Document:

<PAGE>   1
                                                                   EXHIBIT 10.18

                              CONVERTIBLE UNSECURED
                                 PROMISSORY NOTE

$1,000,000.00                                                 September 15, 2000

         FOR VALUE RECEIVED, the undersigned, HALLWOOD INVESTMENT COMPANY, a
Cayman Islands corporation ("Maker"), promises to pay to the order of HALLWOOD
INVESTMENTS LIMITED ("Payee"), a British Virgin Islands company, at HSBC
Republic Bank, for further credit to Monaco Branch, Account Number 50802, in
immediately available funds and in lawful money of the United States of America,
the principal amount of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) ("Total
Principal Amount"), together with interest on such Total Principal Amount from
the date of receipt by Maker of the Total Principal Amount at a rate per annum
of Ten Percent (10.00%), simple interest. The Payee and any person or entity to
whom this Note has properly been assigned, transferred or negotiated are
sometimes referred to herein as the "holder."

         1. Maturity Date. The entire unpaid principal balance of this Note, and
all accrued and unpaid interest on the unpaid principal balance of this Note,
shall be due and payable in full in a single payment on September 15, 2005.
Subject to Section 10 below, this Note may be prepaid in whole or in part
without the consent of the Payee (a) at any time prior to the first anniversary
date with no notice, and (b) at any time after the first anniversary date hereof
on thirty (30) days' notice. However, the outstanding principal and accrued
interest of this Note may be converted at any time prior to the end of the
"Conversion Period" (as hereinafter defined).

         2. Payments and Application of Payments. All payments of the
indebtedness evidenced by this Note shall be applied to such indebtedness in
such order and manner as the holder of this Note may from time to time determine
in its sole discretion. All payments and prepayments of principal of or interest
on this Note shall be made in lawful money of the United States of America in
immediately available funds, at the address of Payee indicated above, or such
other place as the holder of this Note shall designate in writing to Maker. Any
portion of the principal of this Note that is repaid or prepaid may not be
reborrowed. If any payment of principal of or interest on this Note shall become
due on a day which is not a Business Day (as hereinafter defined) such payment
shall be made on the next succeeding Business Day and any such extension of time
shall be included in computing interest in connection with such payment. As used
herein, the term "Business Day" shall mean any day except a Saturday, Sunday or
other date on which national banks in Dallas, Texas are authorized by law to
close. The books and records of the holder shall be prima facia evidence of all
outstanding principal of and accrued and unpaid interest on this Note.

         3. Commercial Loan. Maker agrees that no proceeds of this Note shall be
used for personal, family or household purposes, and that all proceeds hereunder
shall be used solely for general corporate purposes.

         4. Representations by Maker. In connection with this Note, Maker hereby
represents and warrants to Payee as follows:

<PAGE>   2

         a. The execution, delivery, and performance of this Note by Maker have
been duly authorized by all necessary corporate action by Maker;

         b. this Note constitutes the legal, valid and binding obligation of
Maker, enforceable against Maker in accordance with its terms, except as limited
by bankruptcy, insolvency or similar laws of general application relating to the
enforcement of creditors' rights and except to the extent specific remedies may
generally be limited by equitable principles;

         c. The execution, delivery and performance of this Note by Maker, and
the consummation of the transactions contemplated hereby, do not (i) conflict
with, result in a violation of, or constitute a default under (A) any provision
of Maker's organizational documents, or any agreement or other instrument
binding upon Maker, or (B) any law, governmental regulation, court decree or
order applicable to Maker, or (ii) require the consent, approval or
authorization of any third party;

         d. Maker has entered into that certain Capital Contribution Agreement
("Contribution Agreement") of even date herewith between Maker and The Hallwood
Group Incorporated ("Hallwood Group"), a Delaware corporation and corporate
parent of Maker, a copy of which has been presented to Payee, providing for
Maker's right to acquire sufficient shares of the $.10 par value common stock
(the "Hallwood Stock") of Hallwood Group to enable Maker to satisfy its
obligations under Section 6 hereof; and

         e. The Contribution Agreement has been duly authorized, executed and
delivered by all parties thereto and constitutes the legal, valid and binding
obligation of Maker and Hallwood Group, enforceable against such parties in
accordance with its terms, except as limited by bankruptcy, insolvency or
similar laws of general application relating to the enforcement of creditors'
rights and except to the extent specific remedies may generally be limited by
equitable principles.

