-----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, NQNYa5/IhxxtnlJLxmEuR+88zPhgSb6req7fQTSoTLHlw8FpPw/QfYRMn5U9HjcI laYZRr3TODEmETIAcVWrXA== 0000890566-97-001704.txt : 19970805 0000890566-97-001704.hdr.sgml : 19970805 ACCESSION NUMBER: 0000890566-97-001704 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970804 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: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-31345 FILM NUMBER: 97651167 BUSINESS ADDRESS: STREET 1: 3860 VIRGINIA AVE CITY: CINCINNATI STATE: OH ZIP: 45227 BUSINESS PHONE: 5132723600 MAIL ADDRESS: STREET 1: 3860 VIRGINIA AVE CITY: CINCINNATI STATE: OH ZIP: 45227 FORMER COMPANY: FORMER CONFORMED NAME: SUN SPORTSWEAR INC DATE OF NAME CHANGE: 19920703 S-4/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August 4, 1997 REGISTRATION NO. 333-31345 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BRAZOS SPORTSWEAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ 2396 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) DELAWARE 91-1770931 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 3860 VIRGINIA AVENUE CINCINNATI, OHIO 45227 (513) 272-3600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES) F. CLAYTON CHAMBERS CHIEF FINANCIAL OFFICER BRAZOS SPORTSWEAR, INC. 3860 VIRGINIA AVENUE CINCINNATI, OHIO 45227 (513) 272-3600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ WITH A COPY TO: RICHARD L. WYNNE PORTER & HEDGES, L.L.P. 700 LOUISIANA, 35TH FLOOR HOUSTON, TEXAS 77002-2764 (713) 226-0600 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment, please check the following box. [ ] If any of the securities being registered on this form are to be offered in connection with the termination of a holding company and there is compliance with General Instruction G, check the following box. [ ] CALCULATION OF REGISTRATION FEE
======================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF CLASS OF SECURITIES AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PER UNIT(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------ 10 1/2% Senior Notes Due 2007.......... $100,000,000 100% $100,000,000 $30,304(2) ========================================================================================================================
(1) Calculated in accordance with Rule 457(f)(2) under the Securities Act of 1933. (2) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ PROSPECTUS BRAZOS SPORTSWEAR, INC. OFFER TO EXCHANGE ALL OF ITS OUTSTANDING 10 1/2% SENIOR NOTES DUE 2007 FOR 10 1/2% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 4, 1997, UNLESS EXTENDED. Brazos Sportswear, Inc., a Delaware corporation (the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal") relating to the Exchange Offer, to exchange $1,000 principal amount of its 10 1/2% Senior Notes due 2007 (the "Exchange Notes"), which has been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which this Prospectus is a part, for $1,000 principal amount of its outstanding 10 1/2% Senior Notes due 2007 (the "Notes"), of which an aggregate of $100,000,000 in principal amount is outstanding as of the date of this Prospectus. The form and terms of the Exchange Notes are identical in all material respects to the form and terms of the Notes. Interest on the Exchange Notes will be payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1998. The Company will not be required to make any mandatory redemption or sinking fund payments with respect to the Exchange Notes before maturity. The Exchange Notes are redeemable on or after July 1, 2002 at the option of the Company, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, to the date of redemption. In addition, at any time on or before July 1, 2000, the Company may redeem up to 35% of the aggregate principal amount of the Exchange Notes originally issued with the net proceeds of one or more Public Equity Offerings (as defined herein), at a redemption price of 110.5% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, provided that after giving effect to such redemption at least $65 million of the aggregate principal amount of the Exchange Notes originally issued remain outstanding. If a Change of Control (as defined herein) occurs, holders of the Exchange Notes will have the right to require the Company to purchase their Exchange Notes, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. There can be no assurance that the Company will have the financial resources necessary to purchase the Exchange Notes if a Change of Control occurs. The Exchange Notes will be senior unsecured obligations of the Company and will be unconditionally guaranteed on a senior unsecured basis (the "Subsidiary Guarantees") by the Subsidiary Guarantors (as defined herein). The Exchange Notes and each Subsidiary Guarantee will rank PARI PASSU with all other unsecured and unsubordinated indebtedness of the Company and the applicable Subsidiary Guarantor, respectively, but will be effectively subordinated to secured indebtedness of the Company and the Subsidiary Guarantors. As of July 2, 1997, the Company and the Subsidiary Guarantors had (i) no unsecured and unsubordinated indebtedness outstanding other than the Notes and (ii) $30.8 million of secured indebtedness outstanding. Subject to certain limitations, the Company and its subsidiaries (including the Subsidiary Guarantors) may incur additional secured and unsecured indebtedness. The Company will accept for exchange any and all validly tendered Notes on or prior to 5:00 p.m., New York City time, on September 4, 1997, unless extended (if and as extended, the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer." The Exchange Notes are being offered hereunder in order to satisfy certain obligations of the Company contained in the Registration Rights Agreement (as defined herein). Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to third parties, the Company believes the Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than broker-dealers, as set forth below, and any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's business and that such holder has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. Any holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes or who is an affiliate of the Company may not rely upon such interpretations by the staff of the Commission and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Holders of Notes wishing to accept the Exchange Offer must represent to the Company in the Letter of Transmittal that such conditions have been met. Each broker-dealer (other than an affiliate of the Company) that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Any broker-dealer who is an affiliate of the Company may not rely on such no-action letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. The Company will not receive any proceeds from this Exchange Offer. No dealer-manager is being used in connection with this Exchange Offer. SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE TENDERING NOTES IN THE EXCHANGE OFFER. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Prospectus is August 6, 1997. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-4 (No 333-31345) under the Securities Act, with respect to the Exchange Notes offered hereby (the "Registration Statement"). This Prospectus does not contain all the information set forth in the Registration Statements and the exhibits and schedules thereto. For further information with respect to the Company and the Exchange Notes, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements made in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, is on file at the offices of the Commission and may be inspected without charge. Copies of such material may be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. The Registration Statement (with exhibits), as well as such reports, proxy statements and other information, can be inspected and copied at the public reference facilities maintained by the Commission at (i) its principal offices at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, (ii) its regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601 and 7 World Trade Center, 13th Floor, New York, New York 10007, and (iii) its site on the World Wide Web at http://www.sec.gov. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Company's common stock is listed on the National Market tier of the Nasdaq Stock Market, Inc. ("Nasdaq") and material filed by the Company can be inspected at the offices of Nasdaq at 1735 K Street, N.W., Washington, D.C. 20006. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCE TO THE "COMPANY" REFERS TO BRAZOS SPORTSWEAR, INC. AND ITS CONSOLIDATED SUBSIDIARIES, OR BSI HOLDINGS, INC. ON A HISTORICAL BASIS PRIOR TO ITS MERGER WITH SUN SPORTSWEAR, INC. EFFECTIVE MARCH 14, 1997 (SEE "THE COMPANY -- ACQUISITIONS -- SUN SPORTSWEAR, INC."). PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS" PRIOR TO MAKING AN INVESTMENT IN THE EXCHANGE NOTES. THE COMPANY The Company is a leading designer, manufacturer and marketer of decorated sportswear in the United States. The Company offers extensive and diversified product lines of licensed, proprietary and private label sportswear consisting of T-shirts, fleecewear (sweatshirts) and other casual apparel products. Many of the Company's licensed products include creative enhancements of classic cartoon characters, including Disney's Mickey Mouse, Disney's Winnie the Pooh and various Warner Bros. Looney Tunes characters such as Bugs Bunny and the Tasmanian Devil. The Company has entered into license agreements with Disney Enterprises, Inc. ("Disney"), Warner Bros., Chic by H.I.S., Major League Baseball and most major colleges for the use of their characters and logos in developing the Company's products. The Company uses its in-house merchandising, design and art staff to create innovative designs for the Company's proprietary product lines under numerous Company-owned brand names and labels, including Brazos Sportswear, Morning Sun, Top Stitch and Thank Goodness for Kids. In addition, the Company designs private label products for its larger retail customers that are sold under particular customers' labels. The Company sells its products to a diverse customer base including (i) department stores such as J.C. Penney, May Co., Federated Department Stores and Mercantile, (ii) mass merchandising stores such as Wal-Mart, Kmart and Target, (iii) specialty stores such as Kids "R" Us and Garden Ridge and (iv) other regional and national retail chains. The Company believes it maintains a competitive advantage because of several factors, including its (i) extensive and diversified lines of licensed, proprietary and private label products, (ii) award winning in-house merchandising and design staff, (iii) unique sales and marketing programs tailored to the needs of specific customers and markets, (iv) diverse customer base, (v) flexible and efficient manufacturing capabilities and (vi) commitment to a low cost structure. The Company believes growth in the decorated sportswear market may result from: (i) an increased preference for comfortable apparel selections; (ii) more flexible dress codes, including greater acceptance of casual wear in the workplace; (iii) a heightened emphasis on physical fitness including increased participation in sports; (iv) improved characteristics that have enhanced consumer appeal, including improvements in fabric weight, blends and construction, and increased offerings of size, color and style; (v) the enhancement of screenprinted graphics and embroidered designs primarily resulting from more advanced manufacturing equipment and processes; and (vi) the increased use of "attitude" apparel. For example, the Company believes that more people are using apparel as a way to express themselves or show affinity with a group, cause or idea. The Company believes that these trends should continue to drive industry growth. BUSINESS STRATEGY The Company intends to enhance its market position and to increase its net sales by pursuing the following business strategies: EXTENSIVE LINES OF QUALITY PRODUCTS. The Company offers extensive and diversified product lines of licensed, proprietary and private label products. Licensed products are decorated with classic cartoon characters and logos that the Company's artists vary and refine using different lettering, poses, activities or dress. The Company develops its proprietary product lines for its exclusive use under numerous Company- 3 owned brand names and labels. The Company also designs private label product lines by working closely with its larger retail customers to create unique decorated sportswear lines that are sold under particular customers' labels. The Company believes its extensive and diversified product lines position it well to capitalize on retailers' desire to reduce the number of suppliers in order to minimize purchasing and administrative costs. INNOVATIVE MERCHANDISING AND DESIGN STAFF. The Company employs 14 in-house merchandising and design personnel and a staff of approximately 70 artists who work closely with customers to create innovative designs for the Company's sportswear lines. The Company's award winning merchandising and design staff has been recognized for its achievements by licensors and customers, and has received a number of awards, including the Graphic Excellence Award from Disney, the Vendor of the Year Award from J.C. Penney's Women's Department, the Bugsy Award from Warner Bros. and the Vendor of the Year Award for Girls 4-14 from Target. UNIQUE COMBINATION OF SALES AND MARKETING PROGRAMS. The Company uses a unique combination of sales and marketing programs designed to address the differing needs of its diverse customer base. Key sales programs include: BOOKING PROGRAM. The Company works with its larger retail customers to custom design and merchandise a spring and fall product line of "fashion-basic," longer lead time products. The Company books orders under this program prior to committing to overseas production. Production lead times vary by product but typically range from 60 to 120 days. CALENDAR GRAPHICS PROGRAM. The Company offers a calendar graphics program designed to provide customers with an extensive selection of graphics and a wide variety of garments and size mixes but with shorter lead times than under the booking program. Under the calendar graphics program, graphics designs are printed and available on a pre-scheduled basis throughout the year. The Company batches orders from numerous customers to gain production economies of scale to keep product costs competitive. Production lead times generally range from three to four weeks. SHELF STOCK PROGRAM. The Company also offers a shelf stock program that consists of preprinted inventory it delivers to customers on short lead times, typically within five days of receipt of an order. Products are sold through this program by approximately 100 independent sales representatives who call on individual customer stores. In addition, the Company uses an electronic data interchange system ("EDI") through which customers place orders to replenish their stock with weekly shipments of products that are selling well. The Company's marketing programs have enabled it to improve sales and more efficiently manage its inventory, production, distribution and other costs while providing its customers with exceptional service and support. DIVERSE CUSTOMER BASE. Unlike many of the Company's competitors that concentrate marketing efforts on a limited segment of the sportswear market, the Company sells its decorated sportswear products to a diverse customer base including department stores, mass merchandising stores and specialty and other stores. This marketing strategy allows the Company to cover a large portion of the retail market while reducing its exposure to any one market segment. In addition, the Company believes that the breadth of its customer base provides a competitive advantage in obtaining new licenses from licensors seeking to introduce their products through multiple distribution channels. EXPANSION AND ENHANCEMENT OF CUSTOMER RELATIONSHIPS. The expansion of the Company's product lines and license portfolio has provided significant cross-selling opportunities by increasing the number of departments within a retailer that may sell the Company's products. For example, the Company is targeting sales of its women's sportswear to retail customers that traditionally have sold only the Company's men's and boys' sportswear. In addition, the Company maintains a staff of 14 in-house account executives and 4 approximately 100 independent sales representatives to pursue additional large customers. The Company also has established a telemarketing program to market its products to local and regional retailers. FLEXIBLE AND EFFICIENT MANUFACTURING. Many of the Company's competitors do not operate production facilities of their own and, therefore, must contract with third parties to provide the value-added decorating process. The Company believes that operating its own production facilities provides the Company with a competitive advantage through (i) increased manufacturing and production efficiencies, (ii) the flexibility to shift production among various facilities and (iii) better control over quality, delivery and costs. In addition, the Company's shelf stock and calendar graphics programs could not be implemented as effectively without in-house production capabilities. COMMITMENT TO LOW COST STRUCTURE. The Company is committed to controlling costs and improving operating efficiencies. The Company's recent acquisitions have resulted in significant improvements in the Company's purchasing power and its ability to realize certain economies of scale associated with manufacturing, marketing, distribution and administration. In addition, the Company concentrates on the high value-added production processes of custom design, screen printing and embroidery at its manufacturing facilities and outsources the capital intensive process of manufacturing undecorated garments ("blank garments") to a network of domestic and foreign manufacturers. This outsourcing allows the Company to maintain flexibility, low fixed costs and low levels of capital expenditures. INTERNATIONAL OPPORTUNITIES. The Company recently obtained a license from Walt Disney Enterprises of Japan, Ltd. to export and distribute Disney's classic cartoon character products directly to Japan, and the Company believes that it is the only domestic sportswear manufacturer to hold such a license. The Company's current marketing plans include sales to several major retail outlets in Japan representing approximately 3,000 stores. The Company is also evaluating opportunities to sell its products in other countries. STRATEGIC ACQUISITIONS. The Company maintains an acquisition strategy focused on acquiring businesses that provide products or services that complement those offered by the Company. The criteria for identifying an attractive acquisition candidate is not limited to the revenue potential of the acquisition target, but also include such factors as (i) expanding the Company's product lines, (ii) increasing manufacturing, production and other cost efficiencies, (iii) diversifying and expanding the Company's customer base and (iv) gaining access to the talents of key management, sales and design personnel. The Company has made eight acquisitions since 1989 that have brought significant strategic advantages to its business. RECENT ACQUISITIONS In July 1997, the Company acquired all the outstanding capital stock of SolarCo, Inc., the parent of Morning Sun, Inc. ("Morning Sun") for (i) $29.3 million in cash (the "Morning Sun Cash Consideration"), (ii) 73,171 shares of the Company's common stock and (iii) the assumption of certain indebtedness and contractual obligations of Morning Sun. Morning Sun is a leading designer, manufacturer and marketer of moderately-priced imprinted and embroidered tops for women age 40 and over. Morning Sun sells its products under proprietary brand names and various private labels to (i) major department store chains such as J.C. Penney, May Co. and Federated Department Stores, (ii) catalogue companies such as Orvis and National Wildlife Federation and (iii) specialty stores. The Company used a portion of the proceeds of the Note Offering (defined herein) to fund the Morning Sun Cash Consideration and repay the assumed indebtedness and contractual obligations. Also in July 1997, the Company acquired all the assets of Premier Sports Group, Inc. ("Premier") for (i) $2.0 million in cash (the "Premier Cash Consideration"), (ii) a $1.5 million non-interest bearing subordinated note due 2004, that is convertible into and payable only through the issuance of 136,364 shares of the Company's common stock, (iii) a 7%, seven-year, subordinated "earnout" obligation in the principal amount of $4.0 million and (iv) the assumption of certain indebtedness of Premier. Premier is an 5 importer of high quality, low cost "fashion fleece" and other garments for domestic distributors and provides merchandising, design and sourcing services for apparel companies, including the Company. Through established relationships with overseas manufacturing and production facilities, principally in the Far East, Premier purchases blank garments in large quantities at prices that are typically lower than those charged by domestic mills for similar products. In addition, apparel makers, including the Company, use Premier's services to source decorated fleece products in significant quantities. The Company used a portion of the proceeds of the Note Offering to pay the Premier Cash Consideration and repay the assumed indebtedness. The acquisitions of Morning Sun and Premier are hereinafter referred to as the "Morning Sun Acquisition" and the "Premier Acquisition," respectively, or are collectively referred to as the "Acquisitions." The Company's principal executive offices are located at 3860 Virginia Avenue, Cincinnati, Ohio 45227, and its telephone number is (513) 272-3600. THE NOTE OFFERING The Notes........................ The Notes were sold by the Company on July 2, 1997, and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act, to institutional investors that are accredited investors in a manner exempt from registration under the Securities Act and to certain persons in transactions outside the United States in reliance on Regulation S under the Securities Act (the "Note Offering"). Registration Rights Agreement.... In connection with the Note Offering, the Company entered into the Registration Rights Agreement, which grants holders ("Holders") of the Notes certain exchange and registration rights. The Exchange Offer is intended to satisfy such exchange and registration rights, which generally terminate upon the consummation of the Exchange Offer. THE EXCHANGE OFFER Securities Offered............... $100,000,000 aggregate principal amount of 10 1/2% Senior Notes due 2007. The Exchange Offer............... $1,000 principal amount of the Exchange Notes in exchange for each $1,000 principal amount of Notes. As of the date hereof, $100,000,000 aggregate principal amount of Notes are outstanding. The Company will issue the Exchange Notes to Holders on or promptly after the Expiration Date. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and that such Holder does not intend to participate and has no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. 6 Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letters of Transmittal state that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that for a period of 90 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. Any Holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes could not rely on the position of the staff of the Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5, 1991) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale of the Exchange Notes. Failure to comply with such requirements in such instance may result in such Holder incurring liability under the Securities Act for which the Holder is not indemnified by the Company. Expiration Date.................. 5:00 p.m., New York City time, on September 4, 1997, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Interest on the Exchange Notes and the Notes...................... The Exchange Notes will bear interest from July 2, 1997, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date (as defined below in the Summary of Terms of Exchange Notes) to which interest on such Notes has been paid). Accordingly, Holders of Notes that are accepted for exchange will not receive interest on the Notes that is accrued but unpaid at the time of tender, but such interest will be payable on the first Interest Payment Date after the Expiration Date. Conditions to the Exchange Offer........................... The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. Procedures for Tendering Notes... Each Holder of Notes wishing to accept the Exchange Offer must complete, sign and date the relevant accompanying Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Notes and any other required documentation to the Exchange Agent at the address set forth in the Letter of Transmittal. By executing the Letter of Transmittal, each Holder will represent to the Company that, among other things, the Holder or the person receiving such Exchange Notes, whether or not such person is the Holder, is acquiring the Exchange Notes in the ordinary course of business and that neither the Holder nor any such other person has any arrangement or understanding with any person to participate in the distribution of 7 such Exchange Notes. In lieu of physical delivery of the certificates representing Notes, tendering Holders may transfer Notes pursuant to the procedure for book-entry transfer as set forth under "The Exchange Offer -- Procedures for Tendering." Special Procedures for Beneficial Owners......................... Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such owner's own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering its Notes, either make appropriate arrangements to register ownership of the Notes in such beneficial owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Guaranteed Delivery Procedures... Holders of Notes who wish to tender their Notes and whose Notes are not immediately available or who cannot deliver their Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." Withdrawal Rights................ Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date pursuant to the procedures described under "The Exchange Offer -- Withdrawals of Tenders." Acceptance of Notes and Delivery of Exchange Notes.............. The Company will accept for exchange any and all Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. Federal Income Tax Consequences of the Exchange Offer............. The issuance of the Exchange Notes to Holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by Holders of the Notes upon receipt of the Exchange Notes. See "Certain Federal Income Tax Consequences of the Exchange Offer." Effect on Holders of Notes....... As a result of the making of this Exchange Offer, the Company will have fulfilled certain of its obligations under the Registration Rights Agreement, and Holders of Notes who do not tender their Notes will generally not have any further registration rights under the Registration Rights Agreement or otherwise. Such Holders will continue to hold the untendered Notes and will be entitled to all the rights and subject to all the limitations applicable thereto under the Indenture (as defined herein), except to the extent such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. All untendered Notes will continue to be subject to certain restrictions on transfer. Accordingly, if any Notes are tendered and accepted in the Exchange Offer, the trading market for the untendered Notes could be adversely affected. 8 Exchange Agent................... Norwest Bank Minnesota, National Association (the "Exchange Agent"). THE EXCHANGE NOTES Securities Offered............... $100,000,000 principal amount of 10 1/2% Exchange Notes due 2007. Maturity Date.................... July 1, 2007 Interest Rate and Payment Dates.. The Exchange Notes will bear interest at a rate of 10 1/2% per annum. Interest on the Exchange Notes will accrue from the date of issuance thereof and will be payable semi-annually in cash in arrears on January 1 and July 1 of each year, commencing January 1, 1998. Optional Redemption.............. The Exchange Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after July 1, 2002, at the redemption prices set forth herein, together with accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption. If the Company consummates a Public Equity Offering (as defined herein) on or before July 1, 2000, the Company may at its option use all or a portion of the proceeds from such offering to redeem up to 35% of the aggregate principal amount of the Exchange Notes originally issued at a redemption price equal to 110.5% of the aggregate principal amount thereof, together with accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption, provided that after giving effect to such redemption at least $65 million of the aggregate principal amount of Exchange Notes originally issued remains outstanding. See "Description of Exchange Notes -- Optional Redemption." Ranking; Subsidiary Guarantees... The Exchange Notes will be senior unsecured obligations of the Company and will be unconditionally guaranteed on a senior unsecured basis by the Subsidiary Guarantors. The Exchange Notes and each Subsidiary Guarantee will rank PARI PASSU in right of payment with existing and future unsecured and unsubordinated Indebtedness of the Company and the applicable Subsidiary Guarantor, respectively, and senior to all Subordinated Indebtedness of the Company and the applicable Subsidiary Guarantor, respectively, but will be effectively subordinated to secured indebtedness of the Company and the Subsidiary Guarantors. At July 2, 1997, the Company and the Subsidiary Guarantors had (i) no unsecured and unsubordinated indebtedness outstanding other than the Exchange Notes and (ii) $30.8 million of secured indebtedness outstanding. Subject to certain limitations, the Indenture will permit the Company and its Restricted Subsidiaries (as defined herein) to incur additional secured and unsecured Indebtedness. See "Description of Exchange Notes -- Ranking" and "-- Subsidiary Guarantees." Change of Control................ If a Change of Control occurs, each Holder of Exchange Notes will have the right to require the Company to purchase all or a portion of such Holder's Exchange Notes at a price equal to 101% of the aggregate principal amount thereof, together 9 with accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. See "Description of Exchange Notes -- Certain Covenants -- Change of Control." Certain Covenants................ The Indenture will contain certain covenants, including covenants that limit: (i) incurrence of additional Indebtedness; (ii) issuance of preferred stock by a Restricted Subsidiary; (iii) Restricted Payments (as defined herein); (iv) issuances and sales of capital stock of Restricted Subsidiaries; (v) sale/leaseback transactions; (vi) transactions with affiliates; (vii) liens; (viii) asset sales; (ix) dividend and other payment restrictions affecting Restricted Subsidiaries; (x) conduct of business; and (xi) mergers, consolidations and sales of assets. See "Description of Exchange Notes -- Certain Covenants" and "-- Merger, Consolidation and Sale of Assets." Registration Rights; Liquidated Damages........................ Pursuant to the Registration Rights Agreement, the Company has agreed to file this Registration Statement. If (i) the Exchange Offer is not permitted by applicable law, (ii) the Exchange Offer is not consummated within 165 days following the date of original issuance of the Notes, (iii) the Initial Purchasers (as defined herein) so request within six months after consummation of the Note Offering with respect to Notes not eligible to be exchanged for Exchange Notes in the Exchange Offer and held by them following consummation of the Exchange Offer or (iv) any Holder (other than certain broker-dealers) is not eligible to participate in the Exchange Offer or, in the case of any Holder (other than certain broker-dealers) that partici- pates in the Exchange Offer, that Holder does not receive freely tradable Exchange Notes pursuant to the Exchange Offer and such Holder notifies the Company within six months of such date, the Company will be required to file a shelf registration statement (the "Shelf Registration Statement") to register resales of certain Notes or Exchange Notes by the Holders thereof. If the Company fails to comply with certain of its obligations under the Registration Rights Agreement, Liquidated Damages will be payable to Holders of the Senior Notes. See "Description of Senior Notes -- Registration Rights." For additional information regarding the Exchange Notes, see "Certain Federal Income Tax Consequences of an Investment in the Exchange Notes" and "Description of the Exchange Notes." RISK FACTORS Holders of Notes should consider carefully all of the information set forth in this Prospectus and, in particular, the information set forth under "Risk Factors" before making any decision regarding tendering their Notes pursuant to the Exchange Offer and receiving Exchange Notes. 10 SUMMARY HISTORICAL FINANCIAL INFORMATION The following summary historical financial information for the fiscal years 1992 through 1996 has been derived from the audited financial statements of the Company. The statement of operations data for fiscal 1996 includes the results of operations of Plymouth Mills, Inc. ("Plymouth") from its date of acquisition, August 2, 1996. The information presented for the thirteen weeks ended March 30, 1996 and March 29, 1997 has been derived from the unaudited financial statements of the Company. The statement of operations data for the thirteen weeks ended March 29, 1997 includes the results of operations of Sun Sportswear, Inc. ("Sun Sportswear") from the date of the merger of the Company with Sun Sportswear (the "Sun Merger"), March 14, 1997. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED -------------------------------------------------------- -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MAR. 30, MAR. 29, 1992 1993 1994 1995(A) 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............................ $ 48,069 $ 60,850 $ 76,754 $131,020 $169,452 $ 30,132 $ 34,907 Cost of goods sold................... 39,376 51,640 64,846 106,576 127,845 22,761 26,520 -------- -------- -------- -------- -------- -------- -------- Gross profit..................... 8,693 9,210 11,908 24,444 41,607 7,371 8,387 Operating expenses................... 7,511 7,285 10,221 25,549 32,529 6,341 8,602 -------- -------- -------- -------- -------- -------- -------- Operating income (loss).......... 1,182 1,925 1,687 (1,105) 9,078 1,030 (215) Interest expense..................... 1,056 1,153 1,663 3,695 4,491 811 1,145 Other expense (income), net.......... 80 89 -- (22) (234) (233) 125 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary gain......... 46 683 24 (4,778) 4,821 452 (1,485) Provision (benefit) for income taxes.............................. 87 254 99 (338) 789 -- (609) -------- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary gain............. (41) 429 (75) (4,440) 4,032 452 (876) Extraordinary gain................... -- -- -- 500 -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)................ (41) 429 (75) (3,940) 4,032 452 (876) Dividends and accretion on preferred stock.............................. -- -- -- -- 245 -- 165 -------- -------- -------- -------- -------- -------- -------- Net income (loss) available for common shareholders............ $ (41) $ 429 $ (75) $ (3,940) $ 3,787 $ 452 $ (1,041) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common and common equivalent share............ $ (.01) $ .14 $ (.02) $ (1.30) $ .90 $ .11 $ (.27) ======== ======== ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding...... 2,797,788 3,032,656 3,029,803 3,029,803 4,198,907 4,113,580 3,889,538 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges... 1.04 1.50 1.01 (b) 1.89(c) (b)(c) ======== ======== ======== ======== ======== ========
AS OF MAR. 29, 1997 -------- BALANCE SHEET DATA: Working capital...................... $ 12,067 Total assets......................... 113,816 Total long-term obligations, including current maturities....... 25,766 Mandatorily redeemable preferred stock.............................. 898 Mandatorily redeemable convertible preferred stock (dividends payable-in-kind)................... 7,836 Shareholders' equity................. 9,799 - ------------ (a) For further discussion of the Company's loss in 1995, see "The Company -- Acquisitions -- Velva Sheen" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Fiscal year ended December 30, 1995 compared with fiscal year ended December 31, 1994." (b) For the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, earnings, as defined, were inadequate to cover fixed charges. The deficiencies were approximately $4.8 million and $1.5 million for the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, respectively. (c) On a pro forma basis after giving effect to the Exchange Offer, the Acquisitions, the Sun Merger, and the acquisition of Plymouth, as if such transactions occurred at the beginning of fiscal 1996, the ratio of earnings to fixed charges for the year ended December 28, 1996 would have been 1.47 and the deficiency for the thirteen weeks ended March 29, 1997 would have been approximately $4.9 million. 11 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES OFFERED BY THIS PROSPECTUS, INCLUDING INFORMATION UNDER "DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS." SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT The Company is highly leveraged and has significant debt service requirements. At July 2, 1997, the total consolidated indebtedness of the Company was $135.6 million. The degree to which the Company is leveraged will have important consequences to holders of the Exchange Notes, including: (i) the ability of the Company to obtain additional financing, whether for working capital, capital expenditures, or other purposes, may be impaired; (ii) a substantial portion of the Company's cash flow from operations will be required for debt service, thereby reducing funds available to the Company for its operations; (iii) the Company's flexibility in planning for or reacting to changes in market conditions may be limited; (iv) the Company may be more vulnerable upon a downturn in its business; and (v) to the extent that the Company incurs any indebtedness at variable rates, including under the Credit Facility (as defined herein), the Company will be vulnerable to increases in interest rates. Based on current operations, the Company expects that it will be able to meet the debt service requirements on its indebtedness, meet its working capital needs and fund its capital expenditures and other operating expenses out of cash flow from operations and available borrowings under the Credit Facility. However, there can be no assurance that the Company's business will generate cash flow at levels sufficient to meet these requirements. If the Company is unable to generate sufficient cash flow from operations to service its debt obligations and to meet other cash requirements, it may be required to sell assets, reduce capital expenditures, refinance all or a portion of its existing debt (including the Exchange Notes) or obtain additional financing. There can be no assurance that any such asset sales or refinancing would be possible or that any additional financing would be available, if at all, on terms acceptable to the Company. The Company's ability to meet its debt service obligations will be dependent upon its future performance which, in turn, will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. HOLDING COMPANY STRUCTURE The Company holds substantially all of its assets and conducts substantially all of its operations through its subsidiaries. Therefore, the Company derives substantially all of its operating income and cash flow from its subsidiaries and must rely upon earnings, cash flow, distributions, advances or other inter-company transfers from its subsidiaries to generate the funds necessary to meet its obligations, including the payment of principal premium, interest and Liquidated Damages on the Exchange Notes. Although the Indenture generally will prohibit the Company from permitting its Restricted Subsidiaries (as defined herein) to restrict their ability to pay dividends and other amounts to the Company, any such restrictions could materially and adversely affect the ability of the Company to service and repay its existing debt, including the Exchange Notes. RANKING The Exchange Notes will be senior unsecured obligations of the Company and will be unconditionally guaranteed on a senior unsecured basis by the Subsidiary Guarantors. The Exchange Notes and each Subsidiary Guarantee will rank PARI PASSU with all other unsecured and unsubordinated indebtedness of the Company and the applicable Subsidiary Guarantor, respectively, but will be effectively subordinated to secured indebtedness of the Company and the Subsidiary Guarantors. See "Description of Credit Facility and Certain Other Indebtedness" and "Description of Exchange Notes -- Ranking." RESTRICTIONS IMPOSED BY CERTAIN COVENANTS The Credit Facility and the Indenture contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets, incur additional indebtedness, incur liens on 12 property or assets, repay other indebtedness, pay dividends, enter into certain investments or transactions, repurchase or redeem capital stock, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or engage in other business activities that may be in the interest of the Company. In addition, the Credit Facility will also require the Company to maintain compliance with certain financial ratios. The ability of the Company to comply with such ratios may be affected by events beyond the Company's control. A breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in a default under the Credit Facility. If any such default occurs, the lenders under the Credit Facility could elect to declare all borrowings outstanding under the Credit Facility, together with accrued interest and other fees, to be due and payable. If the Company were unable to repay any such borrowings when due, the lenders under the Credit Facility could proceed against their collateral. If the indebtedness under the Credit Facility or the Exchange Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay such indebtedness in full. Since the Company is dependent on the Credit Facility to fund seasonal borrowing needs, any such default may have a material adverse effect on the Company's financial condition and results of operation. See "Description of Credit Facility and Certain Other Indebtedness" and "Description of Exchange Notes." SEASONALITY AND CYCLICALITY The Company's sales are seasonal, with higher sales occurring during the second half of its fiscal year (July to December), primarily due to (i) sales of higher priced products, primarily fleecewear, in the fall season and (ii) increased holiday and "back to school" sales to retail customers during this period. In addition, the apparel industry is cyclical and may be negatively affected by changing retailer and customer demand and downturns in consumer spending. DEPENDENCE ON LICENSING ARRANGEMENTS Many of the Company's licenses are for a term of one to two years but can be terminated on 30 days' notice. Typically, the licensor may terminate the license if specified minimum levels of annual net sales for licensed products are not met or for a failure of the Company to comply with the material terms of the license. In the ordinary course of its business, the Company continues to produce products under expired licenses based on letter agreements or oral representations from licensors to the effect that continued production will be permitted pending negotiation of new licenses. The loss of one or more of the Company's material licenses, or the decline in popularity of certain licensed cartoon character images, could have a material adverse effect on the Company's financial condition and results of operations. On a pro forma basis, after giving effect to the Acquisitions, the Sun Merger, and the acquisition of Plymouth, as if such transactions occurred at the beginning of fiscal 1996, approximately 47% of the Company's net sales during 1996 were of licensed products. DEPENDENCE ON MAJOR CUSTOMERS On a pro forma basis, after giving effect to the Acquisitions, the Sun Merger, and the acquisition of Plymouth, as if such transactions occurred at the beginning of fiscal 1996, approximately 51.8% of the Company's sales were made to its ten largest customers. Sales to Wal-Mart, J.C. Penney, Target, and Kmart represented approximately 16.9%, 15.0%, 5.9% and 4.9%, respectively, of the Company's total sales for 1996 on a pro forma basis as described above. The Company believes that sales to major customers will continue to account for a significant percentage of the Company's total revenues. The loss or material adverse change in the financial condition of one or more of these customers could have a material adverse effect on the Company's financial condition and results of operations. MANUFACTURERS AND FOREIGN SOURCING For its decorated sportswear needs, the Company purchases a significant portion of its blank garments, such as undecorated T-shirts and sweatshirts, from independent manufacturers, both domestic and foreign. The inability of a supplier to ship its products to the Company in a timely manner or to meet the Company's 13 quality standards could adversely affect its ability to meet customer delivery requirements. As is typical in the industry, the Company generally does not enter into long-term contracts with its suppliers. Although the Company believes that the loss of any one or more suppliers is not likely to have a long-term material adverse effect on the Company's business because either new or existing manufacturers likely would be available to fulfill its requirements, the failure of any key supplier to perform or the loss of any key supplier could have a short-term material adverse effect on the Company's results of operations. The Company believes that the Premier Acquisition will increase the importance of foreign sourcing in its operations. To the extent foreign sources grow in importance, the Company's operations may be adversely affected by, among other things, political instability resulting in disruption of trade from foreign countries in which the Company's suppliers are located; the imposition of additional regulations and restrictions related to imports and duties, taxes and other charges on imports, and bilateral trade agreements; any significant fluctuation in the value of the dollar against foreign currencies; and restrictions on the transfer of foreign currencies. An adverse change in any of the foregoing could have a short-term material adverse effect on the Company's financial condition and results of operations. INTEGRATION OF ACQUIRED OPERATIONS The Company's growth in recent years has been attributable in part to strategic business acquisitions. See "The Company -- Acquisitions." In connection with making these acquisitions and in evaluating other potential acquisition transactions, the Company makes certain assumptions regarding the future combined results of the existing and acquired operations. In certain acquisition transactions, the acquisition analysis includes assumptions regarding the consolidation of operations and improved operating cost structures for the combined operations. There can be no assurance, however, that such consolidations or improved cost structures will be achieved on the assumed time schedule, if at all. Any failure to integrate the operations of an acquired business or significant delay in such integration could have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company expects to continue to evaluate and, where appropriate, pursue acquisition opportunities that provide products or services that complement those offered by the Company. There can be no assurance, however, that suitable acquisition candidates will be identified in the future, or that the Company will be able to finance such acquisitions on favorable terms. Further, there can be no assurances that any future acquisitions will be integrated successfully into the Company's operations or will achieve desired financial objectives. SUBSTANTIAL COMPETITION The apparel industry is highly competitive. The Company competes with numerous apparel vendors, including those with their own retail stores, department stores, specialty stores, retail chains and mass merchandisers who sell apparel under their own labels and whose merchandise displays licensed cartoon characters and logos of professional sports teams, colleges and universities. Competitive factors include product quality, access to popular licenses, price, ability to meet delivery requirements and other aspects of customer service, changes in styles and consumer preferences, and the limited availability of customer shelf and rack space. DEPENDENCE ON EXISTING MANAGEMENT The operations of the Company depend to a significant degree upon a relatively small group of senior management personnel and other key employees. Although the Company has entered into employment agreements with certain members of senior management, the continued employment of such persons cannot be assured. The loss of the services of senior management personnel or other key employees could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY PRINCIPAL STOCKHOLDERS Equus II Incorporated ("Equus") beneficially owns approximately 56.3% of the Company's common stock. Consequently, for so long as such level of ownership is maintained, Equus will have the ability to control the election of the Company's directors and the outcome of other issues submitted to the Company's 14 stockholders for approval. Additionally, Messrs. Hale and Lehmann, both of whom are members of the Company's Board of Directors, are also officers of Equus. CHANGE OF CONTROL If a Change of Control occurs, the Company will be required to offer to repurchase all of the outstanding Exchange Notes at 101% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to the date of repurchase. There can be no assurance that the Company will have the financial resources necessary or be permitted by its other debt agreements to repurchase the Exchange Notes upon the occurrence of a Change of Control. The inability to repurchase all of the tendered Exchange Notes would constitute an Event of Default (as defined herein) under the Indenture. See "Description of Exchange Notes -- Certain Covenants -- Change of Control." LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES; RESTRICTIONS ON RESALE There is no existing trading market for the Exchange Notes, and there can be no assurance regarding the future development of a market for the Exchange Notes, the ability of the Holders of the Exchange Notes to sell their notes or the price at which such Holders may be able to sell their notes. If a market for the Exchange Notes develops, the Exchange Notes could trade at prices that may be higher or lower than the original offering price depending on many factors, including prevailing interest rates, the Company's operating results and credit rating and the market for similar securities. Dillon, Read & Co., Inc. and SBC Warburg Inc. (the "Initial Purchasers") currently make a market in the Notes and have advised the Company that they intend to make a market in the Exchange Notes. The Initial Purchasers are not obligated to do so, however, and any market making with respect to the Exchange Notes may be discontinued at any time without notice. Therefore, there can be no assurance as to the liquidity of any trading market for the Exchange Notes or that an active trading market for the Exchange Notes will develop. The Company does not intend to apply for listing or quotation of the Exchange Notes on any securities exchange or stock market. However, the Exchange Notes will continue to be eligible for trading in the PORTAL market. FRAUDULENT CONVEYANCE CONSIDERATIONS The Subsidiary Guarantees may be subject to review under fraudulent transfer or similar laws. To the extent that a court were to find that (i)(1) a Subsidiary Guarantee was incurred by any Subsidiary Guarantor with intent to hinder, delay or defraud any present or future creditor, (2) a Subsidiary Guarantor contemplated insolvency with a design to prefer one or more creditors to the exclusion in whole or in part of others, or (3) any Subsidiary Guarantor did not receive fair consideration or reasonably equivalent value for issuing its Subsidiary Guarantee; and (ii) that Subsidiary Guarantor (1) was insolvent, (2) was rendered insolvent by reason of the issuance of its Subsidiary Guarantee, (3) was engaged or about to engage in a business or transaction for which the remaining assets of that Subsidiary Guarantor constituted unreasonably small capital or (4) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, a court could avoid or subordinate the Subsidiary Guarantee in favor of that Subsidiary Guarantor's creditors and direct the return of amounts paid with respect to such Subsidiary Guarantee. If a Subsidiary Guarantee is avoided or subordinated, payments of principal and interest on the Exchange Notes generally would be subject to the prior payment in full of all indebtedness of the relevant Subsidiary Guarantor. Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits, if any, realized by the relevant Subsidiary Guarantor as a result of the issuance by the Company of the Exchange Notes. The extent to which a particular Subsidiary Guarantor may be deemed to have received such benefits may depend on the Company's use of the proceeds of the Note Offering, including the extent to which such proceeds or benefits therefrom are contributed to the Subsidiary Guarantor. The measure of insolvency for purposes of the foregoing will vary depending on the law of the applicable jurisdiction. Generally, however, an entity would be considered insolvent if the sum of its debts, including contingent or unliquidated debts, is greater than all of its property at a fair valuation or if the present fair saleable value of its assets is less than the amount that will be required to pay its probable liability under its existing debts as such debts become absolute and matured. Based upon financial and other information currently available to it, the Company presently believes that 15 the Subsidiary Guarantees are being incurred for proper purposes and in good faith, and that each Subsidiary Guarantor (i) is solvent and will continue to be solvent after issuing its Subsidiary Guarantee, (ii) will have sufficient capital for carrying on its business after such issuance and (iii) will be able to pay its debts as they mature. There can be no assurance, however, that a court would necessarily agree with these conclusions, or determine that any particular Subsidiary Guarantor received fair consideration or reasonably equivalent value for issuing its Subsidiary Guarantee. ENVIRONMENTAL MATTERS The Company's facilities are subject to a broad range of federal, state and local environmental laws and requirements. The Company has made, and will continue to make, expenditures to comply with such laws and requirements. The Company believes that it is currently in substantial compliance with all applicable environmental laws and requirements and that the Company will not require material capital expenditures to maintain its environmental compliance during fiscal 1997 or in the foreseeable future. However, future events, such as changes in existing laws and regulations or the discovery of contamination at the Company's facilities, may give rise to additional compliance or remediation costs that could have a material adverse effect on the Company's results of operations or financial condition. Moreover, the nature of the Company's business exposes it to some risk of claims with respect to environmental matters, and there can be no assurance that material costs or liabilities will not be incurred in connection with any such claims. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Prospectus contains certain statements that are "Forward Looking Statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Those statements include, among other things, the discussions of the Company's business strategy and expectations concerning market position, future operations, margins, profitability, liquidity and capital resources, and statements concerning the integration of the operations to be acquired pursuant to the Acquisitions and achievement of certain benefits in connection therewith. Forward Looking Statements are included in the sections captioned "Summary," "Risk Factors," "The Company," "Pro Forma Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus. Although the Company believes that the expectations reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to be correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by the Company (including the Acquisitions), or projections involving anticipated revenues, expenses, earnings, levels of capital expenditures or other aspects of operating results. The operations of the Company are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially affect the results of the Company's operations and whether the Forward Looking Statements made by the Company ultimately prove to be accurate. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in "Risk Factors" and elsewhere in this Prospectus. 16 THE COMPANY HISTORY The Company began operations in 1974 as a distributor of blank garments, primarily T-shirts and sweatshirts. In 1989, Equus acquired majority control of Gulf Coast Sportswear, Inc., the predecessor of the Company. Since that time, the Company has completed eight acquisitions that have brought significant strategic advantages to the Company's business. These acquisitions have broadened the Company's product lines, expanded and diversified its customer base, generated significant purchasing power and allowed the Company to realize certain economies of scale in manufacturing, marketing, distribution and administration. ACQUISITIONS A description of each of the Company's acquisitions is set forth below. CC CREATIONS. In September 1990, the Company purchased the operating assets of CC Creations, its then largest contract screen printer, to improve costs and control the quality of the Company's screen printing operations. CC Creations was founded by J. Ford Taylor, the current president and chief executive officer of the Company. CC Creations operates under the trade names Red Oak Sportswear and CC Creations. The Company uses the CC Creations facility primarily to produce collegiate logo products marketed to mass merchandisers. The CC Creations facility also sells custom designed products to various other markets, including schools and corporations. CAPITAL INDUSTRIES, INC. In July 1991, the Company merged with Capital Industries, Inc. ("Capital Industries") to enter the athletic uniform and specialty products business. The Capital Industries facility operates under the trade names Red Fox and Lady Fox. VELVA SHEEN. In November 1994, the Company purchased the assets of Velva Sheen, an operating division of American Marketing Industries, Inc. ("Velva Sheen"), to enter the licensed cartoon character market and expand and diversify its decorated sportswear business. Through its Velva Sheen facility, the Company sells licensed cartoon character products, including products decorated with Disney's Mickey Mouse and Winnie the Pooh, to department stores and specialty retailers. Before being acquired by the Company, Velva Sheen's financial performance was deteriorating. Velva Sheen's net sales decreased 16.1% from $60.4 million in 1993 to $50.7 million in 1994. After the acquisition, the Company developed a plan to improve Velva Sheen's operating efficiency and profitability. The plan included: (i) reducing facility personnel and related costs, particularly senior and mid-level management personnel to levels commensurate with other Company operating locations; (ii) streamlining the facility's product development and manufacturing processes in order to increase production and improve on-time delivery, which included relocating the facility's non-licensed character business to another more suitable Company facility and closing Velva Sheen's retail outlet store operations; (iii) eliminating unprofitable licenses and reducing the number of product offerings to focus Velva Sheen on its core product line of licensed cartoon character products; (iv) reducing inventory levels and the number of inventory types and styles to levels commensurate with the Company's expectations for Velva Sheen's sales levels; (v) implementing the Company's shelf stock sales and marketing program in order to increase inventory turns and stimulate sales; and (vi) realigning Velva Sheen's sales commission structure for in-house and outside sales personnel to more properly incentivize and compensate those personnel for their individual contributions. The successful execution of this business plan, which was implemented in late 1995, has resulted in significant improvements in financial performance, with net sales increasing from $53.0 million in fiscal 1995 to $74.9 million in fiscal 1996. NEEDLEWORKS, INC. In December 1995, Brazos Embroidery, Inc. ("Brazos Embroidery"), a wholly-owned subsidiary of the Company, acquired the assets of Needleworks, Inc. ("Needleworks"), a contract embroidery operation, to improve costs and control quality in the Company's growing embroidery product line. 17 PLYMOUTH MILLS, INC. In August 1996, the Company purchased the assets of Plymouth to enter the proprietary and private label markets. The acquisition strengthened the Company's sales, marketing and sourcing capabilities. SUN SPORTSWEAR, INC. On March 14, 1997, the Company completed the Sun Merger. Sun Sportswear designs, sources, prints and markets licensed sportswear primarily to mass merchandising stores. The Company believes the Sun Merger provides a number of key strategic benefits, including (i) an expanded portfolio of licensed cartoon character products and license agreements through the addition of a more extensive Winnie the Pooh license, new Looney Tunes character licenses and new film property licenses, such as The Little Mermaid, 101 Dalmatians and Anastasia, (ii) increased purchasing power with suppliers on a company-wide basis, (iii) strengthened distribution to the mass merchant retail segment and (iv) enhanced production capacity and flexibility with Sun Sportswear's state-of-the-art facility, strategically located on the west coast to facilitate the import of goods from suppliers and exports to customers in the Far East. Sun Sportswear's financial performance had been deteriorating significantly during the three fiscal years prior to the Sun Merger. Net sales of Sun Sportswear declined from $113.2 million in 1994 to $94.0 million in 1995 and $65.5 million in 1996, an approximate 42% decrease from 1994 to 1996. The Company believes that the principal reasons for the substantial decreases in net sales from 1994 to 1996 were (i) an unsuccessful change in Sun Sportswear's business strategy away from its traditional licensed cartoon character business in an effort to build a line of private label and proprietary products, (ii) a significant decrease in licensed product sales to the men's and boys' market segment resulting from the loss of key divisional management and sales personnel in 1994, (iii) excess inventory due to the combined effects of mismanagement of blank garment purchasing, maintenance of unprofitable product offerings and overall reductions in net sales and (iv) a production and corporate overhead staff that exceeded levels required to operate Sun Sportswear at reduced business volumes. Prior to consummation of the Sun Merger, the Company established and began implementing a restructuring plan designed to increase sales and return Sun Sportswear's operations to profitability. This plan consisted of a variety of operational improvements intended to realign Sun Sportswear's operating costs with existing business levels and certain strategic changes in Sun Sportswear's sales and marketing efforts. The Company's restructuring plan for Sun Sportswear contained many of the same elements that the Company successfully implemented to improve the financial performance of Velva Sheen following its acquisition in late 1994. Key elements of the Company's restructuring plan for Sun Sportswear that have been implemented since the fourth fiscal quarter of 1996 include (i) a significant reduction in facility personnel, including the elimination of Sun Sportswear's four senior executives and approximately 115 middle management and production employees, providing aggregate annual cost savings of $3.2 million, (ii) price increases on most of Sun Sportswear's more popular product offerings, (iii) the elimination of unprofitable and non-core product offerings, including a reduction of inventory from $19.4 million at September 30, 1996, to $12.0 million at March 29, 1997 and (iv) discontinuation of unprofitable license agreements. The principal components of the Company's plan to increase sales volumes at Sun Sportswear consist of (i) refocusing sales and marketing efforts on Sun Sportswear's core licensed cartoon character product offerings, (ii) expanding successful licenses, such as Winnie the Pooh, in an effort to broaden Sun Sportswear's markets and product offerings, (iii) targeting all phases of product development, production and marketing of the Sun Sportswear facility to its traditional strengths in the mass merchant retail segment by shifting a substantial majority of its licensed character business distributed to department stores to the Company's Velva Sheen facility and (iv) integrating Sun Sportswear's sales force with the Company's other operations, primarily Velva Sheen and Plymouth, to provide a coordinated marketing effort for the Company's entire licensed cartoon character product line. The Company had originally anticipated completion of its integrated sales and marketing plan for its licensed character business in advance of its spring 1997 selling season. However, since the closing of the Sun Merger occurred later than originally anticipated, the planned sales and marketing integration was completed subsequent to the Company's spring 18 1997 product offering. The delay created confusion among certain customers and licensors and hindered the Company's ability to develop and market a coordinated line of licensed cartoon character products for its spring offering. The Company has now effectively transitioned all of Sun Sportswear's customer accounts and licensing relationships and realigned its sales and marketing personnel in a manner in which it believes will enhance future sales opportunities. As a result, the Company expects to begin realizing the benefits from its increased sales efforts during the second half of 1997. MORNING SUN. On July 2, 1997, the Company acquired Morning Sun for (i) $29.3 million in cash, (ii) 73,171 shares of the Company's common stock and (iii) the assumption of certain indebtedness and contractual obligations of Morning Sun. Morning Sun is a leading designer, manufacturer and marketer of moderately-priced imprinted and embroidered tops for women age 40 and over. Morning Sun sells its products under proprietary brand names and various private labels to (i) major department store chains such as J.C. Penney, May Co. and Federated Department Stores, (ii) catalogue companies such as Orvis and National Wildlife Federation and (iii) specialty stores. The Company used a portion of the proceeds of the Note Offering to fund the Morning Sun Cash Consideration and repay the assumed indebtedness and contractual obligations. The Morning Sun Acquisition will significantly expand the Company's proprietary product line, customer base and manufacturing capabilities. PREMIER. Also on July 2, 1997, the Company acquired all the assets of Premier for (i) $2.0 million in cash, (ii) a $1.5 million non-interest bearing subordinated note due 2004, that is convertible into and payable only through the issuance of 136,364 shares of the Company's common stock, (iii) a 7%, seven- year, subordinated "earnout" obligation in the principal amount of $4.0 million and (iv) the assumption of certain indebtedness of Premier. Premier is an importer of high quality, low cost "fashion fleece" and other garments for domestic distributors and provides merchandising, design and sourcing services for apparel companies. Through established relationships with overseas manufacturing and production facilities, principally in the Far East, Premier purchases blank garments in large quantities at prices that are typically lower than those charged by domestic mills for similar products. In addition, apparel makers use Premier's services to source decorated fleece products in significant quantities. The Company used a portion of the proceeds of the Note Offering to pay the Premier Cash Consideration and repay the assumed indebtedness. The Premier Acquisition will enhance the Company's merchandising, design and foreign sourcing capabilities. RATIO OF EARNINGS TO FIXED CHARGES The Company has calculated the ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K as follows:
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED -------------------------------------------------------- -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MAR. 29, 1992 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- -------------------- Ratio of earnings to fixed charges 1.04 1.50 1.01 (a) 1.89(b) (a)(b)
- ------------ (a) For the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, earnings, as defined, were inadequate to cover fixed charges. The deficiencies were approximately $4.8 million and $1.5 million for the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, respectively. (b) On a pro forma basis after giving effect to the Exchange Offer, the Acquisitions, the Sun Merger and the acquisition of Plymouth, as if such transactions occurred at the beginning of fiscal 1996, the ratio of earnings to fixed charges for fiscal 1996 would have been 1.47 and the deficiency for the thirteen weeks ended March 29, 1997 would be approximately $4.9 million. 19 CAPITALIZATION The following table sets forth the consolidated capitalization of (i) the Company as of March 29, 1997 and (ii) the Company on a pro forma basis after giving effect to the Acquisitions and the Note Offering and the application of the net proceeds therefrom as if those transactions had occurred on March 29, 1997. This information should be read in conjunction with "Pro Forma Financial Information" and the notes thereto and the consolidated financial statements of the Company and the notes thereto included elsewhere herein. AS OF MARCH 29, 1997 ----------------------- (UNAUDITED) ACTUAL PRO FORMA --------- --------- (IN THOUSANDS) Bank Credit Facility:(1) Revolving line of credit(2)..... $ 36,273 $ 9,585 Term debt, including current maturities..................... 11,600 -- Capital lease obligations............ 1,436 1,436 Other long-term debt, including current maturities................. 12,104 -- Exchange Notes offered hereby, net of discount of $760................... -- 99,240 7% subordinated earnout obligation... -- 4,000 Convertible subordinated note........ -- 1,500 --------- --------- Total debt................. 61,413 115,761 Mandatorily redeemable preferred stock.............................. 898 -- Mandatorily redeemable convertible preferred stock(3)(4).............. 7,836 7,836 Shareholders' equity................. 9,799 10,227 --------- --------- Total capitalization....... $ 79,946 $ 133,824 ========= ========= - ------------ (1) On July 2, 1997, the Company entered into the Credit Facility. See "Description of Certain Indebtedness -- Credit Facility." (2) The pro forma amount reflects the use of $1.2 million of proceeds received upon the exercise of options to acquire common stock of SolarCo, Inc. prior to closing of the Morning Sun Acquisition. (3) The Company, the holders of a majority of the Company's common stock and the holders of the preferred stock have agreed to amend the terms of the preferred stock. Under the amended terms, the mandatory redemption date will be extended to the earlier to occur of (i) December 31, 2008, or (ii) consummation of a Major Transaction (as defined in the certificate of designation relating to the preferred stock). The Company believes that any Major Transaction would also result in a Change of Control. See "Description of Exchange Notes -- Certain Covenants -- Change of Control." (4) Amount shown is net of an original issue discount of $1,529 to give effect to the estimated fair value of certain stock purchase warrants issued concurrently with the preferred stock. 20 PRO FORMA FINANCIAL INFORMATION The unaudited pro forma condensed combined financial statements have been derived from the financial statements of the Company, Plymouth, Sun Sportswear, Morning Sun and Premier and are presented to show (i) the acquisition of Plymouth as of August 2, 1996, (ii) the Sun Merger, which was a reverse acquisition of Sun Sportswear effected on March 14, 1997, (iii) the Acquisitions, which include the Morning Sun and Premier acquisitions, and (iv) the Note Offering and the application of the net proceeds therefrom. These acquisitions are accounted for under the purchase method of accounting pursuant to which the purchase price is allocated based on the fair value of the assets acquired and the liabilities assumed. The pro forma financial information is presented for the year ended December 28, 1996, and as of and for the thirteen weeks ended March 29, 1997. The following is a summary of the purchase price and estimated goodwill for the Morning Sun Acquisition as if the acquisition had taken place on March 29, 1997: Purchase price Cash............................... $ 29,250 Company common stock............... 750 Contingent consideration........... 1,600 --------- Total consideration to be paid.......... 31,600 Estimated transaction costs............. 125 --------- Purchase price including estimated transaction costs..................... 31,725 Net assets acquired..................... (3,877) Proceeds from exercise of Morning Sun stock options prior to closing........ (1,200) Expected tax benefit generated by the exercise of non-qualified stock options by Morning Sun................ (1,600) --------- Estimated goodwill................. $ 25,048 ========= The following is a summary of the purchase price and estimated goodwill for the Premier Acquisition as if the acquisition had taken place on March 29, 1997: Purchase price Cash............................... $ 2,000 7% subordinated earnout obligation........................ 4,000 Convertible subordinated note...... 1,500 --------- Total consideration to be paid.......... 7,500 Estimated transaction costs............. 125 --------- Purchase price including estimated transaction costs..................... 7,625 Net assets acquired..................... (10) --------- Estimated goodwill................. $ 7,615 ========= 21 The following is a summary of the uses of the proceeds after giving effect to the Acquisitions and the Note Offering and the application of the net proceeds therefrom as if those transactions had occurred on March 29, 1997: Morning Sun Acquisition: Purchase of common stock........... $ 29,250 Repay short-term debt.............. 2,822 Repay assumed indebtedness and other obligations................. 4,983 Premier Acquisition: Purchase of Net assets............. 2,000 Repay short-term debt.............. 2,717 Repay assumed indebtedness......... 106 The Company: Repay short-term debt.............. 25,488 Repay term debt.................... 11,600 Repay other long term debt and other obligations................. 15,376 Redeem preferred stock............. 898 Payment of Initial Purchasers' discount and offering transaction and expenses...................... 4,000 --------- Total uses.................... $ 99,240 ========= The unaudited pro forma condensed combined statements of operations for the year ended December 28, 1996, and the thirteen weeks ended March 29, 1997, give effect to the transactions referred to above as if each had occurred on the first day of fiscal 1996. The unaudited pro forma condensed combined balance sheet as of March 29, 1997 gives effect to the Acquisitions and the Note Offering and the application of the net proceeds therefrom as if each had occurred on such date. The actual entries for the Acquisitions are subject to the completion of purchase accounting and will be based upon more precise appraisals, evaluations and estimates of fair value, which are not currently complete, and may differ substantially from the pro forma adjustments. 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, primarily because the 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. The pro forma operating results for the thirteen weeks ended March 29, 1997 are not indicative of the results that are expected for the fiscal year 1997, due in part to the seasonal nature of the business, the negative impact of which appears predominantly in the first quarter. The Company believes that the Acquisitions amplify this seasonal effect due to the nature of their individual product lines. See "The Company -- Acquisitions" " -- Sun Sportswear, Inc." for additional discussion on the operating performance of Sun Sportswear. The unaudited pro forma condensed combined financial statements and the accompanying notes should be read in conjunction with the historical financial statements of the Company, Sun Sportswear, Plymouth and Morning Sun and related notes thereto appearing elsewhere herein. 22 PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO SUN MORNING FORMA THE COMPANY(1) PLYMOUTH(2) SPORTSWEAR SUN PREMIER ADJUSTMENTS -------------- ----------- ---------- ------- ------- ----------- Net sales............................ $ 169,452 $25,860 $ 65,535 $54,754 $35,631 $ (11,510)(3) Cost of goods sold................... 127,845 16,707 57,680 39,506 29,761 (18,416)(4) -------------- ----------- ---------- ------- ------- ----------- Gross profit..................... 41,607 9,153 7,855 15,248 5,870 6,906 Operating expenses................... 32,529 4,636 13,151 10,661 3,219 2,889(5) -------------- ----------- ---------- ------- ------- ----------- Operating income (loss).......... 9,078 4,517 (5,296) 4,587 2,651 4,017 Interest expense..................... 4,491 165 584 669 532 6,396(6) Other expense (income), net.......... (234) 62 (37) 53 (14) -- -------------- ----------- ---------- ------- ------- ----------- Income (loss) before income taxes.......................... 4,821 4,290 (5,843) 3,865 2,133 (2,379) Provision (benefit) for income taxes.............................. 789 434 (7) 1,357 -- (690)(7) -------------- ----------- ---------- ------- ------- ----------- Net income (loss)................ 4,032 3,856 (5,836) 2,508 2,133 (1,689) Dividends and accretion on preferred stock.............................. 245 -- -- -- -- 686(8) -------------- ----------- ---------- ------- ------- ----------- Net income (loss) available for common shareholders............ $ 3,787 $ 3,856 $ (5,836) $2,508 $ 2,133 $ (2,375) ============== =========== ========== ======= ======= =========== Earnings per common and common equivalent share................... $ .90 ============== Shares used in computing earnings per common and common equivalent share.............................. 4,198,907 ==============
PRO FORMA --------- Net sales............................ $ 339,722 Cost of goods sold................... 253,083 --------- Gross profit..................... 86,639 Operating expenses................... 67,085 --------- Operating income (loss).......... 19,554 Interest expense..................... 12,837 Other expense (income), net.......... (170) --------- Income (loss) before income taxes.......................... 6,887 Provision (benefit) for income taxes.............................. 1,883 --------- Net income (loss)................ 5,004 Dividends and accretion on preferred stock.............................. 931 --------- Net income (loss) available for common shareholders............ $ 4,073 ========= Earnings per common and common equivalent share................... $ .80 ========= Shares used in computing earnings per common and common equivalent share.............................. 5,103,056 ========= 23 NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) 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. ACQUISITION AND NOTE OFFERING ADJUSTMENTS:
SUN MORNING NOTE PLYMOUTH SPORTSWEAR SUN PREMIER OFFERING TOTAL --------- ----------- -------- -------- -------- -------- (3) Elimination of intercompany sales to the Company..................... $ -- $-- $ -- $(11,510) $ -- $(11,510) ========= =========== ======== ======== ======== ======== (4) Elimination of cost of goods sold on inter-company sales to the Company. Such amount is equal to the amount of sales in pro forma adjustment (3) above............... $ -- $-- $ -- $(11,510) $ -- $(11,510) Reclassification of royalty expense to operating expenses to conform with the Company's financial reporting practices................ -- (5,917) -- -- -- (5,917) Decrease in depreciation of fixed assets based on their post-acquisition allocated fair values............................. -- (913) (76 ) -- -- (989) --------- ----------- -------- -------- -------- -------- $ -- $(6,830) $ (76 ) $(11,510) $ -- $(18,416) ========= =========== ======== ======== ======== ======== (5) Reclassification of royalty expense from cost of goods sold to conform with the Company's financial reporting practices................ $ -- $ 5,917 $ -- $ -- $ -- $ 5,917 Increase (decrease) in depreciation of fixed assets based on their post-acquisition allocated fair values............................. 3 (810) (41 ) (24) -- (872) Amortization of intangible assets, including goodwill, over periods ranging from 15 to 40 years........ 285 (4) 628 190 -- 1,099 Increase (decrease) in compensation expense to reflect compensation levels on a post-acquisition basis pursuant to post-acquisition employment and advisory agreements......................... 139 -- (1,740 ) (309) -- (1,910) Elimination of non-recurring expenses such as board of directors fees and other fees charged to Morning Sun by its former majority shareholder........................ -- -- (295 ) -- -- (295) Elimination of Sun Merger acquisition expenses............... -- (956) -- -- -- (956) Elimination of duplicate letter of credit fees........................ -- -- -- (94) -- (94) --------- ----------- -------- -------- -------- -------- $ 427 $ 4,147 $(1,448 ) $ (237) $ -- $ 2,889 ========= =========== ======== ======== ======== ======== 24 SUN MORNING NOTE PLYMOUTH SPORTSWEAR SUN PREMIER OFFERING TOTAL --------- ----------- -------- -------- -------- -------- (6) Net increase in interest expense related to increased net indebtedness as follows: WEIGHTED AMOUNT AVG. RATE -------- --------- Interest on Exchange Notes...... $100,000 10.58% $ -- $-- $ -- $ -- $10,576 Interest on Premier subordinated obligation....... 4,000 7% -- -- -- -- 280 Interest on estimated average indebtedness.......... 16,338 8% -- -- -- -- 1,309 Reversal of interest expense on debt repaid............. (165 ) (584) (669 ) (532) (4,424) Amortization of deferred financing costs over the respective lives of the related debt obligations........ 184 46 -- -- 375 --------- ----------- -------- -------- -------- $ 19 $ (538) $ (669 ) $ (532) $ 8,116 ========= =========== ======== ======== ======== Interest on Exchange Notes...... $ 10,576 Interest on Premier subordinated obligation....... 280 Interest on estimated average indebtedness.......... 1,309 Reversal of interest expense on (6,374) Amortization of deferred financi respective lives of the related 605 -------- $ 6,396 ======== (7) Incremental income tax effects for pro forma adjustments, S-Corporation income, and Sun Sportswear's losses at an effective tax rate of 40%....... $ -- $-- $ -- $ -- $ (690 ) $ (690) ========= =========== ======== ======== ======== ======== (8) Dividends on 8% paid-in-kind convertible preferred stock..... $ 329 $ 165 $ -- $ -- $ -- $ 494 Accretion of discount related to fair value allocated to common stock purchase warrants......... 38 154 -- -- -- 192 --------- ----------- -------- -------- -------- -------- $ 367 $ 319 $ -- $ -- $ -- $ 686 ========= =========== ======== ======== ======== ========
25 PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SUN MORNING PRO FORMA PRO THE COMPANY(1) SPORTSWEAR(2) SUN PREMIER ADJUSTMENTS FORMA -------------- -------------- -------- ------- ----------- -------- Net sales............................... $ 34,907 $ 9,190 $ 6,239 $2,469 $ (586)(3) $ 52,219 Cost of goods sold...................... 26,520 8,785 5,078 1,942 (2,164)(4) 40,161 -------------- -------------- -------- ------- ----------- -------- Gross profit........................ 8,387 405 1,161 527 1,578 12,058 Operating expenses...................... 8,602 2,215 4,354 735 (1,947)(5) 13,959 -------------- -------------- -------- ------- ----------- -------- Operating loss...................... (215) (1,810) (3,193 ) (208 ) 3,525 (1,901) Interest expense........................ 1,145 72 94 36 1,508(6) 2,855 Other expense (income), net............. 125 (15) 9 (3 ) -- 116 -------------- -------------- -------- ------- ----------- -------- Loss before income taxes............ (1,485) (1,867) (3,296 ) (241 ) 2,017 (4,872) Benefit for income taxes................ 609 -- 1,155 -- 184(7) 1,948 -------------- -------------- -------- ------- ----------- -------- Net loss............................ (876) (1,867) (2,141 ) (241 ) 2,201 (2,924) Dividends and accretion on preferred stock................................. 165 -- -- -- 81(8) 246 -------------- -------------- -------- ------- ----------- -------- Net loss available for common shareholders...................... $ (1,041) $ (1,867) $(2,141 ) $ (241 ) $ 2,120 $ (3,170) ============== ============== ======== ======= =========== ======== Loss per common and common equivalent share................................. $ (.27) $ (.71) ============== ======== Shares used in computing loss per common and common equivalent share........... 3,889,538 4,453,725 ============== ========
26 NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) GENERAL (1) Includes the results of operations of Sun Sportswear from the Sun Merger date, March 14, 1997, through March 29, 1997. (2) Includes the results of operations of Sun Sportswear from January 1, 1997, to the Sun Merger date, March 14, 1997. ACQUISITION AND NOTE OFFERING ADJUSTMENTS
SUN MORNING NOTE SPORTSWEAR SUN PREMIER OFFERING TOTAL ----------- -------- -------- -------- ------- (3) Elimination of intercompany sales to the Company............ $-- $ -- $ (586) $ -- $ (586) =========== ======== ======== ======== ======= (4) Elimination of cost of goods sold on inter-company sales to the Company. Such amount is equal to the amount of sales in pro forma adjustment (3) above........................... $-- $ -- $ (586) $ -- $ (586) Reclassification of royalty expense to operating expenses to conform with the Company's financial reporting practices... (833) -- -- -- (833) Decrease in depreciation of fixed assets based on their post-acquisition allocated fair values............................... (180) (12 ) -- -- (192) Elimination of non-recurring charges to dispose of certain inventory types and styles, commensurate with the Company's business plan for Sun Sportswear...................... (553) -- -- -- (553) ----------- -------- -------- -------- ------- $(1,566) $ (12 ) $ (586) $ -- $(2,164) =========== ======== ======== ======== ======= (5) Reclassification of royalty expense from cost of goods sold to conform with the Company's financial reporting practices... $ 833 $ -- $-- $ -- $ 833 Decrease in depreciation of fixed assets based on their post-acquisition allocated fair values............................... (159) (3 ) (5) -- (167) Amortization of goodwill over 40 years........................... (1) 155 47 -- 201 Decrease in compensation expense to reflect compensation levels on a post-acquisition basis pursuant to post-acquisition employment and advisory agreements...................... -- (2,500 ) -- -- (2,500) Elimination of non-recurring expenses such as board of directors fees and other fees charged to Morning Sun by its former majority shareholder..... -- (57 ) -- -- (57) Elimination of Sun Merger acquisition expenses............ (233) -- -- -- (233) Elimination of duplicate letter of credit fees.................. -- -- (24) -- (24) ----------- -------- -------- -------- ------- $ 440 $(2,405 ) $ 18 $ -- $(1,947) =========== ======== ======== ======== =======
27
SUN MORNING NOTE SPORTSWEAR SUN PREMIER OFFERING TOTAL ----------- -------- -------- -------- ------- (6) Net increase in interest expense related to increased net indebtedness as follows: WEIGHTED AMOUNT AVG. RATE -------- --------- Interest on Exchange Notes...... $100,000 10.58% $-- $-- $ -- $ 2,644 $ 2,644 Interest on Premier subordinated obligation....... 4,000 7% -- -- -- 70 70 Interest on estimated average indebtedness.......... 1,000 8% -- -- -- 20 20 Reversal of interest expense on debt repaid............. (72) (94) (36 ) (1,128 ) (1,330) Amortization of deferred financing costs over the respective lives of the related debt obligations........ 10 -- -- 94 104 ----------- -------- ------- -------- ------- $ (62) $ (94) $ (36 ) $ 1,700 $ 1,508 =========== ======== ======= ======== ======= (7) Incremental income tax effects for pro forma adjustments, S-Corporation income, and Sun Sportswear's losses at an effective tax rate of 40%....... $-- $-- $ -- $ 184 $ 184 =========== ======== ======= ======== ======= (8) Dividends on 8% paid-in-kind convertible preferred stock..... $ 43 $-- $ -- $ -- $ 43 Accretion of discount related to fair value allocated to common stock purchase warrants......... 38 -- -- -- 38 ----------- -------- ------- -------- ------- $ 81 $-- $ -- $ -- $ 81 =========== ======== ======= ======== =======
28 PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF MARCH 29, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS)
PRO FORMA THE COMPANY MORNING SUN PREMIER ADJUSTMENTS PRO FORMA ----------- ------------ ------- ------------ ---------- ASSETS Current Assets: Cash............................ $ 357 $ 77 $ 61 $ -- $ 495 Accounts receivable, net........ 29,390 2,740 902 -- 33,032 Inventories..................... 47,838 6,279 1,817 -- 55,934 Prepaid expenses and other...... 4,529 525 1,084 -- 6,138 Income tax receivable........... 1,817 1,155 -- 1,600(1) 4,572 ----------- ------------ ------- ------------ ---------- Total current assets....... 83,931 10,776 3,864 1,600 100,171 Property, plant and equipment, net... 6,471 3,110 212 -- 9,793 Other noncurrent assets.............. 435 30 72 -- 537 Intangible assets.................... 22,979 751 -- 36,413(2) 60,143 ----------- ------------ ------- ------------ ---------- Total assets............... $ 113,816 $ 14,667 $ 4,148 $ 38,013 $170,644 =========== ============ ======= ============ ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt.......................... $ 2,612 $ 831 $ 10 $ (3,453)(3) $ -- Capital leases.................. 358 -- -- -- 358 Short-term debt................. 36,273 2,822 2,717 (32,227)(3) 9,585 Accounts payable and accrued liabilities................... 32,621 5,485 1,192 (3,850)(4) 35,448 ----------- ------------ ------- ------------ ---------- Total current liabilities................ 71,864 9,138 3,919 (39,530) 45,391 Long-term debt, net of current maturities......................... 9,000 1,652 96 88,492(3) 99,240 Capital leases, net of current maturities......................... 1,078 -- -- -- 1,078 Subordinated debt due to related parties.............................. 12,092 -- -- (8,092)(3) 4,000 Convertible subordinated debt........ -- -- -- 1,500(3) 1,500 Deferred income taxes................ 954 -- -- -- 954 Other................................ 295 -- 123 -- 418 ----------- ------------ ------- ------------ ---------- Total liabilities.......... 95,283 10,790 4,138 42,370 152,581 Mandatorily redeemable preferred stock.............................. 898 -- -- (898)(5) -- Mandatorily redeemable convertible preferred stock.................... 7,836 -- -- -- 7,836 Shareholders' equity: Common stock.................... 4 1,073 2 (1,075)(6) 4 Additional paid-in capital...... 10,539 7 10 733(7) 11,289 Retained earnings (deficit)..... (744) 2,797 (2) (3,117)(8) (1,066) ----------- ------------ ------- ------------ ---------- Total shareholders' equity..................... 9,799 3,877 10 (3,459) 10,227 ----------- ------------ ------- ------------ ---------- Total liabilities and shareholders' equity.... $ 113,816 $ 14,667 $ 4,148 $ 38,013 $170,644 =========== ============ ======= ============ ==========
29 NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET (1) Adjustment to reflect the tax benefit generated by the exercise of non-qualified stock options prior to the Morning Sun Acquisition..................... $ 1,600 ========= (2) Adjustment to reflect the effects of goodwill and deferred financing costs as follows: INTANGIBLE AMORTIZATION ASSET PERIOD ----------- ------------- Morning Sun.......................... $ 25,048 40 years Premier.............................. 7,615 40 years Note Offering expenses............... 3,750 10 years ----------- $ 36,413 =========== (3) To record a net increase in debt from the issuance of $100,000 of the Note Offering net of a discount of $760, a $4,000, 7% subordinated obligation and a $1,500 convertible subordinated note pursuant to the Note Offering and the Acquisitions, net of the repayment of certain debt obligations of the Company, Morning Sun and Premier as follows: ISSUANCES REPAYMENTS NET ADJUSTMENT ---------- ----------- -------------- Current maturities of long-term debt.............................. $ -- $ (3,453) $ (3,453) Short-term debt................... -- (32,227) (32,227) Long-term debt, net............... 99,240 (10,748) 88,492 Subordinated debt................. 4,000 (12,092) (8,092) Convertible subordinated debt..... 1,500 -- 1,500 ---------- ----------- -------------- $ 104,740 $ (58,520) $ 46,220 ========== =========== ============== The above repayment of short-term debt includes the following: Morning Sun.......................... $ (2,822) Premier.............................. (2,717) The Company revolver, net............ (26,688) ----------- $ (32,227) =========== (4) Adjustment to reflect the effects of the acquisitions of Morning Sun and Premier and the Note Offering as follows: Payment of an earnout related to the acquisition of Plymouth............ $(2,950) Payment of certain assumed contractual obligations of Morning Sun................................ (2,500) Contingent consideration related to the tax benefit generated by the exercise of non-qualified stock options prior to the Morning Sun Acquisition........................ 1,600 ------------- $(3,850) ============= (5) Adjustment to reflect redemption of the Company's Series A-1 and A-2 preferred stock with a portion of the proceeds from the Note Offering. (6) Adjustment to reflect the elimination of Morning Sun's and Premier's historical common stock accounts. 30 (7) Adjustment to reflect the effects of the acquisitions of Morning Sun and Premier as follows: Elimination of Morning Sun's and Premier's historical additional paid-in capital accounts........... $ (17) Stock issued related to the Morning Sun Acquisition.................... 750 ------------- $ 733 ============= (8) Adjustment to reflect the effects of the acquisitions of Morning Sun and Premier and the Note Offering as follows: Elimination of Morning Sun's and Premier's historical retained earnings........................... $(2,795) Effect of write-off of original issue discount associated with the early extinguishment of $3,500 face amount of subordinated debt pursuant to the Note Offering...... (322) ------------- $(3,117) ============= 31 SELECTED FINANCIAL DATA The following summary historical financial information for the fiscal years 1992 through 1996 has been derived from the audited financial statements of the Company. The statement of operations data for fiscal 1996 includes the results of operations of Plymouth Mills, Inc. ("Plymouth") from its date of acquisition, August 2, 1996. The information presented for the thirteen weeks ended March 30, 1996 and March 29, 1997 has been derived from the unaudited financial statements of the Company. The statement of operations data for the thirteen weeks ended March 29, 1997 includes the results of operations of Sun Sportswear, Inc. ("Sun Sportswear") from the date of the merger of the Company with Sun Sportswear (the "Sun Merger"), March 14, 1997.
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED ---------------------------------------------------------- ----------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MAR. 30, MAR. 29, 1992 1993 1994 1995(A) 1996 1996 1997 -------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............................... $ 48,069 $ 60,850 $ 76,754 $131,020 $169,452 $ 30,132 $ 34,907 Cost of goods sold...................... 39,376 51,640 64,846 106,576 127,845 22,761 26,520 -------- -------- -------- -------- -------- -------- -------- Gross profit........................ 8,693 9,210 11,908 24,444 41,607 7,371 8,387 Operating expenses...................... 7,511 7,285 10,221 25,549 32,529 6,341 8,602 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)............. 1,182 1,925 1,687 (1,105) 9,078 1,030 (215) Interest expense........................ 1,056 1,153 1,663 3,695 4,491 811 1,145 Other expense (income), net............. 80 89 -- (22) (234) (233) 125 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary gain............ 46 683 24 (4,778) 4,821 452 (1,485) Provision (benefit) for income taxes.... 87 254 99 (338) 789 -- (609) -------- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary gain................ (41) 429 (75) (4,440) 4,032 452 (876) Extraordinary gain...................... -- -- -- 500 -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)................... (41) 429 (75) (3,940) 4,032 452 (876) Dividends and accretion on preferred stock................................. -- -- -- -- 245 -- 165 -------- -------- -------- -------- -------- -------- -------- Net income (loss) available for common shareholders.......................... $ (41) $ 429 $ (75) $ (3,940) $ 3,787 $ 452 $ (1,041) ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common and common equivalent share...................... $ (.01) $ .14 $ (.02) $ (1.30) $ .90 $ .11 $ (.27) ======== ======== ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding......... 2,797,788 3,032,656 3,029,803 3,029,803 4,198,907 4,113,580 3,889,538 ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges...... 1.04 1.50 1.01 (b) 1.89(c) (b)(c) ======== ======== ======== ======== ======== ======== AS OF -------------------------------------------------------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MAR. 29, 1992 1993 1994 1995(A) 1996 1997 -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital......................... $ 1,951 $ 1,409 $ 5,927 $ (1,592) $ 4,667 $12,067 Total assets............................ 23,092 20,565 45,049 47,070 82,682 113,816 Total long-term obligations, including current maturities.................... 3,118 2,496 9,621 9,143 27,025 25,766 Mandatorily redeemable preferred stock................................. -- -- -- 945 7,613 898 Mandatorily redeemable convertible preferred stock (dividends payable-in-kind)...................... -- -- -- -- -- 7,836 Shareholders' equity.................... 2,130 2,654 3,221 (689) 3,229 9,799
- ------------ (a) For further discussion of the Company's loss in 1995, see "The Company -- Acquisitions -- Velva Sheen" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Fiscal year ended December 30, 1995 compared with fiscal year ended December 31, 1994." (b) For the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, earnings, as defined, were inadequate to cover fixed charges. The deficiencies were approximately $4.8 million and $1.5 million for the year ended December 30, 1995 and the thirteen weeks ended March 29, 1997, respectively. (c) On a pro forma basis after giving effect to the Exchange Offer, the Acquisitions, the Sun Merger, and the acquisition of Plymouth, as if such transations had occurred at the beginning of fiscal 1996, the ratio of earnings to fixed charges for fiscal 1996 would have been 1.47 and the deficiency for the thirteen weeks ended March 29, 1997 would be approximately $4.9 million. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE HEREIN. ON MARCH 14, 1997, SUN SPORTSWEAR MERGED WITH THE COMPANY AND WAS REINCORPORATED AS A DELAWARE CORPORATION. THE SUN MERGER WAS ACCOUNTED FOR AS A PURCHASE, AND THE FOLLOWING DISCUSSION OF RESULTS OF OPERATIONS, EXCEPT FOR THE DISCUSSION OF THE THIRTEEN WEEKS ENDED MARCH 29, 1997, RELATES ONLY TO THE OPERATIONS OF THE COMPANY BEFORE THE SUN MERGER. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of the Company's statements of operations expressed as a percentage of net sales. In 1995, the Company changed its fiscal year from the calendar year ended December 31 to a 52-53 week accounting period ending on the last Saturday of December. Due to the seasonal nature of the Company's business, operating results for the thirteen weeks ended March 30, 1996 and March 29, 1997 are not indicative of the results that are expected for the full year period.
