-----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, H/iNc3P3SI7QG4CU7LgVowH1GFEKqeX6NzgtAZi2d3zxZeyfcow9kq9PTExBc/uT Ec3GKSV1yjAkkanb5yVqpg== 0000890566-97-001093.txt : 19970514 0000890566-97-001093.hdr.sgml : 19970514 ACCESSION NUMBER: 0000890566-97-001093 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970512 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRAZOS SPORTSWEAR INC /DE/ CENTRAL INDEX KEY: 0000856711 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 911770931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18054 FILM NUMBER: 97602300 BUSINESS ADDRESS: STREET 1: 6520 SOUTH 190TH ST CITY: KENT STATE: WA ZIP: 98032 BUSINESS PHONE: 2062513565 FORMER COMPANY: FORMER CONFORMED NAME: SUN SPORTSWEAR INC DATE OF NAME CHANGE: 19920703 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) MAY 12, 1997 BRAZOS SPORTSWEAR, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 0-18054 91-1770931 (Commission File Number) (IRS Employer Identification No.) 3860 VIRGINIA AVENUE, CINCINNATI, OHIO 45227 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (513) 272-3600 - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 1 of 4 Pages ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS a) Financial statements of business acquired. The required audited financial statements of BSI for the three most recent fiscal years, together with the report of the auditors are attached hereto as Exhibit 99.1 and are incorporated herein by reference. b) Pro forma financial information. Description of the transactions MERGER OF SUN SPORTSWEAR, INC. AND BSI HOLDINGS, INC. On March 14, 1997, BSI Holdings, Inc. (BSI) consummated a merger with Sun Sportswear, Inc. (Sun) (hereinafter referred to as the "Merger") whereby the stockholders of BSI acquired an 86% ownership interest in Sun. The Merger will be accounted for as a reverse acquisition with Sun being the surviving legal entity and BSI being the acquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in the State of Delaware under the name Brazos Sportswear, Inc. Sun shareholders prior to the Merger, other than Seafirst Bank (Seafirst), who elected not to retain their shares received $11 per share for 50% of such shares and the remaining shares were converted into Brazos common stock. Seafirst, Sun's majority shareholder prior to the Merger, received $11 per share for 59.5% of its Sun shares in a combination of cash and a note, with its remaining shares being converted into Brazos common stock. ACQUISITION OF PLYMOUTH MILLS, INC. Effective August 2, 1996, BSI acquired certain assets and assumed certain liabilities of Plymouth Mills, Inc. (Plymouth) for approximately $34 million. This transaction has been accounted for as a purchase with approximately $19 million of the excess of the acquisition cost over the fair value of net assets acquired being assigned to goodwill. Goodwill is being amortized over 40 years on a straight-line basis. Pro forma financial statements and periods presented An unaudited pro forma condensed combined balance sheet as of December 28, 1996 has been prepared giving effect to the Merger as if it had occurred on such date. An unaudited pro forma condensed combined statement of operations for the year ended December 28, 1996 has been prepared giving effect to the Merger and the acquisition of Plymouth as if both had occurred on December 31, 1995. The unaudited pro forma condensed combined balance sheet as of December 28, 1996 and the unaudited pro forma condensed combined statement of operations for the year ended December 28, 1996 are attached hereto as Exhibit 99.2 and are incorporated herein by reference. 2 of 4 Pages c. EXHIBITS The following exhibits are filed herewith: EXHIBIT DESIGNATION NATURE OF EXHIBIT - ------------------ -------------------------------------------------------- 99.1 Audited Financial Statements of BSI Holdings, Inc. for the three most recent fiscal years as follows - - Report of independent public accountants - Consolidated balance sheets as of December 28, 1996 and December 30, 1995 - Consolidated statements of operations for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 - Consolidated statements of changes in shareholders' equity for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 - Consolidated statements of cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 - Notes to consolidated financial statements 99.2 Unaudited pro forma financial statements of Brazos Sportswear, Inc. as follows- - Pro forma condensed consolidated balance sheet as of December 28, 1996 - Pro forma condensed consolidated statement of operations for the year ended December 28, 1996 3 of 4 Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. BRAZOS SPORTSWEAR, INC. By: /s/F. CLAYTON CHAMBERS F. Clayton Chambers VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Date: May 12, 1997 4 of 4 Pages EX-99.1 2 EXHIBIT 99.1 BSI HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS WITH CONSOLIDATING DATA AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995 TOGETHER WITH AUDITORS' REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of BSI Holdings, Inc.: We have audited the accompanying consolidated balance sheets of BSI Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996 and December 30, 1995 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 BSI Holdings, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cincinnati, Ohio, March 28, 1997 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995 (DOLLARS IN THOUSANDS) 1996 1995 ASSETS CURRENT ASSETS: Cash ................................................ $ 561 $ 755 Accounts receivable, net of allowance for doubtful accounts of $2,760 and $967, respectively (Note 4) ....................... 22,118 13,294 Inventory (Notes 2(e) and 4) ........................ 25,338 23,571 Prepaid expenses .................................... 1,786 690 Income tax receivable ............................... -- 300 Deferred tax assets (Note 5) ........................ 1,797 -- Total current assets ....................... 51,600 38,610 PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2(f) and 4): Land ................................................ 90 90 Buildings ........................................... 670 670 Machinery and equipment ............................. 6,468 3,866 Furniture and fixtures .............................. 2,823 2,598 Construction in progress ............................ 154 -- 10,205 7,224 Less- accumulated depreciation ...................... (3,332) (2,144) 6,873 5,080 INTANGIBLE ASSETS (Note 2(g)): Costs in excess of fair value of assets acquired .... 21,456 2,461 Less- accumulated amortization ...................... (624) (336) 20,832 2,125 Other ............................................... 3,359 1,320 Less- accumulated amortization ...................... (922) (541) 2,437 779 Total intangible assets .................... 23,269 2,904 OTHER ASSETS ........................................... 940 476 $ 82,682 $ 47,070 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995 (DOLLARS IN THOUSANDS) 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement (Note 4) ............................................. $ 23,524 $ 20,693 Current portion of other debt (Note 4) ................. 3,419 2,531 Payable to former owners of Plymouth (Note 3(a)) ....... 2,950 -- Accounts payable ....................................... 9,998 13,662 Accrued liabilities .................................... 7,042 3,316 Total current liabilities ..................... 46,933 40,202 LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES (Note 4): Borrowings pursuant to revolving credit agreement ...... 8,800 1,900 Notes payable .......................................... 41 118 Subordinated debt due to related parties ............... 13,590 3,716 Capital lease liability ................................ 1,175 878 23,606 6,612 DEFERRED INCOME TAXES PAYABLE (Note 5) .................... 934 -- OTHER LIABILITIES ......................................... 367 -- MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7) ........... 7,613 945 COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY (DEFICIT) (Note 6): Common stock, $.01 par value, 50,000,000 shares authorized and 3,676,008 and 2,015,718 shares issued and outstanding at December 28, 1996 and December 30, 1995, respectively ...................... 5 3 Additional paid-in capital ............................. 2,927 2,860 Retained earnings (deficit) ............................ 297 (3,490) Notes receivable from shareholders ..................... -- (62) Total shareholders' equity (deficit) .......... 3,229 (689) $ 82,682 $ 47,070 The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 NET SALES ............................ $ 169,452 $ 131,020 $ 76,754 COST OF GOODS SOLD ................... 127,845 106,576 64,846 Gross profit ................... 41,607 24,444 11,908 OPERATING EXPENSES: Selling, general and administrative expenses .......... 31,830 25,264 9,997 Amortization of intangible assets and non-compete payments .. 699 285 224 Total operating expenses ....... 