         5. Covenants by Maker. Until this Note is fully paid and satisfied,
Maker will furnish to the holder such information respecting the business,
properties, condition or operations, financial or otherwise, of Maker as Payee
may from time to time reasonably request.

         6. Convertibility. The amounts of principal and interest due under this
Note shall be convertible into shares of Hallwood Stock as provided herein.

         (a) At any time after the date that is one (1) year from date hereof
         and prior to the payment of all amounts of principal and interest due
         under this Note (the "Conversion Period"), the holder may elect to
         convert all or a portion of the outstanding principal and accrued
         interest hereunder into the number of fully paid and nonassessable
         shares of Hallwood Stock which results from dividing the "Conversion
         Amount" by the "Conversion Price." As used herein, (i) "Conversion
         Amount" means the aggregate amount of outstanding principal and accrued
         interest hereunder which is designated by Payee for

                                        2
<PAGE>   3

         conversion; and (ii) "Conversion Price" means $6.47; provided, however,
         if after the date hereof, the outstanding shares of Hallwood Stock
         should be subdivided, combined or consolidated, by stock split, stock
         dividend, combination or like event, into a greater or lesser number of
         shares, the Conversion Price in effect immediately prior to such event
         shall, concurrently with the effectiveness thereof, be proportionately
         adjusted.

         (b) In order to exercise the conversion right granted herein, the
         holder must notify Maker in writing of its election to convert the
         Conversion Amount prior to the expiration of the Conversion Period.
         Such notice (a "Conversion Notice") shall be in the form of ANNEX A
         attached hereto and delivered in accordance with the terms of Section
         15 below. If the holder has properly exercised its conversion right,
         then the conversion shall be deemed to be effective immediately upon
         delivery of the Conversion Notice, and, thereafter, the holder shall
         have the right only to receive certificates evidencing the number of
         shares of Hallwood Stock to which the holder is entitled and the cash
         payment for any fractional shares. Maker shall deliver to the holder at
         a closing (a "Closing") to be held in the offices or Maker (or such
         other place as Maker and the holder agree) one or more stock
         certificates evidencing the number of fully paid and nonassessable
         shares of Hallwood Stock to which the holder is entitled as determined
         in accordance with this Note. The date of the Closing shall be twenty
         (20) days after the delivery of the Conversion Notice to Maker, or if
         the twentieth (20th) day is not a Business Day, on the next Business
         Day. Such stock certificates shall be duly endorsed in favor of the
         holder or accompanied by duly executed and valid stock powers enabling
         the holder to have such shares registered in the holder's name in the
         stock transfer records of Hallwood Group.

         (c) Against receipt of such share certificates, the holder shall
         deliver this Note to Maker for cancellation or reissuance in a reduced
         principal amount, as appropriate. If the Note has matured, whether by
         acceleration or otherwise, and the Conversion Amount represents less
         than all of the outstanding principal and accrued interest with respect
         to this Note, Maker shall also pay any amounts thereof remaining to the
         holder in cash or other current funds acceptable to the holder. If the
         Note has not matured and the Conversion Amount represents less than all
         of the outstanding principal and accrued interest with respect to this
         Note, Maker shall also issue to the holder a new promissory note in the
         same form and tenor as this Note in a principal amount equal to the
         amount of outstanding principal not being converted into shares of
         Hallwood Stock. Any accrued interest not then being converted shall
         remain outstanding and no interest shall accrue thereon. Maker shall
         not be obligated to issue any fractional shares of Hallwood Stock to
         the holder under this Note. Any such Conversion Amount which would
         otherwise represent a fractional share of Hallwood Stock shall be paid
         to the holder in cash or other current funds acceptable to the holder.

         (d) Each certificate evidencing shares of Hallwood Stock issued
         pursuant to this Note shall bear customary securities legends in a form
         approved by counsel to Hallwood Group.

