-----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, J2/BedHeDDMUVmWzA9JQesm92btOl2GBFfHfLGOZKbDJeefnGiuxFHhtetq2ZwHy /NsXL3SrZFHWdzoXV4G17A== 0000897101-97-000392.txt : 19970404 0000897101-97-000392.hdr.sgml : 19970404 ACCESSION NUMBER: 0000897101-97-000392 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970104 FILED AS OF DATE: 19970403 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUMWEAR INC CENTRAL INDEX KEY: 0000069067 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 410429620 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00063 FILM NUMBER: 97574213 BUSINESS ADDRESS: STREET 1: 8000 W 78TH ST STE 400 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6129435000 MAIL ADDRESS: STREET 1: 8000 W 78TH ST STE 400 CITY: MINNEAPOLIS STATE: MN ZIP: 55439 FORMER COMPANY: FORMER CONFORMED NAME: MUNSINGWEAR INC DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 --------------------------- FOR THE FISCAL YEAR ENDED JANUARY 4, 1997 COMMISSION FILE NUMBER 1-63 PREMIUMWEAR, INC. (FORMERLY KNOWN AS MUNSINGWEAR, INC.) (Exact Name of Registrant as Specified in its Charter) DELAWARE 41-0429620 (State of Incorporation) (I.R.S. Employer Identification No.) 8000 W. 78TH STREET, SUITE 400, MINNEAPOLIS, MINNESOTA 55439 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (612) 943-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered - ------------------------------- ------------------------ Common Stock, $.01 par value New York Stock Exchange Preferred share purchase rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ____ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES __X__ NO ____ The aggregate market value of the voting stock held by nonaffiliates of the Registrant at March 19, 1997 was $5,737,000, based upon the closing price of $3.25 per share on that date. The number of shares of common stock outstanding at March 19, 1997 was 2,319,030. 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. ___ -------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Documents incorporated in part by reference in Parts I and II of this report: Portions of PremiumWear, Inc. 1996 Annual Report to Shareholders for the fiscal year ended January 4, 1997. Documents incorporated in part by reference in Part III of this report: Portions of definitive proxy statement for the 1997 Annual Meeting of Shareholders. This Form 10-K consists of 117 total pages: The exhibit index is on page 18. PART I Item 1. Business A. GENERAL DEVELOPMENT OF BUSINESS The Company (formerly known as Munsingwear, Inc.) was incorporated under the laws of Delaware in 1923 as the successor to a business founded in 1886. On July 3, 1991, the Company filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code, together with a proposed Plan of Reorganization. The Company emerged from bankruptcy on October 29, 1991. In late 1995 the Company retained the services of an investment banking firm to explore a range of opportunities to maximize shareholder value. This process culminated with the sale of trade names and trademarks and exit from the retail and professional golf businesses. On June 28, 1996, the Company sold its trademarks and pending trademark applications for certain Far Eastern countries to ITOCHU Corporation, Toyobo Co., Ltd., and Descente, Ltd. for $5,000,000 cash. On September 6, 1996, the Company sold all of its rights to its remaining trademarks and certain associated assets relating to the retail and professional golf businesses to Supreme International Corporation for $18,000,000 in cash. On September 6, 1996 the Company changed its name to PremiumWear, Inc. and now sells Munsingwear(R) brand knit shirts, woven shirts and pants and shorts under license from Supreme International Corporation. Sales are to the special markets channel of distribution which includes advertising specialty incentive customers, specialty distributors and uniform market customers. The Company's principal executive offices are located at 8000 West 78th Street, Suite 400, Minneapolis, Minnesota 55439, and its telephone number is (612) 943-5000. As used in this document, the term "Company" refers to PremiumWear, Inc. and its subsidiaries unless otherwise noted or indicated by the context. At January 4, 1997, the Company had two idle foreign subsidiaries. B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment, apparel manufacturing. As of January 4, 1997, the Company's foreign operations were not material. C. NARRATIVE DESCRIPTION OF BUSINESS Principal Products: The Company sells primarily men's knit sport shirts under the Munsingwear(R) label. All sales are to special markets customers and are under a license from Supreme International Corporation. Sources and Availability of Raw Materials and Products: Approximately 75% of the Company's products are manufactured domestically. The other 25% is sourced primarily from manufacturers in the Far East and through the 807 program in the Caribbean Basin. The principal raw materials used in the domestic production process are cotton, synthetic and cotton/synthetic blended goods obtained principally from United States sources. The Company purchases most of its piece goods from approximately ten sources. There are currently no major problems in availability of raw materials and alternative sources are available. The Company's Fairmont, NC manufacturing facility includes a raw material warehouse, cutting, sewing and embroidery operations, and a finished goods distribution center. The Company also utilizes contract sewing manufacturers in close proximity to its North Carolina facility and all products, both domestically and offshore produced, are distributed to customers from the North Carolina facility. Trademarks and Trade Names: The Company is a licensee of the Munsingwear(R) name under a license granted from Supreme International Corporation in a transaction related to the September 1996 sale of trademarks. The license includes knit shirts for an initial term of 20 years and woven shirts, pants and shorts for an initial term of 5 years. For the first 5 years, knit shirt sales are subject to payment of royalties when annual sales reach a certain aggregate total, at which time license fees are due on all such sales. After 2001 all knit shirt sales are subject to license fees. Management expects to reach the annual sales threshold at which royalties are due in 1998. All sales of woven shirts, pants and shorts are subject to license fees, including certain minimum annual amounts. Seasonal Aspects of the Business: Since the Company has been operating in the special markets channel of distribution for only a short time, specific seasonal trends have not yet been determined. However, management expects peak shipments to occur in the second and third quarters of the fiscal year. Working Capital Practices: The Company maintains a secured bank line of credit to meet its working capital needs. Peak borrowings under this agreement normally will occur in the months of April through September, the heaviest shipping period of the year. The bank line of credit is also used for letters of credit that are required for generally all purchases from Far East sources. The Company allows returns of merchandise as a result of shipping errors, damaged merchandise and for other reasons. Returns in the special markets business have been less than 2% of sales in each of the past two years. Customers: The Company sells to approximately 2,100 customers. Sales to San Mar Corporation were 12% of 1996 net sales. In 1995 no single customer represented more than 10% of total Company sales. Sales to Sam's Club (a division of Wal-Mart Stores, Inc., no longer a customer) in 1994 were 16% of net sales. Backlog of Orders: The Company's backlog of unfilled orders at January 4, 1997 was approximately $3,800,000 as compared to $1,900,000 a year ago. The unfilled order backlog consists of orders received for subsequent delivery. However, since it includes orders subject to change for color, size, stock adjustments, extension of delivery dates and cancellation, the unfilled order backlog does not necessarily relate directly to future sales. Competition: The special markets apparel industry in the United States is becoming increasingly competitive and is characterized by a number of broad-line companies. The principal methods of competition are pricing, styling, quality (both in material and production), inventory replenishment programs and customer service. The Company seeks to maintain its competitive position through the use of all these methods. Research and Development: The Company is involved in limited experimental research activities related to the development of new fabrics and production methods. Research and development expenses, other than for product design, are not significant. Environmental Considerations: The Company's manufacturing operations are subject to various federal, state and local laws restricting the discharge of materials into the environment. The Company is not involved in any pending or threatened proceedings which would require curtailment of its operations because of such regulations. In 1996, the Company's capital expenditures for environmental control facilities were not significant, and no significant capital expenditures related to environmental issues are projected in 1997. Employees: As of January 4, 1997, there were 312 employees, none of whom were represented by a union. Special Cash Distribution to Shareholders: On January 27, 1997, the board of directors declared a special cash distribution of $5.39 per share, or approximately $12,500,000, to shareholders of record on February 19, 1997 which was paid on March 5, 1997. The funds utilized were proceeds from the 1996 sales of trademarks and collection of accounts receivable and liquidation of inventories related to the former retail and golf businesses. D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Sales to unaffiliated foreign customers located outside the United States and its territories for the past three years were not significant. Item 2. Properties At January 4, 1997, the Company occupied the following properties: Approximate Square Percentage Lease Property Footage Utilized Expires -------- ------- -------- ------- Minneapolis, MN - Headquarters 16,000 50 1997 Fairmont, NC - Cutting and sewing plant, warehouse and distribution center 139,100 100 Owned New York, NY - Idle sales 1,000 0 1997 office/showroom Management expects to utilize domestic contractors, 807 contractors and inventory purchases from the Far East to meet the increased production requirements as a result of increased customer demand. At January 4, 1997, no facilities were occupied under capitalized leases. Item 3. Legal Proceedings None of a significant nature. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant The following information is furnished with respect to the Company's executive officers as of the date hereof, pursuant to Item 401(b) of Regulation S-K. Each of the officers has been appointed to serve in his respective office until his successor has been elected.
Executive Officer Name and Age Position Since - ------------ -------- --------- Thomas D. Gleason (61) Chief Executive Officer September 1996 to 1996 present; Chairman and director of the Company 1995 to present; Vice Chairman of Wolverine World Wide, Inc. (footwear manufacturing and marketing), 1993 through April 17, 1996; Chief Executive Officer of Wolverine World Wide, Inc. from 1972 to 1993. David E. Berg (40) Chief Operating Officer, December 1996 to 1995 present; Executive Vice President, Sales & Marketing May 1995 to present; Vice President, General Manager, Special Markets, October 1993 to May 1995; Vice President, National Sales Manager, Retail Division, January 1990 to October 1993; Vice President, General Manager, Furnishings Division, February 1989 to January 1990. James S. Bury (53) Vice President of Finance, December 1996 to 1990 present; Vice President of the Company, 1990 to 1997; Corporate Controller, August 1989 to May 1990; Vice President Finance, Men's Apparel Division, February 1988 to August 1989. Cynthia L. Boeddeker (39) Vice President and General Merchandise Manager, 1996 December 1996 to present; Director of Sourcing and Inventory Management, February 1994 to December 1996; Import Manager, March 1992 to February 1994; Sourcing Administrator, July 1991 to March 1992. Billy E. Smith (46) Vice President of Manufacturing March 1997 to 1997 present; has performed the duties of Vice President of Manufacturing since March 1996 without designation as an executive officer until March 1997; Distribution and Planning Manager, Director of Industrial Engineering, MRP Manager of Kayser-Roth Corporation, 1990 to 1996.
PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this caption is incorporated herein by reference to pages 18 and 26 of the 1996 Annual Report to Shareholders. As of February 19, 1997, the Registrant had 837 shareholders of record (excluding beneficial owners of shares held in nominees' accounts). Item 6. Selected Financial Data The information required under this caption is incorporated herein by reference to page 26 of the 1996 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this caption is incorporated herein by reference to pages 16 through 18 of the 1996 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data The information required under this caption is incorporated herein by reference to pages 19 through 26 of the 1996 Annual Report to Shareholders. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant A. Identification of Directors. The information required under this caption is incorporated by reference to the information set forth under the caption "Election of Directors" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of Registrant's fiscal year ended January 4, 1997. B. Executive Officers is included in Part I of this Report. Item 11. Executive Compensation The information required under this caption is incorporated by reference to the information set forth under the caption "Executive Compensation and Other Information" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended January 4, 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this caption is incorporated by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended January 4, 1997. Item 13. Certain Relationships and Related Transactions The information required under this caption is incorporated by reference to the information set forth under the caption "Executive Compensation and Other Information" of the definitive proxy statement to be filed within 120 days of the Registrant's fiscal year ended January 4, 1997. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Financial statements, included in cited pages of the 1996 Annual Report to Shareholders, are incorporated by reference in Item 8: - Consolidated Statements of Operations for the three years ended January 4, 1997, January 6, 1996 and January 7, 1995 (page 19). - Consolidated Balance Sheets as of January 4, 1997 and January 6, 1996 (page 20). - Consolidated Statements of Cash Flows for the three years ended January 4, 1997, January 6, 1996 and January 7, 1995 (page 21). - Consolidated Statements of Changes in Shareholders' Equity for the three years ended January 4, 1997, January 6, 1996 and January 7, 1995 (page 22). - Notes to Consolidated Financial Statements (pages 23 through 26). - Report of Independent Public Accountants (page 26). 2. Financial Statement Schedules for the three years ended January 4, 1997, January 6, 1996 and January 7, 1995. - Schedule II - Valuation and Qualifying Accounts, pages 13-15 of this report. - Report of Independent Public Accountants on Schedules, page 16 of this report. - All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. 3. Exhibits: - Exhibit 2 - Plan of Reorganization, as confirmed October 1, 1991 by the United States Bankruptcy Court.(2) - Exhibit 3 - Restated Certificate of Incorporation and By- Laws, as amended.(2) (3) - Exhibit 4 - Instruments Defining the Rights of Security Holders - Form of Rights Agreement, incorporated by reference to Registration Statements on Form 8-A, as amended, dated November 6, 1987, File No. 1-63. - Exhibit 10 - Material Contracts (Management Contracts or Compensatory Plans or Agreements): (A) Employment Agreement with James S. Bury dated April 24, 1990.(1) (B) The Registrant's 1991 Stock Plan, as amended.(6) (C) Director Stock Option Agreement with Thomas D. Gleason dated September 22, 1995.(4) (D) Director Stock Option Agreement with Thomas D. Gleason dated January 30, 1996.(4) - Exhibit 10 - Material Contracts (Other): (E) Purchase and Sale Agreement, dated May 22, 1996, between the Registrant and Supreme International Corporation, as amended.(5) (F) License Agreement, dated September 6, 1996, between the Registrant and Supreme International Corporation.(5) (G) Credit and Security Agreement, dated February 4, 1997, between the Registrant and FBS Business Finance Corporation.(6) (H) Severance Agreement, dated September 6, 1996, between the Registrant and Lowell M. Fisher.(6) - Exhibit 11 - Computation of Per Share Earnings.(6) - Exhibit 13 - PremiumWear, Inc. 1996 Annual Report to Shareholders - Such report, except for those portions thereof which are expressly incorporated by reference in this report, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this filing.(6) - Exhibit 21 - Subsidiaries of the Registrant.(6) - Exhibit 23 - Consent of Independent Public Accountants.(6) - Exhibit 27 - Financial Data Schedule.(6) ---------------------- (1) Incorporated herein by reference to Exhibit 10(N) of the Registrant's Annual Report on Form 10-K for the year ended January 5, 1991 (File No. 1-63). (2) Incorporated herein by reference to Exhibits 2 and 3, respectively, of the Registrant's Annual Report on Form 10-K for the year ended January 4, 1992 (File No. 1-63). (3) Incorporated herein by reference to Form 8-K, dated August 1, 1995 (File No. 1-63). (4) Incorporated herein by reference to Exhibits 10(E) and (F) respectively of the Registrant's Annual Report on Form 10K for the year ended January 6, 1996 (File No. 1-63). (5) Incorporated herein by reference to Exhibits 2.1 and 2.2 respectively of the Registrant's Form 8-K, dated September 12, 1996 (File No. 1-63). (6) Filed herewith. (b) REPORTS ON FORM 8-K: Form 8-K, filed September 12, 1996, reported the Registrant's sale of assets to Supreme International Corporation; the entering into a license agreement by the Registrant and Supreme International Corporation; and the resignation of Lowell M. Fisher as President and Chief Executive officer and a member of the Board of Directors of the Company. (c) EXHIBITS: Reference is made to Item 14(a)(3). (d) SCHEDULES: Reference is made to Item 14(a)(2). SCHEDULE II PREMIUMWEAR, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED JANUARY 4, 1997
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ----------------------------- Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- --------- ----------- ----------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 219,000 $ 648,000(d) $ 516,000 $ 674,000(a) $ 709,000 Allowance for doubtful accounts 242,000 (12,000) 0 80,000(b) 150,000 Allowance for returns 50,000 0 1,933,000 1,933,000(c) 50,000 ----------- ----------- ----------- ----------- ----------- $ 511,000 $ 636,000 $ 2,449,000 $ 2,687,000 $ 909,000 =========== =========== =========== =========== =========== Reserve for restructuring $ 193,000 $ 0 $ 0 $ 193,000 $ 0 =========== =========== =========== =========== =========== Reserve for liabilities related to sold assets $ 0 $ 4,437,000(d) $ 0 $ 2,907,000 $ 1,530,000 =========== =========== =========== =========== ===========
Notes: (a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectible accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. (d) Charged against gain on sale of trademarks. SCHEDULE II
PREMIUMWEAR, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED JANUARY 6, 1996 Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions -------------------------------- Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- --------- ---------- ---------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 192,000 $ (8,000) $ 250,000 $ 215,000(a) $ 219,000 Allowance for doubtful accounts 200,000 162,000 0 120,000(b) 242,000 Allowance for returns 50,000 0 1,972,000 1,972,000(c) 50,000 ----------- ----------- ----------- ---------- ----------- $ 442,000 $ 154,000 $ 2,222,000 $2,307,000 $ 511,000 =========== =========== =========== ========== =========== Reserve for Facility Closing $ 37,000 $ (23,000) $ 0 $ 14,000 $ 0 =========== =========== =========== ========== =========== Reserve for Restructuring $ 0 $ 519,000 $ 0 $ 326,000 $ 193,000 =========== =========== =========== ========== ===========
Notes: (a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectible accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. SCHEDULE II PREMIUMWEAR, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED JANUARY 7, 1995
Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions ----------------------------- Balance Charged to Beginning Costs and Charged to Balance at Description of Year Expenses Net Sales Deductions End of Year - ----------- ------- -------- --------- ---------- ----------- Allowances deducted from trade receivables Allowance for cash discounts and other customer credits $ 272,000 $ 5,000 $ 461,000 $ 546,000(a) $ 192,000 Allowance for doubtful accounts 262,000 142,000 0 204,000(b) 200,000 Allowance for returns 50,000 0 1,113,000 1,113,000(c) 50,000 ----------- ----------- ----------- ----------- ----------- $ 584,000 $ 147,000 $ 1,574,000 $ 1,863,000 $ 442,000 =========== =========== =========== =========== =========== Reserve for facility closings $ 450,000 $ (100,000) $ 0 $ 313,000 $ 37,000 =========== =========== =========== =========== ===========
Notes: (a) Discounts allowed and other credits to customers' accounts receivable. (b) Uncollectible accounts written off, net of recoveries. (c) Returns applied to customers' accounts receivable. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of PremiumWear, Inc. included in the Company's annual report to stockholders included in this Form 10-K and have issued our report thereon dated February 19, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota February 19, 1997 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 behalf of the undersigned, thereunto duly authorized. PREMIUMWEAR, INC. Date: APRIL 3, 1997 By: /S/THOMAS D. GLEASON ------------------------------ Thomas D. Gleason, Chairman 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 and in the capacities and on the date indicated.