32,529 25,549 10,221 Operating income (loss) ........ 9,078 (1,105) 1,687 OTHER EXPENSE (INCOME): Interest expense ................... 4,491 3,695 1,663 Other, net ......................... (234) (22) -- Income (loss) before provision (credit) for income taxes and extraordinary item ............ 4,821 (4,778) 24 PROVISION (CREDIT) FOR INCOME TAXES (Note 5) ............................ 789 (338) 99 Net income (loss) before extraordinary item ............ 4,032 (4,440) (75) EXTRAORDINARY ITEM: Gain on extinguishment of debt (Note 4) .......................... -- 500 -- Net income (loss) .............. 4,032 (3,940) (75) DIVIDENDS AND ACCRETION ON PREFERRED STOCK (Note 7) ...................... 245 -- -- Net income (loss) available for common shareholders .............. $ 3,787 $ (3,940) $ (75) PER SHARE DATA: Earnings (loss) per common and common equivalent share before extraordinary item ............... $ .90 $ (1.47) $ (.02) Extraordinary gain per common and common equivalent share ...... -- .17 -- Earnings (loss) per common and common equivalent share .......... $ .90 $ (1.30) $ (.02) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 2(i)) ......................... 4,198,907 3,029,803 3,029,803 The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Notes Total Preferred Stock Common Stock Additional Retained Receivable Shareholders' ------------------- -------------------- Paid-In Earnings From Equity Shares Amount Shares Amount Capital (Deficit) Shareholders (Deficit) -------- -------- --------- --------- ---------- -------- ------------ ------------- BALANCES AT DECEMBER 31, 1993 ... 150,000 $ 1 2,015,718 $ 3 $ 2,265 $ 525 $ (140) $ 2,654 Stock purchase warrants issued ........................ -- -- -- -- 744 -- -- 744 Payments received from shareholders .................. -- -- -- -- -- -- 48 48 Redemption (Note 6) ........... (150,000) (1) -- -- (149) -- -- (150) Net loss ...................... -- -- -- -- -- (75) -- (75) -------- -------- --------- --------- ---------- -------- ------------ ------------- BALANCES AT DECEMBER 31, 1994 ... -- -- 2,015,718 3 2,860 450 (92) 3,221 Payments received from shareholders .................. -- -- -- -- -- -- 30 30 Net loss ...................... -- -- -- -- -- (3,940) -- (3,940) -------- -------- --------- --------- ---------- -------- ------------ ------------- BALANCES AT DECEMBER 30, 1995 ... -- -- 2,015,718 3 2,860 (3,490) (62) (689) Stock purchase warrants issued ........................ -- -- -- -- 815 -- -- 815 Conversion of warrants to common stock ............... -- -- 1,660,290 2 -- -- -- 2 Payments received from shareholders .................. -- -- -- -- -- -- 62 62 Loss on conversion of subordinated debt ............. -- -- -- -- (738) -- -- (738) Redeemable preferred stock issuance costs ................ -- -- -- -- (10) -- -- (10) Accretion of redeemable preferred stock discount ...... -- -- -- -- -- (28) -- (28) Payment of PIK dividends (Note 7) ...................... -- -- -- -- -- (217) -- (217) Net income .................... -- -- -- -- -- 4,032 -- 4,032 -------- -------- --------- --------- ---------- -------- ------------ ------------- BALANCES AT DECEMBER 28, 1996 ... -- $ -- 3,676,008 $ 5 $ 2,927 $ 297 $ -- $ 3,229 ======== ======== ========= ========= ========== ======== ============ =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994 (DOLLARS IN THOUSANDS) 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ......................... $ 4,032 $(3,940) $ (75) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation .......................... 1,291 824 435 Amortization of intangible assets ..... 699 253 192 Gain on extinguishment of debt ........ -- (500) -- Decrease (increase) in deferred income taxes ......................... (863) 78 (120) Decrease (increase) in accounts receivable ........................... 92 (614) (1,495) Decrease (increase) in inventory ...... 4,328 906 (2,945) Decrease (increase) in prepaid expenses ............................. (985) 113 (522) Decrease (increase) in income tax receivable ....................... 300 18 (318) Decrease (increase) in other noncurrent assets .................... (1,825) (20) 166 Increase (decrease) in accounts payable and accrued liabilities ...... (1,991) 3,621 1,094 Net cash provided by (used in) operating activities ............ 5,078 739 (3,588) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Velva Sheen Manufacturing Co., net of cash acquired ............... -- -- (11,735) Purchase of Plymouth Mills, Inc. .......... (20,256) -- -- Purchases of property, plant and equipment, net .......................... (1,137) (518) (528) Additional payments on prior-year asset purchase .......................... -- -- (10) Net cash used in investing activities ...................... (21,393) (518) (12,273) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings pursuant to revolving credit agreement, net ................... 2,831 1,808 9,846 Borrowings of long-term debt pursuant to credit agreement ............ 9,568 1,000 3,569 Repayments of long-term debt pursuant to credit agreement ............ (1,868) (1,409) (203) Proceeds from (repayments of) subordinated debt and stock purchase warrants ....................... 3,500 (996) 2,500 Repayment of capital lease obligations and industrial revenue bonds ........................... (379) (48) -- Payments made under non-compete agreements .............................. (84) -- -- Payments for deferred financing costs ..... (11) (5) (119) Payments received on notes receivable from shareholders ....................... 62 30 48 Issuance of common stock .................. 2 -- -- Issuance of preferred stock and related warrants ........................ 2,500 -- -- Net cash provided by financing activities ............ 16,121 380 15,641 NET INCREASE (DECREASE) IN CASH ................ (194) 601 (220) CASH AT BEGINNING OF YEAR ...................... 755 154 374 CASH AT END OF YEAR ............................ $ 561 $ 755 $ 154 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest .................... $ 3,906 $ 3,500 $ 1,434 Cash paid for income taxes (refunds received) ................ (258) (453) 648 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Capital lease financing ................... 686 377 -- Payments of PIK dividends ................. 217 -- -- Conversion of subordinated debt to preferred stock (Note 4) ........ 3,719 -- -- The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994 (1) ORGANIZATION, NATURE OF OPERATIONS AND SUBSEQUENT EVENT- (a) SUBSEQUENT EVENT--On March 14, 1997, BSI Holdings, Inc. (BSI or the Company) consummated a merger with Sun Sportswear, Inc. (Sun) (hereinafter referred to as the "Merger") whereby BSI acquired an 86% ownership interest in Sun. The Merger will be accounted for as a reverse acquisition with Sun being the surviving legal entity and BSI being the acquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in the State of Delaware under the name Brazos Sportswear, Inc. (New Brazos). As of March 14, 1997, all of the former directors and officers of Sun resigned and six directors designated by BSI became the directors of New Brazos. The current chief executive officer and vice president and chief financial officer of BSI will assume identical responsibilities for New Brazos. Sun shareholders prior to the Merger, other than Seafirst Bank (Seafirst), who elected not to retain their shares received $11.00 per share ($2.20 per share prior to the 1-for-5 reverse stock split pursuant to the Merger) for 50% of such shares and the remaining shares were converted into New Brazos common stock. Seafirst, Sun's majority shareholder prior to the Merger, received $11.00 per share ($2.20 per share prior to the 1-for-5 reverse stock split pursuant to the Merger) for 59.5% of its Sun shares in a combination of cash and a note, with its remaining shares being converted into New Brazos common stock. A preliminary summary of the Merger, pending completion of certain appraisals and analysis of the net assets acquired, utilizing March 14, 1997 balances, is as follows: (000'S OMITTED) Fair value of assets acquired, including: Accounts receivable ........................... $ 7,928 Inventories ................................... 12,994 Other current assets .......................... 2,059 Total fair value of assets acquired .............. 22,981 Less: Purchase Price: Cash ....................................... $ 4,680 Subordinated note to Seafirst .............. 1,500 Equity interest in BSI subsequent to the Merger (587,915 remaining Sun shares at $11.00 per share (2,939,574 shares at $2.20 per share on a pre-split basis)) ... 6,467 12,647 Transaction costs .......................... 1,389 Financing costs ............................ 150 Total purchase price ............................. 