EXHIBIT 99.3
CONVERTIBLE SUBORDINATED NOTE AGREEMENT
CONVERTIBLE SUBORDINATED NOTE AGREEMENT ("AGREEMENT"), dated March 14,
1997, by and between Brazos Sportswear, Inc., a Delaware corporation and the
successor to Sun Sportswear, Inc. ("SUN"), a Washington corporation (the
"COMPANY"), Brazos, Inc., a Texas corporation and a wholly-owned subsidiary of
the Company ("BRAZOS"), and Bank of America NT & SA, doing business as Seafirst
Bank ("SEAFIRST").
W I T N E S S E T H:
WHEREAS, Sun and BSI Holdings, Inc. ("BSI") are parties to a Plan and
Agreement of Merger dated November 13, 1996, as amended (the "MERGER
AGREEMENT"), pursuant to which BSI was merged with and into Sun;
WHEREAS, the Merger Agreement provides that upon the Effective Date (as
defined in the Merger Agreement), Brazos shall issue a Subordinated Note (as
defined in the Merger Agreement), as partial consideration for the conversion of
Seafirst's shares of Sun's common stock pursuant to the Merger; and
WHEREAS, the Subordinated Note shall be issued by Brazos pursuant to the
terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto hereby agree as follows:
SECTION 1.
DEFINITIONS
In addition to the defined terms set forth elsewhere herein, the following
terms shall have the meanings set forth below:
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Seattle, Washington are
authorized or obligated by law or executive order to close.
"CLOSING PRICE" on any Trading Day with respect to any security means the
last reported sales price regular way or, if no such sales are reported, the
average of the bid and asked prices regular way, on the principal securities
exchange on which the security is traded, or if such securities are not traded
on any securities exchange, the over-the-counter price therefor quoted by a New
York Stock Exchange member firm.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means any class of stock of the Company which is not
entitled to any preference as to dividends or liquidating distributions and
which is not redeemable by the Company; provided, that the shares issuable upon
conversion of the Note shall include only shares of Common Stock of the class
designated on the date hereof as the "common stock" of the Company, having a par
value of $0.01 per share, or any securities resulting from the reclassification
of such shares.
"CONVERSION DATE" means the date on which delivery of notice of election to
convert is delivered to the Company by Seafirst.
"CONVERSION FACTOR" means a number, which at the Effective Date (as defined
in the Merger Agreement) shall be 1.0.
"CONVERSION SHARES" means the Common Stock issued upon conversion of the
Note.
"DEFAULT" means any event that is, or after the passage of time or the
giving of notice, or both, would be, an Event of Default.
"EVENT OF DEFAULT" means the occurrence of any of the following: (i)
failure to pay principal on the Note when due; (ii) failure to pay any other
amount due under this Agreement or the Note within 10 days of the date when due;
(iii) any insolvency of, or commencement of a bankruptcy case or appointment of
a receiver with respect to, Brazos or the Company, (iv) breach of any
representation or warranty in this Agreement by Brazos or Company, (v) breach of
any covenant of this Agreement, which is not promptly cured after written notice
to Brazos and the Company by Seafirst, or (vi) a default under the terms of any
indebtedness to a Senior Lender, if not waived or cured within the period
provided by the relevant loan agreement or instrument.
"NOTE" means a convertible subordinated promissory note of Brazos in the
form attached hereto as Exhibit A, dated as of the date hereof and payable to
the order of Seafirst and any renewals, extensions and rearrangements thereof.
"PERSON" means any individual, corporation, non-profit corporation, limited
liability company, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, financial institution, or government or any
agency or political subdivision thereof.
"QUALIFIED PUBLIC OFFERING" means the underwritten public offering of
Common Stock by the Company for cash for its own account pursuant to a
registration statement filed under the Securities Act (as herein defined) (other
than any registration statement relating to warrants, options or shares of
capital stock of the Company granted or to be granted or sold primarily to
employees, directors, or officers of the Company, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule, a
registration statement relating to employee benefit plans or interests therein
or any registration statement covering securities issued in connection with any
debt financing of the Company), in which the net offering proceeds to be
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received by the Company are at least $15,000,000 and the per share Common Stock
offering price to the public is not less than $3.50 per share (as adjusted for
stock splits or combinations).
"SENIOR LENDER" means any holder of indebtedness of Brazos which is secured
by liens on substantially all of its assets.
"TRADING DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday,
other than any day on which securities are not traded on the applicable
securities exchange.
SECTION 2.