NAME TITLE - ---- ----- /S/THOMAS D. GLEASON Chairman and Chief Executive Officer April 3, 1997 - --------------------- (principal executive officer) and Thomas D. Gleason Director /S/JAMES S. BURY Vice President of Finance April 3, 1997 - --------------------------------- /S/C. D. ANDERSON Director April 3, 1997 - --------------------------------- C. D. Anderson /S/KEITH A. BENSON Director April 3, 1997 - --------------------------------- Keith A. Benson /S/GERALD E. MAGNUSON Director April 3, 1997 - --------------------------------- Gerald E. Magnuson /S/KEVIN S. MOORE Director April 3, 1997 - --------------------------------- Kevin S. Moore /S/WILLIAM J. MORGAN Director April 3, 1997 - --------------------------------- William J. Morgan /S/MICHAEL A. RASKIN Director April 3, 1997 - --------------------------------- Michael A. Raskin /S/MARK B. VITTERT Director April 3, 1997 - --------------------------------- Mark Vittert
EXHIBIT INDEX Exhibit No. Exhibit Page No. - ----------- ------- -------- 10 (B) 1991 Stock Plan, as amended. 19-32 10 (G) Credit and Security Agreement with FBS Business Finance 33-81 Corporation. 10 (H) Severance Agreement with Lowell M. Fisher. 82-85 11 Computation of Per Share Earnings. 86 13 PremiumWear, Inc. 1996 Annual Report to Shareholders. 87-114 21 Subsidiaries of the Registrant. 115 23 Consent of Independent Public Accountants. 116 27 Financial Data Schedule 117 EX-10.B 2 1991 STOCK PLAN PREMIUMWEAR, INC. 1991 STOCK PLAN SECTION CONTENTS PAGE 1. General Purpose of Plan; Definitions 1 2. Administration 3 3. Stock Subject to Plan 4 4. Eligibility 4 5. Stock Options 4 6. Restricted Stock 8 7. Transfer, Leave of Absence, etc. 10 8. Amendments and Termination 10 9. Unfunded Status of Plan 10 10. General Provisions 11 11. Effective Date of Plan 12 PREMIUMWEAR, INC. 1991 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the PremiumWear, Inc. 1991 Stock Plan (the "Plan"). The purpose of the Plan is to enable PremiumWear, Inc. (the "Company") and its Subsidiaries to retain and attract executives, other key employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. e. "Company" means PremiumWear, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). f. "Disability" means permanent and total disability as determined by the Committee. g. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. h. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with Section 422 of the Code and any applicable Treasury Department regulations with respect to "incentive stock options." i. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. j. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. k. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." l. "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. m. "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 6 below. p. "Retirement" means Normal Retirement or Early Retirement. q. "Stock" means the Common Stock, $.01 par value per share, of the Company. r. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. s. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board or by a Committee appointed by the Board consisting of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors, and who shall serve at the pleasure of the Board. The Committee may be a subcommittee of the Compensation Committee of the Board The Committee shall have the power and authority to grant to eligible employees, consultants and directors pursuant to the terms of the Plan: (i) Stock Options and (ii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers, other key employees, directors and consultants of the Company and its Subsidiaries to whom Stock Options and/or Restricted Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto); and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 873,500. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan, and in the number of shares subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees, consultants and members of the Board of the Company and Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options or Restricted Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options and Restricted Stock awards under this Plan which exceed 150,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after October 21, 2001. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non- Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time, provided, however, that unless the Stock Option has been approved by the Board, the Committee or the stockholders of the Company, a Stock Option granted to an officer, director or 10% stockholder of the Company shall not be exercisable for a period of six (6) months after the date of grant. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise or vesting provisions, for a period specified by the Committee, but not to exceed sixty (60) days nor be less than seven (7) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or Restricted Stock subject to an award hereunder (based on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that in the event payment is made in the form of shares of Restricted Stock, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock award tendered as payment by the optionee. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee generally shall have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three months (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non- Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three months (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non- Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than death, Disability or Retirement, the Stock Option shall thereupon terminate. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who (i) is not an employee of the Company or its Subsidiaries, and (ii) is elected or reelected to the Board at any annual or special meeting of the shareholders of the Company, or (iii) is serving an unexpired term as Director on the date of an annual meeting at which any other director is elected, shall as of the date of such meeting automatically be granted a Stock Option to purchase 1,000 shares of the Company's Stock at an exercise price per share equal to 100% of the Fair Market Value of a share of the Company's Stock on the date of the grant of the Stock Option. In the case of an annual or special meeting, the action of the shareholders in electing or reelecting a director who is not an employee shall constitute the granting of Stock Options to all such directors who are not employees, and the date when the shareholders shall take such action shall be the date of grant of the Stock Options. All such options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that the term of each such Stock Option shall be equal to five years. In the event discretionary Stock Options are granted to members of the Committee, such Stock Options shall be granted by the Board. SECTION 6. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. In the event that Restricted Stock awards are granted to members of the Committee, such awards shall be granted by the Board. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the PremiumWear, Inc. 1991 Stock Plan and an Agreement entered into between the registered owner and PremiumWear, Inc. Copies of such Plan and Agreement are on file in the executive offices of PremiumWear, Inc. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 6, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 10). Certificates for shares of Unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 6, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) All restrictions with respect to any participant's shares of Restricted Stock shall lapse or be deemed to have lapsed or been terminated on the tenth (10th) business day prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. SECTION 7. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option or Restricted Stock award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 9. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock awards under the Plan (not including Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 10(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant or award made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief executive or chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 11. Effective Date of Plan. The Plan became effective on October 21, 1991, and was amended by the shareholders on May 19, 1994. The Board further amended the Plan on September 6, 1996 and February 19, 1997 to comply with new Rule 16b-3 promulgated under the Securities Exchange Act of 1934 and with Section 162(m) of the Code. EX-10.G 3 CREDIT AND SECURITY AGREEMENT CREDIT AND SECURITY AGREEMENT THIS AGREEMENT is made as of February 4, 1997, by and between FBS BUSINESS FINANCE CORPORATION, a Delaware corporation (the "Lender"), and PREMIUMWEAR, INC., a Delaware corporation (the "Borrower"). In consideration of the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. In addition to terms defined elsewhere in this Agreement or any Supplement, Exhibit or Schedule hereto, the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural forms of the terms defined, as the context may require): "Account Debtor": Any Person who is or who may become obligated to the Borrower under, with respect to, or on account of an Account Receivable, General Intangible or other Collateral. "Account Receivable": Any account of the Borrower and any other right of the Borrower to payment for goods sold or leased or for services rendered, whether or not evidenced by an instrument or chattel paper and whether or not yet earned by performance. "Accounts Receivable Availability": The term "Accounts Receivable Availability" shall have the meaning given such term in Supplement A. "Adverse Event": The occurrence of any event that could have a material adverse effect on the business, operations, property, assets or condition (financial or otherwise) of the Borrower and the Subsidiaries as a consolidated enterprise] or on the ability of the Borrower or any other Obligor to perform its obligations under the Loan Documents. "Affiliate" Any Person which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Lender, including, without limitation, FBNA. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of stock, by contract or otherwise. "Agreement": This Credit and Security Agreement, as it may be amended, modified, supplemented, restated or replaced from time to time. "Application": An application by the Borrower, in a form and containing terms and provisions acceptable to the Lender, for the issuance by the Lender, or any Affiliate, of a Letter of Credit. "Attorneys' Fees": The value of the services (and costs, charges and expenses related thereto) of the attorneys employed by the Lender (including, without limitation, attorneys and paralegals who are employees of the Lender or any Affiliate) from time to time (a) in connection with the negotiation, preparation, execution delivery, administration and enforcement of the Loan Documents, (b) to prepare documentation related to the Loans and other Obligations, (c) to represent the Lender in any litigation, contest, dispute, suit or proceeding or to commence, defend or intervene in any litigation contest, dispute, suit or proceeding or to file a petition, complaint, answer, motion or other pleading, or to take any other action in or with respect to, any litigation, contest, dispute, suit or proceeding (whether instituted by the Lender, the Borrower or any other Person and whether in bankruptcy or otherwise) in any way or respect relating to the Collateral, any Third Party Collateral, the Loan Documents, or the Borrower's or any other Obligor's or any Subsidiary's affairs, (d) to protect, collect, lease, sell, take possession of, or liquidate any of the Collateral or any Third Party Collateral, (e) to attempt to enforce any security interest in any of the Collateral or any Third Party Collateral or to give any advice with respect to such enforcement, and (f) to enforce any of the Lender's rights to collect any of the Obligations. "Borrowing Base": The term "Borrowing Base" shall have the meaning given such term in Supplement A. "Borrowing Base Certificate": The term "Borrowing Base Certificate" shall have the meaning given such term in Section 2.5(c). "Business Day": Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which national banks are permitted to be open in Minneapolis, Minnesota. "Capital Expenditure": Any amount debited to the fixed asset account on the consolidated balance sheet of the Borrower in respect of (a) the acquisition (including, without limitation, acquisition by entry into a Capitalized Lease), construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, and (b) to the extent related to and not included in clause (a), materials, contract labor and direct labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP). "Capitalized Lease": Any lease which is or should be capitalized on the books of the lessee in accordance with GAAP. "Code": The Internal Revenue Code of 1986, as amended, or any successor statute, together with the regulations thereunder. "Collateral": The term "Collateral" shall have the meaning given such term in Section 3.1. "Collateral Account": The term "Collateral Account" shall have the meaning given such term in Section 3.2(b). "Controlled Disbursement Account": The term "Controlled Disbursement Account" shall have the meaning given such term in Section 2.3(c). "Credit": The facility established under this Agreement pursuant to which the Lender will make Loans to the Borrower or issue, or cause any Affiliate to issue, Letters of Credit for the account of the Borrower. "Credit Amount": The term "Credit Amount" shall have the meaning given such term in Supplement A. "Default Rate": The term "Default Rate" shall have the meaning given such term in Supplement A. "Disbursement Account": The term "Disbursement Account" shall have the meaning given such term in Section 2.3(b). "EBITDA": For any period, the consolidated net income of the Borrower and the Subsidiaries before provision for income taxes, interest expense (including, without limitation, implicit interest expense on Capitalized Leases), depreciation, amortization and other non-cash expenses or charges, all as determined in accordance with GAAP, excluding therefrom (to the extent included): (a) non-operating gains (including, without limitation, extraordinary or nonrecurring gains, gains from discontinuance of operations and gains arising from the sale of assets other than Inventory) during the applicable period; and (b) similar non-operating losses during such period. "Eligible Account Receivable": An Account Receivable owing to the Borrower which meets the following requirements: (a) it is genuine and in all respects what it purports to be; (b) it arises from either (i) the performance of services by the Borrower, which services have been fully performed and, if applicable, acknowledged and/or accepted by the Account Debtor with respect thereto; or (ii) the sale or lease of goods by the Borrower and (A) such goods comply with such Account Debtor's specifications (if any) and have been shipped to, or delivered to and accepted by, such Account Debtor, (B) the Borrower has possession of, or has delivered to the Lender, at the Lender's request, shipping and delivery receipts evidencing such shipment, delivery and acceptance, and (C) such goods have not been returned to the Borrower; (c) it (i) is evidenced by an invoice rendered to the Account Debtor with respect thereto which (A) is dated not earlier than the date of shipment or performance and (B) has payment terms not unacceptable to the Lender; and (ii) meets the Eligible Account Receivable requirements set forth in Supplement A; (d) it is not subject to any assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii) Liens consented to by the Lender in writing; (e) it is a valid, legally enforceable and unconditional obligation of the Account Debtor with respect thereto and is not subject to setoff, counterclaim, credit or allowance (except any credit or allowance which has been deducted in computing the net amount of the applicable invoice as shown in the original schedule or Borrowing Base Certificate furnished to the Lender identifying or including such Account Receivable) or adjustment by the Account Debtor with respect thereto, or to any claim by such Account Debtor denying liability thereunder in whole or in part, and such Account Debtor has not refused to accept any of the goods or services which are the subject of such Account Receivable or offered or attempted to return any of such goods; (f) there are no proceedings or actions which are then threatened or pending against the Account Debtor with respect thereto or to which such Account Debtor is a party which might result in any material adverse change in such Account Debtor's financial condition or in its ability to pay any Account Receivable in full when due; (g) it does not arise out of a contract or order which, by its terms, forbids, restricts or makes void or unenforceable the assignment by the Borrower to the Lender of such Account Receivable; (h) the Account Debtor with respect thereto is not a Subsidiary, Related Party or Obligor, or a director, officer, employee or agent of the Borrower, a Subsidiary, Related Party or Obligor; (i) the Account Debtor with respect thereto is a resident or citizen of and is located within the United States of America or Canada unless the sale of goods giving rise to such Account Receivable is on letter of credit, banker's acceptance or other credit support terms satisfactory to the Lender; (j) it does not arise from a "sale on approval," "sale or return" or "consignment," nor is it subject to any other repurchase or return agreement; (k) it is not an Account Receivable with respect to which possession and/or control of the goods sold giving rise thereto is held, maintained or retained by the Borrower, any Subsidiary, Related Party or Obligor (or by any agent or custodian of the Borrower, any Subsidiary, Related Party or Obligor) for the account of or subject to further and/or future direction from the Account Debtor with respect thereto; (l) it does not, in any way, fail to meet or violate any warranty, representation or covenant contained in the Loan Documents relating directly or indirectly to the Borrower's Accounts Receivable; (m) the Account Debtor with respect thereto is not located in the States of Indiana, New Jersey or Minnesota, provided, however, that such restriction shall not apply if (i) the Borrower has filed and has effective a Notice of Business Activities Report with the appropriate office or agency of the States of Indiana, New Jersey or Minnesota, as applicable, for the then current year or (ii) the Borrower is exempt from the filing of such report; (n) it arises in the ordinary course of the Borrower's business; (o) if the Account Debtor with respect thereto is the United States of America or any department, agency or instrumentality thereof, the Borrower has assigned its right to payment of such Account Receivable to the Lender pursuant to the Assignment of Claims Act of 1940 as amended; (p) if the Lender, in its sole and absolute discretion, has established a credit limit for the Account Debtor with respect thereto, the aggregate dollar amount of Accounts Receivable due from such Account Debtor, including such Account Receivable, does not exceed such credit limit; and (q) if it is evidenced by chattel paper or instruments, (i) the Lender shall have specifically agreed to include such Account Receivable as an Eligible Account Receivable, (ii) only payments then due and payable under such chattel paper or instrument shall be included as an Eligible Account Receivable and (iii) the originals of such chattel paper or instruments have been assigned and delivered to the Lender in a manner satisfactory to the Lender. An Account Receivable which is at any time an Eligible Account Receivable but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be an Eligible Account Receivable. Further, with respect to any Account Receivable, if the Lender at any time or times hereafter determines, in its sole and absolute discretion, that the prospect of payment or performance by the Account Debtor with respect thereto is or will be impaired for any reason whatsoever, notwithstanding anything to the contrary contained above, such Account Receivable shall forthwith cease to be an Eligible Account Receivable. "Eligible Inventory": Inventory of the Borrower which meets the following requirements: (a) it is owned by the Borrower and is not subject to any prior assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii) Liens consented to by the Lender in writing; (b) if held for sale or lease or furnishing under contracts of service, it is (except as the Lender may otherwise consent in writing) new and unused; (c) except as the Lender may otherwise consent, it is not stored with a bailee, warehouseman or similar party; if so stored with the Lender's consent, such bailee, warehouseman or similar party has issued and delivered to the Lender, in form and substance acceptable to the Lender, such documents and agreements as the Lender may require, including, without limitation, warehouse receipts therefor in the Lender's name; (d) the Lender has determined, in its sole and absolute discretion, that it is not unacceptable due to age, type, category, quality and/or quantity; (e) it is not held by the Borrower on "consignment" and is not subject to any other repurchase or return agreement; (f) it complies with all standards imposed by any governmental agency having regulatory authority over such goods and/or their use, manufacture or sale; (g) it does not, in any way, fail to meet or violate any warranty, representation or covenant contained in the Loan Documents relating directly or indirectly to the Borrower's Inventory; and (h) it satisfies the Eligible Inventory requirements, if any, set forth in Supplement A. Inventory of the Borrower which is at any time Eligible Inventory but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be Eligible Inventory. "Environmental Laws": The Resource Conservation and Recovery Act of 1987, the Comprehensive Environmental Response, Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, and any other federal, state or local statue, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any Hazardous Materials or other hazardous, toxic or dangerous waste, substance or constituent, or other substance, whether solid, liquid or gas, as now or at any time hereafter in effect. "Environmental Lien": A Lien in favor of any governmental entity for (a) any liability under any Environmental Law, or (b) damages arising from or costs incurred by such governmental entity in response to a spillage, disposal, or release into the environment of any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance. "Equipment": All equipment of the Borrower of every description, including, without limitation, fixtures, furniture, vehicles and trade fixtures, together with any and all accessions, parts and equipment attached thereto or used in connection therewith, and any substitutions therefor and replacements thereof. "ERISA": The Employee Retirement Income Security Act of 1974, as amended, or any successor statute, together with the regulations thereunder. "ERISA Affiliate": Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code. "Event of Default": The term "Event of Default" shall have the meaning given such term in Section 7.1. "FBNA": First Bank National Association, a national banking association having its offices at First Bank Place, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302. "Federal Reserve Board": The Board of Governors of the Federal Reserve System or any successor thereto. "GAAP": Generally accepted accounting principles promulgated by the Financial Accounting Standards Board, as applied in the preparation of the audited financial statement of the Borrower referred to in Section 4.6. "General Intangibles": All of the Borrower's intangible personal property including things in action, causes of action and all other personal property of the Borrower of every kind and nature (other than goods, accounts, chattel paper, documents, instruments and money) including, without limitation, corporate or other business records, inventions, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, security interests, security deposits or other security held by or granted to the Borrower to secure payment by an Account Debtor of any of the Accounts Receivable, any other rights to payment, including, without limitation, rights to reimbursement or indemnification, and any other rights of whatsoever nature. "Hazardous Materials": Any hazardous substance or pollutant or contaminant defined as such in (or for the purposes of) any Environmental Law including, without limitation, petroleum, including crude oil or any fraction thereof which is liquid at standard conditions of temperature or pressure (60 degrees fahrenheit and 14.7 pounds per square inch absolute), any radioactive material, including any source, special nuclear or by-product material as defined at 42 U.S.C. section 2011 et. seq., as amended or hereafter amended, and asbestos in any form or condition. "Indebtedness": Without duplication, all obligations, contingent or otherwise, which in accordance with GAAP should be classified upon the obligor's balance sheet as liabilities, but in any event including the following (whether or not they should be classified as liabilities upon such balance sheet): (a) any obligation secured by any mortgage, pledge, security interest, lien, charge or other encumbrance existing on property owned or acquired subject thereto, whether or not such obligation shall have been assumed and whether or not such obligation is the obligation of the owner or another party; (b) any obligation on account of deposits or advances; (c) any obligation for the deferred purchase price of any property or services, except accounts payable arising in the ordinary course of business; (d) any obligation as lessee under any Capitalized Lease; (e) any guaranty, endorsement or other contingent obligation in respect to Indebtedness of others; and (f) any undertaking or agreement to reimburse or indemnify issuers of letters of credit. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities": The term "Indemnified Liabilities" shall have the meaning given such term in Section 10.2. "Indemnitees": The term "Indemnitees" shall have the meaning given such term in Section 10.2. "Inventory": Any and all of the Borrower's goods, including, without limitation, goods in transit, wheresoever located which are or may at any time be leased by the Borrower to a lessee, held for sale or lease, furnished under any contract of service or held as raw materials, work in process, or supplies or materials used or consumed in the Borrower's business, or which are held for use in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, and all goods, the sale or other disposition of which has given rise to an Account Receivable, which are returned to and/or repossessed and/or stopped in transit by the Borrower or the Lender, or at any time hereafter in the possession or under the control of the Borrower or the Lender, or any agent or bailee of either thereof, and all documents of title or other documents representing the same. "Inventory Availability": The term "Inventory Availability" shall have the meaning given such term in Supplement A. "Investment": The acquisition, purchase, making or holding of any stock or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real and personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase stock or other debt or equity securities of, or any interest in, another Person or any integral part of any business or the assets comprising such business or part thereof. "L/C Draft": A draft drawn on the Lender, or any Affiliate, pursuant to a Letter of Credit. "Letter of Credit": A letter of credit issued by the Lender, or any Affiliate, on the Application of the Borrower. "Letter of Credit Obligations": An amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (a) the amount of any reduction(s) in the original face amount of any Letter of Credit which did not result from a draw made under such Letter of Credit, (b) the amount of any payments made by the Lender, or any Affiliate, with respect to a Letter of Credit or L/C Draft for which the Borrower has reimbursed the Lender, or such Affiliate, and (c) the undrawn portion of any issued, but expired, Letter of Credit plus the amount of any increase(s) in the original face amount of any Letter of Credit. For purposes of determining the outstanding Letter of Credit Obligations at any time, the Lender's, or any Affiliate's, acceptance of an L/C Draft shall constitute a draw on the applicable Letter of Credit at the time of such acceptance. "Letter of Credit Sublimit": The term "Letter of Credit Sublimit" shall have the meaning given such term in Supplement A. "Lien": Any security interest, mortgage, pledge, lien, hypothecation, judgment lien or similar legal process, charge, encumbrance, title retention agreement or analogous instrument or device (including, without limitation, the interest of lessors under Capitalized Leases and the interest of a vendor under any conditional sale or other title retention agreement). "Loan": A Loan referred to in Section 2.1 and any other loans or advances made to the Borrower by the Lender under or pursuant to this Agreement. "Loan Account": The term "Loan Account" shall have the meaning given such term in Section 2.3(a). "Loan Availability": The lesser of (a) the Credit Amount minus the Letter of Credit Obligations and (b) the Borrowing Base minus the Letter of Credit Obligations. "Loan Documents": This Agreement, any Note, [other documents] and each other instrument, document, guaranty, mortgage, deed of trust, chattel mortgage, pledge, power of attorney, consent, assignment, contract, notice, security agreement, lease, financing statement, subordination agreement, trust account agreement, or other agreement executed and delivered by the Borrower or any guarantor or party granting security interests in connection with this Agreement, the Loans or the Collateral. "Net Worth": At any determination date, the total of all assets appearing on a consolidated balance sheet of the Borrower at such date, prepared in accordance with GAAP, after deducting all proper reserves (including reserves for depreciation, obsolescence and amortization) minus all liabilities which in accordance with GAAP would be included on the liability side of a consolidated balance sheet. "Note": Any promissory note of the Borrower evidencing any loan or advance (including but not limited to the Loans) made by the Lender to the Borrower pursuant to this Agreement. "Obligations": All of the liabilities, obligations and indebtedness of the Borrower to the Lender, or any Affiliate, of any kind or nature, however created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or due or to become due, and including, without limitation, (a) the Borrower's obligations under the Loan Documents, including obligations of performance, (b) the Borrower's obligations with respect to any Letter of Credit or any Application, and (c) interest, charges, expenses, Attorneys' Fees and other sums chargeable to the Borrower by the Lender under the Loan Documents. "Obligations" shall also include any and all amendments, extensions, renewals, refundings or refinancings of any of the foregoing. "Obligor": The Borrower and each other Person who is or shall become primarily or secondarily liable on any Obligations or who grants to the Lender a Lien on any property of such Person as security for any Obligations. "Occupational Safety and Health Law": The Occupational Safety and Health Act of 1970 and any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards of conduct concerning employee health and/or safety. "Over Advance": The term "Over Advance" shall have the meaning given such term in Section 2.8. "Overdraft Loan": The term "Overdraft Loan" shall have the meaning given such term in Section 2.7. "Participant": Any Person, now or at any time or times hereafter, participating with the Lender in the Loans made to the Borrower hereunder. "PBGC": The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, or any successor thereto or to the functions thereof. "Person": Any natural person, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision thereof, or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan": An employee benefit plan or other plan, maintained for employees of the Borrower or of any ERISA Affiliate, and subject to Title IV of ERISA or Section 412 of the Code. "Reference Rate": The rate of interest from time to time publicly announced by FBNA as its "reference rate." The Lender may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate which is based on the Reference Rate, such interest rate shall change on the effective date of any change in the Reference Rate. "Related Party": Any Person (other than a Subsidiary): (a) which directly or indirectly, through one of more intermediaries, controls, is controlled by or is under common control with, the Borrower, (b) which beneficially owns or holds 5% or more of the equity interest of the Borrower, or (c) 5% or more of the equity interest of which is beneficially owned or held by the Borrower or a Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Reportable Event": A reportable event, as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC, by regulation, has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a reportable event regardless of the issuance of any such waivers in accordance with Section 412(d) of the Code. "Subordinated Debt": That portion of any liabilities, obligations or Indebtedness of the Borrower which contains terms satisfactory to the Lender and is subordinated, in a manner satisfactory to the Lender, as to right and time of payment of principal and interest thereon, to any and all Obligations. "Subsidiary": Any Person of which or in which the Borrower and its other Subsidiaries own directly or indirectly 50% or more of: (a) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (b) the capital interest or profits interest of such Person, if it is a partnership, joint venture or similar entity, or (c) the beneficial interest of such Person, if it is a trust, association or other unincorporated organization. "Supplemental Documentation": The term "Supplemental Documentation" shall have the meaning given such term in Section 3.5. "Taxes": With respect to any Person means taxes, assessments or other governmental charges or levies imposed upon such Person, its income or any of its properties, franchises or assets. "Termination Date": The term "Termination Date" shall have the meaning given such term in Supplement A. "Third Party Collateral": Any property of any Person other than the Borrower which secures payment or performance of any Obligations. "UCC": The Uniform Commercial Code as in effect in the State of Minnesota and any successor statute, together with any regulations thereunder, in each case as in effect from time to time. References to sections of the UCC shall be construed to also refer to any successor sections. "Unmatured Event of Default": Any event which, with the giving of notice to the Borrower or lapse of time, or both, would constitute an Event of Default. "Unused Credit Amount": The Credit Amount (as determined as of the last day of each month for the month ending on such date) minus the sum of (a) the outstanding principal balance of the Loans plus (b) the Letter of Credit Obligations. 