14,186 Liabilities assumed .............................. $ 8,795 The purchase price was financed through a combination of borrowings under Brazos' credit agreement ($6.3 million short-term, $1.0 million long-term), the issuance of BSI convertible, mandatorily redeemable preferred stock ($2.0 million), and the issuance of a subordinated debenture to Seafirst ($1.5 million). In connection with this transaction, the above proceeds were used to retire $3.0 million of the subordinated debentures payable to the seller of Plymouth. In connection with this transaction, the Company increased its credit facility to approximately $85 million (see Note 4). The credit facility includes a $73.2 million revolving line of credit. The accompanying consolidated financial statements of BSI reflect its historical results of operations prior to the Merger. (b) ORGANIZATION AND NATURE OF OPERATIONS--BSI, a Delaware Corporation, is the parent company for two wholly-owned subsidiaries: Brazos Sportswear, Inc. (Brazos), a Texas corporation, and Brazos Embroidery, Inc. (BEI), a Pennsylvania corporation. Brazos designs, manufactures and distributes sportswear for adults and children. Products manufactured and sold by Brazos under license agreements include those decorated with classic cartoon characters and collegiate logos. Brazos also markets sportswear decorated with its proprietary designs and creates garments under private labels of major retailers. In addition, Brazos distributes undecorated garments to other imprinters of sportswear. The Company had net sales of $53 million to two customers in 1996 and $29 million and $24 million to a single customer in 1995 and 1994 respectively. These amounts represented 31%, 22% and 32% of total net sales during 1996, 1995 and 1994, respectively. The accompanying consolidated balance sheets include accounts receivable of $5.4 million and $3.7 million at December 28, 1996 and December 30, 1995, respectively, due from such customers. The three largest suppliers of blank garments to the Company represented approximately 39, 59% and 51% of cost of goods sold included in the accompanying consolidated statements of operations during 1996, 1995 and 1994, respectively. Management believes that a loss of any single supplier would not significantly impact operations as alternative products are available from other sources. (2) SIGNIFICANT ACCOUNTING POLICIES- (a) PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial statements include the accounts of the Company and its two wholly owned subsidiaries, Brazos and BEI. All significant intercompany accounts and transactions have been eliminated. (b) MANAGEMENT'S USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) YEAR-END--The Company uses a 52-53 week accounting period ending on the last Saturday in December. Prior to fiscal 1995, the Company's year-end was December 31. Fiscal 1996 and 1995 each had 52 weeks. (d) REVENUE RECOGNITION--Sales are recognized when finished garments are shipped to customers from the Company's facilities. (e) INVENTORY--The Company's inventories are stated at cost, which is not in excess of market utilizing both the last-in, first-out (LIFO) method and the first-in, first-out (FIFO) method depending on the specific division location. The following is a summary of inventories at year-end, by costing method (in thousands): INVENTORY CATEGORY METHOD 1996 1995 ------------------ Blank garments LIFO $12,126 $11,074 Printed garments LIFO 1,481 3,174 13,607 14,248 Less -- LIFO reserve (182) (231) Total LIFO 13,425 14,017 Manufactured garments FIFO 2,486 1,676 Blank and printed garments FIFO 9,427 7,878 Total FIFO 11,913 9,554 Total inventory $25,338 $23,571 For financial statement purposes, the Company follows the specific identification method whereby LIFO is determined on an item-by-item basis. For federal income tax reporting purposes, LIFO is determined utilizing the dollar-value method using one homogenous pool. For federal income tax reporting purposes, the Company's LIFO inventories were as follows (in thousands): 1996 1995 Tax LIFO cost $12,710 $12,991 Book LIFO cost 13,425 14,017 Cost of goods sold reflects a LIFO credit of $49,000 in 1996, and charges of $36,000 and $4,000 in 1995 and 1994, respectively. (f) PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When properties are retired or otherwise disposed of, the cost thereof and the applicable accumulated depreciation are removed from the respective accounts and the resulting gain or loss is reflected in the consolidated statements of operations. The estimated useful life for each of the major asset categories is as follows: Land - Buildings 39 years Machinery and equipment 3-7 years Furniture and fixtures 5-7 years (g) INTANGIBLE ASSETS--Amounts paid in excess of the fair value of the tangible net assets acquired are being amortized over periods ranging from 15 to 40 years. Other intangible assets at December 28, 1996 and December 30, 1995 include non-compete agreements, deferred financing costs, licenses and copyrights. The costs of non-compete agreements are being amortized over the respective lives of the agreements (five years) using the straight-line method. The deferred financing costs are being amortized over the life of the credit facility to which they relate using a method which approximates the effective interest method. The costs of licenses are being amortized over a period of 15 years using the straight-line method. The costs of copyrights are being amortized over a period of 40 years using the straight-line method. The Company regularly evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and intangible assets acquired may warrant revisions or that the remaining balance of such costs may not be recoverable, utilizing undiscounted future cash flows. (h) ADVERTISING--The Company expenses the production cost of advertising the first time the advertising takes place, except for direct-response advertising which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalogues that include order phone numbers for the Company's products. The capitalized costs of the advertising are amortized over the year to which the catalogue relates. At December 28, 1996 and December 30, 1995, $107,000 and $176,000, respectively, of advertising was reported as an asset. Advertising expense was approximately $645,000, $930,000 and $579,000 in 1996, 1995 and 1994, respectively. (i) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE--Earnings (loss) per share is based on the weighted average number of common shares outstanding and includes the effect of the issuance of shares in connection with the assumed exercise of stock options and warrants. Such stock options and warrants were in excess of 20% of total common shares issued and outstanding for all periods presented. Earnings (loss) per share has also been computed in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 83 (SAB No. 83). SAB No. 83 requires that options and warrants granted in the twelve-month period immediately preceding a proposed public offering transaction at prices substantially less than the initial public offering price be included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented. Warrants issued in 1996 to purchase 1,014,206 shares (133,757 shares on a pre-split basis) of common stock at $.0013 per share were subject to this requirement. All share and per share information included in the accompanying consolidated financial statements has been retroactively restated for all periods presented to reflect a 37.912252-for-1 stock split and 1-for-5 reverse stock split pursuant to the Merger. (j) NEW ACCOUNTING PRONOUNCEMENTS--In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121). SFAS No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets to be disposed of in the future. The adoption of the provisions of SFAS No. 121 during the first quarter of 1996 did not have a material effect on the Company's consolidated financial condition or results of operations. (k) RECLASSIFICATIONS--Certain amounts in the 1995 consolidated financial statements have been reclassified to conform to the 1996 presentation. (3) ACQUISITIONS- (a) PLYMOUTH MILLS, INC. ACQUISITION--Effective August 2, 1996, BSI acquired certain assets and assumed certain liabilities of Plymouth Mills, Inc. ("Plymouth") for approximately $34 million. This transaction has been accounted for as a purchase with approximately $19 million of the excess of the acquisition cost over the fair value of net assets acquired being assigned to goodwill. Goodwill is being amortized over 40 years on a straight-line basis. Results of operations of Plymouth from August 2, 1996 are included in the consolidated statement of operations for the fifty-two weeks ended December 28, 1996. Pro forma operating results of BSI and Plymouth combined, assuming the acquisition had been made as of January 1, 1995 follow. Such information reflects adjustments to reflect amortization of goodwill and intangible assets acquired, changes in compensation expense to reflect compensation levels included in post-acquisition employment agreements, additional interest expense related to increased net indebtedness, additional income tax expense to reflect termination of Plymouth's S-corporation status, and dividends on additional preferred stock issued. (UNAUDITED) YEAR ENDED DECEMBER 28, DECEMBER 30, 1996 1995 (000's omitted except per share amounts) Net sales ........................ $ 195,312 $ 163,358 Net income (loss) before extraordinary items ............ 5,384 (3,977) Net income (loss) available for common shareholders ........ 4,816 (4,034) Earnings (loss) per common and common equivalent share .... 1.15 (1.33) In connection with the acquisition, assets were acquired and liabilities were assumed as follows: (000'S OMITTED) Fair value of assets acquired including: Accounts receivable ................................. $ 8,804 Inventories ......................................... 6,128 Other current assets ................................ 150 Property, plant and equipment ....................... 1,269 Intangible assets ................................... 400 Goodwill ............................................ 18,985 35,736 Less: Cash paid for net assets ......................... (18,000) $ 17,736 Liabilities assumed, including: Subordinated debt to sellers ........................ $ 10,414 Liabilities assumed and acquisition costs ........... 2,115 Earnout (for the 12-month period ended September 30, 1996) and net worth (as of August 2, 1996) payments 5,207 $ 17,736 Of the $5,207,000 earnout and net worth payments above, at December 28, 1996, the Company had an obligation outstanding to the former owners of Plymouth of $2,950,000. Pursuant to the related asset purchase agreement, the purchase price has been financed through a combination of borrowings under Brazos' revolving credit agreement ($18.6 million), the issuance of subordinated debentures in the capital markets ($3.5 million), the issuance of Brazos mandatorily redeemable preferred stock, Series A ($2.5 million), and the issuance of subordinated debentures to the seller ($10.4 million). Effective with the completion of this transaction, the seller became a member of the board of directors of the Company. The subordinated debentures due the seller consist of the following notes (000's omitted): Note bearing annual interest at 10%, maturing December 31, 1997 (i) ............... $ 3,000 Note bearing annual interest at 7.75%, maturing December 31, 2003 ................... 4,464 Note bearing annual interest at 7.75%, payable in two equal installments on March 31, 1998 and March 31, 1999 ............ 2,950 $10,414 (i) This note has been repaid as part of the Merger. The $3.5 million principal amount of subordinated debt contained detachable warrants to purchase 342,939 shares (45,228 shares on a pre-split basis) of the Company's common stock at a purchase price of $.0013 per share. The warrants were valued at $330,000 which represents the difference between the exercise price and management's estimate of the fair market value of 342,939 shares of the Company's common stock issuable pursuant to the exercise of the warrants at the date of grant. These warrants have been recorded as additional paid-in capital and were exercised during 1996 (see Note 6). The Series A mandatorily redeemable preferred stock contained detachable warrants to purchase 504,316 shares (66,511 shares on a pre-split basis) of the Company's common stock at a purchase price of $.0013 per share. The warrants were valued at $485,000 which represents the difference between the exercise price and management's estimate of the fair market value of the 504,316 shares of the Company's common stock issuable pursuant to the exercise of the warrants at the date of grant. These warrants have been recorded as additional paid-in capital and were exercised during 1996 (see Note 6). The Company also issued to the seller warrants to purchase 227,474 shares (30,000 shares on a pre-split basis) of its common stock at a purchase price of $3.96 per share. These warrants were assigned a value of zero because in the opinion of management, these warrants were granted at an exercise price which is not less than the fair value of the Company's stock at the date of grant. (b) NEEDLEWORKS, INC. ACQUISITION--On December 1, 1995, BEI acquired certain of the assets and assumed certain liabilities of Needleworks, Inc. for approximately $2.7 million. The acquisition was accounted for using the purchase method of accounting with the $357,000 excess of the acquisition cost over the fair value of net assets acquired being assigned to goodwill. Goodwill is being amortized over 15 years on a straight-line basis. The operations of BEI for the periods from December 1, 1995 have been included in the Company's consolidated statements of operations. (c) VELVA SHEEN ACQUISITION--On November 10, 1994, Brazos acquired certain of the assets and assumed certain liabilities of Velva Sheen Manufacturing Co. (Velva Sheen) from American Marketing Industries (AMI) for approximately $20 million. The acquisition was accounted for using the purchase method of accounting with the $115,000 excess of the acquisition cost over the fair value of net assets acquired being assigned to goodwill. Goodwill is being amortized over 15 years on a straight-line basis. The operations of Velva Sheen for the periods from November 10, 1994, have been included in the Company's consolidated statements of operations. (4) LONG-TERM DEBT OBLIGATIONS- Long-term obligations consist of the following: (000'S OMITTED) 1996 1995 Industrial revenue bonds, variable interest rate (5.8% at December 28, 1996), due in monthly installments of $4,166 through April, 2002 and $6,250 through April, 2007, secured by substantially all assets of BEI ....... $ 638 $ 681 Equipment note, variable interest rate of prime plus 1% (9.25% at December 28, 1996), interest payable monthly, principal due in monthly installments of $4,545 through May, 1998, secured by related equipment .......... 73 150 Term loans, variable interest rate (9% to 9.75% at December 28, 1996), interest payable monthly, principal due in monthly installments of $200,000 through August, 1999 with balance due at that time, secured by all assets of Brazos .......................... 11,200 3,500 Subordinated notes due to shareholders of BSI, fixed interest rate of 12%, interest payable quarterly, principal due in quarterly installments of $218,750 beginning 3/31/98 through maturity at 12/31/01 ............. -- 2,760 Subordinated notes due to shareholders of BSI, fixed interest rates from 10% to 12%, interest payable quarterly, principal due in quarterly installments of $47,814 beginning 3/31/98 through maturity at 12/31/02 ... -- 956 Subordinated note, fixed interest rate of 13%, interest payable monthly, principal due in quarterly installments of $250,000 beginning 9/1/01 through 8/31/03 with balance due at that time ......................... 3,176 -- Subordinated note due to former owners of Plymouth, fixed interest rate of 7.75%, interest payable quarterly, principal due upon maturity at 12/31/03 ........................ 4,464 -- Subordinated note due to former owners of Plymouth, fixed interest rate of 10%, interest payable quarterly, principal due upon maturity at 12/31/97 ........................ 3,000 -- Subordinated note due to former owners of Plymouth, fixed interest rate of 7.75%, interest payable quarterly, principal due in two equal payments of $1,475,000 on 3/31/98 and 3/31/99 .............................. 2,950 -- Capital lease obligations (net of $346,000 of interest) ..................................... 1,524 1,096 27,025 9,143 Less - current portion .......................... 3,419 2,531 Long - term obligations .......................... $23,606 $ 6,612 Brazos has a credit agreement, as amended through March 14, 1997, with a financial institution which provides for borrowings of up to approximately $85 million which is reduced by amounts borrowed pursuant to a term loan provided by the credit agreement, outstanding letters of credit and a specified percentage of outstanding documentary letters of credit. The credit agreement provides for a term loan of $11.6 million with the balance available as a revolving loan or letters of credit. Principal amounts borrowed together with interest borrowed pursuant to the revolving loan are due upon demand; however, if no demand is made, interest is payable monthly and the principal is due August 9, 1999, with an option to renew for two additional one-year periods. Amounts borrowed pursuant to the revolver bear interest at the lender's base rate, as defined, plus .5% or the lender's Eurodollar base rate, as defined, plus 2.75% or a combination of both rates. Amounts borrowed pursuant to the term loan bear interest at the lender's base rate, as defined, plus 1.5% or the lender's Eurodollar base rate, as defined, plus 3.5% or a combination of both rates. Available borrowings under the credit agreement are subject to the level of the eligible accounts receivable and inventory. At December 28, 1996, Brazos had approximately $23.5 million outstanding on its line of credit at interest rates ranging from 8.2% to 8.75% and $2.9 million in additional borrowings available pursuant to the credit agreement. The credit agreement may be terminated subject to a prepayment fee. Amounts borrowed pursuant to the credit agreement are secured by