YEAR ENDED THIRTEEN WEEKS ENDED ---------------------------------- --------------------- DEC. 31, DEC. 30, DEC. 28, MAR. 30, MAR. 29, 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................... 84.5 81.3 75.4 75.6 76.0 -------- -------- -------- -------- -------- Gross profit.................... 15.5 18.7 24.6 24.4 24.0 Operating expenses................... 13.3 19.5 19.2 21.0 24.6 -------- -------- -------- -------- -------- Operating income (loss)......... 2.2 (0.8) 5.4 3.4 (0.6) Interest expense..................... 2.2 2.8 2.7 2.7 3.3 Other expense (income), net.......... 0.0 0.0 (0.1) (0.8) 0.4 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary gain.......................... 0.0 (3.6) 2.8 1.5 (4.3) Provision (credit) for income taxes................................ 0.1 (0.2) 0.4 0.0 (1.8) -------- -------- -------- -------- -------- Net Income (loss) before extraordinary gain............ (.1) (3.4) 2.4 1.5 (2.5) Extraordinary gain on extinguishment of debt............................ -- 0.4 -- -- -- -------- -------- -------- -------- -------- Net income (loss)............... (0.1)% (3.0)% 2.4% 1.5% (2.5)% ======== ======== ======== ======== ========
THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED WITH THIRTEEN WEEKS ENDED MARCH 30, 1996 The Company's net sales increased approximately $4.8 million, or 15.8%, from $30.1 million in 1996 to $34.9 million in 1997. This increase was primarily attributable to the acquisition of the assets of Plymouth on August 2, 1996 and the Sun Merger on March 14, 1997. The Plymouth acquisition and the Sun Merger contributed approximately $9.0 million of net sales during 1997. Excluding these acquisitions, net sales declined approximately $4.2 million or 14%. The sales decline was primarily attributable to lower licensed cartoon character sales resulting from delays in realigning the Company's sales force during the period in anticipation of the completion of the Sun Merger, as well as certain other factors. The extended period before the closing of the Sun Merger prohibited the Company from effectively integrating its sales and marketing programs among the Company, Plymouth and Sun Sportswear. The delay created confusion among certain customers and licensors and hindered the Company's ability to effectively develop and market a coordinated line of licensed character products for its 1997 spring offering. Subsequent to the completion of the Sun Merger, the Company effectively transitioned all Sun Sportswear customer accounts and licensing relationships and realigned its 33 sales and marketing personnel in a manner in which it believes will enhance its ability to take advantage of future sales opportunities. Other factors impacting sales during the period included (i) a strategic decision by management to stop selling licensed cartoon character products, primarily Mickey Unlimited products, to one of its major customer's men's and boys' department in order to position the Company to sell to that customer's women's department, which management of the Company believes has significantly higher long-term revenue potential, and (ii) delayed sales in January and February to one of the Company's major customers due to a federal customs quota embargo on certain of the Company's products from China. The Company believes these items are temporary in nature and will not have a long-term continuing impact on its sales and profitability in future periods. The Company's gross profit increased approximately $1.0 million, or 13.8%, from $7.4 million in 1996 to $8.4 million in 1997, principally as a result of the increase in sales volume attributable to the Plymouth acquisition and the Sun Merger. Overall gross profit margin decreased to 24.0% in 1997 from 24.4% in 1996, primarily as a result of the decline in higher gross profit licensed cartoon character sales and a lower contributed gross profit from Sun Sportswear. See "The Company -- Acquisitions" "-- Sun Sportswear, Inc." Operating expenses increased approximately $2.3 million, or 35.7%, from $6.3 million in 1996 to $8.6 million in 1997. The increase resulted principally from the addition of two production facilities from the acquisition of Plymouth and the Sun Merger. As a percentage of net sales, operating expenses increased from 21.0% in 1996 to 24.6% in 1997. This increase was due to higher operating expenses as a percentage of sales at Sun Sportswear and the decline in licensed cartoon character sales. Interest expense increased approximately $0.3 million, or 41.2%, from $0.8 million in 1996 to $1.1 million in 1997, primarily as a result of increased borrowings under the Company's credit facility to fund its increased working capital requirements and borrowings incurred in connection with the Plymouth acquisition and the Sun Merger. Income tax benefit increased from $0.0 million in 1996 to approximately $0.6 million in 1997. In 1996, income tax expense was completely offset by the reversal of a valuation allowance on the Company's net deferred tax assets, most of which related to net operating loss carryforwards. FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30, 1995 The Company's net sales increased approximately $38.4 million, or 29.3%, from $131.0 million in 1995 to $169.5 million in 1996. The acquisition of Plymouth on August 2, 1996 contributed $14.8 million of sales during this period. Excluding Plymouth, net sales increased $23.6 million primarily as a result of the realization of the benefit from the successful implementation of the Company's business plan for Velva Sheen. See "The Company -- Acquisitions -- Velva Sheen." The Company's gross profit increased $17.2 million, or 70.2%, from $24.4 million in 1995 to $41.6 million in 1996, principally as a result of the increase in decorated product sales. Overall gross margin increased to 24.6% in 1996 from 18.7% in 1995, primarily as a result of: (i) increased sales volume, which resulted in improved operating efficiencies; (ii) improved sourcing and manufacturing, which resulted in lower cost of goods sold as a percent of net sales; (iii) improved pricing for the Company's imported fleece product line; and (iv) reduced embroidery production costs as a result of the Company's acquisition of Needleworks. Operating expenses increased $7.0 million, or 27.3%, from $25.5 million in 1995 to $32.5 million in 1996. The increase resulted principally from higher commission and royalty expense due to increased decorated product sales and additional administrative costs as a result of the Needleworks and Plymouth acquisitions. Additionally, in 1996 the Company recorded increased compensation expense pursuant to its incentive compensation plan. As a percentage of net sales, operating expenses dropped slightly from 19.5% in 1995 to 19.2% in 1996. 34 Interest expense increased $0.8 million, or 21.5%, from $3.7 million in 1995 to $4.5 million in 1996, primarily as a result of increased borrowings under the Company's credit facility to fund its increased working capital requirements and borrowings incurred in connection with the Plymouth acquisition. Income tax expense of $0.8 million was recorded in 1996, which reflects the reversal of a valuation allowance on the Company's net deferred tax assets, most of which is related to a net operating loss carryforward. FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED DECEMBER 31, 1994 Before being acquired by the Company, Velva Sheen's financial performance was deteriorating. Velva Sheen's net sales decreased 16.1% from $60.4 million in 1993 to $50.7 million in 1994. Following the acquisition, the Company developed a plan to improve Velva Sheen's operating efficiency and profitability. The plan included: (i) reducing facility personnel and related costs, particularly senior and mid-level management personnel to levels commensurate with other the Company operating locations; (ii) streamlining the facility's product development and manufacturing processes in order to increase throughput and improve on-time delivery, which included relocating Velva Sheen's non-licensed character business to another more suitable the Company facility and closing Velva Sheen's retail outlet store operations; (iii) eliminating unprofitable licenses and reducing the number of product offerings to focus Velva Sheen on its core product line of licensed cartoon character products; (iv) reducing inventory levels and the number of inventory types and styles to levels commensurate with the Company's expectations for Velva Sheen's sales levels; (v) implementing the Company's shelf stock sales and marketing program in order to increase inventory turns and stimulate sales; and (vi) realigning Velva Sheen's sales commission structure for in-house and outside sales personnel to more properly incentivize and compensate those personnel for their individual contributions. The implementation of the plan resulted in a number of non-recurring expenses in the second half of 1995, including: (i) severance and relocation costs for terminated personnel; (ii) additional reserves for inventory to bring carrying values in line with the Company's short-term inventory liquidation plan; (iii) license termination charges or minimum royalty charges for terminated or cancelled licenses; and (iv) costs associated with liquidating inventory and closing Velva Sheen's retail outlet stores. Management of the Company believes the successful implementation of the plan significantly reduced the operating cost structure of the facility and improved its prospects for growth and profitability in the future. The Company's net sales increased $54.3 million, or 70.7%, from $76.8 million in 1994 to $131.0 million in 1995. The increase in sales was primarily the result of the completion of the acquisition of Velva Sheen in November 1994. In addition, the Company's undecorated product sales increased during 1995 primarily as a result of the introduction of a fulfillment program for one of its major customers. The Company's gross profit increased $12.5 million, or 105.3%, from $11.9 million in 1994 to $24.4 million in 1995, as a result of the increase in sales from the Velva Sheen acquisition. Overall gross margin increased from 15.5% in 1994 to 18.7% in 1995, primarily as a result of a change in sales mix toward higher margin decorated sportswear sales due to the Velva Sheen acquisition. Operating expenses increased $15.3 million, from $10.2 million in 1994 to $25.5 million in 1995. As a percentage of net sales, operating expenses increased from 13.3% in 1994 to 19.5% in 1995. The increase was attributable primarily to increased commissions and royalties on decorated sportswear sales from Velva Sheen's operations and increased costs related to the implementation of the plan discussed above. Interest expense increased $2.0 million, from $1.7 million in 1994 to $3.7 million in 1995. The increase in interest expense was primarily attributable to an increase in borrowings under the Company's credit facility to fund its increased working capital requirements and borrowings incurred in connection with the Velva Sheen acquisition. 35 LIQUIDITY AND CAPITAL RESOURCES The Company has funded its working capital requirements, capital expenditures and acquisitions from net cash provided by operations, borrowings under its credit facilities and proceeds from the issuance of debt and equity securities. On July 2, 1997, the Company entered into a Third Amended and Restated Loan and Security Agreement with Fleet Capital Corporation and BankBoston, N.A. which makes a revolving line of credit (the "Credit Facility") available to Brazos, Inc. (the "Borrower") in an aggregate principal amount of up to $50.0 million, subject to a borrowing base based upon eligible accounts receivable and inventory and various reserves established from time to time by the lenders. Borrowings under the Credit Facility bear interest at a rate per annum, at the Borrower's option, equal to (i) a prime rate plus 0.25%, or (ii) LIBOR plus 2.00%. The Credit Facility is secured by accounts receivable and inventory of the Borrower and will include certain covenants applicable to the Borrower, including requirements that the Borrower comply with certain financial ratios. The Credit Facility has an initial term of three years, subject to extension, and borrowings under the Credit Facility are guaranteed by the Company. The Company expects that its primary capital requirements will be for debt service, working capital and capital expenditures. The Company's capital expenditures in 1997 are expected to be approximately $1.3 million. The Company believes that funds generated from operations and funds available under the Credit Facility will be sufficient to meet its liquidity requirements for the foreseeable future. THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED WITH THE THIRTEEN WEEKS ENDED MARCH 30, 1996 Net cash used in the Company's operating activities was $3.8 million during the thirteen weeks ended March 29, 1997 compared to $0.5 million of cash provided by operating activities during the thirteen weeks ended March 30, 1996. Principal working capital changes in the 1997 period included a $9.2 million increase in inventory offset by a $7.7 million increase in accounts payable and accrued liabilities. Principal working capital changes in the 1996 period included a $4.2 million increase in accounts receivable, a $3.0 million increase in inventory and a $7.2 million increase in accounts payable and accrued liabilities. Net cash used in the Company's investing activities was $4.6 million and $0.2 million during the 1997 and 1996 periods, respectively. The Company's investing activities in the 1997 period included a $4.6 million investment in connection with the Sun Merger. Net cash generated by the Company's financing activities was $8.2 million during the 1997 period compared to $1.0 million used by financing activities during the 1996 period. Net cash provided in 1997 primarily included $6.3 million of net borrowings and $2.1 million from the sale of common and preferred stock. Net cash used in the 1996 period principally related to the repayment of approximately $1.0 million of borrowings. FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED WITH THE FISCAL YEAR ENDED DECEMBER 30, 1995 Net cash provided by the Company's operating activities in fiscal 1996 and 1995 were $5.1 million and $0.7 million, respectively. Principal working capital changes in 1996 included a $4.3 million decrease in inventory, a $1.0 million increase in prepaid expenses, a $1.8 million increase in other noncurrent assets and a $2.0 million decrease in accounts payable and accrued liabilities. Net cash used by the Company's investing activities was $21.4 million and $0.5 million during fiscal 1996 and fiscal 1995, respectively. The Company's investing activities during fiscal 1996 included $20.3 million utilized in the acquisition of Plymouth and $1.1 million of capital expenditures. Net cash generated by the Company's financing activities was $16.1 million and $0.4 million in fiscal 1996 and fiscal 1995, respectively. Net cash provided in fiscal 1996 primarily included $13.7 million of net borrowings and $2.5 million from the sale of common and preferred stock. Net cash provided by financing activities in fiscal 1995 principally related to net borrowings of $0.4 million. 36 FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED WITH THE FISCAL YEAR ENDED DECEMBER 31, 1994 Net cash provided from operating activities was $0.7 million in 1995, although the Company experienced a net loss of $3.9 million. Accounts payable and accrued liabilities increased $3.6 million without a significant increase in accounts receivable or inventory. Accounts receivable and inventory increased by $4.4 million in 1994. During 1995, the Company incurred capital expenditures of $0.5 million. During 1994, the Company invested $11.7 million in connection with its acquisition of Velva Sheen and incurred capital expenditures of $0.5 million. Financing activities provided $0.4 million of cash in 1995 as compared with net borrowings of $15.6 million in 1994, which were utilized to fund the Velva Sheen acquisition. OTHER The Company maintains an acquisition strategy focused on the acquisition of businesses that provide products or services that complement those offered by the Company. There can be no assurance that any such acquisitions will be consummated. 37 BUSINESS GENERAL The Company is a leading designer, manufacturer and marketer of decorated sportswear in the United States. The Company offers extensive and diversified product lines of licensed, proprietary and private label sportswear consisting of T-shirts, fleecewear (sweatshirts) and other casual apparel products. Many of the Company's licensed products include creative enhancements of classic cartoon characters, including Disney's Mickey Mouse, Disney's Winnie the Pooh and various Warner Bros. Looney Tunes characters, such as Bugs Bunny and the Tasmanian Devil. The Company has entered into license agreements with Disney, Warner Bros., Chic by H.I.S., Major League Baseball and most major colleges for the use of their characters and logos in developing the Company's products. The Company uses its in-house merchandising, design and art staff to create innovative designs for the Company's proprietary product lines under numerous Company-owned brand names and labels, including Brazos Sportswear, Morning Sun, Top Stitch and Thank Goodness for Kids. In addition, the Company designs private label products for its larger retail customers that are sold under particular customers' labels. The Company sells its products to a diverse customer base including (i) department stores such as J.C. Penney, May Co., Federated Department Stores and Mercantile, (ii) mass merchandising stores such as Wal-Mart, Kmart and Target, (iii) specialty stores such as Kids "R" Us and Garden Ridge and (iv) other regional and national retail chains. The Company believes it maintains a competitive advantage because of several factors, including its (i) extensive and diversified lines of licensed, proprietary and private label products, (ii) award winning in-house merchandising and design staff, (iii) unique sales and marketing programs tailored to the needs of specific customers and markets, (iv) diverse customer base, (v) flexible and efficient manufacturing capabilities and (vi) commitment to a low cost structure. The Company believes growth in the decorated sportswear market has resulted from: (i) an increased preference for comfortable apparel selections; (ii) more flexible dress codes, including greater acceptance of casual wear in the workplace; (iii) a heightened emphasis on physical fitness including increased participation in sports; (iv) improved characteristics that have enhanced consumer appeal, including improvements in fabric weight, blends and construction, and increased offerings of size, color and style; (v) the enhancement of screenprinted graphics and embroidered designs primarily resulting from more advanced manufacturing equipment and processes; and (vi) the increased use of "attitude" apparel. For example, the Company believes that more people are using apparel as a way to express themselves or show affinity with a group, cause or idea. The Company believes that these trends should continue to drive industry growth. BUSINESS STRATEGY The Company intends to enhance its position as one of the leading designers, manufacturers and marketers of decorated sportswear and to increase its net sales and operating cash flow by continuing to pursue the following business strategies: EXTENSIVE LINES OF QUALITY PRODUCTS. The Company offers extensive and diversified lines of licensed, proprietary, private label and blank products. LICENSED PRODUCTS. Licensed products are decorated with classic cartoon characters and logos that the Company's artists vary and refine using different lettering, poses, activities or dress. The Company acquires rights to use characters and logos on specified types of garments, pays each licensor royalties on products sold displaying the licensed character or logo, and typically guarantees a minimum annual royalty. PROPRIETARY PRODUCTS. The Company develops its proprietary product lines for its exclusive use under numerous Company-owned brand names and labels. Proprietary products are merchandized using graphic designs based on a wide variety of themes, including "attitude," recreational, outdoor, wildlife, western, sports, patriotic, humor and seasonal themes. The Company's innovative designs and broad assortment of proprietary products have created a number of emerging Company-owned brand names and labels. The Company believes this increased brand awareness will further expand and enhance its customer relationships by creating a strong consumer following for its products. 38 PRIVATE LABEL PRODUCTS. The Company manufactures private label products for certain of its larger retail customers. The Company designs each private label product by working closely with a customer, creating a unique decorated sportswear line that is sold under that customer's label. The Company believes that providing its private label customers a combination of decorating, merchandising, design, manufacturing and sourcing services afford it a competitive advantage because many other suppliers only provide contract printing or embroidery services. The Company's private label customers include Target, Wal-Mart and Sears. BLANK PRODUCTS. The Company is a wholesale distributor of blank garments of recognized manufacturers such as Fruit of the Loom, Russell and Hanes, and sells these garments to over 12,000 customers that typically decorate the products for later sale. OTHER. Other products include custom manufactured athletic uniforms and custom designed products for corporate accounts. The Company believes its extensive and diversified product lines position it well to capitalize on retailers' desires to reduce purchasing and administrative costs by limiting the number of suppliers they use. INNOVATIVE MERCHANDISING AND DESIGN STAFF. The Company employs 14 in-house merchandising and design personnel and a staff of approximately 70 artists who work closely with customers to create innovative designs for the Company's sportswear lines. The Company's award winning merchandising and design staff has been recognized for its achievements by licensors and customers, and has received a number of awards, including the Graphic Excellence Award from Disney, the Vendor of the Year Award from J.C. Penney's Women's department, the Bugsy Award from Warner Bros. and the Vendor of the Year Award for Girls 4-14 from Target. UNIQUE COMBINATION OF SALES AND MARKETING PROGRAMS. The Company uses a unique combination of sales and marketing programs designed to address the differing needs of its diverse customer base. Key sales programs include: BOOKING PROGRAM. The Company works with its larger retail customers to custom design and merchandise a spring and fall product line of "fashion-basic," longer lead time products. The product line consists primarily of high quality, low price foreign sourced products. The Company's 14 in-house account executives work closely with customers to determine volume needs based on the current years' product line and past sales history. The Company books orders under this program prior to committing to overseas production. Production lead times vary by product but typically range from 60 to 120 days. CALENDAR GRAPHICS PROGRAM. The Company offers a calendar graphics program designed to provide customers with an extensive selection of graphics and a wide variety of garments and size mixes but with shorter lead times than under the booking program. Under the calendar graphics program, graphics designs are printed and available on a pre-scheduled basis throughout the year. The Company batches orders from numerous customers to gain production economies of scale to keep product costs competitive. Therefore, customers can order in minimum quantities of two to four dozen while gaining the pricing advantages of much larger runs. Production lead times generally range from three to four weeks. SHELF STOCK PROGRAM. The Company also offers a shelf stock program that consists of preprinted inventory it delivers to customers on short lead times, typically within five days of receipt of an order. Products are sold through this program by approximately 100 independent sales representatives who call on individual customer stores. In addition, the Company uses an electronic data interchange system ("EDI") through which customers place orders to replenish their stock with weekly shipments of products that are selling well. The program also provides the Company with information that enables the Company to assess market trends and to respond promptly to the success of individual products or graphics. The shelf stock program allows major retailers to tailor their buying to the specific needs of each store and reduces the guesswork and risks of the "corporate buy" allocation approach. In order to minimize the Company's investment in inventory, the Company limits the graphics under this program to only a portion of those the Company offers in its calendar graphics 39 program. However, the program is attractive to the Company's customers because it consists of the Company's most popular graphics, and new concepts are added periodically as less popular designs are phased out. The Company's marketing programs have enabled it to improve sales and more efficiently manage its inventory, production, distribution and other costs while providing its customers with exceptional service and support. DIVERSE CUSTOMER BASE. Unlike many of the Company's competitors that concentrate marketing efforts on a limited segment of the sportswear market, the Company sells its decorated sportswear products to a diverse customer base including department stores, mass merchandising stores and specialty and other stores. This marketing strategy allows the Company to cover a large portion of the retail market while reducing its exposure to any one market segment. In addition, the Company believes that the breadth of its customer base provides a competitive advantage in obtaining new licenses from licensors seeking to introduce their products through multiple distribution channels. EXPANSION AND ENHANCEMENT OF CUSTOMER RELATIONSHIPS. The expansion of the Company's product lines and license portfolio has provided significant cross-selling opportunities by increasing the number of departments within a retailer that may sell the Company's products. For example, the Company is targeting sales of women's sportswear to retail customers that traditionally have sold only the Company's men's and boys' sportswear. In addition, the Company maintains a staff of 14 in-house account executives and approximately 100 independent sales representatives to pursue additional large customers. The Company has also established a telemarketing program to market its products to local and regional retailers. FLEXIBLE AND EFFICIENT MANUFACTURING. Many of the Company's competitors do not operate production facilities of their own and, therefore, must contract with third parties to provide the value added decorating process. The Company believes that operating its own production facilities provides the Company with a competitive advantage through (i) increased manufacturing and production efficiencies, (ii) the flexibility to shift production among various facilities and (iii) better control over quality, delivery and costs. In addition, the Company's shelf stock and calendar graphics programs could not be implemented as effectively without in-house production capabilities. COMMITMENT TO LOW COST STRUCTURE. The Company is committed to controlling costs and improving operating efficiencies. The Company's recent acquisitions have resulted in significant improvements in the Company's purchasing power and its ability to realize certain economies of scale in manufacturing, marketing, distribution and administration. In addition, the Company concentrates on the high value-added production processes of custom design, screen printing and embroidery at its manufacturing facilities and outsources the capital intensive process of manufacturing undecorated blanks to a network of domestic and foreign manufacturers. This outsourcing allows the Company to maintain flexibility, low fixed costs and low levels of capital expenditures. INTERNATIONAL OPPORTUNITIES. The Company recently obtained a license from Walt Disney Enterprises of Japan, Ltd. to export and distribute Disney's classic cartoon character products directly to Japan. The Company's current marketing plans include sales to several major retail outlets in Japan that represent approximately 3,000 stores. The Company also is evaluating opportunities to sell its products in other countries. STRATEGIC ACQUISITIONS. The Company maintains an acquisition strategy focused on acquiring businesses that provide products or services that complement those offered by the Company. The criteria for identifying an attractive acquisition candidate is not limited to the revenue potential of the acquisition target, but also includes such factors as (i) expanding the Company's product lines, (ii) increasing manufacturing, production and other cost efficiencies, (iii) diversifying and expanding the Company's customer base and (iv) gaining access to the talents of key management, sales and design personnel. The Company has made eight acquisitions since 1989 that have brought significant strategic advantages to its business. 40 PRODUCTS The Company provides extensive and diversified product lines of licensed, proprietary and private label sportswear consisting primarily of T-shirts and fleecewear (sweatshirts) imprinted or embroidered to display cartoon characters, brands, logos and designs that are enhanced or created by the Company's in-house merchandising, design and art staff. The products are sold in a variety of styles, including basic pocket, long-sleeved and oversized T-shirts, night shirts and sweat pants. T-shirts are available in solid, stripe, roll sleeve, weathered natural and micro-stripe styles and range in fiber content from 50% cotton/50% polyester to 100% cotton. Fleecewear products range from seven ounces to 12 ounces in weight. The Company's products also include windsuits, denim jackets, parkas, shorts and knit shirts and more detailed fashion-oriented garments, all of which are available in a variety of colors, styles and fabric weights. The Company develops screen print and embroidery designs based on industry trends, visits to fashion and trade shows and frequent meetings with apparel label owners and major customers. Sales managers work closely with the Company's merchandisers, designers and artists to develop appropriate styles and color shades. The design process is interactive, requiring the creation and delivery of numerous samples for customer feedback and further changes. For larger customers, the design staff typically incorporates minor styling changes to a basic design to create a unique product line for the customer. The product development process also involves (i) production feasibility studies, (ii) analysis and documentation of garment and art trends, as well as cost and structure, (iii) prototype preparation for customers and trade shows, and (iv) limited test sales. LICENSES AND TRADEMARKS LICENSES. The Company obtains non-exclusive licenses to manufacture and market products with classic cartoon characters and other images. Many of the Company's license agreements limit sales of products to certain market categories. The Company's material licenses generally are for a term of one to two years but can be terminated on 30 days' notice. Typically, the licensor may terminate the license if specified minimum levels of annual net sales for licensed products are not met or for a failure by the Company to comply with the material terms of the license. In the ordinary course of its business, the Company continues to produce products under expired licenses based on letter agreements or oral representations from licensors to the effect that continued production will be permitted pending negotiation of new licenses. Accordingly, the Company's licensing arrangements are dependent primarily upon maintaining a good relationship between the Company and its licensors. The license agreements (i) generally require minimum annual payments and certain quality control procedures and (ii) give the licensor the right to approve products licensed by the Company. The Company believes it has good relationships with its licensors and has generally been able to obtain renewals of expired licenses and to obtain the required approvals for licensed products. 41 The following table sets forth information concerning certain of the Company's licenses, including (i) the licensed product, (ii) the primary distribution channel and (iii) the target consumer for the licensed product.
MAJOR CUSTOMERS ----------------------------------- TARGET CONSUMER MASS DEPARTMENT SPECIALTY --------------------- MERCHANT STORE STORE MEN WOMEN YOUTH -------- ---------- --------- --- ----- ----- DISNEY Mickey Mouse & Classic Characters..... X X X X X X Winnie the Pooh....................... X X X X X X WARNER BROS. Warner-Looney Tunes (Standard Characters)(1)..................... X X X X X Warner-Looney Tunes (Cross License)(2)........................... X X X X X X OTHER CHARACTERS Garfield.............................. X X X X X Betty Boop............................ X X X SPORTS Major League Baseball................. X X X X X X Minor League Baseball................. X X X X X X The Collegiate Licensing Co.(3)....... X X X X X X University of Notre Dame.............. X X X X X X FILM PROPERTIES The Little Mermaid.................... X X X 101 Dalmatians Live Action............ X X X X The Hunchback of Notre Dame........... X X X X The Lost World Jurassic Park.......... X X X X Anastasia............................. X X X INTERNATIONAL Disney Japan -- Winnie the Pooh....... X X X X X X Disney Japan -- Mickey Mouse.......... X X X X X X OTHER................................... Budweiser............................. X X X X Chic.................................. X X X Chic HIS.............................. X X X
- ------------ (1) Allows use of Looney Tunes characters. (2) Allows use of Looney Tunes characters on collegiate products. (3) Represents licensing and sublicensing arrangements with more than 100 colleges and universities. PROPRIETARY TRADEMARKS. The Company has registered, or has applied for registration for, a variety of trademarks under which it sells a number of its products, including Brazos Sportswear, Morning Sun, Top Stitch, Red Oak Sportswear, Xenogenesis, Red Fox and Name of the Game. The Company believes that its trademarks have significant value. The level of copyright and trademark protection available to the Company for proprietary designs and characters varies depending on several factors including the degree of originality and the distinctiveness of the associated trademarks and designs. SALES AND MARKETING SALES FORCE. The Company has a sales force of 14 in-house account executives who concentrate on national retail accounts and approximately 100 independent sales representatives who sell one or more of the Company's product lines. The in-house account executives work with large accounts and buyers for major retailers to tailor programs specifically for the needs of each customer. The independent sales representatives cover the entire United States and call on chain stores and individual retailers. Management 42 believes that its combination of in-house and independent sales representatives gives the Company a broad coverage of the retail marketplace. The Company compensates key account executives through a combination of salary and bonus incentives tied to sales and profitability. The Company compensates independent sales representatives on a commission-only basis, with rates ranging from 1% to 10% of net sales, and determines their territories by geographic location, market categories covered and products sold. OTHER SALES EFFORTS. The Company also maintains a presence in New York City's garment district, where the Company has (i) a 4,200 square foot apparel showroom for women's, men's and boys' apparel, (ii) a 1,900 square foot showroom for girls' apparel and (iii) an 855 square foot showroom for Morning Sun's women's apparel. The Company also presents its products at trade shows, including the semi-annual MAGIC Show, and operates a telemarketing group that focuses on small customers who might otherwise not be covered by a sales representative. CUSTOMERS. The Company's primary distribution channels are through: (i) department stores such as J.C. Penney, May Co. and Mercantile; (ii) mass merchandisers such as Wal-Mart, Kmart and Target; and (iii) specialty stores such as Kids "R" Us and Garden Ridge. On a pro forma basis after giving effect to the Exchange Offer, the Acquisition, the Sun Merger and the acquisition of Plymouth, as if such transactions had occurred at the beginning of fiscal 1996, the Company's sales to Wal-Mart, J.C. Penney, Target and Kmart accounted for approximately 16.9%, 15.0%, 5.9% and 4.9%, respectively, of its sales. SOURCING OF GARMENTS The Company sources blank garments from a network of domestic and foreign manufacturers that are required to comply with the Company's stringent quality specifications. Suppliers are selected based on the product's design, style, quality specifications and required lead times. A majority of the Company's blank garments are sourced through large domestic mills and independently owned contractors with manufacturing facilities primarily in the United States, China, Guatemala, Pakistan and Mexico. Blank garments requiring short delivery times generally are purchased from domestic suppliers, while products that require greater finishing detail or allow longer delivery times generally are purchased overseas. The Company also orders blank garments from foreign sources when the magnitude of the order is sufficient. The Company anticipates that the percentage of blank garments that are imported will increase because of the Company's increased focus on decorated sportswear sales, the increasing size of its customers' orders and the Premier Acquisition. The relative proportion of blank garments purchased from domestic and foreign suppliers may vary from time to time depending on the factors described above and other competitive factors. The Company believes that its sources of blank garments are sufficient to satisfy its current requirements. Generally, each supplier agrees to produce finished garments in accordance with samples and specifications the Company provides. The Company's representatives regularly visit the facilities of both foreign and domestic suppliers to ensure quality and compliance with the Company's specifications. The Company also conducts quality control inspections that include testing for shrinkage, dye and finish consistency, color fastness, size specification adherence, construction strength and uniformity. At times, the Company uses sourcing agents who assist in selecting and overseeing foreign third-party manufacturers and monitoring quotas and other trade regulations. The Company's production staff and sourcing agents oversee all aspects of apparel manufacturing and production. The Company and its sourcing agents separately negotiate with suppliers for the purchase of fabrics, which are then purchased either by the Company or its suppliers. Premier is one of the Company's most significant sourcing agents. For fiscal 1996, sales by Premier to the Company represented approximately 32.3% of Premier's net sales. The Company believes the Premier Acquisition will significantly enhance the Company's foreign sourcing capabilities and provide it increased flexibility in the timing, delivery and cost of its products. The Company generally does not enter into long-term contracts with its suppliers. The Company believes that its relationships with its suppliers are good. 43 PRODUCTION AND MANUFACTURING The Company is committed to controlling costs and improving operating efficiencies. Recent acquisitions have resulted in significant improvements in the Company's purchasing power and its ability to realize certain economies of scale in manufacturing, marketing, distribution and administration. In addition, the Company concentrates on the high value-added production processes of custom design, screen printing and embroidery at its manufacturing facilities and outsources the capital intensive process of manufacturing undecorated blanks to a network of domestic and foreign manufacturers. This outsourcing allows the Company to maintain flexibility, low fixed costs and low levels of capital expenditures. Production of the Company's products requires applying garment decorations through screen printing or embroidery. SCREEN PRINTING. The screen printing process begins with the preparation of a design by the Company's artists. The Company tests new designs for printability and color dynamics and produces sales and production samples. The Company also stocks over 140 pigment colors and numerous ink bases, which allows for in-house development of new ink applications and techniques. In the printing process, screens are positioned in automatic printing presses where inks are pressed through the screen to duplicate the design on the garment. Garments bearing designs on different portions of the garment may move through the printing process several times. Following printing, the garments are dried, making the printed design permanent and washable. The Company operates 60 automatic screen printing presses, including two belt presses, which permit a design to be printed over an entire side of a garment ("overall print" designs). Most of the screen printing presses are color printing presses with eight to twelve color printing capability, which can print either spot designs or overall print designs. Each press is operated by a group of trained employees who work together as a team. The Company believes that this approach contributes to the flexibility, quality and speed of its production process. The Company believes that its capacity is sufficient for its needs and that during seasonal peaks sufficient sources of outside production are available to the Company to meet its production needs. EMBROIDERY. The embroidery process begins with the preparation of a design by the Company's artists. The Company tests new designs for embroiderability as it relates primarily to stitch count and color selection and produces sales and production samples. After all designs are approved, the design that is to be embroidered is formatted onto a computer disk, which is then programmed into the embroidery machine. Each embroidery machine has 12 sewing heads, permitting one dozen garments to be embroidered at one time. Garments are trimmed, packed in the Company's warehouse and shipped directly to the customer or to other Company facilities for distribution to the customer. The Company operates 41 embroidery machines. QUALITY CONTROL. The Company maintains a quality control department responsible for monitoring all phases of production and ensuring that purchased garments meet the Company's quality standards. The Company develops and inspects prototypes of each product type, establishes fittings based on the prototype, inspects samples and, through its employees or sourcing agents, inspects fabric before cutting. The Company or its sourcing agents inspect the final product before shipment to the Company's facilities. The Company believes that its product quality is among the highest in its market segment. PRODUCT SHIPMENT. The Company believes responding quickly to customer requirements and meeting delivery schedules consistently are important factors in its business. Although customers often place orders for garment styles as long as 20 weeks in advance, customers generally select the specific art designs to be printed on ordered garments periodically for delivery within as few as two days following the design selection. To provide on-time delivery, the Company has developed a bar coding capability to assist in rapid stock control of inventory and has implemented a computerized manufacturing information system to make its manufacturing process more efficient. The Company can place garments on hangers before shipping, affix price tags and other product information, and can ship garments polybagged or folded. These services 44 reduce the time required to prepare the garments for display and thereby enable customers to stock their racks and shelves more quickly. The Company's customers generally bear all shipping costs. The Company operates six production facilities in the United States that operate an aggregate of 60 automatic screen printing presses and 41 embroidery machines. Set forth below is a brief description of each of the Company's manufacturing facilities: SQUARE OWNED/ LOCATION EQUIPMENT FEET LEASED - ---------------------------------------------------------- --------- -------- Cincinnati, OH 12 automatic screen printing presses 187,439 Leased 2 embroidery machines Staten Island, NY 14 automatic screen printing presses; 153,000 Leased 250 yards of cutting tables College Station, TX 12 automatic screen printing presses; 88,625 Leased 5 embroidery machines Kent, WA 15 automatic screen printing presses 230,000 Leased Millersburg, PA 24 embroidery machines 54,000 Owned Tacoma, WA 7 automatic screen printing presses; 171,000 Leased 10 embroidery machines The Company distributes blank garments from 9 warehouses located throughout the United States. The Company also maintains a cut and sew facility in Dallas, Texas, three showrooms in the garment district of New York City and an administrative office in Clute, Texas. REGULATION The Company is subject to federal, state and local environmental laws and regulations, including laws relating to employee knowledge of, exposure to, and disposal of inks, dyes, photographic chemicals and cleaning solvents. The Company believes that its operations comply in all material respects with applicable environmental laws and regulations. Although the Company continues to make capital expenditures for environmental protection, it does not anticipate that significant expenditures will be required to remain in compliance with environmental requirements. COMPETITION The apparel industry is highly competitive. The Company competes with numerous apparel vendors, including those with their own retail stores and those whose merchandise displays licensed cartoon characters and logos of professional sports teams and colleges and universities. The Company also competes through a combination of graphics, decorating techniques, packaging and retail presentation. Competitive factors include product quality, access to popular licenses, price, ability to meet delivery requirements and other aspects of customer service, changes in styles and consumer preferences, and the limited availability of customer shelf and rack space. BACKLOG The Company typically receives purchase orders several months in advance of delivery. A majority of these purchase orders typically can be canceled without penalty or cancellation charges. On a pro forma basis after giving effect to the Exchange Offer, the Acquisition, the Sun Merger and the acquisition of Plymouth, as if such transactions had occurred at the beginning of fiscal 1996, the Company's backlog of orders was approximately $91 million, all of which is expected to be shipped in 1997. EMPLOYEES At July 2, 1997, the Company employed approximately 1,800 full-time employees. None of the Company's employees are covered by a collective bargaining agreement, other than a portion of the Company's employees at the Company's Cincinnati facility. The collective bargaining agreement with respect to such employees expires in July 1997. The Company is currently in negotiations for a new collective bargaining agreement for its Cincinnati facility and expects that an agreement will be entered into 45 in the ordinary course, consistent with past practices. The Company believes that its employee relations are good. LEGAL PROCEEDINGS A lawsuit filed in February 1994 is pending in the Supreme Court of the State of New York, County of Oneida, against the Company, E.R.O. Industries, Inc., Toys "R" Us, Inc., Grace International Apparel, Inc., and Bradlees Department Store. The plaintiff is a child who was severely burned while allegedly lying in a polyester slumber sack (manufactured by E.R.O. Industries, Inc. and sold by Toys "R" Us, Inc.), watching television and playing with a butane lighter. He was allegedly wearing a flannel shirt (manufactured by Grace International Apparel, Inc. and sold by Bradlees Department Store) over a T-shirt (printed by the Company and sold by Bradlees Department Stores). In July of 1995, Bradlees Department Stores filed for Chapter 11 protection. The plaintiff seeks compensatory damages of $50 million against all defendants and punitive damages of $50 million against each defendant under various tort theories. The Company has tendered the defense of this suit to its insurance carrier, which is opposing the suit vigorously. The Company believes its coverage is sufficient in the event it is held liable for compensatory damages. While its coverage may not extend to punitive damages awards, the Company believes there are no grounds for such damages. In July 1997, the trial judge granted the Company's motion for summary judgement regarding claims for punitive damages against the Company, resulting in the dismissal of all such claims. Although it cannot predict with certainty the outcome of this suit, the Company believes its disposition should not result in a material adverse effect on the results of operations or the financial condition of the Company. The Company is subject to other legal proceedings in the ordinary course of business. While the outcome of lawsuits or other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial condition or results of operations of the Company. 46 MANAGEMENT The table below sets forth certain information regarding the executive officers and directors of the Company: NAME AGE POSITION - ------------------------------------ --- ------------------------------------- Randall B. Hale..................... 34 Chairman of the Board and Director J. Ford Taylor...................... 40 President, Chief Executive Officer and Director F. Clayton Chambers................. 37 Vice President, Chief Financial Officer, Treasurer, Secretary and Director Alan B. Elenson..................... 47 President of Plymouth Mills Facility and Director Robert C. Klein..................... 46 President -- Morning Sun Facility* Laurence E. Crabb................... 44 President -- Premier Facility* R. Wayne Hatcher.................... 47 President -- CC Creations and Red Oak Facility Samuel T. McKnight.................. 52 President -- Blank Distribution Division Deborah S. Williams................. 38 President -- Velva Sheen Facility Nolan Lehmann....................... 53 Director Michael S. Chadwick................. 45 Director - ------------ * Will take office upon closing of the Acquisitions. RANDALL B. HALE. Mr. Hale has been a director and chairman of the board of the Company or its predecessors since 1992. He has served as a vice president of Equus and Equus Capital Management Company ("Equus Capital") since 1992 and a director of Equus Capital since 1996. From 1985 to 1992, he was employed by Andersen Worldwide. Mr. Hale is a director of American Residential Services, Inc. and is also a director of numerous privately-owned companies. Mr. Hale is a certified public accountant. J. FORD TAYLOR. Mr. Taylor has been a president, chief executive officer and a director of the Company or its predecessors since 1996. He was president of the decorated sportswear operations from 1995 until 1996 and vice president -- operations of the decorated sportswear operations from 1993 until 1995. Mr. Taylor served as president of the CC Creations and Red Oak facility in College Station, Texas from 1990 to 1993. He founded CC Creations in 1982 which he owned and operated before its acquisition by the Company. F. CLAYTON CHAMBERS. Mr. Chambers has been a director of the Company or its predecessors since 1989. He has served as vice president, chief financial officer, treasurer and secretary of the Company since January 1995, and previously served as a consultant to the Company beginning in May 1994. Mr. Chambers was a principal in the firm of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm located in Houston, Texas, from 1988 until 1994. He was employed by Lovett Mitchell Webb & Garrison, an investment banking firm, from 1986 until 1987. ALAN B. ELENSON. Mr. Elenson has been a director of the Company or its predecessors since 1996. He founded Plymouth in 1975 and owned and operated Plymouth before its acquisition by the Company in August 1996. Mr. Elenson is president of the Company's Plymouth Mills operations. ROBERT C. KLEIN. Mr. Klein has been president of the Morning Sun facility since 1993. He served as president and chief executive officer of Morning Sun before its acquisition by the Company. From 1978 until 1993, Mr. Klein served in a variety of positions within manufacturing, merchandising and sales at Jantzen, Inc., a division of VF Corp., and was vice president of womenswear before he left Jantzen to join Morning Sun. LAURENCE E. CRABB. Mr. Crabb has been president of the Premier facility since 1997. He founded Premier in 1986 and owned and operated Premier before its acquisition by the Company. Mr. Crabb was employed by Jansport from 1982 until 1986, where he had expanded responsibilities for merchandising and sourcing production throughout Asia, with an emphasis in China. He was employed by Levi Strauss and Company from 1977 until 1982, where he was responsible for sourcing production throughout Asia. 47 R. WAYNE HATCHER. Mr. Hatcher has been president of the CC Creations and Red Oak facility since 1996. From 1985 to 1995, he served in a managerial position with the Company and in 1995 was promoted to vice-president -- operations of the CC Creations and Red Oak facility. Mr. Hatcher was employed by Robinson Company, a screen printer, from 1981 to 1985 and by a retail sporting goods and wholesale sportswear store, Purvis Sportswear, from 1972 to 1981. SAMUEL T. MCKNIGHT. Mr. McKnight has been president of the Blank Distribution Division since 1974. He founded Gulf Coast Sportswear, the predecessor of the Company, in 1974. From 1972 to 1974 Mr. McKnight served as president of M & M Designs, a shirt printing company. DEBORAH S. WILLIAMS. Ms. Williams has been president of the Velva Sheen facility since 1996. She served as vice president of purchasing from 1994 until 1996. From 1990 to 1994 Ms. Williams served as director of purchasing of Velva Sheen and from 1982 to 1990 was a buyer at Velva Sheen. NOLAN LEHMANN. Mr. Lehmann has been a director of the Company or its predecessors since 1989. He has served as a director and president of Equus Capital since 1980, and as a director and president of Equus since inception. Before joining Equus Capital, Mr. Lehmann served in a number of executive management positions with Service Corporation International from 1973 to 1980. Mr. Lehmann is also a director of Allied Waste Industries, Inc., American Residential Services, Inc., Drypers Corporation and Garden Ridge Corporation. In addition, he serves as a director of several privately-owned companies. Mr. Lehmann is a certified public accountant. MICHAEL S. CHADWICK. Mr. Chadwick has been a director of the Company or its predecessors since 1989. He is a senior vice president and a managing director of the corporate finance department of Sanders Morris Mundy, a Houston-based financial services and investment banking firm. From 1988 to 1994, Mr. Chadwick served as president of Chadwick, Chambers & Associates, Inc., an investment and merchant banking firm located in Houston, Texas. Mr. Chadwick presently serves on the Board of Directors of Watermarc Food Management Company and Blue Dolphin Energy Company, publicly traded corporations, and Moody-Price, Inc., a privately-owned corporation. EXECUTIVE COMPENSATION Set forth below is certain information concerning the compensation of the executive officers of the Company who have remained its executive officers following completion of the Sun Merger. Even though Sun Sportswear was the entity that survived the Sun Merger, no information with respect to the executive compensation of Sun Sportswear's executive officers has been included below because all of such executive officers resigned upon consummation of the Sun Merger and are no longer employed by the Company. SUMMARY COMPENSATION TABLE. The following table sets forth certain summary information concerning the compensation paid or accrued, during the fiscal years indicated, by the Company to its executive officers.