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be expressly provided to the contrary herein, all accounting terms used herein or in any certificate or other document made or delivered pursuant hereto shall be interpreted and all accounting determinations hereunder (including, without limitation, determination of compliance with financial ratios and restrictions in Articles V and VI) shall be made in accordance with GAAP consistently applied, using a first in first out method of Inventory valuation. Any reference to "consolidated" financial terms shall be deemed to refer to those financial terms as applied to the Borrower and the Subsidiaries in accordance with GAAP. 1.3 OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined herein, all terms defined in this Agreement shall have such defined meanings when used in any other Loan Document. Terms used in this Agreement which are defined in any Supplement, Exhibit or Schedule hereto shall, unless the context otherwise indicates, have the meanings given them in such Supplement, Exhibit or Schedule. Other terms used in this Agreement shall, unless the context otherwise indicates, have the meanings given such terms in the Minnesota Uniform Commercial Code to the extent the same are used or defined therein. The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Reference to "this Agreement" shall include the provisions of Supplement A. References to Sections, Exhibits, Schedules and like references are to this Agreement unless otherwise expressly provided. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. ARTICLE II CREDIT; LETTERS OF CREDIT; OTHER MATTERS 2.1 LOANS. (a) Subject to the terms and conditions of the Loan Documents, and in reliance upon the warranties of the Borrower set forth herein and in the other Loan Documents, the Lender agrees to make such loans or advances (individually, a "Loan" and collectively, the "Loans") to the Borrower as the Borrower may from time to time request, up to but not in excess of the Loan Availability. Loans made by the Lender may be repaid and, subject to the terms and conditions hereof, reborrowed to the Termination Date unless the Credit extended under this Agreement is otherwise terminated as provided in this Agreement. (b) In the event the aggregate outstanding principal balance of the Loans exceeds the Loan Availability, the Borrower shall, unless the Lender shall otherwise consent, immediately and without notice of any kind, make such payments or take such other action as shall be necessary to eliminate such excess. (c) All Loans and other Obligations hereunder shall be paid by the Borrower on the Termination Date, unless payable sooner pursuant to the provisions of this Agreement, but may, at the Borrower's election and subject to the provisions of Supplement A, be repaid in whole or in part at any time prior to such date without premium or penalty. Recourse to Collateral, Third Party Collateral or other security is not required at any time. 2.2 LETTERS OF CREDIT. (a) In addition to Loans made pursuant to Section 2.1, the Lender, or any Affiliate, may, upon receipt of duly executed Applications and such other documents, instruments and/or agreements as the Lender, or such Affiliate, may require, issue Letters of Credit on such terms as are satisfactory to the Lender; provided, however, that no Letter of Credit will be issued if, before or after taking such Letter of Credit into account, the Letter of Credit Obligations exceeds the least of (i) the Letter of Credit Sublimit, (ii) the Credit Amount minus the outstanding principal balance of the Loans and (iii) the Borrowing Base minus the outstanding principal balance of the Loans. (b) The Borrower agrees to pay the Lender, or any Affiliate, on demand, the Lender's, or such Affiliate's, standard administrative operating fees and charges in effect from time to time for issuing and administering any Letters of Credit. The Borrower further agrees to pay the Lender, or any Affiliate, a commission on the undrawn amount of each Letter of Credit and on each L/C Draft accepted by the Lender, or such Affiliate, in the amount indicated in Supplement A. Such commissions shall be paid at such frequency as the Lender, or such Affiliate, shall determine. (c) The Borrower agrees to reimburse the Lender, or any Affiliate, on demand for each payment made by the Lender, or such Affiliate, under or pursuant to any Letter of Credit or L/C Draft. The Borrower further agrees to pay to the Lender, or any Affiliate, on demand, interest at the Default Rate, on any amount paid by the Lender, or such Affiliate, under or pursuant to any Letter of Credit or L/C Draft from the date of payment until the date of reimbursement to the Lender, or such Affiliate. (d) Notwithstanding anything to the contrary herein or in any Application of the Borrower, upon the occurrence of an Event of Default, or on the Termination Date, an amount equal to the aggregate amount of the outstanding Letter of Credit Obligations shall, at the Lender's option and without further notice to the Borrower, be deemed (as between the Lender and the Borrower) to have been paid or disbursed by the Lender under the Letters of Credit and L/C Drafts accepted by the Lender, or any Affiliate, notwithstanding that such amounts may not in fact have been so paid or disbursed, and a Loan to the Borrower, in the amount of such Letter of Credit Obligations, to have been made and accepted, which Loan shall be immediately due and payable. In lieu of the foregoing, at the election of the Lender, the Borrower shall, upon the Lender's demand, deliver to the Lender, or any Affiliate, cash or other Collateral of a type satisfactory to the Lender, or such Affiliate, having a value, as determined by the Lender, or such Affiliate, equal to the aggregate Letter of Credit Obligations. Any such Collateral and/or any amounts received by the Lender, or any Affiliate, in payment of the Loan made pursuant to this paragraph (d) shall be held by the Lender, or such Affiliate, in the Collateral Account or a separate account appropriately designated as a cash collateral account in relation to this Agreement and the Letters of Credit and retained by the Lender, or such Affiliate, as collateral security for the Obligations and each of the Letters of Credit and L/C Drafts. Such amounts shall not be used by the Lender, or any Affiliate, to pay any amounts drawn or paid under or pursuant to any Letter of Credit or L/C Draft but may be applied to reimburse the Lender, or any Affiliate, for drawings or payments under or pursuant to Letters of Credit or L/C Drafts which the Lender, or such Affiliate, has paid or, if no such reimbursement is required, to payment of such other Obligations as the Lender shall determine. Following payment in full of all Obligations, any amounts remaining in any cash collateral account established pursuant to this paragraph (d) which are not (as determined by the Lender) to be applied to reimburse the Lender, or any Affiliate, for amounts actually paid by the Lender, or such Affiliate, in respect of a Letter of Credit or L/C Draft shall be returned to the Borrower (after deduction of the Lender's, or such Affiliate's expenses). 2.3 LOAN ACCOUNT; DISBURSEMENT ACCOUNT; CONTROLLED DISBURSEMENT ACCOUNT. (a) LOAN ACCOUNT. The Lender shall establish or cause to be established on its books in the Borrower's name one or more accounts (each, a "Loan Account") to evidence Loans made to the Borrower. Any amounts advanced as Loans which are credited to the Disbursement Account, together with any other amounts advanced to the Borrower as a Loan pursuant to this Agreement, will be debited to the applicable Loan Account and result in an increase in the principal balance outstanding in such Loan Account in the amount thereof. (b) DISBURSEMENT ACCOUNT. Unless otherwise provided in this Agreement, the Lender will credit or cause to be credited to a commercial account (the "Disbursement Account") maintained by the Borrower at FBNA's First Bank Place, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302 office the amount of any sums advanced as Loans. (c) CONTROLLED DISBURSEMENT ACCOUNT. The Borrower shall maintain a commercial account (the "Controlled Disbursement Account") with First Bank, East Grand Forks, Minnesota into which deposits from the Disbursement Account may be authorized by the Borrower and/or the Lender and from which the Borrower may draw checks for corporate purposes. 2.4 INTEREST; FEES. (a) INTEREST. The outstanding principal balance of each Loan to the Borrower hereunder shall bear interest at the rate(s) applicable to such Loan indicated in Supplement A; provided, however, that no provision of this Agreement or any Note shall require the payment or permit the collection of interest in excess of the rate permitted by applicable law. Interest as aforesaid shall be charged for the actual number of days elapsed over a year consisting of 360 days on the actual daily balance of such Loan. Interest on the unpaid principal of any Loan shall accrue from the date such Loan is made to the date such Loan is paid. Interest shall be paid by the Borrower on the last day of each month, commencing on the first such day to occur after the date hereof, and on maturity. After maturity of any Loan, whether by acceleration or otherwise, interest shall be payable on demand. (b) INTEREST AFTER DEFAULT. At any time that an Event of Default has occurred and is continuing, the outstanding principal amount of all Loans, all past due fees and other sums payable to the Lender or any Affiliate hereunder or under any other Loan Document shall bear interest at the Default Rate. (c) COMMITMENT FEE. The Borrower shall pay to the Lender a commitment fee for the period from the date hereof to the date the Credit terminates in the amount indicated in Supplement A. The commitment fee shall be charged for the actual number of days elapsed over a year consisting of 360 days on the actual daily balance of the Loans. The commitment fee shall be paid by the Borrower on the last day of each March, June, September and December, commencing on the first such day to occur after the date hereof, and on the date the Credit terminates for the period then ended. (d) CREDIT TERMINATION FEE. . Upon termination or cancellation of the Credit by the Borrower, the Borrower shall pay to the Lender a termination fee in the amount indicated in Supplement A. 2.5 REQUESTS FOR LOANS; BORROWING BASE CERTIFICATES; OTHER INFORMATION. (a) Loans shall be requested by telephone, except for Overdraft Loans. Any such telephonic notice shall be promptly confirmed by the Borrower in writing. The Borrower's failure to confirm any such telephonic notice or otherwise comply with the provisions of this Section 2.5(a) shall not in any manner affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (b) In the event that the Borrower shall at any time, or from time to time, (i) make a request for a Loan, or (ii) be deemed to have requested an Overdraft Loan, the Borrower agrees to forthwith provide the Lender with such information, at such frequency and in such format, as is required by the Lender, such information to be current as of the time of such request. (c) The Borrower further agrees to provide to the Lender a current borrowing base certificate ("Borrowing Base Certificate") at the end of (i) each week when either (A) the Loan Availability is less than $1,000,000, or (B) the outstanding balance of the Loans plus all Letter of Credit Obligations exceeds $3,000,000, in each case accompanied by an aging of Accounts Receivable, (ii) each month when the provisions of clause (i) do not apply, and (iii) at such other times as the Lender may request. Such Borrowing Base Certificate shall be in substantially the form of Exhibit A, executed and certified as accurate by such person or persons as the Borrower designates in writing to the Lender pursuant to duly adopted resolutions of the Borrower's Board of Directors authorizing such action. (d) The Borrower shall provide the Lender with documentation satisfactory to the Lender indicating the names of those employees of the Borrower authorized by the Borrower to sign Borrowing Base Certificates, among other things, and/or to make a telephone request for a Loan, and/or to authorize disbursement of the proceeds of a Loan by wire transfer or otherwise, and the Lender shall be entitled to rely upon such documentation until notified in writing by the Borrower of any change(s) in the names of persons so authorized. The Lender shall be entitled to act on the instructions of anyone identifying himself as one of the persons authorized to request Loans or disbursements of Loan proceeds by telephone and the Borrower shall be bound thereby in the same manner as if the person were actually so authorized. The Borrower agrees to indemnify and hold the Lender harmless from any and all claims, damages, liabilities, losses, costs and expenses (including Attorneys' Fees) which may arise or be created by the acceptance of instructions for making or paying Loans or wire transfers by telephone. 2.6 NOTES. Except to the extent a Loan may, in the Lender's sole and absolute discretion, be evidenced by a Note, all Loans and payments hereunder shall be recorded on the Lender's books, which shall be rebuttable presumptive evidence of the amount of such Loans outstanding at any time hereunder. The Lender will account monthly as to all Loans and payments hereunder and each monthly accounting will be fully binding on the Borrower unless, within 15 days following the Borrower's receipt thereof, the Borrower shall provide the Lender with a specific listing of exceptions. Notwithstanding any term or condition of this Agreement to the contrary, the failure of the Lender to record the date and amount of any Loan shall not limit or otherwise affect the obligation of the Borrower to repay any such Loan. 2.7 OVERDRAFT LOANS. The Lender, in its sole and absolute discretion and subject to the terms hereof, may make a Loan to the Borrower in an amount equal to the amount of any overdraft which may from time to time exist with respect to the Disbursement Account or any other bank account which the Borrower may now or hereafter have with FBNA or any other Affiliate. The existence of such overdraft shall be deemed to be a request by the Borrower for such Loan. The Borrower acknowledges that the Lender is under no duty or obligation to make any Loan to the Borrower to cover any overdraft. The Borrower further agrees that an overdraft shall constitute a separate Loan under this Agreement (an "Overdraft Loan"), which shall bear, from the date on which the overdraft occurred until paid, interest in an amount equal to the greater of 130% of the highest rate of interest then charged for Loans (other than Overdraft Loans) made hereunder, or $50.00 per day. If the Lender, in its sole and absolute discretion, decides not to make a Loan to cover part or all of any overdraft, the Lender may return any check(s) which created such overdraft. 2.8 OVER ADVANCES. The Lender, in its sole and absolute discretion, may make Loans to the Borrower, either at the Borrower's request or to pay amounts due to the Lender under this Agreement or any other Loan Document, in excess of the Loan Availability or permit the total Loans to at any time exceed the Loan Availability (such excess Obligations are hereinafter referred to as "Over Advances") and no such event or occurrence shall cause or constitute a waiver by the Lender of its right to refuse to make any further Loan or issue, or cause to be issued, any Letters of Credit at any time that an Over Advance exists or would result therefrom. During any period in which an Over Advance exists, the amount of the Over Advances shall bear interest at a rate equal to 130% of the highest rate of interest then charged for Loans (other than Overdraft Loans) made hereunder. 2.9 ALL LOANS ONE OBLIGATION. All Loans under this Agreement shall constitute one Loan, and all Indebtedness and other Obligations shall constitute one general obligation secured by the Lien granted by the Borrower hereunder on all of the Collateral and by all other Liens heretofore, now or at any time or times hereafter granted by the Borrower or any other Obligor to secure the Obligations. The Borrower agrees that all of the rights of the Lender set forth in the Loan Documents shall, unless otherwise agreed to in writing, apply to any modification of or supplement to the Loan Documents. 2.10 MAKING OF PAYMENTS; APPLICATION OF COLLECTIONS; CHARGING OF ACCOUNTS. (a) All payments hereunder (including payments with respect to any Notes) shall be made without set-off or counterclaim and shall be made to the Lender in immediately available funds (or as the Lender may otherwise consent) prior to 12:30 p.m., Minneapolis time, on the date due at its office at First Bank Place, 601 Second Avenue South, Minneapolis, Minnesota 55402-4302, or at such other place as may be designated by the Lender to the Borrower in writing. Any payments received after such time shall be deemed received on the next Business Day. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a date other than a Business Day such payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of payment of interest or any fees. (b) The Borrower authorizes the Lender to, and the Lender will, subject to the provisions of this Section 2.10(b), apply the whole or any part of any amounts received by the Lender, or any Affiliate (whether deposited in the Collateral Account or otherwise received by the Lender, or any Affiliate) from the collection of items of payment and proceeds of any Collateral or Third Party Collateral against the principal and/or interest of any Loans made hereunder and/or any other Obligations, whether or not then due, in such order of application as the Lender may determine, unless such payments or proceeds are, in the Lender's sole and absolute discretion, released to the Borrower; provided, however, that no checks, drafts or other instruments received by the Lender, or any Affiliate, shall constitute final payment to the Lender unless and until such item of payment has actually been collected. All items or amounts which are delivered to the Lender by or on behalf of the Borrower or any Obligor or any Account Debtor on account of partial or full payment or otherwise as proceeds of any of the Collateral or Third Party Collateral (including any items or amounts which may have been deposited to the Collateral Account) may from time to time, in the Lender's sole and absolute discretion, be released to the Borrower or may be applied by the Lender towards such of the Obligations, whether or not then due, in such order of application as the Lender may determine. Notwithstanding anything to the contrary herein, (i) all cash, checks, instruments and other items of payment, solely for purposes of determining the occurrence of an Event of Default hereunder, shall be deemed received upon actual receipt by the Lender unless the same is subsequently dishonored for any reason whatsoever, (ii) for purposes of determining whether, under Sections 2.1 and 2.2, there is availability for Loans or Letters of Credit, all cash, checks, instruments and other items of payment shall be applied against the Obligations on the first Business Day following receipt thereof by the Lender in Minneapolis, Minnesota or the second Business Day following the initiation by the Lender of an ACH transaction from a Collateral Account, and (iii) solely for purposes of interest calculation hereunder, all cash, checks, instruments and other items of payment shall be deemed to have been applied against the Obligations no later than the second Business Day following receipt thereof by the Lender in Minneapolis, Minnesota or the second Business Day following the initiation by the Lender of an ACH transaction from a Collateral Account. (c) The Borrower hereby authorizes the Lender and the Lender may, in its sole and absolute discretion, charge to the Borrower, at any time, all or any portion of any Obligations (and interest, if any, thereon) including, without limitation, any Attorneys' Fees and other costs and expenses of the Lender for which the Borrower is liable pursuant to the terms of the Loan Documents, by charging the Disbursement Account or any other bank account of the Borrower with FBNA or by advancing the amount thereof to the Borrower as a Loan; provided, however, that the provisions of this Section 2.10(c) shall not affect the Borrower's obligation to pay when due all amounts payable by the Borrower under any of the Loan Documents whether or not there are sufficient funds therefor in the Disbursement Account or any such other bank account of the Borrower with FBNA, or sufficient Loan Availability. 2.11 LENDER'S ELECTION NOT TO ENFORCE. Notwithstanding any term or condition of this Agreement to the contrary, the Lender, in its sole and absolute discretion, at any time and from time to time may suspend or refrain from enforcing any or all of the restrictions imposed in this Section 2 but no such suspension or failure to enforce shall impair the Lender's right and power under this Agreement to refrain from making a Loan or issuing, or causing to be issued, a Letter of Credit requested by the Borrower if all conditions precedent to the Lender's obligation to make such Loan or issue, or cause to be issued, such Letter of Credit have not been satisfied. ARTICLE III COLLATERAL 3.1 GRANT OF SECURITY INTEREST. As security for the payment of all Loans now or hereafter made by the Lender to the Borrower hereunder or under any Note, and as security for the payment or other satisfaction of all other Obligations, the Borrower hereby grants to the Lender, and its Affiliates, a security interest in and to the following property of the Borrower, whether now owned or existing, or hereafter acquired or coming into existence, wherever now or hereafter located (all such property is hereinafter referred to collectively as the "Collateral"): (a) Accounts Receivable (whether or not Eligible Accounts Receivable), including all other rights and interests (including all liens and security interests) that the Borrower may at any time have by law or agreement against any Account Debtor or other obligor obligated to make any such payment or against any of the property of such Account Debtor or other obligor; (b) Inventory (whether or not Eligible Inventory); (c) General Intangibles; (d) documents; (e) all chattel paper and instruments evidencing, arising out of or relating to any obligation to the Borrower for goods sold or leased or services rendered or otherwise arising out of or relating to any property described in clauses (a) through (d) above; (f) goods, instruments, documents or chattel paper that are in the possession or control of, or in transit to, the Lender or any Affiliate or any agent or bailee for the Lender or any Affiliate for any reason and all interest on, dividends and distributions and other rights in connection with such property, and any and all balances, credits, deposits (general or special, time or demand, provisional or final), accounts or monies of or in the name of the Borrower now or hereafter with the Lender, or any Affiliate, and any and all property of every kind or description of or in the name of the Borrower now or hereafter, for any reason or purpose whatsoever, in the possession or control of, in transit to or standing to the Borrower's credit on the books of, the Lender, any Affiliate, or any agent or bailee for the Lender, or any Affiliate, or any Participant; (g) all interest of the Borrower in any goods the sale or lease of which shall have given or shall give rise to, and in all guaranties and other property securing the payment of or performance under, any Accounts Receivable, General Intangibles or any chattel paper or instruments referred to in clause (e) above; (h) any and all other property of the Borrower of any kind or description, including, without limitation, real estate of the Borrower, subject to a separate mortgage, pledge or security interest in favor of the Lender or in which the Lender now or hereafter has or acquires a security interest securing any Obligations, pursuant to any written agreement or instrument other than this Agreement; (i) all replacements, substitutions, additions or accessions to or for any of the foregoing; (j) to the extent related to the property described in clauses (a) through (i) above, all books, correspondence, credit files, records, invoices and other papers and documents, including, without limitation, to the extent so related, all tapes, cards, computer runs, computer programs and other papers and documents in the possession or control of the Borrower or any computer bureau from time to time acting for the Borrower, and, to the extent so related, all rights in, to and under all policies of insurance, including claims of rights to payments thereunder and proceeds therefrom, including any credit insurance; and (k) all proceeds (including, without limitation, any Accounts Receivable or other proceeds arising from the sale or other disposition of any Collateral, any returns of any Inventory sold by the Borrower and the proceeds of any insurance covering any of the Collateral) of any of the foregoing. 3.2 ACCOUNTS RECEIVABLE. (a) The Borrower shall notify the Lender immediately of all disputes and claims by any Account Debtor in an amount exceeding $25,000 and settle or adjust them at no expense to the Lender. If the Lender directs, no discount or credit allowance shall be granted thereafter by the Borrower to any Account Debtor. All Account Debtor payments and all net amounts received by the Lender in settlement, adjustment or liquidation of any Account Receivable may be applied by the Lender to the Obligations or credited to the Disbursement Account (subject to collection), as the Lender may deem appropriate, as more fully described in Section 2.10. If requested by the Lender, the Borrower will make proper entries in its books, disclosing the assignment of Accounts Receivable to the Lender. (b) Unless otherwise consented to by the Lender, the Borrower will, forthwith upon receipt by the Borrower of all checks, drafts, cash and other remittances in payment or as proceeds of, or on account of, any of the Accounts Receivable or other Collateral, deposit the same in a special bank account (the "Collateral Account") with FBNA or such other bank or financial institution as the Lender shall consent, over which the Lender alone has power of withdrawal, and will designate with each such deposit the particular Accounts Receivable or other item of Collateral upon which the remittance was made. The Borrower acknowledges that the maintenance of the Collateral Account is solely for the convenience of the Lender in facilitating its own operations and the Borrower does not and shall not have any right, title or interest in the Collateral Account or in the amounts at any time appearing to the credit thereof. Said proceeds shall be deposited in precisely the form received except for the Borrower's endorsement where necessary to permit collection of items, which endorsement the Borrower agrees to make. Pending such deposit, the Borrower agrees not to commingle any such checks, drafts, cash and other remittances with any of its funds or property, but will hold them separate and apart therefrom and upon an express trust for the Lender until deposit thereof if made in the Collateral Account. Upon the full and final liquidation of all Obligations, the Lender will pay over to the Borrower any excess amounts received by the Lender as payment or proceeds of Collateral, whether received by the Lender as a deposit in the Collateral Account or received by the Lender as a direct payment on any of the sums due hereunder. (c) If any Accounts Receivable, chattel paper or General Intangible arises out of contracts with the United States or any department, agency, or instrumentality thereof, the Borrower will, unless the Lender shall otherwise agree, immediately notify the Lender in writing and execute any instruments and take any steps required by the Lender in order that all monies due and to become due under such contracts shall be assigned to the Lender and notice thereof given to the government under the Federal Assignment of Claims Act of 1940, as amended. (d) If any Accounts Receivable is evidenced by chattel paper or instruments, the Borrower will, unless the Lender shall otherwise agree, deliver the originals of same to the Lender, appropriately endorsed to the Lender's order and, regardless of the form of such endorsement, the Borrower hereby expressly waives presentment, demand, notice of dishonor, protest and notice of protest and all other notices with respect thereto. 3.3 INVENTORY. (a) Unless the Lender shall otherwise agree, if the Borrower sells Inventory for cash, all full and partial payments therefor shall immediately be delivered by the Borrower to the Lender in their original form for deposit in the Collateral Account or other application to reduction of the Obligations. All such cash shall be held by the Borrower in trust for the Lender and shall be remitted to the Lender at the end of the day received or at such other time as the Lender may designate. (b) The Lender shall not be liable or responsible in any way for the safekeeping of any Inventory delivered to it, to any bailee appointed by or for it, to any warehouseman, or under any other circumstances. The Lender shall not be responsible for collection of any proceeds or for losses in collected proceeds held by the Borrower in trust for the Lender. Any and all risk of loss for any or all of the foregoing shall be upon the Borrower except for such loss as shall result from the Lender's gross negligence or willful misconduct. (c) The Borrower shall, upon acquiring an interest in any Inventory, deliver to the Lender schedules of such Inventory, together with supplier's invoices, warranties, production, cost and other records as the Lender may request. If requested by the Lender, the Borrower shall deliver to the Lender schedules of the sale of any Inventory immediately upon its sale. Any material change in the value or condition of any Inventory and any errors discovered in schedules delivered to the Lender shall be reported to the Lender immediately. (d) The Borrower shall (i) notify the Lender immediately if the Borrower obtains possession (by return, repossession or otherwise) of any Inventory which has been sold and shall inform the Lender of the identity of the returned or repossessed Inventory, the applicable Account Debtor and the amount of the applicable Account Receivable; (ii) receive such Inventory in trust; and (iii) resell such Inventory for the Lender unless instructed to deliver it to the Lender. 3.4 EQUIPMENT. The Borrower will, upon request of the Lender, submit to the Lender a current listing of all of the Borrower's Equipment which listing shall indicate the type, model, serial number and location of such Equipment. 3.5 SUPPLEMENTAL DOCUMENTATION. At the Lender's request, the Borrower shall execute and/or deliver to the Lender, at any time or times hereafter, such agreements, documents, financing statements, warehouse receipts, bills of lading, notices of assignment of Accounts Receivable, schedules of Accounts Receivable assigned, and other written matter necessary or requested by the Lender to perfect and maintain perfected the security interest in the Collateral granted hereunder (all the above hereinafter referred to as "Supplemental Documentation"), in form and substance acceptable to the Lender, and pay all taxes, fees and other costs and expenses associated with any recording or filing of the same. The Borrower hereby irrevocably makes, constitutes and appoints the Lender (and all Persons designated by the Lender for that purpose) as the Borrower's true and lawful attorney (and agent-in-fact) to sign the name of the Borrower on any of the Supplemental Documentation and to deliver any of the Supplemental Documentation to such Persons as the Lender in its sole and absolute discretion, may elect. The Borrower agrees that a carbon, photographic, photostatic, and other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. 