substantially all of the assets of Brazos. The credit agreement requires compliance with certain financial covenants, as defined, including a minimum adjusted net worth, debt service coverage ratio, current ratio and leverage ratio, and prohibits BSI from paying cash dividends on common stock, incurring additional debt and prepaying subordinated debt. BSI was in compliance with these provisions at yearend. Pursuant to the purchase of Plymouth in August, 1996, the Company issued subordinated debentures in capital markets of $3.5 million as well as subordinated debentures to the seller of $10.4 million. The subordinated debentures related to the $3.5 million were issued at a discount of $330,000 to give effect to the estimated fair value of warrants issued in connection with the new debt. The discount is being amortized into interest expense using the effective interest rate method during the period of issuance through the maturity date of the debt. An earnout payment to the sellers of approximately $2.95 million is reflected as a current liability as it is due upon completion of an earnout calculation, as defined in the asset purchase agreement. Effective August 8, 1996, BSI issued 4,456,000 shares of Series B mandatorily redeemable preferred stock in exchange for subordinated debt (carrying value of $3,719,000 at August 8, 1996) to all subordinated debt holders of record at BSI. BSI then forgave the subordinated debt due from its subsidiary. The resulting $737,000 loss on retirement was recorded to additional paid-in capital due to the related party nature of the transaction (see Note 7). In connection with the Needleworks, Inc. acquisition, BEI assumed Industrial Revenue Bonds (the Bonds) which bear interest at a floating weekly rate. The bonds are secured by substantially all of the assets of BEI and a bank letter of credit which expires August 15, 1998. The bank letter of credit is essentially guaranteed by another bank under a reimbursement agreement which requires BEI to make monthly principal payments. BEI has the option to establish the Bond's interest rate form (variable or fixed interest rate). When a fixed interest rate is selected, the fixed rate assigned will approximate the market rate for comparable securities. When a variable rate is selected or at the end of a fixed interest rate period, the Bondholders reserve the right to demand payment of the Bonds. In the event that any of the Bondholders exercise their rights, a remarketing agent is responsible for remarketing the Bonds on a best efforts basis for not less than the outstanding principal and accrued interest. In the event the Bonds are not able to be remarketed and borrowings on the letters of credit occur, funding through the reimbursement agreement occurs and BEI could be required to repay the debt at that time. Thus, the Bonds are classified as current debt in the accompanying consolidated balance sheets. In 1995, the Company exercised its option as part of the Velva Sheen purchase agreement to prepay subordinated debt issued to the seller whereby a discount of $500,000 was negotiated and recorded as extraordinary income. Maturities of all borrowings, exclusive of approximately $324,000 of interest remaining to be accreted pertaining to a discounted obligation, are as follows at December 28, 1996 (000's omitted): AMOUNT 1997 $26,943 1998 7,343 1999 8,309 2000 230 2001 584 Thereafter 7,464 $50,873 The revolving loan, term loans and Bonds bear interest at variable rates which approximate current rates, Accordingly, the amounts as stated for these loans approximate fair value. The fair value of the subordinated debt is based on the current rate offered for debt of the same remaining maturities. At December 30, 1995 and December 28, 1996, the estimated fair value of the Company's fixed rate debt approximated carrying value. (5) INCOME TAXES- The Company complies with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities. The provision (credit) for income taxes includes the following components (000's omitted): 1996 1995 1994 Current: Federal ............................... $ 1,370 $ (300) $ 136 State and local ....................... 282 -- 83 1,652 (300) 219 Deferred: Federal- Depreciation ....................... $ 102 $ 204 $ 32 Tax net operating loss carryforward 640 (640) -- Inventory reserves and other ....... 4 (200) (105) Accounts receivable reserves ....... (515) (228) 20 Valuation allowance ................ (1,123) 1,123 -- Other, net ......................... 193 (297) (67) (699) (38) (120) State and local ....................... (164) -- -- $ 789 $ (338) $ 99 The following is a reconciliation between the statutory federal income tax rate and the effective rate shown above (000's omitted): 1996 1995 1994 AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- ------ -------- ------ ------ ------ Computed provision (credit) for federal income taxes at the statutory rate .. $ 1,637 34% $ (1,459) 34% $ 8 34% State and local income taxes, net of federal income tax benefit ..... 118 2% -- -- 24 100% Valuation allowance (1,123) (23)% 1,123 26% -- -- Other ............. 157 3% (2) -- 67 279% $ 789 16% $ (338) 8% $ 99 413% At December 28, 1996 and December 30, 1995, the net deferred tax asset consisted of the following (000's omitted): 1996 1995 Deferred tax liabilities: Tax depreciation over book depreciation ........ $ (356) $ (227) LIFO inventory ................................. (441) (455) Intangible assets .............................. (478) (336) Other .......................................... (100) (97) (1,375) (1,115) Deferred tax assets: Inventory reserves ............................. 444 519 Inventory cost capitalization .................. 544 476 Accounts receivable reserves ................... 1,018 387 Employee benefits .............................. 203 155 Other, net ..................................... 29 448 Net operating loss carryforward ................ -- 772 Valuation allowance ............................ -- (1,123) 2,238 1,115 Net deferred tax asset ............................ $ 863 $ -- The 1995 regular tax net operating loss of approximately $2.8 million was partially utilized in 1995 to offset approximately $900,000 of taxable income from prior years as a loss carryback claim. The remainder was utilized to reduce taxable income in 1996. (6) SHAREHOLDERS' EQUITY- (a) COMMON STOCK--During 1992, the Company issued 379,123 shares (50,000 shares on a pre-split basis) of common stock to existing shareholders in exchange for cash, principal reductions of certain subordinated notes payable to shareholders and notes receivable with original principal amounts aggregating $200,000 with aggregate payments of $12,000 per quarter, plus interest, through December 31, 1996. (b) PREFERRED STOCK--On August 29, 1994, Brazos distributed its investment in another company to its shareholders to redeem its preferred stock (Series 1). (c) STOCK BASED COMPENSATION--The Company accounts for stock based compensation related to its stock option plan (discussed in Note 6(d) below) pursuant to Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, under which stock option-type awards are recorded at intrinsic value. Net income and earnings per share for 1995 and 1996, assuming compensation cost for the stock option plan had been determined at fair value, consistent with the provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION (SFAS No. 123), would have been as follows: 1996 1995 Net income (loss) (000's omitted) As reported $3,787 $(3,940) Pro forma 3,487 (4,151) Earnings (loss) per share As reported $.90 $(1.30) Pro forma .83 (1.37) Pursuant to the provisions of SFAS No. 123, in estimating the pro forma amounts, the fair value method of accounting was not applied to options granted prior to January 1, 1995. As a result, the pro forma effect on net income and earnings per share may not be representative of future years. In addition, the pro forma amounts reflect certain assumptions used in estimating fair values. The fair value of options granted was estimated as of the dates of grant using a Black-Scholes option pricing model. The weighted averages for the assumptions used in determining the fair values of options granted were as follows: 1996 1995 Risk-free interest rate 6.18% 7.49% Expected lives 5.5 yrs. 6.5 yrs. Expected common stock volatility 48.5% 48.5% As the Company had little prior history regarding its expected volatility factor, the above assumption was determined based on historical volatility factors of similar entities at corresponding points in their corporate lives. (d) EMPLOYEE STOCK OPTIONS--The Company maintains a stock option plan in which stock options may be granted to key employees and officers. Options are granted at exercise prices not less than the fair value of the Company's stock on the date of grant. Options generally vest over three years and expire 10 years from the date of grant. The total number of shares of common stock available under this plan may not exceed 454,947 shares (60,000 shares on a pre-split basis). Plan activity for 1996, 1995, and 1994 is summarized as follows: 1996 1995 1994 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE Outstanding, beginning of year 431,821 $2.95 17,136 $1.12 17,136 $1.12 Granted ........ 