 in 1997 (Note 4)......... (192) -- 500 ----------- ----------- ----------- Net income (loss)............. (2,053) 4,032 (3,940) DIVIDENDS AND ACCRETION ON PREFERRED STOCK (Note 7)........................ 905 245 -- ----------- ----------- ----------- Net income (loss) available for common shareholders.............. $ (2,958) $ 3,787 $ (3,940) =========== =========== =========== PER SHARE DATA: BASIC EARNINGS PER SHARE (Note 2 (i)) Earnings (loss) per share.......... $ (.70) $ 1.54 $ (1.95) =========== =========== =========== Weighted average shares outstanding...................... 4,226,416 2,466,025 2,015,719 =========== =========== =========== DILUTED EARNINGS PER SHARE (Note 2 (i)) Earnings (loss) per share.......... $ (.70) $ 1.15 $ (1.95) =========== =========== =========== Weighted average shares outstanding...................... 4,226,416 3,300,248 2,015,719 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-5 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES TOTAL COMMON STOCK ADDITIONAL RETAINED RECEIVABLE SHAREHOLDERS' -------------------- PAID-IN EARNINGS FROM EQUITY SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDERS (DEFICIT) ----------- ------ ---------- --------- ------------ -------------- BALANCES AT DECEMBER 31, 1994........ 2,015,718 $ 3 $ 2,860 $ 450 $ (92) $ 3,221 Payments received from shareholders.................. -- -- -- -- 30 30 Net loss........................ -- -- -- (3,940) -- (3,940) ----------- ------ ---------- --------- ------------ -------------- BALANCES AT DECEMBER 30, 1995........ 2,015,718 3 2,860 (3,490) (62) (689) Stock purchase warrants issued........................ -- -- 815 -- -- 815 Conversion of warrants to common stock......................... 1,660,290 2 -- -- -- 2 Payments received from shareholders.................. -- -- -- -- 62 62 Loss on conversion of subordinated debt............. -- -- (738) -- -- (738) Redeemable preferred stock issuance costs................ -- -- (10) -- -- (10) Accretion of redeemable preferred stock............... -- -- -- (28) -- (28) Payment of PIK dividends (Note 7)............................ -- -- -- (217) -- (217) Net income...................... -- -- -- 4,032 -- 4,032 ----------- ------ ---------- --------- ------------ -------------- BALANCES AT DECEMBER 28, 1996........ 3,676,008 5 2,927 297 -- 3,229 Stock purchase warrants issued........................ -- -- 1,044 -- -- 1,044 Conversion of warrants to common stock......................... 55,248 1 99 -- -- 100 Accretion of redeemable preferred stock............... -- -- -- (187) -- (187) Payment of PIK dividends (Note 7)............................ -- -- -- (718) -- (718) Recapitalization as part of the Sun merger.................... 587,900 6 6,461 -- -- 6,467 Change in par from $.01 to $.001......................... -- (8) 8 -- -- -- Issuance of stock for Morning Sun purchase.................. 73,171 -- 750 -- -- 750 Exercise of stock options....... 20,328 -- 23 -- -- 23 Net loss........................ -- -- -- (2,053) -- (2,053) ----------- ------ ---------- --------- ------------ -------------- BALANCES AT DECEMBER 27, 1997........ 4,412,655 $ 4 $ 11,312 $ (2,661) $-- $ 8,655 =========== ====== ========== ========= ============ ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-6 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (DOLLARS IN THOUSANDS) 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................. $ (2,053) $ 4,032 $ (3,940) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation..................... 1,997 1,291 824 Amortization of intangible assets......................... 1,852 699 253 Loss (gain) on extinguishment of debt........................... 192 -- (500) Change in assets and liabilities, net of effects of acquisitions: Decrease (increase) in deferred income taxes................... (1,158) (863) 78 Decrease (increase) in accounts receivable..................... (2,729) 92 (614) Decrease in inventory............ 1,613 4,328 906 Decrease (increase) in prepaid expenses....................... (3,237) (985) 113 Decrease in income tax receivable..................... 735 300 18 Increase in other noncurrent assets........................ (952) (755) (20) Increase (decrease) in accounts payable and accrued liabilities.................... (905) (1,991) 3,621 --------- --------- --------- Net cash provided by (used in) operating activities.... (4,645) 6,148 739 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Sun Sportswear, Inc., net of cash acquired............. (4,613) -- -- Purchase of Plymouth Mills, Inc.... -- (20,256) -- Purchase of SolarCo, Inc., net of cash acquired.................... (29,198) -- -- Purchase of Premier Sports Group, Inc., net of cash acquired....... (1,996) -- -- Purchase of CS Crable Sportswear, Inc.............................. (13,271) -- -- Purchases of property, plant and equipment, net................... (1,988) (1,137) (518) --------- --------- --------- Net cash used in investing activities................ (51,066) (21,393) (518) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of senior notes............................ 99,277 -- -- Borrowings pursuant to revolving credit agreement, net............ (11,233) 2,831 1,808 Borrowings of long-term debt pursuant to credit agreement..... 1,000 9,568 1,000 Repayments of long-term debt pursuant to credit agreement..... (12,200) (1,868) (1,409) Proceeds from (repayments of) subordinated debt and stock purchase warrants................ (15,409) 3,500 (996) Repayment of capital lease obligations and industrial revenue bonds.................... (490) (379) (48) Payments made under non-compete agreements....................... (157) (84) -- Payments for deferred financing costs............................ (4,184) (1,081) (5) Payments received on notes receivable from shareholders..... -- 62 30 Repayment of mandatorily redeemable preferred stock.................. (898) -- -- Issuance of common stock........... 123 2 -- Issuance of preferred stock and related warrants................. 2,000 2,500 -- --------- --------- --------- Net cash provided by financing activities........ 57,829 15,051 380 --------- --------- --------- NET INCREASE (DECREASE) IN CASH...... 2,118 (194) 601 CASH AT BEGINNING OF YEAR............ 561 755 154 --------- --------- --------- CASH AT END OF YEAR.................. $ 2,679 $ 561 $ 755 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............. $ 5,494 $ 3,906 $ 3,500 Cash paid for income taxes (refunds received)........................ 4,570 (258) (453) SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Capital lease financing............ -- 686 377 Payments of PIK dividends.......... 718 217 -- Conversion of subordinated debt to preferred stock (Note 4)......... -- 3,719 -- The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-7 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 27, 1997, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (1) ORGANIZATION AND NATURE OF OPERATIONS -- (a) ORGANIZATION AND NATURE OF OPERATIONS -- Brazos Sportswear, Inc. (the Company, formerly BSI Holdings, Inc. -- see Note 3(a)), a Delaware Corporation, is the parent company for two wholly-owned subsidiaries: Brazos, Inc., a Texas corporation, and Brazos Embroidery, Inc. (BEI), a Pennsylvania corporation. The Company designs, manufactures and markets sportswear for adults and children. Products manufactured and sold by the Company under license agreements include those decorated with classic cartoon characters and collegiate logos. The Company also markets sportswear decorated with its proprietary designs and creates garments under private labels of major retailers. In addition, the Company distributes undecorated garments to other imprinters of sportswear. The Company had net sales of $75 million and $53 million in 1997 and 1996, respectively, to two customers, and $29 million to a single customer in 1995. These amounts represented 26%, 31%, and 22% of total net sales during 1997, 1996 and 1995, respectively. The accompanying consolidated balance sheets include accounts receivable of $11.7 million and $5.4 million at December 27, 1997 and December 28, 1996, respectively, due from such customers. The three largest suppliers of blank garments to the Company represented approximately 39%, 39% and 59% of cost of goods sold included in the accompanying consolidated statements of operations during 1997, 1996 and 1995, respectively. Management believes that a loss of any single supplier would not significantly impact operations as alternative products are available from other sources. (b) RESTRUCTURING OF OPERATIONS -- In the fourth quarter of 1997, the Company adopted a plan to reduce costs and improve operating efficiencies and recorded a restructuring charge of approximately $5.7 million. The principal actions in the restructuring plan involve the closure and consolidation of two manufacturing facilities into one existing facility and the divestiture of the Company's athletic uniform manufacturing business. The restructuring, which will result in an elimination of approximately 250 administrative staff and manufacturing positions, will be completed by the middle of 1998. The major components of the restructuring charge including accrued balances as of December 27, 1997 are as follows: DESCRIPTION EXPENSE ACCRUAL - ------------------------------------- ------- ------- (000'S OMITTED) Severance and related costs.......... $ 1,044 $ 336 Write-down of property, plant, equipment and other assets......... 254 -- Lease termination costs.............. 3,598 3,598 Estimated loss on sale of athletic uniform business................... 550 550 Other................................ 205 100 ------- ------- $ 5,651 $ 4,584 ======= ======= Severance and related costs shown above include an estimated curtailment charge of $345,000 related to termination of the Company's defined benefit pension plan. The defined benefit pension plan was terminated pursuant to the restructuring plan. During March 1998, the Company signed a letter of intent to sell its athletic uniform business. The Company estimated the loss on the sale of its athletic uniform business based on the difference between the anticipated sale price and the net assets being disposed plus estimated costs incurred to sell the business. This transaction is expected to close in the second quarter of 1998. F-8 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) SIGNIFICANT ACCOUNTING POLICIES -- (a) PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries, Brazos, Inc. and BEI. All significant intercompany accounts and transactions have been eliminated. (b) MANAGEMENT'S 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. (c) YEAR-END -- The Company used a 52-53 week accounting period ending on the last Saturday in December in fiscal years 1995 through 1997. Each year had 52 weeks. In 1998, the Company changed its year-end to a 52-53 week accounting period ending on the Saturday closest to December 31. (d) REVENUE RECOGNITION -- Sales are recognized when finished garments are shipped to customers from the Company's facilities. (e) INVENTORY -- The Company's inventories are stated at cost, which is not in excess of market utilizing both the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method depending on the specific division location. The following is a summary of inventories at year-end, by costing method (in thousands): INVENTORY CATEGORY METHOD 1997 1996 - ---------------------------------------- ------ --------- --------- Raw materials........................... LIFO $ 3,605 $ 3,012 Finished goods.......................... LIFO 12,725 10,595 --------- --------- 16,330 13,607 Less -- LIFO reserve.................... (182) (182) --------- --------- Total LIFO......................... 16,148 13,425 --------- --------- Raw materials........................... FIFO 24,663 8,272 Work in process......................... FIFO 5,926 150 Finished goods.......................... FIFO 8,814 3,491 --------- --------- Total FIFO......................... 39,403 11,913 --------- --------- Total inventory.................... $ 55,551 $ 25,338 ========= ========= For financial statement purposes, the Company follows the specific identification method whereby LIFO is determined on an item-by-item basis. For federal income tax reporting purposes, LIFO is determined utilizing the dollar-value method using one homogenous pool. For federal income tax reporting purposes, the Company's LIFO inventories were as follows (in thousands): 1997 1996 --------- --------- Tax LIFO cost.................................... $ 15,662 $ 12,710 Book LIFO cost................................... 16,148 13,425 Cost of goods sold reflect LIFO credits of $49,000 in 1996 and a charge of $36,000 in 1995. In 1997, LIFO did not have an effect on cost of goods sold. (f) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When properties are retired or otherwise disposed F-9 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of, the cost thereof and the applicable accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in the consolidated statements of operations. The estimated useful life for each of the major asset categories is as follows: Land.................................... -- Buildings............................... 39 years Leasehold improvements.................. 3-7 years Machinery and equipment................. 3-7 years Office furniture, fixtures, and equipment............................. 5-7 years (g) INTANGIBLE ASSETS -- Amounts paid in excess of the fair value of the tangible net assets acquired are being amortized over periods ranging from 15 to 40 years using the straight-line method. Other intangible assets at December 27, 1997 and December 28, 1996 include non-compete agreements, deferred financing costs, licenses and copyrights. The costs of non-compete agreements are being amortized over the respective lives of the agreements (five years) using the straight-line method. The deferred financing costs are being amortized over the life of the credit facility to which they relate using a method which approximates the effective interest method. The costs of licenses are being amortized over a period of 15 years using the straight-line method. The costs of copyrights are being amortized over a period of 40 years using the straight-line method. The Company regularly evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and intangible assets acquired may warrant revisions or that the remaining balance of such costs may not be recoverable, utilizing undiscounted future cash flows. (h) ADVERTISING -- The Company expenses the production cost of advertising the first time the advertising takes place, except for direct-response advertising which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalogues that include order phone numbers for the Company's products. The capitalized costs of advertising are amortized over the year to which the catalogue relates. At December 27, 1997 and December 28, 1996, $124,000 and $107,000, respectively, of advertising was reported as an asset. Advertising expense was approximately $1,019,000, $645,000 and $930,000, in 1997, 1996 and 1995, respectively. (i) EARNINGS (LOSS) PER SHARE -- In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective December 15, 1997. As a result, the Company's reported earnings per share for 1996 and 1995 were restated. The effect of this accounting change on previously reported earnings per share (EPS) data is as follows: 1996 1995 --------- --------- Per share amounts Primary EPS as reported............ $ .90 $ (1.30) Effect of SFAS No. 128............. .64 (.65) --------- --------- Basic EPS as restated.............. $ 1.54 $ (1.95) ========= ========= Fully diluted EPS as reported...... $ -- $ -- Effect of SFAS No. 128............. 1.15 -- --------- --------- Diluted EPS as restated............ $ 1.15 $ -- ========= ========= F-10 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Basic earnings per share were computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share for 1996 includes the dilutive effect of options and warrants to purchase the Company's common stock, using the treasury stock method. There were no anti-dilutive options or warrants in 1996. Diluted earnings per share for 1997 and 1995 are equal to basic earnings per share because of the loss periods. Therefore, all options and warrants are excluded from the dilutive calculations.
FOR THE YEAR ENDED DECEMBER 27, 1997 ------------------------------------------ PER-SHARE INCOME SHARES AMOUNT ---------------- ----------- --------- (000'S OMITTED) Net loss before extraordinary item... $ (1,861) Less: dividends and accretion on preferred stock................. (905) ---------------- Basic and Diluted Earnings per Share Loss available to common shareholders before extraordinary item.......... (2,766) 4,226,416 $ (.66) Extraordinary loss................... (192) (.04) ---------------- --------- Loss available to common shareholders....................... $ (2,958) 4,226,416 $ (.70) ================ =========== ========= FOR THE YEAR ENDED DECEMBER 28, 1996 ------------------------------------------ PER-SHARE INCOME SHARES AMOUNT ---------------- ----------- --------- (000'S OMITTED) Net Income........................... $ 4,032 Less: dividends and accretion on preferred stock.................... (245) ---------------- Basic Earnings per Share Income available to common shareholders....................... 3,787 2,466,025 $ 1.54 ---------------- ----------- --------- Effect of Dilutive Securities Options............................ 115,852 Warrants........................... 718,371 ----------- Diluted Earnings per Share Income available to common shareholders plus assumed exercises.......................... $ 3,787 3,300,248 $ 1.15 ================ =========== ========= FOR THE YEAR ENDED DECEMBER 30, 1995 ------------------------------------------ PER-SHARE INCOME SHARES AMOUNT ---------------- ----------- --------- (000'S OMITTED) Net Loss before extraordinary item... $ (4,440) Basic and Diluted Earnings per Share Loss available to common shareholders before extraordinary item.......... (4,440) 2,015,719 $ (2.20) Extraordinary gain................... 500 .25 ---------------- --------- Loss available to common shareholders....................... $ (3,940) 2,015,719 $ (1.95) ================ =========== =========
Earnings (loss) per share for all periods has also been computed in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 98. There were no nominal shares issued as defined by SAB No. 98. F-11 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) All share and per share information included in the accompanying consolidated financial statements has been retroactively restated for all periods presented to reflect a 37.912252-for-1 stock split and 1-for-5 reverse stock split pursuant to the merger with Sun Sportswear, Inc. (See Note 3(a)) (j) NEW ACCOUNTING PRONOUNCEMENTS -- In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130), which requires that comprehensive income and the associated income tax expense or benefit be reported in a financial statement with the same prominence as other financial statements with an aggregate amount of comprehensive income reported in that same financial statement. SFAS No. 130 permits the statement of changes in shareholders' equity to be used to meet this requirement. "Other Comprehensive Income" refers to revenues, expenses, gains and losses that under GAAP are included in comprehensive income but bypass net income. The Company intends to adopt SFAS No. 130 in the first quarter of fiscal 1998. The Company anticipates that adoption of SFAS No. 130 may expand or modify disclosures but will not have an impact on reported consolidated financial position, results of operations or cash flows. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), which requires disclosures for each segment in which the chief operating decision maker organizes these segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any manner in which management disaggregates a company. The Company intends to adopt SFAS No. 131 in 1998. The Company anticipates that adoption of SFAS No. 131 will expand disclosures but will not have an impact on reported consolidated financial position, results of operations or cash flows. (k) RECLASSIFICATIONS -- Certain amounts in the 1996 consolidated financial statements have been reclassified to conform to the 1997 presentation. (3) MERGERS AND ACQUISITIONS -- During 1997 and 1996, the Company made the following acquisitions, all of which have been accounted for as purchases. The results of operations of each acquisition are included in the Company's consolidated results of operations from the effective date of each acquisition. (a) SUN SPORTSWEAR, INC. ("SUN") -- Effective March 14, 1997, BSI Holdings, Inc. (Holdings) consummated a merger (the Merger) with Sun whereby the Shareholders of Holdings acquired an 86% ownership interest in Sun. The Merger has been accounted for as a reverse acquisition with Sun being the surviving legal entity and Holdings being the acquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in the State of Delaware under the name Brazos Sportswear, Inc. The purchase price of approximately $12.7 million consisted of cash ($4.7 million), the issuance of a subordinated debenture to the former majority shareholder ($1.5 million) and the value of the Company's equity interest subsequent to the Merger ($6.5 million). The purchase price for Sun was substantially below the fair value of assets and liabilities acquired at the date of acquisition. In the application of purchase accounting, fixed assets were written down to an amount substantially below fair value. (b) SOLARCO, INC. -- Effective July 2, 1997, the Company acquired all of the outstanding capital stock of SolarCo, Inc. the parent company to Morning Sun, Inc. ("Morning Sun") for approximately $31.3 million, consisting of approximately $30.5 million in cash and deferred payments, and the issuance of 73,171 shares of common stock valued at approximately $0.8 million. Goodwill from this acquisition (approximately $25.9 million) is being amortized over a period of 40 years. (c) PREMIER SPORTS GROUP, INC. ("PREMIER") -- Effective July 2, 1997, the Company also acquired certain assets and assumed certain liabilities of Premier for approximately $3.5 million, consisting of F-12 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $2.0 million in cash and $1.5 million in subordinated debt to the selling shareholders. The purchase price for Premier also includes a contingent earnout of up to $4.0 million to the former owner of Premier. The payment of the earnout is contingent upon certain specified performance measures being achieved for calendar years 1997 through 2000. No earnout payments were achieved in 1997. Goodwill from this acquisition (approximately $3.5 million, subject to revision pending the outcome of the contingent earnout) is being amortized over a period of 40 years. Prior to the acquisition date, Premier had net sales to the Company of approximately $4.3 million, $11.5 million and $4.2 million in 1997, 1996 and 1995, respectively. (d) CS CRABLE SPORTSWEAR, INC. -- Effective September 29, 1997, the Company acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), a wholly owned subsidiary of The Midland Company ("Midland"), for approximately $13.3 million in cash. Concurrent with this transaction, the Company entered into a long term lease commitment with Midland for the former Crable facility. (e) PLYMOUTH MILLS, INC. ("PLYMOUTH") -- Effective August 2, 1996, the Company acquired certain assets and assumed certain liabilities of Plymouth for approximately $33.6 million, consisting of $18.0 million in cash, approximately $10.4 million in subordinated debt to the selling shareholders and a $5.2 million earnout. Goodwill from this acquisition (approximately $19.0 million) is being amortized over a period of 40 years. The Company also issued to the seller warrants to purchase 227,474 shares of its common stock at a purchase price of $3.96 per share. These warrants were assigned a value of zero because in the opinion of management, these warrants were granted at an exercise price which is not less than the fair value of the Company's stock at the date of grant. A summary of the acquisitions follows:
MORNING SUN SUN PREMIER CRABLE PLYMOUTH ------- ------- ------- ------- -------- (000'S OMITTED) Fair value of assets acquired: Accounts receivable............. $ 7,911 $ 4,227 $ 4,569 $ 5,016 $ 8,804 Inventories..................... 13,215 9,846 2,385 6,380 6,128 Other current assets............ 2,059 1,719 2,724 142 150 Property, plant and equipment... 4 4,348 100 2,020 1,269 Goodwill........................ -- 25,922 3,470 -- 18,985 Intangibles and other........... -- 31 317 -- 400 ------- ------- ------- ------- -------- Total fair value of assets acquired........................... 23,189 46,093 13,565 13,558 35,736 ------- ------- ------- ------- -------- Less: Purchase price -- Cash............................ 4,680 29,370 2,022 13,271 18,000 Common stock issued............. -- 750 -- -- -- Subordinated debt to seller(s)..................... 1,500 -- 1,500 -- 10,414 Deferred payments............... -- 1,161 -- -- -- Earnout......................... -- -- -- -- 5,207 Equity interest in merger....... 6,467 -- -- -- -- ------- ------- ------- ------- -------- Total purchase price................. 12,647 31,281 3,522 13,271 33,621 ------- ------- ------- ------- -------- Liabilities assumed and transaction costs.................. $10,542 $14,812 $10,043 $ 287 $ 2,115 ======= ======= ======= ======= ========
F-13 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro forma results of the Company, Sun, Morning Sun, Premier, Crable and Plymouth for the years ended December 27, 1997 and December 28, 1996, assuming the acquisitions were consummated at the beginning of fiscal 1996 follow. Pro forma results of the Company and Plymouth for the year ended December 30, 1995, assuming the acquisition was consummated at the beginning of fiscal 1995 also follow. Such pro forma information reflects adjustments to reflect the elimination of Sun's historical depreciation expense for the write-off of net equipment and leasehold improvements resulting from the application of purchase accounting, elimination of pre-merger acquisition expenses incurred by Sun, elimination of compensation expense to reflect compensation levels on a post-acquisition basis pursuant to post-acquisition employment and advisory agreements for Morning Sun, Plymouth and Premier, elimination of severance costs for Crable employees terminated as a result of the acquisition, increased rent expense for the lease of the Crable facility, increased amortization expense for Plymouth, Morning Sun and Premier as a result of purchased goodwill, additional interest expense related to increased net indebtedness and dividends on additional preferred stock issued.