3.6 POWER OF ATTORNEY. The Borrower irrevocably designates, makes, constitutes, and appoints the Lender (and all Persons designated by the Lender) as the Borrower's true and lawful attorney (and agent-in-fact) and the Lender, or the Lender's agent, may, without notice to the Borrower: (a) at such time or times hereafter as the Lender or said agent, in its sole and absolute discretion, may determine, in the Borrower's or the Lender's name, (i) receive, open and dispose of all mail received at the lockbox address of the Borrower; (ii) notify and/or require the Borrower to notify, any Account Debtor or other Person obligated under or in respect of any Collateral, of the fact of the Lender's Lien thereon and of the collateral assignment thereof to the Lender; (iii) direct and/or require the Borrower to direct, any Account Debtor or other Person obligated under or in respect of any Collateral, to make payment directly to the Lender of any amounts due or to become due thereunder or with respect thereto; (iv) endorse the Borrower's name on any checks, notes, drafts or any other items of payment relating to and/or proceeds of the Collateral which come into the possession of the Lender or under the Lender's control and apply such payment or proceeds to the Obligations; and (v) endorse the Borrower's name on any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement in the Lender's possession relating to Accounts Receivable, Inventory or any other Collateral; and (b) at such time or times after the occurrence of an Event of Default, as the Lender or said agent, in its sole and absolute discretion, may determine, in the Borrower's or the Lender's name: (i) receive, open and dispose of all mail received at the street address or any post office box address of the Borrower; (ii) demand, collect, surrender, release or exchange all or any part of any Collateral or any amounts due thereunder or with respect thereto; (iii) settle, adjust, compromise, extend or renew for any period (whether or not longer than the initial period) any and all sums which are now or may hereafter become due or owing upon or with respect to any of the Collateral; (iv) enforce, by suit or otherwise, payment or performance of any of the Collateral; (v) settle, adjust or compromise any legal proceedings brought to collect any sums due or owing upon or with respect to any of the Collateral; (vi) exercise all of the Borrower's rights and remedies with respect to the collection of any amounts due upon or with respect to any of the Collateral; (vii) if permitted by applicable law, sell or assign the Collateral upon such terms, for such amounts and at such time or times as the Lender may deem advisable; (viii) discharge and release the Collateral; (ix) prepare, file and sign the Borrower's name on any proof of claim in bankruptcy or similar document against any Account Debtor; (x) prepare, file and sign the Borrower's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with the Accounts Receivable and/or other Collateral; and (xi) do all acts and things necessary, in the Lender's sole and absolute discretion, to obtain repayment of the Obligations and to fulfill the Borrower's other obligations under this Agreement. (c) at such time or times after the assertion by the Lender that an Event of Default has occurred and is continuing (whether or not an Event of Default has in fact occurred), as the Lender or said agent, in its reasonable discretion, may determine, in the Borrower's or the Lender's name, notify the post office authorities to change the address for delivery of the Borrower's mail to an address designated by the Lender. Under no circumstances shall the Lender be under any duty to act in regard to any of the foregoing matters. The costs relating to any of the foregoing matters, including Attorneys' Fees and out-of-pocket expenses shall be borne solely by the Borrower whether the same are incurred by the Lender or the Borrower. Neither the Lender nor any of its directors, officers, employees or agents will be liable for any acts of commission or omission nor for any error in judgment or mistake of fact or law, unless the same shall have resulted from gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable until either (i) all Obligations are paid in full, or (ii) this Agreement is terminated, whichever shall last occur. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and to make Loans to the Borrower hereunder, the Borrower makes the following representations and warranties, all of which shall be true and correct as of the date the initial Loan is made and survive the execution of this Agreement and the making of the initial Loan: 4.1 ORGANIZATION. The Borrower and each of its corporate Subsidiaries are corporations duly incorporated, validly existing and in good standing under the laws of the jurisdiction of their respective incorporation. All of the Borrower's other Subsidiaries, if any, are entities duly organized, validly existing and in good standing under the laws of the jurisdictions of their respective organization. The Borrower and all of the Subsidiaries are in good standing and are duly qualified to do business in each state where, because of the nature of their respective activities or properties, such qualification is required. On the date hereof, the Borrower and each Subsidiary conducts business in its own name exclusively and has no trade names, styles or doing business forms except as disclosed on Schedule 4.1. The Borrower's taxpayer identification number is I.D. No. 41-0429620. 4.2 AUTHORIZATION. The Borrower is duly authorized to execute and deliver the Loan Documents and any Supplemental Documentation contemplated by this Agreement, and is and will continue to be duly authorized to borrow monies hereunder and to perform its obligations under the Loan Documents and any Supplemental Documentation contemplated by this Agreement and the borrowings hereunder do not and will not require any consent or approval of any governmental agency or authority. 4.3 NO CONFLICTS. The execution, delivery and performance by the Borrower of the Loan Documents and any Supplemental Documentation contemplated by this Agreement, do not and will not conflict with (a) any provision of law, (b) the charter or by-laws of the Borrower, (c) any agreement binding upon the Borrower, or (d) any court or administrative order or decree applicable to the Borrower, and do not and will not require, or result in, the creation or imposition of any Lien on any asset of the Borrower or any of the Subsidiaries except as provided herein. 4.4 VALIDITY AND BINDING EFFECT. The Loan Documents and any Supplemental Documentation contemplated by this Agreement, when duly executed and delivered will be, legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 4.5 NO DEFAULT. Neither the Borrower nor any of the Subsidiaries is in default under any agreement or instrument to which the Borrower or any Subsidiary is a party or by which any of their respective properties or assets is bound or affected, which default (a) might materially and adversely affect the Lender's Lien on or rights with respect to any Collateral or Third Party Collateral or (b) constitutes an Adverse Event. No Event of Default or Unmatured Event of Default has occurred and is continuing. 4.6 FINANCIAL STATEMENTS. The Borrower's audited consolidated and consolidating financial statement as at January 6, 1996 and the Borrower's unaudited consolidated and consolidating financial statement as at November 30, 1996, copies of which have been furnished to the Lender, have been prepared in conformity with generally accepted accounting principles promulgated by the Financial Accounting Standards Board and applied on a basis consistent with that of the preceding fiscal year and period and present fairly the financial condition of the Borrower and the Subsidiaries as at such dates and the results of their operations for the periods then ended, subject (in the case of the interim financial statement) to year-end audit adjustments. Since November 30, 1996, no Adverse Event has occurred. 4.7 INSURANCE. Schedule 4.7 sets forth a summary of the property and casualty insurance program carried by the Borrower and the Subsidiaries on the date hereof, including the insurer's(s') name(s), policy number(s), expiration date(s), amount(s) of coverage, type(s) of coverage, the annual premium(s), Best's policyholder's and financial size ratings of the insurers, exclusions, deductibles and self-insured retention, and describes in detail any retrospective rating plan, fronting arrangement or any other self-insurance or risk assumption agreed to by the Borrower or any Subsidiary or imposed upon the Borrower or any Subsidiary by any such insurer. This summary also includes any self-insurance program that is in effect. 4.8 LITIGATION; CONTINGENT LIABILITIES. (a) Except for those referred to in Schedule 4.8, no claims litigation, arbitration proceedings or governmental proceedings are pending or threatened against or are affecting the Borrower or any Subsidiary. (b) Other than any liability incident to the claims, litigation or proceedings disclosed in Schedule 4.8, neither the Borrower nor any the Subsidiary has any contingent liabilities which are material to the Borrower or any Subsidiary. 4.9 LIENS. None of the Collateral or other property or assets of the Borrower or any Subsidiary is subject to any Lien (including, without limitation, Liens pursuant to Capitalized Leases under which the Borrower or any Subsidiary is a lessee) except: (a) Liens in favor of the Lender; (b) Liens for current Taxes not delinquent or Taxes being contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by GAAP are being maintained; (c) carriers', warehousemen's, mechanics', materialmen's and other like statutory Liens arising in the ordinary course of business securing obligations which are not overdue or which are being contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by GAAP are being maintained; and (d) Liens listed on Schedule 4.9. 4.10 SUBSIDIARIES. The Borrower has no Subsidiaries except as listed on Schedule 4.10. The Borrower and the Subsidiaries own the percentage of the Subsidiaries as set forth on Schedule 4.10. 4.11 PARTNERSHIPS. Neither the Borrower nor any of the Subsidiaries is a partner or joint venturer in any partnership or joint venture other than the partnerships and joint ventures listed on Schedule 4.11. 4.12 BUSINESS LOCATIONS. On the date hereof the office where the Borrower keeps the Borrower's books and records concerning the Borrower's Accounts Receivable and other Collateral, and the Borrower's chief place of business and chief executive office, is located at the address of the Borrower set forth on the signature pages of this Agreement, and all of the Borrower's other places of business and all locations and places of business of each Subsidiary are listed on Schedule 4.12. On the date hereof, the names of any landlords and/or mortgagees of any of such locations are identified in Schedule 4.12. 4.13 COLLATERAL LOCATIONS. On the date hereof the Borrower's Inventory, Equipment and, if applicable, fixtures (except any part thereof which prior to the execution of this Agreement the Borrower shall have advised the Lender in writing consists of Collateral normally used in more than one state) is located at the addresses set forth in Schedule 4.13. The legal descriptions of any real property on which any fixtures are located and the name(s) of the record owner of such real property is set forth in Schedule 4.13. 4.14 ELIGIBILITY OF COLLATERAL. (a) All of the Accounts Receivable are and will continue to be bona fide existing obligations created by the sale of goods, the rendering of services, or the furnishing of other good and sufficient consideration to Accounts Debtors in the regular course of business and all shipping or delivery receipts and other documents furnished or to be furnished to the Lender in connection therewith are and will be genuine; (b) Each Account Receivable or item of Inventory which the Borrower shall, expressly or by implication, request the Lender to classify as an Eligible Account Receivable or as Eligible Inventory, respectively, will, as of the time when such request is made, conform in all respects to the requirements of such classification set forth in the respective definitions of "Eligible Account Receivable" and "Eligible Inventory" set forth herein; (c) with respect to each schedule of Inventory delivered to the Lender pursuant to Section 3.3: (i) the descriptions, origins, size, qualities, quantities, weights, and markings of all goods stated thereon, or on any attachment thereto, are true and correct in all material respects; (ii) all goods stated thereon have been produced by the Borrower in compliance with all requirements of the Fair Labor Standards Act; and (iii) none of the goods stated thereon are defective, of second quality, used, or goods returned after shipment, except where described as such; and (iv) all Inventory not included on such schedule has been previously scheduled. 4.15 CONTROL OF COLLATERAL; LEASE OF PROPERTY. The Borrower is not now conducting, or permitting or suffering to be conducted, any activities pursuant to or in conjunction with which any of the Collateral is now, or will be (while any Obligations exist or this Agreement is in effect), in the possession or control of, any Subsidiary, Obligor (other than the Borrower) or Related Party. Except as listed on Schedule 4.15, none of the machinery, equipment or real property used by the Borrower or any Subsidiary is subject to a lease (excluding only Capitalized Leases included on Schedule 6.11) under which the Borrower or such Subsidiary is the lessee. 4.16 PATENTS, TRADEMARKS, ETC. The Borrower and each of the Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others. All such licenses, patents, trademarks, trade names, service marks and copyrights, and applications therefor existing on the date hereof are listed on Schedule 4.16. 4.17 SOLVENCY. The Borrower and each of the Subsidiaries now has capital sufficient to carry on its respective business and transactions and all business and transactions in which it is about to engage and is now solvent and able to pay its respective debts as they mature, and the Borrower and each of the Subsidiaries now owns property having a value, greater than the amount required to pay the Borrower's or such Subsidiary's debts. 4.18 CONTRACTS; LABOR MATTERS. Except as disclosed on Schedule 4.18: (a) neither the Borrower nor any Subsidiary is a party to any contract or agreement, or subject to any charge, corporate restriction, judgment, decree or order, the performance of which constitutes an Adverse Event; (b) no labor contract to which the Borrower or any Subsidiary is subject is scheduled to expire during the original term of this Agreement; and (c) on the date of this Agreement (i) neither the Borrower nor any Subsidiary is a party to any labor dispute and (ii) there are no strikes or walkouts relating to any labor contracts to which the Borrower or any Subsidiary is subject. 4.19 ERISA. Each Plan complies with all material applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event, other than a Reportable Event for which the reporting requirements have been waived by regulations of the PBGC, has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would permit the institution of proceedings to terminate any Plan under Section 4042 of ERISA. The Current value of the Plans' benefits guaranteed under Title IV of ERISA does not exceed the current value of the Plans' assets allocable to such benefits. Except as listed on Schedule 4.8, neither the Borrower nor any Subsidiary has any contingent liability with respect to any "employee welfare benefit plans," as such term is defined in Section 3(1) of ERISA, which covers retired or terminated employees and their beneficiaries. 4.20 REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Federal Reserve Board), and no part of the proceeds of any Loan will be used to purchase or carry margin stock or for any other purpose which would violate any of the margin requirements of the Federal Reserve Board. 4.21 COMPLIANCE. The Borrower and each of the Subsidiaries are in material compliance with all statutes and governmental rules and regulations applicable to them. All Inventory of the Borrower has been produced in compliance with all requirements of the Fair Labor Standards Act. 4.22 TAXES. The Borrower and each Subsidiary has filed all federal, state and local tax returns required to be filed and has paid, or made adequate provisions for the payment of, all Taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property (other than Taxes the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No tax Liens have been filed and no material claims are being asserted with respect to any such Taxes. The charges, accruals and reserves on the books of the Borrower in respect of Taxes are adequate. The Borrower is not aware of any proposed assessment against the Borrower or any Subsidiary for additional Taxes (or any basis for any such assessment) which might be material to the Borrower and the Subsidiaries taken as a whole. 4.23 INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 4.24 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.25 ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS. Except as disclosed on Schedule 4.25: (a) the operations of the Borrower and each of the Subsidiaries complies in all respects with (i) all applicable Environmental Laws, and (ii) all applicable Occupational Safety and Health Laws; (b) none of the operations of the Borrower or any Subsidiary are subject to any judicial or administrative proceeding alleging the violation of any Environmental Law or Occupational Safety and Health Law; (c) none of the operations of the Borrower or any Subsidiary is the subject of federal or state investigation evaluating whether any remedial action is needed to respond to (i) a spillage, disposal or release into the environment of any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance, or (ii) any unsafe or unhealthful condition at any premises of the Borrower or any Subsidiary; (d) neither the Borrower nor any Subsidiary has filed any notice under any Environmental Law or Occupation Safety and Health Law indicating or reporting (i) any past or present spillage, disposal or release into the environment of, or treatment, storage or disposal of, any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance or (ii) any unsafe or unhealthful condition at any premises of the Borrower or any Subsidiary; and (e) neither the Borrower nor any Subsidiary has any known contingent liability in connection with (i) any spillage, disposal or release into the environment of, or otherwise with respect to, any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance, or (ii) any unsafe or unhealthful condition at any premises of the Borrower or any Subsidiary. ARTICLE V AFFIRMATIVE COVENANTS From the date of this Agreement and thereafter until all Obligations are paid in full, the Borrower agrees that unless the Lender shall otherwise consent in writing, it will: 5.1 FINANCIAL STATEMENTS AND OTHER REPORTS. 5.1.1 FINANCIAL REPORTS. Furnish to the Lender in form satisfactory to the Lender: (a) ANNUAL AUDIT REPORT. As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the annual audit report of the Borrower and the Subsidiaries prepared on a consolidating and consolidated basis in conformity with GAAP, consisting of at least statements of income, cash flow and stockholders' equity, and a consolidated and consolidating balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, certified, without qualification, by independent certified public accountants of recognized standing selected by the Borrower and acceptable to the Lender, together with any management letters, management reports or other supplementary comments or reports to the Borrower or its board of directors furnished by such accountants. (b) ACCOUNTANT'S CERTIFICATE. Together with the audited financial statements required under Section 5.1.1(a), a certificate from the accounting firm performing such audit stating that it has reviewed this Agreement and that in performing its examination, nothing came to its attention that caused it to believe that any Event of Default or Unmatured Event of Default exists, or, if such Unmatured Event of Default or Event of Default exists, describing its nature. (c) MONTHLY FINANCIAL STATEMENT. As soon as available and in any event within 20 days after the end of each month of each fiscal year of the Borrower, a copy of the unaudited financial statement of the Borrower and the Subsidiaries prepared in the same manner as the audit report referred to in Section 5.1.1(a), signed by the Borrower's chief financial officer and consisting of at least consolidated statements of income, cash flow and stockholders' equity for the Borrower and the Subsidiaries for such month and for the period from the beginning of such fiscal year to the end of such month, and a consolidated and consolidating balance sheet of the Borrower as at the end of such month. (d) PROJECTIONS. As soon as available and in any event not later than 30 days following the last day of each fiscal year of the Borrower, a projected financial statement of the Borrower and the Subsidiaries prepared in the same manner as the audit report referred to in Section 5.1.1(a), signed by the Borrower's chief financial officer and presenting fairly the Borrower's best good faith projections of the financial position and results of operations of the Borrower and the Subsidiaries for each month of the following fiscal year. (e) OFFICER'S CERTIFICATE. Together with the financial statements furnished by the Borrower under Section 5.1.1(a), and (c), a certificate of the Borrower's chief financial officer, dated the date of such annual audit report or such monthly financial statement, as the case may be, to the effect that no Event of Default or Unmatured Event of Default has occurred and is continuing, or, if there is any such event, describing it and the steps, if any, being taken to cure it, and containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in Articles V and VI and Supplement A. (f) GAAP CHANGES. In the event that a material change occurs, in the Lender's judgment, in GAAP, either the Lender and the Borrower shall amend, in writing, the covenants in this Agreement, Supplement A, and the other Loan Documents which are calculated on the basis of GAAP to reflect such change, or, if the Lender and the Borrower fail to agree on and enter into such an amendment, the Lender shall have the right to deem such change in GAAP to be an Event of Default. 5.1.2 AGINGS; INELIGIBLE ACCOUNTS RECEIVABLE CERTIFICATION. Within 15 days after the end of each month, (a) a detailed aging of all Accounts Receivable by invoice, including, without limitation, a reconciliation to the aging report delivered to the Lender for the preceding month, (b) a certification of ineligible Accounts Receivable and (c) an aging of all accounts payable as of the end of the preceding month, each in form and content acceptable to the Lender. 5.1.3 INVENTORY CERTIFICATION. Within 15 days after the end of each month, an Inventory certification report as of the end of the preceding month for all Inventory locations, in form and content acceptable to the Lender. 5.1.4 INTENTIONALLY OMITTED. 5.1.5 OTHER REPORTS. (a) SEC AND OTHER REPORTS. Promptly upon the making or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower's shareholders, and copies of all registration statements, periodic reports and other documents filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange. (b) REPORT OF CHANGE IN SUBSIDIARIES OR PARTNERSHIPS. Promptly from time to time, a written report of any change in the list of the Borrower's Subsidiaries set forth on Schedule 4.10 or in the list of partnerships and joint ventures set forth on Schedule 4.11. (c) PATENTS, ETC. Promptly from time to time, a written report of any change to the list of patents, trademarks, copyrights and other information set forth in Schedule 4.16. (d) OTHER REPORTS. The information required to be provided pursuant to other provisions of this Agreement, and such other reports from time to time requested by the Lender. 5.2 NOTICES. Notify the Lender in writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the Person(s) affected with respect thereto: (a) DEFAULT. The occurrence of (i) any Event of Default or Unmatured Event of Default, and (ii) to the extent not included in clause (i) above, the default by the Borrower, any other Obligor or any Subsidiary under any note, indenture, loan agreement, mortgage, lease, deed or other material similar agreement to which the Borrower, any other Obligor or any Subsidiary, as appropriate, is a party or by which it is bound. (b) LITIGATION. The institution of any litigation, arbitration proceeding or governmental proceeding affecting the Borrower, any other Obligor, any Subsidiary, any Collateral or any Third Party Collateral, whether or not considered to be covered by insurance wherein the claim involves $25,000 or more. (c) JUDGMENT. The entry of any judgment or decree against the Borrower, any other Obligor or any Subsidiary, if the amount of such judgment exceeds $50,000. (d) ERISA. With respect to any Plan, the occurrence of a Reportable Event (other than a Reportable Event for which the reporting requirements have been waived by PBGC regulations) or any "prohibited transaction" (as defined in Section 4975 of the Code), a notice specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan; or the incurrence of any material increase in the contingent liability of the Borrower, any other Obligor or any Subsidiary with respect to any "employee welfare benefit plan" as defined in Section 3(1) of ERISA which covers retired employees and their beneficiaries. (e) CHANGE IN COLLATERAL LOCATIONS. If any of the Borrower's Inventory or Equipment is placed in locations other than those identified in this Agreement or in Schedule 4.13. (f) CHANGE IN PLACE(S) OF BUSINESS. Any proposed opening, closing or other change in the list of offices and other places of business of the Borrower and each Subsidiary set forth in Schedule 4.12, and any opening, closing or other change in the offices and other places of business of each other Obligor. (g) CHANGE OF NAME. Any change in the name of the Borrower, any other Obligor or any Subsidiary, and any change in the list of trade names and trade styles set forth in Schedule 4.1. (h) ENVIRONMENTAL AND SAFETY AND HEALTH MATTERS. Receipt of any notice that the operations of the Borrower, any other Obligor or any Subsidiary are not in full compliance with requirements of any applicable Environmental Law or any Occupational Safety and Health Law; receipt of notice that the Borrower, any other Obligor or any Subsidiary is subject to federal, state or local investigation evaluating whether any remedial action is needed to respond to (i) any spillage, disposal or release into the environment of any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance, or (ii) any unsafe or unhealthful condition at any premises of the Borrower, any other Obligor or any Subsidiary; or receipt of notice that any properties or assets of the Borrower any other Obligor or any Subsidiary are subject to an Environmental Lien. (i) ADVERSE EVENT. The occurrence of an Adverse Event. (j) DEFAULT BY OTHERS. Any material default by any Account Debtor or other Person obligated to the Borrower, any other Obligor, or any Subsidiary, under any contract, chattel paper, note or other evidence of amounts payable or due or to become due to the Borrower, such Obligor or Subsidiary if the amount payable under such contract, chattel paper, note or other evidence of amounts payable or due or to become due is material. (k) MOVEABLE COLLATERAL. If any of the Collateral or Third Party Collateral shall consist of goods of a type normally used in more than one state, whether or not actually so used, any use of any such goods in any state other than a state in which the Borrower shall have previously advised the Lender such goods will be used. The Borrower agrees that such goods will not, unless the Lender shall otherwise consent in writing, be used outside the continental United States or in Louisiana. (l) CHANGE IN MANAGEMENT OR LINE(S) OF BUSINESS. Any substantial change in the senior management of the Borrower or any Subsidiary, or any change in the Borrower's or any Subsidiary's line(s) of business. (m) OTHER EVENTS. The occurrence of such other events as the Lender may reasonably from time to time specify. 5.3 EXISTENCE. Maintain and preserve, and cause each Subsidiary to maintain and preserve, its respective existence as a corporation or other form of business organization, as the case may be, and all rights, privileges, licenses, patents, patent rights, copyrights, trademarks, trade names, franchises and other authority to the extent material and necessary for the conduct of its respective business in the ordinary course as conducted from time to time. 5.4 NATURE OF BUSINESS. Engage, and cause each Subsidiary to engage, in substantially the same fields of business as it is engaged in on the date hereof. 5.5 BOOKS, RECORDS AND ACCESS. Maintain, and cause each Subsidiary to maintain, complete and accurate books and records (including, without limitation, records relating to Accounts Receivable, Inventory, Equipment and other Collateral), in which full and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its respective business and activities. Cause its books and records as at the end of any calendar month to be posted and closed not more than 15 days after the last business day of such month. Permit, and cause each Subsidiary to permit, access by the Lender and its agents or employees to the books and records of the Borrower and such Subsidiary at the Borrower's or such Subsidiary's place or places of business at intervals to be determined by the Lender and without hindrance or delay, and permit, and cause each Subsidiary to permit, the Lender or its agents and employees to inspect the Borrower's Inventory and Equipment and such Subsidiary's inventory and equipment, and to inspect, audit, check and make copies and/or extracts from the books, records, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts Receivable, chattel paper, General Intangibles, Equipment and any other Collateral or Third Party Collateral, or to any other transactions between the parties hereto. Any and all such inspections and/or audits shall be at the Borrower's expense. 5.6 INSURANCE. Maintain, and cause each Subsidiary to maintain, insurance to such extent and against such hazards and liabilities as is commonly maintained by companies similarly situated or as the Lender may reasonably request from time to time. Keep the Collateral properly housed and insured for its full insurable value against loss or damage by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles) and such other risks as are customarily insured against by persons engaged in business similar to that of the Borrower, with such companies, in such amounts and under policies in such form as shall be satisfactory to the Lender. Certificates of such policies of insurance have been delivered to the Lender prior to the date hereof together with evidence of payment of all premiums therefor. The Borrower hereby directs all insurers under such policies of insurance to pay all proceeds payable thereunder directly to the Lender. The Borrower irrevocably makes, constitutes and appoints the Lender and any Person whom the Lender may from time to time designate (and all officers, employees or agents designated by the Lender or such Person) as the Borrower's true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of the Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. In the event the Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required herein or to pay any premium in whole or in part relating thereto, the Lender, without waiving or releasing any obligations or default by the Borrower hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which the Lender deems advisable. All sums so disbursed by the Lender, including reasonable Attorneys' Fees, court costs, expenses and other charges relating thereto, shall be payable on demand by the Borrower to the Lender. 5.7 INSURANCE SURVEY. Provide to the Lender at least annually within 90 days of the end of the Borrower's fiscal year, a certificate signed by its chief financial officer that attests to and summarizes the property and casualty insurance program carried by the Borrower and the Subsidiaries. This summary shall include the insurer's(s') name, policy number(s), expiration date(s), amount(s) of coverage, type(s) of coverage, the annual premium(s), Best's policyholder's and financial size ratings of the insurers, exclusions, deductibles and self-insured retention and shall describe in detail any retrospective rating plan, fronting arrangement or any other self-insurance or risk assumption agreed to by the Borrower or any Subsidiary or imposed upon the Borrower or any Subsidiary by any such insurer, as well as any self-insurance program that is in effect. The Borrower shall (a) notify the Lender in writing at least 30 days prior to any cancellation or material change of any such insurance by the Borrower or any Subsidiary and (b) within five business days after receipt of any notice (whether formal or informal) thereof, of any cancellation or change in any of its insurance by any of its insurers or any material change in the cost thereof or which reduces the policyholder's or financial size ratings of the insurance carriers of the Borrower or any Subsidiary, as established by Best's Insurance Reports. Annually, the Lender shall have the right to request the Borrower to have a risk management survey completed by a recognized independent risk management consultant acceptable to it and the Lender which will identify, quantify and assess any catastrophic uninsured, underinsured or self-insured exposures faced by the Borrower and the Subsidiaries. The cost of such survey shall be borne solely by the Borrower. A copy of the results of each such a survey shall be promptly delivered by the Borrower to the Lender. 