227,853 3.09 431,821 2.95 -- -- Exercised ...... -- -- -- -- -- -- Forfeited ...... (204,727) 2.97 (17,136) 1.12 -- -- Outstanding, end of year ..... 454,947 $3.01 431,821 $2.95 17,136 $1.12 Exercisable, end of year ............ 153,355 $2.92 7,582 $1.98 17,136 $1.12 Weighted average fair value of options granted during the year . $ 1.46 -- $ .92 -- -- -- Price ranges, along with certain other information, for options outstanding at December 28, 1996, are as follows: OUTSTANDING EXERCISABLE WEIGHTED WEIGHTED WEIGHTED EXERCISE AVERAGE AVERAGE AVERAGE PRICE EXERCISE CONTRACTUAL EXERCISE RANGE NUMBER PRICE LIFE NUMBER PRICE ------------- --------- --------- --------- --------- --------- $1.98 - $3.96 227,094 $ 2.87 8.2 yrs. 80,753 $ 1.98 $ 1.98 125,111 $ 1.98 9.3 yrs. -- -- $ 3.96 72,602 $ 3.96 9.6 yrs. 72,602 $ 3.96 $4.62 - $6.59 30,140 $ 5.61 9.7 yrs. -- -- (e) STOCK PURCHASE WARRANTS--Warrant activity for 1996, 1995 and 1994 is summarized as follows: RANGE OF EXERCISE SHARES SUBJECT PRICES PER TO WARRANTS SHARE Outstanding at January 1, 1994 55,246 $ 1.65 Granted (i) 522,029 $ .0013 Outstanding at December 31, 1994 577,275 $.0013-$1.65 Granted (ii) 124,056 $ .0013 Outstanding at December 30, 1995 701,331 $.0013-$1.65 Granted (iii), (iv) 1,292,110 $.0013-$4.62 Exercised (1,660,290) $ .0013 Outstanding at December 28, 1996 333,151 $ 1.65-$4.62 (i) In connection with the Velva Sheen acquisition, the Company issued warrants to the purchasers of its senior subordinated debt. The warrants allow the holders to purchase 522,029 shares (68,847 shares on a pre-split basis) of the Company's common stock at a purchase price of $.0013 per share. The warrants were valued at $744,000 which represents the difference between the exercise price and management's estimate of the fair market value of the 522,029 shares of the Company's common stock issuable pursuant to the exercise of the warrants at the date of grant. The warrants have been recorded as additional paid-in capital and were exercised during 1996. (ii) In connection with the Needleworks, Inc. acquisition, the Company issued warrants to the seller to purchase 124,056 shares (16,361 shares on a pre-split basis) of the Company's common stock at a purchase price of $.0013 per share. The warrants were valued at zero at the date of the acquisition. The warrants were exercised during 1996. (iii) As discussed in Note 4, warrants representing 166,950 common shares (22,018 shares on a pre-split basis) were issued to the Company's majority shareholder in January 1996. The warrants, which have an exercise price of $.0013 per share were valued at zero on the date of grant. The warrants were exercised during 1996. (iv) As discussed in Note 3(a), in connection with the acquisition of Plymouth, warrants were issued as follows: EXERCISE SHARES PRICE ------- ------- Attached to Series A preferred stock 504,316 $ .0013 Attached to subordinated debt ...... 342,939 $ .0013 Issued to the seller ............... 227,474 $ 3.96 Fee warrants ....................... 50,431 $ 4.62 The warrants shown above attached to the Series A preferred stock and the subordinated debt were exercised in 1996. In connection with the Merger (see Note 1), warrants to purchase 272,968 shares (36,000 shares on a pre-split basis) of the Company's common stock at a purchase price of $6.59 per share were issued. (7) MANDATORILY REDEEMABLE PREFERRED STOCK- Manditorily redeemable preferred stock consisted of the following at December 28, 1996 and December 30, 1995: 1996 1995 (000's omitted) BSI HOLDINGS, INC Series B--Redeemable preferred stock, $.01 par, 8,000,000 shares authorized; 4,594,991 shares issued and outstanding at December 28, 1996, redeemable at $1.00 per share ................................ $4,595 $ -- Series A-1--Redeemable preferred stock, $.01 par, 650,000 shares authorized, issued and outstanding; $598,000 and $645,000 redemption value at December 28, 1996 and December 30, 1995, respectively ................ 598 645 Series A-2--Redeemable preferred stock, $.01 par, 300,000 shares authorized, issued and outstanding; $300,000 redemption value at December 28, 1996 and December 30, 1995 ........ 300 300 BRAZOS SPORTSWEAR, INC Series A--Redeemable preferred stock, $.01 par, 5,000,000 shares authorized, 2,577,815 shares issued and outstanding at December 28, 1996, redeemable at $1.00 per share ........ 2,120 -- $7,613 $ 945 Pursuant to the Merger, BSI Holdings, Inc. Series B preferred stock will be exchanged for an equivalent number of shares of New Brazos Series B-1 preferred stock. Holders of the New Brazos Series B-1 preferred stock are entitled to receive cumulative dividends of 8% annually, payable "in-kind" (PIK) on a quarterly basis. The New Brazos Series B-1 preferred stock is redeemable at the option of New Brazos at any time, at a redemption price of $.01 per share, if the market price of a share of New Brazos common stock trades at or above $17.50 for a period of 20 consecutive trading days. The shares are subject to mandatory redemption on the earlier to occur of (i) a qualified public offering, but only to the extent the offering price per share exceeds $17.50, (ii) the consummation of a sale, as defined, or (iii) December 31, 2003, at $1.00 per share plus declared and unpaid dividends through the date of redemption. Each share of Series B-1 preferred stock is convertible at the option of the holder at any time prior to the time set for redemption into .0909 shares of New Brazos common stock. Pursuant to the Merger, BSI Holdings, Inc. Series A-1 and Series A-2 preferred stock will be exchanged for the equivalent shares of New Brazos Series A-1 and Series A-2 preferred stock, respectively. The New Brazos Series A-1 preferred shares are redeemable at any time at $.919 per share at the option of New Brazos and have a mandatory redemption date at the earlier of (i) the date of a major transaction, as defined, (ii) a qualified public offering, or (iii) the later of the date all of the shares of New Brazos convertible preferred stock are redeemed or converted or December 31, 2003. The preferences, rights and limitations associated with the New Brazos Series A-2 preferred stock are identical to those in respect of the New Brazos Series A-1 preferred stock, except that the redemption price is $1.00 per share. The New Brazos Series A-1 and A-2 preferred stock are not convertible. Prior to the Merger, Brazos Series A preferred stock will be exchanged for equivalent shares of BSI Series B-2 preferred stock, which stock, pursuant to the Merger, will be exchanged for equivalent shares of New Brazos Series B-2 preferred stock. The preferences, rights and limitations associated with the New Brazos Series B-2 preferred stock are identical to those in respect of the New Brazos Series B-1 preferred stock, except such stock will have voting rights similar to holders of New Brazos common stock based on the number of shares of New Brazos common stock into which it is convertible and such shares have a redemption and liquidation preference over the New Brazos Series B-1 preferred stock. As discussed in Note 3(a), the Brazos Series A preferred stock was issued with detachable warrants to purchase 504,316 shares (66,511 shares on a pre-split basis) of the Company's common stock at a purchase price of $.0013 per share. The Brazos Series A preferred stock has been issued at a discount of $485,000 to give effect to the estimated fair value of the stock purchase warrants. The discount is being amortized into retained earnings, essentially as dividends, using the effective interest method during the period of issuance through the mandatory redemption date of December 31, 2003. (8) EMPLOYEE BENEFIT PLANS- (a) EMPLOYEES' 401(K) PLAN--In January 1994, the Company adopted a 401(k) savings plan (the Plan) covering substantially all employees. Under the Plan, the Company will match 50% of employee contributions, up to 6% of compensation, for employees with annual compensation of $75,000 or less. Contributions by employees earning $75,000 or more are not matched by the Company. During 1996 and 1995, the Company contributed $123,000 and $159,000, respectively, pursuant to the Plan. (b) DEFINED BENEFIT PENSION PLAN--Certain Velva Sheen division employees covered by a collective bargaining agreement participate in a defined benefit plan. The benefits to eligible employees are based primarily on years of service. The Company's policy is to contribute at least the amount required by the Employee Retirement Income Security Act of 1977 as determined by consulting actuaries. The assets of this plan are invested primarily in mutual funds. The following sets forth the net periodic pension cost, the status of the defined benefit plan and the assumptions used in computing this information (000's omitted): 1996 1995 1994 Service cost .................... $ 33 $ 25 $ 4 Interest cost ................... 