LONG-TERM COMPENSATION - SECURITIES UNDERLYING ANNUAL COMPENSATION STOCK OPTION -------------------------------------------- AWARDS YEAR SALARY BONUS OTHER(1) (SHARES) --------- ---------- ---------- --------- ---------------- J. Ford Taylor....................... 1996 $ 180,769 $ 160,000 $ 23,750 127,301 1995 $ 92,311 $ 55,000 $ 31,667 -- 1994 $ 75,000 $ 55,000 $ 31,667 -- F. Clayton Chambers.................. 1996 $ 135,100 $ 135,000 -- 24,930 1995 $ 95,308 -- -- -- 1994 $ 28,000 -- -- --
- ------------ (1) Represents payments made to Mr. Taylor pursuant to non-competition covenants included in his employment agreement. 48 OPTION GRANTS The following table sets forth certain information with respect to stock options granted to executive officers during fiscal 1996. These stock options were granted under the Company's 1995 Incentive Stock Plan before the Sun Merger. All market values, numbers of shares underlying options and exercise prices have been adjusted to reflect the conversion and the reverse split in connection with the Sun Merger and the reincorporation, respectively.
INDIVIDUAL GRANTS ----------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE TOTAL AT ASSUMED ANNUAL NUMBER OF OPTIONS RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(1) OPTIONS IN FISCAL PRICE EXPIRATION ------------------------ NAME GRANTED(#) YEAR ($/SHARE) DATE 5% 10% - ------------------------------------- ----------- ---------- --------- ----------- ----------- ----------- J. Ford Taylor....................... 113,736 49.9% $1.98 3/27/06 $ 1,812,706 $ 3,019,824 13,565 6.0% $3.96 8/02/06 $ 189,338 $ 333,308 F. Clayton Chambers.................. 11,373 5.0% $1.98 3/27/06 $ 181,261 $ 301,966 13,557 6.0% $3.96 8/02/06 $ 189,226 $ 333,111
- ------------ (1) Potential values stated are the result of using the Commission's method of calculations of annually compounding 5% and 10% appreciation in value from the date of grant to the end of the option term. Such assumed rates of appreciation and potential realizable values are not necessarily indicative of the appreciation, if any, which may be realized in future periods. Since the above options were granted prior to the establishment of a trading market in the underlying security, the exchange offering price in connection with the Sun Merger, or $11.00 per share, was utilized. OPTION EXERCISES AND YEAR-END VALUES The following table sets forth information with respect to the unexercised options to purchase shares of common stock for each of the executive officers held by them at December 28, 1996. None of the executive officers exercised any stock options during fiscal 1996.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 DECEMBER 28, 1996(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------- ----------- ------------- ----------- ------------- J. Ford Taylor....................... 89,389 37,912 $ 779,430 $ 341,966 F. Clayton Chambers.................. 21,139 3,791 $ 163,831 $ 34,195
- ------------ (1) Represents the difference between the price of the common stock set forth in the Sun Merger with the Company and any lesser exercise price. COMPENSATION OF DIRECTORS Each non-employee board member receives an annual fee of $16,000 for his service on the board of directors and reimbursement of travel expenses incurred for attendance at meetings. BRAZOS ANNUAL INCENTIVE COMPENSATION PLAN Effective December 30, 1995, Brazos, Inc., a wholly-owned subsidiary of the Company, implemented its Annual Incentive Compensation Plan (the "Incentive Plan"), which is a nonqualified compensation plan for its full-time employees that provides that a percentage of its annual net income after taxes be distributed among participating employees based on their annual base salaries. Before each fiscal year, the board of directors of Brazos, Inc. establishes a minimum income threshold (the "Threshold"). At the end of each fiscal year, after annual financial results have been finalized, a 49 percentage of the Company's after-tax income, net of the Threshold, is distributed to each participating employee up to a maximum percentage of his or her annual base income. The Incentive Plan is administered by a committee consisting of Messrs. Hale, Chadwick and Lehmann, and is subject to amendment, modification or termination by the board of directors of Brazos, Inc. at any time in its sole discretion. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Messrs. Taylor and Chambers that provide for current annual salaries of $250,000 and $150,000, respectively. The agreements expire on December 31, 1999. Mr. Taylor's agreement provides for minimum cash bonuses of $15,000, $17,500 and $20,000 for calendar years ending 1997, 1998 and 1999, respectively, and for additional discretionary bonuses. Mr. Chambers' agreement provides for minimum cash bonuses of $5,000, $7,500 and $10,000 for calendar years ending 1997, 1998 and 1999, respectively, and for additional discretionary bonuses. In addition, the agreements provide that upon termination of employment, the terminated officer will be prohibited from competing with the Company for a period of two years. The Company has also entered into employment agreements with Messrs. Elenson and McKnight, and will, in connection with the Acquisitions, enter into employment agreements with Messrs. Crabb and Klein, the chief executive officers of Premier and Morning Sun, respectively. 50 PRINCIPAL STOCKHOLDERS The following table presents certain information regarding the beneficial ownership of the Company's common stock by (i) each person who will beneficially own more than five percent of the outstanding shares of common stock, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all directors and executive officers as a group. NUMBER OF PERCENT OF NAME SHARES CLASS - ------------------------------------- --------- ----------- Equus II Incorporated................ 2,877,410(1) 56.3% 2929 Allen Parkway, Suite 2500 Houston, Texas 77019 Allied Investment Corporation........ 342,938 7.8% Allied Investment Corporation II 1666 K Street, N.W., Suite 901 Washington, D.C. 20006 Bank of America NW, N.A., d/b/a Seafirst Bank........................ 307,552 7.0% 820 A Street, Suite 250 P.O. Box 1493 Tacoma, Washington 98401 George Warny......................... 266,678(2) 6.0% 215 Flag Lake Drive Clute, Texas 77531 Samuel T. McKnight................... 225,039(3) 5.1% 215 Flag Lake Drive Clute, Texas 77531 Alan B. Elenson...................... 232,575(4) 5.0% 330 Tompkins Avenue Staten Island, New York 10304 J. Ford Taylor....................... 225,215(5) 5.0% 3860 Virginia Avenue Cincinnati, Ohio 45227 F. Clayton Chambers.................. 251,112(6) 5.7% 3860 Virginia Avenue Cincinnati, Ohio 45227 Michael S. Chadwick.................. 252,954(7) 5.7% 3100 Texas Commerce Tower Houston, Texas 77002 Randall B. Hale...................... 2,892,573(8)(9) 56.4% 2929 Allen Parkway, Suite 2500 Houston, Texas 77019 Nolan Lehmann........................ 2,886,887(10)(8) 56.4% 2929 Allen Parkway, Suite 2500 Houston, Texas 77019 All directors and executive officers as a group (six persons)........... 3,863,908(10) 69.1% - ------------ (1) Includes 170,839 shares which may be acquired upon exercise of warrants and 546,263 shares issuable upon conversion of preferred stock. (2) Includes 6,824 shares which may be acquired upon exercise of warrants and 36,999 shares issuable upon conversion of preferred stock. Includes 106,116 shares as to which Mr. Warny serves as trustee and as to which Mr. Warny disclaims beneficial ownership. Excludes 90,990 shares held by trusts for the benefit of Mr. Warny's children and for which Mr. McKnight serves as trustee and as to which Mr. Warny disclaims beneficial ownership. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) 51 (3) Includes 32,437 shares issuable upon conversion of preferred stock and includes 90,990 shares to which Mr. McKnight serves as trustee and as to which Mr. McKnight disclaims beneficial ownership. Excludes 106,116 shares held by trusts for the benefit of Mr. McKnight's children and for which Mr. Warny serves as trustee and as to which Mr. McKnight disclaims beneficial ownership. (4) Includes 232,575 shares that may be acquired upon exercise of warrants and options. Includes 226,896 shares held jointly with, or separately by, Joann Elenson, Mr. Elenson's spouse. (5) Includes 96,213 shares that may be acquired upon exercise of warrants and options and 29,908 shares issuable upon conversion of preferred stock. Includes 120,700 shares held jointly by Sandra Taylor, Mr. Taylor's spouse. (6) Includes 27,963 shares that may be acquired upon exercise of warrants and options and 21,752 shares issuable upon conversion of preferred stock of which 5,041 shares and 2,390 shares upon conversion are held in trust for Mr. Chambers' children. Mr. Chambers disclaims beneficial ownership of such shares. (7) Includes 22,367 shares that may be acquired upon exercise of warrants and options and 24,144 shares issuable upon conversion of preferred stock. (8) Includes 2,877,409 shares beneficially owned by Equus; each holder disclaims beneficial ownership of such shares. (9) Includes 15,164 shares that may be acquired upon exercise of options. (10) Includes 9,478 shares that may be acquired upon exercise of options. CERTAIN TRANSACTIONS AND RELATIONSHIPS In August 1996, Brazos, Inc. entered into a financial advisory agreement with Sanders Morris Mundy ("SMM") in connection with the Sun Merger. Mr. Chadwick is a senior vice president and a managing director of SMM and has been a director of the Company or its predecessors since 1989. The agreement provided for a success fee of approximately $160,000 based on the transaction price of the Sun Merger in addition to $100,000 previously paid in financial advisory fees. In April 1997, the Company entered into a financial advisory agreement with SMM pursuant to which SMM has agreed to provide certain financial advisory services to the Company. The agreement provides for payments to SMM in the amount of $10,000 per month, for a period of 12 months, but the Company has the right to terminate the agreement after the cumulative payment to SMM of $60,000. SMM is also entitled to a lump sum success fee of $50,000 in connection with the Morning Sun Acquisition. In connection with the Note Offering, SMM received an amount equal to the product of 0.25% multiplied by the gross proceeds of the Note Offering. SMM has agreed, however, to forego the $50,000 contingent lump sum success fee payable by the Company in connection with the Morning Sun Acquisition. Pursuant to an asset purchase agreement consummated in August 1996, the Company acquired substantially all of the assets of Plymouth for approximately $36 million. Upon consummation of the acquisition, Mr. Elenson, the controlling shareholder of Plymouth, became a director of the Company. As part of the purchase price for the acquisition of Plymouth's assets, the Company agreed to pay certain contingent consideration of $8.2 million, including $2.95 million aggregate principal amount of junior subordinated debentures maturing March 1999 and cash payments of $2.3 million (paid in October 1996) and $2.95 million (which was paid upon consummation of the Note Offering). The Company also issued to Plymouth junior subordinated debentures in the principal amounts of $3.0 million and $4.5 million that provide for periodic interest payments and that mature in December 1997 and December 2003, respectively. Upon consummation of the Sun Merger, the $3.0 million junior subordinated debenture was repaid in full. Upon consummation of the Note Offering, the $2.95 million junior subordinated debenture, the $2.95 million contingent payment amount and the $4.5 million debenture was repaid in full. To finance the acquisition of the Plymouth assets, Brazos, Inc. issued 2,500,000 shares of its preferred stock and the Company issued warrants to purchase 66,511 shares of Company common stock, at an exercise price of $.01 per share, for aggregate 52 consideration of $2,500,000. The Brazos, Inc. preferred stock has been converted into the same number of shares of the Company's Series B-2 Preferred Stock (the "Series B-2 Preferred Stock"). The warrants were exercised prior to the Sun Merger. Equus purchased 1,200,000 shares of Series B-2 Preferred Stock and a warrant to purchase 242,077 shares of Company common stock at a purchase price of $1.2 million. Equus also received warrants to purchase 30,261 shares of Company common stock at an exercise price of $4.62 per share. In connection with the Plymouth acquisition, SMM received warrants to purchase 20,168 shares of Company common stock at an exercise price of $4.62 per share. Of these warrants, 6,065 were assigned by SMM to Mr. Chadwick. Mr. Chadwick purchased 100,000 shares of Series B-2 Preferred Stock and a warrant to purchase 20,173 shares of Company common stock at a purchase price of $100,000. Mr. Taylor (together with his spouse) and each of Messrs. Warny and McKnight purchased 75,000 shares of Series B-2 Preferred Stock and a warrant to purchase 15,128 shares of Company common stock at a purchase price of $75,000 (with the warrant purchased by Mr. McKnight issued in the name of a trust for the benefit of his children). Mr. Chambers purchased 50,000 shares of Series B-2 Preferred Stock and a warrant to purchase 10,084 shares of Company common stock at a purchase price of $50,000. In addition, Mr. Chambers, as trustee for two trusts created for the benefit of his two children, purchased 25,000 shares of Series B-2 Preferred Stock and a warrant to purchase 5,042 shares of Company common stock at a purchase price of $25,000. In connection with the Plymouth acquisition, the following subordinated debt of Brazos, Inc. was converted into shares of the Company's Series B Preferred Stock (the "Series B Preferred Stock"): Equus converted subordinated notes in the amount of $3,350,000 and $178,500 into 3,528,500 shares; each of Messrs. Warny and McKnight converted subordinated notes in the amount of $234,392 and $29,750 into 264,142 shares; Mr. Chadwick converted subordinated notes in the amount of $75,000 and $29,750 into 104,750 shares; Mr. Chambers converted subordinated notes in the amount of $75,000 and $29,750 into 104,750 shares; and J. Ford and Sandra Taylor converted a note in the amount of $190,000 into 190,000 shares. All of these shares were subsequently exchanged for the same number of shares of the Company's Series B-1 Preferred Stock (the "Series B-1 Preferred Stock") pursuant to the Sun Merger. In connection with the Sun Merger, the Company issued 2,000,000 shares of the Company's Series B-3 Preferred Stock (the "Series B-3 Preferred Stock") and warrants to purchase 36,000 shares of Company common stock, at an exercise price of $50.00 per share, for aggregate consideration of $2,000,000. The warrants were converted into warrants to purchase 272,968 shares of Company common stock at an exercise price of $6.59 per share in connection with the Sun Merger. Equus purchased 1,030,000 shares of Series B-3 Preferred Stock and a warrant to purchase 140,578 shares of Company common stock at a purchase price of approximately $1.0 million. Mr. Taylor (together with his spouse) and each of Messrs. Chadwick, Chambers and Warny purchased 50,000 shares of Series B-3 Preferred Stock and a warrant to purchase 6,824 shares of Company common stock at a price of $50,000. Brazos, Inc. leases a 88,625 square foot office and production facility in College Station, Texas, from a partnership whose owners include corporations in which Equus and Messrs. Taylor, Chambers, Chadwick, McKnight and Warny have an ownership interest. The two leases are for a ten-year term expiring 2002 and provide for aggregate monthly lease payments of $18,500. Management is of the opinion that all the transactions described were on terms at least as favorable as could have been obtained from unaffiliated third parties. DESCRIPTION OF PREFERRED STOCK The Company's board of directors has the authority to issue 25,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences and the number of shares constituting any series, without any further vote or action by the stockholders. 53 The Company's board of directors has designated the rights and preferences for the three series of preferred stock, the Series B-1 Preferred Stock, the Series B-2 Preferred Stock and the Series B-3 Preferred Stock with authorized shares of 8,000,000, 4,000,000 and 3,500,000, respectively. As of March 31, 1997, there were 4,688,640, 2,630,332 and 2,007,447 shares issued and outstanding of Series B-1, Series B-2 and Series B-3 Preferred Stock, respectively. A brief summary of the designations, preferences, rights and limitations of each of the three series of Preferred Stock is set forth below. The Company, the holders of a majority of the Company's common stock and the holders of the preferred stock have agreed to amend the terms of the preferred stock to extend the mandatory redemption date to the earlier to occur of (i) December 31, 2008 or (ii) the occurrence of a Sale. For this purpose, a "Sale" is defined to include: (i) the sale, transfer, lease or conveyance of all or substantially all of the properties and assets of the Company or of the issued and outstanding voting securities of the Company; or (ii) the merger or consolidation of the Company with or into any other corporation or entity in which the Company is not the sole surviving corporation, other than a merger or consolidation in which the holders of shares of common stock of the Company immediately preceding the consolidation or merger receive, directly or indirectly, (a) 50% or more of the common stock of the sole surviving or continuing corporation outstanding immediately following the consummation of such merger or consolidation and (b) securities representing 50% or more of the combined voting power of the voting stock of the sole surviving or continuing corporation outstanding immediately following the consummation of such merger or consolidation. SERIES B-1 PREFERRED STOCK. Holders of the Company's Series B-1 Preferred Stock (the "Series B-1 Preferred Stock") are entitled to receive cumulative dividends of $.08 per share per annum, payable quarterly on the last day of March, June, September and December of each year. Except with accrued and unpaid dividends payable on redemption or conversion of the Series B-1 Preferred Stock, the dividends are payable by the issuance of additional shares of Series B-1 Preferred Stock based on the $1.00 per share liquidation value. The Series B-1 Preferred Stock is convertible at the option of the holders at a price of $11.00 per share, at any time, subject to certain adjustments. SERIES B-2 PREFERRED STOCK. The preferences, rights and limitations associated with the Company's Series B-2 Preferred Stock are identical to those in respect of the Series B-1 Preferred Stock, except the Series B-2 Preferred Stock is entitled to (i) voting rights similar to holders of common stock based on the number of shares of common stock into which the Series B-2 Preferred Stock could then be converted and (ii) a liquidation preference of $1.00 per share, plus the amount of any accrued but unpaid dividends on such share, with such preference being paid before any payments in respect of the Series B-1 Preferred Stock and any Junior Stock (as defined in the Company's certificate of incorporation). In addition, the Company may not redeem the Series B-2 Preferred Stock at the $1.00 per share redemption price if any shares of Series B-3 Preferred Stock are then outstanding. The Company and the other holders of Series B-2 Preferred Stock also have a right of first refusal to purchase all (but not less than all) of the shares of Series B-2 Preferred Stock desired to be transferred by any holder of such shares at the third party offering price. SERIES B-3 PREFERRED STOCK. The preferences, rights and limitations associated with the Company's Series B-3 Preferred Stock are identical to those in respect of the Series B-1 Preferred Stock, except the Series B-3 Preferred Stock is entitled to a liquidation preference of $1.00 per share, plus the amount of any accrued but unpaid dividends on such share, with such preference being paid prior to any payments in respect of the Series B-1 Preferred Stock, the Series B-2 Preferred Stock and the Junior Stock. The Company and the other holders of Series B-3 Preferred Stock have a right of refusal similar to the Series B-1 Preferred Stock and the Series B-2 Preferred Stock. 54 THE EXCHANGE OFFER PURPOSE AND EFFECT OF THE EXCHANGE OFFER The Notes were sold by the Company on July 2, 1997, and were subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons in transactions outside the United States in reliance on Regulation S under the Securities Act. In connection with the Note Offering, the Company entered into the Registration Rights Agreement, which requires, among other things, that on or before August 31, 1997, the Company (i) file with the Commission a registration statement under the Securities Act with respect to an issue of new notes of the Company identical in all material respects to the Notes, (ii) use their best efforts to cause such registration statement to become effective under the Securities Act and (iii) upon the effectiveness of that registration statement, offer to the Holders of the Notes the opportunity to exchange their Notes for a like principal amount of Exchange Notes, which would be issued without a restrictive legend and may be reoffered and resold by the holder without restrictions or limitations under the Securities Act (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act). A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The term "Holder" with respect to the Exchange Offer means any person in whose name the Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. Because the Exchange Offer is for any and all Notes, the number of Notes tendered and exchanged in the Exchange Offer will reduce the principal amount of Notes outstanding. Following the consummation of the Exchange Offer, Holders of the Notes who did not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement, and such Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for such Notes could be adversely affected. The Notes are currently eligible for sale pursuant to Rule 144A through the PORTAL System of the National Association of Securities Dealers, Inc. Because the Company anticipates that most holders of Notes will elect to exchange such Notes for Exchange Notes due to the absence of restrictions on the resale of Exchange Notes under the Securities Act, the Company anticipates that the liquidity of the market for any Notes remaining after the consummation of the Exchange Offer may be substantially limited. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Notes validly tendered and not withdrawn prior to 5:00 p.m. New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Notes accepted in the Exchange Offer. Holders may tender some or all of their Notes pursuant to the Exchange Offer. However, Notes may be tendered only in integral multiples of $1,000. The form and terms of the Exchange Notes are the same as the form and terms of the Notes except that (i) the Exchange Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof and (ii) the holders of the Exchange Notes generally will not be entitled to certain rights under the Registration Rights Agreement, which rights generally will terminate upon consummation of the Exchange Offer. The Exchange Notes will evidence the same debt as the Notes and will be entitled to the benefits of the Indenture. Holders of Notes do not have any appraisal or dissenter's rights under the General Corporation Law of Delaware or the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the Commission thereunder, including Rule 14e-1 thereunder. The Company shall be deemed to have accepted validly tendered Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders for the purpose of receiving the Exchange Notes from the Company. 55 If any tendered Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Notes will be returned, without expense, to the tendering Holder thereof as promptly as practicable after the Expiration Date. Holders who tender Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than transfer taxes in certain circumstances, in connection with the Exchange Offer. See " -- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time, on September 4, 1997, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. To extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice, followed by a public announcement thereof no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. The Company reserves the right, in its reasonable judgment, (i) to delay accepting any Notes, to extend the Exchange Offer or to terminate the Exchange Offer if any of the conditions set forth below under " -- Conditions" shall not have been satisfied, by giving oral or written notice of such delay, extension or termination to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a public announcement thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a prospectus supplement that will be distributed to the registered Holders, and, depending upon the significance of the amendment and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for a period of five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. If the Company does not consummate the Exchange Offer, or, in lieu thereof, the Company does not file and cause to become effective the Shelf Registration Statement within the time periods set forth herein, liquidated damages will accrue and be payable on the Notes either temporarily or permanently. See "Description of Exchange Notes -- Registration Rights." Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. INTEREST ON EXCHANGE NOTES The Exchange Notes will bear interest from July 2, 1997, the date of issuance of the Notes that are tendered in exchange for the Exchange Notes (or the most recent Interest Payment Date to which interest on such Notes has been paid). Accordingly, holders of Notes that are accepted for exchange will not receive interest that is accrued but unpaid on the Notes at the time of tender, but such interest will be payable on the first Interest Payment Date after the Expiration Date. Interest on the Exchange Notes will be payable semiannually on each January 1 and July 1, commencing on January 1, 1998. PROCEDURES FOR TENDERING Only a Holder of Notes may tender such Notes in the Exchange Offer. To tender in the Exchange Offer, a Holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Notes and any other required documents, to the Exchange Agent so as to be received by the Exchange Agent at the address set forth below prior to 5:00 56 p.m., New York City time, on the Expiration Date. Delivery of the Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. By executing the Letter of Transmittal, each Holder will make to the Company the representation set forth below in the second paragraph under the heading " -- Resale of Exchange Notes." The tender by a Holder and the acceptance thereof by the Company will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner whose Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered Holder promptly and instruct such registered Holder to tender on such beneficial owner's behalf. Signatures on the Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution (as defined herein) unless the Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not completed the box entitled "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"). If the Letter of Transmittal is signed by a person other than the registered Holder of any Notes listed therein, such Notes must be endorsed or accompanied by a properly completed bond power, signed by such registered Holder as such registered Holder's name appears on such Notes with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal or any Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Notes at The Depository Trust Company ("DTC") for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in DTC's system may make book-entry delivery of the Notes by causing DTC to transfer such Notes into the Exchange Agent's account with respect to the Notes in accordance with DTC's procedures for such transfer. Although delivery of the Notes may be effected through book-entry transfer into the Exchange Agent's account at the Depository, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to the Depository does not constitute delivery to the Exchange Agent. 57 All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, none of the Company, the Exchange Agent or any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agents that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Notes and (i) whose Notes are not immediately available, (ii) who cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent or (iii) who cannot complete the procedures for book-entry transfer, prior to the Expiration Date, may effect a tender if: (a) the tender is made through an Eligible Institution; (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at DTC) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at DTC) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Notes according to the guaranteed delivery procedures set forth above. WITHDRAWALS OF TENDERS Except as otherwise provided herein, tenders of Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the "Depositor"), (ii) identify the Notes to be withdrawn (including the certificate number(s) and principal amount of such Notes, or, in the case of notes transferred by book-entry transfer, the name and number of the account at DTC to be credited), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the 58 name of the person withdrawing the tender and (iv) specify the name in which any such Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time or receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for exchange will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Notes may be retendered by following one of the procedures described above under " -- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company shall not be required to accept for exchange, or to exchange Exchange Notes for, any Notes, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Notes, if: (a) any law, statute, rule, regulation or interpretation by the staff of the Commission is proposed, adopted or enacted, which, in the reasonable judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer or materially impair the contemplated benefits of the Exchange Offer to the Company; or (b) any governmental approval has not been obtained, which approval the Company shall, in its reasonable judgment, deem necessary for the consummation of the Exchange Offer as contemplated hereby. If the Company determines in its reasonable judgment that any of the conditions are not satisfied, the Company may (i) refuse to accept any Notes and return all tendered Notes to the tendering Holders, (ii) extend the Exchange Offer and retain all Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Notes (see " -- Withdrawals of Tenders") or (iii) waive such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the registered Holders, and, depending upon the significance of the waiver and the manner of disclosure to the registered Holders, the Company will extend the Exchange Offer for a period of five to ten business days if the Exchange Offer would otherwise expire during such five to ten business-day period. EXCHANGE AGENT Norwest Bank Minnesota, National Association will act as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal for the Notes and requests for copies of Notice of Guaranteed Delivery should be directed to the Exchange Agent, addressed as follows: By mail: Norwest Bank Minnesota, National Association P.O. Box 1517 Minneapolis, Minnesota 55480-1517 Attention: Corporate Trust Operations By courier: Norwest Bank Minnesota, National Association Norwest Center 6th and Marquette Avenue Minneapolis, Minnesota 55479-0069 Attention: Corporate Trust Operations 59 By hand delivery: Norwest Bank Minnesota, National Association Northstar East, 12th Floor 608 2nd Avenue Minneapolis, Minnesota 55479-0113 Attention: Corporate Trust Operations By facsimile (eligible institutions only): (612) 667-4927 For telephone inquiries: (612) 667-9764 FEES AND EXPENSES The expenses of the Exchange Offer will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone, facsimile or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith and pay other registration expenses, including fees and expenses of the Trustee, filing fees, blue sky fees and printing and distribution expenses. The Company will pay all transfer taxes, if any, applicable to the exchange of the Notes pursuant to the Exchange Offer. If, however, certificates representing the Exchange Notes or the Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered Holder of the Notes tendered, or if tendered Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of the Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the same carrying value as the Notes, which is the aggregate principal amount, as reflected in the Company's accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized in connection with the Exchange Offer. The expenses of the Exchange Offer will be amortized over the term of the Exchange Notes. RESALE OF EXCHANGE NOTES Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered for resale, resold and otherwise transferred by any Holder of such Exchange Notes (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such Holder's business and such Holder does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of such Exchange Notes. Any Holder who tenders in the Exchange Offer with the intention to participate, or for the purpose of participating, in a distribution of the Exchange Notes may not rely on the position of the staff of the Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989) and Morgan Stanley & Co., Incorporated (available June 5, 1991), or similar no-action letters, but rather must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. In addition, any such resale transaction 60 should be covered by an effective registration statement containing the selling security holders information required by Item 507 of Regulation S-K of the Securities Act. Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, may be a statutory underwriter and must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. By tendering in the Exchange Offer, each Holder will represent to the Company that, among other things, (i) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is a Holder, (ii) neither the Holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes and (iii) the Holder and such other person acknowledge that if they participate in the Exchange Offer for the purpose of distributing the Exchange Notes (a) they must, in the absence of an exemption therefrom, comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the Exchange Notes and cannot rely on the no-action letters referenced above and (b) failure to comply with such requirements in such instance could result in such Holder incurring liability under the Securities Act for which such Holder is not indemnified by the Company. Further, by tendering in the Exchange Offer, each Holder that may be deemed an "affiliate" (as defined under Rule 405 of the Securities Act) of the Company will represent to the Company that such Holder understands and acknowledges that the Exchange Notes may not be offered for resale, resold or otherwise transferred by that Holder without registration under the Securities Act or an exemption therefrom. As set forth above, affiliates of the Company are not entitled to rely on the foregoing interpretations of the staff of the Commission with respect to resales of the Exchange Notes without compliance with the registration and prospectus delivery requirements of the Securities Act. CONSEQUENCES OF FAILURE TO EXCHANGE As a result of the making of this Exchange Offer, the Company will have fulfilled one of its obligations under the Registration Rights Agreement, and Holders of Notes who do not tender their Notes generally will not have any further registration rights under the Registration Rights Agreement or otherwise. Accordingly, any Holder of Notes that does not exchange that Holder's Notes for Exchange Notes will continue to hold the untendered Notes and will be entitled to all the rights and limitations applicable thereto under the Indenture, except to the extent that such rights or limitations, by their terms, terminate or cease to have further effectiveness as a result of the Exchange Offer. The Notes that are not exchanged for Exchange Notes pursuant to the Exchange Offer will remain restricted securities. Accordingly, such Notes may be resold only (i) to the Company (upon redemption thereof or otherwise), (ii) pursuant to an effective registration statement under the Securities Act, (iii) so long as the Notes are eligible for resale pursuant to Rule 144A, to a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A, (iv) outside the United States to a foreign person pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation S thereunder, (v) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an institutional accredited investor in a transaction exempt from the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. OTHER Participation in the Exchange Offer is voluntary and Holders should carefully consider whether to accept. Holders of the Notes are urged to consult their financial and tax advisors in making their own decision on what action to take. The Company may in the future seek to acquire untendered Notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. The Company has no present 61 plans to acquire any Notes that are not tendered in the Exchange Offer or to file a registration statement to permit resales of any untendered Notes. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER The following discussion is based upon current provisions of the Internal Revenue Code of 1986, as amended (the "IRC"), applicable Department of the Treasury regulations, judicial authority and administrative rulings and practice. There can be no assurance that the IRS will not take a contrary view, and no ruling from the Internal Revenue Service (the "IRS") has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conditions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to Holders. Certain Holders of the Notes (including insurance companies, tax-exempt organizations, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) may be subject to special rules not discussed below. Each Holder of a Note should consult his, her or its own tax advisor as to the particular tax consequences of exchanging such Holder's Notes for Exchange Notes, including the applicability and effect of any state, local or foreign tax laws. The issuance of the Exchange Notes to Holders of the Notes pursuant to the terms set forth in this Prospectus will not constitute an exchange for federal income tax purposes. Consequently, no gain or loss would be recognized by Holders of the Notes upon receipt of the Exchange Notes, and ownership of the Exchange Notes will be considered a continuation of ownership of the Notes. For purposes of determining gain or loss upon the subsequent sale or exchange of the Exchange Notes, a Holder's basis in the Exchange Notes should be the same as such Holder's basis in the Notes exchanged therefor. A Holder's holding period for the Exchange Notes should include the Holder's holding period for the Notes exchanged therefor. The issue price, original issue discount inclusion and other tax characteristics of the Exchange Notes should be identical to the issue price, original issue discount inclusion and other tax characteristics of the Notes exchanged therefor. See also "Description of Certain Federal Income Tax Consequences of an Investment in the Exchange Notes." DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT FACILITY On July 2, 1997, the Company entered into the Credit Facility. The Credit Facility provides for borrowings of up to $50.0 million, subject to a borrowing base calculated by reference to eligible accounts receivable and inventory and various reserves established from time to time by the lenders. Borrowings under the Credit Facility will bear interest at a rate per annum, at the Borrower's option, equal to (i) a prime rate plus 0.25% or (ii) LIBOR plus 2.00%. The Credit Facility is secured by accounts receivable and inventory of the Borrower and includes certain covenants applicable to the Borrower, including requirements that the Borrower comply with certain financial ratios including, but not limited to, covenants related to minimum tangible net worth, a minimum interest coverage ratio and a minimum fixed charge coverage ratio. The Credit Facility has an initial term of three years and borrowings under the Credit Facility are guaranteed by the Company. OTHER INDEBTEDNESS A portion of the consideration paid pursuant to the Premier Acquisition consisted of (i) a convertible subordinated note (the "Convertible Note") of the Company in the principal amount of $1.5 million and (ii) a subordinated "earnout" obligation (the "Earnout Obligation") of the Company in the principal amount of $4.0 million. The Convertible Note bears no interest, has a seven-year term and is convertible, at the holder's option, into 136,364 shares of the Company's common stock at any time prior to maturity. The Convertible Note has no principal payments and can only be converted by the holder into common stock at 62 or prior to maturity. The Earnout Obligation bears interest at 7.0% per annum and has a seven-year term with no principal payments for the first two years and equal quarterly principal payments of $200,000 for the last five years. In the event that Premier's future operating results do not meet specified performance criteria, the principal amount of the Earnout Obligation will be reduced. DESCRIPTION OF THE EXCHANGE NOTES The Exchange Notes will be issued pursuant to an indenture (the "Indenture") among the Company, as issuer, the Subsidiary Guarantors and Norwest Bank Minnesota, National Association, as trustee (the "Trustee"). The terms of the Exchange Notes include those set forth or referred to in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Exchange Notes are subject to all such terms, and prospective Holders of Exchange Notes are referred to the Indenture, the Trust Indenture Act and the documents referred to in the Indenture for a statement thereof. The following summary does not purport to be a complete description of the Exchange Notes, the Indenture or such documents and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Exchange Notes, the Indenture and such documents. The definitions of certain capitalized terms used in the following summary are set forth below under "-- Certain Definitions." Capitalized terms that are used but not otherwise defined herein have the meanings assigned to them in the Indenture, and those definitions are incorporated herein by reference. As used in the following summary, the term "Company" means Brazos Sportswear, Inc. and does not include any subsidiary of Brazos Sportswear, Inc. GENERAL The Exchange Notes will be (i) senior unsecured obligations of the Company, (ii) unconditionally guaranteed by the Subsidiary Guarantors and (iii) limited to $100 million aggregate principal amount. The Exchange Notes will be issued only in registered form, without coupons, in denominations of $1,000 and integral multiples thereof. The Exchange Notes will mature on July 1, 2007 and bear interest at the rate per annum shown on the front cover hereof from the date they are originally issued under the Indenture or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually in cash in arrears on January 1 and July 1 of each year, commencing January 1, 1998, to the Persons in whose names the Exchange Notes (or any predecessor Exchange Notes) are registered at the close of business on the preceding December 15 or June 15, as the case may be (whether or not a business day). Interest on the Exchange Notes will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, and premium, if any, interest and Liquidated Damages, if any, on, the Exchange Notes will be payable (i) in same-day funds on or prior to the payment dates with respect to those amounts in the case of Exchange Notes held of record by DTC or its nominee and (ii) at the office of the Trustee in New York, New York, in the case of Exchange Notes held of record by Holders other than DTC or its nominee, and the Exchange Notes may be surrendered for registration of transfer or exchange at the office of the Trustee in New York, New York. The Company may, at its option, pay interest on Exchange Notes held of record by Holders other than DTC or its nominee by check mailed to the addresses of the Persons entitled thereto as they appear in the Note Register on the Regular Record Date for that interest. No service charge will be made for any registration of transfer, exchange or redemption of the Exchange Notes, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge and any other expenses (including the fees and expenses of the Trustee) payable in connection therewith. Neither the Trustee nor the Company is required (i) to issue, register the transfer of or exchange any Exchange Notes during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption and ending at the close of business on the day of that mailing or (ii) to register the transfer of or exchange any Exchange Notes selected for redemption in whole or in part, except the unredeemed portion of Exchange Notes being redeemed in part. 63 CERTAIN DEFINITIONS "ACCOUNTS RECEIVABLE" has the meaning specified for the term "accounts" in Section 9-106 of the UCC. "ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, Indebtedness of any other Person (i) existing at the time that other Person merges or consolidates with the specified Person or becomes a Restricted Subsidiary of such specified Person, including Indebtedness incurred in connection with, or in contemplation of, that other Person merging with or into the specified Person or becoming a Restricted Subsidiary of the specified Person or (ii) assumed by the specified Person in connection with an acquisition of properties or assets from that other Person. A specified Person will be deemed to incur Indebtedness constituting its Acquired Indebtedness on the date (i) the obligor respecting that Indebtedness merges or consolidates with the specified Person, (ii) the obligor of that Indebtedness becomes a Restricted Subsidiary of that specified Person or (iii) the specified Person assumes that Indebtedness. "AFFILIATE" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with the specified Person. For purposes of this definition: (i) "control," when used with respect to any Person, means the power to direct the management and policies of that Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing; and (ii) beneficial ownership at any time of 10% or more of the outstanding voting common equity of a Person (including voting common equity subject to being acquired pursuant to the exercise of options, warrants or other rights exercisable within 60 days of that time) will be deemed to constitute control of that Person at that time. "ASSET SALE" means any sale, issuance, conveyance, transfer, lease, assignment or other disposition (including, without limitation, by means of a Sale/Leaseback Transaction or a merger or consolidation) (collectively, for purposes of this definition, a "transfer") to any Person other than the Company or any Wholly Owned Restricted Subsidiary other than Brazos Sportswear Japan KK, directly or indirectly, in one transaction or a series of related transactions, of (i) any Capital Stock, other than Junior Preferred Stock, of any Restricted Subsidiary held by the Company or any other Restricted Subsidiary, (ii) any unissued Capital Stock, other than Junior Preferred Stock, of any Restricted Subsidiary or (iii) any other properties or assets of the Company or any Restricted Subsidiary. Notwithstanding the preceding sentence, the following does not constitute "Asset Sales": (i) transfers of cash, Cash Equivalents, Accounts Receivable (including the sale of Accounts Receivable without recourse to the Company or any Restricted Subsidiary pursuant to a bona fide factoring arrangement with a Person not an Affiliate of the Company), inventories or other properties or assets in the ordinary course of business and issuances of Qualified Capital Stock of the Company; (ii) any transfer of properties or assets (including Capital Stock) that is governed by, and made in accordance with, the covenant described under "-- Merger, Consolidation and Sale of Assets" above; (iii) any transfer of properties or assets if permitted under the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments" above; (iv) transfers of damaged, worn-out or obsolete equipment or assets that, in the Company's reasonable judgment, are either (a) no longer used or (b) no longer useful in the business of the Company and the Restricted Subsidiaries; and (v) any transfer that, but for this clause (v), would be an Asset Sale, if after giving effect to the transfer, the aggregate fair market value of the properties or assets subject to that transfer and all related transfers so designated by the Company does not exceed $500,000. "ATTRIBUTABLE INDEBTEDNESS" means, with respect to any particular lease under which any Person is at the time liable, whether or not accounted for as a Capitalized Lease Obligation, and at any date as of which the amount thereof is to be determined, the present value of the total net amount of lease payments required to be paid by that Person under the lease during the primary term thereof, without giving effect to any renewals at the option of the lessee, discounted from the respective due dates thereof to the date of determination at a rate per annum equal to the discount rate that would be applicable to a Capitalized Lease Obligation with a like term in accordance with GAAP. As used in the preceding sentence, the "net amount of lease payments" under any lease for any period means the sum of lease, rental and other payments 64 required to be paid with respect to such period by the lessee thereunder, excluding any amounts required to be paid by the lessee on account of maintenance and repairs, insurance, and taxes, assessments or similar charges. If a lessee under any lease may terminate that lease by paying a penalty, the "net amount of lease payments" under that lease will include the amount of that penalty, but will exclude all lease payments after the first date on which that lease may be so terminated. "AVERAGE LIFE" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years (and any portion thereof) from the date of determination to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund or mandatory redemption payment requirements) of that Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments. "BANKRUPTCY CODE" means Title 11 of the United States Code or any similar or successor federal law in effect from time to time for the relief of debtors. "CAPITALIZED LEASE OBLIGATION" means, with respect to any Person, any obligation of that Person to pay lease payments, rent or other amounts under a lease of (or other similar agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP and, for purposes of the Indenture, the amount of that obligation at any date will be the capitalized amount thereof at that date, as determined in accordance with GAAP. "CAPITAL STOCK" means, with respect to any Person, any and all shares, interests, participation, rights or other equivalents in the equity interests (however designated) in that Person, and any rights (other than debt securities convertible into an equity interest), warrants or options exercisable or exchangeable for or convertible into such an equity interest in that Person. "CASH EQUIVALENTS" means: (i) marketable obligations with a maturity of 180 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof, provided that the full faith and credit of the United States of America is pledged in support thereof; (ii) demand and time deposits and certificates of deposit or acceptances with a maturity of 180 days or less of (a) Southwest Bank of Texas, N.A., (b) any financial institution that is a member of the Federal Reserve System and has combined capital and surplus and undivided profits of not less than $500 million or any commercial bank that is organized under the laws of any country that is a member of the Organization for Economic Cooperation and Development and has total assets in excess of U.S. $500 million or its equivalent in another currency or (c) any financial institution the deposits with which are insured by the United States of America or any agency or instrumentality thereof, provided that the amount of deposits, certificates of deposit or acceptances pursuant to this clause (ii)(c) with any one institution does not exceed the insured amount with that institution; (iii) commercial paper (a) maturing no more than 180 days from the date of creation thereof issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and (b) rated at least A-1 by S&P or at least P-1 by Moody's; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any commercial bank meeting the specifications of clause (ii) above; and (v) investments in money market or other mutual funds substantially all of whose assets comprise securities of the types described in clauses (i) through (iv) above. For purposes of this definition, the maturity of a security will be determined when it is acquired by the Company or a Restricted Subsidiary. "CHANGE OF CONTROL" means the occurrence of any event or series of events (whether or not otherwise in compliance with the provisions of the Indenture) by which: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Principals) is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of a majority of the total voting power of the total Voting Stock of the Company; (ii) the Company consolidates with or merges into another Person or any Person consolidates with, or merges into, the Company, pursuant to a transaction in which the outstanding Voting Stock of the Company is changed into or exchanged for cash, securities or other property, other than any such transaction pursuant to which (a) the outstanding Voting Stock of the Company is changed into or exchanged for Voting Stock of the surviving or resulting Person 65 that is Qualified Capital Stock and (b) the beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of the total voting power of the total Voting Stock of the Company immediately prior to such transaction beneficially own, directly or indirectly, not less than a majority of the voting power of the total Voting Stock of the surviving or resulting Person immediately after such transaction; (iii) the Company, either individually or in conjunction with one or more Restricted Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, the properties and assets of the Company and its Restricted Subsidiaries substantially as an entirety (either in one transaction or a series of related transactions), including Capital Stock of the Restricted Subsidiaries, to any Person or group of Persons that are Affiliates of each other (in this clause (iii), the "transferee") (other than the Company or a Wholly Owned Restricted Subsidiary), other than any such transaction pursuant to which (a) the properties and assets of the Company and its Restricted Subsidiaries substantially as an entirety are exchanged for Voting Stock of the transferee and (b) the beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of the total voting power of the total Voting Stock of the Company immediately prior to such transaction beneficially own, directly or indirectly, not less than a majority of the total voting power of the Voting Stock of the transferee; (iv) during any consecutive two-year period (which period need not be calendar years), individuals who at the beginning of that period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of two-thirds of the directors then still in office who were either directors at the beginning of that period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; or (v) any plan or proposal for liquidation or dissolution of the Company is approved by the vote or other consent of the holders of Capital Stock of the Company that is required by applicable law to effect that plan or proposal. "COMMON STOCK" of any Person means Capital Stock of that Person that does not rank prior, as to the payment of dividends or the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of that Person, to shares of Capital Stock of any other class of that Person. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any period of four consecutive fiscal quarters of the Company (each such period of four consecutive fiscal quarters, a "computation period"), the ratio of (i) the sum of Consolidated Net Income, Consolidated Fixed Charges, Consolidated Income Tax Expense and Consolidated Non-cash Charges of the Company and the Restricted Subsidiaries, on a consolidated basis for that computation period, all determined in accordance with GAAP, to (ii) Consolidated Fixed Charges for that computation period. For purposes of this computation, acquisitions or dispositions that have been made by the Company or any Restricted Subsidiary, including through mergers or consolidations and including any related financing transactions, during the computation period or subsequent to the computation period but on or prior to the date of computation will be deemed to have occurred on the first day of the computation period and will give pro forma effect to such acquisitions or dispositions and any related financing transactions with appropriate adjustments to the computation of Consolidated Net Income, Consolidated Fixed Charges, Consolidated Income Tax Expense and Consolidated Non-cash Charges. In each computation of the Consolidated Fixed Charge Coverage Ratio, the computation will be made as of the date Indebtedness (other than Permitted Indebtedness) is proposed to be incurred or Disqualified Preferred Stock is proposed to be issued (the "determination date") for the then most recent computation period for which consolidated financial statements are then available (the "current period") on a pro forma basis assuming that (i) the Indebtedness to be incurred or the Disqualified Capital Stock to be issued (and all other Indebtedness incurred or Disqualified Capital Stock issued after the first day of the current period through and including the determination date), and (if applicable) the application of the net proceeds therefrom (and from any other such Indebtedness or Disqualified Capital Stock), including to refinance other Indebtedness, had been incurred, issued or applied, as the case may be, on the first day of the current period and, in the case of Acquired Indebtedness, on the assumption that the related transaction (whether by means of purchase, merger or otherwise) also had occurred on the first day of the current period with the appropriate adjustments with respect to such acquisition being included in such pro forma calculation and (ii) any acquisition or disposition by the Company or any Restricted Subsidiary of 66 any properties or assets outside the ordinary course of business and any related financing transactions, or any repayment of any principal amount of any Indebtedness of the Company or any Restricted Subsidiary, in either case since the first day of the current period through and including the determination date, had been consummated on the first day of the current period. The Consolidated Fixed Charges representing interest on Indebtedness outstanding on any determination date and assumed in accordance with the preceding sentence to have been outstanding throughout the then current period will be computed as follows: (i) if that Indebtedness bears interest only at a floating rate, that floating rate as of the determination date will be assumed to have been in effect throughout that current period; (ii) if that Indebtedness bears interest, at the option of the primary obligor, at either a floating rate or, for one or more periods of varying durations, fixed rates, either that floating rate or, at the option of the Company, that fixed rate for the longest period available to the primary obligor, in each case as of the determination date, will be assumed to have been in effect throughout that current period; (iii) if that Indebtedness is incurred under a revolving credit facility, the principal amount of that Indebtedness assumed to have been outstanding throughout that current period will be the lesser of (a) the average daily outstanding principal balance of that Indebtedness during that current period or such shorter period as amounts have been available to be borrowed or reborrowed under that facility or (b) the total revolving credit commitment under that facility as of the determination date; and (iv) if (a) that Indebtedness bears interest at a floating rate, (b) that floating rate is used pursuant to clause (i) or (ii) of this sentence to determine the Consolidated Fixed Charges attributable to that Indebtedness and (c) that interest is covered by agreements relating to Interest Rate Protection Obligations, that interest, to the extent so covered, will be assumed to have accrued at the rate per annum resulting after giving effect to the operation of those agreements. "CONSOLIDATED FIXED CHARGES" means, for any period, without duplication, (i) the sum of (a) the interest expense of the Company and the Restricted Subsidiaries for that period as determined on a consolidated basis in accordance with GAAP, including, without limitation, any amortization of debt discount, the net cost under Interest Rate Protection Obligations (including any amortization of discounts), the interest portion of any deferred payment obligation constituting Indebtedness, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and all accrued interest, in each case to the extent attributable to that period, (b) if any Indebtedness of any Person (other than the Company or a Restricted Subsidiary) is guaranteed by the Company or any Restricted Subsidiary during that period, the aggregate amount of interest paid (to the extent not accrued in a prior period) or accrued by such other Person during that period attributable to any such Indebtedness, in each case to the extent required by GAAP to be recognized during that period as an expense of the Company or any Restricted Subsidiary, (c) the aggregate amount of the interest component of Capitalized Lease Obligations paid (to the extent not accrued in a prior period), accrued or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during that period, and (d) the aggregate amount of dividends (except dividends paid or payable in additional shares of Qualified Capital Stock) paid (to the extent not accrued in a prior period) or accrued on Preferred Stock or Disqualified Capital Stock of the Company and the Restricted Subsidiaries, to the extent such Preferred Stock or Disqualified Capital Stock is owned by Persons other than the Company or any Restricted Subsidiary, less (ii), to the extent included in clause (i) above, amortization during that period of (a) capitalized debt issuance costs of the Company and the Restricted Subsidiaries and (b) original issue discount on the Premier Convertible Note. "CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the provision for federal, state, local and foreign income taxes (including state franchise taxes accounted for as income taxes in accordance with GAAP) of the Company and the Restricted Subsidiaries for the period as determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED NET INCOME" means, for any period, the consolidated net income (or loss) of the Company and the Restricted Subsidiaries for such period as determined in accordance with GAAP, as adjusted by excluding (i) net after-tax extraordinary gains or losses (less all fees and expenses relating thereto) and after-tax (A) non-recurring pooling-of-interests or acquisition related costs, income and expenses and (B) non-cash non-recurring income and expenses, in each case to the extent included in consolidated net income (or loss) for that period, (ii) net after-tax gains or losses (less all fees and expenses 67 relating thereto) attributable to Asset Sales, (iii) net income (or net loss) of any Person (other than the Company or any Restricted Subsidiary) in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash or property by such other Person during that period (regardless of whether such dividends or distributions are attributable to net income (or net loss) of such Person during that period or during any prior period), (iv) net income (or net loss) of any Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, and (v) net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary of its net income is not at the date of determination permitted, directly or indirectly, by operation of the terms of its charter or any agreement or instrument (other than the Working Capital Agreement), judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders. For purposes of clause (iii) above, the amount of any distribution of property will be equal to the fair market value of that property as determined in good faith by the Board of Directors and evidenced by a Board Resolution. "CONSOLIDATED NET WORTH" means, at any date, the consolidated stockholders' equity of the Company less (without duplication) the amount of that stockholders' equity attributable to Disqualified Capital Stock or treasury stock of the Company and the Restricted Subsidiaries, as determined in accordance with GAAP. "CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate depreciation, depletion, amortization and other non-cash expenses of the Company and the Restricted Subsidiaries that are deducted in computing Consolidated Net Income for that period, all determined on a consolidated basis in accordance with GAAP (excluding any such non-cash charge in the ordinary course of business for which an accrual of or reserve for cash charges for any future period is required). "CURRENCY HEDGE OBLIGATIONS" means, at any time as to any Person, the obligations of that Person at that time incurred by it in the ordinary course of its business pursuant to any foreign currency exchange agreement, option or futures contract or other similar agreement or arrangement designed to protect against or manage the exposure of that Person or any of its Subsidiaries to fluctuations in foreign currency exchange rates. "DEFAULT" means any event, act or condition that, after notice or passage of time or both, would become an Event of Default. "DISINTERESTED DIRECTOR" means, with respect to any transaction or series of transactions in respect of which the Board of Directors is required to deliver a resolution of the Board of Directors under the Indenture, a member of the Board of Directors who does not have any material direct or indirect financial interest (other than an interest arising solely from the beneficial ownership of Capital Stock of the Company) in or with respect to that transaction or series of transactions. "DISQUALIFIED CAPITAL STOCK" of any specified Person means any Capital Stock of the specified Person that, either by its terms, by the terms of any security into which it is convertible or for which it is exchangeable or by contract or otherwise is, or on the happening of an event or passage of time or both would be, (i) required to be redeemed or repurchased (whether mandatorily or at the option of the holder thereof), other than a redemption or repurchase effected solely through the issuance of Qualified Capital Stock of the specified Person, by the specified Person or any of its Subsidiaries or by the Company or any Restricted Subsidiary prior to the final Stated Maturity of the Exchange Notes or (ii) convertible into or exchangeable for any Indebtedness of the specified Person or any of its Subsidiaries or of the Company or any Restricted Subsidiary that has any Stated Maturity prior to the final Stated Maturity of the Exchange Notes. "EVENT OF DEFAULT" has the meaning set forth under the caption " -- Events of Default" above. "EXCHANGE NOTES" means the 10 1/2% Senior Notes due 2007 issued pursuant to the Exchange Offer. "EXISTING PREFERRED STOCK" means the Series B-1, Series B-2 and Series B-3 Preferred Stock of the Company issued and outstanding on the Issue Date in an amount not to exceed the sum of (a) the aggregate 68 liquidation amount of the Series B-1, Series B-2 and Series B-3 Preferred Stock of the Company outstanding on the Issue Date and (b) the aggregate liquidation amount of additional Series B-1, Series B-2 and Series B-3 Preferred Stock issued in lieu of the payment of cash dividends thereon, PROVIDED that the rate at which dividends accrue shall not exceed the rate accruing thereon on the Issue Date. "GAAP" means generally accepted accounting principles, consistently applied, that are set forth in (i) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) the statements and pronouncements of the Financial Accounting Standards Board or (iii) such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States of America. "GUARANTEE" or "GUARANTEE" means, as applied to any Indebtedness, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of that Indebtedness and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of that Indebtedness, including, without limiting the foregoing, the payment of amounts drawn down under letters of credit. When used as a verb, "guarantee" has a corresponding meaning. "HOLDER" means a Person in whose name an Exchange Note is registered in the Note Register. "INDEBTEDNESS" means, with respect to any Person, without duplication, (i) all liabilities of that Person, contingent or otherwise, for borrowed money or for the deferred purchase price of property or services (excluding any trade accounts payable and other accrued current liabilities incurred in the ordinary course of business of that Person) and all liabilities of that Person incurred in connection with any letters of credit, bankers' acceptances or other similar credit transactions or any agreement to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of that Person, or any warrants, rights or options to acquire that Capital Stock, outstanding on the Issue Date or thereafter, or any obligations arising out of the sale of Accounts Receivable of that Person if, and to the extent, any of the foregoing would appear as a liability on a balance sheet of that Person prepared in accordance with GAAP, (ii) all obligations of that Person evidenced by bonds, notes, debentures or other similar instruments, if, and to the extent, any of the foregoing would appear as a liability on a balance sheet of that Person prepared in accordance with GAAP, (iii) all obligations of that Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by that Person (even if the rights and remedies of the seller or lender under such agreement in the event of a default are limited to repossession or sale of such property), (iv) the Attributable Indebtedness of any Capitalized Lease Obligation of that Person, (v) all obligations of the types described in the preceding clauses and all dividends, the payment of which is secured by (or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien upon property (including, without limitation, accounts and contract rights) owned by that Person, even though that Person has not assumed or become liable for the payment of such Indebtedness (the amount of such obligation being deemed to be the lesser of the value of such property or the amount of the obligation so secured), (vi) all Guarantees by that Person of obligations of the types referred to in clauses (i) through (v) of this definition, and (vii) the net amount of obligations of that Person under or in respect of each agreement evidencing Currency Hedge Obligations and Interest Rate Protection Obligations. "INDEPENDENT FINANCIAL ADVISOR" means an accounting, appraisal or investment banking firm of nationally recognized standing that is disinterested and independent with respect to the Company and its Affiliates and, in the reasonable judgment of the Board of Directors, is qualified to perform the task for which it has been engaged. "INTEREST PAYMENT DATE" means the Stated Maturity of an installment of interest on the Exchange Notes. "INTEREST RATE PROTECTION OBLIGATIONS" means, with respect to any specified Person, the obligations of the specified Person pursuant to any arrangement with any other Person whereby, directly or indirectly, the 69 specified Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by the specified Person calculated by applying a fixed or a floating rate of interest on the same notional amount and includes, without limitation, interest rate swaps, caps, floors, collars and other similar agreements or arrangements designed to protect against or manage the exposure of the specified Person or any of its Subsidiaries to fluctuations in interest rates. "INVENTORY" has the meaning specified in Section 9-109(4) of the UCC. "INVESTMENT" means, with respect to any specified Person, any direct or indirect advance, loan, guarantee of Indebtedness or other extension of credit or capital contribution by the specified Person to (by means of any transfer of cash or other property or assets to others or any payment for property, assets or services for the account or use of others), or any purchase or acquisition by the specified Person of any Capital Stock, bonds, notes, debentures or other securities (including derivatives) or evidences of Indebtedness issued by, any other Person. If the Company designates a Restricted Subsidiary as an Unrestricted Subsidiary, the Company will be deemed to make at the effective time of that designation an "Investment" in that Unrestricted Subsidiary in the amount equal to the then fair market value of that Unrestricted Subsidiary's net assets. The following are not "Investments": (i) extensions of trade credit or other advances to customers on commercially reasonable terms in accordance with normal trade practices or otherwise in the ordinary course of business; (ii) Interest Rate Protection Obligations and Currency Hedge Obligations, but only to the extent that the same constitute Permitted Indebtedness; and (iii) endorsements of negotiable instruments and documents in the ordinary course of business. "ISSUE DATE" means the date the Exchange Notes are initially issued, or July 2, 1997. "JUNIOR PREFERRED STOCK" means, with respect to any specified Person, Preferred Stock of the specified Person (i) that (a) is issued after the Issue Date as part of the purchase price to acquire assets or Capital Stock of another Person, (b) is Qualified Capital Stock, (c) is expressly subordinated as to payment to any Subsidiary Guarantee of the specified Person, (d) has no voting rights except as otherwise provided by law or generally with respect to any amendment of the instrument pursuant to which such Preferred Stock was issued that would adversely alter the powers, preferences and rights associated with such Preferred Stock and (e) if the Preferred Stock is issued by a Subsidiary of the Company, the Preferred Stock is exchangeable at the option of the Company into Qualified Capital Stock of the Company, and (ii) dividends, if any, on which are payable solely in kind by the issuance of additional shares of Preferred Stock meeting the requirements of subclauses (i)(b) through (i)(e) of this definition. "LIEN" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim or similar type of encumbrance (including, without limitation, any agreement to give or grant any lease, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing) upon or with respect to any property of any kind. A Person will be deemed to own subject to a Lien any property that the Person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "MATURITY" means, with respect to any Exchange Note, the date on which any principal of that Exchange Note becomes due and payable as therein or in the Indenture provided, whether at the Stated Maturity with respect to that principal or on redemption, repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, by declaration of acceleration or otherwise. "MOODY'S" means Moody's Investors Service, Inc. and its successors. "NET AVAILABLE PROCEEDS" means, with respect to any Asset Sale, the proceeds therefrom in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (i) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel, accountants and investment banking firms) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale (after taking into account available tax credits or deductions and any tax sharing arrangements), (iii) amounts required to be 70 paid to any Person (other than the Company or any Restricted Subsidiary) (a) owning a beneficial interest in the properties or assets subject to the Asset Sale, (b) having a Lien on such properties or assets or (c) requiring such payment as a condition to providing any consent necessary to consummate the Asset Sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with that Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after that Asset Sale, including, without limitation, pensions and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with that Asset Sale, all as reflected in an Officers' Certificate; provided, however, that any amounts remaining after adjustments, revaluations or liquidations of those reserves will constitute Net Available Proceeds. "NET CASH PROCEEDS" means, with respect to any issuance or sale of Qualified Capital Stock or other securities, the cash proceeds of that issuance or sale net of the fees of attorneys and accountants, fees, discounts or commissions of underwriters and placement agents and brokerage, consultant and other fees and expenses actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "NON-RECOURSE PURCHASE MONEY INDEBTEDNESS" means only Indebtedness of the Company or any Restricted Subsidiary that is incurred to finance the purchase of any assets of the Company or any Restricted Subsidiary within 90 days of such purchase, as long as (i) the amount of that Indebtedness does not exceed 100% of the purchase cost of such assets as initially recorded in the "property, plant and equipment" account on a balance sheet of the Company or that Restricted Subsidiary, as the case may be, in accordance with GAAP, (ii) that Indebtedness is non-recourse to the Company or any of its Restricted Subsidiaries and all their respective assets other than the assets so purchased and (iii) the purchase of such assets is not part of an acquisition of any Person. "NOTE REGISTER" means the register required by the Indenture to be maintained by or on behalf of the Company for the registration of the Exchange Notes and transfers of the Exchange Notes. "PAYMENT RESTRICTION" means, with respect to any Restricted Subsidiary, any encumbrance, restriction or limitation, whether by operation of the terms of its charter or by reason of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation, on the ability of (i) that Restricted Subsidiary to (a) pay dividends or make other distributions on its Capital Stock or make payments on any obligation, liability or Indebtedness owed to the Company or any other Restricted Subsidiary, (b) make loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its properties or assets to the Company or any other Restricted Subsidiary or (ii) the Company or any other Restricted Subsidiary to receive or retain any such dividends, distributions or payments, loans or advances or transfer of properties or assets. "PERMITTED INDEBTEDNESS" means any of the following: (i) Indebtedness under Working Capital Agreements in an aggregate principal amount at any time outstanding not to exceed the greater of (1) $50.0 million or (2) the sum of (A) 85% of the amount of the Accounts Receivable of the Company and the Restricted Subsidiaries, and (B) 55% of the amount of the Inventory of the Company and the Restricted Subsidiaries (except that during the period April 1 through September 30 of each year, 65% of the amount of the Inventory of the Company and the Restricted Subsidiaries shall be used), in each case as would be shown on a consolidated balance sheet of the Company and the Restricted Subsidiaries at that time prepared in accordance with GAAP; (ii) Indebtedness under the Exchange Notes and the Subsidiary Guarantees; (iii) Indebtedness outstanding, or to be incurred pursuant to commitments in effect, on the Issue Date after giving effect to this Note Offering and the application of the net proceeds therefrom; (iv) Indebtedness under Interest Rate Protection Obligations, provided that (a) those Interest Rate Protection Obligations are related to payment obligations on Permitted Indebtedness or Indebtedness otherwise permitted by the Consolidated Fixed Charge Coverage Ratio test described under "Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above, and (b) the 71 notional principal amount of those Interest Rate Protection Obligations does not exceed the principal amount of the Indebtedness to which those Interest Rate Protection Obligations relate; (v) Indebtedness under Currency Hedge Obligations, provided that (a) those Currency Hedge Obligations are related to payment obligations on Permitted Indebtedness or Indebtedness otherwise permitted by the Consolidated Fixed Charge Coverage Ratio test described under "Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above or to the foreign currency cash flows reasonably expected to be generated or required by the Company and the Restricted Subsidiaries, (b) the notional principal amount of the Currency Hedge Obligations does not exceed the principal amount of that Indebtedness and the amount of those foreign currency cash flows to which those Currency Hedge Obligations relate and (c) those Currency Hedge Obligations are entered into for the purpose of limiting currency exchange rate risks in connection with transactions entered into in the ordinary course of business; (vi) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary and Indebtedness of any Restricted Subsidiary to the Company or to a Wholly Owned Restricted Subsidiary; provided, however, that upon either (i) the subsequent issuance (other than directors' qualifying shares), sale, transfer or other disposition of any Capital Stock or any other event that results in a Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or (ii) the transfer or other disposition of any such Indebtedness (except to the Company or a Wholly Owned Restricted Subsidiary), the provisions of this clause (vi) will no longer apply to such Indebtedness and such Indebtedness will be deemed, in each case, to be incurred and will be treated as an incurrence for purposes of the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above at the time the transfer or other disposition occurred; (vii) Guarantees of Permitted Indebtedness or Indebtedness incurred in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants" " -- Limitation on Indebtedness and Disqualified Capital Stock" above; (viii) other Indebtedness in an aggregate principal amount at any time outstanding not to exceed $10 million; and (ix) any renewals, amendments, extensions, supplements, modifications, deferrals, substitutions, refinancing or replacements (each, for purposes of this clause (ix), a "refinancing") by the Company or a Restricted Subsidiary of any Indebtedness incurred in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants" " -- Limitation on Indebtedness and Disqualified Capital Stock" above or referred to above in clauses (ii) through (vii) or this clause (ix), so long as (a) any such new Indebtedness shall be in a principal amount that does not exceed the principal amount (or, if the Indebtedness being refinanced provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration thereof, such lesser amount as of the date of determination) so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company or such Restricted Subsidiary as necessary to accomplish such refinancing, plus the amount of expenses of the Company or such Restricted Subsidiary incurred in connection with such refinancing, (b) in the case of any refinancing of Indebtedness (including the Exchange Notes) that is pari passu with or subordinated in right of payment to the Exchange Notes, then such new Indebtedness is pari passu with or subordinated in right of payment to the Exchange Notes at least to the same extent as the Indebtedness being refinanced and (c) such new Indebtedness has an Average Life equal to or longer than the Average Life of the Indebtedness being refinanced and a final Stated Maturity that is not earlier than the final Stated Maturity of the Indebtedness being refinanced. "PERMITTED INVESTMENTS" means any of the following: (i) Investments in Cash Equivalents; 72 (ii) an Investment or series of related Investments by the Company or any Restricted Subsidiary in another Person, if as a result of that Investment or series of related Investments (a) that other Person becomes a Wholly Owned Restricted Subsidiary or (b) that other Person is merged or consolidated with or into, or transfers or conveys its properties and assets substantially as an entirety to, the Company or a Wholly Owned Restricted Subsidiary; (iii) Investments of Net Available Proceeds permitted by the covenant described under " -- Certain Covenants" " -- Limitation on Asset Sales" above; (iv) Investments consisting of loans and advances to employees, officers and directors of the Company or any Restricted Subsidiary (a) for travel, entertainment, relocation or other expenses in the ordinary course of business or (b) representing the consideration for the issuance to such employees, officers or directors of Common Stock of the Company; (v) Investments consisting of loans and advances by the Company or any Restricted Subsidiary to employees, officers and directors of the Company or any Restricted Subsidiary in an aggregate principal amount at any one time outstanding not exceeding $1 million; (vi) Investments acquired by the Company or any Restricted Subsidiary in the ordinary course of business (a) in exchange for any other Investment or account receivable held by the Company or any Restricted Subsidiary in connection with or as a result of a bankruptcy, workout, reorganization or recapitalization of the issuer of such other Investment or the obligor with respect to such account receivable or (b) as a result of a foreclosure by the Company or any Restricted Subsidiary with respect to any secured Investment or other transfer of title with respect to any such secured Investment in default; or (vii) Investments the payment for which consists exclusively of Qualified Capital Stock, provided that any such Investment must be made in accordance with the other requirements of the Indenture, including (a) with respect to any Acquired Indebtedness relating to such an Investment, the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants" " -- Limitation on Indebtedness and Disqualified Capital Stock" above and (b) with respect to any Lien on properties or assets acquired in connection with any such Investment, the covenant described under " -- Certain Covenants" " -- Limitation on Liens" above. "PERMITTED LIENS" means the following types of Liens: (i) Liens existing as of the Issue Date; (ii) Liens securing the Exchange Notes or the Subsidiary Guarantees; (iii) Liens in favor of the Company or, with respect to a Restricted Subsidiary, Liens in favor of another Restricted Subsidiary; (iv) Liens securing Permitted Indebtedness of the Company and the Restricted Subsidiaries of the type described in clause (i) of the definition of Permitted Indebtedness, provided that (a) no such Lien will extend to any property other than Accounts Receivable and Inventory and the proceeds therefrom and (b) the Company or any Restricted Subsidiary may grant a license to the holders of any such Permitted Indebtedness to use trademark and other intellectual property owned by the Company or any Restricted Subsidiary to enable such holder to dispose of Accounts Receivable and Inventory following foreclosure; (v) Liens securing Indebtedness that constitutes Permitted Indebtedness of the type described in clause (ix) of the definition of "Permitted Indebtedness" incurred as a refinancing of any Indebtedness secured by Liens described in clauses (i), (iv), (xi), (xii) and (xiii) of this definition; provided, however, that (a) if any Lien securing Indebtedness being refinanced is subordinated or junior to any Lien granted for the benefit of the Holders, then the Lien securing the new Indebtedness must be subordinated or junior to any Lien granted for the benefit of the Holders at least to the same extent as the Lien securing the Indebtedness being refinanced and (b) such Liens do not extend to or cover any 73 property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced; (vi) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or a Restricted Subsidiary, as the case may be, has set aside on its books such reserves, or has made such other appropriate provision, if any, as is required by GAAP; (vii) Liens of landlords, carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other similar Liens incurred in the ordinary course of business for sums not delinquent or being contested in good faith, and as to which the Company or a Restricted Subsidiary, as the case may be, has set aside on its books such reserves, or has made such other appropriate provision, if any, as is required by GAAP; (viii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the payment or performance of tenders, statutory or regulatory obligations, surety and appeal bonds, bids, government contracts and leases, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (ix) Liens securing any judgment not giving rise to a Default or Event of Default and so long as any appropriate legal proceedings that may have been duly initiated for the review of the judgment has not been finally terminated or the period within which those proceedings may be initiated has not expired; (x) easements, rights-of-way, reservations, zoning and other restrictions and other similar encumbrances not interfering in any material respect with the ordinary conduct of business of the Company or any Restricted Subsidiary; (xi) any interest or title of a lessor under any Capitalized Lease Obligation or operating lease or of a secured party under a purchase money security interest; provided that (a) the Attributable Indebtedness or Indebtedness related thereto constitutes Indebtedness permitted to be incurred under the terms of the Indenture and (b) with respect to any Capitalized Lease Obligation or purchase money security interest, such Liens do not extend to any property or assets other than leased property subject to such Capitalized Lease Obligation or property acquired with the proceeds of such purchase money indebtedness, as the case may be; (xii) Liens securing Non-Recourse Purchase Money Indebtedness; provided, however, that (a) the Non-Recourse Purchase Money Indebtedness shall not be secured by any property or assets of the Company or any Restricted Subsidiary other than the property or assets so acquired and any proceeds therefrom and (b) the Lien securing such Non-Recourse Purchase Money Indebtedness shall be created within 90 days of such acquisition; (xiii) Liens securing Acquired Indebtedness incurred in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above; provided that (a) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary and (b) such Liens do not extend to or cover any property or assets of the Company or of any Restricted Subsidiary other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Restricted Subsidiary and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Restricted Subsidiary; (xiv) Leases or subleases granted to others that do not interfere with the ordinary conduct of business of the Company or any Restricted Subsidiary; 74 (xv) Rights of a common owner of any interest in property held by the Company or any Restricted Subsidiary and that common owner as tenants in common or through other common ownership; and (xvi) Liens or equitable encumbrances deemed to exist by reason of (a) fraudulent conveyance or transfer laws or (b) negative pledge or other agreements to refrain from giving Liens. "PERSON" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "PREFERRED STOCK" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of that Person's preferred or preference Capital Stock, whether outstanding on or after the Issue Date, including, without limitation, all classes and series of preferred or preference Capital Stock of that Person. "PREMIER CONVERTIBLE NOTE" means the non-interest bearing, convertible subordinated note in the original principal amount of $1.5 million that will (i) be issued in connection with the Premier Acquisition, (ii) have a seven year term from its date of issuance, (iii) not have or permit any principal payments or prepayments and (iv) be redeemable and convertible into, and payable only through the issuance of, 136,364 shares of the Company's Common Stock. "PRINCIPALS" means, collectively, Equus II Incorporated, J. Ford Taylor, F. Clayton Chambers and Alan B. Elenson. "PUBLIC EQUITY OFFERING" means an offer and sale of Common Stock of the Company for cash pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock of that Person other than Disqualified Capital Stock of that Person. "REGULAR RECORD DATE" means, with respect to the interest payable on any Interest Payment Date, the June 15 or December 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "RELATED BUSINESS" means the businesses of the Company and the Restricted Subsidiaries on the Issue Date and any business related, ancillary or complementary to the business of the Company and the Restricted Subsidiaries on that date. "RELATED BUSINESS INVESTMENT" means any Investment by the Company or any Restricted Subsidiary in any Related Business. "RESTRICTED INVESTMENT" means, with respect to any Person, any Investment by such Person (other than a Permitted Investment) (i) in any Unrestricted Subsidiary or (ii) any Person that is not a Wholly Owned Restricted Subsidiary other than by reason of having outstanding Junior Preferred Stock. "RESTRICTED PAYMENT" means, with respect to any Person: (i) any declaration or payment of any dividend (other than a dividend declared or paid by a Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary), or any other distribution, with respect to any shares of Capital Stock of that Person (other than dividends or distributions payable solely in shares of Qualified Capital Stock of that Person or in options, warrants or other rights to purchase Qualified Capital Stock of that Person); (ii) any purchase, redemption, retirement or other acquisition for value of any Capital Stock of that Person (other than the redemption of the Company's Series A-1 and Series A-2 Preferred Stock from proceeds of the Note Offering) or any other payment or distribution made in respect thereof, either directly or indirectly (other than any payment made solely in Qualified Capital Stock of that Person) by that Person or any Subsidiary of that Person; 75 (iii) any principal payment on or repurchase, redemption, defeasance or other acquisition or retirement for value, prior to any scheduled principal payment, scheduled sinking fund payment or maturity, of any subordinated indebtedness (including, with respect to the Company and any Subsidiary Guarantor, Subordinated Indebtedness) of that Person by that Person or any Subsidiary of that Person; or (iv) any Restricted Investment. "Restricted Subsidiary" means any Subsidiary of the Company, whether existing on or after the Issue Date, unless that Subsidiary is an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary in the manner described in the definition of "Unrestricted Subsidiary." "S&P" means Standard and Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., and its successors. "SALE/LEASEBACK TRANSACTION" means any direct or indirect arrangement pursuant to which properties or assets are sold or transferred by the Company or a Restricted Subsidiary and are thereafter leased back from the purchaser or transferee thereof by the Company or a Restricted Subsidiary. "SENIOR MANAGEMENT" means, with respect to the Company, the Chairman of the Board of Directors, the president, the chief operating officer, the chief financial officer, the chief accounting officer, the treasurer, the controller and any vice president of the Company. "STATED MATURITY" means, when used with respect to any Indebtedness or any installment of interest thereon, the date specified in the instrument evidencing or governing such Indebtedness as the fixed date on which the principal of that Indebtedness or that installment of interest is due and payable. "SUBJECT ACQUISITIONS" means the acquisition by the Company or any Restricted Subsidiary of (i) all the outstanding Capital Stock of SolarCo, Inc., a Washington corporation and the parent of Morning Sun, Inc., a Washington corporation, and (ii) all the assets of Premier Sports Group, Inc., a Colorado corporation. "SUBORDINATED INDEBTEDNESS" means any Indebtedness of the Company or a Subsidiary Guarantor that is expressly subordinated in right of payment to the Exchange Notes or Subsidiary Guarantees, respectively. "SUBSIDIARY" means, with respect to any specified Person, (i) a corporation a majority of the voting power of whose Voting Stock is at the time, directly or indirectly, owned by the specified Person, by one or more Subsidiaries of the specified Person or by the specified Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation), including, without limitation, a joint venture, in which the specified Person, one or more Subsidiaries thereof or the specified Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof, has or have at least a majority of the voting power of the Voting Stock of that Person which is entitled to vote in the election of directors, managers or trustees thereof (or other Persons performing similar functions). "SUBSIDIARY GUARANTORS" mean (i) all Subsidiaries of the Company existing as of the Issue Date and (ii) any other Subsidiary of the Company that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York. "UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that at the time of determination will be designated as an Unrestricted Subsidiary by the Board of Directors as provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company as an Unrestricted Subsidiary so long as: (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable for the payment of any Indebtedness of that Subsidiary; (ii) no default with respect to any Indebtedness of that Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on that other Indebtedness or cause the payment thereof to be accelerated or payable prior to its Stated Maturity or require the Company or any Restricted Subsidiary to repurchase or secure that other Indebtedness; (iii) such designation as an Unrestricted Subsidiary would be permitted by the covenant described under " -- Certain 76 Covenants -- Limitation on Restricted Payments" above; (iv) that designation would not result in the creation or imposition of any Lien on any of the properties or assets of the Company or any Restricted Subsidiary (other than any Permitted Lien); and (v) the Company could incur at least $1.00 of additional Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above; provided, however, that with respect to clause (i) of this sentence, the Company or a Restricted Subsidiary may be liable for the payment of Indebtedness of an Unrestricted Subsidiary if (x) the liability constituted a Permitted Investment or a Restricted Payment permitted by the covenant described under " -- Certain Covenants -- Limitation on Restricted Payments" above, in each case at the time of incurrence, or (y) the liability would be a Permitted Investment at the time of designation of that Subsidiary as an Unrestricted Subsidiary. Any such designation by the Board of Directors must be evidenced to the Trustee by filing a Board Resolution with the Trustee giving effect to that designation, together with an Officers' Certificate stating that such designation complies with the requirements of the Indenture. The Board of Directors may designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after giving effect to such designation on a pro forma basis, (i) no Default or Event of Default has occurred and is continuing, (ii) the Company could incur at least $1.00 of additional Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above and (iii) if any of the properties and assets of the Company or any Restricted Subsidiary would on such designation become subject to any Lien (other than a Permitted Lien), the creation or imposition of that Lien must comply with the covenant described under " -- Certain Covenants -- Limitation on Liens" above. "VOTING STOCK" means, with respect to any specified Person, any class or classes of Capital Stock of the specified Person pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of the specified Person (irrespective of whether or not, at the time, stock of any other class or classes have, or might have, voting power by reason of the happening of any contingency). "WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary: (i) all the outstanding shares of Capital Stock or other ownership interests in which, other than any directors' qualifying shares mandated by applicable law, are owned directly or indirectly by the Company; and (ii) if that Restricted Subsidiary is organized in a foreign jurisdiction and is required by the applicable laws and regulations of that jurisdiction to be partially owned by the government of that jurisdiction or individual or corporate citizens of that jurisdiction in order for that Restricted Subsidiary to transact business in that jurisdiction, the Company, directly or indirectly, owns the remaining Capital Stock or ownership interest in that Restricted Subsidiary and, by contract or otherwise, controls the management and business of that Restricted Subsidiary and derives the economic benefits of ownership of that Restricted Subsidiary to substantially the same extent as if that Restricted Subsidiary were a Wholly Owned Subsidiary of the type described in clause (i) of this sentence. "WORKING CAPITAL AGREEMENT" means, with respect to any specified Person, (i) any agreement providing for the making of loans or advances on a revolving basis, the issuance of letters of credit and/or the creation of bankers' acceptances to fund the general working capital and other corporate requirements of that Person and one or more of its Subsidiaries and (ii) any refinancings, renewals, replacements, modification and extensions of any of the agreements described in clause (i) of this sentence. Initially, "Working Capital Agreement" means the Credit Facility among Brazos, Inc., a Texas corporation and a Wholly Owned Restricted Subsidiary, and Morning Sun, Inc., a Washington corporation and a Wholly Owned Restricted Subsidiary, Fleet Capital Corporation and BankBoston, N.A., formerly known as The First National Bank of Boston. 77 OPTIONAL REDEMPTION The Company may, at its option, redeem the Exchange Notes in whole or from time to time in part, on or after July 1, 2002, on not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below, together with accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of redemption (subject to the right of Holders of record on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of redemption), if redeemed during the 12-month period beginning on July 1 of the year indicated below: REDEMPTION YEAR PRICE - ---------------------------------------- ---------- 2002.................................... 105.25% 2003.................................... 103.50% 2004.................................... 101.75% 2005 and thereafter..................... 100.00% Notwithstanding the foregoing, at any time on or prior to July 1, 2000, the Company may redeem up to 35% of the aggregate principal amount of Exchange Notes originally issued from the Net Cash Proceeds of a Public Equity Offering, at a redemption price equal to 110.5% of the principal amount thereof, together with accrued and unpaid interest thereon and Liquidated Damages, if any, to the date of redemption, PROVIDED that (i) at least $65 million of the aggregate principal amount of Exchange Notes originally issued remains outstanding immediately after that redemption and (ii) the Company effects that redemption within 60 days after the Public Equity Offering closes. If less than all the Exchange Notes are to be redeemed, the Trustee will, not less than 30 nor more than 60 days prior to the redemption date, select the particular Exchange Notes (or any portion thereof that is an integral multiple of $1,000) to be redeemed, PRO RATA, by lot or by any other method the Indenture permits. No sinking fund or mandatory redemption is provided for the Exchange Notes. RANKING The Exchange Notes and each Subsidiary Guarantee will be senior unsecured obligations of the Company and the applicable Subsidiary Guarantor, respectively, and will rank PARI PASSU in right of payment with all other existing and future unsecured and unsubordinated Indebtedness of the Company and the applicable Subsidiary Guarantor, respectively, and senior to all existing and future Subordinated Indebtedness of the Company and the Subsidiary Guarantors, respectively. The Exchange Notes and Subsidiary Guarantees, however, will be effectively subordinated to secured Indebtedness of the Company and the Subsidiary Guarantors with respect to the assets securing that Indebtedness. At July 2, 1997, the Company and the Subsidiary Guarantors have no unsecured and unsubordinated Indebtedness outstanding other than the Exchange Notes and $31.4 million of secured Indebtedness outstanding. Subject to certain limitations, the Company and its Subsidiaries (including the Subsidiary Guarantors) may incur additional Indebtedness in the future. See " -- Certain Covenants" " -- Limitation on Indebtedness and Disqualified Capital Stock." SUBSIDIARY GUARANTEES Each Restricted Subsidiary other than the Company's existing Japanese subsidiary will unconditionally guarantee (each, a "Subsidiary Guarantee"), jointly and severally, to each Holder of Exchange Notes and the Trustee, the full and punctual performance of the Company's obligations under the Indenture and the Exchange Notes, including the payment of principal of and premium, if any, interest and Liquidated Damages, if any, on the Exchange Notes. All of the Company's Subsidiaries are Wholly Owned Restricted Subsidiaries. Under certain circumstances, the Board of Directors of the Company (the "Board of Directors") will be able to designate its existing or future Subsidiaries as Unrestricted Subsidiaries. See " -- Certain Covenants" " -- Future Designation of Restricted and Unrestricted Subsidiaries" below. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the Indenture. 78 Each Subsidiary Guarantee will be a senior unsecured obligation of the applicable Subsidiary Guarantor and will rank PARI PASSU in right of payment with all other existing and future unsecured and unsubordinated Indebtedness of that Subsidiary Guarantor. Each Subsidiary Guarantee will be effectively subordinated to any secured Indebtedness of the applicable Subsidiary Guarantor with respect to the assets securing such Indebtedness. The obligations of each Subsidiary Guarantor are limited to the maximum amount that, after giving effect to any collections from or payments made by or on behalf of any other Subsidiary Guarantor in respect of the obligations of that other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its contribution obligations under the Indenture, will result in the obligations of that Subsidiary Guarantor under the Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee will be entitled to a PRO RATA contribution from each other Subsidiary Guarantor based on the net assets of each Subsidiary Guarantor, determined in accordance with GAAP. The Indenture will provide that no Subsidiary Guarantor (in this paragraph, the "Subject Subsidiary Guarantor") may consolidate with or merge with or into (whether or not the Subject Subsidiary Guarantor is the surviving Person) another Person (other than the Company or another Subsidiary Guarantor), whether or not affiliated with the Subject Subsidiary Guarantor, unless: (i) either (a) the survivor is not a Subsidiary Guarantor following that consolidation or merger and the consolidation or merger satisfies the provisions described under " -- Certain Covenants" " -- Limitation on Asset Sales" below or (b) the survivor is a Subsidiary Guarantor and the surviving Subsidiary Guarantor could make the Investment in the Person that consolidated or merged with it in accordance with the limitation on Restricted Payments described under " -- Certain Covenants" " -- Limitation on Restricted Payments" below; or (ii)(a) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than the Subject Subsidiary Guarantor) assumes all the obligations of the Subject Subsidiary Guarantor under the Exchange Notes and the Indenture pursuant to a supplemental indenture, in form and substance satisfactory to the Trustee; (b) immediately after giving effect to such transaction, no Default or Event of Default exists; and (c) immediately after giving effect to such transaction as if the same had occurred at the beginning of the most recently ended period of four consecutive fiscal quarters of the Company for which consolidated financial statements of the Company and its Restricted Subsidiaries are available, the Company and the Restricted Subsidiaries could incur at least $1.00 of additional Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Certain Covenants" " -- Limitation on Indebtedness and Disqualified Capital Stock" below. The Indenture will provide that in the event of a sale or other disposition of all the properties and assets of any Subsidiary Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all the Capital Stock of any Subsidiary Guarantor, then that Subsidiary Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all the Capital Stock of that Subsidiary Guarantor) or the corporation acquiring the properties and assets (in the event of a sale or other disposition of the properties and assets of that Subsidiary Guarantor substantially as an entirety) will be released and relieved of any obligations under its Subsidiary Guarantee, provided that the Net Available Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the Indenture. See " -- Certain Covenants" " -- Limitation on Asset Sales." In addition, any Subsidiary Guarantor that is designated by the Board of Directors as an Unrestricted Subsidiary in accordance with the terms and conditions of the Indenture will be released and relieved of any obligation under its Subsidiary Guarantee. CERTAIN COVENANTS The Indenture will contain, among others, the covenants described below. LIMITATION ON INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK. The Company will not, and will not permit any Restricted Subsidiary to, (a) create, incur, assume, guarantee or in any manner become directly 79 or indirectly liable for the payment of (collectively, "incur") any Indebtedness (including any Acquired Indebtedness, but excluding any Permitted Indebtedness) or (b) issue any Disqualified Capital Stock, unless, on a pro forma basis after giving effect to that incurrence or issuance and the application of the net proceeds therefrom, the Company's Consolidated Fixed Charge Coverage Ratio for the four most recent consecutive fiscal quarters of the Company prior to the date of the proposed incurrence or issuance for which consolidated financial statements of the Company and its Restricted Subsidiaries are available would be at least 2.0 to 1.0. LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The Company will not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary other than Junior Preferred Stock. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment unless, at the time of and after giving effect to the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing; (ii) the Company and its Restricted Subsidiaries would be permitted to incur at least $1.00 of additional Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under "Limitation on Indebtedness and Disqualified Capital Stock" above; and (iii) the amount of that Restricted Payment, when added to the aggregate amount of all other Restricted Payments made after the Issue Date, does not exceed the sum (without duplication) of the following: (a) 50% of the Consolidated Net Income (or, if Consolidated Net Income is a loss, minus 100% of such loss) accrued on a cumulative basis during the period beginning on July 1, 1997 and ending on the last day of the Company's last fiscal quarter for which quarterly or annual consolidated financial statements are available next preceding the date of payment of the proposed Restricted Payment; (b) the aggregate Net Cash Proceeds received by the Company after the Issue Date from the issuance or sale (other than to any Restricted Subsidiary) of shares of Qualified Capital Stock of the Company or any options, warrants or rights to purchase shares of Qualified Capital Stock of the Company; and (c) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or otherwise liquidated or repaid for cash, the cash proceeds of that sale, liquidation or repayment received by the Company or any Restricted Subsidiary net of the fees and expenses actually incurred in connection with such sale, liquidation or repayment and net of taxes paid or payable as a result thereof. The foregoing provisions (ii) and (iii) will not prohibit: (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration the payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement or other acquisition of any Capital Stock of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to any Restricted Subsidiary) of Qualified Capital Stock of the Company; (iii) the defeasance, redemption, repurchase or other retirement of Subordinated Indebtedness in exchange for, or out of the proceeds of, the substantially concurrent issue and sale of (a) Subordinated Indebtedness so long as the new Subordinated Indebtedness has (1) an Average Life equal to or longer than the Average Life of the Subordinated Indebtedness being defeased, redeemed, repurchased or otherwise retired and (2) terms of subordination no less favorable to the Holders of the Exchange Notes than those applicable to the Subordinated Indebtedness being defeased, redeemed, repurchased or otherwise retired or (b) Qualified Capital Stock of the Company (other than to any Restricted Subsidiary); (iv) the repurchase, redemption or other acquisition or retirement for value of any Capital Stock held by any member of the Company's or any Restricted Subsidiary's management pursuant to any management equity subscription agreement, employment agreement, stock option agreement or other compensation agreement in an amount not to exceed in the aggregate $500,000 in any fiscal year of the Company; (v) the making of one or more Related Business Investments that are Restricted Investments in an aggregate amount not in excess of $10.0 million; or (vi) subject to the condition precedent that the Company has first satisfied all its obligations described under 80 " -- Change of Control" below, the redemption of any then outstanding shares of Existing Preferred Stock upon the occurrence of a "Major Transaction" (as such term is defined in the certificate of designation for each such series of preferred stock as in effect on the Issue Date). The amounts referred to in clauses (i), (ii), (iii), (iv), (v) or (vi) of the immediately preceding paragraph will be included as Restricted Payments in any computation made pursuant to clause (iii) of the second preceding paragraph. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted by and complies with the Indenture and setting forth in reasonable detail the basis on which the required calculations were computed, which calculations will be based upon the Company's latest consolidated available financial statements. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, (i) issue or sell or otherwise dispose of any Capital Stock of any Restricted Subsidiary (other than to the Company or a Wholly Owned Restricted Subsidiary) other than Junior Preferred Stock or (ii) permit any Person other than the Company or a Wholly Owned Restricted Subsidiary to own any Capital Stock of any Restricted Subsidiary other than Junior Preferred Stock, except, in the case of clause (i) or (ii), to the extent permitted by and in accordance with the definition of "Wholly Owned Restricted Subsidiary" set forth in " -- Certain Definitions" below. The sale of all the Capital Stock of any Restricted Subsidiary is permitted by this covenant but is subject to the limitations described under " -- Limitation on Asset Sales" below. LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, assume, guarantee or otherwise become liable with respect to any Sale/Leaseback Transaction unless (i) the Company or the Restricted Subsidiary, as the case may be, would be permitted to incur Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under " -- Limitation on Indebtedness and Disqualified Capital Stock" above in an amount equal to the Attributable Indebtedness arising from the Sale/Leaseback Transaction, (ii) the Company or the Restricted Subsidiary receives proceeds from the Sale/Leaseback Transaction at least equal to the fair market value of the property or assets subject thereto (as determined in good faith by the Board of Directors, whose determination in good faith and evidenced by a Board Resolution will be conclusive), (iii) the Company applies an amount in cash equal to the Net Available Proceeds of the Sale/Leaseback Transaction in accordance with the provisions of the covenant described under " -- Limitation on Asset Sales" below as if the Sale/Leaseback Transaction were an Asset Sale and (iv) the Sale/Leaseback Transaction would not result in a violation of the covenant described under " -- Limitation on Liens" below. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary to, enter into, renew or extend any contract or agreement relating to the sale, purchase or lease of assets (other than Capital Stock of the Company), property or services from or to any Affiliate of the Company (each of the foregoing, an "Affiliate Transaction") (i) on terms less favorable to the Company or the Restricted Subsidiary, as the case may be, than would be available in a comparable transaction with a Person not an Affiliate of the Company or (ii) on terms that are not fair from a financial point of view to the Company or the Restricted Subsidiary, as the case may be, in the event no comparable transaction with a Person not an Affiliate of the Company is available; PROVIDED, that the Company will not, and will not permit any Restricted Subsidiary to, enter into, renew or extend any Affiliate Transaction or series of related Affiliate Transactions involving aggregate payments, value, remuneration or other consideration in excess of $1.0 million after the Issue Date unless the prior approval thereof by the Board of Directors (including a majority of the Disinterested Directors) has been obtained and the Company delivers to the Trustee an Officers' Certificate (i) certifying that the Affiliate Transaction or series of related Affiliate Transactions complies with the foregoing restriction and (ii) if the Affiliate Transaction or series of related Affiliate Transactions involves aggregate payments, value, remuneration or other consideration in excess of $5.0 million after the Issue Date, to which is attached a copy of a written opinion of an Independent Financial Advisor specializing or having a speciality in the type and subject matter of the transaction or series of 81 related transactions at issue, to the effect that such transaction or series of related transactions is fair from a financial point of view to the Company or the Restricted Subsidiary, as the case may be; provided, however, that the foregoing restriction will not apply to: (i) transactions between or among (a) the Company and one or more Wholly Owned Restricted Subsidiaries or (b) Wholly Owned Restricted Subsidiaries; (ii) transactions between the Company or any Restricted Subsidiary and any qualified employee stock ownership plan established for the benefit of the Company's employees, or the establishment or maintenance of any such plan; (iii) reasonable director, officer and employee compensation and other benefit, and indemnification, arrangements approved by the Board of Directors; or (iv) transactions permitted by the covenant described under " -- Limitation on Restricted Payments" above. LIMITATION ON LIENS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, affirm or suffer to exist or become effective any Lien upon any of its property or assets, whether owned on or acquired after the Issue Date, or upon any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom, except Permitted Liens, unless prior to, or contemporaneously therewith, the Exchange Notes are equally and ratably secured with (or prior to) the obligation or liability secured by that Lien; PROVIDED, HOWEVER, that if a Lien is granted to secure Indebtedness and that Indebtedness is expressly subordinated to the Exchange Notes, the Lien securing that Indebtedness must be expressly subordinated and junior to the Lien securing the Exchange Notes, with the same relative priority as such Indebtedness has with respect to the Exchange Notes. The incurrence of additional secured Indebtedness by the Company and the Restricted Subsidiaries is subject to further limitations on the incurrence of Indebtedness as described under " -- Limitation on Indebtedness and Disqualified Capital Stock" above. CHANGE OF CONTROL. If a Change of Control occurs, the Company must make an offer to purchase all the then outstanding Exchange Notes (a "Change of Control Offer") and purchase, on a business day (the "Change of Control Purchase Date") not more than 60 nor less than 30 days following the date notice is mailed, as provided below, all the then outstanding Exchange Notes validly tendered pursuant to that Change of Control Offer and not withdrawn, at a purchase price (the "Change of Control Purchase Price") equal to 101% of the principal amount thereof, together with accrued and unpaid interest thereon and Liquidated Damages, if any, to the Change of Control Purchase Date. The Company must keep the Change of Control Offer open for at least 20 business days and until the close of business on the fifth business day prior to the Change of Control Purchase Date. To effect a Change of Control Offer, the Company will, not later than the 30th day after a Change of Control occurs, send, by first class mail, to the Trustee and each Holder a notice of the Change of Control Offer, which notice will govern the terms of the Change of Control Offer and state the procedures Holders must follow to accept the Change of Control Offer. There can be no assurance the Company will have available funds sufficient to fund the purchase of the Exchange Notes that might be tendered by Holders seeking to accept a Change of Control Offer. If a Change of Control occurs at a time when the Company does not have available funds sufficient to pay the Change of Control Purchase Price for all the Exchange Notes tendered by Holders seeking to accept the Change of Control Offer, an Event of Default would occur under the Indenture. The Company will not be required to make a Change of Control Offer following the occurrence of a Change of Control if another Person (i) makes the Change of Control Offer (a) at the same purchase price, (b) at the same time and (c) otherwise in substantial compliance with the requirements applicable to a Change of Control Offer to be made by the Company and (ii) purchases all Exchange Notes validly tendered and not withdrawn under that Person's Change of Control Offer. The existence of a Holder's right to require, subject to certain conditions, the Company to repurchase its Exchange Notes following the occurrence of a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes, or results in, a Change of Control. The Company will comply with Rule l4e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any other securities laws and regulations thereunder, if applicable, if a Change of Control occurs and the Company is required to purchase Exchange Notes as described above. 82 LIMITATION ON ASSET SALES. The Company will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale unless (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration at the time of the Asset Sale at least equal to the fair market value of the assets and properties sold or otherwise disposed of pursuant to the Asset Sale (as determined by the Board of Directors, whose determination in good faith will be conclusive and evidenced by a Board Resolution), (ii) at least 75% of the consideration received by the Company or the Restricted Subsidiary, as the case may be, in respect of the Asset Sale consists of cash or Cash Equivalents and (iii) the Company delivers to the Trustee an Officers' Certificate certifying that the Asset Sale complies with clauses (i) and (ii) of this sentence. The amount (without duplication) of any Indebtedness (other than Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is expressly assumed by the transferee in an Asset Sale and with respect to which the Company or the Restricted Subsidiary, as the case may be, is unconditionally released by the holder of that Indebtedness will be deemed (i) to be cash or Cash Equivalents for purposes of clause (ii) of the preceding sentence and (ii) to constitute a repayment of, and a permanent reduction in, the amount of that Indebtedness for purposes of the second following paragraph. If at any time any non-cash consideration received by the Company or any Restricted Subsidiary, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration) or Cash Equivalents, then such conversion or disposition will constitute an Asset Sale and the Net Available Proceeds therefrom must be applied in accordance with this covenant. A transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to a Wholly Owned Restricted Subsidiary will not constitute an Asset Sale, and a transfer of assets that constitutes a Restricted Investment and that is permitted under the covenant described under " -- Limitation on Restricted Payments" above will not constitute an Asset Sale. If substantially all (but not all) the property and assets of the Company and its Restricted Subsidiaries are transferred as an entirety to a Person in a transaction permitted under the covenant described under "Merger, Consolidation and Sale of Assets" below, the successor corporation will be deemed to have sold the properties and assets of the Company and its Subsidiaries not so transferred for purposes of this covenant (other than the provision described in clause (ii) of the first sentence of the immediately preceding paragraph) and must comply with the provisions of this covenant with respect to that deemed sale as if it were an Asset Sale. In addition, the fair market value of the properties and assets of the Company or its Subsidiaries deemed to be sold will be deemed to be Net Available Proceeds for purposes of this covenant. If the Company or any Restricted Subsidiary consummates an Asset Sale, the Company or any Restricted Subsidiary, as the case may be, may either, no later than 365 days after that Asset Sale, (i) apply all or any of the Net Available Proceeds therefrom to repay Indebtedness (other than Subordinated Indebtedness) of the Company or any Restricted Subsidiary, PROVIDED, in each case, that the related loan commitment (if any) is thereby permanently reduced by the amount of the Indebtedness so repaid or (ii) invest all or any part of the Net Available Proceeds therefrom in properties and assets that replace the properties or assets that were the subject of the Asset Sale or in other properties or assets that will be used in the business of the Company and the Restricted Subsidiaries. The amount of the Net Available Proceeds not applied or invested as provided in this paragraph will constitute "Excess Proceeds." NET PROCEEDS OFFER. When the aggregate amount of Excess Proceeds from one or more Asset Sales equals or exceeds $5.0 million, the Company must make an offer to purchase, from all Holders of the then outstanding Exchange Notes, an aggregate principal amount of Exchange Notes equal to such Excess Proceeds, as follows: (i) The Company must make an offer to purchase (a "Net Proceeds Offer") from all Holders of the Exchange Notes in accordance with the procedures set forth in the Indenture the maximum aggregate principal amount (expressed as a multiple of $1,000) of Exchange Notes that may be purchased out of the amount (the "Payment Amount") of such Excess Proceeds; (ii) The offer price for the Exchange Notes will be payable in cash in an amount equal to 100% of the principal amount of the Exchange Notes tendered pursuant to a Net Proceeds Offer, together with accrued and unpaid interest thereon and Liquidated Damages, if any, to the date that Net Proceeds 83 Offer is consummated (the "Offered Price"), in accordance with the procedures set forth in the Indenture. To the extent that the aggregate Offered Price of Exchange Notes tendered pursuant to a Net Proceeds Offer is less than the Payment Amount relating thereto (such shortfall constituting a "Net Proceeds Deficiency"), subject to the limitations of the covenant described under "-- Limitation on Restricted Payments" above, the Company may use any or all of such Net Proceeds Deficiency for general corporate purposes; (iii) If the aggregate Offered Price of Exchange Notes validly tendered and not withdrawn by Holders thereof exceeds the Payment Amount, the Trustee will select the Exchange Notes to be purchased on a PRO RATA basis in accordance with the relative aggregate principal amounts of the Exchange Notes so tendered and not withdrawn; and (iv) When a Net Proceeds Offer is completed, the amount of Excess Proceeds will be zero. The Company will not, and will not permit any Restricted Subsidiary to, enter into or suffer to exist any agreement that would place any restriction of any kind (other than pursuant to law or regulation) on the ability of the Company to make a Net Proceeds Offer following any Asset Sale. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder, if applicable, if an Asset Sale occurs and the Company is required to purchase Exchange Notes as described above. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or allow to become effective any consensual Payment Restriction with respect to any Restricted Subsidiary, except for any such Payment Restriction existing under or by reason of (i) applicable law, (ii) customary non-assignment provisions in leases or other contracts entered into in the ordinary course of business and consistent with past practices, (iii) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired, (iv) customary restrictions imposed on the transfer of copyrighted or patented materials, (v) the entering into of a contract for the sale or other disposition of assets, directly or indirectly, so long as such restrictions do not extend to assets that are not subject to such sale or other disposition, (vi) the terms of any agreement evidencing any Indebtedness of Restricted Subsidiaries that was permitted by the Indenture to be incurred that only restrict the transfer of the assets purchased with the proceeds of such Indebtedness, (vii) the terms of the Working Capital Agreement in effect on the Issue Date and any similar Payment Restriction under any similar revolving credit facility or any replacement thereof, provided that such similar Payment Restriction is no more restrictive than the Payment Restriction in effect on the Issue Date and (viii) the terms of any agreement evidencing any Acquired Indebtedness that was permitted by the Indenture to be incurred, provided that such Payment Restriction only applies to assets that were subject to such restrictions prior to the acquisition of such assets by the Company or any Restricted Subsidiary. LIMITATION ON CONDUCT OF BUSINESS. The Company will not, and will not permit any Restricted Subsidiary to, engage in the conduct of any business other than any Related Business. FUTURE DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The foregoing covenants (including calculation of financial ratios and the determination of limitations on the incurrence of Indebtedness and Liens) may be affected by the designation by the Company of any existing or future Subsidiary of the Company as an Unrestricted Subsidiary. The definition of "Unrestricted Subsidiary" set forth under the caption "-- Certain Definitions" below describes the circumstances under which the Board of Directors may designate a Subsidiary of the Company as an Unrestricted Subsidiary. Any Investment made by the Company or any Restricted Subsidiary that is redesignated from a Restricted Subsidiary to an Unrestricted Subsidiary will be subject to the covenant described under "-- Limitation on Restricted Payments" above and will be treated as a Restricted Payment (to the extent not previously included as a Restricted Payment) made on the day of redesignation in an amount equal to the greater of (i) the fair market value (as determined by the Board of Directors in good faith and evidenced by a Board Resolution) of the Capital Stock of such redesignated Subsidiary held by the Company and its Restricted Subsidiaries on that date, and 84 (ii) the amount of the Investments determined in accordance with GAAP made by the Company and its Restricted Subsidiaries in that redesignated Subsidiary. ADDITIONAL SUBSIDIARY GUARANTORS. If the Company or any Restricted Subsidiary acquires or creates another Subsidiary of the Company after the Issue Date, that newly acquired or created Subsidiary must execute a Subsidiary Guarantee and deliver an Opinion of Counsel, in accordance with the terms of the Indenture, unless the Board of Directors has duly designated that Subsidiary as an Unrestricted Subsidiary in accordance with the definition of Unrestricted Subsidiary under the caption "-- Certain Definitions" below. Additional Covenants. The Indenture also contains covenants with respect to the following matters: (i) payment of principal, premium, if any, and interest and Liquidated Damages, if any; (ii) maintenance of an office or agency in The City of New York; (iii) arrangements regarding the handling of money held in trust; (iv) maintenance of corporate existence; (v) payment of taxes and other claims; and (vi) maintenance of properties. REPORTS. The Company will file on a timely basis with the Commission, to the extent the Commission accepts such filings and whether or not the Company has a class of securities registered under the Exchange Act, the annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13 or 15(d) of the Exchange Act. The Company also will (i) file with the Trustee (with exhibits), and provide to each Holder (without exhibits), without cost to that Holder, copies of such reports and documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were subject to Section 13 or 15(d) of the Exchange Act and (ii) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, supply at its cost copies of such reports and documents (including any exhibits thereto) to any Holder promptly on its written request. For so long as the Exchange Notes remain outstanding, the Company will also furnish to the Holders and beneficial holders of Exchange Notes and to prospective purchasers of Exchange Notes designated by the Holders of Transfer Restricted Securities (as defined in the Registration Rights Agreement) and to broker-dealers, on their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. MERGER, CONSOLIDATION AND SALE OF ASSETS The Company will not, in any single transaction or series of related transactions, consolidate or merge with any other Person, or sell, assign, convey, transfer, lease or otherwise dispose of the properties and assets of the Company and the Restricted Subsidiaries on a consolidated basis substantially as an entirety to any Person or group of Persons that are Affiliates of each other (an "Affiliated Group"), and the Company will not permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions, if, in any event, such transaction or series of transactions, in the aggregate, would result in the sale, assignment, conveyance, transfer, lease or other disposition of the properties and assets of the Company and the Restricted Subsidiaries on a consolidated basis substantially as an entirety to any other Person or Affiliated Group, unless: (i) either (a) if the transaction is a merger, the Company will be the surviving Person of that merger, or (b) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person or Affiliated Group that acquires the properties and assets of the Company and the Restricted Subsidiaries on a consolidated basis substantially as an entirety (any such surviving Person or acquiring Person or member of an acquiring Affiliated Group being the "Surviving Entity") is a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and expressly assumes by a supplemental indenture to the Indenture executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company or the Restricted Subsidiary, as the case may be, with respect to the Exchange Notes and the Indenture, including, with respect to each Restricted Subsidiary that is a Subsidiary Guarantor, the obligations under the Subsidiary Guarantee of that Restricted Subsidiary, and, in any case, the Indenture remains in full force and effect; (ii) immediately before and immediately after giving effect to such transaction or series of transactions on a pro forma basis (and treating any Indebtedness not previously an obligation of the 85 Company or any Restricted Subsidiary that becomes an obligation of the Company or any Restricted Subsidiary in connection with or as a result of such transaction or transactions as having been incurred at the time of such transaction or transactions), no Default or Event of Default has occurred and is continuing; (iii) except in the case of the consolidation or merger of any Restricted Subsidiary with or into the Company, immediately after giving effect to such transaction or transactions on a pro forma basis, the Consolidated Net Worth of the Company (or of the Surviving Entity if the Company is not the continuing obligor under the Indenture) is at least equal to the Consolidated Net Worth of the Company immediately before such transaction or series of transactions; (iv) except in the case of the consolidation or merger of the Company with or into a Restricted Subsidiary or any Restricted Subsidiary with or into the Company or another Restricted Subsidiary, immediately before and immediately after giving effect to such transaction or series of transactions on a pro forma basis (assuming that the transaction or series of transactions occurred on the first day of the most recent period of four consecutive fiscal quarters of the Company prior to the consummation of such transaction or series of transactions for which consolidated financial statements of the Company are available, with the appropriate adjustments with respect to the transaction or transactions being included in such pro forma calculation), the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could incur at least $1.00 of additional Indebtedness not constituting Permitted Indebtedness in accordance with the Consolidated Fixed Charge Coverage Ratio test described under "-- Certain Covenants -- Limitation on Indebtedness and Disqualified Capital Stock" above; (v) if any of the properties or assets of the Company or any Restricted Subsidiary would on such transaction or series of transactions become subject to any Lien (other than a Permitted Lien), the creation and imposition of that Lien complies with the covenant described under "-- Certain Covenants -- Limitation on Liens" above; (vi) each Subsidiary Guarantor, unless it is the other party to the transaction or series of transactions, confirms by amendment to its Subsidiary Guarantee that its guarantee of the Exchange Notes will apply to the obligations of the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) under the Exchange Notes and the Indenture; and (vii) the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) delivers to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction or series of transactions and any supplemental indenture in respect thereof comply with the requirements the Indenture and that all conditions precedent in the Indenture relating to such transaction or series of transactions have been satisfied. When any consolidation or merger or any sale, assignment, lease, conveyance, transfer or other disposition of the properties and assets of the Company and its Restricted Subsidiaries on a consolidated basis substantially as an entirety becomes effective in accordance with the foregoing in which the Company is not the Surviving Entity, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if the Surviving Entity had been named as the Company in the Indenture, and thereafter the Company, except in the case of a lease, will be discharged from all obligations and covenants under the Indenture and the Exchange Notes and may be liquidated and dissolved. EVENTS OF DEFAULT The following will be "Events of Default" under the Indenture: (i) any default in the payment of the principal of or premium, if any, on any of the Exchange Notes, whether such payment is due at Stated Maturity or on redemption, repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer, acceleration or otherwise; or (ii) any default in the payment of any installment of interest or Liquidated Damages, if any, on any Exchange Note, when due, and the continuance of that default for a period of 30 days; or (iii) any default in the performance or breach by the Company or any Restricted Subsidiary of the covenants described under "-- Merger, Consolidation and Sale of Assets" above, or any failure of the Company to make or consummate either a Change of Control Offer or a Net Proceeds Offer in accordance with the applicable provisions of the Indenture; or 86 (iv) any failure of the Company or any Subsidiary Guarantor to perform or observe any other term, covenant or agreement applicable to it and contained in the Exchange Notes, the Indenture (other than a default specified in clause (i), (ii) or (iii) above) or the Subsidiary Guarantees, as the case may be, for a period of 30 days after written notice of that failure is given (a) to the Company or the Subsidiary Guarantor, as the case may be, by the Trustee or (b) to the Company or the Subsidiary Guarantor, as the case may be, and the Trustee by the Holders of at least 25% in aggregate principal amount of the Exchange Notes then outstanding; or (v) the occurrence and continuation beyond any applicable grace period of any default in the payment of the principal of any Indebtedness of the Company (other than the Exchange Notes) or any Restricted Subsidiary for money borrowed when due at final Stated Maturity, or any other default resulting in acceleration of any Indebtedness of the Company or any Restricted Subsidiary for money borrowed, PROVIDED that the aggregate principal amount of such Indebtedness exceeds $5.0 million; or (vi) one or more final judgments or orders rendered against the Company or any Restricted Subsidiary that are unsatisfied and require the payment in money, either individually or in an aggregate amount, in excess of $5.0 million are not paid, discharged or stayed for a period of 60 days; or (vii) certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary; or (viii) except as permitted by the Indenture and the Exchange Notes, the cessation of the effectiveness of any Subsidiary Guarantee or the repudiation by any Subsidiary Guarantor (or by any Person acting on behalf of any Subsidiary Guarantor) of its obligations under its Subsidiary Guarantee. If an Event of Default (other than one of the types described in clause (vii) above) occurs and is continuing, the Trustee, by written notice to the Company, or the Holders of at least 25% in aggregate principal amount of the Exchange Notes then outstanding, by written notice to the Trustee and the Company, may, and the Trustee on the request of the Holders of not less than 25% in aggregate principal amount of the Exchange Notes then outstanding will, declare the principal of and premium, if any, accrued and unpaid interest and Liquidated Damages, if any, on all the Exchange Notes due and payable immediately, on which declaration all amounts payable in respect of the Exchange Notes will be immediately due and payable. If an Event of Default of any type described in clause (vii) above occurs, then the principal of and premium, if any, and accrued and unpaid interest and Liquidated Damages, if any, on all Exchange Notes will become and be immediately due and payable without any declaration, notice or other act on the part of the Trustee or any Holder. After a declaration of acceleration under the Indenture, but before the Trustee obtains a judgment or decree for payment of the money due, the Holders of a majority in aggregate principal amount of the outstanding Exchange Notes, by written notice to the Company and the Trustee, may, under certain circumstances, rescind and annul that declaration and its consequences if all Events of Default, other than the non-payment of principal of and premium, if any, interest or Liquidated Damages, if any, on the Exchange Notes that has become due solely because of that declaration, have been cured or waived. No such rescission will affect any subsequent Default or Event of Default or impair any right consequent thereto. No Holder will have any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless (i) that Holder has notified the Trustee of a continuing Event of Default and the Holders of not less than 25% in aggregate principal amount of the outstanding Exchange Notes have made written request, and offered reasonable indemnity, to the Trustee to institute that proceeding as Trustee under the Exchange Notes and the Indenture, (ii) the Trustee has failed to institute that proceeding within 60 days after receipt of that notice and offer and (iii) the Trustee, within that 60-day period, has not received directions inconsistent with that written request by Holders of a majority in aggregate principal amount of the outstanding Exchange Notes. These limitations will not apply, however, to a suit instituted by any Holder to enforce the payment of the principal of and premium, if any, interest or Liquidated Damages, if 87 any, on that Holder's Exchange Note on or after the respective due dates expressed in that Exchange Note or in the Registration Rights Agreement described below. The Holders of a majority in principal amount of the Exchange Notes may waive any existing Default or Event of Default under the Indenture and its consequences, except a default (i) in the payment of the principal of or premium, if any, interest or Liquidated Damages, if any, on any Exchange Notes or (ii) in respect of any provision that cannot be modified or amended without the consent of the Holder of each Exchange Note. The Company has agreed (i) to furnish to the Trustee annual and quarterly statements as to the performance by the Company of its obligations under the Indenture and as to any default in that performance and (ii) to notify the Trustee within 30 days after Senior Management becomes aware of any Default or Event of Default. LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE The Company may, at its option and at any time, terminate its obligations respecting the outstanding Exchange Notes (that action being a "legal defeasance"). If legal defeasance occurs, the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Exchange Notes and to have been discharged from all its other obligations with respect to the Exchange Notes, except for (i) the rights of Holders to receive payment in respect of the principal of and premium, if any, interest and Liquidated Damages, if any, on their outstanding Exchange Notes when those payments are due, (ii) the Company's obligations to replace any temporary Exchange Notes, register the transfer or exchange of any Exchange Notes, replace mutilated, destroyed, lost or stolen Exchange Notes and maintain an office or agency for payments in respect of the Exchange Notes, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the legal defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to terminate its obligation to comply with certain covenants in the Indenture, some of which are described under " -- Certain Covenants" above, and any omission to comply with those covenants will not constitute a Default or an Event of Default respecting the Exchange Notes (that action being a "covenant defeasance"). If covenant defeasance occurs, certain events (not including nonpayment, bankruptcy, insolvency and reorganization events) described under " -- Events of Default" will no longer constitute Events of Default respecting the Exchange Notes. In order to exercise either legal defeasance or covenant defeasance: (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars or U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of and premium, if any, interest and Liquidated Damages, if any, on the outstanding Exchange Notes to redemption or maturity; (ii) the Company must deliver to the Trustee an Opinion of Counsel to the effect that the Holders of the outstanding Exchange Notes will not recognize income, gain or loss for federal income tax purposes as a result of such legal defeasance or covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance or covenant defeasance had not occurred (in the case of legal defeasance, this opinion must refer to and be based on a published ruling of the Internal Revenue Service or a change in applicable federal income tax laws); (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clauses (vii) and (viii) under the first paragraph of " -- Events of Default" above are concerned, at any time during the period ending on the 91st day after the date of deposit; (iv) such legal defeasance or covenant defeasance must not cause the Trustee to have a conflicting interest under the Indenture or the Trust Indenture Act with respect to any securities of the Company; (v) such legal defeasance or covenant defeasance will not result in a breach or violation of, or constitute a default under, any material agreement or instrument to which the Company or any Restricted Subsidiary is a party or by which the Company or any Restricted Subsidiary is bound; (vi) the Company must deliver to the Trustee an Opinion of Counsel experienced in bankruptcy matters to the effect that the use of the trust funds to pay the principal of and premium, if any, interest and Liquidated Damages, if any, on the outstanding Exchange Notes would not be avoidable as a preferential payment under Section 547 of 88 the Bankruptcy Code (or any similar provision then in force) or recoverable under Section 550 of the Bankruptcy Code (or any similar provision then in force) in the event the Company became a debtor in a proceeding commenced thereunder; (vii) the Company must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company must deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, satisfactory to the Trustee, each stating that all conditions precedent under the Indenture to either legal defeasance or covenant defeasance, as the case may be, have been complied with. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Exchange Notes, as expressly provided for in the Indenture) as to all outstanding Exchange Notes when: (i) either (a) all the Exchange Notes theretofore authenticated and delivered (except lost, stolen, mutilated or destroyed Exchange Notes that have been replaced or paid and Exchange Notes for whose payment money or certain U.S. Government Obligations have been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Exchange Notes not theretofore delivered to the Trustee for cancellation have become due and payable or will become due and payable at their Stated Maturity within one year, or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the serving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Exchange Notes not theretofore delivered to the Trustee for cancellation, for principal of and premium, if any, interest and Liquidated Damages, if any, on the Exchange Notes to the date of deposit (in the case of Exchange Notes that have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be, together with instructions from the Company irrevocably directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an Officers' Certificate stating and an Opinion of Counsel opining that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. AMENDMENTS AND WAIVERS From time to time, the Company and the Trustee may, without the consent of any Holder, amend or supplement the Indenture or the Exchange Notes to: (i) evidence the succession of another Person to the Company or any Subsidiary Guarantor and the assumption by any such successor of the covenants of the Company or the Subsidiary Guarantor, as the case may be, in the Indenture and the Exchange Notes; (ii) add to the covenants of the Company for the benefit of Holders or to surrender any right or power conferred on the Company in the Indenture; (iii) comply with any requirement of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act; (iv) secure the Exchange Notes; (v) provide for uncertificated Exchange Notes in addition to or in place of certificated Exchange Notes; (vi) reflect the release of any Subsidiary Guarantor from its Subsidiary Guarantee or add any Subsidiary of the Company as a Subsidiary Guarantor pursuant to and in the manner provided by the Indenture; (vii) evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (viii) cure any ambiguity or omission in the Indenture or the Exchange Notes, correct or supplement any provision in the Indenture or the Exchange Notes that may be defective or inconsistent with any other provision in the Indenture or the Exchange Notes and make any other provisions with respect to matters or questions arising under the Indenture; PROVIDED, HOWEVER, that no modification or amendment described in this clause (ix) may adversely affect the interests of the Holders in any material respect. Other amendments and modifications of the Indenture or the Exchange Notes may be made by the Company and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the outstanding Exchange Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each outstanding Exchange Note affected thereby: (i) change the Stated 89 Maturity of the principal of, or any installment of interest on, any Exchange Note or alter the provisions with respect to redemption of the Exchange Notes; (ii) reduce the principal amount of or premium, if any, the rate of interest or Liquidated Damages, if any, on any Exchange Note; (iii) change the coin or currency in which principal of or premium, if any, interest or Liquidated Damages, if any, on any Exchange Note is payable; (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any Exchange Note; (v) reduce the above-stated percentage of aggregate principal amount of outstanding Exchange Notes necessary to modify or amend the Indenture; (vi) reduce the percentage of aggregate principal amount of outstanding Exchange Notes necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults; (vii) modify any provisions of the Indenture relating to the modification and amendment of the Indenture or the waiver of past Defaults or covenants, except as otherwise specified, or the rights of any Holder to receive payments of principal of or premium, if any, interest or Liquidated Damages, if any, on the Exchange Notes; (viii) change the ranking of the Exchange Notes in a manner adverse to the Holders or expressly subordinate in right of payment the Exchange Notes to any other Indebtedness; (ix) amend, change or modify the obligation of the Company to make and consummate a Change of Control Offer if a Change of Control occurs or make and consummate a Net Proceeds Offer with respect to any Asset Sale or modify any of the provisions or definitions in the Indenture insofar as they relate thereto; or (x) release any security that may have been granted in respect of the Exchange Notes except as expressly provided in the Indenture. The Holders of not less than a majority in aggregate principal amount of the outstanding Exchange Notes may, on behalf of the Holders of all Exchange Notes, waive any past default under the Indenture, except a default in the payment of principal of or premium, if any, interest or Liquidated Damages, if any, on the Exchange Notes, or in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the Holder of each Exchange Note outstanding. THE TRUSTEE Norwest Bank Minnesota, National Association will serve as trustee under the Indenture. The Indenture (including provisions of the Trust Indenture Act incorporated therein) will contain limitations on the rights of the Trustee thereunder, if it becomes a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Indenture will permit the Trustee to engage in other transactions; PROVIDED, HOWEVER, if it acquires any conflicting interest (as defined in the Trust Indenture Act), it must eliminate such conflict or resign. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE The Indenture and the Exchange Notes will be governed by the laws of the State of New York, without regard to the principles of conflicts of law. The Company and the Subsidiary Guarantors will expressly submit to the nonexclusive jurisdiction of the State of New York and the U.S. federal courts sitting in The City of New York for the purposes of any suit, action or proceeding with respect to the Indenture, the Exchange Notes and the Subsidiary Guarantees and for actions brought under federal or state securities laws with respect to the Exchange Notes. The Company and the Subsidiary Guarantors will appoint CT Corporation as their agent upon which process may be served in any such action or proceeding with respect to the Indenture, the Exchange Notes or the Subsidiary Guarantees. FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES Exchange Notes will be issued only in fully registered form, without interest coupons, in denominations of $1,000 and integral multiples thereof. The Exchange Notes generally will be represented by one or more fully-registered global notes (collectively, the "Global Exchange Note"). Notwithstanding the foregoing, Notes held in certificated form will be exchanged solely for Exchange Notes in certificated form, as discussed below. The Global Exchange Note will be deposited upon issuance with The Depository Trust Company ("DTC") and registered in the name of DTC or a nominee of DTC (the "Global Exchange Note 90 Registered Owner"). Except as set forth below, the Global Exchange Note may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. A Holder may transfer or exchange Exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Exchange Notes selected for redemption. Also, the Company is not required to transfer or exchange Exchange Notes for a period of 15 days before a selection of Exchange Notes to be redeemed. The registered Holder of an Exchange Note will be treated as the owner of such Exchange Note for all purposes. EXCHANGES OF BOOK-ENTRY EXCHANGE NOTES FOR CERTIFICATED EXCHANGE NOTES A beneficial interest in a Global Exchange Note may not be exchanged for an Exchange Note in certificated form unless (i) DTC (x) notifies the Company that it is unwilling or unable to continue as Depositary for the Global Exchange Note or (y) has ceased to be a clearing agency registered under the Exchange Act, and in either case the Company thereupon fails to appoint a successor Depositary, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of the Exchange Notes in certificated form or (iii) there shall have occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the Exchange Notes. In all cases, certificated Exchange Notes delivered in exchange for any Global Exchange Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the Depositary (in accordance with its customary procedures). Any such exchange will be effected through the DWAC System and an appropriate adjustment will be made in the records of the Security Registrar to reflect a decrease in the principal amount of the relevant Global Exchange Note. CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL EXCHANGE NOTES The descriptions of the operations and procedures of DTC that follow are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them from time to time. The Company takes no responsibility for these operations and procedures and urges investors to contact the system or their participants directly to discuss these matters. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants ("participants") and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical transfer and delivery of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). DTC had advised the Company that its current practice, upon the issuance of the Global Exchange Notes, is to credit, on its internal system, the respective principal amount of the individual beneficial interests represented by such Global Exchange Notes to the accounts with DTC of the participants through which such interests are to be held. Ownership of beneficial interests in the Global Exchange Notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominees (with respect to interests of participants) and the records of participants and indirect participants (with respect to interests of persons other than participants). 91 AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL EXCHANGE NOTE, DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND HOLDER OF THE EXCHANGE NOTES REPRESENTED BY SUCH GLOBAL EXCHANGE NOTE FOR ALL PURPOSES UNDER THE INDENTURE AND THE EXCHANGE NOTES. Except in the limited circumstances described above under " -- Exchanges of Book-Entry Notes for Certificated Notes," owners of beneficial interests in a Global Exchange Note will not be entitled to have any portions of such Global Exchange Note registered in their names, will not receive or be entitled to receive physical delivery of Exchange Notes in definitive form and will not be considered the owners or Holders of the Global Exchange Note (or any Exchange Notes represented thereby) under the Indenture or the Exchange Notes. Investors may hold their interests in the Global Exchange Note directly through DTC, if they are participants in such system, or indirectly through organizations (including Euroclear and CEDEL) which are participants in such system. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Exchange Note to such persons may be limited to that extent. Because DTC can act only on behalf of its participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having beneficial interests in a Global Exchange Note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. Payments of the principal of, premium, if any, and interest on the Global Exchange Note will be made to DTC or its nominee as the registered owner thereof. Neither the Company, the Trustee nor any of their respective agents will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Exchange Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Exchange Note representing any Exchange Notes held by it or its nominee, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Exchange Note for such Exchange Notes as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in such Global Exchange Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in "street name." Such payments will be the responsibility of such participants. None of the Company or the Trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the Exchange Notes, and the Company and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee as the registered owner of the Exchange Notes for all purposes. Interests in the Global Exchange Notes will trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. Because of time zone differences, the securities account of a Euroclear or CEDEL participant purchasing an interest in a Global Exchange Note from a DTC participant will be credited, and any such crediting will be reported to the relevant Euroclear or CEDEL participant, during the securities settlement processing day (which must be a business day for Euroclear and CEDEL) immediately following the DTC settlement date. Cash received in Euroclear or CEDEL as a result of sales of interests in a Global Exchange Note by or through a Euroclear or CEDEL participant to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Euroclear or CEDEL cash account only as of the business day for Euroclear or CEDEL following the DTC settlement date. DTC has advised the Company that it will take any action permitted to be taken by a holder of Exchange Notes only at the direction of one or more participants to whose accounts with DTC interests in the Global Exchange Notes are credited and only in respect of such portion of the aggregate principal 92 amount of the Exchange Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default (as defined below) under the Exchange Notes, DTC reserves the right to exchange the Global Exchange Notes for Exchange Notes in certificated form, and to distribute such Exchange Notes to its participants. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of beneficial ownership interests in the Global Exchange Notes among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations, including maintaining, supervising or reviewing the records relating to, or payments made on account of, beneficial ownership interests in Global Exchange Notes. REGISTRATION RIGHTS The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which is filed with the Commission as an exhibit to the Registration Statement. The Company, the Subsidiary Guarantors and the Initial Purchasers have entered into the Registration Rights Agreement pursuant to which the Company has agreed to file with the Commission this Registration Statement with respect to the Exchange Offer. If (i) the Exchange Offer is not permitted by applicable law or Commission policy, (ii) the Exchange Offer is not consummated within 165 days following July 2, 1997 (or if such 165th day is not a business day, the first business day thereafter), (iii) the Initial Purchasers so request within six months after consummation of the Exchange Offer with respect to the Notes not eligible to be exchanged for Exchange Notes in the Exchange Offer and held by either of them following consummation of the Exchange Offer or (iv) any Holder (other than certain broker-dealers) is not eligible to participate in the Exchange Offer or, in the case of any Holder (other than certain broker-dealers) that participates in the Exchange Offer, such Holder does not receive freely tradeable Exchange Notes on the date of the consummation of the Exchange Offer and such Holder notifies the Company within six months of such date, the Company will file with the Commission a shelf registration statement (the "Shelf Registration Statement") to cover resales of the Notes or Exchange Notes by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement to cover resales of the Notes or the Exchange Notes by the holders thereof. The Company will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. The Registration Rights Agreement provides that the Company will at its cost, (i) within 60 days after July 2, 1997 (or, if such 60th day is not a business day, the first business day thereafter), file a registration statement regarding the Exchange Offer (the "Exchange Offer Registration Statement") with the Commission; (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective by the Commission within 120 days after July 2, 1997 (or, if such 120th day is not a business day, the first business day thereafter); (iii) following the declaration of effectiveness of the Exchange Offer Registration Statement, the Company will promptly commence the Exchange Offer and will issue promptly after the date of consummation of the Exchange Offer (the "Exchange Offer Effective Date") Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange Offer; and (iv) if obligated to file the Shelf Registration Statement, the Company will, at its cost, as promptly as practicable, file the Shelf Registration Statement with the Commission and use its best efforts to cause the Shelf Registration Statement to be declared effective by the Commission. If (a) by the 60th day (or if such 60th day is not a business day, the first business day thereafter) after July 2, 1997, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed with the Commission; (b) by the 120th day (or if such 120th day is not a business day, the first business day thereafter) after July 2, 1997, neither the Exchange Offer Registration Statement nor the Shelf Registration Statement is declared effective; (c) by the 165th day (or if 93 such 165th day is not a business day, the first business day thereafter) after July 2, 1997, the Exchange Offer has not been consummated; or (d) after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Notes or Exchange Notes in accordance with and during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) a "Registration Default"), then the Company will pay Liquidated Damages to each holder of Transfer Restricted Securities, during the first 90-day period immediately following the occurrence of such Registration Default in an amount equal to $.05 per week per $1,000 principal amount of Notes or Exchange Notes constituting Transfer Restricted Securities held by such holder. The amount of the Liquidated Damages will increase an additional $.05 per week per $1,000 principal amount of Notes or Exchange Notes constituting Transfer Restricted Securities for each subsequent 90-day period until the applicable Registration Default has been cured, up to a maximum amount of Liquidated Damages of $.30 per week per $1,000 principal amount of Notes or Exchange Notes constituting Transfer Restricted Securities. All accrued Liquidated Damages will be paid by the Company on each interest payment date to the Global Note Holders by wire transfer of immediately available funds or by federal funds check and to the holders of certified securities by mailing a check to such holders' registered addresses. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. As used herein, "Transfer Restricted Securities" means each Note or Exchange Note until (i) the date on which such Note has been exchanged by the person other than a broker-dealer for a freely transferable Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note or Exchange Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Note or Exchange Note is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE EXCHANGE NOTES The following is a summary of certain federal income tax consequences associated with the acquisition, ownership, and disposition of the Exchange Notes by holders who acquire the Exchange Notes at original issue for cash. The following summary does not discuss all of the aspects of federal income taxation that may be relevant to a prospective holder of the Exchange Notes in light of his or her particular circumstances, or to certain types of holders (including dealers in securities, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, S corporations, and except as discussed below, foreign corporations and persons who are not citizens or residents of the U.S. nor does it include persons who hold the Exchange Notes as part of a hedge, straddle, "synthetic security" or other integrated investment) which are subject to special treatment under the federal income tax laws. In addition, this summary does not describe any tax consequences under state, local, or foreign tax laws. The discussion is based upon the IRC, Treasury Regulations, Internal Revenue Service rulings and pronouncements and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a holder of the Exchange Notes. The Company has not sought and will not seek any rulings or opinions from the IRS or counsel with respect to the matters discussed below. There can be no assurance that the IRS will not take positions concerning the tax consequences of the purchase, ownership or disposition of the Exchange Notes which are different from those discussed herein. PROSPECTIVE PURCHASERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO THEM OF ACQUIRING, OWING AND DISPOSING OF THE EXCHANGE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. 94 CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS TAXATION OF STATED INTEREST. In general, interest on an Exchange Note will be taxable to a U.S. holder as ordinary interest income at the time it accrues or is received, in accordance with the holder's regular method of accounting for federal income tax purposes. A U.S. holder means any person who or which is (i) a citizen or resident of the U.S.; (ii) a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or of any state; (iii) any estate or trust whose income is included in gross income for U.S. federal income tax purposes regardless of its source; and (iv) a person otherwise subject to U.S. federal income taxation on its worldwide income. POSSIBLE ORIGINAL ISSUE DISCOUNT ON THE EXCHANGE NOTE. Depending on the initial offering price to the public at which a substantial amount of the Exchange Notes are sold, the Exchange Notes may be issued with original issue discount for federal income tax purposes. The amount of original issue discount with respect to each Exchange Note will be equal to the excess of the "stated redemption price at maturity" of such Exchange Note over its "issue price." For these purposes, the "issue price" of an Exchange Note is the initial offering price to the public at which a substantial amount of the Notes were sold. The "stated redemption price at maturity" of each Exchange Note will include all cash payments (other than stated interest to the extent that it is unconditionally payable at least annually at a single fixed rate ("qualified stated interest")) required to be made thereunder until maturity. The amount of original issue discount with respect to a debt instrument is considered to be zero if such discount is less than one-fourth of one percent of its stated redemption price at maturity (as defined above) multiplied by the number of complete years from the issue date to the maturity date of the debt instrument ("de minimis" original issue discount). TAXATION OF ORIGINAL ISSUE DISCOUNT ON THE EXCHANGE NOTES. If there is more than de minimis original issue discount, each Holder of an Exchange Note will be required to include in gross income (as ordinary interest income) an amount equal to the sum of the "daily portions" of the original issue discount on the Exchange Notes for each day such Holder holds an Exchange Note. The daily portions of original issue discount required to be included in a Holder's gross income will be determined on a constant yield basis by allocating to each day during the taxable year in which the Holder holds the Exchange Notes a PRO RATA portion of the original issue discount thereon which is attributable to the "accrual period." The amount of the original issue discount attributable to each accrual period will be the product of the "adjusted issue price" of the Exchange Notes at the beginning of such accrual period multiplied by the "yield to maturity" of the Exchange Notes, less the amount of any qualified stated interest allocable to the accrual period. Appropriate adjustments will be made in computing the amount of original issue discount attributable to the initial accrual period. The adjusted issue price of the Exchange Notes at the beginning of the first accrual period is the issue price. Thereafter the adjusted issue price of an Exchange Note is the issue price of the Exchange Note plus the aggregate amount of original issue discount that accrued in all prior accrual periods, less payments (other than payments of qualified stated interest) on the Exchange Note. The yield to maturity of an Exchange Note will be the discount rate that, when used to compute the present value (on a semi-annual compounded basis) of all principal and interest payments to be made under an Exchange Note, produces a present value equal to the issue price of the Exchange Note. The "accrual periods" of an Exchange Note (other than the initial accrual period) are each of the six-month periods during the term of the Exchange Note that end on the biannual payment dates of each year. EFFECT OF MANDATORY REPURCHASE AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT OF THE EXCHANGE NOTES. In the event the Company is required to make an Offer to Purchase, each Holder may require the Company to repurchase such Holder's Exchange Notes in accordance with such offer. In addition, in the event of certain sales or other dispositions of assets the Company may be required to make an Offer to Purchase the Exchange Notes. Treasury Regulations contain special rules for calculating the yield to maturity and maturity on a note in the event the debt instrument provides for a contingency that could result in the acceleration or deferral of one or more payments. Further, Treasury Regulations contain special rules for determining the yield to maturity or maturity of a debt instrument if either the holder or the issuer has an option to defer or accelerate payments. Because neither of these rules should apply to an Offer to Purchase for either of the reasons described above, the Company has no present intention of treating such repurchase 95 provisions of the Exchange Notes as affecting the computation of the yield to maturity or maturity date of any Exchange Notes. The Company may redeem the Exchange Notes, in whole or in part, at any time on or after July 1, 2001. The Company may also redeem up to 35% of the Exchange Notes prior to July 1, 2000, in connection with a Public Equity Offering. Treasury Regulations set forth special rules relating to the determination of yield to maturity and maturity for a debt instrument that may be redeemed prior to its stated maturity date at the option of the issuer. These rules should not apply to a debt instrument, and, hence, should not affect the determination of the yield to maturity or the maturity date of such debt instrument, unless the issuer's exercise of its redemption rights would reduce the yield to maturity on such instruments. The Company's exercise of these redemption rights would not reduce the yield to maturity on the Exchange Notes; therefore the special option rules will not apply to the Exchange Notes. SALE OR OTHER TAXABLE DISPOSITION OF THE EXCHANGE NOTES. The sale or other taxable disposition of an Exchange Note will result in the recognition of gain or loss to the holder in an amount equal to the difference between (a) the amount of cash and fair market value of property received in exchange therefor (except to the extent attributable to the payment of accrued stated interest) and (b) the holder's adjusted tax basis in such Note. A holder's initial tax basis in an Exchange Note purchased by such holder will be equal to the issue price of the Notes. The holder's initial tax basis in an Exchange Note will be increased by the amount of original issue discount included in gross income with respect to such Note to the date of disposition and decreased by the amount of payments (other than payments of stated interest) with respect to such Note. Any gain or loss on the sale or other taxable disposition of an Exchange Note will be capital gain or loss, assuming a purchaser of the Exchange Note holds such security as a "capital asset" (generally property held for investment) within the meaning of Section 1221 of the IRC. Any capital gain or loss will be long-term capital gain or loss if the Exchange Note had been held for more than one year and otherwise will be short-term capital gain or loss. Payments on such disposition for accrued qualified stated interest not previously included in income will be treated as ordinary interest income. BACKUP WITHHOLDING. The backup withholding rules require a payor to deduct and withhold a tax if (i) the payee fails to furnish a taxpayer identification number ("TIN") to the payor, (ii) the IRS notifies the payor that the TIN furnished by the payee is incorrect, (iii) the payee has failed to report properly the receipt of "reportable payments" and the IRS has notified the payor that withholding is required, or (iv) there has been a failure of the payee to certify under the penalty of perjury that a payee is not subject to withholding under section 3406 of the IRC. As a result, if any one of the events discussed above occurs with respect to a holder of Exchange Notes, the Company, its paying agent or other withholding agent will be required to withhold a tax equal to 31% of any "reportable payment" made in connection with the Exchange Notes of such holder. A "reportable payment" includes, among other things, amounts paid in respect of interest or original issue discount and amounts paid through brokers in retirement of securities. Any amounts withheld from a payment to a holder under the backup withholding rules will be allowed as a refund or credit against such holder's federal income tax, PROVIDED that the required information is furnished to the IRS. Certain holders (including, among others, corporations and certain tax-exempt organizations) are not subject to backup withholding. CERTAIN U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS The following is a summary of certain U.S. federal income and estate tax consequences of the ownership and disposition of Exchange Notes by holders who are Non-U.S. Holders (as defined below). This summary discusses only Exchange Notes held as "capital assets" (as defined in the IRC) by the holders thereof. This summary does not discuss all aspects of U.S. federal income and estate taxation that may be relevant to a particular Non-U.S. Holder (as defined herein) of the Exchange Notes in light of its particular investment circumstances. This discussion also does not address the tax consequences to stockholders, partners or beneficiaries in a Non-U.S. Holder. Further, it does not consider Non-U.S. Holders subject to special tax treatment under the federal income tax laws (including dealers in securities, holders of 96 securities held as part of a "straddle," hedge or "conversion transaction," or situations in which the "functional currency" of a Holder, within the meaning of Section 985(b) of the IRC, is not the U.S. dollar). The following discussion is based upon the IRC, the applicable Treasury regulations promulgated and proposed thereunder, judicial authority and current administrative rulings and practices. All of the foregoing are subject to change (possibly on a retroactive basis) and any such change could affect the continuing validity of this discussion. For purposes hereof, a "Non-U.S. Holder" means any person other than (i) a citizen or resident of the U.S.; (ii) a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or of any state; or (iii) any estate or trust whose income is included in gross income for U.S. federal income tax purposes regardless of its source. For purposes of the withholding tax on interest discussed below, a non-resident alien or other non-resident fiduciary of an estate or trust will be considered a Non-U.S. Holder. For purposes of the following discussion, interest income and gain on the sale, exchange or retirement of an Exchange Note will be "U.S. trade or business income" if such income or gain is (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the U.S. or (ii) if a tax treaty applies, attributable to a permanent establishment (or in the case of an individual, a fixed place of business) in the U.S. trade or business income will be taxed at regular U.S. federal income tax rates. See, generally, "Certain U.S. Federal Income Tax Considerations for U.S. Holders" above. In the case of a Non-U.S. Holder that is a corporation, such U.S. trade or business income may also be subject to the branch profits tax (which is generally imposed on a foreign corporation on the actual or deemed repatriation from the U.S. of earnings and profits attributable to U.S. trade or business income) at a 30% rate. The branch profits tax may not apply (or may apply at a reduced rate) if the recipient is a qualified resident of certain countries with which the U.S. has an income tax treaty. INTEREST. Payments of interest to a Non-U.S. Holder that do not qualify for the portfolio interest exception discussed below and which are not U.S. trade or business income will be subject to withholding of U.S. federal income tax at a rate of 30% unless a U.S. income tax treaty applies to reduce the rate of withholding. To claim a treaty reduced rate or an exemption from withholding because the interest is U.S. trade or business income, the Non-U.S. Holder must provide a properly executed Form 1001 or Form 4224, respectively. Interest that is paid to a Non-U.S. Holder on an Exchange Note that is not U.S. trade or business income will not be subject to U.S. tax if the interest qualifies as "portfolio interest." Generally, interest on the Exchange Notes that is paid by the Company will qualify as portfolio interest if (i) the Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of Section 871(h)(3) of the IRC and the regulations thereunder; (ii) the Non-U.S. Holder is not a controlled foreign corporation that is related to the Company through stock ownership for U.S. federal income tax purposes; (iii) the Non-U.S. Holder is not a bank whose receipt of interest on an Exchange Note is described in Section 881(c)(3)(A) of the IRC; and (iv) the Company, or its paying agent, receives a properly executed certification as set forth in Section 871(h) and 881(c) of the IRC and the regulations thereunder, signed under penalties of perjury that the beneficial owner is not a "U.S. person" for U.S. federal income tax purposes and which provides the beneficial owner's name and address. SALE, EXCHANGE OR RETIREMENT OF EXCHANGE NOTES. Any gain realized by a Non-U.S. Holder on the sale exchange or retirement of Exchange Notes, will generally not be subject to U.S. federal income tax provided that (i) such gain is not U.S. trade or business income; (ii) the Non-U.S. Holder is not an individual who is present in the U.S. for 183 days or more in the taxable year of the disposition and meets certain other requirements; and (iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of U.S. tax law applicable to certain U.S. expatriates. For the treatment of amounts received in respect of accrued and unpaid interest, see discussion above under "Interest." FEDERAL ESTATE TAX. Exchange Notes held (or treated as held) by an individual who is a Non-U.S. Holder at the time of his or her death (or theretofore transferred subject to certain retained rights or powers) 97 will not be subject to U.S. federal estate tax provided that any interest thereon would be exempt as portfolio interest if such interest were received by the Non-U.S. Holder at the time of his or her death. U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX. The Company generally must report annually on Form 1042-S to the IRS and to each Non-U.S. Holder the amount of interest paid to, and the tax withheld, if any, with respect to each Non-U.S. Holder. These reporting requirements apply whether or not withholding is reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. The U.S. backup withholding tax (in general, a tax imposed at the rate of 31% on interest payments to persons that fail to furnish the information required under the U.S. information reporting requirements) will generally not apply to payments of interest that qualify as portfolio interest as described above (PROVIDED that the Company has no actual knowledge that the holder is a U.S. person). Non-U.S. Holders will be required to provide certification to the Company of qualification for the portfolio interest or treaty exemption to avoid withholding. Payments of the proceeds of the sale of Exchange Notes to or through a foreign office of a "broker" (as defined in the pertinent regulations) will not be subject to backup withholding (absent actual knowledge that the payee is a U.S. person) but will be subject to information reporting if the broker is a U.S. person, a controlled foreign corporation for U.S. federal income tax purposes, or a foreign person 50% or more of whose gross income is from a U.S. trade or business for a specified three-year period, unless the broker has in its records documentary evidence that the holder is not a U.S. person and certain conditions are met (including that the broker has no actual knowledge that the holder is a U.S. person) or the holder otherwise establishes an exemption. Payment of the proceeds of a sale to or through the U.S. office of a broker is subject to backup withholding and information reporting, unless the holder certifies that it is a Non-U.S. Holder under penalties of perjury or otherwise establishes an exemption. Any amount withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a credit against, or refund of, such holder's regular federal income tax liability, PROVIDED that certain information is provided by the holder to the IRS. PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such Exchange Notes. The Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until November 5, 1997 (90 days after commencement of the Exchange Offer), all dealers effecting transactions in the Exchange Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sales of the Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to the purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells the Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the 98 Securities Act. The Letters of Transmittal state that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay certain expenses incident to the Exchange Offer, other than commission or concessions of any brokers or dealers, and will indemnify the holders of the Exchange Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the Exchange Notes offered hereby will be passed on for the Company by Porter & Hedges, L.L.P., Houston, Texas. EXPERTS The audited consolidated financial statements of BSI Holdings, Inc. included in this prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of Sun Sportswear, Inc. as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The audited financial statements of Plymouth Mills, Inc. included in this Prospectus have been audited by Mahoney Cohen & Company, CPA, PC, independent public accountants, as indicated in their report thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The audited consolidated financial statements of SolarCo, Inc. and Subsidiary included in this prospectus and elsewhere in the Registration Statement have been audited by Moss Adams LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. 99 BRAZOS SPORTSWEAR, INC. INDEX TO FINANCIAL STATEMENTS PAGE ---- BSI HOLDINGS, INC. AND BRAZOS SPORTSWEAR, INC. Report of Independent Public Accountants............................... F-3 Consolidated balance sheet at December 30, 1995 and December 28, 1996.................................... F-4 Consolidated statement of operations for the years ended December 31, 1994, December 30, 1995 and December 28, 1996.................................... F-6 Consolidated statement of shareholders' equity (deficit) for the years ended December 31, 1994, December 30, 1995 and December 28, 1996.............. F-7 Consolidated statement of cash flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996.................................... F-8 Notes to consolidated financial statements.............................. F-9 Consolidated condensed balance sheets at December 28, 1996 and March 29, 1997 (unaudited)............................. F-25 Consolidated condensed statements of operations for the thirteen week periods ended March 30, 1996 and March 29, 1997 (unaudited)............................. F-27 Consolidated condensed statement of cash flows for the thirteen week periods ended March 30, 1996 and March 29, 1997 (unaudited).............. F-28 Notes to consolidated condensed unaudited financial statements.......... F-29 SUN SPORTSWEAR, INC. Report of Independent Public Accountants............................... F-32 Balance sheets at December 31, 1995 and 1996................................ F-33 Statements of income for each of the years ended December 31, 1994, 1995 and 1996................................ F-35 Statements of changes in shareholders' equity for the years ended December 31, 1994, 1995 and 1996.................................... F-36 Statements of cash flows for the years ended December 31, 1994, 1995 and 1996................................ F-37 Notes to financial statements............. F-38 PLYMOUTH MILLS, INC. Report of Independent Public Accountants............................... F-48 Balance sheets as of September 30, 1995 and August 2, 1996................. F-49 Statements of income and retained earnings for the years ended September 30, 1994 and 1995 and for the period from October 1, 1995 through August 2, 1996.................. F-50 Statements of cash flows for the years ended September 30, 1994 and 1995 and for the period from October 1, 1995 through August 2, 1996.................................... F-51 Notes to financial statements............. F-52 F-1 PAGE ---- SOLARCO, INC. AND SUBSIDIARY Report of Independent Public Accountants............................... F-55 Consolidated balance sheet at December 31, 1995 and December 29, 1996.................................... F-56 Consolidated statement of income for the years ended January 1, 1995, December 31, 1995 and December 29, 1996.................................... F-57 Consolidated statement of stockholders' equity for the years ended January 1, 1995, December 31, 1995 and December 29, 1996................... F-58 Consolidated statement of cash flows for the years ended January 1, 1995, December 31, 1995 and December 29, 1996....................... F-59 Notes to consolidated financial statements..........................l... F-60 Consolidated condensed balance sheet at December 29, 1996 and March 30, 1997 (unaudited)............................. F-64 Consolidated condensed statement of income for the thirteen-week periods ended March 31, 1996 and March 30, 1997 (unaudited)............................. F-65 Consolidated condensed statement of cash flows for the thirteen-week periods ended March 31, 1996 and March 30, 1997 (unaudited).............. F-66 Notes to consolidated condensed unaudited financial statements.......... F-67 F-2 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 30, 1995 and December 28, 1996 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996. 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 30, 1995 and December 28, 1996, and the results of their operations and their cash flows for the years ended December 31, 1994, December 30, 1995 and December 28, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cincinnati, Ohio, March 28, 1997 F-3 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 1995 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS) 1995 1996 --------- --------- ASSETS CURRENT ASSETS: Cash............................... $ 755 $ 561 Accounts receivable, net of allowance for doubtful accounts of $967 and $2,760, respectively (Note 4).......................... 13,294 22,118 Inventory (Notes 2(e) and 4)....... 23,571 25,338 Prepaid expenses................... 690 1,786 Income tax receivable.............. 300 -- Deferred tax assets (Note 5)....... -- 1,797 --------- --------- Total current assets.......... 38,610 51,600 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2(f) and 4): Land............................... 90 90 Buildings.......................... 670 670 Machinery and equipment............ 3,866 6,468 Furniture and fixtures............. 2,598 2,823 Construction in progress........... -- 154 --------- --------- 7,224 10,205 Less -- accumulated depreciation... (2,144) (3,332) --------- --------- 5,080 6,873 --------- --------- INTANGIBLE ASSETS (Note 2(g)): Costs in excess of fair value of assets acquired................... 2,461 21,456 Less -- accumulated amortization... (336) (624) --------- --------- 2,125 20,832 --------- --------- Other.............................. 1,320 3,359 Less -- accumulated amortization... (541) (922) --------- --------- 779 2,437 --------- --------- Total intangible assets....... 2,904 23,269 --------- --------- OTHER ASSETS............................ 476 940 --------- --------- $ 47,070 $ 82,682 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-4 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 1995 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS) 1995 1996 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement (Note 4)......... $ 20,693 $ 23,524 Current portion of other debt (Note 4)................................ 2,531 3,419 Payable to former owners of Plymouth (Note 3(a)).............. -- 2,950 Accounts payable................... 13,662 9,998 Accrued liabilities................ 3,316 7,042 --------- --------- Total current liabilities..... 40,202 46,933 --------- --------- LONG-TERM OBLIGATIONS -- LESS SCHEDULED MATURITIES (Note 4): Borrowings pursuant to revolving credit agreement.................. 1,900 8,800 Notes payable...................... 118 41 Subordinated debt due to related parties........................... 3,716 13,590 Capital lease liability............ 878 1,175 --------- --------- 6,612 23,606 --------- --------- DEFERRED INCOME TAXES PAYABLE (Note 5).................................... -- 934 OTHER LIABILITIES....................... -- 367 MANDATORILY REDEEMABLE PREFERRED STOCK (Note 7).............................. 945 7,613 COMMITMENTS AND CONTINGENCIES (Note 9) SHAREHOLDERS' EQUITY (DEFICIT) (Note 6): Common stock, $.01 par value, 50,000,000 shares authorized and 2,015,718 and 3,676,008 shares issued and outstanding at December 30, 1995 and December 28, 1996, respectively...................... 3 5 Additional paid-in capital......... 2,860 2,927 Retained earnings (deficit)........ (3,490) 297 Notes receivable from shareholders...................... (62) -- --------- --------- Total shareholders' equity (deficit)................... (689) 3,229 --------- --------- $ 47,070 $ 82,682 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-5 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 1995 1996 ----------- ----------- ----------- NET SALES............................ $ 76,754 $ 131,020 $ 169,452 COST OF GOODS SOLD................... 64,846 106,576 127,845 ----------- ----------- ----------- Gross profit............... 11,908 24,444 41,607 OPERATING EXPENSES: Selling, general and administrative expenses....... 9,997 25,264 31,830 Amortization of intangible assets and non-compete payments...................... 224 285 699 ----------- ----------- ----------- Total operating expenses... 10,221 25,549 32,529 ----------- ----------- ----------- Operating income (loss).... 1,687 (1,105) 9,078 OTHER EXPENSE (INCOME): Interest expense................ 1,663 3,695 4,491 Other, net...................... -- (22) (234) ----------- ----------- ----------- Income (loss) before provision (credit) for income taxes and extraordinary item...... 24 (4,778) 4,821 PROVISION (CREDIT) FOR INCOME TAXES (Note 5)........................... 99 (338) 789 ----------- ----------- ----------- Net income (loss) before extraordinary item...... (75) (4,440) 4,032 EXTRAORDINARY ITEM: Gain on extinguishment of debt (Note 4)...................... -- 500 -- ----------- ----------- ----------- Net income (loss).......... (75) (3,940) 4,032 DIVIDENDS AND ACCRETION ON PREFERRED STOCK (Note 7)..................... -- -- 245 ----------- ----------- ----------- Net income (loss) available for common shareholders........... $ (75) $ (3,940) $ 3,787 =========== =========== =========== PER SHARE DATA: Earnings (loss) per common and common equivalent share before extraordinary item............ $ (.02) $ (1.47) $ .90 Extraordinary gain per common and common equivalent share... -- .17 -- ----------- ----------- ----------- Earnings (loss) per common and common equivalent share....... $ (.02) $ (1.30) $ .90 =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 2(i)).............................. 3,029,803 3,029,803 4,198,907 =========== =========== =========== The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-6 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE ----------------- ----------------- PAID-IN EARNINGS FROM SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDERS --------- ------ --------- ------ ---------- --------- ------------- BALANCES AT DECEMBER 31, 1993........... 150,000 $ 1 2,015,718 $ 3 $2,265 $ 525 $ (140) Stock purchase warrants issued...... -- -- -- -- 744 -- -- Payments received from shareholders...................... -- -- -- -- -- -- 48 Redemption (Note 6)................. (150,000) (1 ) -- -- (149) -- -- Net loss............................ -- -- -- -- -- (75) -- --------- ------ --------- ------ ---------- --------- ------------- BALANCES AT DECEMBER 31, 1994........... -- -- 2,015,718 3 2,860 450 (92) Payments received from shareholders...................... -- -- -- -- -- -- 30 Net loss............................ -- -- -- -- -- (3,940) -- --------- ------ --------- ------ ---------- --------- ------------- BALANCES AT DECEMBER 30, 1995........... -- -- 2,015,718 3 2,860 (3,490) (62) Stock purchase warrants issued...... -- -- -- -- 815 -- -- Conversion of warrants to common stock............................. -- -- 1,660,290 2 -- -- -- Payments received from shareholders...................... -- -- -- -- -- -- 62 Loss on conversion of subordinated debt.............................. -- -- -- -- (738) -- -- Redeemable preferred stock issuance costs............................. -- -- -- -- (10) -- -- Accretion of redeemable preferred stock discount.................... -- -- -- -- -- (28) -- Payment of PIK dividends (Note 7)... -- -- -- -- -- (217) -- Net income.......................... -- -- -- -- -- 4,032 -- --------- ------ --------- ------ ---------- --------- ------------- BALANCES AT DECEMBER 28, 1996........... -- $-- 3,676,008 $ 5 $2,927 $ 297 $-- ========= ====== ========= ====== ========== ========= =============
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ------------- BALANCES AT DECEMBER 31, 1993........... $ 2,654 Stock purchase warrants issued...... 744 Payments received from shareholders...................... 48 Redemption (Note 6)................. (150) Net loss............................ (75) ------------- BALANCES AT DECEMBER 31, 1994........... 3,221 Payments received from shareholders...................... 30 Net loss............................ (3,940) ------------- BALANCES AT DECEMBER 30, 1995........... (689) Stock purchase warrants issued...... 815 Conversion of warrants to common stock............................. 2 Payments received from shareholders...................... 62 Loss on conversion of subordinated debt.............................. (738) Redeemable preferred stock issuance costs............................. (10) Accretion of redeemable preferred stock discount.................... (28) Payment of PIK dividends (Note 7)... (217) Net income.......................... 4,032 ------------- BALANCES AT DECEMBER 28, 1996........... $ 3,229 ============= The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-7 BSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS) 1994 1995 1996 ---------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................. $ (75) $ (3,940) $ 4,032 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation.................. 435 824 1,291 Amortization of intangible assets..................... 192 253 699 Gain on extinguishment of debt....................... -- (500) -- Decrease (increase) in deferred income taxes...... (120) 78 (863) Decrease (increase) in accounts receivable........ (1,495) (614) 92 Decrease (increase) in inventory.................. (2,945) 906 4,328 Decrease (increase) in prepaid expenses................... (522) 113 (985) Decrease (increase) in income tax receivable............. (318) 18 300 Decrease (increase) in other noncurrent assets.......... 166 (20) (1,825) Increase (decrease) in accounts payable and accrued liabilities........ 1,094 3,621 (1,991) ---------- --------- ---------- Net cash provided by (used in) operating activities............ (3,588) 739 5,078 ---------- --------- ---------- 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................... (528) (518) (1,137) Additional payments on prior-year asset purchase................... (10) -- -- ---------- --------- ---------- Net cash used in investing activities............ (12,273) (518) (21,393) ---------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings pursuant to revolving credit agreement, net............ 9,846 1,808 2,831 Borrowings of long-term debt pursuant to credit agreement..... 3,569 1,000 9,568 Repayments of long-term debt pursuant to credit agreement..... (203) (1,409) (1,868) Proceeds from (repayments of) subordinated debt and stock purchase warrants................ 2,500 (996) 3,500 Repayment of capital lease obligations and industrial revenue bonds.................... -- (48) (379) Payments made under non-compete agreements....................... -- -- (84) Payments for deferred financing costs............................ (119) (5) (11) Payments received on notes receivable from shareholders..... 48 30 62 Issuance of common stock........... -- -- 2 Issuance of preferred stock and related warrants................. -- -- 2,500 ---------- --------- ---------- Net cash provided by financing activities............ 15,641 380 16,121 ---------- --------- ---------- NET INCREASE (DECREASE) IN CASH......... (220) 601 (194) CASH AT BEGINNING OF YEAR............... 374 154 755 ---------- --------- ---------- CASH AT END OF YEAR..................... $ 154 $ 755 $ 561 ========== ========= ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............. $ 1,434 $ 3,500 $ 3,906 Cash paid for income taxes (refunds received)........................ 648 (453) (258) SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Capital lease financing............ -- 377 686 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. F-8 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 (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 chief executive officer and vice president and chief financial officer of BSI assumed 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 F-9 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $24 million and $29 million to a single customer in 1994 and 1995, respectively, and $53 million to two customers in 1996. These amounts represented 32%, 22% and 31% of total net sales during 1994, 1995 and 1996, respectively. The accompanying consolidated balance sheets include accounts receivable of $3.7 million and $5.4 million at December 30, 1995 and December 28, 1996, respectively, due from such customers. The Company sells licensed products which are decorated with classic cartoon characters and logos. The Company acquires rights to use characters and logos only on specified types of garments, pays each licensor royalties on products sold which display the licensed character or logo, and typically guarantees a minimum annual royalty. The three largest suppliers of blank garments to the Company represented approximately 51%, 59% and 39% of cost of goods sold included in the accompanying consolidated statements of operations during 1994, 1995 and 1996, 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 1995 and 1996 each had 52 weeks. (d) REVENUE RECOGNITION -- Sales are recognized when finished garments are shipped to customers from the Company's facilities. F-10 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 1995 1996 - ------------------------------------- ------ --------- --------- Blank garments....................... LIFO $ 11,074 $ 12,126 Printed garments..................... LIFO 3,174 1,481 --------- --------- 14,248 13,607 Less -- LIFO reserve................. (231) (182) --------- --------- Total LIFO................. 14,017 13,425 --------- --------- Manufactured garments................ FIFO 1,676 2,486 Blank and printed garments........... FIFO 7,878 9,427 --------- --------- Total FIFO................. 9,554 11,913 --------- --------- Total inventory............ $ 23,571 $ 25,338 ========= ========= For financial statement purposes, the Company follows the specific identification method whereby LIFO is determined on an item-by-item basis. For federal income tax reporting purposes, LIFO is determined utilizing the dollar-value method using one homogenous pool. For federal income tax reporting purposes, the Company's LIFO inventories were as follows (in thousands): 1995 1996 --------- --------- Tax LIFO cost........................ $ 12,991 $ 12,710 Book LIFO cost....................... 14,017 13,425 Cost of goods sold reflects charges of $4,000 and $36,000 in 1994 and 1995, respectively, and a LIFO credit of $49,000 in 1996. (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 30, 1995 and December 28, 1996 include non-compete agreements, deferred financing costs, licenses and copyrights. The costs of non-compete agreements are being amortized over the respective lives of the agreements (five years) using the straight-line method. The deferred financing costs are being amortized over the life of the credit facility to which they relate using a method which approximates the effective interest method. The costs of licenses are being amortized over a F-11 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 30, 1995 and December 28, 1996, $176,000 and $107,000, respectively, of advertising was reported as an asset. Advertising expense was approximately $579,000, $930,000 and $645,000 in 1994, 1995 and 1996, 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 $36 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 F-12 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 30, DECEMBER 28, 1995 1996 ------------ ------------ (000'S OMITTED EXCEPT PER SHARE AMOUNTS) Net sales............................... $163,358 $195,312 Net income (loss) before extraordinary items................................. (3,977) 5,384 Net income (loss) available for common shareholders.......................... (4,034) 4,816 Earnings (loss) per common and common equivalent share...................... (1.33) 1.15 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). F-13 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. F-14 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) LONG-TERM DEBT OBLIGATIONS -- Long-term obligations consist of the following: (000'S OMITTED) -------------------- 1995 1996 --------- --------- 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................................ $ 681 $ 638 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.................. 150 73 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............ 3,500 11,200 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).............. 1,096 1,524 --------- --------- 9,143 27,025 Less -- current portion.............. 2,531 3,419 --------- --------- Long -- term obligations............. $ 6,612 $ 23,606 ========= ========= 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, F-15 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 December 28, 1996. 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. F-16 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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): 1994 1995 1996 --------- --------- --------- Current: Federal............................ $ 136 $ (300) $ 1,370 State and local.................... 83 -- 282 --------- --------- --------- 219 (300) 1,652 --------- --------- --------- Deferred: Federal -- Depreciation.................. $ 32 $ 204 $ 102 Tax net operating loss carryforward............... -- (640) 640 Inventory reserves and other...................... (105) (200) 4 Accounts receivable reserves................... 20 (228) (515) Valuation allowance........... -- 1,123 (1,123) Other, net.................... (67) (297) 193 --------- --------- --------- (120) (38) (699) --------- --------- --------- State and local.................... -- -- (164) --------- --------- --------- $ 99 $ (338) $ 789 ========= ========= ========= F-17 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a reconciliation between the statutory federal income tax rate and the effective rate shown above (000's omitted):
1994 1995 1996 -------------- --------------- --------------- AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ---- ------- ---- ------- ---- Computed provision (credit) for federal income taxes at the statutory rate.... $ 8 34 % $(1,459) 34 % $ 1,637 34 % State and local income taxes, net of federal income tax benefit............ 24 100 % -- -- 118 2 % Valuation allowance..................... -- -- 1,123 26 % (1,123) (23 )% Other................................... 67 279 % (2) -- 157 3 % ------ ---- ------- ---- ------- ---- $ 99 413 % $ (338) 8 % $ 789 16 % ====== ==== ======= ==== ======= ====