5.8 REPAIR. Maintain, preserve and keep, and cause each Subsidiary to maintain, preserve and keep, its properties in good repair, working order and condition, and from time to time make, and cause each Subsidiary to make, all necessary and proper repairs, renewals, replacements, additions, betterments and improvements thereto so that at all times the efficiency thereof shall be fully preserved and maintained. 5.9 TAXES. Pay, and cause each Subsidiary to pay, when due, all of its Taxes, unless and only to the extent that the Borrower or such Subsidiary, as the case may be, is contesting such Taxes in good faith and by appropriate proceedings and the Borrower or such Subsidiary has set aside on its books such reserves or other appropriate provisions therefor as may be required by GAAP. 5.10 COMPLIANCE. Comply, and cause each Subsidiary to comply, with all statutes and governmental rules and regulations applicable to it, including, without limitation, the Fair Labor Standards Act. 5.11 COLLATERAL MONITORING. Permit the Lender to (a) use the Borrower's stationery and sign the name of the Borrower to request verification of Accounts Receivable or other Collateral from Account Debtors, and (b) use the information recorded on or contained in any data processing equipment and computer hardware and software to which the Borrower has access relating to Accounts Receivable, Inventory, Equipment and/or other Collateral. ARTICLE VI NEGATIVE COVENANTS From the date of this Agreement and thereafter until all Obligations are paid in full, the Borrower agrees that, unless the Lender shall otherwise consent in writing, it will not, and will not permit any Subsidiary to, do any of the following: 6.1 MERGER. Merge or consolidate or enter into any analogous reorganization or transaction with any Person. 6.2 SALE OF ASSETS. Sell, transfer, convey, lease, assign or otherwise dispose (with or without recourse) of any of its assets (including, without limitation, any Accounts Receivable, instruments or chattel paper) except for sales and leases of Inventory in the ordinary course of business. 6.3 PURCHASE OF ASSETS. Purchase or lease or otherwise acquire all or substantially all the assets of any Person. 6.4 ERISA. Permit any condition to exist in connection with any Plan which might constitute grounds for the PBGC to institute proceedings to have such Plan terminated or a trustee appointed to administer such Plan; permit any Plan to terminate under any circumstances which would cause the lien provided for in Section 4068 of ERISA to attach to any property, revenue or asset of the Borrower or any Subsidiary; or permit the underfunded amount of Plan benefits guaranteed under Title IV of ERISA to exceed $25,000. 6.5 CHANGES IN COLLATERAL OR BUSINESS LOCATIONS. Change (a) the location of its chief executive office or chief place of business; (b) its name; or (c) the locations where it stores or maintains Inventory or Equipment without, in each case, at least 30 days' prior written notice to the Lender. 6.6 SUBSIDIARIES, PARTNERSHIPS AND JOINT VENTURES. Either: (a) form or acquire any corporation which would thereby become a Subsidiary; or (b) form or enter into any partnership as a limited or general partner or into any joint venture. 6.7 OTHER AGREEMENTS. Enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Lender which would (a) prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant, to the Lender any Lien on any assets or properties of the Borrower or such Subsidiary, or (b) be violated or breached by the Borrower's performance of its obligations under the Loan Documents. 6.8 RESTRICTED PAYMENTS. Purchase or redeem or otherwise acquire for value any shares of the Borrower's or any Subsidiary's stock, declare or pay any dividends thereon (other than stock dividends and dividends payable to the Borrower), make any distribution to, or set aside any funds for distributions to, stockholders as such (other than the Borrower), except for a distribution to the Borrower's stockholders in the amount of up to $12,525,000 to be paid in the first quarter of 1997; prepay, purchase or redeem any subordinated Indebtedness of the Borrower or any Subsidiary; and not take any action which will result in a decrease in the Borrower's or any Subsidiary's ownership interest in any Subsidiary. 6.9 LEASES. Enter into or permit to exist any arrangements for the leasing by the Borrower or any Subsidiary, as lessee, of any real or personal property (or any interest therein) under leases (other than Capitalized Leases), except as listed on Schedule 4.15, which require the payment by the Borrower and the Subsidiaries on a consolidated basis of rental amounts in the aggregate in excess of (a) $450,000 in any one fiscal year, or (b) $1,500,000 during the full remaining terms of such leases. 6.10 INVESTMENTS. Acquire for value, make, have or hold any Investments, except: (a) advances to employees of the Borrower or any Subsidiary for travel or other ordinary business expenses, provided that the aggregate amount outstanding at any one time shall not exceed $10,000 for any single employee and $50,000 in the aggregate for all employees; (b) advances to subcontractors and suppliers in maximum aggregate amounts reasonably acceptable to the Lender; (c) extensions of credit in the nature of Accounts Receivable or notes receivable arising from the sale of goods and services in the ordinary course of business; (d) shares of stock, obligations or other securities received in settlement of claims arising in the ordinary course of business; (e) Investments (other than Investments in the nature of loans or advances) outstanding on the date hereof in subsidiaries by the Borrower and other Subsidiaries; (f) other Investments outstanding on the date hereof and listed on Schedule 6.10; and (g) other Investments consented to by the Lender in writing. 6.11 INDEBTEDNESS. Incur, create, issue, assume or suffer to exist any Indebtedness, including, without limitation, Indebtedness as lessee under any Capitalized Lease, except: (a) Indebtedness under the terms of this Agreement; (b) Subordinated Debt; (c) Indebtedness hereafter incurred in connection with Liens permitted under Section 6.12(d); (d) other Indebtedness outstanding on the date hereof and listed on Schedule 6.11; and (e) other Indebtedness approved in writing by the Lender. 6.12 LIENS. Create, incur, assume or suffer to exist any Lien with respect to any property, revenues or assets now owned or hereafter arising or acquired, except: (a) Liens for current Taxes not delinquent or Taxes being contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by GAAP are being maintained; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's, and other like statutory Liens arising in the ordinary course of business securing obligations which are not overdue or which are being contested in good faith and by appropriate proceedings and as to which such reserves or other appropriate provisions as may be required by GAAP are being maintained; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) Liens in connection with Capital Expenditures attaching only to the property being acquired if the Indebtedness secured thereby does not exceed 100% of the fair market value of such property at the time of acquisition thereof; (e) Liens in favor of the Lender; (f) Liens referred to in Section 4.9; and (g) Liens consented to by the Lender in writing. 6.13 CONTINGENT LIABILITIES. Either: (a) endorse, guarantee, contingently agree to purchase or to provide funds for the payment of, or otherwise become contingently liable upon, any obligation of any other Person, except by the endorsement of negotiable instruments for deposit or collection (or similar transactions) in the ordinary course of business, or (b) agree to maintain the net worth or working capital of, or provide funds to satisfy any other financial test applicable to, any other Person. 6.14 CHANGE IN ACCOUNTS RECEIVABLE. After the occurrence of an Event of Default or receipt of notice from the Lender that the Lender intends to commence direct collection of Accounts Receivable, permit or agree to any extension, compromise or settlement or make any change or modification of any kind or nature with respect to any Account Receivable, including any of the terms relating thereto. 6.15 UNCONDITIONAL PURCHASE OBLIGATIONS. Enter into or be a party to any contract for the purchase of materials, supplies or other property or services, if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services. 6.16 USE OF PROCEEDS. Use or permit any proceeds of the Loans to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying any margin stock" within the meaning of Regulation U of the Federal Reserve Board, as amended from time to time, and furnish to the Lender upon request, a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of the Federal Reserve Board. 6.17 TRANSACTIONS WITH RELATED PARTIES. Enter into or be a party to any transaction or arrangement, including, without limitation, the purchase, sale, lease or exchange of property or the rendering of any service, with any Related Party, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not a Related Party. ARTICLE VII EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) NON-PAYMENT. The Borrower shall fail to pay, when due or declared due, any Obligations; (b) NON-PAYMENT OF OTHER INDEBTEDNESS. The Borrower, any other Obligor or any Subsidiary shall fail to pay, when due, whether by acceleration or otherwise (subject to any applicable grace period), any Indebtedness of, or guaranteed by, the Borrower, such other Obligor or such Subsidiary; (c) ACCELERATION OF OTHER INDEBTEDNESS. Any event or condition shall occur which results in the acceleration of the maturity of any Indebtedness of, or guaranteed by, the Borrower, any other Obligor or any Subsidiary or enables the holder or holders of such other Indebtedness or any trustee or agent for such holders (any required notice of default having been given and any applicable grace period having expired) to accelerate the maturity of such other Indebtedness; (d) OTHER OBLIGATIONS. The Borrower, any other Obligor or any Subsidiary shall fail to pay, when due, whether by acceleration or otherwise, or perform or observe (subject to any applicable grace period or waiver of such default) (i) any obligation or agreement of the Borrower, such other Obligor or such Subsidiary to or with the Lender (other than any obligation or agreement of the Borrower hereunder and under any Notes) or (ii) any material obligation or agreement of the Borrower, such other Obligor or such Subsidiary to or with any other Person (other than (A) any such material obligation or agreement constituting or related to Indebtedness, (B) accounts payable arising in the ordinary course of business, and (C) any material obligation or agreement of any Subsidiary to the Borrower or to any other Subsidiary), except only to the extent that the occurrence of any such failure is being contested by the Borrower, such other Obligor or such Subsidiary, as the case may be, in good faith and by appropriate proceedings and the Borrower, such other Obligor or such Subsidiary, as applicable, shall have set aside on its books such reserves or other appropriate provisions therefor as may be required by GAAP; (e) INSOLVENCY. The Borrower, any other Obligor or any Subsidiary becomes insolvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they mature, or applies for, consents to, or acquiesces in, the appointment of a trustee, receiver or other custodian for the Borrower, such other Obligor or such Subsidiary, or for a substantial part of the property of the Borrower, such other Obligor or such Subsidiary, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Borrower, any other Obligor or any Subsidiary or for a substantial part of the property of the Borrower, any other Obligor or any Subsidiary and is not discharged or dismissed within 30 days; or any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is instituted by or against the Borrower, any other Obligor or any Subsidiary; or any warrant of attachment or similar legal process is issued against any substantial part of the property of the Borrower, any other Obligor or any Subsidiary; (f) ERISA. The institution by the Borrower or any ERISA Affiliate of steps to terminate any Plan if, in order to effectuate such termination, the Borrower or any ERISA Affiliate would be required to make a contribution to such Plan or would incur a liability or obligation to such Plan, in excess of $25,000; or the institution by the PBGC of steps to terminate any Plan; (g) NON-COMPLIANCE WITH THIS AGREEMENT. (i) The Borrower shall fail to comply with any of the Borrower's agreements set forth in Section 7 of Supplement A); or (ii) The Borrower shall fail to comply with any of the Borrower's agreements set forth in this Agreement (and not constituting an Event of Default under any of the other subsections of this Section 7.1, including, without limitation, Section 7.1(g)(i)), and such failure to comply shall continue for ten days; (h) NON-COMPLIANCE WITH LOAN DOCUMENTS. Failure by the Borrower, any other Obligor or any Subsidiary to comply with any of its respective agreements set forth in any Loan Documents other than this Agreement (and not constituting an Event of Default under any of the other subsections of this Section 7.1), and such failure to comply shall continue after the grace period (if any) set forth therein; (i) WARRANTY. Any warranty made by the Borrower or any other Obligor in any of the Loan Documents is untrue or misleading in any material respect when made or deemed made; or any schedule, statement, report, notice, certificate or other writing furnished by the Borrower or any other Obligor to the Lender is untrue or misleading in any material respect on the date as of which the facts set forth therein are stated or certified; or any certification made or deemed made by the Borrower or any other Obligor to the Lender is untrue or misleading in any material respect on or as of the date made or deemed made; (j) LITIGATION. There shall be entered against any one of the Borrower, any other Obligor or any Subsidiary one or more judgments or decrees in excess of $100,000 in the aggregate at any one time outstanding, excluding those judgments or decrees (i) that shall have been outstanding less than 30 calendar days from the entry thereof, (ii) for and to the extent which the Borrower, such Obligor or such Subsidiary, as applicable, is insured and with respect to which the insurer has assumed responsibility in writing or for and to the extent which the Borrower, such Obligor or such Subsidiary, as applicable, is otherwise indemnified if the terms of such indemnification are satisfactory to the Lender or (iii) that are subject to a properly perfected and timely appeal and execution under which have been stayed by bond; (k) DEATH OF OBLIGOR. If any natural person who is an Obligor, partner in a partnership which is an Obligor, or owner of a material interest in a corporate Obligor, shall die or be declared legally incompetent; (l) VALIDITY. If the validity or enforceability of any of the Loan Documents shall be challenged by the Borrower, any other Obligor or any other Person, or shall fail to remain in full force and effect; (m) CONDUCT OF BUSINESS. If the Borrower, any other Obligor or any Subsidiary is enjoined, restrained or in any way prevented by court order, which has not been dissolved or stayed within five Business Days, from conducting all or any material part of its business affairs; [and] (n) ADVERSE EVENT. The Lender shall have determined in good faith (which determination shall be conclusive) that (i) an Adverse Event has occurred or (ii) the Lender's interest in any material Collateral or Third Party Collateral has been adversely affected or impaired, or the value thereof to the Lender has been diminished to a material extent, or (iii) the prospect of payment or performance of any obligation or agreement of the Borrower or any other Obligor under any of the Loan Documents is materially impaired, and the condition giving rise to such determination does not constitute an Event of Default under any of the other subsections of this Section 7.1; and (o) CHANGE IN MANAGEMENT OR LINE(S) OF BUSINESS. Any substantial change in the senior management of the Borrower or any change in the Borrower's line(s) of business. 7.2 EFFECT OF EVENT OF DEFAULT; REMEDIES. (a) In the event that one or more Events of Default described in Section 7.1(e) shall occur, then the Credit extended under this Agreement shall terminate and all Obligations hereunder and under any Notes shall be immediately due and payable without demand, notice or declaration of any kind whatsoever. (b) In the event an Event of Default other than one described in Section 7.1(e) shall occur, then the Lender may declare all Obligations hereunder and under any Notes immediately due and payable without demand or notice of any kind whatsoever, whereupon the Credit extended under this Agreement shall terminate and all Obligations hereunder and under any Notes shall be immediately due and payable. The Lender shall promptly advise the Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration. (c) In the event of the occurrence of any Event of Default the Lender may exercise any one or more or all of the following remedies, all of which are cumulative and non-exclusive: (i) any remedy contained in the Loan Documents or any Supplemental Documentation; (ii) any rights and remedies available to the Lender under the Uniform Commercial Code as enacted in Minnesota as of the date of this Agreement, and any other applicable law; (iii) without notice, demand or legal process of any kind, the Lender may take possession of any or all of the Collateral (in addition to Collateral which it might already have in its possession), wherever it might be found, and for that purpose may pursue the same wherever it may be found, and may enter into any premises where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of, and the Lender shall have the right to store the same in any of the Borrower's premises without cost to the Lender; (iv) at the Lender's request, the Borrower will, at the Borrower's expense, assemble the Collateral and make it available to the Lender at a place or places to be designated by the Lender which is reasonably convenient to the Lender and the Borrower; and (v) the Lender at its option, and pursuant to notification given to the Borrower as provided for below, may sell any Collateral actually or constructively in its possession at public or private sale and apply the proceeds thereof as provided below. 7.3 SETOFF. In addition to and not in limitation of all rights of offset that the Lender or any other holder of a Note may have under applicable law, the Lender or such other holder of a Note shall, upon the occurrence of any Event of Default, or any Unmatured Event of Default described in Section 7.1(e) hereof, have the right to appropriate and apply to the payment of the Obligations any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with the Lender, or any Affiliate, or other holder. ARTICLE VIII COLLATERAL AND THE LENDER'S RIGHTS 8.1 NOTICE OF DISPOSITION OF COLLATERAL. Any notification of intended disposition of any of the Collateral required by law shall be deemed reasonably and properly given if given at least ten calendar days before such disposition. 8.2 APPLICATION OF PROCEEDS OF COLLATERAL. Any proceeds of any disposition by the Lender of any of the Collateral may be applied by the Lender to the payment of expenses in connection with the taking possession of, storing, preparing for sale, and disposition of Collateral, including Attorneys' Fees and legal expenses, and any balance of such proceeds may be applied by the Lender toward the payment of such of the Obligations, and in such order of application, as the Lender may from time to time elect. 8.3 CARE OF COLLATERAL. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if it takes such action for that purpose as the Borrower requests in writing, but failure of the Lender to comply with such request shall not, of itself, be deemed a failure to exercise reasonable care, and no failure of the Lender to preserve or protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by the Borrower, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. 8.4 PERFORMANCE OF BORROWER'S OBLIGATIONS. The Lender shall have the right, but shall not be obligated, to discharge any claims against or Liens, and any Taxes at any time levied or placed upon any or all Collateral including, without limitation, those arising under statute or in favor of landlords, taxing authorities, government, public and/or private warehousemen, common and/or private carriers, processors, finishers, draymen, coopers, dryers, mechanics, artisans, laborers, attorneys, courts, or others. The Lender may also pay for maintenance and preservation of Collateral. The Lender may, but is not obligated to, perform or fulfill any of the Borrower's responsibilities under this Agreement which the Borrower has failed to perform or fulfill. 8.5 LENDER'S RIGHTS. None of the following shall affect the obligations of the Borrower to the Lender under this Agreement or the Lender's rights with respect to the remaining Collateral or any Third Party Collateral (any or all of which actions may be taken by the Lender at any time, whether before or after an Event of Default, at its sole and absolute discretion and without notice to the Borrower): (a) acceptance or retention by the Lender of other property or interests in property as security for the Obligations, or acceptance or retention of any obligor(s), in addition to the Borrower, with respect to any Obligations; (b) release of its security interest in, or surrender or release of, or the substitution or exchange of or for, all or any part of the Collateral or any Third Party Collateral or any other property securing any Obligations (including, without limitation, any property of any Obligor other than the Borrower), or any extension or renewal for one or more periods (whether or not longer than the original period) , or release, compromise, alteration or exchange, of any obligations of any guarantor or other Obligor with respect to any Collateral or any such property; (c) extension or renewal for one or more periods (whether or not longer than the original period), or release, compromise, alteration or exchange of any Obligations, or release or compromise of any obligation of any Obligor with respect to any Obligations; or (d) failure by the Lender to resort to other security or pursue any Person liable for any Obligations before resorting to the Collateral. ARTICLE IX CONDITIONS PRECEDENT 9.1 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the Lender to make the initial Loan shall be subject to the satisfaction of the following conditions precedent, in addition to the applicable conditions precedent set forth in Section 9.2: 9.1.1 NO CHANGE IN CONDITION. No change in the condition or operations, financial or otherwise, of the Borrower, any other Obligor or any Subsidiary, shall have occurred which change, in the sole credit judgment of the Lender, may constitute an Adverse Event or have a material adverse effect on any Collateral or Third Party Collateral or the Lender's interest therein. 9.1.2 ACCOUNTING METHODS. The Borrower shall not have made any material, as determined by the Lender, change in its accounting methods or principles. 9.1.3 SURVEY. The Lender shall have completed its updated survey of the business, operations and assets of the Borrower, each Subsidiary and each other Obligor, and such survey shall provide the Lender with results and information which, in the Lender's determination, are satisfactory to the Lender. 9.1.4 NO MATERIAL TRANSACTION. None of the Borrower, any other Obligor or any Subsidiary shall have entered into any material, as determined by the Lender, commitment or transaction, including, without limitation, transactions for borrowings and capital expenditures, which are not in the ordinary course of their respective businesses. 9.1.5 LITIGATION. No litigation shall be outstanding or have been instituted or threatened which the Lender determines to be material against the Borrower, any other Obligor or any Subsidiary. 9.1.6 FILING OF DOCUMENTS. All financing statements, mortgages and other documents relating to the Collateral and Third Party Collateral shall have been filed or recorded, as appropriate. 9.1.7 DELIVERY OF DOCUMENTS. The Borrower shall have delivered to the Lender with each of the following, each duly executed and dated the date of the initial Loan or such earlier date as shall be acceptable to the Lender: (a) RESOLUTIONS. A copy, duly certified by the secretary or an assistant secretary of the Borrower, of (i) the resolutions of the Board of Directors of the Borrower authorizing (1) the borrowings by the Borrower hereunder, (2) the execution, delivery and performance by the Borrower of the Loan Documents to which the Borrower is a party or by which it is bound and (3) certain officers or employees of the Borrower to request borrowings by telephone and to execute Borrowing Base Certificates; (ii) all documents evidencing other necessary corporate action; and (iii) all approvals or consents, if any, with respect to the Loan Documents; (b) INCUMBENCY CERTIFICATE. A certificate of the secretary or an assistant secretary of the Borrower, certifying the names of the officers of the Borrower authorized to sign the Loan Documents to which it is a party and any Supplemental Documentation, together with the true signatures of such officers; (c) OTHER AGREEMENTS. Duly executed copies of each of the Loan Documents not specifically identified herein which the Lender determines to be necessary or desirable, each in form and content satisfactory to the Lender; (d) OPINION. A legal opinion of Lindquist & Vennum, PLLP, counsel to the Borrower, substantially in the form set forth as Exhibit C; (e) BORROWER'S CERTIFICATE. The certificate of the President of the Borrower certifying, to the best of his/her knowledge after diligent inquiry, to the fulfillment of all conditions precedent to closing and funding the secured financing transaction contemplated by this Agreement and to the truth and accuracy, as of such date, of the representations and warranties of the Borrower contained in the Loan Documents to which the Borrower is a party; (f) INSURANCE. Evidence satisfactory to the Lender of the existence of insurance on the Collateral and Third Party Collateral in amounts and with insurers acceptable to the Lender, together with evidence establishing that the Lender is named as a loss payee and, if required by the Lender, additional insured, on all related insurance policies and an endorsement or an independent instrument from each issuer of an insurance policy substantially in the form set forth as Exhibit D; (g) BYLAWS. A copy, duly certified by the secretary or an assistant secretary of the Borrower, of the Borrower's Bylaws; (h) ARTICLES OF INCORPORATION. A copy, duly certified by the secretary or an assistant secretary of the Borrower, of the Borrower's Articles of Incorporation; (i) GOOD STANDING CERTIFICATES. Certificates of good standing as to the Borrower and each of other corporate or partnership Obligor issued by the Secretary of State of the state in which the Borrower or such other Obligor, as applicable, is organized, and each other state in which the failure of the Borrower or such other Obligor, as applicable, to be in good standing would constitute an Adverse Event or have a material adverse effect on the Lender's rights in any Collateral or Third Party Collateral; (j) DISBURSEMENT LETTER. Written authorization and instructions from the Borrower, in form satisfactory to the Lender, for disbursement of the proceeds of the initial Loan; (l) LANDLORDS AND WAREHOUSEMEN WAIVERS. If required by the Lender, (i) from each lessor or landlord identified on Schedule 4.12 or Schedule 4.13, a landlord waiver and (ii) from each operator of a public warehouse where Inventory is stored, a letter from such operator, in each case in form acceptable to the Lender; and (m) OTHER. Such other documents, instruments or agreements as the Lender shall determine to be necessary or desirable. 9.1.8 SECURITY INTEREST. The Lien in the Collateral and Third Party Collateral granted to the Lender to secure the Obligations shall be senior, perfected Liens except as otherwise agreed by the Lender. 9.1.9 RESTRICTED ACCESS LOCKBOX; COLLATERAL ACCOUNT AND DISBURSEMENT ACCOUNT AGREEMENTS. The Borrower shall have entered into (a) a Restricted Access Lockbox; Collateral Account and Disbursement Account Agreement, substantially in the form of Exhibit E, with the Lender and FBNA, and (b) a Controlled Disbursement Account Agreement, substantially in the form set forth as Exhibit F, with First Bank, Havre, Montana and the Lender for, among other things, the collection and remittance to the Lender of cash proceeds of the Collateral. 9.1.10 EFFECT OF LAW. No law or regulation affecting the Lender's entering into the secured financing transaction contemplated by this Agreement shall impose upon the Lender any material obligation, fee, liability, loss, cost, expense or damage. 9.1.11 EXHIBITS; SCHEDULES. All Exhibits and Schedules to the Loan Documents shall have been completed in form and substance satisfactory to the Lender and shall contain no facts or information which the Lender, in its sole judgment, determines to be unacceptable. 9.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Lender to make any Loan or to issue, or cause to be issued, any Letter of Credit (including the initial Loan) shall be subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the Borrower and each other Obligor set forth in the Loan Documents to which the Borrower or such other Obligor, as applicable, is a party shall be true and correct. (b) EVENT OF DEFAULT. Immediately before and after making such Loan or issuing, or causing to be issued such Letter of Credit, no Event of Default or Unmatured Event of Default shall exist or be continuing. ARTICLE X INDEMNITY 10.1 ENVIRONMENTAL AND SAFETY AND HEALTH INDEMNITY. The Borrower hereby indemnifies the Lender and agrees to hold the Lender harmless from and against any and all losses, liabilities, damages, injuries, costs, expenses and claims of any and every kind whatsoever (including, without limitation, court costs and Attorneys' Fees) which at any time or from time to time may be paid, incurred or suffered by, or asserted against, the Lender for, with respect to, or as a direct or indirect result of the violation by the Borrower or any Subsidiary, of any Environmental Law or Occupational Safety and Health Law; or with respect to, or as a direct or indirect result of (a) the presence on or under, or the escape, seepage, leakage, spillage, disposal, discharge, emission or release from, properties utilized by the Borrower and/or any Subsidiary in the conduct of its business into or upon any land, the atmosphere, or any watercourse, body of water or wetland, of any Hazardous Material or other hazardous, toxic or dangerous waste, substance or constituent, or other substance (including, without limitation, any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under the Environmental Laws) or (b) the existence of any unsafe or unhealthful condition on or at any premises utilized by the Borrower and/or any Subsidiary in the conduct of its business. The provisions of and undertakings and indemnification set out in this Section 10.1 shall survive satisfaction and payment of the Obligations and termination of this Agreement. 10.2 GENERAL INDEMNITY. In addition to the payment of expenses pursuant to Section 12.3, whether or not the transactions contemplated hereby shall be consummated, the Borrower agrees to indemnify, pay and hold the Lender and any holder of any Notes, and the officers, directors, employees, agents, and affiliates of the Lender and such holders (collectively called the "Indemnitees") harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for any of such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not any of such Indemnitees shall be designated a party thereto), that may be imposed on, incurred by, or asserted against the Indemnitees, in any manner relating to or arising out of the Loan Documents, the statements contained in any commitment letters delivered by the Lender, the Lender's agreement to make the Loans or to issue Letters of Credit hereunder, or the use or intended use of any Letters of Credit, or the use or intended use of the proceeds of any of the Loans (the "Indemnified Liabilities"); provided, however, that the Borrower shall have no obligation to an Indemnitee hereunder with respect to indemnified liabilities arising from the gross negligence or willful misconduct of an Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all indemnified liabilities incurred by the Indemnitees or any of them. The provisions of the undertakings and indemnification set out in this Section 10.2 shall survive satisfaction and payment of the Obligations and termination of this Agreement. 