YEAR ENDED -------------------------------------------- DECEMBER 27, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------ ------------ ------------ (000'S OMITTED EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Net sales............................... $337,687 $372,416 $163,358 Net income (loss)....................... (8,276) 2,779 (3,977) Net income (loss) available for common shareholders.......................... (9,288) 1,821 (4,034) Basic earnings (loss) per share......... $ (2.12) $ .58 $ (2.00) Diluted earnings (loss) per share....... $ (2.12) $ .56 $ (2.00)
(4) LONG-TERM DEBT OBLIGATIONS -- Long-term obligations consist of the following: 1997 1996 ---------- --------- (000'S OMITTED) Senior notes, net of unamortized discount of $723,000 at December 27, 1997, fixed interest rate of 10.5%, interest payable semi-annually, principal due July 1, 2007............ $ 99,277 $ -- Convertible subordinated note, due to former owner of Premier (and current employee of the Company), non-interest bearing, convertible into 136,364 shares of Company common stock at July 1, 1998, due July 1, 2004............. 1,500 -- Industrial revenue bonds, variable interest rate (6.25% at December 27, 1997), due in monthly installments of $4,166 through April, 2002 and $6,250 through April, 2007, secured by substantially all assets of BEI....... 589 638 Capital lease obligations (net of $184,000 and $346,000 of interest in 1997 and 1996, respectively).......... 1,153 1,524 Term loans, variable interest rate (9% to 9.75% at December 28, 1996), interest payable monthly, principal due in monthly installments of $200,000 through August, 1999 with balance due at that time, secured by all assets of Brazos, Inc. ........... -- 11,200 Subordinated note, fixed interest rate of 13%, interest payable monthly, principal due in quarterly installments of $250,000 beginning 9/1/01 through 8/31/03 with balance due at that time...................... -- 3,176 (Table continued on following page) F-14 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1997 1996 ---------- --------- (000'S OMITTED) Subordinated notes due to former owner of Plymouth (current employee and director of the Company), fixed interest rates ranging from 7.75% to 10%, interest payable quarterly, principal due between 12/31/97 and 12/31/03.............................. -- 10,414 Equipment note, variable interest rate of prime plus 1% (9.25% at December 28, 1996), interest payable monthly, principal due in monthly installments of $4,545 through May, 1998, secured by related equipment.................. -- 73 ---------- --------- 102,519 27,025 Less -- current portion................. 947 3,419 ---------- --------- Long-term obligations................... $ 101,572 $ 23,606 ========== ========= On July 2, 1997, the Company issued $100 million principal amount of senior notes at a discount of $760,000 which is being amortized into interest expense using the effective interest method from the date of issuance through the maturity date of the notes. Proceeds from the notes were used to finance the acquisition of Morning Sun and Premier, repay related assumed indebtedness, and repay existing subordinated debt and term loans outstanding as of July 2, 1997. In connection with the issuance of the senior notes, the Company incurred financing costs of approximately $3.7 million. These financing costs have been deferred and are being amortized over the life of the notes. Approximately $3.0 million of the financing costs represent investment advisory fees paid to the underwriters. In connection with the acquisition of Brazos Embroidery, Inc., the Company assumed Industrial Revenue Bonds (the Bonds) which bear interest at a floating weekly rate. The bonds are secured by substantially all of the assets of BEI and a bank letter of credit which expires August 15, 1998. The bank letter of credit is essentially guaranteed by another bank under a reimbursement agreement which requires BEI to make monthly principal payments. BEI has the option to establish the Bond's interest rate form (variable or fixed interest rate). When a fixed interest rate is selected, the fixed rate assigned will approximate the market rate for comparable securities. When a variable rate is selected or at the end of a fixed interest rate period, the Bondholders reserve the right to demand payment of the Bonds. In the event that any of the Bondholders exercise their rights, a remarketing agent is responsible for remarketing the Bonds on a best efforts basis for not less than the outstanding principal and accrued interest. In the event the Bonds are not able to be remarketed and borrowings on the letters of credit occur, funding through the reimbursement agreement occurs and BEI could be required to repay the debt at that time. Thus, the Bonds are classified as current debt in the accompanying consolidated balance sheets. Pursuant to the purchase of Plymouth in August, 1996, the Company issued subordinated debentures in capital markets of $3.5 million. The subordinated debentures were issued at a discount of $330,000 to give effect to the estimated fair value of warrants issued in connection with the new debt. The subordinated debentures were repaid in 1997. As a result, the unamortized portion of the original issue discount has been recorded as an extraordinary loss on extinguishment of debt in the accompanying consolidated statements of operations. Effective August 8, 1996, Holdings issued 4,456,000 shares of Series B mandatorily redeemable preferred stock in exchange for subordinated debt (carrying value of $3,719,000 at August 8, 1996) to all subordinated debt holders of record at Holdings. Holdings then forgave the subordinated debt due from its subsidiary. The resulting $737,000 loss on retirement was recorded to additional paid-in capital due to the related party nature of the transaction (see Note 7). F-15 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1995, the Company exercised its option as part of the Velva Sheen purchase agreement to prepay subordinated debt issued to the seller whereby a discount of $500,000 was negotiated and recorded as extraordinary income. Maturities of long-term borrowings, exclusive of approximately $723,000 of interest remaining to be accreted pertaining to a discounted obligation, are as follows at December 27, 1997 (000's omitted): AMOUNT ---------- 1998.................................... $ 947 1999.................................... 483 2000.................................... 228 2001.................................... 84 2002.................................... -- Thereafter.............................. 100,777 ---------- $ 102,519 ========== Brazos, Inc. maintained a credit agreement, as amended through March 14, 1997, with its primary lender which provided for borrowings of up to approximately $85 million, reduced by amounts borrowed pursuant to a term loan provided by the credit agreement, outstanding letters of credit and a specified percentage of outstanding documentary letters of credit. The credit agreement provided for a term loan of $11.6 million with the balance available as a revolving loan or letters of credit. At December 28, 1996, Brazos had approximately $23.5 million outstanding on its line of credit at interest rates ranging from 8.2% to 8.75% (weighted average of 8.7%) and $2.9 million in additional borrowings available pursuant to the credit agreement. On July 2, 1997, the Company entered into a Third Amended and Restated Loan and Security Agreement with its primary lender, which makes a revolving line of credit (the "Credit Facility") available to its principal operating subsidiary, Brazos, Inc. (the "Borrower"), in an aggregate principal amount of up to $50.0 million, subject to collateral limitation. Advances under this line are based on a percentage of the Borrower's inventory and receivables and various other reserves established from time to time by the lenders. Interest on the line of credit is payable at prime plus .25% or the Eurodollar base rate plus 2.00%. Under the Third Amended and Restated Loan and Security Agreement, the term loan facility previously provided was discontinued. The Credit Facility has an initial term of three years, subject to extension, and borrowings under the Credit Facility are guaranteed by the Company. On September 29, 1997, in connection with the Crable acquisition, the Borrower amended the Credit Facility to provide a revolving line of credit in an aggregate principal amount of up to $70.0 million, subject to collateral limitation. Interest on the line of credit was reduced to prime plus .25% or the Eurodollar base rate plus 1.75%. Under the amended Credit Facility, at December 27, 1997 the Borrower had approximately $31.5 million outstanding on its line of credit at interest rates ranging from 7.72% to 8.75% (weighted average of 8.1%) and $34.4 million in additional borrowings available pursuant to the Credit Facility. At December 27, 1997, the Company had outstanding standby and documentary letters of credit in the amounts of $0.4 million and $3.65 million, respectively. The Credit Facility may be terminated subject to a prepayment fee. Amounts borrowed pursuant to the Credit Facility are secured by substantially all of the assets of Brazos, Inc. The Credit Facility requires compliance with certain financial covenants, as defined, including a minimum fixed charge ratio, minimum adjusted net earnings from operations, a maximum indebtedness to net worth ratio, and prohibits the Company from paying cash dividends on common stock, incurring additional debt and prepaying subordinated debt. The Company was in compliance with these provisions at yearend. F-16 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The revolving loan and Bonds bear interest at variable rates which approximate current rates. Accordingly, the amounts as stated for these loans approximate fair value. At December 27, 1997 and December 28, 1996, the estimated fair value of the Company's fixed rate debt approximated carrying value. (5) INCOME TAXES -- The Company complies with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. The provision (credit) for income taxes excluding the effect of the extraordinary item includes the following components (000's omitted): 1997 1996 1995 --------- --------- --------- Current: Federal......................... $ 421 $ 1,370 $ (300) State and local................. 172 282 -- --------- --------- --------- 593 1,652 (300) --------- --------- --------- Deferred: Federal -- Depreciation............... $ 439 $ 102 $ 204 Tax net operating loss carryforward............ 516 640 (640) Inventory reserves and other................... (813) 4 (200) Prepaid expenses........... 1,526 -- -- Accounts receivable reserves................ (1,044) (515) (228) Valuation allowance........ -- (1,123) 1,123 Restructuring charge....... (1,444) -- -- Other, net................. (228) 193 (297) --------- --------- --------- (1,048) (699) (38) --------- --------- --------- State and local................. (276) (164) -- --------- --------- --------- $ (731) $ 789 $ (338) ========= ========= ========= The following is a reconciliation between the statutory federal income tax rate and the effective rate shown above (000's omitted):
1997 1996 1995 -------------- --------------- --------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ---- ------- ---- ------- ---- Computed provision (credit) for federal income taxes at the statutory rate..................... $(881) (34)% $ 1,637 34 % $(1,459) (34)% State and local income taxes, net of federal income tax benefit......... (104) (4)% 118 2 % -- -- Valuation allowance.................. -- -- (1,123) (23)% 1,123 26 % Non-deductible goodwill amortization....................... 119 5 % -- -- -- -- Non-deductible pension plan costs.... 126 5 % -- -- -- -- Other................................ 9 -- 157 3 % (2) -- ------ ---- ------- ---- ------- ---- $(731) (28)% $ 789 16 % $ (338) (8)% ====== ==== ======= ==== ======= ====
F-17 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 27, 1997 and December 28, 1996, net deferred tax assets consisted of the following (000's omitted): 1997 1996 --------- --------- Deferred tax assets: AMT & business credits.......... $ 365 $ -- Inventory reserves.............. 1,245 444 Inventory cost capitalization... 1,580 544 Accounts receivable reserves.... 2,701 1,018 Employee benefits............... 447 203 Restructuring charge............ 1,699 -- Other, net...................... 176 29 Accrued royalties............... 441 -- Net operating loss carryforward.................. 1,439 -- --------- --------- 10,093 2,238 Valuation allowance............. (3,636) -- --------- --------- 6,457 2,238 --------- --------- Deferred tax liabilities: Tax depreciation over book depreciation.................. -- (356) LIFO inventory.................. (356) (441) Intangible assets............... (725) (478) Prepaid expenses................ (1,863) -- Other........................... (5) (100) --------- --------- (2,949) (1,375) --------- --------- Net deferred tax asset............... $ 3,508 $ 863 ========= ========= At December 27, 1997, the Company has a federal tax loss carryforward in the amount of approximately $4.2 million, which expires beginning in 2010. The Company also has available federal tax credit carryforwards of approximately $355,000, which expire beginning in 2010. In connection with the Sun Merger, the Company acquired the tax loss carryforward referred to above and other future tax benefits, whose tax effects total approximately $3.6 million. There are limitations on the utilization of these acquired future tax benefits. A corresponding valuation allowance in the amount of approximately $3.6 million has been applied against these future tax benefits based on management's assessment of realizability under the provisions of SFAS No. 109. In 1996, the Company reversed the valuation allowance on certain deferred tax assets, most of which related to the utilization of a tax operating loss carryforward which originated in 1995. (6) SHAREHOLDERS' EQUITY -- (a) COMMON STOCK -- During 1992, the Company issued 379,123 shares of common stock to existing shareholders in exchange for cash, principal reductions of certain subordinated notes payable to shareholders and notes receivable with original principal amounts aggregating $200,000 with aggregate payments of $12,000 per quarter, plus interest, through December 31, 1996. F-18 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (b) STOCK BASED COMPENSATION -- The Company accounts for stock based compensation related to its stock option plan (discussed in Note 6(c) below) pursuant to Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, under which stock option-type awards are recorded at intrinsic value. Net income and earnings per share, assuming compensation cost for the stock option plan had been determined at fair value, consistent with the provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No. 123), would have been as follows: 1997 1996 1995 --------- --------- --------- Net income (loss) (000's omitted) As reported........................ $ (2,958) $ 3,787 $ (3,940) Pro forma.......................... (3,710) 3,487 (4,151) Basic earnings (loss) per share As reported........................ $ (.70) $ 1.54 $ (1.95) Pro forma.......................... (.88) 1.41 (2.06) Diluted earnings (loss) per share As reported........................ $ (.70) $ 1.15 $ (1.95) Pro forma.......................... (.88) 1.06 (2.06) Pursuant to the provisions of SFAS No. 123, in estimating the pro forma amounts, the fair value method of accounting was not applied to options granted prior to January 1, 1995. As a result, the pro forma effect on net income and earnings per share may not be representative of future years. In addition, the pro forma amounts reflect certain assumptions used in estimating fair values. The fair value of options granted was estimated as of the dates of grant using a Black-Scholes option pricing model. The weighted averages for the assumptions used in determining the fair values of options granted were as follows: 1997 1996 1995 -------- -------- -------- Risk-free interest rate.............. 6.19% 6.18% 7.49% Expected lives....................... 5.4 yrs. 5.5 yrs. 6.5 yrs. Expected common stock volatility..... 41.1% 48.5% 48.5% Expected dividend yield.............. 0% 0% 0% As the Company had little prior history regarding its expected volatility factor, the above assumption was determined based on historical volatility factors of similar entities at corresponding points in their corporate lives. F-19 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) EMPLOYEE STOCK OPTIONS -- The Company maintains a stock option plan in which stock options may be granted to key employees and officers. Options are granted at exercise prices not less than the fair value of the Company's stock on the date of grant. Options generally vest over three years and expire 10 years from the date of grant. The total number of shares of common stock available under this plan may not exceed 750,000 shares. Pursuant to the Merger with Sun Sportswear, Inc. in 1997, outstanding Sun stock options as of the Merger date, were subject to the 1-for-5 reverse stock split (as described in Note 2(i)) and were converted into Brazos Sportswear, Inc. stock options. Converted Sun stock options are shown as "acquired" in the following summary. Plan activity for 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995 ------------------- -------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE ------- -------- -------- -------- ------- -------- Outstanding, beginning of year....... 454,947 $ 3.01 431,821 $ 2.95 17,136 $ 1.12 Granted......................... 181,686 9.94 227,853 3.09 431,821 2.95 Acquired........................ 54,417 21.29 -- -- -- -- Exercised....................... (20,328) 1.78 -- -- -- -- Forfeited....................... (59,049) 20.13 (204,727) 2.97 (17,136) 1.12 ------- -------- ------- Outstanding, end of year............. 611,673 $ 5.31 454,947 $ 3.01 431,821 $ 2.95 ======= ======== ======= Exercisable, end of year............. 397,177 $ 4.93 153,355 $ 2.92 7,582 $ 1.98 ======= ======== ======= Weighted average fair value of options granted during the year.... $4.68 $1.46 $ .92 ======= ======== =======
Price ranges, along with certain other information, for options outstanding at December 27, 1997, are as follows:
OUTSTANDING EXERCISABLE ------------------------------------ -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE CONTRACTUAL EXERCISE PRICE RANGE NUMBER PRICE LIFE NUMBER PRICE - ------------------------------------- ------- -------- ----------- ------- -------- $16.25-$22.50 2,900 $18.79 3-5 yrs. 2,900 $18.79 6.4-6.7 $21.88-$29.38 3,800 $29.08 yrs. 3,800 $29.08 $1.98-$3.96 210,023 $ 2.97 7.2 yrs. 140,015 $ 2.48 8.2-8.7 $14.38 1,100 $14.38 yrs. 550 $14.38 $1.98 113,409 $ 1.98 8.3 yrs. 71,706 $ 1.98 $3.96 72,600 $ 3.96 8.6 yrs. 72,600 $ 3.96 $4.62-$6.59 30,136 $ 5.60 8.7 yrs. 10,045 $ 4.62 9.5-9.9 $9.00-$10.38 177,705 $ 9.93 yrs. 95,561 $10.07
F-20 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (d) STOCK PURCHASE WARRANTS -- Warrant activity for 1997, 1996 and 1995 is summarized as follows: RANGE OF SHARES SUBJECT EXERCISE PRICES TO WARRANTS PER SHARE -------------- --------------- Outstanding at December 30, 1995..... 701,329 $.0013-$1.65 Granted (i), (ii)............... 1,292,110 $.0013-$4.62 Exercised....................... (1,660,290) $.0013 -------------- Outstanding at December 28, 1996..... 333,149 $1.81-$4.62 Granted (iii)................... 272,959 $6.59 Exercised....................... (55,248) $1.81 -------------- Outstanding at December 27, 1997..... 550,860 $3.95-$6.59 ============== - ------------ (i) Warrants representing 166,950 common shares were issued to the Company's majority shareholder in January 1996. The warrants, which have an exercise price of $.0013 per share were valued at zero on the date of grant. The warrants were exercised during 1996. (ii) In connection with the acquisition and financing of Plymouth, warrants were issued as follows: EXERCISE PRICE SHARES PER SHARE ------- -------- Attached to Series A preferred stock (see Note 7)....................... 504,316 $.0013 Attached to third-party subordinated debt............................... 342,939 $.0013 Issued to the seller................. 227,474 $ 3.96 Fee warrants......................... 50,431 $ 4.62 The warrants shown above attached to the Series A preferred stock and the subordinated debt were exercised in 1996. (iii) In connection with the Merger with Sun, the Company issued warrants to purchase 272,959 shares of the Company's common stock. The warrants, which have an exercise price of $6.59 per share, were attached to the Company's Series B-3 Preferred Stock (see Note 7). F-21 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) MANDATORILY REDEEMABLE PREFERRED STOCK -- Mandatorily redeemable preferred stock, which is primarily held by management and directors of the Company, consisted of the following at December 27, 1997 and December 28, 1996: 1997 1996 --------- --------- (000'S OMITTED) Series B-1 (formerly Holdings Series B) -- Redeemable preferred stock, $.001 par, 8,000,000 shares authorized; 4,972,664 and 4,594,991 shares issued and outstanding at December 27, 1997 and December 28, 1996, respectively, redeemable at $1.00 per share.................... $ 4,973 $ 4,595 Series B-2 (formerly Brazos, Inc. Series A) -- Redeemable preferred stock, $.001 par, 4,000,000 shares authorized, 2,789,652 and 2,577,815 shares issued and outstanding at December 27, 1997 and December 28, 1996, respectively, redeemable at $1.00 per share.................... 2,397 2,120 Series B-3 Redeemable preferred stock, $.001 par, 3,500,000 shares authorized; 2,129,043 shares issued and outstanding at December 27, 1997, redeemable at $1.00 per share.............................. 1,207 -- Series A-1 Redeemable preferred stock, $.001 par, 650,000 shares authorized, issued and outstanding; $598,000 redemption value at December 28, 1996.................. -- 598 Series A-2 -- Redeemable preferred stock, $.001 par, 300,000 shares authorized, issued and outstanding; $300,000 redemption value at December 28, 1996.................. -- 300 --------- --------- $ 8,577 $ 7,613 ========= ========= Pursuant to the Merger, Holdings Series B preferred stock was exchanged for an equivalent number of shares of the Company's Series B-1 preferred stock. Holders of the Series B-1 preferred stock are entitled to receive cumulative dividends of 8% annually, payable "in-kind" (PIK) on a quarterly basis. The Series B-1 preferred stock is redeemable at the option of the Company at any time, at a redemption price of $.001 per share, if the market price of a share of Brazos Sportswear, Inc. common stock trades at or above $17.50 for a period of 20 consecutive trading days. The shares are subject to mandatory redemption on the earlier to occur of (i) the date of consummation of a sale, as defined, or (ii) December 31, 2008, at $1.00 per share plus declared and unpaid dividends through the date of redemption. Each share of Series B-1 preferred stock is subject to automatic conversion at the conversion ratio in effect, as defined, into the Company's common stock upon consummation of a qualified public offering, but only to the extent the per share offering price exceeds $17.50 and the net offering proceeds to be received by the Company are at least $15,000,000. Each share of Series B-1 preferred stock is convertible at the option of the holder at any time prior to the time set for redemption into .0909 shares of Brazos Sportswear, Inc. common stock. Prior to the Merger, Brazos, Inc. Series A preferred stock was exchanged for equivalent shares of Holdings Series B-2 preferred stock, which stock, pursuant to the Merger, was exchanged for equivalent shares of the Company's Series B-2 preferred stock. The preferences, rights and limitations associated with the Company's Series B-2 preferred stock are identical to those in respect of the Company's Series B-1 preferred stock, except such stock has voting rights similar to holders of the Company's common stock based on the number of shares of Brazos Sportswear, Inc. common stock into which it is convertible and such shares have a redemption and liquidation preference over the Company's Series B-1 preferred stock. The Series B-2 preferred stock was originally issued with detachable warrants to purchase 504,316 shares of the Company's common stock at a purchase price of $.0013 per share. The Series B-2 preferred stock was issued at a discount of $485,000 to give effect to the estimated fair value of the stock purchase warrants. The discount is being amortized into retained earnings, essentially as dividends, using the effective interest method during the period of issuance through the mandatory redemption date of December 31, 2008. F-22 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the Merger, Holdings issued 2,000,000 shares of Series B-3 preferred stock, which stock, pursuant to the Merger, was exchanged for equivalent shares of the Company's Series B-3 preferred stock. The preferences, rights and limitations associated with the Company's Series B-3 preferred stock are identical to those in respect of the Company's Series B-1 preferred stock, except such stock is entitled to redemption and liquidation preferences over the Company's Series B-1 and Series B-2 preferred stock. The Series B-3 preferred stock was originally issued with detachable warrants to purchase 272,959 shares of the Company's common stock at a purchase price of $6.59 per share. The Series B-3 preferred stock has been issued at a discount of $1,044,000 to give effect to the estimated fair value of the stock purchase warrants. The discount is being amortized into retained earnings, essentially as dividends, using the effective interest method during the period of issuance through the mandatory redemption date of December 31, 2008. Pursuant to the Merger, Holdings Series A-1 and Series A-2 preferred stock, originally issued to the owner of BEI, were exchanged for the equivalent shares of the Company's Series A-1 and Series A-2 preferred stock, respectively. Subsequent to the exchange, in 1997 the Series A-1 and A-2 preferred stock series were redeemed pursuant to optional redemption provisions of the preferred stock. The fair value of the Company's preferred stock is estimated to be approximately $7.2 million at December 27, 1997. The estimated fair value was determined based on the number of "convertible" shares of common stock and the market price of the Company's common stock at December 27, 1997. (8) EMPLOYEE BENEFIT PLAN -- In January 1994, the Company adopted a 401(k) savings plan (the Plan) covering substantially all employees. In 1997, the Sun 401(k) plan was merged into the existing Plan. Under the Plan, the Company will match 50% of employee contributions, up to 6% of compensation, for employees with annual compensation of $80,000 or less. Contributions by employees earning $80,000 or more are not matched by the Company. During 1997, 1996 and 1995, the Company contributed $238,000, $123,000 and $159,000, respectively, pursuant to the Plan. During the first quarter of fiscal year 1998, the Morning Sun 401(k) plan and Premier profit-sharing plan were also merged into the Plan. The Company does not offer post-retirement benefits (other than the defined contribution plan described above) or post-employment benefits to its employees. F-23 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) COMMITMENTS AND CONTINGENCIES -- (a) LEASES -- The Company leases various office and warehouse facilities and equipment from both related and unrelated parties under noncancellable operating leases. The Company leases office space from two of BSI's shareholders. In addition, the Company leases an office and manufacturing facility from one of the Company's directors. The Company also has two leases for facilities in College Station, Texas, with a partnership which is controlled by certain shareholders of the Company. The Company is obligated to pay all applicable taxes and insurance expenses pursuant to the terms of all of these leases. Future minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more at December 27, 1997, are as follows (000's omitted): RELATED UNRELATED PARTIES PARTIES -------- ---------- 1998................................. $ 417 $ 4,268 1999................................. 395 4,457 2000................................. 462 3,063 2001................................. 382 1,818 2002................................. 111 1,363 Thereafter........................... -- 5,277 -------- ---------- $1,767 $ 20,246 ======== ========== Total lease expense recorded during 1997, 1996 and 1995 was approximately $4,061,000, $1,932,000 and $1,713,000, respectively, of which $418,000, $347,000 and $258,000, respectively, was to related parties. (b) EMPLOYMENT AND NON-COMPETE AGREEMENTS -- The Company has entered into employment and non-compete agreements with certain key employees providing for payment of salaries and incentive compensation. Such employment and non-compete agreements expire at various times through July 1, 2002. The minimum payments for salaries to be made under these agreements subsequent to December 27, 1997 are $1,715,000 in 1998 and $811,000 in 1999. During 1997, 1996 and 1995, respectively, compensation expense recognized by the Company pursuant to such employment and non-compete agreements was $1,605,000, $1,010,000 and $416,000, including incentive compensation. (c) ROYALTY AND LICENSE COMMITMENTS -- The Company acquires rights to use trademarks, characters and logos on specified types of garments under license agreements with third parties. Pursuant to these license agreements, the Company pays royalties which generally range between 7% and 15% of the sales price of garments sold. Royalty expense for the Company's license agreements was approximately $15.7 million, $9.5 million and $5.8 million for 1997, 1996 and 1995, respectively. Certain license agreements require that the Company (i) guarantee a minimum royalty payment based on sales and (ii) prepay a portion of the minimum guaranteed royalty. Prepaid royalties included in the accompanying consolidated balance sheet were approximately $4.4 million at December 27, 1997. The Company reserves for anticipated shortfalls in minimum sales when known. (d) LITIGATION -- The Company is involved in litigation arising in the ordinary course of business, which in the opinion of management, will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. F-24 BRAZOS SPORTSWEAR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) VALUATION AND QUALIFYING ACCOUNTS -- (a) Inventory Obsolescence -- The following summarizes activity in valuation reserves for inventory obsolescence (000's omitted):
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF PERIOD EXPENSES DEDUCTIONS OTHER(1) PERIOD ------------ ---------- ---------- -------- ---------- Year ended December 27, 1997......... $1,263 $2,711 $4,836 $4,017 $3,155 Year ended December 28, 1996......... 1,297 1,797 2,101 270 1,263 Year ended December 30, 1995......... 1,101 1,968 1,772 -- 1,297
- ------------ (1) Balances reflect acquired valuation accounts related to the acquisitions described in Note 3. (b) Accounts Receivable -- The following summarizes activity in the allowance for doubtful accounts on accounts receivable (000's omitted):
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF PERIOD EXPENSES DEDUCTIONS OTHER(1) PERIOD ------------ ---------- ---------- -------- ---------- Year ended December 27, 1997......... $2,760 $7,105 $4,325 $2,390 $7,930 Year ended December 28, 1996......... 1,052 1,867 711 552 2,760 Year ended December 30, 1995......... 690 1,605 1,243 -- 1,052
- ------------ (1) Balances reflect acquired valuation accounts related to the acquisitions described in Note 3. (11) UNAUDITED QUARTERLY FINANCIAL DATA (000'S OMITTED, EXCEPT PER SHARE AMOUNTS) --
BASIC DILUTED GROSS OPERATING NET EARNINGS PER EARNINGS PER QUARTER ENDED NET SALES PROFIT INCOME/(LOSS) INCOME/(LOSS) SHARE SHARE - ---------------------------------------- --------- ------- ------------- ------------- ------------ ------------ March 29, 1997.......................... $ 34,907 $ 8,187 $ (215) $ (876) $ (.27) $ (.27) June 28, 1997........................... 56,198 14,142 2,272 316 .02 .01 September 27, 1997...................... 105,185 29,111 10,840 4,189 .90 .71 December 27, 1997....................... 88,197 20,713 (5,409) (5,682) (1.35) (1.35) --------- ------- ------------- ------------- Total.............................. $ 284,487 $72,153 $ 7,488 $(2,053) $(.70) $(.70) March 30, 1996.......................... $ 30,132 $ 7,414 $ 1,051 $ 452 .23 .17 June 29, 1996........................... 39,407 9,390 2,232 1,256 .52 .42 September 28, 1996...................... 57,996 15,668 5,289 2,936 1.14 .80 December 28, 1996....................... 41,917 9,009 361 (612) (.26) (.26) --------- ------- ------------- ------------- Total.............................. $ 169,452 $41,481 $ 8,933 $ 4,032 $1.54 $1.15