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<PAGE>   4

         7. Events of Default. Each of the following shall constitute an "Event
of Default" under this Note:

         (a) The failure, refusal or neglect of Maker to pay when due any part
of the principal of, or interest on, this Note after such payment has become due
and payable; or

         (b) Any representation contained herein made by Maker is false or
misleading in any material respect; or

         (c) Maker fails to perform any covenant or agreement contained herein
within fifteen (15) after having received written notice of such failure from
Payee; or

         (d) If either of Maker or "Guarantor" (as hereinafter defined) (i)
becomes insolvent, or makes a transfer in fraud of creditors, or makes an
assignment for the benefit of creditors, or admits in writing its inability to
pay its debts as they become due; (ii) generally is not paying its debts as such
debts become due; (iii) has a receiver or custodian appointed for, or a receiver
or custodian takes possession of, all or substantially all of its assets, either
in a proceeding brought by it or in a proceeding brought against it, and such
appointment is not discharged or such possession is not terminated within thirty
(30) days after the effective date thereof, or if it consents or acquiesces in
such appointment or possession; (iv) files a petition for relief under the
United States Bankruptcy Code or any other present or future federal or state
insolvency, bankruptcy or similar laws (all of the foregoing hereinafter
collectively called "Applicable Bankruptcy Law") or an involuntary petition for
relief is filed against it under any Applicable Bankruptcy Law and such
involuntary petition is not dismissed within thirty (30) days after the filing
thereof, or an order for relief naming it is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension, reorganization or
other relief of debtors now or hereafter existing is requested or consented to
by it; (v) fails to have discharged within a period of thirty (30) days any
attachment, sequestration or similar writ levied upon any of its property; or
(vi) fails to pay within thirty (30) days any final money judgment against it.

         Nothing contained in this Note shall be construed to limit the Events
of Default enumerated hereinabove and all such Events of Default shall be
cumulative.

         8. Remedies. Maker agrees that upon the occurrence of any Event of
Default, the holder of this Note may, at its option, without further notice or
demand, (i) declare the outstanding principal balance of and accrued but unpaid
interest on this Note at once due and payable, (ii) pursue any and all other
rights, remedies and recourses available to the holder hereof, including, but
not limited to, any such rights, remedies or recourses, at law or in equity, or
(iii) pursue any combination of the foregoing.

         9. Guaranty. The obligations of Maker under this Note are guaranteed by
Hallwood Group pursuant to that certain Guaranty Agreement of even date
herewith. Hallwood Group is sometimes referred to herein as the "Guarantor" in
its capacity as such.

                                        4

<PAGE>   5

         10. Compliance with Credit Agreement. Maker and Payee acknowledge that
Hallwood Group is a party to that certain Credit Agreement (the "Credit
Agreement"), dated December 21, 1999 by and among HWG LLP, Hallwood Group, First
Bank Texas, N.A. and certain other lenders. Maker and Payee intend that each
such party comply with all covenants and undertakings contained in the Credit
Agreement which may be applicable to them and specifically agree that no holder
of this Note shall be paid any cash payment by Maker or Guarantor in violation
of the terms of the Credit Agreement. This Section 10 shall not prohibit any
holder from receiving Hallwood Stock upon any conversion of outstanding
principal and accrued interest as contemplated by Section 6 of this Note.

         11. No Waiver. The failure to exercise the option to accelerate the
maturity of this Note or any other right, remedy or recourse available to the
holder hereof upon the occurrence of an Event of Default hereunder shall not
constitute a waiver of the right of the holder of this Note to exercise the same
at that time or at any subsequent time with respect to such uncured Event of
Default or any other Event of Default. The rights, remedies and recourses of the
holder hereof, as provided in this Note, shall be cumulative and concurrent and
may be pursued separately, successively or together as often as occasion
therefor shall arise, at the sole discretion of the holder hereof. The
acceptance by the holder hereof of any payment under this Note which is less
than the payment in full of all amounts due and payable at the time of such
payment shall not (a) constitute a waiver of or impair, reduce, release or
extinguish any right, remedy or recourse of the holder hereof, or nullify any
prior exercise of any such right, remedy or recourse, or (b) impair, reduce,
release or extinguish the obligations of any party liable under this Note as
originally provided herein.