10.3 CAPITAL ADEQUACY. If the Lender shall reasonably determine that the application or adoption of any law, rule, regulation, directive, interpretation, treaty or guideline regarding capital adequacy, or any change therein or in the interpretation or administration thereof, whether or not having the force or law (including, without limitation, application of changes to Regulation H and Regulation Y of the Federal Reserve Board issued by the Federal Reserve Board on January 19, 1989 and regulations of the Comptroller of the Currency, Department of the Treasury, 12 CFR Part 3, Appendix A, issued by the Comptroller of the Currency on January 27, 1989) increases the amount of capital required or expected to be maintained by the Lender or any Person controlling the Lender, and such increase is based upon the existence of the Lender's obligations hereunder and other commitments of this type, then from time to time, within 10 days after demand from the Lender, the Borrower shall pay to the Lender such amount or amounts as will compensate the Lender or such controlling Person, as the case may be, for such increased capital requirement. The determination of any amount to be paid by the Borrower under this Section 10 shall take into consideration the policies of the Lender or any Person controlling the Lender with respect to capital adequacy and shall be based upon any reasonable averaging, attribution and allocation methods. A certificate of the Lender setting forth the amount or amounts as shall be necessary to compensate the Lender as specified in this Section 10.3 shall be delivered to the Borrower and shall be conclusive in the absence of manifest error. ARTICLE XI ADDITIONAL PROVISIONS Additional provisions are set forth in Supplement A. ARTICLE XII GENERAL 12.1 BORROWER'S WAIVER. Except as otherwise provided for in this Agreement, the Borrower waives (a) presentment, demand and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, one or more extensions or renewals of any or all commercial paper, accounts, documents, instruments, chattel paper and guaranties at any time held by the Lender on which the Borrower may in any way be liable and hereby ratifies and confirms whatever the Lender may do in this regard; (b) all rights to notice and a hearing prior to the Lender's taking possession or control of, or the Lender's relevy, attachment or levy on or of, the Collateral or any bond or security which might be required by any court prior to allowing the Lender to exercise any of the Lender's remedies; and (c) the benefit of all valuation, appraisement and exemption laws. The Borrower acknowledges that it has been advised by counsel of its choice with respect to this Agreement and the transactions evidenced by this Agreement. 12.2 EXPENSES; ATTORNEY'S FEES. The Borrower agrees, whether or not any Loan is made hereunder, to pay the Lender upon demand for all expenses and Attorneys' Fees, including, without limitation, those incurred by the Lender in connection with (a) the preparation, negotiation and execution of the Loan Documents, (b) the preparation of any and all amendments to the Loan Documents and all other instruments or documents provided for therein or delivered or to be delivered thereunder or in connection therewith, (c) the collection or enforcement of the Borrower's or any other Obligor's obligations under any of the Loan Documents and (d) the collection or enforcement of any of the Lender's rights in or to any Collateral or Third Party Collateral. The Borrower also agrees (y) to indemnify and hold the Lender harmless from any loss or expense which may arise or be created by the acceptance of telephonic or other instructions for making Loans and (z) to pay, and save the Lender harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of any Note or of any other instruments or documents provided for herein or to be delivered hereunder or in connection herewith. The Borrower's foregoing obligations shall survive any termination of this Agreement. 12.3 LENDER FEES AND CHARGES. The Borrower agrees to pay the Lender, or any Affiliate, on demand the customary fees and charges of the Lender, or such Affiliate, for maintenance of accounts with the Lender, or such Affiliate, or for providing other services to the Borrower. The Lender may, in its sole and absolute discretion, provide for such payment by charging the Disbursment Account or any other account of the Borrower with FBNA or any other Affiliate, or advancing the amount thereof to the Borrower as a Loan. 12.4 NO WAIVER BY LENDER; AMENDMENTS. No failure or delay on the part of the Lender in the exercise of any power or right, and no course of dealing between the Borrower and the Lender shall operate as a waiver of such power or right, nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. The remedies provided for herein are cumulative and not exclusive of any remedies which may be available to the Lender at law or in equity. No notice to or demand on the Borrower not required hereunder shall in any event entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Lender to any other or further action in any circumstances without notice or demand. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed and delivered by the Lender. Any waiver of any provision of this Agreement, and any consent to any departure by the Borrower from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given. 12.5 NOTICE. Except as otherwise expressly provided herein, any notice hereunder to the Borrower or the Lender shall be in writing (including telegraphic, telex, or telecopy communication) and shall be given to the Borrower or the Lender at its address, telex number or fax number set forth on the signature pages hereof or at such other address, telex number or telecopier number as the Borrower or the Lender may, by written notice, designate as its address, telex number or fax number for purposes of notice hereunder. All such notices shall be deemed to be given when transmitted by telex and the appropriate answer back is received, transmitted by fax, delivered to the telegraph office, delivered by courier, personally delivered or, in the case of notice by mail, three days following deposit in the United States mails, properly addressed as herein provided, with proper postage prepaid. 12.6 PARTICIPATIONS; INFORMATION. The Borrower hereby consents to the Lender's grant of participations in or sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of the Loan Documents, or of any portion of any thereof, including without limitation lender's rights, titles, interests, remedies, powers and/or duties. The Lender may furnish any information concerning the Borrower in the possession of the Lender from time to time to assignees of the rights and/or obligations of the Lender hereunder and to participants in any Loan (including prospective assignees and participants) and may furnish information in response to credit inquiries consistent with general banking practice. 12.7 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 12.8 SUCCESSORS. This Agreement shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. The Borrower shall not assign its rights or duties hereunder without the consent of the Lender. 12.9 ENTIRE AGREEMENT. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrower and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. 12.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. 12.11 CONSTRUCTION. The Borrower acknowledges that this Agreement shall not be binding upon the Lender or become effective until and unless accepted by the Lender, in writing. If so accepted by the Lender, THE LOAN DOCUMENTS AND ANY SUPPLEMENTAL DOCUMENTATION SHALL, UNLESS OTHERWISE EXPRESSLY PROVIDED THEREIN, BE DEEMED TO HAVE BEEN NEGOTIATED AND ENTERED INTO IN, AND SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF, THE STATE OF MINNESOTA AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, CHOICE OF LAW, AND IN ALL OTHER RESPECTS, INCLUDING, BUT NOT LIMITED TO, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF SECURITY INTERESTS AND LIENS WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION. 12.12 CONSENT TO JURISDICTION. To induce the Lender to accept this Agreement, the Borrower, irrevocably, agrees that, subject to the Lender's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THE LOAN DOCUMENTS OR ANY SUPPLEMENTAL DOCUMENTATION OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA. THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON THE BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. 12.13 SUBSIDIARY REFERENCE. Any reference herein to a Subsidiary or Subsidiaries of the Borrower, and any financial definition, ratio, restriction or other provision of this Agreement which is stated to be applicable to "the Borrower" and the Subsidiaries or which is to be determined on a "consolidated" or "consolidating" basis, shall apply only to the extent the Borrower has any Subsidiaries and, where applicable, to the extent any such Subsidiaries are consolidated with the Borrower for financial reporting purposes. 12.14 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER EACH WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THE LOAN DOCUMENTS OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION THEREWITH OR (b) ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first written above. PREMIUMWEAR, INC. By: (illegible -------------------------------------- Title: VP Finance ----------------------------------- Address: 8000 West 78th Street, Suite 400 Edina, MN 55439 Attention: James Bury Telephone: (612) 943-5034 Fax No.: (612) 943-5052 FBS BUSINESS FINANCE CORPORATION By: (illegible) -------------------------------------- Title: vp ----------------------------------- Address: First Bank Place MPFP0804 601 Second Avenue South Minneapolis, Minnesota 55402-4302 Attention: Business Credit Division Telephone: (612) 973-3251 Fax No.: (612) 973-0829 EX-10.H 4 RESIGNATION AND SEVERANCE AGREEMENT MUNSINGWEAR, INC. 8000 West 78th Street Suite 400 Minneapolis, Minnesota 55439 September 5, 1996 Mr. Lowell M. Fisher 1203 Devonshire Curve Bloomington MN 55431 Re: Resignation and Severance Agreement Dear Lowell: This letter describes our agreement regarding your resignation as President and Chief Executive Officer of Munsingwear, Inc. ("Munsingwear") effective as of the first business day after the closing of the transaction between Munsingwear and Supreme International Corporation, which is currently expected to occur on September 6, 1996. You also agree to resign from Munsingwear's Board of Directors as of the same date. If, after reading this letter, you feel there is any discrepancy between our conversations and the content of this letter, please contact me. Munsingwear will provide you with the following benefits in connection with your resignation: 1. We will pay you a regular monthly paycheck of $15,000, subject to applicable withholding, for eighteen months, beginning with the first day of the first month following expiration of the 15-day rescission period described on page 3 of this agreement and our receipt of your written certification, in a form identical to Exhibit 1 attached hereto, that you have taken no steps to exercise your right of rescission. Any unpaid amounts due to you under this paragraph shall become immediately due and payable in a lump sum immediately following any closing of the sale of Munsingwear's Premium business. 2. We will pay you $40,000, subject to applicable withholding, following your signature on this agreement. You agree that you will immediately repay this amount to Munsingwear if you exercise your right of rescission. 3. We will pay the employer share of your currently provided group health and life insurance premiums under Munsingwear's group health and life plans through February 28, 1998 or until you are covered under other group health and life plans, whichever occurs first, provided you make the appropriate written COBRA and life insurance continuation elections to continue your group coverages and provided the plans remain in effect for Munsingwear's active employees. The premiums under said plans shall be the same premiums payable with respect to active Munsingwear employees and the coverages under said plans shall be the same coverages which you were receiving prior to your resignation. 4. We are providing you with a letter of reference in connection with your resignation. If any prospective employer of yours wishes to contact Munsingwear for employment information, you agree to direct all such prospective employers to make a written request only to me. I will provide the prospective employer with your dates of employment, nature of the positions you held with Munsingwear, and a letter of reference to be agreed upon between you and me on behalf of Munsingwear. 5. The Board will take appropriate action to assure that all Stock Option and Restricted Stock Agreements between you and Munsingwear shall be immediately exercisable for the term currently provided. 6. You have the option within the next ten days to purchase the personal computers owned or leased by Munsingwear and currently used by you in your home for the price provided in paragraph 3 of Amendment No. 1 to Employment Agreement (Exhibit 3), provided the leased computer may be purchased at the cost Munsingwear is required to pay to buy out the lease. 7. Munsingwear hereby releases you, your heirs, agents, attorneys and successors from any and all claims and causes of action, known or unknown, which Munsingwear may have against you and which have accrued up to the execution of this agreement. Through this release, Munsingwear extinguishes any contract, wage or benefit claims; defamation or any other tort claims; and all claims arising from any federal, state or municipal law or ordinance. In consideration for the benefits outlined above, you agree to do the following things: 1. You hereby covenant not to sue and unconditionally release and forever discharge Munsingwear, Inc., its affiliates, subsidiaries and related entities, predecessors, successors, owners, its and their officers, directors, agents, shareholders, employees, attorneys, insurers and indemnitors and any entity affiliated with any of the foregoing (collectively, the "Releasees") from any and all past or present claims, demands, obligations, actions, damages, expenses of any nature and causes of action, known and unknown, which you may have against any and all of them. Through this release, you extinguish all causes of action against the Releasees occurring up to the date of this agreement, including but not limited to any contract, compensation, expense or benefit claims; intentional infliction of emotional distress, defamation or any other tort claims; any and all claims arising out of or relating to your ownership of Munsingwear stock;and all claims arising from any federal, state or municipal law or ordinance. This release extinguishes any potential claims of employment discrimination arising from your employment with and resignation from Munsingwear, including specifically any claims under the Minnesota Human Rights Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act and the Older Workers Benefit Protection Act. Under the Age Discrimination in Employment Act, you have 21 days to review and consider this offer. If you sign this letter before 21 days have elapsed from the date on which you first receive it (September 5, 1996), then you will be voluntarily waiving your right to the full 21-day review period. You understand that you are not releasing your rights to any claims which arise after you sign this agreement and that you are advised to review your rights and obligations under this agreement with your own legal counsel. You have the right to rescind this agreement within fifteen (15) calendar days of the date upon which you sign it. You understand that if you desire to rescind this agreement, you must put the rescission in writing and deliver it to Mr. Thomas D. Gleason, Munsingwear, Inc., 8000 West 78th Street, Suite 400, Minneapolis MN 55439, by hand or by mail. If your rescission is by mail, it must be postmarked within 15 calendar days of the date on which you sign this agreement and sent by certified mail, return receipt requested. If you rescind this agreement, Munsingwear's obligations to you will immediately cease, and Munsingwear will owe you no amounts or benefits hereunder except as may be otherwise required under the Employment Agreement attached as Exhibit 2 and Amendment No. 1 to Employment Agreement attached as Exhibit 3. 2. You agree not to (a) make, either directly or indirectly, any derogatory or negative comments of any kind, either oral or written, to any person or organization about Munsingwear or any officer, director, shareholder, employee or any other person affiliated with Munsingwear; or (b) in any way interfere with any of Munsingwear's business relationships. 3. Until December 9, 1996, you agree to make yourself reasonably available at mutually convenient times, as requested by Munsingwear, to provide assistance and consulting services to Munsingwear in connection with Munsingwear business matters, litigation or threatened litigation involving Munsingwear. You also agree not to at any time in the future directly or indirectly cooperate with any person or entity in any threatened or actual litigation or claims against Munsingwear, except as required by court order. This agreement shall not in any way be construed as an admission of liability by Munsingwear or as an admission that Munsingwear has acted wrongfully with respect to you. Munsingwear specifically denies and disclaims any such liability or wrongful acts. This agreement sets forth our entire agreement and fully supersedes any prior oral or written agreements or understandings between you and Munsingwear, including the Employment Agreement attached as Exhibit 2 and the Amendment No. 1 to Employment Agreement attached as Exhibt 3, except for Sections IV(b) and VII(a) of the Employment Agreement and paragraph 4 of Amendment No. 1 to Employment Agreement, which shall remain fully enforceable in accordance with their terms. Munsingwear asks that our records reflect that you conclude your employment on terms you understand and accept and that you have entered into this agreement voluntarily, without coercion or duress. If this letter accurately reflects our understanding and agreement, please sign the original and copy and return the original to me. The copy is for your file. Sincerely, MUNSINGWEAR, INC. - --------------------------------------- Thomas D. Gleason Chairman, Board of Directors Read and agreed to, with declarations confirmed, this ___day of ______, 1996. EX-11 5 COMPUTATION OF PER SHARE EARNINGS (LOSS) EXHIBIT 11 PREMIUMWEAR, INC. and SUBSIDIARIES Computation of Per Share Earnings (Loss)
Year ended ------------------------------ January 4, January 6, 1997 1996 ---------- ---------- Primary Earnings (Loss) Per Share: Weighted average number of common shares outstanding ...................... 2,068,000 2,066,000 Common share equivalents from assumed exercise of options ..................... 62,000 --- ----------- ----------- Total shares ......................... 2,130,000 2,066,000 Net income (loss) .................... $ 7,181,000 $(2,335,000) Net income (loss) per common share and common share equivalents .......... $ 3.37 $ (1.13) ----------- ----------- Fully Dilutive Earnings (Loss) Per Share: Weighted average number of common shares outstanding ...................... 2,068,000 2,066,000 Common share equivalents from assumed exercise of options ..................... 76,000 --- ----------- ----------- Total shares ......................... 2,144,000 2,066,000 Net income (loss) .................... $ 7,181,000 $(2,335,000) Net income (loss) per common share and common share equivalents .......... $ 3.35 $ (1.13) ----------- -----------
Net income (loss) per common share and common share equivalents is computed using the weighted average number of shares and common share equivalents outstanding during each period. Common share equivalents represent the dilutive effects of outstanding stock options using the treasury stock method. The calculation of primary earnings (loss) per share uses the average market price for the period. The calculation of fully dilutive earnings (loss) per share uses the higher of the ending market price for the period or the average market price. The impact of common share equivalents has been excluded from the computation of the 1995 net loss per common share as such impact would be antidilutive. EX-13 6 1996 ANNUAL REPORT PREMIUMWEAR, INC. 1996 ANNUAL REPORT TABLE OF CONTENTS Company Profile 3 Mission Statement 3 Letter to Shareholders 4 Our History 7 Our Customers 9 Our Product 11 Our People 12 Our Service 13 Our Shareholders 15 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Consolidated Statements of Operations 19 Consolidated Balance Sheets 20 Consolidated Statements of Cash Flows 21 Consolidated Statements of Changes in Shareholders' Equity 22 Notes to Consolidated Financial Statements 23 Report of Independent Public Accountants 26 Five Year Financial Review 26 Directors and Officers 27 Corporation Information 27 COMPANY PROFILE Our new company profile has defined our actions: "We design, source and market knit and woven shirts and pants under the "Munsingwear(R)" name to the Special Markets industry through distributors and advertising specialty dealers." MISSION STATEMENT Our new corporate mission statement has guided our efforts: "To be a leading provider of branded knit and woven shirts and pants to the Special Markets industry through total commitment to quality in people, value in products and excellence in service to our customers while delivering superior return to our shareholders." 3 LETTER TO SHAREHOLDERS DEAR FELLOW SHAREHOLDERS: Your Company made monumental changes in 1996 that have resulted in increased value to you as shareholders. Further, we believe these changes hold promise for additional value in 1997 and beyond. As reported earlier, we sold our trademarks for cash and exited the retail and professional golf channels of distribution. We now concentrate solely on the special markets channel of distribution. Our end customers are no longer individual consumers, but are now companies and institutions who use our shirts, pants and shorts for promotional and/or uniform purposes. While this shift caused our overall sales to decline slightly, it also resulted in increased gross margins, reduced expenses and extinguishment of our debt which had reached extremely high levels in early 1996. Our business has become less complicated and we are better prepared to face the future. FINANCIAL RESULTS Sales for fiscal 1996 were $49.9 million, down 3% from $51.5 million the previous year. Net income, including gains from the sale of trademarks, was $7.2 million, or $3.37 per share, compared to a loss in the previous year of $2.3 million, or $1.13 per share. We sold our trademarks in the United States and other countries for a combined total of $23.0 million cash and picked up another $3.2 million from receivables and inventories net of accounts payable and other liabilities primarily associated with the retail and golf channels of distribution. These funds were used to reduce our debt from $12.9 million at the end of the first quarter of 1996 to zero at the end of the year, and to set aside $12.5 million to pay a special cash distribution of $5.39 per share to you, our shareholders, in March of 1997. Our gross margins increased to 19.1% in 1996 compared to 17.1% the previous year and our selling, general and administrative expenses dropped to 21.6% of revenues in 1996 versus 24.9% in 1995. We expect further improvements in both margin and expenses in 1997. TRADEMARK SALE It was a very difficult decision to exit the retail and professional golf channels, to sell the Munsingwear(R) and related trademarks and to change our name to PremiumWear, Inc.. However, we believe these actions were in the best interests of our shareholders as they improved our financial condition and allowed us to concentrate on the special markets business. We did not have the size or financial strength to market and promote the brand in the manner it deserved in the consumer market. We have licensed back the Munsingwear(R) name and Penguin(R) trademark for the special markets business and we believe Supreme International Corporation, the buyer of the trademarks in the USA and most other countries, will support the brand appropriately. [PHOTO/CHART] SPECIAL MARKETS SALES SALES IN MILLIONS 4 WHERE WE ARE TODAY PremiumWear markets knit and woven shirts, woven pants and shorts to distributors and dealers who in turn sell our goods to companies and institutions that use our apparel to promote their name or to provide their employees with uniforms embroidered with their corporate or institutional logos. We entered this channel of distribution in 1994 and have enjoyed significant sales increases - 1996 sales were $27.0 million, up 75% from $15.4 million in 1995. We count among our customers some of the largest distributors and dealers serving this market. The special markets business requires that we provide quality products and reliable service. To meet these demands, we have instituted improved quality control measures and implemented quick response programs. These initiatives will allow us to service our customers with better product and reduced order-to-ship time. As a part of our efforts to provide reliable service we have increased special markets unit inventory levels while at the same time reducing overall inventory investment due to our exit from the retail and professional golf businesses. BOARD AND MANAGEMENT In January of 1996 Kevin Moore and William Morgan joined the Board of Directors. Following the September sale of trademarks, Lowell Fisher resigned from the Board and as President and CEO. We thank Lowell for his role in the restructuring of the Company during his tenure. As a part of our overall cost reduction program the Board agreed to reduce their compensation (see 1997 Proxy Statement for details). Further, to help reduce the size of the Board and its related expenses and because they feel the new direction of the Company has been successfully launched, Mr. Morgan and Michael Raskin have volunteered to resign from the board at mid-year, and Mr. Moore has elected not to stand for re-nomination. We very much appreciate their efforts during this past year of significant change for the Company. In December the Board elected David E. Berg as Chief Operating Officer of the Company in addition to his responsibility as Executive Vice President. James S. Bury was elected Vice President of Finance, and Cynthia L. Boeddeker was elected Vice President and General Merchandise Manager. OUTLOOK We believe our focus on the special markets business is good news for our customers and shareholders since we are now concentrating our efforts on a growing market. We feel optimistic about 1997 and beyond, while at the same time realizing that we cannot be complacent as our competition increases their efforts. In 1997 we look to increase our special markets sales at a rate of 20% or more and to show a positive operating income. To achieve these results, we will continue to provide our customers with high quality, fashion-right products and seek to continue lowering expenses relative to sales. In closing, I want to thank our customers and suppliers for their support as we overcame our growing pains in 1996 and for the loyalty and dedication of our employees and management. In addition, we appreciate the support from our shareholders as we continue efforts to increase shareholder value. Respectfully, /s/ Thomas D. Gleason Thomas D. Gleason, Chairman and CEO [PHOTO] 5 [PHOTO] This is the earliest known picture of Munsingwear(R) employees (taken in the 1890's): George Munsing is on the steps in the center, wearing a bowler hat [PHOTO] The yarn winding department in the main Munsingwear(R) plant on Lyndale and Glenwood Avenues in Minneapolis [PHOTO] A men's Kitten Ball team, sponsored by Munsingwear(R) [PHOTO] Munsingwear(R) salesmen, a photo from the employee booklet; The Success of Well Doing, published by Munsingwear(R) in 1921 6 OUR HISTORY It all started with one man's desire to create a better fabric. In the late 1800s George D. Munsing invented a new textile application which plated silk over wool. This process, innovative because it solved a real customer problem, took the "itch" out of wool resulting in softer, itchless underwear. So desirable was this new fabric, that it justified starting a new company. And the rest, as they say, was history. George D. Munsing, Frank H. Page, and Edward O. Tuttle founded the Northwestern Knitting Company(R) in 1886. Later, in 1919, the company's name was changed to The Munsingwear(R) Corporation. Throughout history, the Munsingwear(R) name has stood for quality and innovation. Whether it's been the creation of new fabric, the development of a new manufacturing process or the introduction of a never-tried-before sales or marketing technique, this company has and will continue to be successful based on a tradition of satisfying customer needs and responding to market changes. In the early years our company was primarily known for underwear. In 1912, for instance, we acquired the Vassar Swiss Underwear Company, adding a high-priced line of full-fashioned underwear to our collection. In 1923 we expanded the line to include hosiery by purchasing Wayne Knitting Mills of Indiana. In 1932 we introduced elastic fabric girdles to the market. And in 1957, we were the first in the industry to offer a coordinated line of intimate apparel. Perhaps one of our biggest underwear feats, however, was the famous one-piece unionsuit. Also known as longjohns, our unionsuit became popular, during and after World War I, when soldiers demanded comfort and warmth. As you might guess, more than underwear has marked our success. In 1941 we gained controlling interest in the David Clark Company. This company had invented an antigravity suit for use by Navy and Air Force pilots. Later, in 1962, using the combined expertise of David Clark and Munsingwear(R), we collectively developed the Gemini Space Suit for NASA and, in 1968, we were responsible for the Apollo Space Communications Headset. Due to the introduction of newer and better fabrics and manufacturing processes, we also expanded our apparel line during the 1960s to include swimwear and men's and boys' products. But it was earlier, in the 1950s, when our ever-popular golf shirt hit the market. We had just patented the nylon reinforced neckband in T-shirts in 1950; and five years later, in 1955, the new Grand Slam(R) knit golf shirt with the Penguin(R) emblem took the apparel industry by storm. It soon became the world's largest selling golf shirt. Our reputation and the Munsingwear(R) brand name remain our competitive advantage. As explained in the Letter t Shareholders, it was a difficult decision to sell the Munsingwear(R) name and related trademarks and to exit th retail and professional golf channels, but it was a necessary move for the company. Today our business is less complicated and more focused. As part of the sale, we did license back the Munsingwear(R) name and Penguin(R) logo or use on our products. This has allowed us to continue to take full advantage of our rich history and brand recognition, setting a strong foundation for our growth in the special markets industry. In 1996 we also changed our name to PremiumWear, Inc. This name is transitional. Chosen by the Board of Directors, it reflects our change in the marketplace - from a company which primarily markets to consumers through retail department stores and national chains to one which markets to corporations and institutions through distributors and advertising specialty dealers. Additional names are under review now and, by mid 1997, a permanent name will be adopted. At that time, an introduction will be made to our shareholders, employees, and customers. As with any company, our story continues to evolve. For PremiumWear, the next chapter in our history will involve the special markets industry. As the following pages will attest, our corporate mission has changed to reflect this new endeavor. We anticipate this newest change to be both exciting and profitable. [PHOTO] Wear Them..You will like Them MUNSING UNION SUITS 7 [PHOTO] 8 OUR CUSTOMERS No longer are we selling directly to retail customers. We now market knit and woven shirts, pants and shorts to four channels of distribution: Wholesale Apparel Distributors, Advertising Specialty Dealers, Decorators (Screenprinters and Embroiderers) and Uniform Companies. These channels, described below, then sell our goods to companies, schools, churches or other organizations who use our apparel to promote their name. Our product, for instance, after having a logo, name or design added to it, might now be worn by church members at a fund-raiser, employees at a company picnic or the entire staff of a large corporation such as a major airline, retail chain, restaurant, or hospital. Wholesale apparel distributors, one of our primary channels, purchase large quantities of what is known as blank, or unembroidered, goods. Today these distributors represent 60% of our sales volume. Through support of cooperative advertising programs, inventory management programs and personalized customer service, we are fully committed to the growth of these business partnerships. We also see significant growth opportunities in our other three channels of distribution. The Advertising Specialty Institute, for example, has over 15,500 member companies. The advertising specialty dealers market a variety of promotional products, premiums, and incentives to