F-25 EX-10.5 2 EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of the 2nd day of July, 1997, between Morning Sun, Inc., a Washington corporation (the "Company"), and ROBERT C. KLEIN (the "Employee"). 1. EMPLOYMENT TERM. The Company hereby employs the Employee for a term commencing on date hereof and, subject to earlier termination as provided in Section 5 hereof, ending on July 1, 2000 (such term being herein referred to as the "term of this Agreement"). The Employee agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter stated. 2. DUTIES. The Employee shall serve the Company in an executive capacity and shall report to and be subject to the general direction and control of the Board of Directors and Chief Executive Officer of the Company. The Employee shall perform the executive, management and administrative duties of president of the Company's Seattle, Washington operations and the Company's MORNING SUN and TOPSTICH BRANDS. The Employee shall also perform such other executive, management and administrative functions that are consistent with the foregoing and assigned to him by the Board of Directors or Chief Executive Officer of the Company. The Company agrees that it will assign the Employee those duties, and only those duties, of the type, nature and dignity that are normally assigned to an employee of his position in a corporation of the size, stature and nature of the Company. 3. EXTENT OF SERVICE. The Employee shall devote his full business time and attention to the business of the Company, and, except as may be specifically permitted by the Company, shall not be engaged in any other business activity during the term of this Agreement. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises, provided, however, that such investments will not require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement. 4. SALARY AND BENEFITS. (a) The Company shall pay the Employee a base salary of $20,833.33 per full calendar month of service completed during the term of this Agreement, appropriately prorated for partial months at the beginning and end of the term of this Agreement. Such salary shall be payable in accordance with the normal payroll policies of the Company from time to time in effect. The Company shall have the right to deduct from any payment of all compensation to the Employee hereunder (x) any federal, state or local taxes required by law to be withheld with respect to such payments, and (y) any other amounts specifically authorized to be withheld or deducted by the Employee. -1- (b) During the term of this Agreement, the Employee shall be entitled to receive the following benefits: (i) The Employee shall be entitled to participate in the Company's Key Employee Incentive Plan (the "Plan"), and may receive benefits under such Plan in an amount of up to 75% of the Employee's base salary under paragraph (a) above. In addition, the Employee shall also be entitled to a bonus, in the sole discretion of the Company's Board of Directors. Any bonus (whether pursuant to the Plan or otherwise) payable to the Employee for any year shall be paid no later than March 31st of the following year. (ii) The Employee shall be granted options to purchase 45,000 shares of the Common Stock of Brazos Sportswear, Inc. ("Brazos"), the parent corporation of the Company, pursuant to the Brazos stock option plan (the "Option Plan"). Such options shall (a) vest 331/3% per year for three years commencing with the first 331/3% vesting on the date hereof, (b) have an exercise price equal to the fair market value at the date of grant and (c) otherwise be subject to the terms of the Option Plan. Notwithstanding anything contrary in the Option Plan, vesting shall continue for an additional one year after termination of the Employee's employment pursuant to Section 5(c)(i) or 5(d)(i) below. (iii) The Employee shall also be entitled to receive such other benefits as are generally available to employees of the Company. The Employee shall be entitled to four weeks of vacation annually. 5. TERMINATION. (a) DEATH. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate, except under the terms of the Plan (including payment of the pro rata portion of the bonus thereunder) or any other benefit plan in which the Employee is a participant, and the Company shall pay the Employee's estate that portion of the Employee's salary accrued through the end of the month in which the Employee's death occurred. (b) DISABILITY. If during the term of this Agreement, the Employee shall be prevented from performing his duties hereunder by reason of disability, and such disability shall continue for a period of three months, then the Company may terminate this Agreement at any time after the expiration of such three-month period while such disability is continuing. For purposes of this Agreement, the Employee shall be deemed to have become -2- disabled when the Company, upon the advice of a qualified physician, shall have determined that the Employee has become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illness) of performing his duties under this Agreement. In the event of a termination pursuant to this paragraph (b), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Employee his base salary through the end of the month during which such termination shall have occurred, (less any benefits received by the Employee during such period of disability under any disability benefits plan maintained by the Company) plus the pro rata portion of the bonus under the Plan. (c) CERTAIN DISCHARGES. (i) DISCHARGE WITHOUT CAUSE. Prior to the end of the term of this Agreement, the Company, on 30 days' prior written notice to the Employee, may discharge the Employee for any reason, without Cause (as defined in subparagraph (ii) below), in which case the Company may terminate this Agreement without further liability to the Employee or his estate in the event of his subsequent death, other than to pay to the Employee or to his estate the Employee's base salary for the one-year period following such termination, plus the pro rata portion of the bonus under the Plan through such termination. Such payments to the Employee shall be made in the same manner and at the same times as they would have been paid had the Employee not been discharged. A failure of the Company to extend the term of this Agreement at the end of the three year term (or any annual extensions thereafter) shall be deemed a termination by the Company without cause under Section c(i). (ii) DISCHARGE WITH CAUSE. Prior to the end of the term of this Agreement, the Company may discharge the Employee with Cause (as hereinafter defined) with out prior written notice, and terminate this Agreement without any further liability hereunder to the Employee or his estate other than to pay to the Employee his base salary accrued to the date of discharge. For purposes of this Agreement, the Company shall have "Cause" to discharge the Employee or terminate the Employee's employment hereunder upon (i) the Employee's commission of any felony or other crime involving moral turpitude, (ii) the Employee's willful or persistent failure or refusal to follow policies or directives established by the Company consistent with this Agreement, (iii) the Employee's commission of material acts amounting to gross negligence or willful misconduct to the detriment of the Company or its affiliates or (iv) the Employee's material breach of this Agreement; provided that in the cases of clauses (ii), (iii) and (iv) the Company shall give notice to the Employee and the opportunity to cure prior to such termination. -3- (d) TERMINATION BY EMPLOYEE. (i) GOOD REASON. On prior written notice to the Company, the Employee shall have the right to terminate his employment at any time for Good Reason, defined as follows: (a) a material breach by the Company of its obligations hereunder; provided, the Company shall have reasonable opportunity to cure any such breach; (b) the assignment to the Employee of duties inconsistent with, or a substantial alteration in the status of, his responsibilities as an executive of the Company; or (c) the relocation of the Employee's place of business outside the Seattle, Washington metropolitan area (provided, the Employee acknowledges that travel in the ordinary course of business shall not be deemed such a relocation). In the event of a termination by the Employee for Good Reason, the Company shall pay to the Employee the Employee's base salary for the one year period following such termination, plus the pro rata portion of the bonus under the Plan through such termination. Such payments to the Employee shall be made in the same manner and at the same times as they would have been paid had the Employee not terminated employment. (ii) WITHOUT GOOD REASON. Prior to the end of the term of this Agreement, the Employee may terminate his employment hereunder without Good Reason. Upon such termination the Company shall have no further liability hereunder to the Employee or his estate other than to pay to the Employee his base salary accrued through the date of termination. 6. CONFIDENTIAL INFORMATION. The Employee acknowledges that in the course of his employment by the Company he has received and will receive certain trade secrets, programs, lists of customers and other confidential information concerning the business of the Company (hereinafter collectively referred to as "Information") which the Company desires to protect. The Employee understands that the Information is confidential and he agrees not to reveal the Information to anyone outside the Company so long as the confidential or secret nature of the Information shall continue. The Employee further agrees that he will at no time use the Information in competing with the Company. Upon termination of this Agreement, the Employee shall surrender to the Company all papers, documents, writings and other property produced by him or coming into his possession by or through his employment or relating to the Information, and the Employee agrees that all such materials will at all times remain the property of the Company. The provisions of this Section 6 shall survive any termination of this Agreement. 7. RESTRICTIVE COVENANTS. During the term of this Agreement and for a period of one year thereafter, the Employee shall not: (i) engage, as principal, agent, trustee or through the agency of any corporation, partnership, association or agent or agency, anywhere within the United States -4- (hereafter the "Territory"), in the business of the design, manufacture, sale, marketing or distribution of screen printed or embroidered fleece or t-shirt products which are competitive with the products of the Company or its affiliates (the "Industry") (provided, any such business which derives less than 10% of its revenues from the Industry shall be deemed not to be in competition with the Company for purposes of this section); (ii) own or hold any beneficial interest of more than the Applicable Percentage of the voting securities in any corporation, partnership or other business entity which conducts its operations, in whole or in part, within the Industry and within the Territory; or (iii) become an employee of or consultant to, or serve in any similar capacity with, any business within the Industry which conducts its operations in whole or in part within the Territory. In addition, in any such event and during such period, the Employee further agrees that he shall not, either directly or indirectly, through any person, firm, association or corporation with which the Employee is now or may hereafter become associated, solicit any present or future employee of the Company to leave the employ of the Company to accept employment with the Employee or with such person, firm, association or corporation. For purposes of the foregoing, "Applicable Percentage" means (x) one percent (1%), in the case of corporations, partnerships and other business entities having a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or (y) five percent (5%) in all other cases. The foregoing covenants shall not be held invalid or unenforceable because of the scope of the territory or actions subject thereto or restricted thereby, or the period of time within which such covenants are operative; but any judgment of a court of competent jurisdiction may define the maximum territory and actions subject to and restricted by this Section 7 and the period of time during which such covenants are enforceable. The provisions of this Section 7 shall survive any termination of this Agreement. The one-year period referred to above shall commence and be effective regardless of the reason for any termination of this Agreement, including (without limitation) the Employee's voluntary resignation or discharge without Cause, provided that in case of a discharge without Cause, this Section 7 shall remain in effect for only so long after such termination that the Company is continuing to make payments to the Employee pursuant to Section 5(c)(i). 8. NOTICES. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or on the date mailed, postage prepaid, by certified mail, return receipt requested, or telegraphed and confirmed if addressed to the respective parties as follows: If to the Employee: Robert C. Klein ____________________________ ____________________________ -5- If to the Company: Morning Sun, Inc. c/o Brazos, Inc. 3860 Virginia Avenue Cincinnati, Ohio 45227-3487 Attention: President Either party hereto may designate a different address by providing written notice of such new address to the other party hereto. 9. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such provision or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10. ASSIGNMENT. This Agreement may not be assigned by the Employee. Neither the Employee nor his estate shall have any right to commute, encumber or dispose of any right to receive payments hereunder, it being agreed that such payments and the right thereto are nonassignable and nontransferable. 11. BINDING EFFECT. Subject to the provisions of Section 10 of this Agreement, this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Employee's heirs and personal representatives, and the successors and assigns of the Company. 12. CAPTIONS. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13. COMPLETE AGREEMENT. This Agreement represents the entire agreement between the parties concerning the subject hereof and supersedes all prior agreements between the parties con cerning the subject thereof. Without limiting the generality of the foregoing, this Agreement supersedes all preexisting employment agreements between the Company and the Employee which may have heretofore been in effect. 14. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Washington. 15. COUNTERPARTS. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -6- 16. BRAZOS GUARANTY. On the date hereof, Brazos, Inc., an affiliate of the Company, shall guarantee the performance of the obligations of the Company under the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement on the date and year first above written. THE COMPANY: MORNING SUN, INC. By:/s/ J. FORD TAYLOR ---------------------- J. FORD TAYLOR, Chief Executive Officer THE EMPLOYEE: /s/ ROBERT C. KLEIN ---------------------- ROBERT C. KLEIN -7- EX-10.10 3 THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is executed to be effective as of July 2, 1997, by and among FLEET CAPITAL CORPORATION ("FLEET"), a Rhode Island corporation, successor-in-interest by merger to Fleet Capital Corporation, a Connecticut corporation (Fleet Capital Corporation, a Connecticut corporation, being formerly known as Shawmut Capital Corporation, and being the successor-in-interest by assignment to Barclays Business Credit, Inc., a Connecticut corporation), with an office at 2711 Haskell Avenue, Suite 2100, LB21, Dallas, Texas 75204, BANKBOSTON, N.A. ("BOSTON"), a national banking association (formerly known as The First National Bank of Boston) with an office at 100 Federal Street, Boston, Massachusetts 02110 (Fleet and Boston are collectively referred to as "Lenders" or each individually a "LENDER"), FLEET, as Agent for Lenders (Fleet, in such capacity, the "AGENT"), and BRAZOS, INC. ("BRAZOS"), a Texas corporation (formerly known as Brazos Sportswear, Inc.), with its chief executive office at 3860 Virginia Avenue, Cincinnati, Ohio 45227, and MORNING SUN, INC., a Washington corporation (formerly known as SolarCo., Inc.) ("MORNING SUN"), with its chief executive office at 3500 20th Street E., Building C, Tacoma, Washington 98401 (Brazos and Morning Sun being hereinafter individually and collectively referred to as "BORROWER", as governed by the provisions of SECTION 1.5 and SECTION 1.6 of this Agreement). A. Brazos and Fleet, as the sole Lender, entered into that certain Loan and Security Agreement, dated as of May 6, 1992, as thereafter amended from time to time, including, without limitation, as amended by (i) that certain First Amendment Agreement, dated as of November 30, 1993, executed by Fleet and Brazos, (ii) that certain Second Amendment to Loan and Security Agreement, dated as of June 20, 1994, executed by Brazos and Fleet, and (iii) that certain Third Amendment to Loan and Security Agreement, dated as of July 1, 1994, executed by Brazos and Fleet (as amended, "ORIGINAL LOAN AGREEMENT"). B. Brazos and Fleet, as the sole Lender, amended, restated and modified (but did not extinguish) the Original Loan Agreement by entering into that certain Amended and Restated Loan and Security Agreement dated as of November 10, 1994, as amended by (i) that certain First Amendment to Amended and Restated Loan and Security Agreement, dated as of June 2, 1995, (ii) that certain Second Amendment to Amended and Restated Loan and Security Agreement, dated as of January 11, 1996, (iii) that certain Third Amendment to Amended and Restated Loan and Security Agreement, dated as of April 22, 1996 and (iv) that certain Fourth Amendment to Amended and Restated Loan and Security Agreement, dated as of May 2, 1996 (as amended, "RESTATED LOAN AGREEMENT"). C. Fleet and Boston as "LENDERS", Fleet, as "AGENT", and Brazos amended, restated and modified (but did not extinguish) the Restated Loan Agreement by entering into that certain Second Amended and Restated Loan and Security Agreement, dated as of August 9, 1996, as amended by (i) that certain letter agreement, dated December 11, 1996, between Brazos and Lenders, (ii) that certain letter agreement, dated February 3, 1997, between Brazos and Lenders, and (iii) that certain March 1997 Amendment to Second Amended and Restated Loan and 1 Security Agreement, dated March 14, 1997, executed by Borrower and Lenders (as amended, the "SECOND RESTATED LOAN AGREEMENT"). D. Brazos Sportswear, Inc., a Delaware corporation, successor-in-interest by merger to BSI Holdings, Inc., and the owner of 100% of the issued and outstanding common stock of Brazos ("PARENT") and Brazos desire to enter into and close the following simultaneous transactions (collectively, the "TRANSACTION") as of the effective date of this Agreement: (i) The consummation of each of the following (collectively, the "MORNING SUN ACQUISITION"): (a) The acquisition by Parent of all the capital stock of SolarCo, Inc., a Washington corporation ("SOLARCO") and owner of all the capital stock of Morning Sun, Inc., a Washington corporation ("OLD MORNING SUN") pursuant to the terms, conditions and provisions of that certain Stock Purchase Agreement, dated May 8, 1997, executed by Parent and the shareholders of SolarCo (the "STOCK PURCHASE AGREEMENT") (the "MORNING SUN STOCK ACQUISITION"); (b) The immediate merger of Old Morning Sun into SolarCo, with SolarCo being the surviving entity, and the surviving entity changing its name to "Morning Sun, Inc.", and as a result thereof, owning all of the assets of Old Morning Sun (the "MORNING SUN MERGER"); and (c) The immediate contribution by Parent to Brazos of all the capital stock of such merged and renamed entity, such that Morning Sun will be a wholly-owned Subsidiary of Brazos ("MORNING SUN CONTRIBUTION"); (ii) The purchase by Brazos of all the assets of Premier Sports Group, Inc., a Colorado corporation ("PREMIER"), pursuant to the terms, conditions and provisions of that certain Asset Purchase Agreement, dated May 30, 1997, by and among Brazos, Parent, Premier and Laurence E. Crabb (the "ASSET PURCHASE AGREEMENT") (the "PREMIER ASSET ACQUISITION"); and (iii) The completion by Parent of its offering of $100,000,000 Senior Notes ("PARENT SENIOR NOTES") pursuant to and consistent with the provisions of that certain Offering Memorandum regarding such Parent Senior Notes, dated June ___, 1997 ("OFFERING MEMORANDUM"), the terms of which Parent Senior Notes shall include those terms described on EXHIBIT S attached hereto (the "SENIOR NOTES PLACEMENT"), the net proceeds of the Senior Notes Placement to total at least $94,000,000, and such net proceeds to be used for: (a) paying the cash portion of the purchase price for the Morning Sun Stock Acquisition and paying off in full the indebtedness for borrowed money of SolarCo and Old Morning Sun and any indebtedness for 2 borrowed money assumed by Borrower or Parent in connection with the Morning Sun Stock Acquisition; (b) paying the cash portion of the purchase price for the Premier Asset Acquisition and paying off in full any indebtedness for borrowed money (other than the Contingent Amount and the Convertible Note) assumed by Borrower or Parent in connection with the Premier Asset Acquisition; (c) paying off existing indebtedness for borrowed money of Parent; (d) paying off in full all subordinated debt of Parent and Brazos existing prior to consummation of the Transaction; (e) paying off in full the Term Loan (as defined in the Second Restated Loan Agreement); and (f) paying off existing indebtedness for borrowed money of Brazos. E. As a result of the Transaction, the parties hereto desire, among other things, to effectuate the following revisions to the existing credit facilities presently provided for in the Second Restated Loan Agreement: (i) Decrease the revolving credit facility from $73,200,000 to $50,000,000; (ii) Pay off in full the Term Loan and not continue forward any term loan facility; (iii) Add Morning Sun as a co-borrower to the revolving credit facility; and (iv) Release all collateral securing obligations incurred pursuant to the Second Restated Loan Agreement other than the Collateral described in SECTION 4 hereof. F. To effectuate the foregoing, the parties hereto wish to completely amend, restate and modify (but not extinguish) the Second Restated Loan Agreement through the execution of this Agreement, which will supersede all prior agreements among the parties hereto. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: 3 SECTION 1. GENERAL DEFINITIONS 1.1. DEFINED TERMS. When used herein, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): ACCOUNT DEBTOR - any Person who is or may become obligated under or on account of an Account. ACCOUNTS - all accounts, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest. ADJUSTED NET EARNINGS FROM OPERATIONS - with respect to any fiscal period, means the Consolidated net earnings (or loss) after provision for income taxes for such fiscal period of Borrower, all as reflected on the Consolidated financial statement of Borrower supplied to Agent and Lenders pursuant to SECTION 9.1(J) hereof, but excluding: (a) any gain or loss arising from the sale of capital assets; (b) any gain arising from any write-up of assets; (c) earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (d) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Borrower, realized by such corporation prior to the date of such acquisition; (e) net earnings of any business entity (other than a Subsidiary) in which Borrower has an ownership interest unless such net earnings shall have actually been received by Borrower in the form of cash distributions; (f) any portion of the net earnings of any Subsidiary which, at the time of determination, the Subsidiary is prohibited (by contract or charter) from paying as dividends to Borrower; (g) the earnings of any Person to which any assets of Borrower shall have been sold, transferred or disposed of, or into which Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (h) any gain or loss arising from the acquisition of any Securities of Borrower; and (i) any gain or loss arising from extraordinary or non-recurring items. 4 ADVANCE - the disbursement by a Lender (or by Agent on behalf of Lenders) of a Loan to Borrower pursuant to this Agreement. AFFILIATE - a Person (other than a Subsidiary): (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, Borrower; (b) which beneficially owns or holds 10% or more of any class of the Voting Stock of Borrower; or (c)10% or more of the Voting Stock (or in the case of a Person which is not a corporation, 10% or more of the equity interest) of which is beneficially owned or held by Borrower or a Subsidiary of Borrower. For purposes hereof, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. AGENT - as defined in the preamble of this Agreement, and any successor Agent appointed pursuant to the terms of this Agreement. AGREEMENT - this Third Amended and Restated Loan and Security Agreement, including all Exhibits hereto, as the same may be modified, supplemented, extended, amended, or restated from time to time. APPLICABLE ANNUAL RATE - as defined in SECTION 3.1(A) of this Agreement. ASSET PURCHASE AGREEMENT - as defined in the preamble of this Agreement. AVERAGE DAILY LOAN BALANCE - for any relevant period of time, the amount obtained by adding the unpaid balance of the Loans owing by Borrower to Lenders at the end of each day for each day during the time period in question and by dividing such sum by the number of days in such time period. AVERAGE MONTHLY LOAN BALANCE - the amount obtained by adding the unpaid balance of Loans owing by Borrower to Lenders at the end of each day for each day during the month in question and by dividing such sum by the number of days in such month. AVERAGE MONTHLY REVOLVING CREDIT LOANS USAGE - as defined in SECTION 3.1(F) of this Agreement. BANK - Fleet National Bank and its successors and assigns. BASE RATE - the rate of interest announced or quoted by Bank from time to time as its prime rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if the prime rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. BASE RATE LOANS - all Base Rate Revolving Credit Loans. 5 BASE RATE REVOLVING CREDIT LOANS - all Revolving Credit Loans other than Eurodollar Revolving Credit Loans. BORROWER SUBORDINATED DEBT - Indebtedness of Borrower that is expressly subordinated to the Obligations upon terms satisfactory to Lenders, including, without limitation, the Contingent Amount and such other Indebtedness, if any, of Borrower described on EXHIBIT O attached hereto. BORROWING - the combined Advances made to Borrower on a single date. BORROWING BASE - as at any date of determination thereof, an amount equal to the lesser of: (a) (i) the Revolving Credit Commitment; MINUS (ii) 100% of the face amount of all standby Letters of Credit issued by Agent or covered by the provisions of an LC Risk Participation Agreement which are outstanding at such date; MINUS (iii) 45% of the face amount of all documentary Letters of Credit issued by Agent or covered by the provisions of an LC Risk Participation Agreement which are outstanding at such date; MINUS (iv) any reserves for accrued and unpaid royalty payments established by Agent and/or Lenders from time to time pursuant to SECTION 2.1(A) hereof (based on the amount of such accrued and unpaid royalty payments which are shown on Borrower's financial statements); MINUS (v) all other reserves established by Agent and/or Lender from time to time pursuant to SECTION 2.1(A) hereof; MINUS (vi) the FX Amount; or (b) an amount equal to: (i) (A) 85% (or such lesser percentage as Lenders may in their discretion determine from time to time after the occurrence of a Default) of the net amount of Eligible Accounts outstanding as of the applicable Calculation Date PLUS (B) the lesser of $500,000 or 85% (or such lesser percentage as Lenders may in their discretion determine from time to time after the occurrence of a Default) of the net amount of Eligible Dated Accounts outstanding as of the applicable Calculation Date; PLUS (C) 85% (or such lesser percentage as Lenders may in their discretion determine from time to time after the occurrence of a Default) of the lesser of (a) $3,000,000 or (b) the net amount of Japanese Accounts outstanding as of the applicable Calculation Date; PLUS (ii) the lesser of (A) $30,000,000 or (B) the sum of: (1) (x) the LESSER of (I) $9,000,000 or (II) 55% (or such lesser percentage as Lenders may in their discretion determine from time to time after the occurrence of a Default) of the value of Eligible Finished Goods Inventory consisting of "printed" finished goods as of the applicable Calculation Date PLUS (y) 55% (or such lesser percentage as Lenders may in their discretion determine from time to time after 6 the occurrence of a Default) of the value of Eligible Inventory (other than Eligible Finished Goods Inventory consisting of "printed" finished goods), as of the applicable Calculation Date PLUS (2) the Seasonal Inventory Overadvance Amount as of the applicable Calculation Date. MINUS (subtract from the sum of CLAUSES (I) and (II) above) (iii) the sum of: (a) 100% of the face amount of all standby Letters of Credit issued by Agent or covered by the provisions of an LC Risk Participation Agreement which are outstanding at such date, (b) 45% of the face amount of all documentary Letters of Credit issued by Agent or covered by the provisions of an LC Risk Participation Agreement which are outstanding at such date, (c) any reserves for accrued and unpaid royalty payments established by Agent and/or Lenders from time to time pursuant to SECTION 2.1(A) hereof and based on the amount of such accrued and unpaid royalty payments which are shown on Borrower's financial statements, (d) all other reserves established by Agent and/or Lenders from time to time pursuant to SECTION 2.1(A) hereof, and (e) the FX Amount. For purposes of CLAUSE (B)(I) above, the net amount of Eligible Accounts or Eligible Dated Accounts, as the case may be, at any time shall be the face amount of such Eligible Accounts or such Eligible Dated Accounts, as the case may be, less any and all returns, rebates, discounts (which may, at Agent's option, be calculated on shortest terms), credits, allowances or excise taxes of any nature at any time issued, owing, claimed by Account Debtors, granted, outstanding or payable in connection with such Accounts at such time. For purposes of CLAUSE (B)(II) above and the definition of "Seasonal Inventory Overadvance Amount," the value of Eligible Inventory on a date shall be calculated on the basis of the lower of cost or market. Cost shall be calculated on a first-in, first-out basis. Without limiting Lenders' discretion to adjust advance rates from time to time after the occurrence of a Default as provided above, Borrower acknowledges that Lenders may from time to time before or after the occurrence of a Default reduce the Inventory advance rate if Lenders determine that the size mix of Borrower's finished goods has materially changed from the size mix as of the Closing Date. BORROWING BASE REPORT - as defined in SECTION 9.1(R) hereof. BOSTON - as defined in the preamble to this Agreement. BUSINESS DAY - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Texas or is a day on which banking institutions located in such state are closed; PROVIDED, HOWEVER, if any determination of a "Business Day" shall relate to a 7 Eurodollar Loan, the term "Business Day" shall in addition exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. CALCULATION DATE - as at any date when the Borrowing Base is to be determined the effective date of the most recent Borrowing Base Report submitted to Agent pursuant to SECTION 9.1(R) hereof (provided that if the Borrowing Base Report required by SECTION 9.1(R) hereof is due and has not been delivered by Borrower to Agent, Agent shall have the right to determine in its credit judgment what should be the relevant "Calculation Date" for purposes of calculation of the Borrowing Base). CAPITAL EXPENDITURES - expenditures made and liabilities incurred (including the principal portion of Capitalized Lease Obligations, but excluding capitalized interest) for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the direct or indirect acquisition of such assets by way of increased product or service charges, offset items or otherwise. CAPITALIZED LEASE OBLIGATION - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with GAAP. CHANGE IN CONTROL - the first date that those Persons who on the date of this Agreement hold all of the outstanding Voting Stock of Brazos (including options, warrants and other Securities convertible into or exchangeable with such Voting Stock), together with their respective Affiliates, hold less than fifty percent (50%) of the outstanding Voting Stock of the Brazos determined on a fully diluted basis (assuming full conversion or exchange of all options, warrants, or other Securities which are convertible into or exchangeable with such Voting Stock). CLOSING DATE - July 2, 1997. CODE - the Uniform Commercial Code as adopted and in force in the State of Texas, as from time to time in effect. COLLATERAL - all of the Property and interests in Property described in SECTION 4 hereof. CONSOLIDATED - the consolidation in accordance with GAAP of the accounts or other items as to which such term applies. CONTINGENT AMOUNT - as defined in SECTION 1.3.2 of the Asset Purchase Agreement. CONVERTIBLE NOTE - as defined in SECTION 1.3.1(B) of the Asset Purchase Agreement. DEFAULT - an event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. 8 DEFAULT RATE - as defined in SECTION 3.1(B) of this Agreement. DESIGNATED PREFERRED STOCK - at any date any preferred stock of Brazos issued after the Closing Date, on terms satisfactory to Lenders. DISTRIBUTION - in respect of any corporation means and includes: (a) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (b) the redemption or acquisition of its capital stock (or any rights, warrants or options relating to the acquisition of Borrower's capital stock) unless made contemporaneously from the net proceeds of the sale of Securities. DOLLAR - lawful money of the United States of America. DOMINION ACCOUNT - a special account of Lenders established by Borrower pursuant to this Agreement at a bank selected by Borrower, but acceptable to Agent, and over which Agent, for the benefit of Lenders, shall have sole and exclusive access and control for withdrawal purposes. ELIGIBLE ACCOUNT - an Account arising in the ordinary course of Borrower's business from the sale of goods or rendition of services which Agent, in its credit judgment, deems to be an Eligible Account. Without limiting the generality of the foregoing, no Account shall be an Eligible Account if: (a) it arises out of a sale made by Borrower to a Subsidiary or an Affiliate of Borrower or to a Person controlled by an Affiliate of Borrower; or (b) it is unpaid for more than 60 days after the original due date shown on the invoice; or (c) it is due or unpaid more than 90 days after the original invoice date; or (d) 20% or more of the Accounts from an Account Debtor to Borrower are not deemed Eligible Accounts or Eligible Dated Accounts hereunder; or (e) any covenant, representation or warranty contained in this Agreement with respect to such Account has been breached; or (f) the Account Debtor is also Borrower's creditor or supplier, or has disputed liability with respect to such Account, or has made any claim with respect to any other Account due from such Account Debtor to Borrower, or the Account otherwise is subject to any right of setoff by the Account Debtor, to the extent of any offset, dispute or claim; or (g) the Account Debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or a decree or order for relief has been entered by a court having jurisdiction in the premises in respect of the Account Debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other petition or other application for relief under the federal bankruptcy laws has been filed against the Account Debtor, or if the Account Debtor has failed, suspended business, ceased to be Solvent, or consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs; or (h) it arises from a sale to an Account Debtor outside the United States, unless a documentary Letter of Credit has been issued with respect to such Account, by an issuer and in form and substance satisfactory to Lenders, or the Lenders otherwise approve such Account; or (i) it arises from a sale to the Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or any other repurchase or return basis; or (j) Agent in good faith believes that collection of such Account is insecure or that payment thereof is doubtful or will be 9 delayed by reason of the Account Debtor's financial condition; or (k) the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Agent, on behalf of Lenders, in form and substance satisfactory to Agent, so as to comply with the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 203 ET SEQ.); or (l) the Account Debtor is located in either the state of New Jersey, the state of Minnesota, the state of Indiana, the state of West Virginia or any other state requiring the filing of a Business Activity Report or similar document in order for Borrower to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state, unless Borrower has qualified to do business as a foreign corporation or has filed a Notice of Business Activities Report or similar required report with the appropriate officials in those states for the then current year; or (m) the Account is subject to a Lien other than a Permitted Lien (which Permitted Lien, if so required by Lenders, has been satisfactorily subordinated to Agent's Lien, for the benefit of Lenders, in such Account pursuant to an intercreditor agreement or similar document acceptable in form and substance to Lenders, in their sole discretion); or (n) the goods giving rise to such Account have not been delivered to and accepted by the Account Debtor or the services giving rise to such Account have not been performed by Borrower and accepted by the Account Debtor or the Account otherwise does not represent a final sale; or (o) the total unpaid Accounts of the Account Debtor exceed a credit limit determined by Agent to the extent such Account exceeds such limit; or (p) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; or (q) Borrower has made any agreement with the Account Debtor for any deduction therefrom, except for discounts or allowances which are made in the ordinary course of business for prompt payment and which discounts or allowances for prompt payment are reflected in the calculation of the face value of each invoice related to such Account, to the extent of such deduction; or (r) Borrower has made an agreement with the Account Debtor to extend the time of payment thereof; or (s) the Account arises from a retail sale of goods to a Person who is purchasing same primarily for personal, family or household purposes; or (t) the Account is an Eligible Dated Account; or (u) Lenders do not have a perfected first priority Lien in the Account; or (v) the Account is a Japanese Account. ELIGIBLE DATED ACCOUNTS - an Account arising in the ordinary course of Borrower's business (i) as to which the relevant Account Debtor is given payment terms of greater than sixty (60) days, but not greater than one hundred eighty (180) days after the invoice date, (ii) which is not an Eligible Account because it has been outstanding for more than ninety (90) days, and (iii) which Agent, in its credit judgment, deems to be an Eligible Dated Account. Without limiting the generality of the foregoing, no such dated Account of Borrower shall be an Eligible Dated Account if such Account (i) is described in any of the lettered clauses of the definition of an `Eligible Account' contained in this Agreement (other than CLAUSES (B), (C), (D), and (T) of such definition), (ii) it is unpaid for more than sixty (60) days after the original due date shown on the invoice or more than one hundred eighty (180) days after the invoice date or (iii) 20% or more of the dated Accounts to a Borrower from the Account Debtor to such Borrower are not deemed Eligible Dated Accounts hereunder. ELIGIBLE FINISHED GOODS INVENTORY - Eligible Inventory consisting of "blank" or "printed" finished goods of Borrower. 10 ELIGIBLE INVENTORY - such Inventory of Borrower (other than packaging materials and supplies) which Agent, in its credit judgment, deems to be Eligible Inventory. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory unless, in Agent's opinion, it (a) is (i) cloth rolls, piece goods and other raw materials acceptable to Agent or (ii) "blank" or "printed" finished goods of Borrower, (b) work in process of Borrower (other than work in process of Brazos' "Garment" division), (c) is in good, new and saleable condition, (d) is not obsolete or unmerchantable, (e) meets all standards imposed by any governmental agency or authority, (f) conforms in all respects to the warranties and representations set forth in SECTION 6.1 hereof, (g) is at all times subject to Agent's, for the benefit of Lenders, duly perfected, first priority security interest and no other Lien except a Permitted Lien, (h) is situated at a location in compliance with SECTION 4.4 hereof and is not in-transit; PROVIDED, HOWEVER, in-transit inventory of Borrower shall be included within Eligible Inventory so long as a documentary Letter of Credit has been issued in connection with the purchase of such Inventory by Borrower, such Inventory satisfies the other requirements herein and title thereto is in the name of Borrower; PROVIDED, FURTHER, Inventory which is situated at the location of a processor of such Inventory shall not be included within Eligible Inventory unless such processor has entered into a written agreement with Agent, on behalf of and for the benefit of Lenders, in form and substance satisfactory to Lenders, in their sole discretion, providing, among other things, that such processor will not assert any lien with respect to any Collateral for unpaid processing or storage charges, and (i) is not consigned by a Person to Borrower or by Borrower to any Person. EMBROIDERY - Brazos Embroidery, Inc., a Pennsylvania corporation. ENVIRONMENTAL LAWS - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to health, safety and environmental matters. EQUUS - Equus II Incorporated, a Delaware corporation. ERISA - the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated thereunder. EURODOLLAR BASE RATE - with respect to a Eurodollar Loan for the relevant Eurodollar Interest Period, a rate per annum equal to the quotient of the following: (a) the rate at which deposits in U.S. dollars in immediately available funds are offered by Bank to first-class banks in the London interbank market at approximately 11:00 a.m. (London, England time) two (2) Business Days prior to the first day of such Eurodollar Interest Period, in the approximate amount of the Eurodollar Loan and having a maturity approximately equal to the Eurodollar Interest Period divided by (b) the difference of 1.00 minus the Eurodollar Reserve Requirement. EURODOLLAR BORROWING NOTICE - as defined in SECTION 2.4(A) of this ----------------------------- --------------- Agreement. EURODOLLAR INTEREST PERIOD - with respect to a Eurodollar Loan, a period of one (1), two (2), three (3) or six (6) months commencing on a Business Day selected by Borrower pursuant to 11 this Agreement. Such Eurodollar Interest Period shall end on (but exclude) the day which corresponds numerically to such date one (1), two (2), three (3) or six (6) months thereafter, PROVIDED, HOWEVER, that if there is no such numerically corresponding day in such first (1st), second (2nd), third (3rd) or sixth (6th) succeeding month, such Eurodollar Interest Period shall end on the last Business Day of such first (1st), second (2nd), third (3rd) or sixth (6th) succeeding month. If a Eurodollar Interest Period would otherwise end on a day which is not a Business Day, such Eurodollar Interest Period shall end on the next succeeding Business Day; PROVIDED, HOWEVER, that if said next succeeding Business Day falls in a new month, such Eurodollar Interest Period shall end on the immediately preceding Business Day. EURODOLLAR LOANS - all Eurodollar Revolving Credit Loans. EURODOLLAR RESERVE REQUIREMENT - on any day, means that percentage (expressed as a decimal fraction) which is in effect on such day, as provided by the Board of Governors of the Federal Reserve System (or any successor governmental body) applied for determining the maximum reserve requirements (including without limitation, basic, supplemental, marginal and emergency reserves) under Regulation D with respect to "eurocurrency liabilities" as currently defined in Regulation D, or under any similar or successor regulation with respect to eurocurrency liabilities or eurocurrency funding. Each determination by Agent of the Eurodollar Reserve Requirement shall, in the absence of manifest error, be conclusive and binding. EURODOLLAR REVOLVING CREDIT LOAN - a Revolving Credit Loan which bears interest at a rate based on the Eurodollar Base Rate in accordance with SECTION 2 hereof. EVENT OF DEFAULT - as defined in SECTION 11.1 of this Agreement. EXCESS - as defined in SECTION 3.1(D) of this Agreement. EXISTING BOSTON REVOLVING CREDIT NOTE - that certain Amended and Restated Revolving Credit Note, dated as of March 17, 1997, in the original principal amount of $30,158,400.00, executed by Brazos, and payable to the order of Boston. EXISTING FLEET REVOLVING CREDIT NOTE - that certain Amended and Restated Revolving Credit Note, dated as of March 17, 1997, in the original principal amount of $43,041,600.00, executed by Brazos, and payable to the order of Fleet. FIXED CHARGE RATIO - for any period means the ratio for Borrower of (i) Consolidated Adjusted Net Earnings from Operations for such period PLUS Consolidated amortization expense and Consolidated depreciation expense for such period (to the extent deducted in calculating Consolidated Adjusted Net Earnings from Operations) PLUS Consolidated Interest Expense for such period, to (ii) Consolidated Interest Expense for such period PLUS Consolidated Unfinanced Capital Expenditures made during such period, PLUS scheduled principal payments on Consolidated Funded Indebtedness during such period, PLUS Distributions paid during such period to Parent pursuant to the provisions of SECTION 9.2(J) of this Agreement (other than Distributions made pursuant to SECTION 9.2(J)(I) hereof to the extent such amounts are already 12 reflected as a tax expense of Borrower, in the calculation of Borrower's Consolidated Adjusted Net Earnings From Operations). FLEET BANK RISK PARTICIPATION AGREEMENT - that certain Letter of Credit Risk Participation Agreement executed by and between Fleet and Bank, dated August 9, 1996, as amended and restated from time to time. FUNDED INDEBTEDNESS - means Consolidated Indebtedness for Money Borrowed of Borrower having a final maturity (or which is renewable or extendible at the option of Borrower for a period ending) more than one year after the date of creation thereof. FX AMOUNT - at any time, the sum of (i) 10% of the aggregate amount of the U.S. Dollar Equivalent of all FX Contracts consisting of foreign currency forward purchase contracts or foreign currency forward sale contracts then outstanding with a settlement date more than two (2) Business Days after the date of determination, PLUS (ii) 100% of the aggregate amount of the U.S. Dollar Equivalent of all FX Contracts consisting of foreign currency forward purchase contracts or foreign currency forward sale contracts then outstanding with a settlement date two (2) or less Business Days from the date of determination PLUS (iii) 100% of the aggregate amount of the U.S. Dollar Equivalent of all FX Contracts consisting of foreign currency spot purchase contracts or foreign currency sale spot contracts then outstanding (not including such FX Contracts which have been fully cash collateralized by the Borrower). FX CONTRACT - any foreign currency forward or spot purchase contract or foreign currency forward sale or spot contract entered into by Bank and Borrower in the ordinary course of Borrower's business, in compliance with the terms of SECTION 2.10 of this Agreement, the term of which shall not exceed 150 days. FX GUARANTY - any guaranty, in form and substance satisfactory to Fleet, executed by Agent and Bank in connection with an FX Contract, pursuant to which Agent shall guaranty the payment or performance by Borrower of its obligations to Bank under any such FX Contract. FX PAYMENT - as defined in SUBSECTION 2.3(A) of this Agreement. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. GUARANTOR - Parent and any other Person who may hereafter guarantee payment of or performance of the whole or any part of the Obligations. GUARANTY AGREEMENTS - (i) the Second Amended and Restated Continuing Guaranty Agreement which is to be executed on the Closing Date by Parent, in favor of Agent, for the benefit of Lenders, in form and substance satisfactory to Agent, covering all Obligations of Borrower to Lenders and Agent, and (ii) the Morning Sun Guaranty Agreement. 13 INDEBTEDNESS - as applied to a Person means, without duplication (a) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (b) all obligations of other Persons which such Person has guaranteed and (c) in the case of Borrower (without duplication), the portion of the Obligations which would be shown on the liability side of a balance sheet of Borrower as at the date of determination. INDENTURE - that certain indenture among Parent, as issuer, Brazos, Morning Sun, the relevant trustee and others pursuant to which the Parent Senior Notes are issued. INTEREST EXPENSE - means for any period, the interest charges paid or accrued by Borrower during such period (including imputed interest on Capitalized Lease Obligations, but excluding amortization of debt discount and expense) on Indebtedness. INVENTORY - all of Borrower's inventory, whether now owned or hereafter acquired and wherever located, including, but not limited to, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrower's business; and all documents evidencing any of the foregoing. JAPANESE ACCOUNTS - An account arising in the ordinary course of the Japanese Subsidiary's business which has been assigned to Brazos in a manner acceptable to Agent and Lenders; PROVIDED, HOWEVER, that no such Account shall be a Japanese Account if (i) it is due or unpaid for more than 120 days after the original invoice date, (ii) the Japanese Subsidiary incurs any Indebtedness other than royalty payments and normal operating expenses incurred in the ordinary course of business (provided the unpaid amount of such operating expenses do not exceed $200,000 at any time), (iii) the Japanese Subsidiary has failed to grant Brazos a valid, perfected first priority Lien (as determined under applicable law) in all assets of the Japanese Subsidiary in a manner and pursuant to executed documentation satisfactory to the Lenders, (iv) there is any restriction under Japanese law preventing the transfer of funds to Brazos as to payment of such Account (whether directly from the Account Debtor, indirectly through the Japanese Subsidiary or otherwise), (v) the Account Debtor (other than Jupiter Trading) fails to obtain a documentary Letter of Credit issued by a financial institution satisfactory to Lenders, (vi) in the case of Accounts as to which Jupiter Trading is the Account Debtor, Jupiter Trading fails to obtain FCIA insurance which names Agent as the loss payee, (vii) 20% or more of the Accounts from such Account Debtor to the Japanese Subsidiary (and assigned to Brazos) are not deemed Japanese Accounts hereunder, and (viii) such Account is described in any of the lettered clauses of the definition of an "Eligible Account" contained in this Agreement (other than CLAUSES (D), (H) and (V) of such definition); PROVIDED, FURTHER, HOWEVER, that, notwithstanding the foregoing, in the case of Accounts as to which Jupiter Trading is the Account Debtor, no more than $2,000,000 of such Accounts shall be deemed Japanese Accounts. 14 JAPANESE SUBSIDIARY - Brazos Sportswear Japan, KK, a corporation organized under the laws of Japan and a wholly-owed subsidiary of Brazos. JUPITER TRADING - Jupiter Trading Company, a corporation organized under the laws of Japan. LC PAYMENT - as defined in SECTION 2.3(A) of this Agreement. LC RISK PARTICIPATION AGREEMENT - each of the Fleet Bank Risk Participation Agreement and each other agreement, in form and substance satisfactory to Lenders, executed by Agent with a Person who has issued one or more Letters of Credit for the account of Borrower, pursuant to which Agent agrees to purchase a one hundred percent (100%) participation in any payments made by the issuing Person under such Letter(s) of Credit which are not immediately reimbursed to such Person by Borrower; PROVIDED, HOWEVER, that if the issuing Person is not Bank, such Letters of Credit must be standby Letters of Credit. LETTER OF CREDIT - a standby or documentary Letter of Credit, as the case may be, at any time issued by Agent, Bank or another Person for the account of a Borrower. LIEN - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, security title or lien arising from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. LOAN ACCOUNT - the loan account established on the books of Agent pursuant to SECTION 2.8 hereof. LOAN DOCUMENTS - this Agreement, the Other Agreements and the Security Documents. LOANS - all loans and advances made by Lenders pursuant to this Agreement, including, without limitation, all Revolving Credit Loans. MAXIMUM LEGAL RATE - as defined in SECTION 3.1(C) of this Agreement. MONEY BORROWED - as applied to Indebtedness, means (a) Indebtedness for borrowed money; (b) Indebtedness, whether or not in any such case the same was for borrowed money, (i) which is represented by notes payable or drafts accepted that evidence extensions of credit, (ii) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (iii) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (c) Indebtedness that constitutes a Capitalized Lease Obligation; and (d) Indebtedness under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (a) through (c) hereof. MORNING SUN - as defined in the preamble of this Agreement. 15 MORNING SUN CONTRIBUTION - as defined in the preamble of this Agreement. MORNING SUN GUARANTY AGREEMENT - the Continuing Guaranty Agreement which is to be executed on the Closing Date by Morning Sun, in favor of Agent, for the benefit of Lenders, in form and substance satisfactory to Agent, covering all Obligations of Brazos to Lenders and Agent. MORNING SUN MERGER - as defined in the preamble of this Agreement. MORNING SUN STOCK ACQUISITION - as defined in the preamble of this Agreement. MULTI-EMPLOYER PLAN - has the meaning set forth in SECTION 4001(A)(3) -------------------- ------------------- of ERISA. NET WORTH - the total shareholders' equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would be shown on a Consolidated balance sheet of Borrower at such date in accordance with GAAP, plus (without duplication) the aggregate amount of the Designated Preferred Stock which would be shown on a balance sheet of Borrower at such date in accordance with GAAP. NOTES - the Revolving Credit Notes executed by Borrower and delivered pursuant to the terms of this Agreement, together with any renewals, extensions or modifications thereof. OBLIGATIONS - all Loans and all other advances, reimbursement obligations under Letters of Credit, LC Payments, FX Payments, obligations under FX Guaranties, debts, liabilities, obligations, covenants and duties arising under this Agreement or any of the other Loan Documents owing, arising, due or payable from Borrower to Agent and/or Lenders of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and any other sums chargeable to Borrower under any of the Loan Documents. OFFERING MEMORANDUM - as defined in the preamble of this Agreement. OLD MORNING SUN - as defined in the preamble of this Agreement. ORIGINAL LOAN AGREEMENT - as defined in the preamble of this Agreement. ORIGINAL TERM - as defined in SECTION 3.2 of this Agreement. OSHA - the Occupational Safety and Health Act and all rules and regulations from time to time promulgated thereunder. 16 OTHER AGREEMENTS - any and all agreements, instruments, certificates, and documents (other than this Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower or delivered to Agent and/or Lenders in respect to the transactions contemplated by this Agreement, including, without limitation, the Revolving Credit Notes, all as amended, renewed, modified, extended or restated from time to time. OVERADVANCE - the amount, if any, by which the outstanding principal amount of the Revolving Credit Loans exceeds the Borrowing Base. PARENT - as defined in the preamble of this Agreement. PARENT SENIOR NOTES - as defined in the preamble of this Agreement. PERMITTED INSURER - an insurance company rated AA+, AA or higher by Standard and Poors Corporation and AA or higher by Moody's Investor Services, Inc. and which is otherwise reasonably satisfactory to Agent. PERMITTED LIENS - any Lien of a kind specified in CLAUSES (I) THROUGH (X) of SECTION 9.2(H) of this Agreement. PERMITTED PAYMENT - a regularly scheduled payment of principal and/or interest due and payable in accordance with the terms of Borrower Subordinated Debt as such terms are in effect as of the Closing Date, IF AND ONLY IF (i) no Default or Event of Default would be caused thereby, (ii) such payment would not violate the terms of this Agreement, and (iii) such payment would not violate the terms of any subordination agreement executed in connection with such Borrower Subordinated Debt. In no event shall the definition of "Permitted Payment" include any prepayment of any Borrower Subordinated Debt. PERSON - an individual, partnership, corporation, joint stock company, land trust, business trust or unincorporated organization, or a government or agency or political subdivision thereof. PLAN - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. PREMIER - as defined in the preamble of this Agreement. PREMIER ASSET ACQUISITION - as defined in the preamble of this Agreement. PROHIBITED TRANSACTION - any transaction set forth in SECTION 406 of ERISA or SECTION 4975 of the Internal Revenue Code of 1986. PROJECTIONS - Borrower's forecasted (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. 17 PROPERTY - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. RENEWAL TERM - as defined in SECTION 3.2 of this Agreement. RENTALS - as defined in SECTION 9.2(W) of this Agreement. REPORTABLE EVENT - any of the events set forth in SECTION 4043(B) of ERISA which is required to be reported to the PBGC. RESTATED LOAN AGREEMENT - as defined in the preamble of this Agreement. RESTRICTED INVESTMENT - any investment in cash or by delivery of Property to any Person including without limitation, Embroidery and Parent, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (a) Property to be used in the ordinary course of business; (b) Current Assets arising from the sale of goods and services in the ordinary course of business of Brazos and its Subsidiaries; (c) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (d) demand deposit accounts maintained in the ordinary course of business with federally insured financial institutions; (e) investments in certificates of deposit issued by Boston or Bank or by any other bank or financial institution with combined capital surplus and undivided profits of at least $100,000,000 maturing within one year from the date of acquisition; (f) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof; (g) investments by Brazos in Morning Sun and by Morning Sun in Brazos; (h) repurchase obligations with a term of not more than seven days for underlying securities of the types described in CLAUSE (C) above entered into with any commercial bank meeting the requirements of CLAUSE (E) above; and (i) investments in money market or other mutual funds substantially all the assets of which are comprised of securities of the types referred to in CLAUSES (C), (E) and (H) above. REVOLVING CREDIT AVAILABILITY - means, at any particular date, the excess of the Borrowing Base over the amount of the Revolving Credit Loans then outstanding. For the purposes of this definition, the "Borrowing Base" shall mean the amount calculated under PARAGRAPH (B) of the definition of "Borrowing Base"; PARAGRAPH (A) of the definition of "Borrowing Base" shall be disregarded in such calculation. REVOLVING CREDIT COMMITMENT - $50,000,000.00. Fleet's maximum portion of the Revolving Credit Commitment is $29,400,000, i.e., Fleet's Revolving Credit Commitment is $29,400,000. Boston's maximum portion of the Revolving Credit Commitment is $20,600,000, i.e., Boston's Revolving Credit Commitment is $20,600,000. 18 REVOLVING CREDIT LOAN - a Loan made by a Lender as provided in SECTION 2.1(A) of this Agreement. REVOLVING CREDIT NOTES - those certain Second Amended and Restated Revolving Credit Notes to be executed by Borrower in favor of each Lender to evidence Borrower's Indebtedness to such Lender for its Revolving Credit Percentage, the Second Amended and Restated Revolving Credit Note in favor of Fleet to be in the form of EXHIBIT A-1 attached hereto, as the same may be amended, renewed, extended, modified or restated from time to time, the provisions of which are in amendment and restatement of, and in replacement for, the provisions of the Existing Fleet Revolving Credit Note and the Second Amended and Restated Revolving Credit Note in favor of Boston to be in the form of EXHIBIT A-2 attached hereto as the same may be amended, renewed, modified, extended or restated from time to time, the provisions of which are in amendment and restatement of, and in replacement for, the provisions of the Existing Boston Revolving Credit Note. REVOLVING CREDIT PERCENTAGE - each Lender's percentage of the Revolving Credit Commitment, which as to Fleet is 58.80%, and which as to Boston is 41.20%. SCHEDULE OF ACCOUNTS - as defined in SECTION 5.2 of this Agreement. SEASONAL INVENTORY OVERADVANCE AMOUNT - during the period (BUT ONLY DURING THE PERIOD) beginning April 1 and continuing through September 30 of each year during the term of this Agreement, the lesser of (a) $4,500,000 or (b) 10% (or such lesser percentage as Lenders may in their discretion determine from time to time after the occurrence of a Default) of the value of Eligible Inventory at such date. Beginning October 1 of each year and continuing through March 31 of the following year, the Seasonal Inventory Overadvance Amount shall be $0.00. SECOND RESTATED LOAN AGREEMENT - as defined in the preamble of this Agreement. SECURITY - shall have the same meaning as in SECTION 2(1) of the Securities Act of 1933, as amended. SECURITY DOCUMENTS - the Guaranty Agreements and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations, all as amended, renewed, modified, extended or restated from time to time. SENIOR NOTES PLACEMENT - as defined in the preamble of this Agreement. SOLARCO - as defined in the preamble of this Agreement. SOLVENT - as to any Person, such Person (a) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (b) is able to pay all of its Indebtedness as such Indebtedness matures and (c) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. 19 STOCK PURCHASE AGREEMENT - as defined in the preamble of this Agreement. SUBSIDIARY - as to any Person, any corporation of which such Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. TAX EXPENSE - means for any period, the tax expense paid or accrued by a Person during such period. TAX SHARING AGREEMENT - the Tax Sharing Agreement entered into by Parent, each Borrower and Embroidery, provided that Lenders and Agent have been supplied a copy of such Tax Sharing Agreement. TERM LOAN - as defined in the preamble of this Agreement. TRANSACTION - as defined in the preamble of this Agreement. UNFINANCED CAPITAL EXPENDITURES - Capital Expenditures by Borrower to the extent NOT financed pursuant to Funded Indebtedness of Borrower (other than the Loans) or from the cash proceeds of the sale of Borrower's fixed assets. U.S. DOLLAR EQUIVALENTS - with respect to any monetary amount in any currency other than Dollars, at any time, the amount of Dollars obtained by converting such currency into Dollars at the spot rate for such transaction as quoted by Bank on such date. VOTING STOCK - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with that applied in preparation of the financial statements referred to in SECTION 9.1(J), and all financial data pursuant to the Agreement shall be prepared in accordance with such principles. 1.3. OTHER TERMS. All other terms contained in this Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. 1.4. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. 20 All references to any instruments or agreements, including, without limitation, references to any of the Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 1.5 THE TERM "BORROWER" OR "BORROWERS". Unless otherwise specifically provided herein, all references to "Borrower" or "Borrowers" herein shall refer to and include each Borrower separately and all representations contained herein shall be deemed to be separately made by each of them, and each of the covenants, agreements and obligations set forth herein shall be deemed to be the joint and several covenants, agreements and obligations of them. Any notice, request, consent, report or other information or agreement delivered to Agent or a Lender by any Borrower shall be deemed to be ratified by, consented to and also delivered by the other Borrower. Each Borrower recognizes and agrees that each covenant and agreement of "Borrower" or "Borrowers" under this Agreement and the other Loan Documents shall create a joint and several obligation of the Borrowers, which may be enforced against Borrowers, jointly, or against each Borrower separately. Without limiting the terms of this Agreement and the other Loan Documents, security interests granted under this Agreement and other Loan Documents in properties, interests, assets and collateral shall extend to the properties, interests, assets and collateral of each Borrower. Similarly, the term "Obligations" shall include, without limitation, all obligations, liabilities and indebtedness of such corporations, or any one of them, to Agent and to Lenders, whether such obligations, liabilities and indebtedness shall be joint, several, joint and several or individual. 1.6 BRAZOS OBLIGATIONS. Notwithstanding any other provision of the Notes or this Agreement to the contrary, it is hereby agreed that Morning Sun is not assuming payment of any of the unpaid principal balance of the Obligations incurred by Brazos prior to the date of execution of this Agreement pursuant to this Agreement and the other Loan Documents (collectively, the "BRAZOS OBLIGATIONS"). However, the parties hereto agree and acknowledge that the preceding sentence shall not (i) limit any contingent liability of Morning Sun for payment of any of the Brazos Obligations which arises pursuant to the Morning Sun Guaranty Agreement, or (ii) limit the security interest and Liens in favor of Lender granted by Morning Sun against the assets of Morning Sun as a result of Morning Sun becoming an additional named "Borrower", which Liens shall secure payment of all Obligations arising in connection with this Agreement, whether currently existing or hereafter arising. For purposes of determining on or after the date hereof which Obligations outstanding constitute Brazos Obligations and how payments are applied to Brazos Obligations, (x) all payments received by Agent or a Lender from Brazos on account of the Obligations shall be deemed to be applied first in payment of all then due and payable Brazos Obligations (until such time as the Brazos Obligations shall have been reduced to zero), and thereafter to the other Obligations and unless Borrower specifically indicates to the contrary in writing to Lender, all payments received by Agent or a Lender through the Dominion Account shall be deemed to be payments received by Lender from Brazos, and (y) all payments received by Lender from Morning Sun shall be deemed to be applied on account of Obligations which are not Brazos Obligations, and to the extent that, notwithstanding the foregoing, for any reason any payment received by Agent or a Lender from Morning Sun shall instead be determined to have been applied on account of any Brazos Obligations, such payment shall be deemed to have been made by Morning Sun pursuant to the Morning Sun Guaranty Agreement. 21 SECTION 2. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, each Lender agrees to make Revolving Credit Loans in an amount of up to such Lender's Revolving Commitment Percentage of the Revolving Credit Commitment available upon Borrower's request therefor, as follows: 2.1. REVOLVING CREDIT LOANS. (A) Subject to all of the terms and conditions of this Agreement, Lenders agree, for so long as no Default or Event of Default exists, to make Revolving Credit Loans to Borrower from time to time, as requested by Borrower in accordance with the terms of SECTION 2.3 hereof, up to a maximum principal amount at any time outstanding equal to the Borrowing Base at such time, as evidenced by the Revolving Credit Notes; PROVIDED, HOWEVER, that (i) no Lender shall be obligated to make Advances in excess of such Lender's Revolving Credit Percentage and (ii) each Borrowing shall be made ratably by all Lenders in accordance with their respective Revolving Credit Percentages. It is expressly understood and agreed that Agent may use the Borrowing Base as a maximum ceiling on Revolving Credit Loans outstanding to Borrower at any time. If the unpaid balance of the Revolving Credit Loans should exceed the Borrowing Base or any other limitation set forth in this Agreement, such Revolving Credit Loans shall nevertheless constitute Obligations that are secured by the Collateral and entitled to all the benefits thereof. In no event shall Borrower be authorized to request a Loan at any time that there exists a Default or an Event of Default. Notwithstanding the foregoing provisions of this SECTION 2.1(A), Borrower and Lenders agree that for so long as no Default or Event of Default exists, Agent shall have the right to establish and/or eliminate reserves in such amounts, and with respect to such matters, as Agent shall in good faith deem necessary or appropriate, against the amount of Revolving Credit Loans which Borrower may otherwise request under this SECTION 2.1(A), including, without limitation, with respect to (i) price adjustments, damages, unearned discounts, returned products or other matters for which credit memoranda are issued in the ordinary course of Borrower's business; (ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow moving Inventory; (iv) other sums chargeable against Borrower's Loan Account as Revolving Credit Loans under any section of this Agreement; (v) tax liabilities and (vi) such other matters, events, conditions or contingencies as to which Agent, in its credit judgment, determines reserves should be established from time to time hereunder. In addition to the foregoing, at any time, Lenders shall have the right to establish and/or eliminate reserves against the amount of Revolving Credit Loans for accrued and unpaid royalty payments based on the amount of such accrued and unpaid payments which is shown on Borrower's financial statements at such time. Upon the occurrence of a Default or Event of Default, no reserves shall be eliminated by Agent without the consent of the Lenders. (B) The Revolving Credit Loans shall be used solely for the purchase price and other costs and expenses related to consummation of the Transaction and for Borrower's general operating capital needs to the extent not inconsistent with the provisions of this Agreement. 22 2.2. JOINT AND SEVERAL LIABILITY; RIGHTS OF CONTRIBUTION. (A) Each Borrower states and acknowledges that: (i) pursuant to this Agreement, Borrowers desire to utilize their borrowing potential on a consolidated basis to the same extent possible if they were merged into a single corporate entity; (ii) it has determined that it will benefit specifically and materially from the advances of credit contemplated by this Agreement; (iii) it is both a condition precedent to the obligations of Agent and Lenders hereunder and a desire of the Borrowers that each Borrower execute and deliver to Agent and Lenders this Agreement; and (iv) Borrowers have requested and bargained for the structure and terms of and security for the advances contemplated by this Agreement. (B) Each Borrower hereby irrevocably and unconditionally: (i) agrees that, subject to the provisions of SECTION 1.6 hereof, it is jointly and severally liable to Agent and Lenders for the full and prompt payment of the Obligations and the performance by each Borrower of its obligations hereunder in accordance with the terms hereof; (ii) agrees to fully and promptly perform all of its obligations hereunder with respect to each advance of credit hereunder as if such advance had been made directly to it; and (iii) agrees as a primary obligation to indemnify Agent and Lenders on demand for and against any loss incurred by Agent or Lenders as a result of any of the obligations of any Borrower being or becoming void, voidable, unenforceable or ineffective for any reason whatsoever, whether or not known to Agent or any Lender or any Person, the amount of such loss being the amount which Agent or such Lender would otherwise have been entitled to recover from Borrower. (C) It is the intent of each Borrower that the indebtedness, obligations and liability hereunder of no one of them be subject to challenge on any basis. Accordingly, as of the date hereof, the liability of each Borrower under this SECTION 2.2, together with all of its other liabilities to all Persons as of the date hereof and as of any other date on which a transfer is deemed to occur by virtue of this Agreement, calculated in amount sufficient to pay its probable net liabilities on its existing Indebtedness as the same become absolute and matured ("DATED LIABILITIES") is, and is to be, less than the amount of the aggregate of a fair valuation of its Property as of such corresponding date ("DATED ASSETS"). To this end, each Borrower under this SECTION 2.2 (i) grants to and recognizes in each other Borrower, ratably, rights of subrogation and contribution in the amount, if any, by which the Dated Assets of such Borrower, but for the aggregate of subrogation and contribution in its favor recognized herein, would exceed the Dated Liabilities of such Borrower or, as the case may be, (ii) acknowledges receipt of and recognizes its right to subrogation and contribution ratably from the other Borrower in the amount, if any, by which the Dated Liabilities of such Borrower, but for the aggregate of subrogation and contribution in its favor recognized herein, would exceed the Dated Assets of such Borrower under this SECTION 2.2. In recognizing the value of the Dated Assets and the Dated Liabilities, it is understood that Borrowers will recognize, to at least the same extent of their aggregate recognition of liabilities hereunder, their rights to subrogation and contribution hereunder. It is a material objective of this SECTION 2.2 that each Borrower recognizes rights to subrogation and contribution rather than be deemed to be insolvent (or in contemplation thereof) by reason of any arbitrary interpretation of its joint and several obligations hereunder. 