90 79 14 Actual loss (return) on plan assets ................... (129) (161) 6 Net amortization and deferral ... 32 57 (24) Total net periodic pension cost .................... $ 26 $ -- $ -- Actuarial present value of benefit obligations: Vested benefit obligation .... $ (1,362) $ (1,207) -- Non-vested benefit obligation (15) (38) -- Accumulated benefit obligation .. (1,377) (1,245) -- Plan assets at fair value ....... 1,545 1,498 -- Plan assets in excess of projected benefit obligation 168 253 -- Unrecognized net loss ........... 177 118 -- Prepaid pension cost ......... $ 345 $ 371 -- The actuarial assumptions were: 1996 1995 1994 Discount rate 6.75% 7.0% 7.75% Rate of return on assets 7.5% 7.5% 7.5% The Company does not offer post-retirement benefits (other than the defined benefit pension plan described above) or post-employment benefits to its employees. (9) COMMITMENTS AND CONTINGENCIES- (a) LEASES--The Company leases various office and warehouse facilities and equipment from both related and unrelated parties under noncancellable operating leases. The Company leases office space from two of BSI's shareholders. In addition, the Company leases an office and manufacturing facility from one of BSI's directors. The Company also has two leases for facilities in College Station, Texas, with a partnership which is controlled by certain shareholders of BSI. The Company is obligated to pay all applicable taxes and insurance expenses pursuant to the terms of all of these leases. Future minimum lease payments under noncancellable operating leases with initial or remaining terms of one year or more at December 28, 1996, are as follows (000's omitted): RELATED UNRELATED PARTIES PARTIES 1997 $ 417 $1,281 1998 417 1,266 1999 405 936 2000 462 652 2001 362 333 Thereafter 190 26 $2,253 $4,494 Total lease expense recorded during 1996, 1995 and 1994 was approximately $1,932,000, $1,713,000 and $793,000, respectively, of which $347,000, $258,000 and $266,000, respectively, was to related parties. (b) EMPLOYMENT AND NON-COMPETE AGREEMENTS--The Company has entered into employment and non-compete agreements with certain key employees providing for payment of salaries and incentive compensation up to a specified maximum amount of incentive compensation. Such employment and non-compete agreements expire at various times through December 31, 2001. The minimum payments for salaries to be made under these agreements subsequent to December 28, 1996 are $1,092,000 in 1997, $1,100,000 in 1998 and $672,000 in 1999. During 1996, 1995 and 1994, respectively, compensation expense recognized by the Company pursuant to such employment and non-compete agreements was $1,010,000, $416,000 and $489,000, including incentive compensation. (c) PURCHASES OF INVENTORY--The Company has agreements with vendors to purchase garments used in production. The most restrictive agreements have noncancellable provisions which bind the Company to purchase all garments scheduled to be shipped within 60 days. At December 28, 1996, the Company was committed to purchase approximately $5 million under such agreements. EX-99.2 3 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The unaudited pro forma condensed combined financial statements have been derived from the financial statements of BSI Holdings, Inc. (BSI), Plymouth Mills, Inc. (Plymouth) and Sun Sportswear,Inc. (Sun) and are presented to show (1) the acquisition of Plymouth by BSI as of August 2, 1996 and (2) the merger, via a reverse acquisition, of Sun. These acquisitions are accounted for under the "purchase" method of accounting whereby the purchase price is allocated based on the fair value of the assets acquired and the liabilities assumed. The financial information presented herein shall include BSI financial information as of and for the year ended December 28, 1996. The unaudited pro forma condensed combined statement of operations for BSI and Plymouth Combined for the year ended December 28, 1996, gives effect to the acquisition of Plymouth by BSI as if the acquisition had occurred on December 31, 1995. Pro forma adjustments include: (i) adjustments to reflect compensation levels included in post-acquisition employment agreements, (ii) expenses incurred in connection with non-compete agreements, (iii) additional depreciation and amortization resulting from the allocation of the purchase price to fixed assets, other intangible assets and goodwill, (iv) additional interest expense related to debt incurred in connection with the Plymouth acquisition, (v) incremental tax effects of the pro forma adjustments including the termination of Plymouth's S Corporation status and (vi) dividends and accretion on additional preferred stock. The unaudited pro forma condensed combined statement of operations for the period above also gives effect to the merger of BSI with and into Sun, by virtue of a reverse acquisition. Pro forma adjustments include: (i) reductions in depreciation for the writedown of property, plant and equipment as well as amortization of negative goodwill from applying purchase accounting, (ii) amortization of deferred financing fees, (iii) additional interest expense for the merger related debt, (iv) incremental tax effects of the pro forma adjustments and benefits associated with Sun's operating loss and (v) dividends and accretion on additional preferred stock. The unaudited pro forma condensed combined balance sheet gives effect to the merger of BSI with and into Sun by virtue of a reverse acquisition as if such transaction occurred on December 28, 1996. The unaudited pro forma condensed combined balance sheet of BSI as of December 28, 1996, includes the acquired assets and liabilities of Plymouth and the related purchase accounting adjustments, since this transaction occurred on August 2, 1996. Pro forma adjustments include: (i) a write-down of Sun's inventories to reflect BSI's plans to more aggressively reduce the level of inventory, reduce certain types and styles of inventory and to conform with BSI's accounting policies and procedures, (ii) purchase accounting entries to write-off property, plant and equipment and record negative goodwill, (iii) the issuance of debt and repayment of certain debt obligations as a result of and concurrent with the merger, (iv) certain deferred financing fees and (v) the proceeds from the issuance of BSI preferred stock and related common stock purchase warrants. The following is a summary of the sources and uses of cash related to the completion of the merger: (In thousands) Sources: Borrowings under BSI credit facilities: Revolver ............................ $ 6,268 Term note............................ 1,000 Subordinated Note issued to Seafirst........ 1,500 --------- Subtotal - debt ..................... 8,768 Issuance of BSI preferred stock ............ 2,000 --------- Total Sources ....................... $ 10,768 ========= Uses: Cash paid for Sun Common Stock ............. $ 4,680 Subordinated Note issued to Seafirst........ 1,500 Retirement of BSI indebtedness ............. 3,000 Transaction costs........................... 1,451 Financing costs ............................ 137 --------- Total Uses .......................... $ 10,768 ========= The actual acquisition entries are subject to the completion of appraisals, evaluations and estimates of fair value, which are not currently complete, and may differ substantially from the pro forma adjustments. Potential additional operating synergies available in the future are not reflected. For example, elimination of specific Sun personnel in connection with the merger is expected to reduce annual compensation costs by approximately $2.2 million. This savings is not reflected in the accompanying pro forma statements. The pro forma results are not indicative of the results of operations had the acquisitions taken place at the beginning of the respective periods or of future results of the combined companies, primarily because both the Plymouth and Sun acquisitions and related purchase prices were based on financial terms and conditions that existed on the acquisition dates, and not as of the beginning of the respective periods discussed above. Brazos Sportswear, Inc. Pro Forma Condensed Combined Statement of Operations for the Year Ended December 28, 1996 (Unaudited) (Dollars in Thousands, Except Per Share Amounts)