corporations, schools, and other organizations. Their custom logo'd products range from writing instruments to awards, jewelry, electronics and apparel. Of all these product categories, apparel has recently moved ahead to become the largest category and best perceived value in the industry. Considering this industry has grown from $5.0 billion in 1990 to $8.0 billion in 1995, we see tremendous opportunity here. The target market for our decorator channel of distribution is comprised of over 25,000 screenprinters and embroiderers. The name "decorator" describes their function. These companies provide further decoration - an added value - to products similar to that of the advertising specialty dealers. Comprised of several hundred companies, our fourth channel, uniform companies, sells uniforms to corporate and government customers. As uniform trends now reflect a more relaxed, contemporary look, our product fits exceptionally well in this market. This customer is also finding that sportswear is less expensive and more convenient than tailored clothing. Our customer is new but our reputation for quality has opened many doors. Next year we anticipate sales to increase by a minimum of 20%. [PHOTO] [CHART] CHANNELS OF DISTRIBUTION Distributors * Ad Specialty * Uniform * Decorator * 9 [PHOTOS] 10 OUR PRODUCT Customers expect our garments to wear better, last longer and look great. In short, they want value, quality and fashion, which we provide through our innovative product design. Our reputation for unique fabrics, color, construction, styling and detail has helped us withstand and surpass the rigid performance standards demanded by the special markets industry. Fabric is the first consideration in our product design. For over one hundred years, we have been a leader in introducing new fabrics to the market. Today we offer a variety of high-quality, ringspun fabrications in knits and wovens; including piques, interlocks, herringbone, jacquards, prints, and novelty woven fabrics. Through our work with major textile mills around the world, we continue to be first to the market introducing new patterns and textures. We have also developed stringent testing procedures for these fabrics to ensure our garments perform well. And to better interface with fabric suppliers, our design department uses computer-aided design technology. This technology has allowed us to reduce development and lead times by providing textile designs that fit machine specifications. Color is also a vital part of our product. We encourage our customers to mix and match within the collection. We not only color-coordinate our pallete throughout the collection, but we also make certain these colors are consistent from year to year. To further fit the needs of our customers and to also give us inventory longevity, we offer traditional, timeless color themes, such as hunter, burgundy and navy, as well as neutrals, such as natural, khaki and black. In addition, a new fashion color story is launched each year to further meet the needs of our trend-driven customers. In regards to styling and construction, we will not cut corners. Our garments are fully constructed with an eye to detail. These details might include extra buttons, top-stitching or a proportionally oversized pocket. Our cuts, for example, are more generous, giving our customers a better fit and better ease of movement. And, to infuse new fashion trends into our styling, we might add a banded collar or a contrasting yoke. Every year we introduce new styles to keep ahead of the demands of our customers. In 1996 we continued to add value to our product by adopting a strategy of customer individualism. Our new non-retail customers demand a product which fits their individual needs. They might require an embroidered logo, a specific color match or a styling modification in order to create a custom look for their corporate or uniform needs. To meet these individual needs and our on-going commitment to value, in 1996 we made a significant investment in state-of-the-art embroidery and digitizing technology and personnel. In addition we established custom guidelines for fabric, color and lead times to meet customized orders. True to our heritage our name continues to represent value, quality and fashion. [PHOTO] [PHOTO] 11 OUR PEOPLE At PremiumWear we believe that the quality of our business is directly related to the quality and experience of our people. At a time when employees have been known to switch jobs every two to three years, many of our people have been with the company for over ten years. These combined years of expertise in the apparel industry set us far ahead of the competition in our ability to deliver superior services. Our effort, in regards to people, is to enhance the quality of the employees' work environment. We believe the best way to boost employee performance is to provide a place of work for people which allows them to be innovative. We are working to develop a high-performance, customer-focused organization. Beginning in 1997 a new performance management process will include measurement of success factors such as Customer Service and Teamwork. In addition, our management incentive program will tie financial rewards directly to the financial performance of the company. Comprehensive training and support also arms our employees with necessary product and industry knowledge, improving our competitive strength in the marketplace. Our goal is to create a structure which is more fluid and better poised to respond to market changes. Our current operations allow for greater teamwork, openness and candor. Dedication to our people and the quality of their worklife is essential to our success. [PHOTO] [PHOTO] 12 OUR SERVICE A different market requires a different strategy. Though excellent customer service has always been an integral part of our operations, our non-retail customer has placed new challenges on how we do business. As explained earlier, our four channels of distribution now include wholesale apparel distributors, advertising specialty dealers, decorators (embroiderers and screenprinters) and uniform companies. These channels must answer to our end-customer (corporations and other institutions) who have demands of their own. In order to provide this end-customer with excellent service, the four channels expect the best from us. They expect the merchandise to be easy to order, to be available and to be delivered in a timely manner. In 1996 we addressed these expectations by starting to develop and implement a Quick Response Program. The objective of this program is to meet and exceed our customers' requirements for getting our product into their hands quickly and efficiently. This we'll do by improving our business processes. Specifically, our entire operations, from manufacturing through fulfillment or delivery, have been under review. To ensure timely sourcing and availability of fabric, we are continuing to develop partnerships with our suppliers as part of this program. To allow for quicker response to customer needs and added flexibility in product customization, we now manufacture a majority of merchandise in our North Carolina plant. In addition, we utilize worldwide resources to get the right products at the right price. And to better anticipate future orders, we have been developing a Vendor Managed Inventory (VMI) program. VMI allows us to monitor a customer's inventory levels of our products so we, in turn, will be better prepared to fill the order quickly and make appropriate recommendations for additional orders. We believe excellence in service is critical to our growth. Our customers expect it from us; and we demand it from ourselves. [PHOTO] [PHOTO] 13 [PHOTO] 14 OUR SHAREHOLDERS 1996 marked a turning point in our company's history. We left the retail market and entered, full force, into the special markets industry with new channels of distribution and new customers. We sold our name and trademarks then licensed back the Munsingwear(R) name and Penguin logo for use on our products. We reduced our office space, cut staff, and focused our design and marketing efforts by specializing primarily in shirts and pants. In 1996 we also continued our successful partnership with a national sales agency who, through their sales agents, service our customers. This helped, in part, to reduce our selling, general and administrative expenses. We fully intend to build this relationship, through cooperative efforts and support. We took the necessary actions to maximize shareholder value. As the following pages will show, the benefits of these actions are already being demonstrated. One direct benefit, to you, was a special cash distribution in March 1997. Other benefits include reduced expenses and extinguishment of debt. And, perhaps most importantly, within the special markets channel of distribution our sales have increased significantly. It has been our plan and desire that these efforts will provide you with superior return in the future. We are confident about our long-term strategy for success. Our financial success will be demonstrated through increased revenues, plus a more stable, stronger gross margin, combined with continued cost control measures. 1996 may have come to a close, but a new company is just beginning. [PHOTO] [PHOTO] 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES, WHICH PROVIDE ADDITIONAL INFORMATION CONCERNING THE COMPANY'S FINANCIAL ACTIVITIES AND CONDITION. CAPITAL RESOURCES AND LIQUIDITY On June 28, 1996, the Company sold its trademarks and pending trademark applications for certain Far Eastern countries to ITOCHU Corporation, Toyobo Company Ltd., and Descente Ltd. for $5,000,000 cash. On September 6, 1996, the Company sold to Supreme International Corporation all of its rights to its trademarks and certain associated assets relating to the retail and professional golf businesses for $18,000,000 cash. Proceeds from these trademark sales and the liquidation of inventories and collection of accounts receivable related to the retail and golf businesses were used to pay off the Company's asset-based lender, pay transaction expenses and provide funds for operations and for a $12,500,000 special distribution to shareholders in early 1997. In a related transaction with Supreme International Corporation, the Company entered into a license agreement for the use of the Munsingwear(R) name and Penguin(R) trademark on knit shirts for twenty years and on woven shirts, pants and shorts for five years. The license is for the special markets channel of distribution which includes the advertising specialty incentive market, specialty distributors and the uniform market. At January 4, 1997, working capital totaled $21,266,000 compared to $3,926,000 the previous year and the current ratio was 3.9:1 compared to 1.2:1 in 1995. During 1996 operating activities provided $2,195,000 of cash, the result of a combined $6,692,000 reduction in receivables and inventories offset by a $3,677,000 decrease in accounts payable and other liabilities, all of which related primarily to the liquidation of inventories, collection of receivables and payment of liabilities related to the retail and golf businesses. Capital expenditures totaled $689,000, primarily for information systems improvements and purchases of manufacturing equipment. Proceeds of $23,000,000 were received in 1996 from the sale of trademarks and $819,000 was received from the exercise of common stock options. At year end the Company had cash and cash equivalents of $14,030,000, essentially all of which was invested in short-term government securities and commercial paper. After giving effect, on a proforma basis, to the $12,500,000 special cash distribution in early 1997, working capital at January 4, 1997 would have totaled $8,766,000 and the current ratio would have been 2.2:1. At January 6, 1996, working capital totaled $3,926,000 compared to $6,847,000 the previous year and the current ratio was 1.2:1 compared to 1.5:1. During 1995 operating activities used $4,094,000 of cash, primarily the result of net losses of $2,335,000 and an increase in receivables of $3,468,000 which was due to a 29% increase in fourth quarter revenues compared to the previous year. These uses of cash were offset by a $1,248,000 increase in accounts payable and $782,000 of depreciation and amortization. Capital expenditures totaled $1,201,000, primarily for information systems improvements and purchases of manufacturing equipment. The Company financed the net use of cash through a $5,298,000 increase in its bank line of credit borrowings. During 1994 operating activities used $3,127,000 of cash, primarily the result of net losses of $573,000 and an increase in inventories of $5,986,000 which was due to a planned increase in support of first quarter 1995 retail and golf sales and shelf stock in support of the Company's entry into the special markets channel of distribution. These uses of cash were offset by a $2,729,000 net increase in royalty advances, primarily the result of a contract extension with one of the Company's licensees, an increase in accounts payable of $944,000 and $712,000 of depreciation and amortization. Capital expenditures totaled $865,000, primarily for purchases of manufacturing equipment and information systems improvements. Principal payments on long-term debt and capital lease obligations totaled $270,000. The Company financed the net use of cash through a $3,894,000 increase in its bank line of credit borrowings. As a result of the 1996 sale of trademarks the Company's previous asset-based credit arrangement was terminated and all funds due the lender were repaid. On February 4, 1997, the Company entered into a new long-term bank line of credit with a new lender which provides up to $6,000,000 of funds available based on certain financial formulas. Following the 1996 sale of trademarks the Company no longer receives royalty income from license agreements, a major source of capital during the previous five years. However, management believes that its focus on the special markets business and exit from the retail and golf businesses will lead to profitable sales growth, stable gross margins, and lower selling, general and administrative expenses. Management will pay the $12,500,000 special distribution out of cash and cash equivalents on hand at January 4, 1997 and expects to be able to finance working capital needs and capital expenditures through a combination of funds from operations, operating leases, and its new bank line of credit. RESULTS OF OPERATIONS NET SALES for 1996 decreased 3% from the prior year. The reduction was due to the September 1996 exit from the retail and golf businesses, which collectively totaled sales of $23,000,000 in 1996 compared to $36,000,000 in 1995. Special markets volume continued its strong growth, increasing 75% in 1996 to $27,000,000 compared to $15,400,000 the previous year, partially offsetting the decrease in retail and golf business sales. Sales growth was from added customers and additional volume with existing customers and is due in part to the Company's product offering which generally includes more fashion than many of its competitors. Selling prices remained relatively constant from 1995 to 1996. Net sales for 1995 increased 38% over 1994. Sales to special markets customers increased seven-fold, from $2,000,000 in 1994 to $15,400,000. Business with golf pro shops increased 52% 16 over the prior year. These increases offset lower sales to department stores, chain stores and wholesale clubs, which decreased 4% collectively. Net sales for fiscal 1994, a 53-week period, were essentially flat with 1993 levels. 1994 represented the first full year of operations for the Company's special markets business which totaled sales of $2,000,000. Sales increased 62% in the golf pro shop channel of distribution while the Company's traditional channels of distribution - department stores, chain stores, wholesale clubs, and specialty stores - decreased 10% collectively. The Company's backlog of unfilled orders for the special markets business at the end of 1996 was approximately $3,800,000 as compared to $1,900,000 the previous year. Orders for the special markets channels of distribution are not necessarily indicative of future performance since this channel of distribution is characterized by a large number of "at once" orders which are generally received less than 30 days prior to requested delivery. The unfilled order backlog consists of orders received for subsequent delivery and includes orders subject to change for color, size, extension of delivery dates and cancellation. As a result, the unfilled order backlog does not necessarily relate directly to future sales. Following the 1996 sale of trademarks, the Company no longer receives income from ROYALTIES. As a result, this income dropped dramatically in 1996 compared to the prior year. Royalties in 1995 were essentially flat with 1994 when they were 25% above 1993 levels due to increased minimum guarantees on previous years' agreements and additional income recognized in connection with a 1994 license agreement extension. GROSS PROFIT in 1996 was 19% of net sales vs. 17% in 1995. The increase was primarily due to the cessation of the retail business which in recent years experienced fierce competition and price pressure in the marketplace, significant markdowns, increased levels of unsold seasonal merchandise and rising production costs. Gross profit for the special markets business was 23.6% in 1996 compared to 24.4% in 1995. The reduction was a result of heavy sales to specialty distributors, who receive volume discounts on large quantity purchases. Gross profit dropped from 20% of net sales in 1994 to 17% in 1995 as a result of losses related to a new product line and markdowns taken during the last half of the year to move excess end-of-season merchandise in response to the continued sluggish retail apparel marketplace. 1994 gross profit was 20% of net sales vs. 24% in 1993. The decrease was primarily due to higher manufacturing and material costs that were not able to be passed on through higher selling prices and because of management's decision to add value to products without increasing prices in order to achieve wider customer acceptance. SELLING, GENERAL AND ADMINISTRATIVE expenses were $2,543,000 lower in 1996 than in 1995 and, as a percent of sales, decreased from 27% in 1995 to 23% in 1996. This reduction was largely due to reductions in staff, design costs, advertising programs and other expenses as a result of the cessation of the retail and golf businesses. Design expenses decreased $767,000 due to exit from the retail and golf businesses, which formerly required significantly more product offerings due to multiple labels and merchandising seasons. Advertising expenses decreased $772,000 as a result of lower spending on cooperative advertising programs, point of sale materials and PGA Tour endorsements. Selling expenses decreased $735,000 due to elimination of sales executive positions, closed sales offices and reduced commissions. General and administrative expenses decreased $557,000 due to reduced recruiting expenses, lower staffing, reduced trademark defense costs and lower office lease costs. Management information systems expense increased $513,000 due to support of the Company's new computer systems installed in late 1995. Selling, general and administrative expenses were $1,827,000 higher in 1995 than in 1994. However, as a percent of sales, these expenses dropped from 32% in 1994 to 27% in 1995. Commissions expense increased $1,161,000 and warehouse and distribution costs increased $358,000, both due primarily to the 38% increase in sales volume. Advertising costs increased $909,000 due to additional cooperative advertising programs with retailers, media advertising during the second quarter of 1995, additional expenses for catalogs and higher costs associated with the Company's PGA Tour endorsement program. Administrative expenses were $248,000 lower due to reduced legal expenses related to patent and trademark matters. In 1994, selling, general and administrative expenses were $265,000 higher than in 1993. Merchandising and design expenses increased $251,000 due to the addition of a senior merchandising executive and the full year effect of other additions to design staff. Information systems expenses increased $231,000 due to lease and other expenses associated with the Company's management information systems improvement project, and selling expenses increased $256,000 due to increased commissions expense. Advertising expenses decreased $423,000 as a result of management's late 1993 reassessment of advertising activities. In 1995, RESTRUCTURING COSTS of $520,000 related to staff reductions and future lease payments on excess office space. In 1994, the Company completed the closing of its Hong Kong sourcing office and United Kingdom sales office for $100,000 less than the related RESERVE FOR CLOSING OF FACILITIES established in 1993. As a result of increased gross margins and decreased selling, general and administrative expenses due to the exit from the retail and golf businesses, the Company reported Operating income of $1,097,000 in 1996, compared to operating losses the prior two years. 1996 INTEREST EXPENSE was 33% below 1995's level due to payoff of the bank line of credit by proceeds from the sale of trademarks and liquidation of inventories and collection of receivables from the retail and golf businesses. Interest expense in 1995 was $805,000 higher than in 1994 due to higher borrowings to finance increased inventory levels required to meet rising demand in the Company's special markets channel of distribution and higher levels of unsold end-of-season merchandise related to the retail and golf businesses. Interest expense in 1994 was $67,000 higher than in 1993 as a result of rising interest rates and higher average daily borrowings. INTEREST INCOME on excess funds totaled $247,000 in 1996. GAIN ON SALE OF TRADEMARKS includes $4,383,000 realized on the June 1996 sale of certain Far Eastern trademarks and $6,244,000 realized on the September 1996 sale of the Company's remaining trademarks and certain associated assets related to the retail and professional golf businesses. The gains were comprised of proceeds less transaction and disposition costs. 17 PROVISION FOR INCOME TAXES represents federal, state, local and foreign taxes. 1995 and 1994 provisions were attributable to state income, franchise and foreign taxes, which are generally not dependent on pre-tax income. At January 4, 1997, the Company had net operating loss carryforwards of approximately $20,000,000 for domestic federal income tax purposes. LOOKING FORWARD Management has completed a transition which generally began in 1994 with entry into the special markets channel of distribution and which intensified in late 1995 when the Company retained an investment banker to explore a range of opportunities to maximize shareholder value. These actions led directly to the June 1996 and September 1996 sales of trademarks and other assets relating to the retail and professional golf businesses. During this period, management continued to increase its focus on and commitment to development of the special markets channel of distribution. Following the sale of trademarks and other assets related to the retail and golf businesses, the Company now operates entirely in the special markets channel of distribution and no longer solicits orders from department stores, chain stores, specialty retail shops, or golf pro shops. Management believes this strategy will lead to continued sales growth, stable gross margins, reduced selling, general and administrative expenses and profitability. However, there can be no assurance that this strategy will be successful. The Company currently pays no license fees on the majority of its sales under the terms of its licensing agreement with Supreme International Corporation and is not required to pay any such fees until aggregate sales dollars reach a specific amount which will not likely occur until fiscal 1998. At that time, license fees will represent an additional expense to the Company which management hopes to recover through improved margins and reduced costs in other areas. CAUTIONARY STATEMENT Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Letter to Shareholders, elsewhere in the Annual Report, in the Company's Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) competitive conditions that currently exist, including the entry into the market by a number of competitors with significantly greater financial resources than the Company, are expected to continue, placing pressure on pricing which could adversely impact sales and gross margins; (ii) continued implementation of the North America Free Trade Agreement (NAFTA) is expected to put competitive cost pressure on apparel wholesalers with domestic production facilities such as the Company; (iii) the inability to carry out marketing and sales plans would have a materially adverse impact on the Company's projections; (iv) since the Company now is a licensee of the Munsingwear(R) name maintaining a harmonious working relationship with the licensor is extremely important for continued successful development of the special markets business; (v) as a licensee, the Company is dependent on the licensor to adequately promote the brand and defend it from trademark infringement. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. IMPACT OF INFLATION Inflation affects the Company's business principally in the form of cost increases for materials and wages. The Company generally attempts to offset these cost increases by a combination of merchandising and design techniques, purchasing practices, labor savings and price increases. MARKET STATISTICS The Company's common stock is listed on the New York Stock Exchange under the symbol PWA. The 1996 and 1995 market price high and low were as follows: QUARTER - -------------------------------------------------------------- 1st 2nd 3rd 4th - -------------------------------------------------------------- 1996 - -------------------------------------------------------------- High 9 1/8 9 10 7/8 10 1/4 Low 6 7/8 6 5/8 8 7/8 8 3/8 1995 - -------------------------------------------------------------- High 8 3/4 8 5/8 9 5/8 8 7/8 Low 6 7/8 6 7/8 7 7/8 6 1/4 - -------------------------------------------------------------- On March 5, 1997, the Company paid a special cash distribution to shareholders of $5.39 per share which caused a comparable reduction in the market price on March 6, 1997. As of February 19, 1997, the Company had 837 shareholders of record. 18
CONSOLIDATED STATEMENTS OF OPERATIONS PremiumWear, Inc. Year ended Year ended Year ended January 4, January 6, January 7, (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- REVENUES: Net sales $49,948 $51,512 $ 37,407 Royalties 2,969 4,609 4,528 - ----------------------------------------------------------------------------------------------------------------------------- 52,917 56,121 41,935 - ----------------------------------------------------------------------------------------------------------------------------- EXPENSES: Cost of goods sold 40,402 42,714 30,029 Selling, general and administrative 11,418 13,961 12,134 Restructuring costs (Note 9) - 520 - Gain on closing of facilities (Note 9) - - (100) - ----------------------------------------------------------------------------------------------------------------------------- 51,820 57,195 42,063 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 1,097 (1,074) (128) - ----------------------------------------------------------------------------------------------------------------------------- Interest expense (771) (1,158) (353) Interest income 247 2 57 Gain on sale of trademarks (Note 2) 10,627 - - Other 52 - 120 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item 11,252 (2,230) (304) Provision for income taxes 4,071 105 108 - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item 7,181 (2,335) (412) Extraordinary loss from early debt extinguishment (Note 3) - - 161 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 7,181 $(2,335) $ (573) ============================================================================================================================= Net income (loss) per common share: Income (loss) before extraordinary item $ 3.37 $(1.13) $ (.20) Extraordinary item - - (.08) - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) PER COMMON SHARE $ 3.37 $(1.13) $ (.28) ============================================================================================================================= Weighted average shares of common stock and common stock equivalents outstanding 2,130 2,066 2,066 ============================================================================================================================= The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS Premiumwear, Inc. January 4, January 6, (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $14,030 $ 62 Restricted cash 447 - Receivables: Trade, net of allowances of $909 and $511 3,705 8,260 Other 525 277 - ----------------------------------------------------------------------------------------------------------------------------- 4,230 8,537 Inventories 9,804 14,641 Prepaid expenses 128 1,004 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 28,639 24,244 - ----------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 15 15 Buildings and leasehold improvements 552 568 Machinery and equipment 4,137 3,928 - ----------------------------------------------------------------------------------------------------------------------------- 4,704 4,511 Less accumulated depreciation and amortization 3,087 1,584 - ----------------------------------------------------------------------------------------------------------------------------- 1,617 2,927 TRADEMARKS, net of accumulated amortization of $1,274 - 4,173 DEFERRED TAXES, net of valuation allowance of $10,950 and $11,796 - 2,309 - ----------------------------------------------------------------------------------------------------------------------------- $30,256 $33,653 ============================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit borrowings $ - $10,890 Current maturities of long-term debt 23 21 Accounts payable 4,009 5,008 Accrued payroll and employee benefits 1,050 1,009 Unearned royalty income - 2,993 Liabilities related to sold assets 1,530 - Other accruals 761 397 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 7,373 20,318 - ----------------------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Long-term debt, less current maturities - 22 Postretirement benefits 701 319 Unearned royalty income - 10 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 701 351 - ----------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 6-8, 10 and 11) SHAREHOLDERS' EQUITY: Series A preferred stock, $100 stated value; voting, cumulative and participating (authorized 50,000 shares, none issued) Preferred stock, no par value (authorized 950,000 shares, none issued) Common stock, $.01 par value (authorized 20,000,000 shares, 2,163,153 and 2,026,768 shares issued) 22 21 Additional paid-in capital 17,128 15,112 Retained earnings (deficit) 5,032 (2,149) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 22,182 12,984 - ----------------------------------------------------------------------------------------------------------------------------- $30,256 $33,653 ============================================================================================================================= The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS PREMIUMWEAR, INC. Year ended Year ended Year ended January 4, January 6, January 7, (AMOUNTS IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income (loss) from operations $ 7,181 $(2,335) $ (573) Reconciling items: Depreciation and amortization 847 782 712 Deferred taxes 3,507 - ( 69) Provision for losses on accounts receivable 75 69 142 Gain on sale of trademarks (10,627) - - Loss on restructuring - 193 - Gain on closing of facilities - - (100) Change in unearned royalty income (1,988) (356) 2,729 Changes in operating assets and liabilities: Receivables 3,456 (3,468) (380) Inventories 3,236 (422) (5,986) Prepaid expenses 185 282 (254) Accounts payable (1,129) 1,248 944 Other accrued liabilities (2,548) (87) (292) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,195 (4,094) (3,127) - ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchases of property, plant and equipment (689) (1,201) (865) Proceeds from sale of trademarks 23,000 - - - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 22,311 (1,201) (865) - ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net change in line of credit borrowings (10,890) 5,298 3,894 Net change in restricted cash (447) - - Principal payments on long-term debt and capital lease obligations (20) ( 14) (270) Proceeds from exercise of stock options 819 - - - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (10,538) 5,284 3,624 - ------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,968 ( 11) (368) Cash and cash equivalents at beginning of period 62 73 441 - ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,030 $ 62 $ 73 ============================================================================================================================== Supplemental disclosures of cash flow information: Cash paid for taxes $ 390 $ 178 $ 122 ============================================================================================================================== Cash paid for interest $ 728 $1,078 $ 370 ============================================================================================================================== The accompanying notes are an integral part of these financial statements.