23 2.3. MANNER OF BORROWING REVOLVING CREDIT LOANS. Borrowings under the credit facility established pursuant to SECTION 2.1 hereof shall be as follows: (A) A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower may give Agent notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date; (ii) the becoming due of any amount required to be paid under this Agreement or the Notes as interest shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest; (iii) the becoming due of any amount required to be paid under the Notes as principal shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date for the amount required to pay such principal; (iv) any payment made by Agent pursuant to a Letter of Credit issued by Agent or pursuant to the Fleet Bank Risk Participation Agreement or any other LC Risk Participation Agreement which is not immediately reimbursed by Borrower (each such unreimbursed payment made by Agent being referred to individually as an "LC PAYMENT") shall be deemed irrevocably to be a request for a Revolving Credit Loan on the date such LC Payment was made; (v) any payment made by Agent pursuant to an FX Guaranty or FX Contract which is not immediately reimbursed by Borrower (each such unreimbursed payment made by Agent being referred to individually as a "FX PAYMENT") shall be deemed irrevocably to be a request for a Revolving Credit Loan on the date such FX Payment was made; and (vi) the becoming due of any other Obligations shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount then so due. (B) Borrower hereby irrevocably authorizes Agent to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, pursuant to this SECTION 2.3 as follows: (i) the proceeds of each Revolving Credit Loan requested under SECTION 2.3(A)(I) shall be disbursed by Agent in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by Borrower and Agent from time to time; and (ii) the proceeds of each Revolving Credit Loan requested under SECTION 2.3(A)(II), (III) OR (IV) shall be disbursed by Agent by way of direct payment of the relevant Obligation. (C) SETTLEMENT. On or about 10:00 A.M. (Dallas, Texas time) on Friday of each week during the term of this Agreement (or, if any such Friday is not a Business Day, the next preceding Business Day), Agent shall notify each Lender by telephone (confirmed immediately by facsimile or cable), facsimile or cable of (i) the terms of Borrower's Borrowings at the time of such notice and the amount of such Lender's Revolving Credit Percentage of such Borrowings, (ii) the aggregate principal amount of all Letters of Credit issued in connection with this Agreement and outstanding at the end of such week, the aggregate amount of any LC Payments made by Agent, such Lender's participation therein and the total amount of commissions paid to the Lenders with respect thereto, and (iii) the aggregate amount of U.S. Dollar Equivalents of all FX Contracts outstanding, the aggregate amount of any FX Payments made by Agent, Fleet's participation therein and the total amount of commissions paid to Fleet 24 with respect thereto. Contemporaneously with the giving of such notice, Agent shall deliver to each Lender copies of (i) any Letters of Credit which were issued during such week, (ii) any LC Risk Participation Agreements which were executed during such week, and (iii) any FX Contracts and FX Guaranties which were issued during such week. Each Lender shall, before 2:00 P.M. (Dallas, Texas time) on the day of such notice, deposit with Agent the amount of such Lender's Revolving Credit Percentage of such Borrowings and/or LC Payments and Fleet shall, before 2:00 P.M. (Dallas, Texas time) on the day of such notice, deposit with Agent 100% of such FX Payments in immediately available funds. In the event of any failure by a Lender to make an Advance required hereunder, the other Lenders may (but shall not be required to) purchase (on a pro rata basis, according to their respective Revolving Credit Percentages) such Lender's Revolving Credit Percentage of such Borrowings and/or LC Payments. Upon the failure of a Lender to make an Advance required to be made by it hereunder, Agent shall use good faith efforts to obtain one or more banks, acceptable to the Lenders, to replace such Lender, but neither Agent nor any other Lender shall have any liability or obligation whatsoever as a result of the failure to obtain a replacement for such Lender. Lenders hereby agree with Borrower and Agent, and hereby direct Agent, that Agent may assume (i) that each notified Lender will make such Lender's Revolving Credit Percentage of the Borrowings and/or LC Payments, and (ii) that Fleet will make its 100% portion of the FX Payments available to Agent in accordance with the terms of this SECTION 2.3(C) and Agent shall, in reliance upon such assumption, make available a corresponding amount to or on behalf of Borrower on the requested date of each Borrowing or make the LC Payment of FX Payment, subject to the terms and conditions of this Agreement. If and to the extent any Lender shall not make its Revolving Credit Percentage of any Borrowing or LC Payment or Fleet shall not make its 100% portion of the FX Payment available to Agent, Borrower agrees to repay to Agent forthwith on demand such corresponding amount. Each Lender shall be solely responsible for its Revolving Credit Percentage of any Borrowing or LC Payment hereunder, and Fleet shall be solely responsible for its 100% portion of any FX Payment hereunder, and in no event shall Agent or any Lender (including Agent in its capacity as a Lender) bear any financial risk for the failure of any other Lender to make an Advance required hereunder. 2.4. ADDITIONAL PROVISIONS REGARDING EURODOLLAR LOANS. (A) MANNER OF BORROWING A EURODOLLAR LOAN. Borrower shall give Agent notice of its intention to either (i) borrow a Eurodollar Loan or (ii) designate a portion of the Base Rate Loans to bear interest based upon the Eurodollar Base Rate, in the form of EXHIBIT R attached hereto (a "EURODOLLAR BORROWING NOTICE"), in which notice Borrower shall specify (x) the aggregate amount of such Eurodollar Loan, (y) the requested date of such Eurodollar Loan, and (z) the Eurodollar Interest Period applicable thereto. Borrower shall give Agent the Eurodollar Borrowing Notice by 11:00 A.M. (Dallas, Texas time) on the date which is at least three (3) Business Days prior to the requested date of the Eurodollar Loan. With respect to such Eurodollar Loans, (I) each Eurodollar Loan shall be in a principal amount of not less than One Million Dollars ($1,000,000) and if greater than One Million Dollars ($1,000,000), in integral multiples of Five Hundred Thousand Dollars ($500,000), (II) no more than four (4) Eurodollar Interest Periods may be in existence at any one time, and (III) Borrower may not request a 25 Eurodollar Loan if there exists a Default or Event of Default. Borrower shall select Eurodollar Interest Periods with respect to Eurodollar Loans so that no Eurodollar Interest Period expires after the end of the Original Term, or if extended pursuant to SECTION 3.2, any Renewal Term. An outstanding Revolving Credit Loan may be converted to a Eurodollar Loan at any time subject to the provisions of this SECTION 2.4. Agent shall advise the Lenders of any notice given pursuant to this SECTION 2.4(A) and of each Lender's portion of the requested borrowing by 2:00 P.M. (Dallas, Texas time) on the date the notice was given to Agent by Borrower. (B) INTEREST ON EURODOLLAR LOANS. Each Eurodollar Loan shall bear interest from and including the first day of the Eurodollar Interest Period applicable thereto (but not including the last day of such Eurodollar Interest Period) at the interest rate determined as applicable to such Eurodollar Loan, but interest on such Eurodollar Loan shall be payable as provided in SECTION 3.1(A). If at the end of a Eurodollar Interest Period for an outstanding Eurodollar Loan, Borrower has failed to deliver to Agent a new Eurodollar Borrowing Notice with respect to such Eurodollar Loan or to pay such Eurodollar Loan, then such Eurodollar Loan shall be converted to a Base Rate Loan, and shall be subject to all other terms and conditions of this Agreement, applicable to Base Rate Loans on and after the last day of such Eurodollar Interest Period until paid or until the effective date of a new Eurodollar Borrowing Notice with respect thereto. (C) AVAILABILITY OF EURODOLLAR LOANS. If Agent or any Lender determines that maintenance of any Eurodollar Loans would violate any applicable law, rule, regulation or directive, whether or not having the force of law, Agent shall, upon receipt of notice of such violation, suspend the availability of Eurodollar Loans and require any Eurodollar Loans outstanding to be repaid; or if Agent or any Lender determines that (x) deposits of a type or maturity appropriate to match fund Eurodollar Loans are not available or (y) the Eurodollar Base Rate does not accurately reflect the cost of making a Eurodollar Loan, then Agent shall suspend the availability of Eurodollar Loans after the date it receives notice of any such determination. (D) FUNDING INDEMNIFICATION. If any payment of a Eurodollar Loan occurs on a date which is not the last day of the applicable Eurodollar Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Loan is not made on the date specified by Borrower because Borrower has not satisfied the conditions precedent to such Eurodollar Loan contained in this Agreement or has otherwise breached the terms of this Agreement, Borrower will indemnify Agent and Lenders for any loss or cost incurred by them resulting therefrom, including without limitation any loss or cost in liquidating or employing deposits acquired to fund or maintain the Eurodollar Loan. (E) LENDER STATEMENTS: SURVIVAL OF INDEMNITY. Within sixty (60) days of the date upon which Agent suspends the availability of Eurodollar Loans under SECTION 2.4(C) hereof or learns of any loss or cost for which Borrower has indemnified Agent and/or a Lender under SECTION 2.4(D) hereof, Agent and/or such Lender shall deliver a written statement as to the amount due under SECTION 2.4(C) or SECTION 2.4(D). Such written statement shall set forth in reasonable detail the calculations upon which Agent and/or such Lender determined such amount and shall be final, conclusive and binding on Borrower in the absence of manifest error. 26 Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though Agent and/or such Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Base Rate applicable to such Eurodollar Loan whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by Borrower of the written statement. 2.5. YIELD PROTECTION. If either (i) the adoption after the date hereof of any applicable law, rule or regulation, or any change after the date hereof therein, or any change after the date hereof in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Lender with any request or directive (whether or not having the force of law) after the date hereof of any such authority, central bank or comparable agency shall subject any Lender to any additional tax (including without limitation any United States interest equalization or similar tax, however named), duty or other charge with respect to any Eurodollar Loan or a Lender's obligation to compute interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate, or shall change after the date hereof the basis of taxation of payments to a Lender of the principal of or interest on any Eurodollar Loan or any other amounts due under this Agreement in respect of any Eurodollar Loan or a Lender's obligation to compute the interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate, or (ii) any governmental authority, central bank or other comparable authority shall at any time after the date hereof impose, modify or deem applicable any reserve (other than the Eurodollar Reserve Requirement), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, a Lender, or shall impose on a Lender (or its eurodollar lending office) or any relevant interbank eurodollar market any other condition affecting any Eurodollar Loan or a Lender's obligation to compute the interest on the principal balance of any Eurodollar Loan at a rate based upon the Eurodollar Base Rate; and the result of any of the foregoing is to increase the cost to a Lender of maintaining any Eurodollar Loans, or to reduce the amount of any sum received or receivable by a Lender under this Agreement by an amount deemed by such Lender to be material, then upon demand by such Lender, Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. Such Lender will promptly notify Borrower and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this SECTION 2.5. A certificate of such Lender claiming compensation under this SECTION 2.5 and setting forth the additional amount or amounts to be paid to such Lender hereunder shall be conclusive in the absence of manifest error. 2.6. LETTERS OF CREDIT, LC RISK PARTICIPATION AGREEMENTS. If requested to do so by Borrower and subject to the terms of this Agreement and any documents executed in connection with any Letter of Credit, the Fleet Bank Risk Participation Agreement, or any other LC Risk Participation Agreement, Agent shall issue its, or cause Bank to issue Letters of Credit for the account of Borrower or, in connection with a standby Letter of Credit (but in no event in connection with a documentary Letter of Credit) issued by another Person for the account of Borrower, execute an LC Risk Participation Agreement, PROVIDED THAT no Event of Default then exists. The aggregate face amount of all standby Letters of Credit issued by Agent and Bank and 27 the aggregate face amount of all standby Letters of Credit which are covered by an LC Risk Participation Agreement (other than the Fleet Bank Risk Participation Agreement) at any time shall not exceed $1,000,000. The aggregate face amount of all documentary Letters of Credit issued by Agent and Bank outstanding at any time shall not exceed $15,000,000. No Letter of Credit issued by Agent or Bank or covered by an LC Risk Participation Agreement may have an expiry date that is after the last day of the Original Term, or, if this Agreement remains in effect after the Original Term, after the last day of any Renewal Term then in effect; PROVIDED, HOWEVER, that so long as no Default or Event of Default exists, a Letter of Credit may have an expiry date up to one hundred eighty (180) days after the last day of the Original Term or after the last day of the Renewal Term then in effect IF Borrower provides to Agent, for the benefit of Lenders, on or before the last day of the Original Term or the Renewal Term then in effect, cash collateral equal to the face amount of such Letter of Credit. Further, no documentary Letter of Credit issued by Agent or Bank shall have a term exceeding 180 days, and no standby Letter of Credit issued by Agent or Bank or standby Letter of Credit covered by an LC Risk Participation Agreement (other than the Fleet Bank Risk Participation Agreement) shall have a term exceeding one year. A documentary Letter of Credit may only be issued by Agent or Bank if such documentary Letter of Credit is issued in connection with the purchase of inventory by Borrower. By the issuance of a Letter of Credit hereunder by Agent and without further action on the part of the Agent or the Lenders, each Lender hereby accepts from the Agent an undivided participation (which participation shall be nonrecourse to the Agent) in such Letter of Credit and in each LC Payment equal to such Lender's pro rata (based on its Revolving Credit Percentage) share of such LC Payment under such Letter of Credit, effective upon the issuance of such Letter of Credit and, in addition, without further action on the part of the Agent or the Lenders, each Lender agrees to purchase, and Agent agrees to sell, an undivided participation equal to such Lender's pro rata (based on its Revolving Credit Percentage) share, in any LC Payment made pursuant to the Fleet Bank Risk Participation Agreement or any other LC Risk Participation Agreement. Each Lender hereby absolutely and unconditionally assumes, as primary obligor and not as a surety, and agrees to pay and discharge, and to indemnify and hold the Agent harmless from liability in respect of such Lender's pro rata share of the amount of any LC Payment. Each Lender acknowledges and agrees that its obligation to acquire participations in either (x) each Letter of Credit issued by Agent or (y) each LC Payment made by Agent and its obligation to make the payments specified herein, and the right of the Agent to receive the same, in the manner specified herein, are absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, the occurrence and continuance of an Event of Default hereunder, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. 2.7. ALL LOANS TO CONSTITUTE ONE OBLIGATION. All Loans shall constitute one general obligation of Borrower, and shall be secured by Agent's security interest, for the benefit of Lenders, in and Lien upon all of the Collateral, and by all other security interests and Liens heretofore, now or at any time or times hereafter granted by Borrower to Agent, for the benefit of Lenders. 2.8. LOAN ACCOUNT. Agent shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower on the Loans and all 28 proceeds of Collateral which are finally paid to Lenders, and may record therein, in accordance with customary accounting practice, all charges and expenses properly chargeable to Borrower hereunder. 2.9. SHARING OF SETOFFS. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, including, but not limited to, a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, obtain payment (voluntary or involuntary) in respect of any Loan made by it or in respect of a participation held by it in a Letter of Credit or an LC Payment as a result of which the unpaid principal portion of the Loans made by it plus the participations held by it in Letters of Credit and LC Payments shall be proportionately less than the unpaid principal portion of the Loans made by any other Lender plus outstanding participations held by such other Lender in Letters of Credit and LC Payments, it shall be deemed to have simultaneously purchased from such other Lender a participation in the Loans made by such other Lender and outstanding participations held by such Lender in Letters of Credit and LC Payments, so that (a) the aggregate unpaid principal amount of the Loans and participations in Loans made by it plus the outstanding participations held by it in Letters of Credit and LC Payments shall be in the same proportion to (b) the sum of the aggregate unpaid principal amount of the Loans plus the aggregate participations held by all Lenders in Letters of Credit and LC Payments then outstanding as (i) the sum of the principal amount of the Loans and participations in the Loans held by it plus participations held by it in the Letters of Credit and LC Payments prior to such exercise of banker's lien, setoff or counterclaim was to (ii) the sum of the aggregate unpaid principal amount of the Loans outstanding plus the aggregate participations held by all Lenders in the Letters of Credit and LC Payments prior to such exercise of banker's lien, setoff or counterclaim; PROVIDED, HOWEVER, that if any such purchase or purchases or adjustments shall be made pursuant to this SECTION 2.9 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustments restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or another Lender's participating interest in any Letters of Credit and LC Payments deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by Borrower to such Lender as fully as if such Lender held a Loan or direct participation in a Letter of Credit or LC Payment in the amount of such participation. 2.10. FX CONTRACTS AND FX GUARANTIES. (A) FX CONTRACTS. Agent agrees, for so long as no Default or Event of Default exists and if requested by Borrower, to cause Bank to enter into FX Contracts with Borrower, so long as the aggregate amount of all FX Contracts entered into with Borrower does not exceed $2,000,000 in U.S. Dollar Equivalents. Each FX Contract shall be in form and substance satisfactory to Agent and Bank and, without limiting the generality of the foregoing, no FX Contract shall have a settlement date that is beyond the earlier to occur of (i) 150 days from the effective date thereof or (ii) the last day of the Original Term (or if this Agreement is renewed in 29 accordance with SECTION 3.2 of this Agreement, the last day of the Renewal Term). Borrower shall repay all of its obligations to Bank under each FX Contract in accordance with the terms of the confirmation of such FX Contract. (B) FX GUARANTIES. Agent agrees, for so long as no Default or Event of Default exists and if requested by Borrower, to execute and deliver to Bank one or more FX Guaranties by which Agent shall guarantee the payment and performance of Borrower's obligations to Bank under each FX Contract; provided, that the aggregate amount of Agent's obligations under the FX Guaranties shall not exceed $2,000,000 in U.S. Dollar Equivalents, plus costs and expenses of Bank incurred in connection with such FX Contracts. In no event shall Agent have any liability with respect to any FX Contract that is entered into by Borrower and Bank after the date on which Bank and Borrower each has received notice from Agent that a Default or Event of Default exists or would result as a consequence of Agent's guaranteeing the payment and performance of Borrower's obligation sunder such FX Contract. Any amounts paid by Agent under any FX Guaranty, including, without limitation, any costs or expenses incurred by Agent or Bank due to the failure of Borrower to perform its duties under the FX Contracts, shall be treated as Revolving Credit Loans, shall be secured by all of the Collateral and shall bear interest and be payable at the same rate and in the same manner as Base Rate Revolving Credit Loans. In the event that Revolving Credit Loans are not, for any reason, promptly made to satisfy all then existing such Obligations, Fleet hereby agrees to pay Agent, on demand, an amount equal to such Obligations, and until so paid, such amount shall be secured by the Collateral and shall bear interest and be payable at the same rate and in the same manner as Base Rate Revolving Credit Loans. (C) FLEET'S PARTICIPATION. Immediately upon the execution of each FX Contract or FX Guaranty under this Agreement, Fleet shall be deemed to have irrevocably and unconditionally purchased and received from Agent, without recourse or warranty, a 100% undivided interest and participation in such FX Contract, FX Guaranty and in each FX Payment made in respect to such FX Contract to the extent of Fleet's 100% portion of such FX Payment. Fleet hereby absolutely and unconditionally assumes, as primary obligor and not as a surety, and agrees to pay and discharge, and to indemnify and hold the Agent harmless from liability in respect of Fleet's 100% share of the amount of any FX Payment. Fleet acknowledges and agrees that its obligation to acquire participations in either (x) each FX Guaranty issued by Agent or (y) each FX Payment made by Agent and its obligation to make the payments specified herein, and the right of the Agent to receive the same, in the manner specified herein, are absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, the occurrence and continuance of an Event of Default hereunder, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (D) FX CONTRACT REQUESTS. A request for an FX Contract shall be made in the following manner: Borrower may make a request for a telephone quote from Bank with respect to a proposed FX Contract in a specified amount of a specified foreign currency and with a specific settlement date. Borrower may make a request for such FX Contract not later than 2:00 p.m. Dallas, Texas time on the Business Day on which Borrower proposes that such FX Contract become effective; provided, that no such request may be made at a time when there exists a 30 Default or Event of Default. Prior to, or at the time of, such request Borrower shall have delivered to Bank corporate resolutions authorizing Borrower to enter into such FX Contract (which authorization may be general rather than specific to such FX Contract), an indemnity agreement with respect to electronically transmitted instructions relating to such FX Contract (which indemnity may be general rather than specific to such FX Contract) and such other customary documentation as Bank shall reasonably require, all in form and substance reasonably satisfactory to Bank. In no event shall Bank enter into an FX Contract unless Bank has received from Agent an FX Guaranty covering such FX Contract. SECTION 3. INTEREST, FEES, TERM AND REPAYMENT 3.1. INTEREST, FEES AND CHARGES. (A) INTEREST. Outstanding principal on the Loans shall bear interest, calculated daily (computed on the actual days elapsed over a year of 360 days), at the following rates per annum (individually called, as applicable, an "APPLICABLE ANNUAL RATE"): (i) Eurodollar Revolving Credit Loans shall bear interest at a rate per annum equal to two percent (2.00%) above the Eurodollar Base Rate for the Eurodollar Interest Period applicable thereto, and (ii) Base Rate Revolving Credit Loans shall bear interest at a fluctuating rate per annum equal to one-quarter percent (0.25%) above the Base Rate. Unless the Borrower provides a Eurodollar Borrowing Notice to the Agent in accordance with SECTION 2.4 irrevocably electing that all or a portion of the Loans are to be designated as Eurodollar Loans, all Loans shall be considered Base Rate Loans. The Applicable Annual Rate for all Base Rate Loans shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the date hereof, but if this Agreement is executed on a day that is not a Business Day, the Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the last Business Day immediately preceding the date hereof. For the purpose of computing interest, all items of payment received by Agent, for the benefit of Lenders, shall be applied by Agent (subject to final payment of all drafts and other items received in form other than immediately available funds) against the Obligations on the second Business Day after receipt. The determination of when a payment is received by Agent will be made in accordance with SECTION 3.5. (B) DEFAULT RATE OF INTEREST. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of the Loans and other Obligations shall bear interest, calculated daily (computed on the actual days elapsed over a year of 360 days), at 2.00% above the Applicable Annual Rate or other applicable rate of interest (a "DEFAULT RATE"). (C) MAXIMUM RATE OF INTEREST. Notwithstanding the foregoing, (i) if at any time the amount of interest computed as provided in the Loan Documents would exceed the amount of such interest computed upon the basis of the maximum rate of interest permitted by applicable state or federal law in effect from time to time hereafter (the "MAXIMUM LEGAL RATE"), 31 the interest payable under this Agreement shall be computed upon the basis of the Maximum Legal Rate, but any subsequent reduction in the Applicable Annual Rate, Default Rate or other rate, as applicable, shall not reduce such interest thereafter payable hereunder below the amount computed on the basis of the Maximum Legal Rate until the aggregate amount of such interest accrued and payable under this Agreement equals the total amount of interest which would have accrued if such interest had been at all times computed solely as provided in the Loan Documents; and (ii) unless preempted by federal law, the Applicable Annual Rate, Default Rate or other rate, as applicable, from time to time in effect hereunder may not exceed the "indicated ceiling rate" from time to time in effect under Tex. Rev. Civ. Stat. Ann. art 5069-1.04(c) (Vernon 1987). If the applicable state or federal law is amended in the future to allow a greater rate of interest to be charged under this Agreement than is presently allowed by applicable state or federal law, then the limitation of interest hereunder shall be increased to the maximum rate of interest allowed by applicable state or federal law as amended, which increase shall be effective hereunder on the effective date of such amendment, and all interest charges owing to Lenders by reason thereof shall be payable upon demand. (D) EXCESS INTEREST. No agreements, conditions, provisions or stipulations contained in this Agreement or any other instrument, document or agreement between Borrower, Agent and/or any Lender, or default of Borrower, or the exercise by Agent or Lenders of the right to accelerate the payment of the maturity of principal and interest, or to exercise any option whatsoever contained in this Agreement or any other Loan Document, or the arising of any contingency whatsoever, shall entitle Agent or any Lender to contract for, charge, or receive, in any event, interest exceeding the Maximum Legal Rate. In no event shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate and all agreements, conditions or stipulations, if any, which may in any event or contingency whatsoever operate to bind, obligate or compel Borrower to pay a rate of interest exceeding the Maximum Legal Rate, shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such Maximum Legal Rate. In the event any interest is contracted for, charged or received in excess of the Maximum Legal Rate ("EXCESS"), Borrower acknowledges and stipulates that any such contract, charge, or receipt shall be the result of an accident and BONA FIDE error, and that any Excess received by Agent and/or any Lender shall be applied, first, to reduce the principal then unpaid hereunder; second, to reduce the other Obligations; and third, returned to Borrower, it being the intention of the parties hereto not to enter at any time into a usurious or otherwise illegal relationship. Borrower recognizes that, with fluctuations in the Base Rate and the Maximum Legal Rate, such a result could inadvertently occur. By the execution of this Agreement, Borrower covenants that the credit or return of any Excess shall constitute the acceptance by Borrower of such Excess. For the purpose of determining whether or not any Excess has been contracted for, charged or received by Agent and/or Lender, all interest at any time contracted for, charged or received by Agent and/or Lender in connection with the Loan Documents shall be amortized, prorated, allocated and spread in equal parts during the entire term of this Agreement and the Loans. (E) INCORPORATION BY THIS REFERENCE. The provisions of SECTIONS 3.1(C) AND 3.1(D) shall be deemed to be incorporated into every document or communication relating to the Obligations which sets forth or prescribes any account, right or claim or alleged account, right or 32 claim of Agent and/or any Lender with respect to Borrower (or any other obligor in respect of Obligations), whether or not any provision of SECTION 3.1 is referred to therein. All such documents and communications and all figures set forth therein shall, for the sole purpose of computing the extent of the Obligations and obligations of the Borrower (or other obligor) asserted by Agent and/or any Lender thereunder, be automatically re-computed by any Borrower or obligor, and by any court considering the same, to give effect to the adjustments or credits required by SECTION 3.1(D). (F) UNUSED FACILITY FEE. From the date hereof, Borrower agrees to pay to Agent, for the account of Lenders, in accordance with their respective Revolving Credit Percentages, a monthly unused facility fee, equal to one-quarter of one percent (0.25%) per annum (calculated on the basis of a year of 360 days) of the difference between the Revolving Credit Commitment and the sum of (i) the Average Monthly Loan Balance for the Revolving Credit Loans for such month, PLUS (ii) the average face amount of outstanding Letters of Credit issued by Agent, PLUS (iii) the average face amount of outstanding Letters of Credit which are covered by an LC Risk Participation Agreement for such month (the sum of CLAUSES (I), (II) and (III) above being referred to as the "AVERAGE MONTHLY REVOLVING CREDIT LOANS USAGE"), payable in arrears with the first payment being due on August 1, 1997, and continuing regularly thereafter during the term of this Agreement, and upon the termination hereof. In no event, however, shall any charge be payable for any month for which the Average Monthly Revolving Credit Loans Usage was less than the Revolving Credit Commitment by reason of any Lender's declining to extend Revolving Credit Loans to Borrower in amounts equal to the Borrowing Base, to the extent of such refusal, for any month for which the Average Monthly Revolving Credit Loans Usage was less than the Revolving Credit Commitment by reason of Agent's determination to reduce applicable advance rates under the Borrowing Base, to the extent of such reduction, or for any month during which or after Agent or Lenders accelerate the maturity or demands payment of the Obligations by reason of the occurrence of any Event of Default. (G) CAPITAL ADEQUACY CHARGE. In the event that Agent or any Lender shall have determined that the adoption after the date hereof of any law, rule or regulation regarding capital adequacy, or any change therein or in the interpretation or application thereof or compliance by Agent or any Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any central bank or governmental authority, does or shall have the effect of reducing the rate of return on Agent or any Lenders' capital as a consequence of its obligations hereunder to a level below that which Agent or such Lender could have achieved but for such adoption, change or compliance (taking into consideration Agent's and each Lender's policies with respect to capital adequacy) by an amount deemed by Agent or such Lender, in its sole discretion, to be material, then from time to time, after submission by Agent or such Lender to Borrower of a written demand therefor, the Borrower shall pay to Agent or such Lender such additional amount or amounts as will compensate Agent or such Lender for such reduction. A certificate of Agent or any Lender claiming entitlement to payment as set forth above shall be conclusive in the absence of manifest error. Such certificate shall set forth the nature of the occurrence giving rise to such payment, the additional amount or amounts to be paid to Agent or such Lender, and the method by which such amounts were determined. In 33 determining such amount, Agent or such Lender may use any reasonable averaging and attribution method. (H) LETTER OF CREDIT; LC FEES; FX GUARANTY FEES. (I) As additional consideration for Agent's issuing its or causing Bank to issue its Letters of Credit for Borrower's account or for entering into LC Risk Participation Agreements at Borrower's request pursuant to SECTION 2.6 hereof, Borrower agrees to pay Agent, for the account of Lenders in accordance with their respective Revolving Credit Percentages, a fee equal to one percent (1.00%) per annum of the face amount of each standby Letter of Credit issued by Agent or Bank for the account of Borrower, and each standby Letter of Credit issued by a Person and covered by an LC Risk Participation Agreement which fee shall be deemed fully earned upon issuance of each such standby Letter of Credit, and shall be due and payable upon the issuance of each such standby Letter of Credit. Other fees and charges relevant to standby Letters of Credit are set forth in EXHIBIT T attached hereto. The fees and charges payable by Borrower in connection with a documentary Letter of Credit issued for the account of Borrower by Agent or Bank or covered by an LC Risk Participation Agreement are shown on EXHIBIT T attached hereto. No fee payable by Borrower under this SECTION 3.1(H) or as set forth on EXHIBIT T attached hereto shall be subject to rebate or proration upon the termination of this Agreement for any reason. (II) Borrower shall pay to Agent, for the account of Fleet, for FX Guaranties and FX Contracts, a fee equal to 2.50% per annum of the FX Amount, payable monthly in arrears on the first day of each calendar month hereafter, which fees and charges shall be fully earned and due and payable upon issuance of each FX Guaranty or FX Contract and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. Borrower shall also pay to Agent, for the account of Agent or Bank, as applicable, its respective normal and customary charges associated with the execution of FX Guaranties and FX Contracts, payable monthly in arrears on the first day of each calendar month hereafter. (I) AGENCY FEE. Borrower agrees to pay to Agent an annual agency fee in the amount of $35,000, first payable on August 9, 1997, and subsequently payable on each anniversary thereafter during the term of this Agreement. Each such fee shall be deemed fully earned and nonrefundable as of its due date, and no fee payable under this SECTION 3.1(I) shall be subject to rebate or proration upon the termination of this Agreement for any reason. Upon demand therefor by Agent, Borrower shall promptly reimburse Agent for all out-of-pocket costs incurred by Agent in connection with any and all collateral monitoring functions deemed necessary or appropriate by Agent, in its sole discretion. (J) RESTRUCTURING FEE. Borrower agrees to pay to Agent on the Closing Date, for the account of Lenders, an amount equal to $150,000.00 which fee shall be deemed fully earned and non-refundable as of the Closing Date. Agent shall then pay to Boston $61,800.00 of such fee. 34 3.2. TERM OF AGREEMENT. Subject to Lenders' right to cease making Loans to Borrower at any time upon or after the occurrence of a Default or Event of Default, this Agreement shall be in effect for the period of time from the date hereof, through and including the date which is three (3) years after the Closing Date (the "ORIGINAL TERM") and, unless any party hereto elects to terminate this Agreement by giving notice of such election not less than ninety (90) days before the end of the Original Term, this Agreement shall automatically be extended for an additional one-year period (the "RENEWAL TERM"), through and including the date which is four years after the Closing Date, whereupon the maturity of each of the Notes shall be extended for an additional one-year period upon the same terms as are in existence on the date of such renewal. 