BSI and Pro Forma Plymouth Sun BSI (1) Plymouth (2) Adjustments Combined Sportswear -------- -------- ----------- -------- ------- Net sales $169,452 $25,860 - $195,312 $65,535 Cost of goods sold 127,845 16,707 - 144,552 57,680 -------- -------- ----------- -------- ------- Gross profit 41,607 9,153 - 50,760 7,855 Operating expenses 32,529 4,636 605 (3) 37,770 13,151 -------- -------- ----------- -------- ------- Operating income (loss) 9,078 4,517 (605) 12,990 (5,296) Other (income) expense: Interest expense 4,491 165 1,517 (4) 6,173 584 Other, net (234) 62 - (172) (37) -------- -------- ----------- -------- ------- Income (loss) before provision for income taxes 4,821 4,290 (2,122) 6,989 (5,843) Provision (credit) for income taxes 789 434 455 (5) 1,678 (7) -------- -------- ----------- -------- ------- Net income (loss) 4,032 3,856 (2,577) 5,311 (5,836) Dividends and accretion on preferred stock 245 - 367 (6) 612 - -------- -------- ----------- -------- ------- Net income (loss) available for common shareholders $3,787 $3,856 ($2,944) $4,699 $(5,836) ======== ======== =========== ======== ======= Per share data (a): Primary earnings per share $0.90 ($1.02) ======== ======= Weighted average common and common equivalent shares outstanding: Primary 4,198,907 5,748,500 ======== ======= Pro Forma Pro Forma Combined Adjustments Company ----------- --------- Net sales - $260,847 Cost of goods sold (6,830)(7) 195,402 ----------- --------- Gross profit 6,830 65,445 Operating expenses 2,933 (8) 53,854 ----------- --------- Operating income (loss) 3,897 11,591 Other (income) expense: Interest expense 467 (9) 7,224 Other, net - (209) ----------- --------- Income (loss) before provision for income taxes 3,430 4,576 Provision (credit) for income taxes (982)(10) 689 ----------- --------- Net income (loss) 4,412 3,887 Dividends and accretion on preferred stock 319 (11) 931 ----------- --------- Net income (loss) available for common shareholders $4,093 $2,956 =========== ========= Per share data (a): Primary earnings per share $0.62 ========= Weighted average common and common equivalent shares outstanding: Primary 4,786,834 =========
(a) Fully-diluted earnings per share is not presented because the effect would be anti-dilutive. Brazos Sportswear, Inc. Pro Forma Condensed Balance Sheet As Of December 28, 1996 (Unaudited) (Dollars In Thousands)
BSI Sun Pro Forma Pro Forma Adjustments Combined ------- -------- -------- -------- Assets Current Assets: Cash $ 561 $ 84 -- $ 645 Accounts receivable, net 22,118 7,181 -- 29,299 Inventories 25,338 15,760 (768)(1) 40,330 Prepaids 1,786 848 -- 2,634 Deferred income taxes 1,797 20 -- 1,817 Federal income tax receivable -- 1,034 -- 1,034 ------- -------- -------- -------- Total current assets 51,600 24,927 (768) 75,759 Property, plant and equipment, net 6,873 3,492 (3,492)(2) 6,873 Intangible assets, net 23,269 -- -- 23,269 Other assets 940 15 137 (3) 1,092 ------- -------- -------- -------- Total assets $82,682 $ 28,434 ($ 4,123) $106,993 ======= ======== ======== ======== Liabilities and Shareholders' Equity Current liabilities: Borrowings pursuant to revolving credit agreement $23,524 $ 2,961 $ 6,268 (4) $ 32,753 Current portion of other debt 3,419 -- 200 (4) 3,619 Payable to former owners of Plymouth Mills, Inc. 2,950 -- -- 2,950 Accounts payable and accrued liabilities 17,040 5,271 -- 22,311 ------- -------- -------- -------- Total current liabilities 46,933 8,232 6,468 61,633 ------- -------- -------- -------- Noncurrent liabilities: Long-term debt, net of current maturities 23,606 -- (700)(4) 22,906 Deferred income taxes 934 20 -- 954 Negative goodwill -- -- 1,683 (2) 1,683 Other liabilities 367 -- 141 (7) 508 ------- -------- -------- -------- Total noncurrent liabilities 24,907 20 1,124 26,051 ------- -------- -------- -------- Convertible mandatorily redeemable preferred stock 7,613 -- 956 (6) 8,569 ------- -------- -------- -------- Shareholders' equity: Common stock 5 21,618 (21,619)(5) 4 Additional paid-in capital 2,927 -- 7,512 (5)(6) 10,439 Retained earnings (deficit) 297 (1,436) 1,436 (5) 297 ------- -------- -------- -------- Total shareholders' equity 3,229 20,182 (12,671) 10,740 ------- -------- -------- -------- Total liabilities and shareholders' equity $82,682 $ 28,434 $ (4,123) $106,993 ======= ======== ======== ========
Notes to Pro Forma Condensed Combined Balance Sheet as of December 28, 1996 (Unaudited) Note Description (1) To reflect BSI's business plan to reduce inventory levels and the number of inventory types and styles to levels commensurate with BSI's expectation for Sun's sales levels. It is expected that the reduction in inventory levels will be accomplished partially through the sale of inventory during "off season" periods at substantially reduced margins, and at times, below original purchase cost. (2) To reflect the net effects of the merger based on the application of purchase accounting. Since the purchase price is less than the fair market value of the net assets acquired, net equipment and leasehold improvements of $3,492 are written down to zero and the remaining deficiency, after giving effect to estimated transaction costs of $1,451, is recorded as negative goodwill. This adjustment also includes the impact of entry no. 1. (3) To record the effects of financing costs expected to be incurred as a result of and concurrent with the Merger. (4) To record a $ 5,768 net increase in debt from the issuance of $11,729 of debt net of repayment of $5,961 of certain debt obligations as a result of and concurrent with the merger. (5) Shareholders' equity accounts reflect the net amount of common stock outstanding after consummation of the merger of 587,927, excluding 58,050 shares issuable upon the exercise of stock options, at $11.00 per share, and the effect of changing the par value of Sun's historical common stock of zero to $.001 as a result of and concurrent with the merger. Additional paid-in capital also includes $1,044 related to the fair value allocated to the common stock purchase warrants associated with the additional preferred stock issued. (6) To record the issuance of $2,000 face amount of preferred stock. Such preferred stock will be recorded at a discount to give effect to the allocation of a portion of the proceeds ($1,044) to the detachable common stock purchase warrants. (7) To record the accrual of directors and officers insurance related to the former directors and officers of Sun who were terminated concurrent with the merger. (8) Reflects the net impact of the above entries, as follows: Entry Amount Description ----- ------ ------------------------------ (3) ($137) Financing fees (2) (4,680) Cash paid for Sun common stock (4) (1,500) Subordinated note to Seafirst (2) (1,451) Transaction costs (4) 5,768 Net increase in debt (5), (6) 2,000 Issuance of preferred stock and common stock purchase warrants ----- $0 ===== Notes to Pro Forma Condensed Combined Statement of Operations for the Year Ended December 28, 1996 (Unaudited) Note Description - ---- ----------- General (1) Includes the results of operations of Plymouth from the date of acquisition, August 2, 1996, through December 28, 1996. (2) Includes the results of operations of Plymouth from January 1, 1996, to the date of acquisition, August 2, 1996. Plymouth Acquisition Adjustments (3) $104 Additional compensation to reflect compensation levels included in post-acquisition employment agreements. 35 Amortization of non-compete agreements of $300 over a five-year period. 277 Amortization of goodwill of $18,985 over a 40-year period. 177 Amortization of deferred financing costs of $987 over the lives of the related debt obligations. 8 Amortization of intangible assets acquired over periods ranging from 15 to 40 years. 4 Additional depreciation of fixed assets based on their post- acquisition allocated fair value. ------ $605 ====== (4) $1,517 Net increase in interest expense related to increased net ====== indebtedness of $28,004 at a weighted average annual interest rate of 8.6%. (5) $455 Incremental income tax effect of the above pro forma adjustments ====== and termination of Plymouth's S-Corporpation status at a 41% effective tax rate. (6) $329 Dividends on additional preferred stock issued at a compounding dividend rate of 8%. 38 Accretion of discount related to fair value allocated to common stock purchase warrants. ------ $367 ====== Sun Acquisition Adjustments (7) $(5,917) Reclassification of royalty expense to operating expenses to conform with BSI's financial reporting practices. (913) Elimination of Sun depreciation expense for the write-off of net equipment and leasehold improvements resulting from the application of purchase accounting. ------- $(6,830) ======= (8) $ 5,917 Reclassification of royalty expense from cost of goods sold to conform with BSI's financial reporting practices. (810) Elimination of Sun depreciation expense for the write-off of net equipment and leasehold improvements resulting from the application of purchase accounting. (956) Elimination of pre-merger acquisition expenses incurred by Sun. (1,222) Elimination of compensation, benefits and severance related to officers whose employment was terminated concurrent with the merger. 46 Amortization of deferred financing costs of $137 over a three-year period. (42) Amortization of negative goodwill of $1,683 over a 40-year period. ------ $2,933 ====== (9) $467 Net increase in interest expense related to increased net ====== indebtedness of $5,768. (10) $(982) Incremental income tax effect of the above pro forma adjustments ====== and benefit related to Sun's operating losses. (11) $165 Dividends on additional preferred stock issued at a compounding dividend rate of 8%. 154 Accretion of discount related to fair value allocated to common stock purchase warrants. ------ $319 ====== -----END PRIVACY-ENHANCED MESSAGE-----