21
CONSOLIDATED STATEMENTS OF CHANGES PREMIUMWEAR, INC. IN SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------------------------------------- Common Stock Additional Retained Issued Paid-in Earnings Shares Amount Capital (Deficit) - -------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 2,026,768 $21 $15,112 $ 759 Net loss for year - - - (573) - -------------------------------------------------------------------------------------------------------------- Balance at January 7, 1995 2,026,768 $21 $15,112 $ 186 Net loss for year - - - (2,335) - -------------------------------------------------------------------------------------------------------------- Balance at January 6, 1996 2,026,768 $21 $15,112 $(2,149) Stock grant 3,500 - - - Exercise of stock options 132,885 1 818 - Utilization of net operating loss carryforwards - - 1,198 - Net income for year - - - 7,181 - -------------------------------------------------------------------------------------------------------------- Balance at January 4, 1997 2,163,153 $22 $17,128 $ 5,032 ============================================================================================================== The accompanying notes are an integral part of these financial statements.
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies NATURE OF OPERATIONS PremiumWear, Inc. (formerly Munsingwear, Inc.) ("the Company") designs, sources and markets knit and woven shirts and pants bearing the Munsingwear(R) label under license from Supreme International Corporation (See Note 2). Sales are to the special markets industry through specialty distributors, advertising specialty incentive dealers and to the uniforms market. Substantially all sales are in the United States. Approximately 75% of the Company's products are manufactured in the United States in one Company-owned facility and at several sewing subcontractors. The remaining products are assembled in the Caribbean and Central America or are purchased in the Far East. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of PremiumWear, Inc. and two inactive foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying value of cash equivalents approximates fair value. Cash and cash equivalents at January 4, 1997 includes $12,500,000 which will be paid to shareholders in a special distribution in the first quarter of fiscal 1997. RESTRICTED CASH At January 4, 1997, $447,000 of cash was pledged as collateral on outstanding letters of credit related to inventory purchases and was classified as restricted cash on the balance sheet. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. Inventoriable costs include raw materials, labor and related manufacturing overhead expenses. Inventories consist of: January 4, January 6, (In thousands) 1997 1996 - -------------------------------------------------------------- Raw materials $1,906 $ 1,359 Work in process 1,265 ,639 Finished goods 6,633 12,643 - -------------------------------------------------------------- $9,804 $14,641 ============================================================== PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost. The Company provides for depreciation using the straight line method for financial reporting purposes and generally uses accelerated methods for income tax purposes. Estimated useful lives used in computing depreciation and amortization for financial reporting purposes range from five to forty years for buildings and leasehold improvements and from two to ten years for machinery and equipment. Assets recorded under capital leases are amortized over the lease term. TRADEMARKS In 1996 the Company sold all rights to its trademarks. Prior to the sale, trademarks were recorded at the estimated fair value established in connection with the Company's 1991 reorganization and were being amortized over 20 years. INCOME TAXES The Company accounts for income taxes under the liability method. The tax benefit associated with utilization of the net operating loss carryforwards which survived the reorganization has been recorded as a reduction to deferred taxes and trademarks and as a credit to additional paid-in capital. Any future utilization of these net operating loss carryforwards will be recorded as a credit to additional paid-in capital. REVENUES Net sales are recognized at the time of shipment and reserves are established for returns and allowances at that time. In 1996 sales to one customer totaled 12% of total Company net sales; no customer accounted for greater than 10% of the Company's total net sales in 1995; and sales to one customer were 16% in 1994. Following the 1996 sale of its trademarks the Company no longer receives royalties, which had been recorded as earned in accordance with specific terms of each license agreement. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the year plus the weighted average number of common stock equivalents. Common stock equivalents consist of shares subject to stock options and are determined using the treasury stock method. The effect of options was anti-dilutive in 1995 and 1994 and was excluded from the number of shares used to compute net loss per common share for those years. FISCAL YEAR The Company's fiscal year ends on the first Saturday following December 31. The 1996, 1995 and 1994 fiscal years ended January 4, 1997, January 6, 1996, and January 7, 1995 respectively. Fiscal 1994 had 53 weeks. NEW ACCOUNTING PRONOUNCEMENTS In 1996 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill either to be held or disposed of. There was no impact on the financial position or results of operations of the Company as a result of the adoption. Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation", requires certain disclosure and recommends accounting treatment for employee stock-based compensation plans. The Company has set forth its accounting practice and related disclosures in Note 6. 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. These reclassifications had no effect on previously reported net loss or shareholders' equity. 2. SALE OF TRADEMARKS On June 28, 1996, the Company sold its trademarks and pending trademark applications for certain Far Eastern countries to ITOCHU Corporation, Toyobo Co., Ltd., and Descente, Ltd. for $5,000,000 cash, resulting in a gain before income taxes of $4,383,000. Proceeds were used to pay down line of credit borrowings. On September 6, 1996, the Company sold all of its rights to its remaining trademarks and certain associated assets relating to the retail and professional golf businesses to Supreme International Corporation for $18,000,000 in cash, resulting in a gain before income taxes of $6,244,000. As part of the purchase and sale agreement the Company was required to change its corporate name. At the September 6, 1996 Annual Meeting of Shareholders, a name change from Munsingwear, Inc. to PremiumWear, Inc. was approved by shareholders. 3. FINANCING ARRANGEMENTS, LONG-TERM DEBT AND EXTRAORDINARY LOSS FROM EARLY DEBT EXTINGUISHMENT Subsequent to January 4, 1997, the Company established a long-term bank line of credit under which up to $6,000,000 is available for borrowings and letters of credit through February 2000. Borrowings and letters of credit are limited to an aggregate amount equaling approximately 80% of eligible receivables and 50% of eligible finished goods inventories ($5,086,000 at January 4, 1997). Essentially all the assets of the Company except property, plant and 23 equipment are pledged as collateral under the agreement. Borrowings under the facility bear interest at the bank's base rate of interest (8.25% at January 4, 1997). The agreement contains a commitment fee of .5% per annum on the unused line of credit and also contains cross default provisions to other agreements and other covenants which, among other matters, require maintenance of certain financial ratios, restrict the sale of assets, and restrict consolidation or merger of the Company with another entity. Additionally, the Company is limited in incurring additional indebtedness and liens on assets. A previous bank line of credit, which was paid off at the time of the September 6, 1996 trademark sale, was entered into in late 1994 and resulted in an extraordinary loss of $161,000 from early debt extinguishment. The loss was comprised of unamortized debt issuance costs and prepayment fees related to another bank line of credit. 4. INCOME TAXES The income tax provision for 1996, 1995, and 1994 consists of current taxes payable of $195,000, $105,000, and $108,000, respectively, and resulted from federal alternative minimum, state income, franchise and foreign taxes payable. As of January 4, 1997, the Company had net operating loss carryforwards for regular federal income tax purposes of approximately $20,000,000, which will begin to expire in 2002. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes. Deductible temporary differences are comprised of financial reserves not yet deductible and unearned royalty income. Taxable temporary differences are recorded for trademarks, if any, and excess depreciation. The components of the net deferred tax asset were as follows: January 4, January 6, (In Thousands) 1997 1996 - -------------------------------------------------------------------------------- Federal net operating loss carryforwards $ 7,270 $12,930 Tax credit carryforwards 860 500 Deductible temporary differences 3,020 2,355 Taxable temporary differences (,200) (1,680) - -------------------------------------------------------------------------------- 10,950 14,105 Valuation allowance (10,950) (11,796) - -------------------------------------------------------------------------------- $ - $ 2,309 ================================================================================ As of January 4, 1997 and January 6, 1996, a valuation allowance has been established to reduce the deferred tax asset to estimated realizable amounts. 5. SHAREHOLDERS' EQUITY The Company's capital structure includes 20,000,000 shares authorized for all classes of common stock and 1,000,000 shares authorized for all classes of preferred stock. There are restrictions with respect to the trading of common stock to or from Five Percent Holders, as defined in the Company's 1991 Plan of Reorganization, through October 2001 as a means of preserving the benefits of the net operating loss carryforwards following the Company's reorganization in 1991. As of January 4, 1997, 2,163,153 shares of common stock had been issued. Subsequently, an additional 155,877 shares of common stock were issued upon the exercise of stock options. On January 27, 1997 the Company's board of directors declared a special cash distribution of $5.39 per share, or approximately $12,500,000, payable on March 5, 1997 to shareholders of record February 19, 1997, using proceeds from the 1996 sales of trademarks. Preferred stock has been reserved for issuance under a 1987 shareholders' rights plan. Upon the occurrence of certain events, the shareholders' rights plan entitles the registered holder to purchase one two-hundredth of a share of preferred stock at a stated price or to purchase either the Company's shares or stock in an acquiring entity at half their market value. At January 4, 1997, no preferred stock was outstanding. 6. STOCK OPTIONS AND RESTRICTED STOCK The Company's 1991 Stock Plan includes a provision for the granting of stock options, which are accounted for under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation costs for these plans been determined consistent with FASB Statement No. 123, the Company's net income (loss) and earnings per share would have been reduced to the following pro forma amounts: (IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 - -------------------------------------------------------------------------------- Net income (loss): As Reported $ 7,181 $(2,335) Pro Forma $ 7,036 $(2,699) - -------------------------------------------------------------------------------- Net income (loss) per share: As Reported $ 3.37 $ (1.13) Pro Forma $ 3.30 $ (1.29) ================================================================================ Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 5.84%-7.55% and 5.29%-5.94%; expected dividends per share of $0-$5 and $0; expected lives of 1-5 years and 5 years; and expected volatility of 40%-44% and 39%-41%. A total of 873,500 shares of common stock was reserved under the 1991 Stock Plan for grants to employees in the form of restricted stock awards and incentive and non-qualified stock options. In addition, the Plan annually grants to each non-employee director an option to purchase 1,000 shares of common stock, which was reduced in December 1996 from the previous 5,000 shares. At January 4, 1997 there were 367,504 shares available for future grants under this Plan. Information with respect to the 1991 Stock Plan is as follows: Options Option Price Outstanding Range Per Share - -------------------------------------------------------------------------------- Balance at January 1, 1994 201,803 $5.750 - 10.875 Granted 48,500 4.750 - 7.000 Canceled (18,208) 6.125 - 9.375 - -------------------------------------------------------------------------------- Balance at January 7, 1995 232,095 4.750 - 10.875 Granted 124,500 7.500 - 7.875 Canceled (38,110) 6.125 - 9.375 - -------------------------------------------------------------------------------- Balance at January 6, 1996 318,485 4.750 - 10.875 Granted 75,000 7.500 - 10.875 Exercised (132,885) 4.750 - 9.375 Canceled (4,800) 7.875 - 9.625 - -------------------------------------------------------------------------------- Balance at January 4, 1997 255,800 $5.625 - 10.875 ================================================================================ The 1991 Stock Plan includes a provision allowing the acceleration of vesting of options upon the occurrence of certain events. The September 6, 1996 sale of trademarks was deemed by the Company's board of directors to be such an event and all outstanding options as of that date became vested. At January 4, 1997, all 255,800 outstanding options under the Plan were exercisable. Subsequent to fiscal 1996 year end, 195,800 options at prices per share ranging from $5.625 to $7.875 were exercised, of which 54,923 were surrendered in cashless exercise transactions. In 1996 and 1995, under another agreement, options to purchase 10,000 and 5,000 shares of common stock, respectively, at a price of $7.50 per share were granted to a non-employee director. All 15,000 options were exercised subsequent to fiscal 1996 year end. 7. RETIREMENT PLAN The Company has a 401(k) profit sharing plan covering all employees. In July 1994 the Company amended the plan to match one-half of the employee's first five percent contribution. Expense under this plan, including profit sharing and Company match, totaled $216,000, $73,000 and $66,000 for 1996, 1995 and 1994, respectively. 24 8. POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS The Company has unfunded plans providing certain medical and life insurance benefits to specific retiree groups. Future retirees are not covered by these plans. The Company accounts for these plans under the accrual method of accounting. The net periodic benefit cost for the past three years included the following components: (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------- Interest cost on accumulated postretirement benefit obligation $59 $54 $64 Net amortization and deferral 38 23 33 - -------------------------------------------------------------------------------- $97 $77 $97 ================================================================================ A 9% increase in the cost of covered medical benefits was assumed for 1996. This rate is assumed to decrease incrementally to 5.5% after 8 years and remain at that level thereafter. The discount rate used in determining the accumulated benefit obligation was 7.5% for 1996 and 1995. The accrued postretirement benefit obligation is summarized as follows: January 4, January 6, (IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation $792 $730 Unrecognized actuarial loss (10) (327) - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation 782 403 Less current payable 81 84 - -------------------------------------------------------------------------------- $701 $319 ================================================================================ 9. RESTRUCTURING COSTS AND CLOSING OF FACILITIES During 1995 the Company developed a restructuring plan which eliminated certain functions to achieve cost efficiencies and provided $520,000 to cover severance and other costs. As of January 4, 1997, all such costs had been paid. In 1994 the Company completed the closing of its Hong Kong sourcing office and its subsidiary operations in the United Kingdom at a cost of $350,000. 10. LEASES The Company is party to certain operating lease agreements covering office space and equipment through 1999. Minimum future obligations on operating leases in effect that have initial or remaining noncancelable lease terms in excess of one year as of January 4, 1997 are as follows: (IN THOUSANDS) - ---------------------------------------------------------------- 1997 $233 1998 94 1999 10 - ---------------------------------------------------------------- $337 ================================================================ Total rent expense under operating leases was $655,000, $821,000 and $722,000 for 1996, 1995 and 1994, respectively. 11. LICENSE AGREEMENT The Company is obligated under a license agreement for certain products to make future minimum payments as follows: (IN THOUSANDS) - ---------------------------------------------------------------- 1997 $21 1998 58 1999 66 2000 76 2001 58 - ---------------------------------------------------------------- $279 ================================================================ In addition to the above minimum obligation, the agreement includes an obligation to pay license fees through 2001 on the sales of certain other products when such sales reach specified annual amounts. After 2001, license fees will be payable on all sales of such products. In 1996 sales did not reach the specified annual amount and management estimates the annual threshold will not be met until 1998 at which time license fees would become payable on all sales. 12. UNAUDITED SELECTED PRO FORMA FINANCIAL DATA The following table summarizes certain selected unaudited quarterly pro forma financial data for PremiumWear, Inc. special markets business. The following pro forma financial data is presented for informational purposes only and is not necessarily indicative of the results of the future operations of the remaining business or the actual results that would have been achieved had the sale of trademarks and exit from the retail and professional golf businesses been consummated prior to 1995. (IN THOUSANDS, EXCEPT GROSS MARGIN %) Special Markets - -------------------------------------------------------------------------------- Cost of Gross Net sales goods sold margin % - -------------------------------------------------------------------------------- 1996: First $ 5,387 $ 4,120 23.5% Second 6,898 5,205 24.5% Third 7,718 5,951 22.9% Fourth 6,973 5,337 23.5% - -------------------------------------------------------------------------------- $26,976 $20,613 23.6% ================================================================================ 1995: First $ 2,486 $1,960 21.2% Second 4,295 3,223 25.0% Third 4,935 3,702 25.0% Fourth 3,645 2,725 25.2% - -------------------------------------------------------------------------------- $15,361 $11,610 24.4% ================================================================================ The pro forma financial data excludes any allocation of selling, general and administrative expenses since management believes that any allocation would be entirely subjective in nature and not necessarily indicative of the performance of the remaining business. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a condensed summary of actual quarterly results for 1996 and 1995. (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- Net Income Operating Net (loss) per income income common Revenues (loss) (loss) share - -------------------------------------------------------------------------------- 1996: First $15,840 $ 386 $ 12 $ .01 Second 19,146 721 3,075 1.47 Third 10,886 (97) 4,025 1 .86 Fourth 7,045 87 69 .03 - -------------------------------------------------------------------------------- $52,917 $1,097 $ 7,181 $ 3.37 ================================================================================ 1995: First $15,923 $ 725 $ 288 $ .14 Second 16,269 766 268 .13 Third 11,042 (547) (568) (.27) Fourth 12,887 (2,018) (2,323) (1.13) - -------------------------------------------------------------------------------- $56,121 $(1,074) $(2,335) $(1.13) ================================================================================ 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To PremiumWear, Inc.: We have audited the accompanying consolidated balance sheets of PremiumWear, Inc. (a Delaware corporation and formerly Munsingwear, Inc.) and subsidiaries as of January 4, 1997 and January 6, 1996, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for each of the three fiscal years in the period ended January 4, 1997. 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 PremiumWear, Inc. and subsidiaries as of January 4, 1997 and January 6, 1996 and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 4, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota February 19, 1997 FIVE YEAR FINANCIAL REVIEW
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR - -------------------------------------------------------------------------------------------------------------------------------- Net sales $ 49,948 $ 51,512 $ 37,407 $ 37,635 $ 37,867 Royalty income 2,969 4,609 4,528 3,624 1,977 Cost of sales 40,402 42,714 30,029 28,783 26,832 Gross profit % 19.1 17.1 19.7 23.5 29.1 Interest expense 771 1,158 353 286 400 Income (loss) before income taxes and extraordinary item 11,252 (2,230) (304) (203) 2,091 Net income (loss) 7,181 (2,335) (573) (342) 1,241 Purchases of property, plant and equipment 689 1,201 865 490 449 Depreciation and amortization 847 782 712 873 729 AS OF THE END OF THE YEAR - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 30,256 $ 33,653 $ 29,738 $ 23,406 $ 22,929 Current assets 28,639 24,244 20,716 14,606 13,646 Current liabilities 7,373 20,318 13,869 5,045 5,538 Working capital 21,266 3,926 6,847 9,561 8,108 Current ratio 3.9 1.2 1.5 2.9 2.5 Long-term debt - 22 38 57 331 Common shareholders' equity(1) 22,182 12,984 15,319 15,892 16,101 Number of employees 312 343 348 374 375 =================================================================================================================================
(1)No dividends were declared or paid for the years listed. 26 BOARD OF DIRECTORS C. D. Anderson(1) GENERAL PARTNER PLANTAGENET CAPITAL MANAGEMENT, INC., SAN FRANCISCO Keith A. Benson(1),(2) PRESIDENT, MALL STORES DIVISION MUSICLAND STORES CORPORATION, MINNEAPOLIS Thomas D. Gleason(3) CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Gerald E. Magnuson(1),(2) OF COUNSEL TO LINDQUIST & VENNUM PLLP MINNEAPOLIS Kevin S. Moore(3) SENIOR VICE PRESIDENT THE CLARK ESTATES, INC., NEW YORK CITY William J. Morgan(3) PRESIDENT AND MANAGING DIRECTOR PACHOLDER ASSOCIATES, INC., CINCINNATI Michael A. Raskin(2) PRIVATE BUSINESS ADVISOR Mark B. Vittert(2) PRIVATE INVESTOR (1)Member of Audit Committee (2)Member of Compensation Committee (3)Member of Governance Committee OFFICERS Thomas D. Gleason CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER David E. Berg EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER James S. Bury VICE PRESIDENT OF FINANCE AND ASSISTANT SECRETARY Cynthia L. Boeddeker VICE PRESIDENT AND GENERAL MERCHANDISE MANAGER Billy E. Smith VICE PRESIDENT OF MANUFACTURING John R. Houston PARTNER IN THE LAW FIRM OF LINDQUIST & VENNUM PLLP SECRETARY CORPORATION INFORMATION CORPORATION INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held Wednesday, May 14, 1997, at 11:00 a.m. CDT at the Radisson Hotel South 7800 Normandale Boulevard Bloomington, MN 55439-3145 FORM 10-K Copies of Form 10-K annual report, filed with the Securities and Exchange Commission, are available without charge upon written request to Shareholder Relations, PremiumWear, Inc., 8000 West 78th Street, Suite 400, Minneapolis, MN 55439 TRANSFER AGENT AND REGISTRAR OF COMMON STOCK Norwest Bank Minnesota, N.A. Stock Transfer Department P.O. Box 738 So. St. Paul, MN 55075-0738 (612) 450-4064 / (800) 468-9716 PremiumWear Stock PremiumWear Stock is listed on the New York Stock Exchange. Symbol PWA PREMIUMWEAR BY PHONE AND INTERNET Company News On Call (through PR Newswire): 1-800-758-5804 (Code #589750) Internet address: http://www.prnewswire.com LEGAL COUNSEL Lindquist & Vennum PLLP Minneapolis, Minnesota INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Minneapolis, Minnesota FACILITIES CORPORATE HEADQUARTERS 8000 West 78th Street Minneapolis, MN 55439 MANUFACTURING AND DISTRIBUTION Fairmont, North Carolina 27 [PHOTO] PREMIUMWEAR, INC. Corporate Headquarters 8000 West 78th Street Minneapolis, MN 55439 28 (C) 1997 PremiumWear, Inc. EX-21 7 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 PREMIUMWEAR, INC. and SUBSIDIARIES Subsidiaries of the Registrant State of Jurisdiction of Incorporation ---------------------- Munsingwear UK Limited (inactive) United Kingdom Munsingwear Canada Limited (inactive) Canada EX-23 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports, included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-83386. ARTHUR ANDERSEN LLP Minneapolis, Minnesota April 3, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-04-1997 JAN-04-1997 14,477 0 4,230 909 9,804 28,639 4,704 3,087 30,256 20,318 0 0 0 23 22,160 30,256 49,948 52,917 40,644 40,402 11,418 75 771 11,252 (4,071) 7,181 0 0 0 7,181 ($3.37) ($3.35)
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