3.3. EARLY TERMINATION BY BORROWER. (A) Upon at least forty-five (45) days prior written notice to Agent, Borrower may, at its option, terminate this Agreement; PROVIDED, HOWEVER, no such termination shall be effective until (i) Borrower has paid all of the Obligations in immediately available funds, (ii) all Letters of Credit have expired or been confirmed by another Person satisfactory to Lenders, in their credit judgment, and (iii) all FX Contracts and FX Guaranties have settled or been terminated by the parties thereto. (B) At the effective date of any such termination by Borrower, Borrower shall pay to Agent, for the benefit of Lenders, in accordance with their respective Revolving Credit Percentage (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents), as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to one-half of one percent (0.5%) of the Average Daily Loan Balance for the one year period preceding the date of termination if the termination occurs during the period from the Closing Date to and including the day immediately prior to the first anniversary of the Closing Date. No prepayment fee shall be payable if the termination occurs during the period on or after the first anniversary of the Closing Date. (C) All of the Obligations shall be forthwith due and payable upon any termination of this Agreement. Except as otherwise expressly provided for in this Agreement or the other Loan Documents, no termination or cancellation (regardless of cause or procedure) of this Agreement or any of the other Loan Documents shall in any way affect or impair the rights, powers or privileges of Agent and/or any Lender or the obligations, duties or liabilities of Borrower or Agent and/or any Lender in any way relating to (i) any transaction or event occurring prior to such termination or cancellation or (ii) any of the undertakings, agreements, covenants, warranties or representations of Borrower contained in this Agreement or any of the other Loan Documents. All such undertakings, agreements, covenants, warranties and representations of Borrower shall survive such termination or cancellation and Agent, for the benefit of Lenders, shall retain its Liens in the Collateral and all of its rights and remedies under this Agreement and the other Loan Documents notwithstanding such termination or cancellation until all of the Obligations have been paid in full, in immediately available funds. 35 3.4. PAYMENTS. Except where evidenced by notes or other instruments issued or made by Borrower to Agent or any Lender specifically containing payment provisions which are in conflict with this SECTION 3.4 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: (A) Principal payable on account of Revolving Credit Loans made by Lenders to Borrower pursuant to SECTION 2.1 of this Agreement shall be payable by Borrower to Agent, for the account of Lenders, immediately upon the earliest of (i) the receipt by Agent or Borrower of any proceeds of any of the Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which Agent or Lenders elect to accelerate the maturity and payment of such Loans, or (iii) termination of this Agreement pursuant to SECTION 3.3 hereof; PROVIDED, HOWEVER, that if the principal balance of Revolving Credit Loans outstanding at any time shall exceed the Borrowing Base at such time, Borrower shall, on demand, repay the Revolving Credit Loans in an amount sufficient to reduce the aggregate unpaid principal amount of such Revolving Credit Loans by an amount equal to such excess. (B) Interest accrued on the Revolving Credit Loans shall be due and payable to Agent, for the account of Lenders, on the earliest of (i) the first day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Agent or Lenders elect to accelerate the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to SECTION 3.3 hereof; PROVIDED, HOWEVER, that Borrower hereby irrevocably authorizes Agent, in Agent's sole discretion, to advance to Borrower, and to charge to Borrower's Loan Account hereunder as a Revolving Credit Loan, a sum sufficient each month to pay all interest accrued on the Obligations during the immediately preceding month. (C) Costs, fees and expenses payable pursuant to this Agreement shall be payable by Borrower, on demand by Agent, to Agent, for its benefit and the benefit of Lenders, or to any other Person designated by Lenders in writing. Agent will promptly provide Borrower with written notice detailing any such costs, fees and expenses payable by Borrower. (D) The balance of the Obligations requiring the payment of money, if any, shall be payable by Borrower to Agent and/or to Lenders as and when provided in the Loan Documents, or, if no provision is made in the Loan Documents for payment of any such Obligations, such Obligations shall be payable on demand. 3.5. APPLICATION OF PAYMENTS AND COLLECTIONS. Borrower irrevocably waives the right to direct the application of any and all payments and collections at any time or times hereafter received by Agent or any Lender from or on behalf of Borrower, provided such payments and collections are first applied to the portion of the Obligations then due. Except as provided in the preceding sentence, Borrower does hereby irrevocably agree that Agent shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Agent or its agent against the Obligations, in such manner as Agent may deem advisable, notwithstanding any entry by Agent upon any of its books and records, so long as such payments and collections are first applied to the portion of the Obligations then due. 36 If as the result of collections of Accounts as authorized by SECTION 5.4 hereof a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. Notwithstanding the foregoing, Agent may offset such credit balance against the Obligations upon or after the occurrence of an Event of Default. Payments and collections received by Agent, for the benefit of Lenders, from the Dominion Account or otherwise in Chicago, Illinois (a) before 2:00 p.m. (Dallas, Texas time) on a Business Day shall be deemed received on such Business Day, and (b) after 2:00 p.m. (Dallas, Texas time) on a Business Day shall be deemed received on the next succeeding Business Day, in each case for purposes of determining the amount of Revolving Credit Loans available for borrowing hereunder and for purposes of computing interest on the Loans (subject in each case to final payment of all items and collections received in form other than immediately available funds). 3.6. STATEMENTS OF ACCOUNT. Agent will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Agent absent manifest error shall be deemed final, binding and conclusive upon Borrower unless Agent is notified by Borrower in writing to the contrary within sixty (60) days after the date each account is mailed to Borrower. Such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 4. COLLATERAL: GENERAL TERMS 4.1. SECURITY INTEREST IN COLLATERAL. To secure the prompt payment and performance to Lenders of the Obligations, Borrower hereby grants to Agent, for the benefit of Lenders, a continuing security interest in and Lien upon all of the Property of Borrower described below, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (A) Accounts; (B) Inventory; (C) all accessions to, substitutions for and all replacements, products and cash and non-cash proceeds of (A) and (B) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (D) all books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (A), (B), or (C) above. The security interests in the Collateral are given in renewal, extension and modification of the security interests previously granted in the Collateral to Agent, for the benefit of Lenders, by Borrower (including, without limitation, the security interests granted pursuant to the Second Restated Loan Agreement); such existing security interests in the Collateral described above are not extinguished hereby; and the making, perfection and priority of such existing security interests in the Collateral described above shall continue in full force and effect. 37 4.2. REPRESENTATIONS, WARRANTIES AND COVENANTS -- COLLATERAL. To induce Agent and Lenders to enter into this Agreement, Borrower represents, warrants, and covenants to Agent and Lenders: (A) The Collateral is now and, so long as any of the Obligations are outstanding, will continue to be owned solely by Borrower. No other Person has or will have any right, title, interest, claim, or Lien therein, thereon or thereto other than a Permitted Lien. (B) Except for Liens permitted by SECTION 9.2(H) hereof and as otherwise specifically consented to in writing by Lenders, the Liens granted to Agent, for the benefit of Lenders, shall be first and prior on the Collateral and as to the Accounts and proceeds, including insurance proceeds, resulting from the sale, disposition, or loss thereof. No further action need be taken to perfect the Liens granted to Agent, for the benefit of Lenders, other than the filing of continuation statements under the Code or other applicable law. 4.3. LIEN PERFECTION. Borrower agrees to execute the UCC-1 financing statements provided for by the Code or otherwise together with any and all other instruments, assignments or documents and shall take such other action as may be required to perfect or to continue the perfection of Agent's security interest, for the benefit of Lenders, in the Collateral. Unless prohibited by applicable law, Borrower hereby authorizes Agent to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. 4.4. LOCATION OF COLLATERAL. All Collateral, other than Inventory in transit, will at all times be kept by Borrower at one or more of the business locations set forth in EXHIBIT B or other locations permitted pursuant to SECTION 9.2(M) hereof and shall not, without the prior written approval of Agent, be moved therefrom except, prior to an Event of Default, for (A) sales of Inventory in the ordinary course of business; (B) the storage of Inventory at locations within the continental United States other than those shown on EXHIBIT B if (i) Borrower gives Agent written notice of the new storage location prior to storing Inventory at such location, (ii) Agent's security interest, for the benefit of Lenders, in such Inventory is and continues to be a duly perfected, first priority Lien thereon, (iii) neither Borrower's nor Agent's nor any Lender's right of entry upon the premises where such Inventory is stored, or its right to remove the Inventory therefrom, is in any way restricted, (iv) the owner of such premises agrees with Agent and/or Lenders not to assert any landlord's, bailee's or other Lien in respect of the Inventory for unpaid rent or storage charges, and (v) all negotiable documents and receipts in respect of any Collateral maintained at such premises are promptly delivered to Agent; and (C) temporary transfers of Inventory from a location set forth on EXHIBIT B to another location if done for the limited purpose of additional processing to such Inventory in the ordinary course of Borrower's business. 4.5. INSURANCE OF COLLATERAL. Borrower agrees to maintain and pay for insurance upon all Collateral wherever located, in storage or in transit in vehicles, including goods evidenced by documents, covering casualty, hazard, public liability and such other risks and in such amounts 38 and with a Permitted Insurer to insure Agent's and Lenders' interest in the Collateral. Borrower shall deliver the originals or certified copies of such policies to Lender with satisfactory endorsements naming Agent, for the benefit of Lenders, as loss payee and as mortgagee pursuant to a standard mortgagee clause. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever and a clause that the interest of Agent and Lenders shall not be impaired or invalidated by any act or neglect of Borrower or owner of the Property nor by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance, Agent may, at Borrower's expense, procure the same, but shall not be required to do so. Borrower agrees to deliver to Agent, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. Borrower will maintain, with Permitted Insurers, insurance with respect to its Properties and business against such casualties and contingencies of such type (including public liability, product liability, larceny, embezzlement, or other criminal misappropriation insurance) and in such amounts as is customary in the business or as otherwise reasonably required by Agent. 4.6. PROTECTION OF COLLATERAL. All insurance expenses and all expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion thereof when due, Agent may, at its option, but shall not be required to, pay the same and charge the Loan Account therefor. Borrower agrees to reimburse Agent promptly for any amounts not charged to the Loan Account with interest accruing thereon daily at the Default Rate. All sums so paid or incurred by Agent for any of the foregoing and all costs and expenses (including reasonable attorneys' fees, legal expenses, and court costs) which Agent may incur in enforcing or protecting its Lien on or rights and interest in the Collateral or any of its rights or remedies under any Loan Document or in respect of any of the transactions to be had hereunto, together with interest at the Default Rate, shall be considered Obligations hereunder secured by all Collateral. Neither Agent nor any Lender shall be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto (except for reasonable care in the custody thereof while any Collateral is in Agent's or any Lender's actual possession) or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrower's sole risk. SECTION 5. PROVISIONS RELATING TO ACCOUNTS 5.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. With respect to all Accounts, Borrower represents and warrants to Agent and Lenders that Agent and Lenders may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts, and, unless otherwise indicated in writing to Agent, that with respect to each Account which is represented by Borrower to be an Eligible Account: 39 (A) it is genuine and in all respects what it purports to be, and it is not evidenced by a judgment; (B) it arises out of a completed, BONA FIDE sale and delivery of goods or rendition of services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts or other documents relating thereto and forming a part of the contract between Borrower and the Account Debtor; (C) it is for a liquidated amount maturing as stated in the duplicate invoice covering such sale or rendition of services, a copy of which has been furnished or is available to Agent; (D) such Account, and Agent's security interest, for the benefit of Lenders, therein, is not, and will not be in the future, subject to any offset, Lien, deduction, defense, dispute, counterclaim or any other adverse condition except for disputes resulting in returned goods where the amount in controversy is deemed by Agent to be immaterial, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason; (E) Borrower has made no agreement with any Account Debtor thereunder for any deduction therefrom, except discounts or allowances which are granted by Borrower in the ordinary course of its business for prompt payment and which are reflected in the calculation of the net amount of each respective invoice related thereto; (F) there are no facts, events or occurrences which in any way impair the validity or enforceability thereof or tend to reduce the amount payable thereunder from the face amount of the invoice and statements delivered to Agent with respect thereto; (G) to the best of Borrower's knowledge, the Account Debtor thereunder (i) is Solvent and (ii) had the capacity to contract at the time any contract or other document giving rise to the Account was executed; and (H) Borrower has no knowledge of any fact or circumstance which would impair the validity or collectability of the Account, and to the best of Borrower's knowledge there are no proceedings or actions which are threatened or pending against any Account Debtor thereunder which might result in any material adverse change in such Account Debtor's financial condition or the collectability of such Account. 5.2. ASSIGNMENTS, RECORDS AND SCHEDULES OF ACCOUNTS. If so requested by Agent, Borrower shall execute and deliver to Agent formal written assignments of all of its Accounts monthly, or, if requested by Agent, weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of invoices or invoice registers related thereto. Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and, if requested by Agent, shall submit to Agent on a daily basis a sales and collections report for the preceding day, in form satisfactory to Agent. On or before the fifteenth day of each month from and after the date hereof, Borrower shall deliver to 40 Agent, in form satisfactory to Agent, a detailed aged trial balance of all Accounts existing as of the last day of the preceding month, specifying the names, addresses, face value, dates of invoices and due dates for each Account Debtor obligated on an Account so listed ("SCHEDULE OF ACCOUNTS"), and, upon Agent's request therefor, copies of proof of delivery and the original copy of all documents, including, without limitation, repayment histories and present status reports relating to the Accounts so scheduled and such other matters and information relating to the status of then existing Accounts as Agent shall reasonably request. 5.3. ADMINISTRATION OF ACCOUNTS. (A) Upon the granting of any discounts, allowances or credits by Borrower that are not shown on the face of the invoice for the Account involved, Borrower shall promptly report such discounts, allowances or credits, as the case may be, to Agent and in no event later than the time of its submission to Agent of the next Schedule of Accounts as provided in SECTION 5.2. Upon and after the occurrence of an Event of Default, Agent shall have the right to settle or adjust all disputes and claims directly with the Account Debtor and to compromise the amount or extend the time for payment of the Accounts upon such terms and conditions as Agent may deem advisable, and to charge the deficiencies, costs and expenses thereof, including reasonable attorney's fees, to Borrower. (B) If an Account includes a charge for any tax payable to any governmental taxing authority, Agent is authorized, in its sole discretion, to pay the amount thereof to the proper taxing authority for the account of Borrower and to charge the Loan Account therefor. Borrower shall notify Agent if any Account includes any tax due to any governmental taxing authority and, in the absence of such notice, Agent, for the benefit of Lenders, shall have the right to retain the full proceeds of the Account and shall not be liable for any taxes to any governmental taxing authority that may be due by Borrower by reason of the sale and delivery creating the Account. (C) Whether or not a Default or an Event of Default has occurred, any of Agent's officers, employees or agents shall have the right, at any time or times hereafter, in the name of Agent, any designee of Agent or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with Agent in an effort to facilitate and promptly conclude any such verification process. 5.4. COLLECTION OF ACCOUNTS. (A) To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts for Agent and Lenders. All remittances received by Borrower on account of Accounts shall be held as Lenders' property by Borrower as trustee of an express trust for Lenders' benefit and Borrower shall immediately deposit or cause to be deposited same in the Dominion Account. Agent shall have the right at any time after the occurrence of a Default or an Event of Default to notify Account Debtors that Accounts have been assigned to Agent and Lenders and to collect Accounts directly in its own and Lenders' name and to charge the 41 collection costs and expenses, including reasonable attorneys' fees, to Borrower. Neither Agent nor any Lender has any duty to protect, insure, collect or realize upon the Accounts or preserve rights in them. (B) Borrower shall deposit all proceeds of the Collateral or cause the same to be deposited in kind in a Dominion Account pursuant to a lockbox arrangement with such banks as may be selected by Borrower and be acceptable to Agent. Borrower shall issue to any such banks, an irrevocable letter of instruction directing such banks to deposit all payments or other remittances received in the lockbox to the Dominion Account for application on account of the Obligations. All funds deposited in the Dominion Account shall immediately become the property of Lenders and Borrower shall obtain the agreement by such banks to waive any offset rights against the funds so deposited. Neither Agent nor any Lender assumes any responsibility for such lockbox arrangement, including, without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. SECTION 6. PROVISIONS RELATING TO INVENTORY 6.1. REPRESENTATIONS, WARRANTIES AND COVENANTS. With respect to Inventory, Borrower represents and warrants to Agent and Lenders that Agent and Lenders may rely, in determining which items of Inventory constitute Eligible Inventory, on all statements and representations made by Borrower with respect to any Inventory and that: (A) all Inventory is presently and will continue to be located at Borrower's places of business listed on EXHIBIT B and will not be removed therefrom except as authorized by SECTION 4.4 of this Agreement or in connection with changes in business locations permitted under SECTION 9.2(M) of this Agreement; (B) no Inventory is now, nor shall any Inventory at any time or times hereafter be, stored with a bailee, warehouseman or similar party without Agent's prior written consent and, if Agent gives such consent, Borrower will concurrently therewith cause any such bailee, warehouseman, or similar party to issue and deliver to Agent, in form and substance acceptable to Agent, warehouse receipts therefor in Agent's name, for the benefit of Lenders; (C) no Inventory is or will be consigned to any Person without Agent's prior written consent, and, if such consent is given, Borrower shall, prior to the delivery of any Inventory on consignment, (i) provide Agent with all consignment agreements to be used in connection with such consignment, all of which shall be acceptable to Agent, (ii) prepare, execute and file appropriate financing statements with respect to any consigned Inventory, showing Agent, for the benefit of Lenders, as assignee, (iii) conduct a search of all filings made against the consignee in all jurisdictions in which any consigned Inventory is to be located and deliver to Agent copies of the results of all such searches, and (iv) notify, in writing, all the creditors of the consignee which are or may be holders of Liens in the Inventory to be consigned that Borrower expects to deliver certain Inventory to the consignee, all of which Inventory shall be described in such notice by item or type; 42 (D) to the best of Borrower's knowledge, no Inventory is or will be produced by Borrower in violation of the Fair Labor Standards Act or in violation of any international law prohibiting child labor; and (E) to the best of Borrower's knowledge, all Inventory is presently and will continue to be produced in conformity with the terms of all applicable licenses of Borrower. 6.2. INVENTORY REPORTS. Subject to SECTION 9.1(K) of this Agreement, Borrower agrees to furnish Agent with Inventory reports at such times as Agent may request, but at least once each month. Such reports shall be in form and detail satisfactory to Agent. Borrower shall conduct a physical count of Inventory no less frequently than semi-annually and shall provide to Agent a report based on each such physical count of Inventory promptly thereafter, together with such supporting information as Agent shall in its discretion request. 6.3. RETURNS OF INVENTORY. If at any time or times hereafter any Account Debtor returns any Inventory to Borrower the shipment of which generated an Account on which such Account Debtor is obligated in excess of $250,000, Borrower shall notify Agent of the same immediately, specifying the reason for such return and the location and condition of the returned Inventory. After the occurrence of an Event of Default, Borrower shall hold all returned Inventory in trust for each Lender, shall segregate all returned Inventory from all other Property owned by Borrower or in its possession and shall conspicuously label such Inventory as the Property of Agent and each Lender. SECTION 7. [THIS SECTION IS INTENTIONALLY OMITTED.] SECTION 8. REPRESENTATIONS AND WARRANTIES 8.1. GENERAL REPRESENTATIONS AND WARRANTIES. To induce Agent and Lenders to enter into this Agreement and to induce Lenders to make advances hereunder, Borrower warrants, represents and covenants to Agent and Lenders as follows: (A) ORGANIZATION AND QUALIFICATION. Brazos is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Morning Sun is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Each Borrower has duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction listed on EXHIBIT C attached hereto and made a part hereof and in all other states and jurisdictions where the character of its Properties or the nature of its activities make such qualification necessary. (B) CORPORATE NAMES. During the preceding seven years, Borrower has not been known as or used any corporate, fictitious or trade names except as disclosed on EXHIBIT D attached hereto and made a part hereof. Except as set forth on EXHIBIT D, Borrower has not, during the preceding seven years, been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person. 43 (C) CORPORATE POWER AND AUTHORITY. Borrower has the right and power and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action on the part of Borrower and do not and will not (i) require any consent or approval of the shareholders of Borrower that has not been obtained; (ii) contravene Borrower's charter, articles of incorporation or by-laws; (iii) violate, or cause Borrower to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Permitted Liens) upon or with respect to any of the Properties now owned or hereafter acquired by Borrower. (D) SUBSIDIARIES. Brazos has no Subsidiaries except for (i) Morning Sun, (ii) Stadium Apparel, Inc., a Texas corporation, which is a dormant Subsidiary with no assets or operations, and (iii) Japanese Subsidiary. Morning Sun has no Subsidiaries. (E) LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower and each other Person party thereto, enforceable against them in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally or by principles of equity pertaining to the availability of equitable remedies. (F) USE OF PROCEEDS. Borrower's uses of the proceeds of any Loans pursuant to this Agreement are, and will continue to be, legal and proper corporate uses, duly authorized by its Board of Directors, and such uses will not violate any applicable laws, including, without limitation, the Foreign Assets Control Regulations, the Foreign Funds Control Regulations and the Transaction Control Regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended). (G) MARGIN STOCK. Borrower is not engaged principally, or as one of its important activities, in the business of purchasing or carrying "margin stock" (within the meaning of Regulation G or U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loans to Borrower will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or be used for any purpose which violates or is inconsistent with the provisions of Regulation G, T, U or X of said Board of Governors. (H) GOVERNMENTAL CONSENTS. Borrower has, and is in good standing with respect to, all governmental consents, approvals, authorizations, permits, certificates, inspections, 44 and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it. (I) PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, trade names, copyrights, licenses and other similar rights owned or possessed as of the date of this Agreement are listed on EXHIBIT E attached hereto and made a part hereof. (J) CAPITAL STRUCTURE. EXHIBIT F attached hereto and made a part hereof states (i) the correct name of each of the Subsidiaries of each Borrower, the jurisdiction of incorporation and the percentage of its Voting Stock owned by such Borrower, (ii) the name of each of each Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of each Borrower and each Subsidiary of such Borrower, and (iv) the number of authorized, issued and treasury shares of such Borrower and each Subsidiary of such Borrower. Each Borrower has good title to all of the shares it purports to own of the stock of each Subsidiary of such Borrower, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and nonassessable. Except as set forth on EXHIBIT F attached hereto, there are not outstanding any options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of any Borrower. There are not outstanding any agreements or instruments binding upon any of any Borrower's shareholders relating to the ownership of its shares of capital stock. (K) SOLVENT FINANCIAL CONDITION. Each Borrower is now and, after giving effect to initial Loans to be made hereunder, will be, Solvent. (L) RESTRICTIONS. No Borrower is a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Properties. No Borrower is a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on EXHIBIT G attached hereto, none of which prohibit the execution of or compliance with this Agreement by such Borrower. Neither any Borrower nor any of such Borrower's Subsidiaries has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien that is not a Permitted Lien. (M) LITIGATION. Except as set forth on EXHIBIT H attached hereto or otherwise disclosed in writing and made a part hereof, there are no actions, suits, proceedings or investigations pending, or to the knowledge of any Borrower, threatened, against or affecting such Borrower or any of its Subsidiaries, or the business, operations, Properties, prospects, profits or condition of such Borrower or any of its Subsidiaries, in any court or before any governmental authority or arbitration board or tribunal which involves the possibility of 45 materially and adversely affecting the Properties, business, prospects, profits or financial condition of any Borrower or the ability of any Borrower to perform this Agreement. Neither any Borrower nor any of its Subsidiaries is in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. (N) TITLE TO PROPERTIES. Each Borrower and its Subsidiaries each has good, indefeasible title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property, and good title to all of its other Property, in each case, free and clear of all Liens except Permitted Liens. (O) FINANCIAL STATEMENTS; FISCAL YEAR. The Consolidated and consolidating balance sheets of Brazos and such other Persons described therein as of May 3, 1997, and the related statements of operations, stockholder's equity and cash flows for the period ended on such date, have been prepared in accordance with GAAP (except for changes in application in which Brazos' independent certified public accountants concur), and present fairly, in all material respects, the financial positions of Brazos and its Subsidiaries at such dates and the results of the operations of Brazos and its Subsidiaries for such periods. Since May 3, 1997, there has been no material adverse change in the condition, financial or otherwise, of Brazos or Brazos' Subsidiaries and such other Persons as shown on the Consolidated balance sheet as of such date and no change in the aggregate value of Equipment and real Property owned by Brazos or Brazos' Subsidiaries or such other Persons, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. The fiscal year of Brazos and each of its Subsidiaries ends on the last Saturday in December of each year. (P) FULL DISCLOSURE. The financial statements referred to in SECTION 8.1(O) above, do not, nor does this Agreement or any other written statement of any Borrower to Agent and/or any Lender, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which any Borrower has failed to disclose to Agent or any Lender in writing which materially affects adversely or, so far as such Borrower can now foresee, will materially affect adversely the Properties, business, prospects, profits, or condition (financial or otherwise) of any Borrower or any of its Subsidiaries or the ability of any Borrower or its Subsidiaries to perform this Agreement. (Q) PENSION PLANS. Except as disclosed on EXHIBIT I attached hereto and made a part hereof, no Borrower nor any of its Subsidiaries has any Plan. No Borrower nor any of its Subsidiaries has received any notice to the effect that it is not in full compliance with any of the requirements of ERISA and the regulations promulgated thereunder. No fact or situation that could result in a material adverse change in the financial condition of any Borrower (including, but not limited to, any Reportable Event or Prohibited Transaction) exists in connection with any Plan. Neither any Borrower nor any of its Subsidiaries has any withdrawal liability in connection with a Multi-Employer Plan. (R) TAXES. Brazos' federal tax identification number is 74-1897317. Morning Sun's federal tax identification number is 13-3701740 Each Borrower and its Subsidiaries each 46 has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees and other governmental charges that are due and payable. The provision for taxes on the books of each Borrower and its Subsidiaries are adequate for all years not closed by applicable statutes, and for its current fiscal year. EXHIBIT P contains an accurate list of all taxing authorities to which each Borrower and its Subsidiaries and their respective Properties are subject. No Properties of any Borrower or its Subsidiaries are or could become subject to any Lien in favor of any such taxing authorities for nonpayment of taxes, except for inchoate liens for taxes not yet due and payable and as specified on EXHIBIT P. (S) LABOR RELATIONS. Except as described on EXHIBIT J attached hereto and made a part hereof, neither any Borrower nor any of its Subsidiaries is a party to any collective bargaining agreement, and there are no material grievances, disputes or controversies with any union or any other organization of any Borrower's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. (T) COMPLIANCE WITH LAWS. Each Borrower has duly complied in all material respects with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to such Borrower, its Properties or the conduct of its business, including, without limitation, OSHA and all Environmental Laws, and there have been no citations, notices or orders of noncompliance issued to any Borrower or any of its Subsidiaries under any such law, rule or regulation. (U) SURETY OBLIGATIONS. Borrower is not obligated as surety or indemnitor under any surety or similar bond or other contract issued or entered into any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. (V) NO DEFAULTS. No event has occurred and no condition exists which would, upon the execution and delivery of this Agreement or any Borrower's performance hereunder, constitute a Default or an Event of Default. None of any Borrower nor any of any Borrower's Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. (W) BROKERS. Except as provided in the Offering Memorandum, there are no claims for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement, for which Borrower is responsible. (X) MANAGEMENT FEES. Except as permitted pursuant to SECTION 9.2(J) hereof, Borrower is not now required and will not in the future be required to pay any management fees to Equus or to any other Person. 47 (Y) BUSINESS LOCATIONS; AGENT FOR PROCESS. During the preceding seven year period, Borrower has had no office, place of business or agent for service of process located in any state or county other than as shown on EXHIBIT B. (Z) TRADE RELATIONS. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between any Borrower and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of such Borrower, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially affect adversely any Borrower or prevent any Borrower from conducting such business after the consummation of the transaction contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. (AA) LEASES. EXHIBIT K attached hereto is a complete listing of all capitalized leases of Borrower and EXHIBIT L attached hereto is a complete listing of all operating leases of Borrower (excluding any operating leases for copiers and other office equipment). (BB) INVESTMENT COMPANY ACT. Borrower is not an "investment company" and is not "controlled" by any "investment company", (within the meaning of the Investment Company Act of 1940, as amended) except Equus, which is a "business development company." 8.2. REAFFIRMATION. Each request for a Loan made by Borrower pursuant to this Agreement or any of the other Loan Documents shall constitute (i) an automatic representation and warranty by Borrower to Agent and Lenders that there does not then exist any Default or Event of Default and (ii) a reaffirmation as of the date of said request that all of the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true in all material respects except for any changes in the nature of Borrower's business or operations that would render the information contained in any exhibit (other than EXHIBIT H) attached hereto either inaccurate or incomplete, so long as Lenders have consented to such changes or such changes are not restricted or prohibited by this Agreement. 8.