         12. Compliance with Applicable Usury Laws. This Note is intended to be
performed in accordance with, and only to the extent permitted by, all
applicable usury laws. If any provision hereof or the application thereof to any
person or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, neither the application of such provision to any other person or
circumstance nor the remainder of the instrument in which such provision is
contained shall be affected thereby and shall be enforced to the greatest extent
permitted by law. It is expressly stipulated and agreed to be the intent of the
holder hereof to at all times comply with the usury and other applicable laws
now or hereafter governing the interest payable on the indebtedness evidenced by
this Note. If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any amount called for under this Note, or
contracted for, charged, taken, reserved or received with respect to the
indebtedness evidenced by this Note, or if the holder's exercise of the option
to accelerate the maturity of this Note, or if any prepayment by Maker results
in Maker having paid any interest in excess of that permitted by law, then it is
the express intent of Maker and Payee that all excess amounts theretofore
collected by the holder be credited on the principal balance of this Note (or,
if this Note has been paid in full, refunded to Maker), and the provisions of
this Note immediately be deemed reformed and the amounts thereafter collectable
hereunder reduced, without the necessity of the execution of any new document,
so as to comply with the then applicable law, but so as to permit the recovery
of the fullest amount otherwise called for hereunder or thereunder. All sums
paid, or agreed to be paid, by Maker for the use, forbearance, detention,
taking, charging, receiving or reserving of the indebtedness of Maker to the
holder under this Note shall, to the

                                        5

<PAGE>   6

maximum extent permitted by applicable law, be amortized, prorated, allocated
and spread throughout the full term of such indebtedness until payment in full
so that the rate or amount of interest on account of such indebtedness does not
exceed the usury ceiling from time to time in effect and applicable to such
indebtedness for so long as such indebtedness is outstanding. It is not the
intention of Payee to accelerate the maturity of any interest that has not
accrued at the time of such acceleration or to collect unearned interest at the
time of such acceleration.

         13. Attorney's Fees. If this Note is placed in the hands of an attorney
for collection, or is collected in whole or in part by suit or through probate,
bankruptcy or other legal proceedings of any kind, Maker agrees to pay, in
addition to all other sums payable hereunder, all costs and expenses of
collection, including but not limited to reasonable attorneys' fees. Maker
hereby agrees to pay on demand all reasonable fees and expenses of counsel to
the holder incurred by the holder in connection with the preparation,
negotiation and execution of this Note and all related documents.

         14. Waiver of Notice, Etc. Maker and any and all endorsers and
guarantors of this Note severally waive presentment for payment, notice of
nonpayment, protest, demand, notice of protest and dishonor, diligence in
enforcement and indulgences of every kind and without further notice hereby
agree to renewals, extensions, exchanges or releases of collateral, taking of
additional collateral, indulgences or partial payments, either before or after
maturity.

         15. Notices. All notices given hereunder shall be in writing and shall
be deemed delivered upon (a) actual receipt if personally delivered or sent by
courier service or (b) confirmed receipt of a telecopy to the address or
telecopy number, respectively, of the Maker or Payee as follows:

                        Maker:

                        Hallwood Investment Company
                        c/o Cater Allen Trust Company
                        Cater Allen House
                        Commercial Street
                        St. Helier, Jersey JE 4 5XZ
                        Channel Islands

                        Payee:

                        Hallwood Investments Limited
                        Le Roccabella
                        24 Princesse Grace Avenue
                        Monte Carlo, 98000 Monaco

If either Maker or Payee should change its or his address or if this Note should
be transferred or assigned by Payee to another holder, the Maker, Payee or such
holder, as appropriate, shall notify

                                        6

<PAGE>   7

the other party to this Note of such party's new address in accordance with the
requirements of this Section 15.

         16. Applicable Law. THIS NOTE HAS BEEN EXECUTED IN CONNECTION WITH THE
CONTRIBUTION AGREEMENT AND RELATED GUARANTY AGREEMENT OF HALLWOOD GROUP, A
CORPORATION WITH ITS PRINCIPAL PLACE OF BUSINESS IN DALLAS, TEXAS, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS,
EXCEPT AS SUCH LAWS ARE PREEMPTED BY APPLICABLE FEDERAL LAWS.