ISSUANCE OF THE NOTE
2.1. Upon the Effective Date (as defined in the Merger Agreement) and in
accordance with the Merger Agreement, Brazos shall issue the Note to Seafirst.
The Note shall be convertible into Common Stock, as provided in Section 3
hereof. Brazos shall have the right to prepay the principal amount of the Note
in full or in part at any time, without premium or penalty.
2.2. The Note shall bear interest at the rate of 10% per annum from the
date hereof until March 13, 1998, 10.5% per annum from March 14, 1998 until
March 13, 1999, and 11% per annum from March 14, 1999 until March 13, 2000, on
the principal amount thereof outstanding from time to time, payable quarterly on
each April 30, June 30, September 30 and December 31, commencing June 30, 1997,
until the principal thereof is paid. If the Note is converted, Seafirst shall
be entitled to receive interest accrued and unpaid to the date of conversion.
If Brazos shall default in the payment of the principal of or interest on the
Note, Brazos shall on demand from time to time pay interest, to the extent
permitted by law, on the unpaid principal balance of the Note and on such
defaulted amount up to the date of actual payment at a rate of 15% per annum.
The maturity date of the Note is March 13, 2000 (the "MATURITY DATE"). All
principal and any accrued but unpaid interest shall be due on the Maturity Date,
or five business days following the closing of any Qualified Public Offering, if
sooner.
2.3. The principal of and interest on the Note shall be payable by wire
transfer in immediately available funds to any account in the United States
which Seafirst may designate by written notice to Brazos at least three Business
Days prior to the due date. All payments shall be made by Brazos not later than
2:00 p.m., New York City time, on the date that such payment is required to be
made. If the date for any payment due under the Note falls on a day which is
not a Business Day, such payment date shall be deemed to have fallen on the next
following Business Day.
2.4. Subject to rights of the Company to acquire the Note pursuant to a
Right of First Refusal Agreement between Seafirst and the Company dated as of
the date hereof (the "ROFR AGREEMENT"), Seafirst shall not to sell, assign,
transfer, negotiate or hypothecate the Note to any party, unless such party
agrees to all of the terms and conditions of this Agreement applicable to
Seafirst, and further agrees to execute a subordination agreement consistent
with Section 7.3.
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SECTION 3.
CONVERSION RIGHT
3.1. At any time (i) after the Maturity Date, if the principal amount of
the Note has not been paid in full or (ii) subsequent to five Business Days
following the closing of a Qualified Public Offering, if the principal amount of
the Note has not been paid in full, Seafirst shall have the right to convert the
outstanding principal amount of the Note and any accrued but unpaid interest
into Common Stock. Seafirst may exercise its conversion right by delivering to
the Company and Brazos a written notice stating the amount of the principal of
the Note which Seafirst elects to convert into Common Stock as provided herein
and, if the entire principal amount of the Note is to be converted, its Note
duly endorsed and assigned to the Company. Conversion shall be effective as of
the close of business on the date of delivery of such notice. As promptly as
practicable thereafter, the Company shall issue and deliver to Seafirst, a
certificate for the shares of Common Stock issuable upon such conversion. Any
person in whose name the certificate for Common Stock is to be issued shall be
considered to have become a holder of record of such Common Stock as of the
close of business on the Conversion Date.
The number of shares of Common Stock issuable upon conversion of the entire
$1,500,000 principal amount of the Note shall be the product of (a) 681,818 and
(b) the Conversion Factor. If the amount of the Note plus unpaid interest to be
converted on any Conversion Date is either less than or more than $1,500,000,
the number of Conversion Shares issuable upon such conversion, as compared to
the number of Conversion Shares issuable upon conversion of such entire
principal amount, shall be proportionate to the aggregate principal amount of
the Note plus unpaid interest to be converted on such Conversion Date, as
compared to the entire principal amount of $1,500,000.00.
If Seafirst shall convert less than the entire principal amount and any
unpaid interest of the Note, Seafirst shall indicate on the Note the amount and
date of such conversion, as the case may be, and the remaining principal amount
thereof.
3.2. The Company shall not be required to issue fractional shares of Common
Stock on the conversion of the Note. Seafirst expressly waives its right to
receive any fractional shares upon conversion of the Note. If any fraction of a
share would be issuable on the conversion of the Note, the Company or Brazos
shall pay to Seafirst in lieu thereof an amount in cash equal to the product of
such resulting fraction and the Closing Price for such Common Stock on the
effective date of the Conversion.