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower covenants, warrants and represents to Agent and Lenders that all representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall be true at the time of Borrower's execution of this Agreement and the other Loan Documents, and shall survive the execution, delivery and acceptance thereof by Agent, Lenders and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 9. COVENANTS AND CONTINUING AGREEMENTS 9.1. AFFIRMATIVE COVENANTS. During the term of this Agreement, and thereafter for so long as there are any Obligations to Agent or to any Lender, each Borrower covenants that, unless otherwise consented to by Lenders in writing, it shall: 48 (A) TAXES AND LIENS. Pay and discharge, and cause each Subsidiary to pay and discharge, all taxes, assessments and governmental charges upon it, its income and Properties as and when such taxes, assessments and charges are due and payable (and, if requested by any Lender, provide Agent and each Lender with proof that such Borrower or such Subsidiary has done so), except and to the extent only that such taxes, assessments and charges are being actively contested in good faith and by appropriate proceedings, Borrower maintains adequate reserves on its books therefor and the nonpayment of such taxes, assessments and charges does not result in a Lien upon any Properties or Borrower other than a Permitted Lien. Borrower shall also pay and discharge any lawful claims which, if unpaid, might become a Lien against any of Borrower's Properties except for Permitted Liens. (B) TAX RETURNS. File, and cause each Subsidiary to file, all federal, state and local tax returns and other reports such Borrower or such Subsidiary is required by law to file and maintain adequate reserves for the payment of all taxes, assessments, governmental charges, and levies imposed upon it, its income, or its profits, or upon any Property belonging to it. (C) PAYMENT OF BANK CHARGES. Pay to Agent and/or Lenders, on demand, any and all fees, costs or expenses which Agent or any Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to such Borrower or any other Person on behalf of such Borrower proceeds of loans made by any Lender to such Borrower pursuant to this Agreement and (ii) the depositing for collection, by any Lender, of any check or item of payment received or delivered to Agent or any Lender on account of the Obligations. (D) BUSINESS AND EXISTENCE. Preserve and maintain, and cause each Subsidiary to preserve and maintain, its separate corporate existence and all rights, privileges, and franchises in connection therewith, and maintain, and cause each Subsidiary to maintain, its qualification and good standing in all states in which such qualification is necessary. (E) MAINTAIN PROPERTIES. Maintain, and cause each Subsidiary to maintain, its Properties in good condition and make, and cause each Subsidiary to make, all necessary renewals, repairs, replacements, additions and improvements thereto, reasonable wear and tear excepted. (F) COMPLIANCE WITH LAWS. Comply, and cause each Subsidiary to comply, with all laws, ordinances, governmental rules and regulations to which it is subject, including, without limitation, all OSHA and Environmental Laws, and obtain and keep in force any and all licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business, which violation or failure to obtain might materially and adversely affect the business, prospects, profits, Properties, or financial condition of Borrower. (G) ERISA COMPLIANCE. (i) At all times make prompt payment of contributions required to meet the minimum funding standards set forth in ERISA with respect to each Plan; (ii) promptly after the filing thereof, furnish to Agent copies of any annual report required to be filed pursuant to ERISA in connection with each Plan and any other employee 49 benefit plan of it and its Affiliates subject to said Section; (iii) notify Agent as soon as practicable of any Reportable Event and of any additional act or condition arising in connection with any Plan which Borrower believes might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States district court of a trustee to administer the Plan; and (iv) furnish to Agent, promptly upon Agent's request therefor, such additional information concerning any Plan or any other such employee benefit plan as may be reasonably requested. (H) BUSINESS RECORDS. Keep, and cause each Subsidiary to keep, adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all its financial transactions. (I) VISITS AND INSPECTIONS. Permit representatives of Agent and Lenders, from time to time, as often as may be reasonably requested, but only during normal business hours, to visit and inspect the Properties of Borrower, inspect and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower's business, assets, liabilities, financial condition, business prospects and results of operations. (J) FINANCIAL STATEMENTS. Cause to be prepared and furnished to Agent and each Lender the following (all to be kept and prepared in accordance with GAAP applied on a consistent basis, unless Borrower's certified public accountants concur in any change therein and such change is disclosed to Agent and each Lender and is consistent with GAAP): (i) as soon as possible, but not later than one hundred twenty (120) days after the close of each fiscal year of Borrower, audited Consolidated financial statements of Parent and its Consolidated Subsidiaries as of the end of such year consisting of a Consolidated balance sheet, income statement and statement of cash flows, accompanied by the unmodified report of independent certified public accountants of recognized national standing or otherwise acceptable to Agent (except for a modification for a change in accounting principles with which the independent public accountants concur), together with consolidating financial statements of Parent and its Consolidated Subsidiaries as of the end of such year, consisting of balance sheets, income statements and statements of cash flows, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting in all material respects the Consolidated financial position and results of operations of Parent and its Consolidated Subsidiaries for such period (except for any change in accounting principles with which the independent public accountants concur); (ii) as soon as possible, but not later than forty-five (45) days after the end of each month hereafter (including the calendar month ending on the last day of the fiscal year), unaudited interim Consolidated financial statements of Parent and its Consolidated Subsidiaries, consisting of a Consolidated balance sheet, income statement and statement of cash flows, together with consolidating financial statements of Parent and its Consolidated Subsidiaries as of the end of such month and of the portion of Parent's fiscal year then elapsed, consisting of balance sheets, income statements and statements of cash flows, certified by the principal financial officer of Borrower as prepared in accordance with GAAP and fairly presenting in all 50 material respects the Consolidated financial position and results of operations of Parent and its Consolidated Subsidiaries for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; and (iv) such other data and information (financial and otherwise) as Agent and Lenders, from time to time, may reasonably request, bearing upon or related to the Collateral, such Borrower's financial condition or results of operations, including, without limitation, federal income tax returns of such Borrower, accounts payable ledgers, and bank statements. Concurrently with the delivery of the financial statements described in CLAUSE (I) of this SECTION 9.1(J), Borrower shall forward or cause to be forwarded to Agent and each Lender a copy of the accountant's letter to Borrower's management that is prepared in connection with such financial statements. Concurrently with the delivery of the financial statements described in CLAUSES (I) AND (II) of this SECTION 9.1(J), Borrower shall cause to be prepared and furnished to Agent and each Lender a certificate from the principal financial officer of Borrower certifying to Agent and each Lender that, to the best of his knowledge, Borrower has kept, observed, performed and fulfilled each and every covenant, obligation and agreement binding upon Borrower in this Agreement and the other Loan Documents and that no Default or Event of Default has occurred, or, if such Default or Event of Default has occurred, specifying the nature thereof. (K) NOTICES TO AGENT AND LENDERS. Notify Agent and each Lender in writing: (i) promptly after Borrower's learning thereof, of the commencement of any litigation affecting Borrower or any of its Properties, whether or not the claim is considered by Borrower to be covered by insurance, and of the institution of any administrative proceeding which may materially and adversely affect Borrower's operations, financial condition, Properties or business or Agent's Lien, for the benefit of Lenders, upon any of the Collateral; (ii) at least sixty (60) days prior thereto, of Borrower's opening of any new office or place of business or Borrower's closing of any existing office or place of business; (iii) promptly after Borrower's learning thereof, of any material labor dispute to which Borrower may become a party, any material strikes or walkouts relating to any of its plants or other facilities, and the expiration of any labor contract to which it is a party or by which it is bound; (iv) promptly after Borrower's learning thereof, of any material default by Borrower under any note, indenture, loan agreement, mortgage, lease, deed, guaranty or other similar agreement relating to any Indebtedness of Borrower exceeding $500,000; (v) promptly after the occurrence thereof, of any Default or Event of Default; (vi) promptly after the occurrence thereof, of any default by any obligor under any note or other evidence of Indebtedness payable to Borrower in excess of $500,000; (vii) promptly after the rendition thereof, of any judgment in an amount in excess of $500,000 rendered against any Borrower or any of its Subsidiaries; and (viii) promptly after Borrower's learning thereof, the occurrence of any default or event of default under or pursuant to the provisions of the Parent 51 Senior Notes, the Indenture or any other document executed in connection with the Parent Senior Notes. (L) LANDLORD AND STORAGE AGREEMENTS. Provide Agent with copies of all agreements between Borrower and any landlord or warehouseman which owns any premises at which any Inventory or other Collateral may, from time to time, be kept. (M) SUBORDINATIONS. Provide Agent and each Lender with a debt subordination agreement in form and substance satisfactory to Lenders, executed by Borrower and any Person who is an officer, director or Affiliate of Borrower to whom Borrower is or hereafter becomes indebted for Money Borrowed, subordinating in right of payment and claim all of such Indebtedness and any future advances thereon to the full and final payment and performance of the Obligations. (N) FURTHER ASSURANCES. At Agent's request, promptly execute or cause to be executed and deliver to Agent any and all documents, instruments and agreements deemed necessary by Agent to give effect to or carry out the terms or intent of this Agreement or any of the other Loan Documents. Without limiting the generality of the foregoing, if any of the Accounts, the aggregate face value of which exceeds $250,000, arises out of a contract with the United States of America, or any department, agency, subdivision or instrumentality thereof, Borrower shall promptly notify Agent thereof in writing and shall execute any instruments and take any other action required or requested by Agent to comply with the provisions of the Federal Assignment of Claims Act. (O) COMPLIANCE CERTIFICATE. As soon as possible, but not later than forty-five (45) days after the end of each month, or more frequently if requested by Agent, cause the principal financial officer of Borrower to prepare and deliver to Agent and Lenders a Compliance Certificate in the form of EXHIBIT N attached hereto, with appropriate insertions and accompanied by detail showing the required calculations. (P) PROJECTIONS. As soon as available, and in any event no later than (i) thirty (30) days prior to the end of each fiscal year of Borrower, deliver to Agent and Lenders preliminary three-year Projections of Borrower and (ii) January 15 of each fiscal year of Borrower, deliver to Agent and Lenders final board approved three-year Projections of Borrower, each of which shall be in form and substance satisfactory to Lenders and which for the current fiscal year shall be month by month, and for the following two years shall be year by year. (Q) TAX CERTIFICATE. Within ninety (90) days after the end of each fiscal year of Borrower, or more frequently if requested by Agent, cause the chief financial officer of Borrower to prepare and deliver to Agent a certificate in the form of EXHIBIT Q attached hereto, with appropriate insertions. (R) BORROWING BASE REPORT. As soon as possible, but not later than twenty (20) days after the end of each month, or more frequently if requested by Agent, cause the principal financial officer of Borrower to prepare and deliver to Agent a Borrowing Base Report 52 in the form of EXHIBIT U attached hereto ("BORROWING BASE REPORT"), with appropriate insertions and accompanied by the relevant supporting materials. 9.2. NEGATIVE COVENANTS. During the term of this Agreement, and thereafter for so long as there are any Obligations to Agent or any Lender, each Borrower covenants that, unless Lenders have first consented thereto in writing, it will not: (A) MERGERS; CONSOLIDATIONS; ACQUISITIONS. Merge or consolidate, or permit any Subsidiary to merge or consolidate, with any Person, except a consolidation or merger involving only Borrower and one or more wholly owned Subsidiaries; nor acquire all or any substantial part of the Properties of any Person. (B) LOANS. Make, or permit any Subsidiary to make, any loans or other advances of money to any Person, including, without limitation, any of Borrower's Affiliates, officers or employees, other than salary, travel advances, advances against commissions and other similar advances in the ordinary course of business; PROVIDED, HOWEVER, (i) Borrower may make loans or similar advances of money to its officers or employees in an aggregate amount, when combined with the outstanding principal amount of all indebtedness of Borrower's officers and employees guaranteed at that time by Borrower or a Subsidiary of Borrower, not to exceed $1,000,000 at any particular date, and (ii) Borrower and each Subsidiary may make loans or other advances of money to the extent such loans or other advances of money are permitted pursuant to the provisions of SECTION 9.2(C)(III) hereof. (C) TOTAL INDEBTEDNESS. Create, incur, assume, or suffer to exist, or permit any Subsidiary to create incur or suffer to exist, any Indebtedness, except: (i) Obligations owing to Agent or any Lender; (ii) Borrower Subordinated Debt; (iii) Indebtedness of Morning Sun to Brazos and of Brazos to Morning Sun, and, if consented to by Lenders, Indebtedness of any other Subsidiary to Borrower; (iv) unsecured accounts payable to trade creditors which are not aged more than one hundred eighty (180) days from billing date and current operating expenses (other than for Money Borrowed) which are not more than sixty (60) days past due, in each case incurred in the ordinary course of business and paid within such time period, unless the same are actively being contested in good faith and by appropriate and lawful proceedings and Borrower shall have set aside such reserves, if any, with respect thereto as are required by generally accepted accounting principles and deemed adequate by Borrower and its independent public accountants; (v) Capitalized Lease Obligations or purchase money Indebtedness incurred to finance Capital Expenditures permitted by SECTION 9.2(L); (vi) Obligations to pay Rentals permitted by SECTION 9.2(X); (vii) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; (viii) accruals (including interest accruals) in accordance with GAAP in the normal course of Borrower's business; (ix) guarantees of the Parent Senior Notes; (x) guarantees of Indebtedness otherwise permitted pursuant to the provisions of this SECTION 9.2(C); and (xi) Indebtedness not included in CLAUSES (I) THROUGH (X) above which does not exceed at any time, in the aggregate, the sum of $500,000. 53 (D) AFFILIATE TRANSACTIONS. Enter into, or be a party to, or permit any Subsidiary to enter into or be a party to, any transaction with any Affiliate or stockholder, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's or such Subsidiary's business and upon fair and reasonable terms which are fully disclosed to Agent and each Lender and are no less favorable to Borrower than would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrower or such Subsidiary. (E) PARTNERSHIPS OR JOINT VENTURES. Become or agree to become a general or limited partner in any general or limited partnership or a joint venturer in any joint venture. (F) ADVERSE TRANSACTIONS. Enter into any transaction, or permit any Subsidiary to enter into any transaction, which materially and adversely affects or may materially and adversely affect the Collateral or Borrower's ability to repay the Obligations or permit or agree to any material extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account, including any of the terms relating thereto, other than discounts, compromises, settlements and allowances in the ordinary course of business, all of which shall be reflected in the Schedules of Accounts submitted to Agent pursuant to SECTION 5.2 of this Agreement. (G) GUARANTIES. Guarantee, assume, endorse or otherwise, in any way, become directly or contingently liable with respect to the Indebtedness of any Person (other than a Borrower) except (i) by endorsement of instruments or items of payment for deposit or collection, or (ii) guaranty agreements executed by each Borrower of payment of the Parent Senior Notes, provided each such guaranty agreement is unsecured. (H) LIMITATION ON LIENS. Create or suffer to exist, or permit any Subsidiary to create or suffer to exist, any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Agent or any Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due or being contested as permitted by SECTION 9.1(A) hereof, but only if in Agent's judgment such Lien does not affect adversely Lenders' rights or the priority of Agent's Lien, for the benefit of Lenders, in the Collateral; (iii) Liens securing the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons for labor, materials, supplies or rentals incurred in the ordinary course of Borrower's business, but only if the payment thereof is not at the time required or is being actively contested in good faith and by appropriate proceedings (with adequate reserves maintained on Borrower's books to cover the amount of such payment) and only if such Liens are junior to the Liens in favor of Agent, for the benefit of Lenders, on terms satisfactory to Lenders; (iv) Liens resulting from deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance, social security and other like laws; (v) attachment, judgment and other similar non-tax Liens arising in connection with court proceedings, but only if and for so long as the execution or other enforcement of such Liens is and continues to be effectively stayed and bonded on appeal in a manner satisfactory to Lenders for the full amount thereof, the validity and amount of the claims secured thereby are being actively contested in good faith and by appropriate lawful proceedings and such Liens do not, in the aggregate, materially detract, in the judgment of 54 Agent, from the value of the Property of such Borrower or materially impair the use thereof in the operation of such Borrower's business; (vi) reservations, exceptions, easements, rights of way, and other similar encumbrances affecting real Property, provided that, in Agent's judgment, they do not in the aggregate materially detract from the value of said Properties or materially interfere with their use in the ordinary conduct of Borrower's business; (vii) Liens securing Indebtedness of a Subsidiary to Borrower or another Subsidiary; (viii) such other Liens as appear on EXHIBIT M attached hereto; (ix) Capital Lease Obligations or purchase money Liens securing Indebtedness incurred to finance Capital Expenditures permitted by SECTION 9.2(L); and (x) such other Liens as Lenders may hereafter approve in writing. (I) SUBORDINATED DEBT. Make, or permit any Subsidiary to make, any prepayment of any part or all of any Borrower Subordinated Debt, or otherwise repurchase, redeem or retire any instrument evidencing any such Borrower Subordinated Debt prior to maturity; or enter into any agreement (oral or written) which could in any way be construed to amend, modify, alter or terminate any one or more instruments or agreements evidencing or relating to any Borrower Subordinated Debt. (J) DISTRIBUTIONS. Declare or make, or permit any Subsidiary to declare or make any Distributions; PROVIDED, HOWEVER, that notwithstanding the foregoing, Borrower may make the following described Distributions, provided that no Default or Event of Default shall exist hereunder, either before or after giving effect to such Distributions: (i) Borrower may make Distributions to Parent pursuant to the Tax Sharing Agreement, but only insofar as such Distributions do not exceed the income tax liability for which Borrower would otherwise have been responsible for as if it were not a member of the consolidated group for federal income tax purposes of Parent, Embroidery and Borrower, (ii) Borrower may make Distributions to Parent up to an aggregate amount of $300,000 per fiscal year to cover the aggregate amount of management fees of Parent and the annual operating expenses of Parent incurred in the normal course of Parent's business; and (iii) Borrower may make Distributions to Parent equal in amount to regularly scheduled interest payments at such time required to be paid by Parent pursuant to the Parent Senior Notes and Distributions to Parent equal in amount to the Liquidated Damages (as such term is defined in the Offering Memorandum), if any, at such time required to be paid by Parent pursuant to the Parent Senior Notes. (K) SUBSIDIARIES. Hereafter create any Subsidiary or divest itself of any material assets by transferring them to any Subsidiary to whose existence Lenders have consented. (L) CAPITAL EXPENDITURES. Make Capital Expenditures which, in the aggregate, as to Brazos and its Subsidiaries, exceed $3,000,000 during any fiscal year of Borrower. (M) BUSINESS LOCATIONS. Transfer its principal place of business or chief executive office, or open new manufacturing plants, or transfer existing manufacturing plants, or maintain warehouses or records with respect to Accounts or Inventory, to or at any locations other than those at which the same are presently kept or maintained, as set forth on EXHIBIT B hereto (which shall be updated quarterly so long as no Default or Event of Default exists and, 55 during the existence of a Default or Event of Default, as frequently as shall be requested by Lenders), except upon at least 30 days prior written notice to Agent and at least 30 days after the delivery to Agent of financing statements, if required by Agent, in form satisfactory to Agent to perfect or continue the perfection of Agent's Lien, for the benefit of Lenders, and security interest hereunder. (N) CHANGE OF BUSINESS. Enter into any new business or make any material change in any of any Borrower's business objectives, purposes and operations. (O) DISPOSITION OF ASSETS. Sell, lease or otherwise dispose of any of its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of Borrower's business for so long as no Event of Default exists hereunder, (ii) transfers of monies from Borrower's operating account in the ordinary course of Borrower's business for so long as no Event of Default exists hereunder, (iii) a transfer of Property to Brazos by a Subsidiary, (iv) as long as no Default or Event of Default exists, (a) dispositions of equipment which, in the aggregate, during any consecutive twelve-month period have a fair market value or book value, whichever is less, of $500,000 or less or (b) replacements of equipment that is substantially worn, damaged or obsolete with equipment of like kind, function and value, provided that the replacement equipment is free of Liens other than Permitted Liens, (v) sale of the "Red Fox" division of Brazos, or (vi) dispositions expressly authorized by this Agreement. (P) NAME OF BORROWER. Use any corporate name (other than its own) or any fictitious name, tradestyle or "d/b/a" except for the names disclosed on EXHIBIT D attached hereto, unless Borrower shall have given Agent and each Lender sixty days prior written notice of such new corporate name, fictitious name, tradestyle or d/b/a. (Q) BILL-AND-HOLD SALES, ETC. Make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment basis, or any sale on a repurchase or return basis. (R) USE OF AGENT'S OR A LENDER'S NAME. Without the prior written consent of Agent or such Lender, use the name of Agent or such Lender or the name of any Affiliates of Lender in connection with any of Borrower's business or activities, except in connection with internal business matters, as required in dealings with governmental agencies and financial institutions and to trade creditors of Borrower solely for credit reference purposes. (S) MARGIN SECURITIES. Own, purchase or acquire (or enter into any contract to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereafter be in effect unless, prior to any such purchase or acquisition or entering into any such contract, Agent shall have received an opinion of counsel satisfactory to Agent to the effect that such purchase or acquisition will not cause this Agreement to violate Regulations G, T, U or X or any other regulation of the Federal Reserve Board then in effect. 56 (T) RESTRICTED INVESTMENT. Make or have, or permit any Subsidiary to make or have, any Restricted Investment. (U) FISCAL YEAR. Change, or permit any Subsidiary to change, its fiscal year, or permit any Subsidiary to have a fiscal year different from that of Brazos. (V) STOCK OF SUBSIDIARY, ETC. Sell or otherwise dispose of any shares of capital stock of any Subsidiary of such Borrower, except in connection with a transaction permitted under SECTION 9.2(A), or permit any Subsidiary to issue any additional shares of its capital stock except director's qualifying shares. (W) LEASES. Become a lessee under any operating lease (other than a lease under which any Borrower is lessor) of Property if the aggregate Rentals payable during any current or future period of twelve consecutive months under the lease in question and all other leases under which such Borrower is then lessee would exceed $6,000,000.00 The term "RENTALS" means, as of the date of determination, all payments which the lessee is required to make by the terms of any lease. (X) TAX CONSOLIDATION. File or consent to the filing of any consolidated income tax return with any Person other than its Subsidiaries; PROVIDED; HOWEVER; that notwithstanding the foregoing, Agent and Lenders hereby agree that each Borrower has with Embroidery and Parent become a member of a consolidated group of corporations (consisting of each Borrower, Embroidery and Parent) for accounting and federal income tax purposes, and that in connection therewith, each Borrower has entered into the Tax Sharing Agreement under which such Borrower will be responsible to pay to Parent no more than such Borrower's proportionate share of the consolidated federal income tax liability that it would otherwise have been required to pay as if such Borrower was not a member of such consolidated group of corporations. 9.3. SPECIFIC FINANCIAL COVENANTS. During the term of this Agreement, and thereafter for so long as there are any obligations to Agent and/or any Lender, Borrower covenants that, unless otherwise consented to by Lenders in writing, it shall: (A) INDEBTEDNESS TO NET WORTH RATIO. As of the end of each fiscal quarter of Borrower, starting with the fiscal quarter ending September 30, 1997, maintain a ratio of Borrower's Consolidated Indebtedness to Borrower's Consolidated Net Worth of no more than 1.00 to 1.00. For the purposes of this ratio, the term "Indebtedness" (i) shall include at any relevant calculation date the aggregate undrawn amount of all then outstanding Letters of Credit, and (ii) shall NOT include any guarantee by Borrower of the Parent Senior Notes. (B) FIXED CHARGE RATIO. As of the end of each fiscal month of Borrower ending closest to the date indicated below, maintain a Fixed Charge Ratio of not less than the ratio indicated below for the time period indicated below: 57 RELEVANT TIME PERIOD RATIO (i) Three-month period ending September 27, (i) 1.25 to 1.00 1997 (ii) Six-month period ending December 27, (ii) 1.25 to 1.00 1997 (iii) Nine-month period ending March 28, 1998 (iii) 1.25 to 1.00 (iv) Twelve-month period ending June 27, 1998 (iv) 1.25 to 1.00 Twelve-month period ending on the last (v) day of each thereafter occurring fiscal (v) 1.25 to 1.00 quarter (C) ADJUSTED NET EARNINGS FROM OPERATIONS. Achieve during each fiscal year of Borrower, beginning with the fiscal year ending on December 27, 1997, Adjusted Net Earnings From Operations of at least $1,000,000, as determined on a Consolidated basis. SECTION 10. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Agent and Lenders under the other Sections of this Agreement, it is understood and agreed that Lenders will not make any Loan under SECTION 2 of this Agreement unless and until each of the following conditions has been and continues to be satisfied or waived, all in form and substance satisfactory to Agent and its counsel: 10.1. DOCUMENTATION. Agent shall have received the following documents and materials, each to be in form and substance satisfactory to Agent and its counsel: (A) This Agreement, duly executed by Borrower; (B) (i) Revolving Credit Note in favor of Fleet, duly executed by Borrower, in the form of EXHIBIT A-1 attached hereto, and (ii) Revolving Credit Note in favor of Boston, duly executed by Borrower, in the form of EXHIBIT A-2 attached hereto; (C) The Guaranty Agreements, respectively duly executed by Parent and by Morning Sun; (D) copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any filing or recordation necessary to perfect the Liens of Agent, for the benefit of Lenders, in the Collateral (including the assets acquired in the Transaction) and evidence to Agent and Lenders that such Liens constitute valid and perfected security interests and Liens, having the Lien priority specified in SECTION 4.2(B) hereof; 58 (E) landlord consent letters from such of the landlords as shall be required by Agent, in form and substance satisfactory to Lenders, as to each new location of Borrower resulting from the Transaction; (F) good standing certificates for each Borrower, issued within fifteen (15) days before the Closing Date by the Secretary of State or other appropriate official of such Borrower's jurisdiction of incorporation and each jurisdiction where the conduct of such Borrower's business activities or the ownership of its Properties necessitates qualification; (G) a closing certificate signed by the President and Chief Financial Officer of each Borrower dated as of the Closing Date, stating that (i) the representations and warranties set forth in SECTION 8 hereof are true and correct on and as of such date, (ii) each Borrower is on such date in compliance with all the terms and provisions set forth in this Agreement, and (iii) on such date no Default or Event of Default has occurred or is continuing; (H) evidence satisfactory to Agent of the satisfaction (or waiver by Brazos and Parent) of all conditions precedent to the Asset Purchase Agreement, and a copy thereof, duly executed by the parties thereto, and evidence that the Premier Asset Acquisition has been consummated in accordance with the provisions of the Asset Purchase Agreement; (I) evidence satisfactory to Agent of the satisfaction (or waiver by Parent) of all conditions precedent to the Stock Purchase Agreement, and a copy thereof, duly executed by the parties thereto, and evidence that the Morning Sun Stock Acquisition has been consummated in accordance with the provisions of the Stock Purchase Agreement; (J) evidence satisfactory to Agent of the Morning Sun Merger; (K) evidence satisfactory to Agent of the consummation by Parent to Brazos of the Morning Sun Contribution; (L) evidence satisfactory to Agent of the consummation of the Senior Notes Placement, including without limitation, evidence that the proceeds received by Parent from the Senior Notes Placement have been used, at least in part, to: (i) pay the cash portion of the purchase price for the Morning Sun Stock Acquisition and pay in full the Indebtedness for Money Borrowed of SolarCo and Old Morning Sun and any indebtedness for Money Borrowed assumed by Borrower or Parent in connection with the Morning Sun Stock Acquisition; (ii) pay the cash portion of the purchase price for the Premier Asset Acquisition and pay off in full any Indebtedness for Money Borrowed (other than the Contingent Amount and the Convertible Note) assumed by Borrower or Parent in connection with the Premier Asset Acquisition; 59 (iii) pay off existing Indebtedness for Money Borrowed of Parent; (iv) pay off in full all subordinated debt of Parent and Brazos existing prior to the consummation of the Transaction; (v) pay off in full the Term Loan; and (vi) pay off existing Indebtedness for Money Borrowed of Brazos. (M) certifications, documentation and such other evidence and materials satisfactory to Agent of the consummation of the Transaction; (N) the written opinion of Porter & Hedges, L.L.P., counsel to Borrower, regarding Borrower, and the execution of this Agreement and the Other Agreements executed in connection with this Agreement, and the transactions contemplated hereby, to be in form and substance satisfactory to Lenders, in their sole discretion; (O) written instructions from Borrower directing the application of proceeds of the initial Loans to be made hereunder; (P) certified copies of Borrower's casualty insurance policies, together with endorsements naming Agent, for the benefit of Lenders, as loss payee and as mortgagee pursuant to a standard mortgagee clause, and certified copies of Borrower's liability insurance policies, together with endorsements naming Agent, for the benefit of Lenders, as a co-insured; (Q) agreements in form and substance satisfactory to Lenders and duly executed by Borrower, giving Agent, on behalf of Lenders, the right and license to use the equipment of Borrower to finish out the Inventory of Borrower and the right and license to use such software, trademarks and other intellectual property of Borrower as Lenders shall determine will facilitate the sale of Borrower's Inventory and the billing and collection of Borrower's Accounts, each such right and license to be on terms and conditions acceptable to Lenders; and (R) such other documents, instruments and agreements as Lenders or their legal counsel shall reasonably request. 10.2. OTHER CONDITIONS. The following conditions have been and shall continue to be satisfied: (A) No Default or Event of Default shall have occurred and be continuing unless such Default or Event of Default shall have been specifically waived in writing by Lenders; (B) The representations and warranties contained herein and the Loan Documents shall be true and correct as of the date hereof, as if made on the date hereof; 60 (C) Borrower shall have paid to Agent, for its account and the account of Lenders, in immediately available funds, the restructuring fee set forth in SECTION 3.1(J), which closing fee is non-refundable and shall be deemed fully earned as of the date of execution of this Agreement; (D) On the date of the funding to Borrower of the initial Loans hereunder, the amount of the Borrowing Base after giving effect to the Loans made on such date, shall exceed the aggregate amount of the outstanding Revolving Credit Loans by at least $20,000,000, and Borrower shall have provided Agent with a Borrowing Base Certificate to the foregoing effect; (E) To the extent proceeds from the Senior Notes Placement are transferred from Parent to either or both Borrowers or from one Borrower to the other Borrower, each such transfer shall be in the form of contributions to capital rather than debt; (F) The financial covenants in the Parent Senior Notes, the Indenture and in all other documents executed in connection with the Parent Senior Notes shall be consistent with those contained in the Offering Memorandum or shall otherwise have been reviewed and approved by Lenders; (G) Borrower shall have delivered to Lenders (i) a debt subordination agreement, in form and substance satisfactory to Lenders, executed by Brazos and Premier, subordinating in right of payment and claim the Contingent Amount, and (ii) a debt subordination agreement in form and substance satisfactory to Lenders, executed by Parent and Seller, subordinating in right of payment and claim the Convertible Note, in accordance with the terms thereof; and (H) All corporate proceedings taken in connection with the transactions contemplated by this Agreement and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lenders and their legal counsel. SECTION 11. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 11.