         This Note is executed as of the 15th of September, 2000.

                                                MAKER:

                                                HALLWOOD INVESTMENT COMPANY

                                                By:
                                                    ----------------------------
                                                    Melvin J. Melle
                                                    Vice President

                                        7

<PAGE>   8

                                     ANNEX A

                            Form of Conversion Notice

                                CONVERSION NOTICE

         This Conversion Notice is delivered by the undersigned, the legal and
beneficial holder (the "Holder") of that certain Convertible Unsecured
Promissory Note (the "Note") issued by Hallwood Investment Company ("HIC") to
Hallwood Investments Limited, dated September 15, 2000, to HIC pursuant to the
terms and provisions of the Note. All capitalized terms used herein and not
specifically defined shall have the meanings given them in the Note.

         Holder hereby exercises its right to convert $______________ of
outstanding principal and $_________ of accrued interest on the Note into
______________ shares of Hallwood Stock pursuant to Section 6 of the Note. Such
number of shares of Hallwood Stock has been computed by dividing the Conversion
Amount of $_____________ [the sum of the two blanks above] by the Conversion
Price of $___________ [the Conversion Price stated in the Note or such
Conversion Price as adjusted in accordance with the Note].

Check the appropriate box

         [ ] Such Conversion Amount represents all of the outstanding principal
and accrued interest on the Note.

         [ ] Such Conversion Amount done not represent all of the outstanding
principal and accrued interest on the Note. Holder hereby directs that a new
promissory note in the principal amount of $_____________ [representing the
portion of outstanding principal not being converted into shares of Hallwood
Stock] be issued to Holder along with delivery of the appropriate number of
shares of Hallwood Stock as stated above.

         IN WITNESS WHEREOF, this Conversion Notice is executed and delivered
this ___ day of ___________, 200[ ].

                                               HOLDER:

                                               [Name of Holder]

                                               By:
                                                  ------------------------------

                                               Name:
                                                    ----------------------------

                                               Title:
                                                     ---------------------------

                                        8<PAGE>   1
                                                                   EXHIBIT 10.19

                  FIRST AMENDMENT TO FIRST AMENDED AND RESTATED
                  REVOLVING CREDIT LOAN AND SECURITY AGREEMENT

         This First Amendment to First Amended and Restated Revolving Credit
Loan and Security Agreement ("First Amendment") is entered into as of the 23rd
day of October, 2000, by and among KeyBank National Association ("Bank") and
Brookwood Companies Incorporated ("Brookwood"), Kenyon Industries, Inc.
("Kenyon"), Brookwood Laminating, Inc. ("Laminating"), Ashford Bromley, Inc.
("Ashford"), XtraMile, Inc. ("Xtra"), and Land and Ocean III, Inc. ("Land" and,
together with Brookwood, Kenyon, Laminating, Ashford and Xtra, being sometimes
hereinafter collectively referred to as "Borrower").

                                   RECITALS:

         WHEREAS, Borrower and Bank entered into a certain First Amended and
Restated Revolving Credit Loan and Security Agreement dated as of June 6, 2000
(the "Existing Agreement"); and

         WHEREAS, Borrower has requested Bank to make certain changes to the
Existing Agreement, all as more particularly set forth in this First Amendment;

                             PRELIMINARY STATEMENT:

         A. Unless otherwise defined herein, capitalized terms as used herein
shall have the meanings ascribed to them in the Existing Agreement.

         B. Unless otherwise indicated, all section and subsection numbers
correspond with those in the Existing Agreement.

         C. In the event of a conflict between the terms and conditions of the
Existing Agreement and the terms and conditions of this First Amendment, the
terms and conditions of this First Amendment shall prevail and the Existing
Agreement shall be interpreted and construed so as to give maximum effect to the
intent and terms and conditions of this First Amendment.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Borrower and Bank, the parties
hereto agree that the Existing Agreement is hereby amended as follows:

         1. This First Amendment is being entered into in connection with a
certain letter between Bank and Borrower dated October 23, 2000, a copy of which
is attached hereto as Exhibit A (the "Waiver Letter").