3.3. The Conversion Factor shall be subject to adjustment from time to time
in case any of the following events shall occur: (i) distribution of any
dividend consisting solely of Common Stock with respect to any class of the
Common Stock, or the distribution consisting in whole or in part of Common
Stock of any dividend on any class of capital stock of the Company; (ii)
distribution of any dividend on any class of the Common Stock of the Company
consisting in
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whole or in part of, or the issuance to all holders of Common Stock of, rights
or warrants entitling the holders thereof to subscribe for or purchase shares of
Common Stock at a price per share less than the Closing Price of the Common
Stock on the relevant record date; and (iii) the subdivision or combination of
the outstanding shares of Common Stock into a greater or lesser number of such
shares. Upon the occurrence of any such event, the Conversion Factor shall be
adjusted as appropriate so that the economic benefits or losses that would have
accrued to Seafirst upon conversion of any part of the Note prior to such event
shall be equal to the economic benefits that would accrue to Seafirst upon
conversion of such part after such event. Such adjustments shall be effective as
of the record date for such dividend or distribution or the effective date of
such combination or subdivision and shall be made successively whenever any
event listed above shall occur.
3.4. If the Company shall merge or consolidate with another corporation,
Seafirst shall thereafter have the right, upon conversion of the Note to receive
solely the kind and amount of shares of stock (including, if applicable, Common
Stock), other securities, property or cash or any combination thereof receivable
by a holder of the number of shares of Common Stock for which such Note might
have been exercised immediately prior to such merger or consolidation (assuming,
if applicable, that the holder of such Common Stock failed to exercise its
rights of election, if any, as to the kind or amount of shares of stock, other
securities, property or cash or combination thereof receivable upon such merger
or consolidation).
SECTION 4.
COVENANTS
The Company and Brazos covenant to Seafirst as follows:
4.1. The Company shall furnish to Seafirst, promptly upon becoming aware of
the existence of any condition or event which constitutes a Default or an Event
of Default, written notice specifying the nature and period of existence thereof
and the action which the Company or Brazos is taking or proposes to take with
respect thereto.
4.2. The Company agrees to give Seafirst the same notice of any regular or
special meeting of the board of directors of the Company as it provides to its
directors, and the Company agrees that a representative of Seafirst may attend
any such board meeting or be present by telephone. Any such representative of
Seafirst shall only attend or be present at any such meeting for informational
purposes and shall have no rights as a board member.
4.3. Neither the Company nor Brazos shall merge or consolidate with, or
sell substantially all its assets to, any other corporation unless the surviving
corporation expressly assumes all obligations of the Company or Brazos under
this Agreement and the Note.
4.4. Brazos agrees not to prepay any other debt subordinated to
indebtedness owed a Senior Lender, and agrees to not to modify any terms nor
take any action that would permit the
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lender to (i) accelerate payment of such debt, or (ii) increase the interest
rates or fees payable in connection with such debt.
4.5. Company and Brazos each agree not to purchase or redeem any of the
Company's common or preferred stock, and the Company further agrees not to pay
dividends for any of its preferred stock, other than such dividends that it is
contractually obligated to pay as of the date of this Agreement.
4.6. Company and Brazos agree to provide Seafirst with all reports filed
with the Securities and Exchange Commission.
4.7. Company and Brazos agree that Seafirst shall have the right, upon
reasonable notice to Brazos and at reasonable times, to visit and inspect any
plant or facility of Brazos.
4.8. Brazos agrees to immediately notify Seafirst of any default under the
terms of any indebtedness to any Senior Lender, if such default is not waived or
cured within the period provided for such cure by the relevant loan agreement or
instrument.
4.9. Company and Brazos each agree not to issue any additional subordinate
debt which has a maturity date sooner than the maturity date of the Subordinated
Convertible Note issued to Seafirst.
SECTION 5.
REPRESENTATIONS AND WARRANTIES
5.1. The Company and Brazos represent and warrant to Seafirst as follows:
(a) Each of the Company and Brazos is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
jurisdiction of incorporation, and has full power and authority to
consummate the transactions contemplated in this Agreement.
(b) The Company and Brazos are duly authorized and empowered to
create, issue, execute and deliver this Agreement, and with respect to
Brazos, the Note, and all action on the part of each party requisite for
the due creation, issuance, execution and delivery of this Agreement, and
with respect to Brazos, the Note, has been duly and effectively taken.
This Agreement and all agreements executed in connection herewith are valid
and binding obligations of the Company or Brazos, as the case may be,
enforceable in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, debtor relief, or
similar laws affecting the rights of creditors generally.
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5.2. Seafirst represents and warrants to the Company and Brazos as follows:
(a) Seafirst is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, and has full power
and authority to consummate the transactions contemplated in this
Agreement. Seafirst is duly authorized and empowered to execute, deliver
and perform its obligations under this Agreement and all action on its part
requisite for the due execution, delivery and performance of its
obligations under this Agreement has been duly and effectively taken.