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default": (A) PAYMENT OF NOTES. Borrower shall fail to pay any installment of principal, interest or premium, if any, owing on any Note on the due date of such installment. (B) PAYMENT OF OTHER OBLIGATIONS. Borrower shall fail to pay any of the Obligations that are not evidenced by the Notes on the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). (C) MISREPRESENTATIONS. Any warranty, representation, or other statement made or furnished to Agent and/or Lenders by or on behalf of Borrower or Guarantor or in any 61 instrument, certificate or financial statement furnished in compliance with or in reference to this Agreement or any of the other Loan Documents proves to have been false or misleading in any material respect when made or furnished. (D) BREACH OF COVENANTS. Borrower shall fail or neglect to perform, keep or observe (i) any covenant contained in SECTIONS 4.3, 4.4, 4.5, 5.4(B), 9.1(F), 9.2 (other than 9.2(H)) or 9.3 of this Agreement, or (ii) any covenant contained in SECTIONS 5.2, 9.1(A), 9.1(J), 9.1(O), 9.1(P) or 9.2(H) and the breach of such covenant is not cured to Lenders' satisfaction within 10 days after the sooner to occur of Borrower's receipt of notice of such breach from Agent or the date on which such failure or neglect becomes known to any executive officer of Borrower, or (iii) any other covenant contained in this Agreement (other than a covenant a default in the performance or observance of which is dealt with specifically elsewhere in this SECTION 11.1) and the breach of such other covenant is not cured to Lenders' satisfaction within 15 days after the sooner to occur of Borrower's receipt of notice of such breach from Agent or the date on which such failure or neglect becomes known to any executive officer of Borrower. (E) DEFAULT UNDER OTHER AGREEMENTS. Any event of default shall occur under, or Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Other Agreements and such default shall continue beyond any applicable period of grace. (F) DEFAULT UNDER SECURITY DOCUMENTS. Any event of default shall occur under, or Borrower or any other Person party thereto shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents and such default shall continue beyond any applicable period of grace. (G) OTHER DEFAULTS. (i) There shall occur any default or event of default on the part of any Borrower (including specifically, but without limitation, due to nonpayment) under any agreement, document or instrument to which such Borrower is a party or by which such Borrower or any of its respective Property is bound, creating or relating to any Indebtedness (other than the Obligations) in excess of $250,000 if the payment or maturity of such Indebtedness is accelerated in consequence of such event of default or demand for payment of such Indebtedness is made, or (ii) the occurrence of an "Event of Default", as such term is defined in the Indenture. (H) UNINSURED LOSSES; UNAUTHORIZED DISPOSITIONS. Any material loss, theft, damage or destruction not fully covered by insurance (as required by this Agreement and subject to reasonable deductibles), or sale, lease or encumbrance of any of the Collateral or the making of any levy, seizure, or attachment thereof or thereon except in all cases as may be specifically permitted by other provisions of this Agreement. (I) ADVERSE CHANGES. There shall occur any material adverse change in the financial condition or business prospects of Borrower. 62 (J) INSOLVENCY, ETC. Any Borrower or Guarantor shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against any Borrower or Guarantor under the Bankruptcy Code (if against a Borrower or Guarantor, the continuation of such proceeding for more than 30 days), or any Borrower or Guarantor shall make any offer of settlement, extension or composition to their respective unsecured creditors generally. (K) BUSINESS DISRUPTION; CONDEMNATION. There shall occur a cessation of a substantial part of the business of any Borrower for a period which significantly affects such Borrower's capacity to continue its business, on a profitable basis; or any Borrower shall suffer the loss or revocation of any material license or permit now held or hereafter acquired by such Borrower which is necessary to the continued or lawful operation of its business; or any Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any material part of its business affairs; or any material lease or agreement pursuant to which any Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term; or any part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. (L) ERISA. A Reportable Event shall occur which Lenders shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated or any such trustee shall be requested or appointed, or if any Borrower is in "default" (as defined in SECTION 4219(C)(5) of ERISA) with respect to payments to a Multi-Employer Plan resulting from Borrower's complete or partial withdrawal from such Plan. (M) LITIGATION. Any Borrower or any Affiliate of any Borrower, shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Agent, for the benefit of Lenders. (N) JUDGMENTS. Any money judgment, writ of attachment or similar process is entered or filed against any Borrower or any of its Property and results in the creation or imposition of any Lien that is not a Permitted Lien or any money judgment or writ of attachment or similar process of greater than $500,000 is filed against any Borrower or any of its Property and remains undischarged or unstayed for more than thirty (30) days. (O) SUBORDINATED DEBT. Borrower shall make any payment on account of Borrower Subordinated Debt other than a Permitted Payment or Parent shall make any payment on the Convertible Note not specifically permitted by the provisions of the subordination agreement among Premier, Parent and Lenders. 63 (P) CHANGE IN CONTROL. (i) A Change in Control shall occur, or (ii) the occurrence of a "Change of Control", as defined in the Indenture. (Q) DEFAULT UNDER SUBORDINATED DEBT DOCUMENTS. Any event of default shall occur under, or any Person shall default in the performance or observance of any term, covenant, condition or agreement contained in any instrument or document evidencing or executed in connection with any Borrower Subordinated Debt, including, without limitation, any subordination agreement. (R) REPUDIATION OF OR DEFAULT UNDER GUARANTY AGREEMENT. Guarantor shall revoke or attempt to revoke the Guaranty Agreement to which it is a party or shall repudiate its liability thereunder or shall be in default under the terms thereof. (S) REVOCATION OF DISNEY LICENSES. Walt Disney Company and/or its affiliates shall revoke all or substantially all of the licenses granted to any Borrower by such entity. (T) MANDATORY REDEMPTION OF PARENT SENIOR NOTES. The occurrence of any event which triggers or gives any holder of any of the Parent Senior Notes the right to require a mandatory redemption of all or any portion of the Parent Senior Notes owned by or on behalf of such holder. 11.2. ACCELERATION OF THE OBLIGATIONS. Without in any way limiting the right of Agent and/or Lenders to demand payment of any portion of the Obligations payable on demand in accordance with SECTION 3.4 hereof, upon or at any time after the occurrence of an Event of Default as above provided, all or any portion of the Obligations due or to become due from Borrower to Agent and/or any Lender (whether under this Agreement, or any of the other Loan Documents or otherwise) shall, at Lenders' option, become at once due and payable without presentment, demand, protest, notice of dishonor, notice of default, notice of intent to accelerate, notice of acceleration, or any other notice whatsoever, and Borrower shall forthwith pay to Agent, for the account of Lenders, in addition to any and all sums and charges due, the entire principal of and interest accrued on the Obligations. 11.3. REMEDIES. Upon and after the occurrence of an Event of Default, Agent, with the prior consent of Lenders and on behalf of Lenders, shall have and may exercise from time to time the following rights and remedies: (A) All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Agent or any Lender may be entitled, all of which rights and remedies shall be cumulative, and none of which shall be exclusive, and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents. (B) The right to take immediate possession of the Collateral, and (i) to require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Agent at a 64 place designated by Agent which is reasonably convenient to both parties, and (ii) to enter any of the premises of Borrower or wherever any of the Collateral shall be located, and to keep and store the same on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). (C) The right to sell or otherwise dispose of all or any Inventory in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Agent, in its discretion, may deem advisable. Borrower agrees that ten days written notice to Borrower of any public or private sale or other disposition of such Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Agent shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Agent shall have the right to sell, lease or otherwise dispose of such Collateral, or any part thereof, for cash, credit or any combination thereof, and Agent or any Lender may purchase all or any part of such Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. (D) Agent, for the benefit of Lenders, is hereby granted a license and a right to use, without charge, (i) Borrower's equipment, and all other Property of Borrower deemed useful by Agent, in finishing out and preparing for sale and selling any Collateral and (ii) Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, licenses and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and in collecting any of the Accounts, and Borrower's rights under all licenses and all franchise agreements shall inure to Agent's and Lenders' benefit. Such rights and licenses hereunder of Agent shall continue until the earlier to occur of (x) disposition of all the Collateral and collection of all the Accounts or (y) payment in full of all Obligations and termination of all obligations under this Agreement of Agent and Lenders. As to licenses held by Borrower for the manufacture of trademarked goods (such as from Walt Disney Company and Warner Bros.), Agent and Lenders acknowledge that the foregoing sentences shall not entitle Agent or Lender to manufacture or finish-out inventory in violation of the provisions of such licenses. In addition to and not in limitation of the foregoing provisions, Borrower agrees that if it can not legally grant to Agent, for the benefit of Lenders, any of the licenses or rights described above, Borrower will use its best efforts to obtain for Agent and Lenders substantially the same rights, benefits and protections Agent and Lenders otherwise would have received from the grant of such right or license. (E) The proceeds realized from the sale of any Collateral may be applied, after allowing two Business Days for collection, first to the costs, expenses and reasonable attorneys' fees incurred by Agent in collecting the Obligations, in enforcing the rights of Agent and Lenders under the Loan Documents and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivery any of the Collateral; secondly, to interest due upon any of the Obligations; and thirdly, to the principal of the Obligations and fourthly, at the option of Agent, to the establishment of a cash collateral fund to be held as a reserve to fund future 65 drawings made under Letters of Credit issued by Agent or Bank and future LC Payments. If any deficiency shall arise, Borrower shall remain liable to Agent and Lenders therefor. 11.4. REMEDIES CUMULATIVE; NO WAIVER. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrower contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to Agent and/or any Lender or contained in any other agreement between Agent or any Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrower herein contained. The failure or delay of Agent or any Lender to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such Liens, rights, powers and remedies, but all such Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrower to Agent and/or any Lender shall have been fully satisfied, and all Liens, rights, powers, and remedies herein provided for are cumulative and none are exclusive. SECTION 12. THE AGENT 12.1. APPOINTMENT AND AUTHORIZATION. Each Lender hereby irrevocably appoints and authorizes Agent to take such action on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto. With respect to its Revolving Credit Commitment, the Advances made by it, and the Note issued to it, Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include the Agent, in its capacity as a Lender. The Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, Borrower and its Affiliates, and any Person which may do business with Borrower or its Affiliates, all as if Agent were not Agent hereunder and without any duty to account therefor to Lenders. 12.2. NOTE HOLDERS. Agent may treat the payee of any Note as the holder thereof until written notice of transfer shall have been filed with it signed by such payee and in form satisfactory to Agent. 12.3. CONSULTATION WITH COUNSEL. Lenders agree that Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. 12.4. DOCUMENTS. Agent shall not be under a duty to examine or pass upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be. 66 12.5. RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving written notice thereof to Lenders and Borrower and the Agent may be removed at any time with or without cause by any number of Lenders whose aggregate Revolving Commitment Percentages total at least 51%. Upon any such resignation or removal, Lenders shall have the right to appoint a successor Agent reasonably acceptable to Borrower. If no successor Agent shall have been so appointed by Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent reasonably acceptable to Borrower. Upon the acceptance by any Person of any appointment as successor Agent hereunder, 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. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this SECTION 12 shall continue in effect for its benefit with respect to any actions taken or omitted to be taken by it while it was acting as Agent. 12.6. RESPONSIBILITY OF AGENT. It is expressly understood and agreed that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents and that Agent shall be entitled to assume that no Default or Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from Borrower or a Lender that a Default or an Event of Default has occurred and is continuing and specifying the nature thereof. Neither Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Loan Documents, except for its own gross negligence or willful misconduct. Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment or discretion, or which may seem to it to be necessary or desirable in the premises. Agent shall not be responsible to Lenders for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any Lender under, this Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any document referred to or provided for herein or for any failure by Borrower to perform any of its obligations hereunder. Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The relationship between Agent and each of the Lenders is only that of agent and principal and has no fiduciary aspects. Nothing in this Agreement or elsewhere contained shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is herein made. In performing its duties and functions hereunder, Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility 67 toward or any relationship of agency or trust with or for Borrower. As to any matters not expressly provided for by this Agreement, Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of Lenders and such instructions shall be binding upon all Lenders; PROVIDED, HOWEVER, that Agent shall not be required to take any action which exposes Agent to personal liability or which is contrary to this Agreement or applicable law. 12.7. NOTICES OF EVENT OF DEFAULT. In the event that Agent shall have acquired actual knowledge of any Event of Default or of an event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default, Agent shall promptly give notice thereof to the Lenders. 12.8. REQUESTS FOR INFORMATION. In the event that Agent shall have received any information, notices, or documents of any kind which are not required to be provided to Lenders pursuant to the terms of this Agreement, Agent shall, upon any Lender's request, use its best efforts to provide copies of the same to such Lender. In addition, contemporaneously with the giving of the settlement notice pursuant to SECTION 2.3(C) hereof, Agent shall deliver to each Lender an analysis of Borrower's Borrowing Base and availability as of the preceding Business Day, detailed to show Collateral categories and ineligibles. 12.9. INDEPENDENT INVESTIGATION. Each of the Lenders severally represents and warrants to Agent that it has made its own independent investigation and assessment of the financial condition and affairs of the Borrower in connection with the making and continuation of its participation in the Loans hereunder and has not relied exclusively on any information provided to such Lender by Agent in connection herewith, and each Lender represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the creditworthiness of Borrower while the Loans are outstanding or its Revolving Credit Commitment hereunder is in force. 12.10. INDEMNIFICATION. Lenders agree to indemnify Agent (to the extent not reimbursed by Borrower), ratably according to their respective Revolving Commitment Percentages, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by Agent under the Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. 12.11. BENEFIT OF SECTION 12. The agreements contained in SECTION 12 hereof are solely for the benefit of Agent and Lenders, and are not for the benefit of, or to be relied upon by, Borrower, or any third party. 68 SECTION 13. MISCELLANEOUS 13.1. POWER OF ATTORNEY. Borrower hereby irrevocably designates, makes, constitutes and appoints Agent (and all Persons designated by Agent) as Borrower's true and lawful attorney (and agent-in-fact) and Agent, or Agent's agent, may, without notice to Borrower and in either Borrower's or Agent's name, but at the cost and expense of Borrower: (A) At such time or times hereafter as Agent or said agent may determine, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Agent or any Lender or under Agent's or any Lender's control; and (B) At such time or times upon or after the occurrence of an Event of Default as Agent or its agent may determine: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Agent deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Agent may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lenders on account of the Obligations; (viii) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, and any other Collateral and to which Borrower has access; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Agent's determination, to fulfill Borrower's obligations under this Agreement. 13.2. INDEMNITY. BORROWER HEREBY INDEMNIFIES, HOLDS HARMLESS, AND SHALL DEFEND AGENT, LENDERS AND THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS, COUNSEL AND EMPLOYEES ("INDEMNIFIED PERSONS") FROM AND AGAINST ANY AND ALL LOSSES, LIABILITIES, DAMAGES, COSTS, EXPENSES, SUITS, ACTIONS AND PROCEEDINGS EVER SUFFERED OR INCURRED BY ANY INDEMNIFIED PERSON ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, ANY LOSSES CAUSED BY THE NEGLIGENCE OF SUCH INDEMNIFIED PERSON, BUT NOT 69 INCLUDING ANY LOSSES CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PERSON, AND BORROWER SHALL REIMBURSE THE AGENT, LENDERS AND EACH OTHER INDEMNIFIED PERSON FOR ANY EXPENSES (INCLUDING IN CONNECTION WITH THE INVESTIGATION OF, PREPARATION FOR OR DEFENSE OF ANY ACTUAL OR THREATENED CLAIM, ACTION OR PROCEEDING ARISING THEREFROM, INCLUDING ANY SUCH COSTS OF RESPONDING TO DISCOVERY REQUESTS OR SUBPOENAS, REGARDLESS OF WHETHER AGENT, SUCH LENDER OR SUCH OTHER INDEMNIFIED PERSON IS A PARTY THERETO). WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THIS INDEMNITY SHALL EXTEND TO ANY CLAIMS ASSERTED AGAINST AGENT, ANY LENDER OR ANY OTHER INDEMNIFIED PERSON BY ANY PERSON UNDER ANY ENVIRONMENTAL LAWS OR SIMILAR LAWS BY REASON OF BORROWER'S OR ANY OTHER PERSON'S FAILURE TO COMPLY WITH LAWS APPLICABLE TO SOLID OR HAZARDOUS WASTE MATERIALS OR OTHER TOXIC SUBSTANCES. EACH INDEMNIFIED PERSON MAY SELECT ITS OWN COUNSEL WITH RESPECT TO ANY LOSSES, IN ADDITION TO BORROWER'S COUNSEL, AND SHALL BE INDEMNIFIED THEREFOR HEREUNDER. NOTWITHSTANDING ANY CONTRARY PROVISION OF THIS AGREEMENT, THE OBLIGATION OF BORROWER UNDER THIS SECTION 13.2 SHALL SURVIVE THE PAYMENT IN FULL OF THE LOANS AND THE TERMINATION OF THIS AGREEMENT. 13.3. MODIFICATION OF AGREEMENT. All modifications, consents, amendments or waivers of any provision of any Loan Document, or consent to any departure by Borrower therefrom, shall be effective only if the same shall be in writing and concurred in by Lenders, and then shall be effective only in the specific instance and for the purpose for which given. 13.4. REIMBURSEMENT OF EXPENSES. Without limiting Borrower's obligations for payment of expenses as provided elsewhere in this Agreement or in any other Loan Document, if, at any time or times prior or subsequent to the date hereof, regardless of whether or not an Event of Default then exists or any of the transactions contemplated hereunder are concluded, Agent or any Lender employs counsel for advice or other representation, or incurs legal expenses or other costs or out-of-pocket expenses in connection with: (A) the negotiation and preparation of this Agreement or any of the other Loan Documents or any amendment of or modification of this Agreement or any of the other Loan Documents; or (B) the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby; (C) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Agent, any Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents, or Borrower's affairs (but excluding any litigation by Borrower against Agent, any Lender in which Borrower is the prevailing party); (D) any attempt to enforce any rights of Agent or any Lender against Borrower or any other Person which may be obligated to Agent or any Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; (E) the exercise or enforcement of any rights, remedies or privileges of Agent or any Lender under the Loan Documents or applicable law; (F) the analysis of information received in connection with any Loan Documents; 70 (G) the audit of any Collateral or Borrower's books and records; (H) the granting of any consents or waivers requested in connection with the Loan Documents; (I) the collection of any Obligation; or (J) any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then, in any such event, the reasonable attorneys' fees arising from such services and all expenses, costs, charges and other fees of such counsel or of Agent or any Lender or relating to any of the events or actions described in this SECTION 13.4 shall be payable, on demand and upon presentation of an itemized statement, by Borrower to Agent or such Lender, as the case may be, and shall be additional Obligations hereunder secured by the Collateral. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include appraisal fees; audit fees; accountants' fees, costs and expenses; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges; telegram charges; secretarial overtime charges; consulting fees, costs and expenses; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other services, and Agent or such Lender shall not be obligated to give Borrower any notice prior to incurring any such expenses. Additionally, if any taxes (excluding taxes imposed upon or measured by the net income of Agent or any Lender) shall be payable on account of the execution or delivery of this Agreement, or the execution, delivery, issuance or recording of any of the other Loan Documents, or the creation of any of the Obligations hereunder, by reason of any existing or hereafter enacted federal or state statute, Borrower will pay all such taxes, including, but not limited to, any interest and penalties thereon, and will indemnify and hold Agent or such Lender harmless from and against liability in connection therewith. 13.5. INDULGENCES NOT WAIVERS. Agent's and/or Lenders' 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 Agent or any Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Agent or any Lender of an Event of Default under this Agreement or any of the other Loan Documents shall not suspend, waive or affect any other Event of Default under this Agreement or any of the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations contained in this Agreement or any of the other Loan Documents and no Event of Default under this Agreement or any of the other Loan Documents shall be deemed to have been suspended or waived by Agent and/or Lenders, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Agent and directed to Borrower. 13.6. SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement 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 remainder of such provision or the remaining provisions of this Agreement. 13.7. SUCCESSORS AND ASSIGNS; PARTICIPATIONS BY LENDER. This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the successors and assigns of 71 Borrower, Agent and Lenders; PROVIDED, HOWEVER, that Borrower may not sell, assign or transfer any interest in this Agreement or any other Loan Document, or any portion thereof, including, without limitation, Borrower's rights, title, interests, remedies, powers and duties hereunder or thereunder. Any purported assignment by Borrower in violation of this SECTION 13.7 shall be void, without Lenders' prior written consent. Borrower hereby consents to Agent's and/or any Lender's participation, sale, assignment, transfer or of the disposition, at any time or times hereafter, of this Agreement, any other Loan Document, or any other Obligations, or of any portion hereof or thereof, including, without limitation, Agent's and Lenders' rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would have if it were the original "Agent" or "Lender" (as the case may be) hereunder, Agent or Lender (as the case may be) shall be relieved of all obligations hereunder upon any such assignment. In the case of a participation, (i) each participating lender shall be entitled to receive all information received by Agent regarding the creditworthiness of Borrower, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether such participating lender is subject to the circular or not), (ii) Borrower shall execute new Notes in favor of each Lender and (iii) each Lender's pro rata share of the Loans shall be adjusted accordingly. 13.8. CUMULATIVE EFFECT; CONFLICT OF TERMS. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in SECTION 3.4 of this Agreement and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 13.9. 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 and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 13.10. NOTICE. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto shall be in writing and shall be sent by certified or registered mail return receipt requested, by personal delivery against receipt, or by telegraph or telex and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered when delivered against receipt or one Business Day after deposit in the U.S. mail postage prepaid, or, in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answerback received, addressed as follows: (A) If to Agent: Fleet Capital Corporation 2711 North Haskell, Suite 2100 Dallas, Texas 75204 Attention: Loan Administration Manager 72 with a courtesy copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attention: Kenneth M. Vesledahl, Esq. (B) If to Borrower: Brazos, Inc. Morning Sun, Inc. 3860 Virginia Avenue Cincinnati, Ohio 45227 Attention: President with a courtesy copy to: Porter & Hedges, L.L.P. 700 Louisiana, 35th Floor Houston, Texas 77002-2764 Attention: William W. Wiggins, Jr., Esq. (C) If to Lenders: Fleet Capital Corporation 2711 North Haskell, Suite 2100 Dallas, Texas 75204 Attention: Loan Administration Manager BankBoston, N.A. 115 Perimeter Circle Place, N.E., Suite 500 Atlanta, Georgia 30346 Attention: Patrick A. Morris Stephen Y. McGehee with a courtesy copy to: Hughes & Luce, L.L.P. 1717 Main Street, Suite 2800 Dallas, Texas 75201 Attention: Kenneth M. Vesledahl, Esq. or to such other address as each party may designate for itself by like notice given in accordance with this SECTION 13.10; PROVIDED, HOWEVER, that any notice, request or demand to or upon Agent or any Lender pursuant to SECTIONS 2.3 or 3.3 shall not be effective until received by Agent or such Lender. Any written notice that is not sent in conformity with the provisions hereof shall nevertheless be effective on the date that such notice is actually received by the noticed party. 13.11. AGENT'S OR LENDERS' CONSENT. Whenever Agent's or Lenders' consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Agent or Lenders shall be authorized to give or withhold such consent in its sole and absolute discretion (unless otherwise 73 specifically provided herein) and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 13.12. DEMAND OBLIGATIONS. Nothing in this Agreement shall affect or abrogate the demand nature of any portion of the Obligations expressly made payable on demand by this Agreement or by any instrument evidencing or securing same, and the occurrence of an Event of Default shall not be a prerequisite for Agent's and/or Lenders' requiring payment of such Obligations. 13.13. TIME OF ESSENCE. Time is of the essence of the Loan Documents. 13.14. ENTIRE AGREEMENT. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 13.15. INTERPRETATION. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured, drafted or dictated such provision. 13.16. NONAPPLICABILITY OF ARTICLE 5069-15.01 ET SEQ. Borrower and Lenders hereby agree that, except for SECTION 15.10(B) thereof, the provisions of Tex. Rev. Civ. Stat. Ann. art. 5069-15.01 ET SEQ. (Vernon 1987) (regulating certain revolving credit loans and revolving tri-party accounts) shall not apply to this Agreement or any of the other Loan Documents. 13.17. NO PRESERVATION OR MARSHALING. Borrower agrees that neither Agent nor any Lender shall have any obligation to preserve rights to the Collateral against prior parties or to marshal any Collateral for the benefit of any Person. 13.18. GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN DALLAS, TEXAS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN TEXAS, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF AGENT'S LIEN, FOR THE BENEFIT OF LENDERS, UPON SUCH COLLATERAL AND THE ENFORCEMENT OF AGENT'S OR ANY LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF 74 BORROWER OR AGENT OR ANY LENDER, BORROWER HEREBY CONSENTS AND AGREES THAT THE DISTRICT COURT OF DALLAS COUNTY, TEXAS, OR, AT AGENT'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND AGENT OR ANY LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING FOR SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR THREE DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY AGENT OR ANY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORM OR JURISDICTION. 13.19. WAIVERS BY BORROWER. BORROWER WAIVES (A) THE RIGHT TO TRIAL BY JURY (WHICH AGENT AND LENDERS HEREBY ALSO WAIVE) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL; (B) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON-PAYMENT, INTENT TO ACCELERATE, ACCELERATION, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY AGENT AND LENDERS ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER AGENT OR ANY LENDER MAY DO IN THIS REGARD; (C) NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING AGENT OR ANY LENDER TO EXERCISE ANY OF AGENT'S OR ANY LENDER'S REMEDIES; (D) THE BENEFIT OF ALL 75 VALUATION, APPRAISEMENT AND EXEMPTION LAWS; (E) ANY RIGHT BORROWER MAY HAVE UPON PAYMENT IN FULL OF THE OBLIGATIONS TO REQUIRE AGENT AND/OR ANY LENDER TO TERMINATE ITS SECURITY INTEREST IN THE COLLATERAL OR IN ANY OTHER PROPERTY OF BORROWER UNTIL TERMINATION OF THIS AGREEMENT IN ACCORDANCE WITH ITS TERMS AND THE EXECUTION BY BORROWER, AND BY ANY PERSON WHOSE LOANS TO BORROWER IS USED IN WHOLE OR IN PART TO SATISFY THE OBLIGATIONS, OF AN AGREEMENT INDEMNIFYING AGENT AND LENDERS FROM ANY LOSS OR DAMAGE AGENT AND EACH LENDER MAY INCUR AS THE RESULT OF DISHONORED CHECKS OR OTHER ITEMS OF PAYMENT RECEIVED BY AGENT OR ANY LENDER FROM BORROWER OR ANY ACCOUNT DEBTOR AND APPLIED TO THE OBLIGATIONS; AND (F) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO AGENT'S AND EACH LENDER'S ENTERING INTO THIS AGREEMENT AND THAT AGENT AND EACH LENDER ARE RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 13.20. RELEASE. BORROWER HEREBY AGREES AND ACKNOWLEDGES THAT (A) IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM AGENT OR ANY LENDER, OR (B) IF IT HAS ANY SUCH DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND, IN CONSIDERATION OF AGENT'S AND LENDERS' EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE LOANS MADE IN CONNECTION WITH THE ACQUISITION, BORROWER HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES AGENT AND EACH LENDER, EACH OF THEIR RESPECTIVE AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AGREEMENT IS EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST AGENT, ANY LENDER, EACH OF THEIR RESPECTIVE AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING 76 FROM ANY "LOANS", INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AGREEMENT. 13.21. WAIVER OF CONSUMER RIGHTS. BORROWER HEREBY WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ., BUSINESS AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF BORROWER'S OWN SELECTION, BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER. BORROWER EXPRESSLY WARRANTS AND REPRESENTS THAT BORROWER (A) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO AGENT AND/OR LENDERS, AND (B) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. BORROWER HAS READ AND UNDERSTANDS SECTION 13.21: ______(INITIALS) 13.22. ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THE SAME MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 13.23. RELEASE. Upon the funding of the initial Loans hereunder, Agent, on behalf of Lenders, hereby releases all the existing security interests of Agent, for the benefit of Lenders, in all the "Collateral", as defined in the Second Restated Loan Agreement, OTHER THAN in the Property and interests in Property described in SECTION 4 hereof. Agent and Lenders agree to execute, at the expense of Borrower, such UCC-3 amendments and other documents as shall be reasonably requested by Borrowers to evidence such release. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 77 IN WITNESS WHEREOF, this Agreement has been duly executed and effective as of the day and year specified at the beginning hereof. "BORROWER" BRAZOS, INC. By: .................................... Name: .................................... Title:.................................... MORNING SUN, INC. By: .................................... Name: .................................... Title:.................................... "AGENT" FLEET CAPITAL CORPORATION as Agent By: .................................... Name: .................................... Title:.................................... "LENDERS" FLEET CAPITAL CORPORATION, in its individual capacity By: .................................... Name: .................................... Title:.................................... 78 BANKBOSTON, N.A. By: .................................... Name: .................................... Title:.................................... 79 EX-21.1 4 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT NAME STATE/COUNTRY OF FORMATION - ------------------------------------- ---------------------------------------- Brazos Embroidery, Inc............... Pennsylvania Brazos, Inc.......................... Texas Morning Sun, Inc................ Washington Brazos Sportswear Japan KK ..... Japan EX-23.1 5 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Brazos Sportswear, Inc.'s previously filed Registration Statement File No. 333-40965. ARTHUR ANDERSEN LLP Cincinnati, Ohio March 23, 1998 EX-27.1 6
5 1,000 12-MOS DEC-27-1997 DEC-27-1997 2,679 0 49,919 7,930 55,551 116,570 18,557 5,221 185,310 63,329 101,572 8,577 0 4 8,651 185,310 284,487 284,487 212,334 212,334 64,665 2,486 9,996 (2,592) (731) (1,861) 0 (192) 0 (2,053) (.70) (.70)
EX-27.2 7 AMENDED AND RESTATED
5 1,000 YEAR DEC-28-1996 DEC-28-1996 561 0 24,878 2,760 25,338 51,600 10,205 3,332 82,682 46,933 23,606 7,613 0 5 3,224 82,682 169,452 169,452 127,971 127,971 32,548 756 4,332 4,821 789 4,032 0 0 0 4,032 1.54 1.15
EX-27.3 8 AMENDED AND RESTATED
5 1,000 YEAR DEC-30-1995 DEC-30-1995 755 0 14,261 1,053 23,571 38,610 7,224 2,144 47,070 40,202 6,612 945 0 3 (692) 47,070 131,020 131,020 106,576 106,576 25,549 619 3,695 (4,778) (338) (4,440) 0 500 0 (3,940) (1.95) (1.95)
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