<PAGE>   2

         2. Section 2.3, et seq. of the Existing Agreement is hereby amended to
permit Borrower to open two (2) new Uzzi retail store locations in Sarasota,
Florida and Key West, Florida; provided, however, that Borrower will not be
permitted to use Advances under the Acquisition Revolver to finance the second
store opening at the Key West location; provided, further, that Borrower may not
open a third Uzzi retail store location without the express written consent of
Bank.

         3. Section 2.6, et seq. is hereby amended to increase the spread on the
Tier I LIBOR pricing option by 50 basis points for both the Working Capital
Revolving Credit Loans and the Acquisition Revolving Credit Loans. Pricing on
all other Tiers will remain the same. Pricing for the Prime Rate Option is
unchanged.

         The pricing grid under Section 2.6.1 is revised as follows:

<TABLE>
<CAPTION>
          TOTAL FUNDED DEBT
TIER         TO EBITDA         PRIME RATE +   LIBOR +
----    --------------------   ------------   -------
<S>     <C>                    <C>            <C>

 1          > or = 3.00x          0.25%       3.00%
 2      > or = 2.50x < 3.00x      0.25%       2.25%
 3      > or = 2.00x < 2.50x      0.25%       2.00%
 4            < 2.00x             0.25%       1.75%
</TABLE>

         The pricing grid under Section 2.6.2 is revised as follows:

<TABLE>
<CAPTION>
          TOTAL FUNDED DEBT
TIER         TO EBITDA         PRIME RATE +   LIBOR +
----    --------------------   ------------   -------
<S>     <C>                    <C>            <C>

 1          > or = 3.00x          0.25%       3.25%
 2      > or = 2.50x < 3.00x      0.25%       2.50%
 3      > or = 2.00x < 2.50x      0.25%       2.25%
 4            < 2.00x             0.25%       2.00%
</TABLE>

         Section 2.6.3 of the Existing Agreement is hereby amended to increase
the initial pricing for the Acquisition Revolving Credit Loans to Prime Rate
plus 100 basis points.

         4. Section 8.4 of the Existing Agreement is hereby amended to restrict
payments to Hallwood for dividends and federal income taxes until Bank's receipt
and satisfactory review of budget projections with monthly cash flow analysis by
division for the remainder of FYE 2000 and FYE 2001.

                                       2
<PAGE>   3

         5. Except as expressly amended by this First Amendment, the terms and
conditions of the Existing Agreement shall remain in full force and effect and
Borrower acknowledges and confirms that its representations and warranties
contained in the Existing Agreement are true, correct and complete in all
material respects as of the date hereof and there exists no Default or Event of
Default under the Existing Agreement as of the date hereof except as set forth
in the Waiver Letter.

         IN WITNESS WHEREOF, the undersigned have duly executed this First
Amendment as a sealed instrument as of the date first set forth above.

ATTEST:                                       BORROWER:

                                              BROOKWOOD COMPANIES INCORPORATED

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Vice President Finance
                                                         Chief Financial Officer

                                              KENYON INDUSTRIES, INC.

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Treasurer and Secretary

                                              BROOKWOOD LAMINATING, INC.

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Treasurer and Secretary

                                              ASHFORD BROMLEY, INC.

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Assistant Treasurer

                                        3

<PAGE>   4

                                              XTRAMILE, INC.

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Assistant Treasurer

                                              LAND AND OCEAN III, INC.

                                              By:
------------------------------                   ------------------------------
Witness                                          Name:  Duane O. Schmidt
                                                 Title: Treasurer

                                              ACCEPTED BY BANK:
                                              KEYBANK NATIONAL ASSOCIATION

/s/ [ILLEGIBLE]                              By: /s/ KAREN L. CUMMINGS
------------------------------                   ------------------------------
Witness                                          Name:  Karen L. Cummings
                                                 Title: Vice President

                                       4

<PAGE>   5

                             [KEY BANK LETTERHEAD]

                            October 23, 2000
                            CERTIFIED MAIL
                            RETURN RECEIPT REQUESTED

Duane O. Schmidt, Treasurer
Kenyon Industries, Inc.
36 Sherman Avenue
Kenyon, RI 02836

        Re:  NOTICE AND WAIVER OF DEFAULT
             First Amended and Restated Revolving Credit Loan and Security
             Agreement dated June 6, 2000 (the "Loan Agreement")

Dear Duane:

        The purpose of this letter is to formally notify the Borrower (as that
and all other capitalized terms used herein are defined in the Loan Agreement)
that a Default has arisen under the Loan Agreement and all Loan Documents
(including, but not limited to, the Notes). As of today's date, KeyBank is aware
of the following Default:

                The EBITDA to Total Fixed Charge Ratio for the period ending
                6/30/00 was 1.1:1 and the minimum requirement is 1.25:1.