(b) Seafirst will acquire the Conversion Shares solely for its own
beneficial account, for investment purposes, and not with a view to, or for
resale in connection with, any distribution of the Conversion Shares;
Seafirst understands that the Conversion Shares have not been registered
under the Securities Act of 1933, as amended (the "1933 ACT"), or any state
securities laws by reason of specific exemptions under the provisions
thereof which depend in part upon the investment intent of Seafirst; and
Seafirst understands that the Company is relying upon the representations
and agreements contained in this Agreement for the purpose of determining
whether this transaction meets the requirements for such exemptions.
Seafirst understands further that the certificate for the Conversion Shares
will bear the following legend for so long as such legend may be required
pursuant to applicable federal securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED,OR THE SECURITIES LAWS OF ANY STATE; THEREFORE,
THIS STOCK MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED,
DIRECTLY OR INDIRECTLY,EXCEPT UPON SUCH REGISTRATION OR
UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED
FOR SUCH SALE OR TRANSFER.
SECTION 6.
REGISTRATION RIGHTS
6.1. As used in this Section 6, the term "Registrable Stock" shall mean all
Common Stock issued upon conversion of the Note; provided, however, such Common
Stock shall cease to be Registrable Stock when such securities shall be eligible
for sale pursuant to Rule 144(k) under the Securities Act or any successor rule
which permits resale of such securities without restriction.
(a) Required Registration. After receipt of a written request (a
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"REGISTRATION REQUEST") from Seafirst requesting that the Company effect the
registration of Registrable Stock under the Securities Act of 1933, as amended
(the "SECURITIES ACT") and specifying the intended
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method or methods of disposition thereto, the Company shall prepare and file
with the Commission a registration statement under the Securities Act on any
form which the Company is eligible to use for registering the resale of the
Registrable Stock which the Company has been requested to register (including,
without limitation, a registration statement on Form S-3 of the Securities Act)
and shall use its best efforts to cause such registration statement to become
effective; provided, however, that, subject to the provisions of the immediately
following sentence, the Company shall not be required to effect more than a
total of one registration statement of Registrable Stock with respect to a
request by Seafirst pursuant to this section and, in the case of an underwritten
offering, the Company shall have the right to approve the underwriter, which
approval shall not be unreasonably withheld. The Company shall have the right to
defer the filing of any registration statement requested pursuant to this
section if (i) on the date of the Registration Request the Company is in the
process of preparing another registration statement for an underwritten public
offering, until the 90th day after the date of such Registration Request, (ii)
in order to file such registration statement, the Company would be required to
conduct an audit other than the regular audit of the Company conducted by the
Company at the end of its fiscal year, until such time the Company conducts its
regular annual audit (unless Seafirst agrees to pay the expenses of such an
audit) or (iii) in the good faith determination of the board of directors of the
Company the filing of such registration statement would have a materially
adverse affect to the Company, until such time period as such filing would not
have such affect, such period not to exceed 90 days; provided that the Company
shall not have the right to exercise this right more than once in any 12 month
period.
(b) Registration Procedures.
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(1) If and when the Company is required by the provisions of this
section to use its best efforts to effect promptly the registration of shares of
Registrable Stock under the Securities Act, the Company will:
(i) prepare and file with the Commission a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become and remain effective as provided herein for a period of not
less than six months, except that the Company shall not be required to conduct
any special audit of the Company and if such an audit would be required, the
Company may delay such registration statement until such time as such special
audit is no longer required;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
current and to comply with the provisions of the Securities Act with respect to
the sale or other disposition of all shares covered by such registration
statement, including such amendments and supplements as may be necessary to
reflect the intended method of disposition from time to time by Seafirst of such
shares for a period of not less than six months;
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(iii) furnish to Seafirst such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as Seafirst may reasonably request in
order to facilitate the public sale or other disposition of the shares owned by
Seafirst;
(iv) use its best efforts to register or qualify the shares covered by
such registration statement under such other securities or blue sky or other
applicable laws of such jurisdictions within the United States, as Seafirst
shall reasonably request, to enable Seafirst to consummate the public sale or
other disposition in such jurisdictions of the shares owned by Seafirst;
(2) Seafirst and each underwriter designated by Seafirst shall be required to
furnish to the Company such information as the Company may reasonably require
from Seafirst reflect the intended method of disposition from time to time by
Seafirst of such shares for a period of not less than six mac
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