        The primary purpose of this letter is to advise the Borrower in writing
of this Default, and to indicate our agreement to waive said Default upon the
terms and conditions hereinafter set forth. The continuation of any advances by
KeyBank under the Revolving Loans does not waive or impair any of KeyBank's
rights and remedies under the Loan Agreement, nor does it establish a course of
conduct on which Borrower should or could rely. You should not assume that, if
further Defaults under the Loan Agreement occur, we will also agree to waive any
such future Defaults.

        In consideration of our agreement to waive this Default and in
recognition of the potential default for the period ending 9-30-00, we will
require you to execute an amendment to the Loan Agreement incorporating the
following terms and conditions: (i) the LIBOR pricing option for Tier I only for
both the Working Capital Revolving Credit Loans and the Acquisition Revolving
Credit Loans shall be increased by 50 basis points; (ii) initial pricing for the
Acquisition Revolving Credit Loans shall be increased to the Prime Rate plus 100
basis points; (iii) We will permit you to open Uzzi retail store locations in
Sarasota and Key West, but you will not be permitted to use Advances under the
Acquisition Revolver to finance the second store opening and Borrower may not
open a third Uzzi retail store without the prior written consent of the Bank;
(iv) payments to Hallwood for

<PAGE>   6

Duane O. Schmidt
October 23, 2000
Page 2

dividends and federal income taxes are restricted until the receipt and
satisfactory review of budget projections for the remainder of FYE 2000 and FYE
2001 by division with monthly cash flow analysis. We will instruct our counsel
to prepare the necessary legal documentation to amend the Loan Agreement to
incorporate these changes.

     Please call me if you have any questions concerning this letter.

                                    Sincerely yours,

                                    /s/ KAREN L. CUMMINGS
                                    ------------------------------------------
                                    Karen L. Cummings
                                    Vice President

                                    SEEN AND AGREED:

                                    BROOKWOOD COMPANIES INCORPORATED

                                    By: /s/ DUANE O. SCHMIDT
                                        --------------------------------------
                                        Name: Duane O. Schmidt
                                        Title: Vice President Finance
                                               Chief Financial Officer

                                    KENYON INDUSTRIES, INC.

                                    By: /s/ DUANE O. SCHMIDT
                                        --------------------------------------
                                        Name: Duane O. Schmidt
                                        Title: Treasurer and Secretary

                                    BROOKWOOD LAMINATING, INC.

                                    By: /s/ DUANE O. SCHMIDT
                                        --------------------------------------
                                        Name: Duane O. Schmidt
                                        Title: Treasurer and Secretary
<PAGE>   7
Duane O. Schmidt
October 23, 2000
Page 3

                                              ASHFORD BROMLEY, INC.

                                              By: /s/ DUANE O. SCHMIDT
                                                 ------------------------------
                                                 Name:  Duane O. Schmidt
                                                 Title: Assistant Treasurer

                                              XTRAMILE, INC.

                                              By: /s/ DUANE O. SCHMIDT
                                                 ------------------------------
                                                 Name:  Duane O. Schmidt
                                                 Title: Assistant Treasurer

                                              LAND AND OCEAN III, INC.

                                              By: /s/ DUANE O. SCHMIDT
                                                 ------------------------------
                                                 Name:  Duane O. Schmidt
                                                 Title: Treasurer

CC:  Dennis C. Sbrega, Esq.
     Preti, Flaherty, Beliveau, Pachios & Haley, LLC
     One City Center
     P.O. Box 9546
     Portland, ME 04112-9546

     Roger M. Barzun, Esq.
     60 Hubbard Street
     Concord, MA 01742

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