At December 30, 1995 and December 28, 1996, the net deferred tax asset consisted of the following (000's omitted): 1995 1996 --------- --------- Deferred tax liabilities: Tax depreciation over book depreciation..................... $ (227) $ (356) LIFO inventory..................... (455) (441) Intangible assets.................. (336) (478) Other.............................. (97) (100) --------- --------- (1,115) (1,375) --------- --------- Deferred tax assets: Inventory reserves................. 519 444 Inventory cost capitalization...... 476 544 Accounts receivable reserves....... 387 1,018 Employee benefits.................. 155 203 Other, net......................... (53) 29 Net operating loss carryforward.... 754 -- Valuation allowance................ (1,123) -- --------- --------- 1,115 2,238 --------- --------- 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). F-18 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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: 1995 1996 --------- --------- Net income (loss) (000's omitted) As reported........................ $ (3,940) $ 3,787 Pro forma.......................... (4,151) 3,487 Earnings (loss) per share As reported........................ $ (1.30) $ .90 Pro forma.......................... (1.37) .83 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: 1995 1996 --------- --------- Risk-free interest rate................. 7.49% 6.18% Expected lives.......................... 6.5 yrs. 5.5 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. F-19 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 1994, 1995, and 1996 is summarized as follows:
1994 1995 1996 -------------------- -------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE --------- -------- --------- -------- ---------- -------- Outstanding, beginning of year....... 17,136 $ 1.12 17,136 $ 1.12 431,821 $ 2.95 Granted......................... -- -- 431,821 2.95 227,853 3.09 Exercised....................... -- -- -- -- -- -- Forfeited....................... -- -- (17,136) 1.12 (204,727) 2.97 --------- --------- ---------- Outstanding, end of year............. 17,136 $ 1.12 431,821 $ 2.95 454,947 $ 3.01 ========= ========= ========== Exercisable, end of year............. 17,136 $ 1.12 7,582 $ 1.98 153,355 $ 2.92 ========= ========= ========== Weighted average fair value of options granted during the year.... -- $ .92 $ 1.46 ========= ========= ==========
Price ranges, along with certain other information, for options outstanding at December 28, 1996, are as follows: OUTSTANDING EXERCISABLE ------------------------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE CONTRACTUAL EXERCISE PRICE 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 1994, 1995 and 1996 is summarized as follows: RANGE OF SHARES SUBJECT EXERCISE PRICES TO WARRANTS PER 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 F-20 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 -- Mandatorily redeemable preferred stock consisted of the following at December 30, 1995 and December 28, 1996: 1995 1996 --------- --------- (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; $645,000 and $598,000 redemption value at December 30, 1995 and December 28, 1996, respectively.... 645 598 Series A-2 -- Redeemable preferred stock, $.01 par, 300,000 shares authorized, issued and outstanding; $300,000 redemption value at December 30, 1995 and December 28, 1996............................... 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 --------- --------- $ 945 $ 7,613 ========= ========= 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 F-21 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1995 and 1996, the Company contributed $159,000 and $123,000, 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. F-22 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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): 1994 1995 1996 --------- --------- --------- Service cost......................... $ 4 $ 25 $ 33 Interest cost........................ 14 79 90 Actual loss (return) on plan assets............................... 6 (161) (129) Net amortization and deferral........ (24) 57 32 --------- --------- --------- Total net periodic pension cost.......................... $ -- $ -- $ 26 ========= ========= ========= Actuarial present value of benefit obligations: Vested benefit obligation....... $ (1,207) $ (1,362) Non-vested benefit obligation... (38) (15) --------- --------- Accumulated benefit obligation....... (1,245) (1,377) Plan assets at fair value............ 1,498 1,545 --------- --------- Plan assets in excess of projected benefit obligation.................... 253 168 Unrecognized net loss................ 118 177 --------- --------- Prepaid pension cost............ $ 371 $ 345 ========= ========= The actuarial assumptions were: 1994 1995 1996 ---- ---- ---- Discount rate........................ 7.75% 7.0 % 6.75% 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 ======= ========= F-23 BSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total lease expense recorded during 1994, 1995 and 1996 was approximately $793,000, $1,713,000 and $1,932,000, respectively, of which $266,000, $258,000 and $347,000, 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 1994, 1995 and 1996, respectively, compensation expense recognized by the Company pursuant to such employment and non-compete agreements was $489,000, $416,000 and $1,010,000, 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. F-24 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 28, 1996 AND MARCH 29, 1997 (DOLLARS IN THOUSANDS) 1996 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash............................ $ 561 $ 357 Accounts receivable, net of allowance for doubtful accounts of $2,760 and $2,612, respectively................... 22,118 29,390 Inventory (note 2(b))........... 25,338 47,838 Prepaid expenses................ 1,786 3,069 Income tax receivable........... -- 1,817 Deferred tax assets............. 1,797 1,460 ---------- ---------- Total current assets............. 51,600 83,931 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT-net, at cost............................... 6,873 6,471 ---------- ---------- INTANGIBLE ASSETS: Costs in excess of fair value of assets acquired................ 21,456 21,476 Less -- accumulated amortization................... (624) (800) ---------- ---------- 20,832 20,676 ---------- ---------- Other........................... 3,359 3,351 Less -- accumulated amortization................... (922) (1,048) ---------- ---------- 2,437 2,303 ---------- ---------- Total intangible assets............. 23,269 22,979 ---------- ---------- OTHER ASSETS......................... 940 435 ---------- ---------- $ 82,682 $ 113,816 ========== ========== The accompanying notes are an integral part of these consolidated condensed balance sheets. F-25 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 28, 1996 AND MARCH 29, 1997 (DOLLARS IN THOUSANDS) 1996 1997 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement............... $ 23,524 $ 36,273 Current portion of other debt... 3,070 3,238 Current portion of capital leases......................... 349 358 Earnout payable................. 2,950 2,950 Accounts payable................ 9,998 23,838 Accrued liabilities............. 7,042 5,207 ---------- ---------- Total current liabilities........ 46,933 71,864 ---------- ---------- LONG-TERM OBLIGATIONS -- LESS SCHEDULED MATURITIES: Borrowings pursuant to credit agreement...................... 8,800 9,000 Notes payable................... 41 -- Subordinated debt due to related parties........................ 13,590 12,092 Capital lease liability......... 1,175 1,078 ---------- ---------- 23,606 22,170 ---------- ---------- DEFERRED INCOME TAXES PAYABLE........ 934 954 OTHER LIABILITIES.................... 367 295 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK.................... 6,715 7,836 MANDATORILY REDEEMABLE PREFERRED STOCK.............................. 898 898 COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDERS' EQUITY: Common stock, $.001 par value, 15,000,000 shares authorized and 3,676,008 and 4,319,170 shares issued and outstanding at December 28, 1996 and March 29, 1997, respectively......... 5 4 Additional paid-in capital...... 2,927 10,539 Retained earnings (deficit)..... 297 (744) ---------- ---------- Total shareholders' equity............. 3,229 9,799 ---------- ---------- $ 82,682 $ 113,816 ========== ========== The accompanying notes are an integral part of these consolidated condensed balance sheets. F-26 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THIRTEEN-WEEK PERIODS ENDED MARCH 30, 1996 AND MARCH 29, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1997 ----------- ----------- NET SALES............................... $ 30,132 $ 34,907 COST OF GOODS SOLD...................... 22,761 26,520 ----------- ----------- Gross profit.................. 7,371 8,387 OPERATING EXPENSES: Selling, general and administrative expenses......................... 6,259 8,317 Amortization of intangible assets and non-compete payments......... 82 285 ----------- ----------- Total operating expenses...... 6,341 8,602 ----------- ----------- Operating income (loss)....... 1,030 (215) OTHER EXPENSE (INCOME): Interest expense................... 811 1,145 Other, net......................... (233) 125 ----------- ----------- Income (loss) before credit for income taxes........... 452 (1,485) CREDIT FOR INCOME TAXES................. -- (609) ----------- ----------- Net income (loss)............. 452 (876) DIVIDENDS AND ACCRETION ON PREFERRED STOCK................................. -- 165 ----------- ----------- Net income (loss) available for common shareholders.............. $ 452 $ (1,041) =========== =========== PER SHARE DATA: Earnings (loss) per common and common equivalent share.......... $ .11 $ (.27) =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 2(c))................................. 4,113,580 3,889,538 =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements. F-27 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THIRTEEN-WEEK PERIODS ENDED MARCH 30, 1996 AND MARCH 29, 1997 (DOLLARS IN THOUSANDS) 1996 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 452 $ (876) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation............... 262 381 Amortization of intangible assets.................. 82 285 Increase in accounts receivable.............. (4,156) (328) Increase in inventory...... (2,963) (9,244) Increase in prepaid expenses................ (364) (344) Increase in income tax receivable.............. -- (426) Increase in other noncurrent assets....... 5 (946) Increase in accounts payable and accrued liabilities............. 7,216 7,663 --------- --------- Net cash provided by (used in) operating activities............ 534 (3,835) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Sun Sportswear, Inc., net of cash acquired..... -- (4,613) Purchases of property, plant and equipment, net................. (211) 21 --------- --------- Net cash used in investing activities......... (211) (4,592) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings pursuant to revolving credit agreement, net.......... (560) 9,045 Borrowings of long-term debt pursuant to credit agreement... -- 1,000 Repayments of long-term debt pursuant to credit agreement... (400) (600) Repayments of subordinated debt........................... -- (3,000) Repayment of capital lease obligations and industrial revenue bonds.................. (68) (157) Payments made under non-compete agreements..................... -- (25) Payments for deferred financing costs.......................... -- (140) Payments received on notes receivable from shareholders... 18 -- Issuance of common stock........ -- 100 Issuance of preferred stock and related stock purchase warrants....................... -- 2,000 --------- --------- Net cash provided by (used in) financing activities......... (1,010) 8,223 --------- --------- NET DECREASE IN CASH................. (687) (204) CASH AT BEGINNING OF YEAR............ 755 561 --------- --------- CASH AT END OF YEAR.................. $ 68 $ 357 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 672 $ 1,687 Cash paid for income taxes...... 3 1,404 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Payments of PIK dividends....... -- 149 The accompanying notes are an integral part of these consolidated condensed financial statements. F-28 BRAZOS SPORTSWEAR, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (1) ACQUISITIONS -- On March 14, 1997, BSI Holdings, Inc. (Holdings) consummated a merger with Sun Sportswear, Inc. (Sun) (hereinafter referred to as the "Merger") whereby the shareholders of Holdings acquired an 86% ownership interest in Sun. The Merger has been accounted for as a reverse acquisition with Sun being the surviving legal entity and Holdings being the aquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in the State of Delaware under the name Brazos Sportswear, Inc. (BSI or the Company). See Note 3. (2) SIGNIFICANT ACCOUNTING POLICIES -- (a) INTERIM FINANCIAL STATEMENTS -- The accompanying consolidated condensed financial statements of BSI for the thirteen-week period ended March 29, 1997 reflect the results of operations of Sun from the date of acquisition, March 14, 1997. The accompanying consolidated condensed financial statements of BSI prior to March 14, 1997, reflect Holdings' historical results prior to the Merger. The accompanying consolidated condensed financial statements of BSI are unaudited. These unaudited interim financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated condensed financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. These consolidated condensed financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in BSI's Current Report on Form 8-K/A dated May 12, 1997. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. (b) INVENTORIES -- Inventories are comprised of: DECEMBER 28, MARCH 29, INVENTORY CATEGORY METHOD 1996 1997 - ------------------------------------- ------- ------------ --------- Blank garments....................... LIFO $ 12,126 $19,743 Printed garments..................... LIFO 1,481 1,593 ------------ --------- 13,607 21,336 Less -- LIFO reserve................. (182) (182) ------------ --------- Total LIFO................. 13,425 21,154 ------------ --------- Manufactured garments................ FIFO 2,486 2,877 Blank and printed garments........... FIFO 9,427 23,807 ------------ --------- Total FIFO................. 11,913 26,684 ------------ --------- Total inventory............ $ 25,338 $47,838 ============ ========= (c) 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. 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 preceding a proposed public offering be included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented. F-29 Warrants issued in 1996 and 1997 to purchase 1,287,174 shares of common stock at prices ranging from $.0013 per share to $6.59 per share were subject to this requirement. Fully-diluted earnings (loss) per share has not been presented because such per share amounts were anti-dilutive to primary earnings (loss) per share. All share and per share information included in the accompanying consolidated condensed financial statements has been restated for all periods presented to reflect the 37.912252-for-1 stock split and 1-for-5 reverse stock split pursuant to the Merger. (d) NEW ACCOUNTING PRONOUNCEMENTS -- During February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128). SFAS No. 128 replaces the current presentation of primary and fully-diluted earnings per share with a presentation of basic and diluted earnings per share. Pursuant to the provisions of SFAS No. 128, basic earnings per share excludes any dilution. The current presentation of primary earnings per share includes the dilutive effect of common stock equivalents such as options and warrants. BSI intends to adopt the provisions of SFAS No. 128 during the fourth quarter of 1997. Assuming profitable results of operations, management expects that the adoption of the provisions of SFAS No. 128 will have the effect of reporting an amount of basic earnings per share which is greater than the current presentation of primary earnings per share because the dilutive effect of common stock equivalents, such as options and warrants, will be excluded from the calculation of basic earnings per share. Pro forma earnings (loss) per share assuming the provisions of SFAS No. 128 had been applied follow. THIRTEEN-WEEK PERIODS ENDED -------------------------- MARCH 30, MARCH 29, 1996 1997 ---------- ---------- Basic earnings (loss) per share...... $ .14 $ (.27) Diluted earnings (loss) per share.... .11 (.27) (3) ACQUISITION OF SUN -- Pro forma results of BSI and Sun combined, assuming that the acquisition had been made as of the beginning of fiscal 1996, or December 31, 1995, follow. Such information reflects adjustments to reflect elimination of Sun's historical depreciation expense for the write-off of net equipment and leasehold improvements resulting from the application of purchase accounting, elimination of pre-merger acquisition expenses incurred by Sun, additional interest expense related to increased net indebtedness, and dividends and accretion on additional preferred stock issued. THIRTEEN-WEEK PERIODS ENDED -------------------------- MARCH 30, MARCH 29, 1996 1997 ---------- ---------- (000'S EXCEPT PER SHARE AMOUNTS) Net sales............................ $ 63,725 $ 44,097 Net income (loss).................... 1,223 (1,754) Net income (loss) available to common shareholders....................... 1,145 (2,000) Earnings (loss) per common and common equivalent share................... $ .24 $ (.46) F-30 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............. $ 6,912 Inventories..................... 13,256 Other current assets............ 2,059 ------------------ Total fair value of assets acquired........................... 22,227 ------------------ Less: Purchase Price -- Cash....................... $ 4,680 Subordinated note to Seafirst................. 1,500 Equity interest in BSI subsequent to the Merger (587,927 remaining Sun shares at $11.00 per share)................... 6,467 ------------------ 12,647 Transaction costs.......... 1,451 Financing costs............ 137 ------------------ Total purchase price................. 14,235 ------------------ Liabilities assumed.................. $ 7,992 ================== The purchase price was financed through a combination of borrowings under BSI's credit agreement ($6.3 million short-term, $1.0 million long-term), the issuance of BSI convertible, mandatorily redeemable preferred stock ($2.0 million--Series B-3), 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 Mills, Inc. In connection with this transaction, BSI increased its credit facility to approximately $85 million. The credit facility includes a $73.2 million revolving line of credit. The Series B-3 mandatorily redeemable preferred stock contained detachable warrants to purchase 272,968 shares of BSI's common stock at a purchase price of $6.59 per share. The warrants were valued at $1,044,000 which represents the portion of the $2,000,000 proceeds allocated to the warrants based on the relative individual fair values of the preferred stock and warrants on the date of grant. These warrants have been recorded as additional paid-in capital. (4) SIGNIFICANT CUSTOMERS -- BSI had net sales of $9.6 million to two customers for the thirteen-week period ended March 30, 1996 and $7.1 million to two customers for the thirteen-week period ended March 29, 1997. These amounts represented 32% and 20% of total net sales during the thirteen-week periods ended March 30, 1996 and March 29, 1997, respectively. The accompanying consolidated condensed balance sheets include accounts receivable of $5.4 million and $8.8 million at December 28, 1996 and March 29, 1997, respectively, due from such customers. (5) COMMITMENTS AND CONTINGENCIES -- During May 1997, BSI agreed to acquire all of the outstanding common stock of SolarCo, Inc. and its wholly-owned subsidiary Morning Sun, Inc., a privately-held, Seattle based designer and manufacturer of embroidered and screen-printed fleece wear, T-shirts and other women's tops, for approximately $30 million plus the assumption of liabilities of approximately $12 million. During fiscal 1996, Morning Sun, Inc. had net sales of approximately $55 million. The acquisition, which is subject to the satisfactory completion of due diligence and other conditions, including regulatory approvals and financing, is expected to close during the second quarter of 1997. BSI has committed to pay a termination fee of $650,000 to SolarCo, Inc. if this transaction does not close within a specified timeframe during the third quarter of 1997. F-31 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Stockholders of Brazos Sportswear, Inc. In our opinion, the accompanying balance sheets and related statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Brazos Sportswear, Inc. (formerly Sun Sportswear, Inc.) at December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Seattle, Washington February 12, 1997, except for Note 1 ("Merger and Subsequent Reincorporation") for which the date is March 14, 1997 F-32 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) BALANCE SHEETS DECEMBER 31, ------------------------------ 1995 1996 -------------- -------------- ASSETS CURRENT ASSETS: Cash............................ $ 2,006,633 $ 84,532 Accounts receivable, net of allowance for doubtful accounts of $46,317 and $33,930, respectively (Note 11)......... 13,102,275 7,180,833 Inventories, net (Note 3)....... 23,631,358 15,760,393 Prepaid expenses and other current assets................. 959,872 847,641 Deferred income taxes (Note 9)............................. 788,332 19,740 Federal income tax receivable... 1,979,535 1,033,985 -------------- -------------- Total current assets....... 42,468,005 24,927,124 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net: (Note 4)...................... 4,831,994 3,492,013 OTHER ASSETS:........................ 15,107 14,506 -------------- -------------- Total assets............... $ 47,315,106 $ 28,433,643 ============== ============== See accompanying notes to financial statements F-33 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) BALANCE SHEETS DECEMBER 31, ------------------------------ 1995 1996 -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 5).......... $ 13,500,000 $ 2,960,513 Accounts payable................ 4,985,953 3,592,365 Accrued royalties payable....... 1,753,745 1,061,597 Accrued wages and taxes payable........................ 512,078 591,971 Accrued interest payable........ 51,263 25,381 Current portion of long-term debt (Note 6).................. 245,652 -0- -------------- -------------- Total current liabilities............ 21,048,691 8,231,827 -------------- -------------- NONCURRENT LIABILITIES: Long-term debt, net of current portion (Note 6)............... 92,354 -0- Deferred income taxes (Note 9)............................. 155,642 19,740 -------------- -------------- Total noncurrent liabilities............ 247,996 19,740 -------------- -------------- SHAREHOLDERS' EQUITY: Common stock, no par value, 20,000,000 shares authorized; 5,748,500 shares issued and outstanding.................... 21,618,339 21,618,339 Retained (deficit) earnings..... 4,400,080 (1,436,263) -------------- -------------- Total shareholders' equity................. 26,018,419 20,182,076 -------------- -------------- COMMITMENTS AND CONTINGENCIES (Note 2 and Note 10) Total liabilities and shareholders' equity... $ 47,315,106 $ 28,433,643 ============== ============== See accompanying notes to financial statements F-34 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1994 1995 1996 --------------- -------------- -------------- Net sales (Note 8)................... $ 113,212,896 $ 93,965,325 $ 65,534,545 Cost of goods sold................... 95,878,764 84,569,855 57,679,610 --------------- -------------- -------------- Gross margin......................... 17,334,132 9,395,470 7,854,935 --------------- -------------- -------------- Operating expenses: Selling......................... 3,781,116 3,649,256 3,342,014 Design and pattern.............. 2,527,013 2,492,222 2,503,370 General and administrative...... 6,712,365 7,690,321 7,210,176 Provision for doubtful accounts and factoring fees (Note 11).. 71,586 132,284 95,694 --------------- -------------- -------------- 13,092,080 13,964,083 13,151,254 Operating (loss) income............ 4,242,052 (4,568,613) (5,296,319) --------------- -------------- -------------- Other expense (income): Interest expense................ 676,612 1,267,442 584,046 Other, net...................... (111,236) (200,981) (37,114) --------------- -------------- -------------- 565,376 1,066,461 546,932 --------------- -------------- -------------- (Loss) income before provision for income taxes....................... 3,676,676 (5,635,074) (5,843,251) (Benefit) provision for income taxes (Note 9)........................... 1,228,000 (1,898,620) (6,908) --------------- -------------- -------------- Net (loss) income.................... $ 2,448,676 $ (3,736,454) $ (5,836,343) =============== ============== ============== (Loss) earnings per share............ $0.43 $(0.65) $(1.02) =============== ============== ============== Weighted average shares outstanding........................ 5,722,121 5,748,249 5,748,500
See accompanying notes to financial statements F-35 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED ----------------------- (DEFICIT) SHARES AMOUNT EARNINGS TOTAL --------- ------------ ------------ ------------ Balance, December 31, 1993........... 5,637,500 $ 21,132,521 $ 5,687,858 $ 26,820,379 Exercise of stock options including tax benefit of $109,498............ 109,625 481,170 -- 481,170 Net income for the year ended December 31, 1994.................. -- -- 2,448,676 2,448,676 --------- ------------ ------------ ------------ Balance, December 31, 1994........... 5,747,125 21,613,691 8,136,534 29,750,225 Exercise of stock options, -0- tax benefit............................ 1,375 4,648 -- 4,648 Net loss for the year ended December 31, 1995........................... -- -- (3,736,454) (3,736,454) --------- ------------ ------------ ------------ Balance, December 31, 1995........... 5,748,500 21,618,339 4,400,080 26,018,419 Net loss for the year ended December 31, 1996........................... -- -- (5,836,343) (5,836,343) --------- ------------ ------------ ------------ Balance, December 31, 1996........... 5,748,500 $ 21,618,339 $ (1,436,263) $ 20,182,076 ========= ============ ============ ============
See accompanying notes to financial statements F-36 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ 1994 1995 1996 --------------- -------------- --------------- Cash flows from operating activities: Net (loss) income............... $ 2,448,676 $ (3,736,454) $ (5,836,343) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............... 1,225,139 1,526,015 1,723,025 Loss (gain) on disposal of equipment.................. 1,025 (18,054) 18,609 Decrease (increase) in accounts receivable........ (10,644,227) 11,322,559 5,921,442 Decrease (increase) in inventories................ (8,094,570) 6,524,260 7,870,965 Decrease (increase) in federal income tax receivable, and net deferred tax assets.... 92,158 (2,189,620) 1,578,240 Decrease (increase) in other assets..................... (84,790) (366,117) 112,832 (Decrease) increase in accounts payable........... 5,925,735 (6,754,384) (880,571) (Decrease) increase in accrued liabilities................ 938,153 (238,914) (638,137) --------------- -------------- --------------- Net cash provided by (used in) operating activities............... (8,192,701) 6,069,291 9,870,062 --------------- -------------- --------------- Cash flows from investing activities: Capital expenditures............ (1,953,218) (1,169,168) (416,199) Proceeds from sale of equipment..................... 70,956 46,133 14,545 --------------- -------------- --------------- Net cash used in investing activities.................... (1,882,262) (1,123,035) (401,654) --------------- -------------- --------------- Cash flows from financing activities: (Decrease) increase in outstanding checks in excess of funds on deposit.... 186,329 (1,297,807) (513,015) Net (repayments) borrowings under line of credit agreement..................... 12,534,000 (2,487,000) (10,539,488) Principal payments under long-term debt................ (2,558,454) (376,635) (338,006) Proceeds from issuance of common stock for employee stock options....................... 481,171 4,648 -0- --------------- -------------- --------------- Net cash (used in) provided by financing activities............... 10,643,046 (4,156,794) (11,390,509) --------------- -------------- --------------- Net (decrease) increase in cash...... 568,083 789,462 (1,922,101) Cash at beginning of period.......... 649,088 1,217,171 2,006,633 --------------- -------------- --------------- Cash at end of period................ $ 1,217,171 $ 2,006,633 $ 84,532 =============== ============== =============== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest................... $ 688,174 $ 1,269,992 $ 609,927 Income taxes............... $ 1,251,000 $ 291,000 $ 137,607
F-37 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: MERGER AND SUBSEQUENT REINCORPORATION On March 14, 1997, Sun Sportswear, Inc. (the "Company") merged with BSI Holdings, Inc. ("BSI") and was reincorporated as a Delaware corporation which was renamed Brazos Sportswear, Inc. The merger was accounted for as a reverse acquisition with the Company being the surviving legal entity and BSI being the predecessor entity for accounting purposes. The merger will be accounted for as a purchase. In connection with the reincorporation, a one for five reverse stock split was implemented. Except for Seafirst Bank, shareholders of the Company prior to the merger who did not elect to retain their shares received $2.20 per share ($11.00 per share as adjusted for the effective one-for-five reverse stock split (the "Reverse Split")) for 50% of such shares and the remaining shares were converted into common stock of Brazos Sportswear, Inc. Seafirst Bank received $2.20 per share ($11.00 per share as adjusted for the Reverse Split) for 59.5% of its shares in a combination of a note and cash, with its remaining shares being converted into shares of Brazos Sportswear, Inc. The Company underwent a change in a control as of the effective date of the merger. As of March 14, 1997, all the former directors of the Company resigned and six directors designated by BSI became the directors of Brazos Sportswear, Inc. In addition, on or before the effective date of the merger, the president, executive vice president, and two senior vice presidents resigned. The financial statements of the Company for the year ended December 31, 1996 include the costs associated with these resignations as well as the merger related charges incurred by the Company through December 31, 1996, which totaled $1.2 million. The merger, including the Reverse Split, was not otherwise reflected in the December 31, 1996 financial statements. OPERATIONS The Company is engaged in designing, sourcing, printing and marketing moderately priced apparel. Products consist primarily of garments printed with designs which are subject to licenses or distributor agreements with third parties, and proprietary designs developed by the Company. Revenues from operations are principally generated in the United States. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts to conform to the presentation of the December 31, 1996 financial statements. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out (FIFO) method. Cost includes the purchase price of unprinted garments, the cost of manufacturing "cut-and-sewn" garments and the cost of production of printed garments. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, vehicles, equipment and leasehold improvements are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets for furniture, vehicles and equipment and over the lease term or useful life for leasehold improvements. ACCOUNTS PAYABLE Outstanding checks in excess of funds on deposit of $1,003,000 and $490,000 at December 31, 1995 and 1996, respectively, have been classified as accounts payable. F-38 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ACCRUED ROYALTIES PAYABLE Royalties are accrued when the related licensed garments are shipped. Additionally, the Company periodically reviews its royalty agreements, which contain guaranteed minimum payments, and accrues the amount of the guaranteed minimum royalties not expected to be met by sales of the licensed product. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (FAS 109), ACCOUNTING FOR INCOME TAXES. Deferred taxes have been provided on income and expense items that are reported in different periods for financial and tax reporting purposes, net of appropriate valuation allowance. REVENUE RECOGNITION Sales are recognized when finished garments are shipped from the Company's facilities. SALES DEDUCTIONS Sales discounts and allowances are accrued as sales are recorded. Sales returns, the other component of sales deductions, are accrued when the Company believes sales returns will occur. ESTIMATES BY MANAGEMENT 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. NET (LOSS) INCOME PER SHARE Net (loss) income per share has been computed based upon the weighted average number of shares outstanding for all periods presented. Fully diluted per share amounts do not differ materially from primary per share amounts. NOTE 2 -- COMMITMENTS: The Company has historically leased office, warehouse and manufacturing space in Kent, Washington from a company owned by David Sabey, the majority shareholder until December 1992 (at which time Mr. Sabey divested himself of all his shares in the Company). The current lease requires monthly payments of $115,000 plus operating and maintenance expense of the facility. Rent expense for leases with Sabey totaled $1,386,000, $1,389,000 and $1,392,000 in 1994, 1995 and 1996, respectively. The Company has an option to purchase the facility it presently occupies during the five year period October 6, 1994 through October 5, 1999 for a mutually agreeable fair market price. This lease expires in 1999. F-39 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company also leases warehouse space in Kent, Washington from a third party. The lease expires in June 1997. Rent expense for this third party lease, and other expired leases, in 1994, 1995 and 1996 totaled $89,000, $181,000 and $227,000, respectively. Future minimum rent commitments under all operating leases for periods after December 31, 1996 are as follows: RENT COMMITMENTS - ------------------------------------- 1997............................ 1,437,300 1998............................ 1,380,000 1999............................ 1,035,000 ------------ $ 3,852,300 ============ Sun acquires rights to use trademarks and characters on specified types of garments, under license agreements from third parties. At December 31, 1996, the Company was party to approximately 28 such license agreements. Under these license agreements, the Company pays royalties of between 4% and 14% of the sales price of products sold displaying the licensed character or trademark. Royalty expense for Sun's license agreements totaled $9,354,684, $9,004,513 and $5,917,049 in 1994, 1995 and 1996, respectively. These license agreements typically require that the Company guarantee a minimum royalty payment. Unmet guaranteed minimum royalty commitments under all licensing agreements in place at December 31, 1996, are as follows: ROYALTY COMMITMENTS - ------------------------------------- 1997............................ $ 900,000 1998............................ 3,600,000 ------------ $ 4,500,000 ============ At December 31, 1996, the Company had an allowance of $198,753 recorded on its balance sheet primarily to cover 1997 and 1998 minimum royalty commitments which are not anticipated to be recovered through licensed product sales. (See "Note 11 -- Valuation and Qualifying Accounts") NOTE 3 -- INVENTORIES: Inventories are composed of: DECEMBER 31, ------------------------------ 1995 1996 -------------- -------------- Garments in process.................. $ 2,244,781 $ 1,480,782 Unprinted finished garments.......... 19,827,823 14,542,492 Printed finished garments............ 5,617,347 1,096,859 Supplies............................. 407,064 651,978 Lower of cost or market allowance.... (4,465,657) (2,011,718) -------------- -------------- $ 23,631,358 $ 15,760,393 ============== ============== F-40 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements are summarized by major classifications as follows:
DECEMBER 31, ESTIMATED ------------------------------ USEFUL LIVES 1995 1996 -------------- -------------- -------------- Production equipment................. 5-7 $ 3,658,352 $ 3,707,247 Leasehold improvements............... 5-10 2,380,317 2,369,882 Design system hardware and software........................... 3-5 851,056 967,294 Information system hardware and software........................... 3-5 2,145,582 1,837,237 Furniture and fixtures............... 5 1,116,112 937,675 Distribution equipment............... 5-10 343,941 371,033 Warehouse equipment.................. 5-7 395,797 357,814 Vehicles............................. 5 12,417 12,417 -------------- -------------- 10,903,574 10,560,599 Construction in progress............. 509 -0- Less -- Accumulated depreciation..... (6,072,089) (7,068,586) -------------- -------------- $ 4,831,994 $ 3,492,013 ============== ==============
NOTE 5 -- NOTES PAYABLE: Notes payable consist of the following:
INTEREST RATE AT DECEMBER 31, DECEMBER 31, ---------------------------- 1996 1995 1996 ---------------- -------------- ------------ Heller line of credit, Prime based... 8.50% $ -0- $ 2,960,513 Bank line of credit, LIBOR based..... -- 13,500,000 -0- -------------- ------------ $ 13,500,000 $ 2,960,513 ============== ============
At December 31, 1996, the Company's credit agreement with Heller Financial, Inc. provided for a line of credit (including commercial letters of credit) of up to $24,000,000. The borrowing rate for the revolving portion of the line is the prime rate and all the Company's assets, including accounts receivable and inventories, are pledged as security for borrowings under the Heller credit agreement. The Heller credit agreement requires compliance with certain financial covenants principally relating to working capital, tangible net worth, ratio of debt to equity, expenditures for fixed assets, minimum earnings (before taxes, interest and depreciation), interest coverage, restrictions on the payment of dividends and restrictions on the incurrence of long-term debt. At December 31, 1996, approximately $8.9 million was available for borrowing. F-41 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- LONG-TERM DEBT: Long-term debt consists of the following: DECEMBER 31, -------------------------- 1995 1996 ------------ ------------ Notes payable to GE Capital in monthly installments of $25,694.... $ 338,006 $ -0- ------------ ------------ 338,006 Less -- Current installments......... (245,652) -0- ------------ ------------ Long-term debt....................... $ 92,354 $ -0- ============ ============ The notes payable to GE Capital were repaid in February 1996. NOTE 7 -- CASH PROFIT SHARING, 401-K PROFIT SHARING PLAN, STOCK OPTION PLANS, AND RETIREMENT BENEFITS: CASH PROFIT SHARING AND SALES BONUS PLAN. The Company has a Cash Profit Sharing and Sales Bonus Plan for its employees ("Cash Plan"). Under the Cash Plan, the Board of Directors determines, at its discretion, a percentage of the Company's net profits to be distributed to employees on an annual basis. The amount of the distribution to any employee is based upon the employee's compensation level or sales performance and in some instances, length of service with the Company. The Cash Plan is administered by a committee of senior management employees appointed by the Board of Directors. The amount charged to expense under the Cash Plan totaled $194,000, $94,000 and $63,000 in 1994, 1995 and 1996, respectively. 401-K PROFIT SHARING PLAN. Effective January 1, 1992, the Company established a 401-K profit sharing plan for qualifying employees. Employee contributions to the 401-K plan are matched by the Company dollar for dollar on the first $200 contributed to the plan; then $.25 for every $1 up to 6.0% of the employee's gross earnings. Employees are fully vested in the 401-K plan after three years of service. The 401-K plan is administered by a non-related, third party. The amount charged to expense under the 401-K plan totaled $57,000, $66,000 and $55,000 in 1994, 1995 and 1996, respectively. FASB 123 -- EFFECT ON NET INCOME AND EARNINGS PER SHARE. At December 31, 1996, the Company has two stock-based compensation plans, which are described below. In October 1995, the Financial Accounting Standards Board issued FASB 123, "Accounting for Stock-Based Compensation", which established financial accounting and reporting standards for stock-based employee compensation plans and for the issuance of equity instruments to acquire goods and services from non-employees. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation expense cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the amounts indicated below: 1995 1996 -------------- -------------- Net Income................... As reported $ (3,736,454) $ (5,836,343) Pro forma (3,780,796) (5,886,443) Primary earnings per share... As reported $(0.65) $(1.02) Pro forma (0.66) (1.02) The pro forma effect on net income and primary earnings per share resulting from the compensation expense attributed to stock options as calculated under FASB Statement 123 may not be representative of F-42 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the effects on future years as options vest over several years and additional awards may be granted in the future. STOCK OPTION PLANS. In October 1989, the Board of Directors approved stock option plans for Company employees and directors coincident with the completion of the public offering of common stock of the Company. The plans provide for the issuance of options to purchase common stock to employees and non-employee directors of the Company, at an exercise price in most cases equal to the fair market value at the date of grant. The maximum term of options granted is ten years, vesting from one to five years depending on the specific grant. Options to employees are granted at the discretion of the Compensation Committee of the Board of Directors. Options granted to non-employee directors are granted in accordance with a formula set forth in the director plan. A total of 660,000 common stock shares have been reserved for issuance under these plans. A summary of the status of the Company's stock option plans as of December 31, 1995 and 1996, and changes during the years then ended are presented below. The stock option exercise prices do not reflect the Reverse Split described in Note 1.
EMPLOYEE PLAN DIRECTOR PLAN ---------------------------- --------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE - ------------------------------------- ---------- --------------- --------- --------------- Outstanding at December 31, 1994..... 321,250 $4.32 18,000 $4.61 Options granted...................... 54,500 $4.13 2,000 $4.13 Options exercised.................... (1,375) $3.38 -- -- Options canceled..................... (8,875) $5.44 (1,000) $4.13 ---------- --------- Outstanding at December 31, 1995..... 365,500 $4.27 19,000 $4.84 Options granted...................... 10,500 $2.88 -- -- Options exercised.................... -0- -- -- -- Options canceled..................... (111,437) $4.13 (11,000) $4.97 ---------- --------- Outstanding at December 31, 1996..... 264,563 $4.27 8,000 $4.06 ========== =========
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1995 and 1996, respectively: expected volatility of 70% and 64%, risk-free interest rates of 6.49% and 6.5%, and expected lives of 6 years and 5.98 years. The Company does not anticipate declaring dividends during the expected lives of the options. At December 31, 1995, 268,541 options were exercisable under the Employee Plan and 18,000 options were exercisable under the Director Plan. The weighted fair market value of options granted during calendar year 1995 was $2.34 for both plans. At December 31, 1996, 254,063 options were exercisable under the Employee Plan, and 8,000 options were exercisable under the Director Plan. The weighted-average fair value of options granted during the calendar year 1996 was $1.54 under the Employee Plan. No options were granted in the calendar year 1996 under the Director Plan. F-43 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ---------------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - ------------------------------------- ------------ ----------------- --------------- --------------- --------------- EMPLOYEE PLAN $2.88 to $3.38....................... 112,750 5.44 years $3.28 102,250 $3.30 $4.25 to $4.50....................... 83,313 6.59 years $4.30 83,313 $4.30 $5.88................................ 68,500 7.42 years $5.88 68,500 $5.88 DIRECTOR PLAN $3.75 to $5.88....................... 8,000 1.79 years $4.06 8,000 $4.06
NOTE 8 -- INDUSTRY PROFILE AND MAJOR CUSTOMERS: The Company operates almost exclusively in one industry, which is the wholesale distribution of imprinted, dyed and decorated casual apparel. The Company's customers consist of large retail mass merchants. A substantial portion of the Company's customers' ability to honor their obligations is dependent on the retail apparel economic sector. The Company has three major customers who are mass merchants. The percentage of gross sales for each customer and the total percentage of gross sales for the three customers are as follows: PERCENTAGE OF GROSS SALES TOTAL PERCENTAGE FOR KMART, TARGET AND OF GROSS SALES FOR FOR THE YEAR ENDED DECEMBER 31, WAL-MART, RESPECTIVELY THE THREE CUSTOMERS - ------------------------------- ------------------------- ------------------- 1996...................... 10%, 26% and 41% 77% 1995...................... 17%, 24% and 47% 88% 1994...................... 19%, 29% and 40% 88% NOTE 9 -- INCOME TAXES: The (benefit) provision for income taxes was as follows: FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------ 1994 1995 1996 ------------ -------------- ------------ Current.......................... $ 1,554,000 $ (1,854,594) $ (896,378) Deferred......................... (326,000) (44,026) 889,470 ------------ -------------- ------------ $ 1,228,000 $ (1,898,620) $ (6,908) ============ ============== ============ F-44 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Federal Income Tax Rate Schedule: FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1994 1995 1996 ------------ -------------- -------------- Income taxes (benefit) at federal rate................... $ 1,250,070 $ (1,915,925) $ (1,986,705) Non-deductible merger expenses... -0- -0- 325,962 Change in valuation allowance.... -0- -0- 1,567,237 Other............................ (22,070) 17,305 86,598 ------------ -------------- -------------- Income tax (benefit) provision... $ 1,228,000 $ (1,898,620) $ (6,908) ============ ============== ============== Deferred tax assets (liabilities) at December 31 comprised the following: 1995 1996 ---------- -------------- Inventory capitalization............. $ 463,749 $ 583,897 Allowance for doubtful accounts...... 15,748 11,537 Accrued expenses..................... 39,116 28,365 Accrued royalties.................... 235,077 136,065 AMT credits.......................... -0- 78,203 Net operating loss carry forward..... -0- 673,552 Other................................ 78,907 119,623 ---------- -------------- Gross deferred tax assets............ 832,597 1,631,242 Less -- Depreciation................. (199,907) (64,005) Valuation Allowance.................. -0- (1,567,237) ---------- -------------- $ 632,690 $ -0- ========== ============== 1995 1996 ------------ ---------- Net current deferred tax asset....... $ 788,332 $ 19,740 Net noncurrent deferred tax liability.......................... (155,642) (19,740) ------------ ---------- $ 632,690 $ -0- ============ ========== Due to uncertainty in the realization of certain tax assets, including those representing the net operating loss and alternative minimum tax credit carryforwards, the Company has established a valuation allowance of $1,567,237 in the quarter and fiscal year ended December 31, 1996. At December 31, 1996, the Company had net operating loss carryforwards of approximately $2.0 million for federal tax purposes which begin to expire in 2010. Due to changes in the ownership structure of the Company, the availability of certain net operating loss carryforwards may be limited. NOTE 10 -- CONTINGENCIES: The Company is involved in litigation arising in the ordinary course of business, which in the opinion of management, will not have a material effect on the Company's financial position or results of operations. F-45 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- VALUATION AND QUALIFYING ACCOUNTS: Activity of the Company's allowance for doubtful accounts follows: FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 1996 ---------- --------- ---------- Balance, beginning of the year....... $ 88,000 $ 46,524 $ 46,317 Provision for doubtful accounts...... -0- -0- -0- Chargeoffs/collections............... (41,476) (207) (12,387) ---------- --------- ---------- Balance, end of the year............. $ 46,524 $ 46,317 $ 33,930 ========== ========= ========== During 1994, 1995 and 1996, the Company had an agreement with Heller Financial, Inc. intended to transfer the collection risk to Heller for Sun's accounts receivable for essentially all of its customers other than Target, Kmart and Wal-Mart. Under the agreement, Heller assumed 100% of the collection risk associated with the Company's covered receivables. Heller received a fee equal to .55% of the gross amount of covered receivables for assuming such collection risk. The amount charged to expense for factoring fees was $80,000, $48,000, and $119,000 in 1994, 1995 and 1996, respectively. This agreement expired in March 1997. In February 1996, Sun amended the risk-transfer agreement with Heller, whereby Heller also assumes 70% of the collection risk associated with the Kmart receivables for a fee equal to .65% of the gross amount of such receivables. Activity of the Company's lower of cost or market inventory reserves follows: FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1994 1995 1996 ------------ -------------- -------------- Balance, beginning of the year... $ 1,501,876 $ 3,080,755 $ 4,465,657 Accruals......................... 2,470,097 3,773,078 1,938,999 Chargeoffs....................... (891,218) (2,388,176) (4,392,938) ------------ -------------- -------------- Balance, end of the year......... $ 3,080,755 $ 4,465,657 $ 2,011,718 ============ ============== ============== Activity of the Company's unmet guaranteed minimum royalty reserves follows: FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Balance, beginning of the year....... $ 147,333 $ 301,085 $ 691,403 Accruals............................. 350,000 693,643 173,315 Chargeoffs........................... (196,248) (303,325) (665,965) ------------ ------------ ------------ Balance, end of the year............. $ 301,085 $ 691,403 $ 198,753 ============ ============ ============ NOTE 12 -- RELATED PARTY TRANSACTIONS: During 1995, Sun hired the consulting firm of Wiley, Pene and Company to assist in the Company's re-engineering efforts. Wiley, Pene and Company was paid $243,000 from March to October 1995 for its services. Wiley, Pene and Company is owned by Robert Pene, a former director of Sun, who resigned from the Company's Board of Directors in September 1995; and by William S. Wiley, who was appointed as the Company's Chief Executive Officer, President and Director in October 1995, and subsequently resigned as Chief Executive Officer in January of 1997. Mr. Wiley remained as Chairman and Director through March 14, 1997, the date of the merger. F-46 BRAZOS SPORTSWEAR, INC. (FORMERLY SUN SPORTSWEAR, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED): Quarterly financial information for the years ended December 31, 1995 and 1996 is as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL -------------- -------------- -------------- -------------- -------------- 1995 Net sales............................ $ 25,720,562 $ 30,581,505 $ 16,224,578 $ 21,438,680 $ 93,965,325 Cost of goods sold................... 22,522,498 25,310,087 17,097,761 19,639,509 84,569,855 -------------- -------------- -------------- -------------- -------------- Gross margin......................... 3,198,064 5,271,418 (873,183) 1,799,171 9,395,470 Operating expenses................... 3,627,428 3,662,095 3,504,743 3,169,817 13,964,083 Other expense........................ 330,034 314,033 152,794 269,600 1,066,461 -------------- -------------- -------------- -------------- -------------- (Loss) income before provision for income taxes....................... (759,398) 1,295,290 (4,530,720) (1,640,246) (5,635,074) (Benefit) provision for income taxes....................... (258,000) 440,000 (1,540,500) (540,120) (1,898,620) -------------- -------------- -------------- -------------- -------------- Net (loss) income.................... $ (501,398) $ 855,290 $ (2,990,220) $ (1,100,126) $ (3,736,454) ============== ============== ============== ============== ============== Net (loss) income per share.......... $(0.09) $0.15 $(0.52) $(0.19) $(0.65)
The sum of quarterly earnings per share will not necessarily equal the earnings per share reported for the entire year, due to rounding.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL -------------- -------------- -------------- -------------- -------------- 1996 Net sales............................ $ 24,433,440 $ 20,034,565 $ 9,133,714 $ 11,932,826 $ 65,534,545 Cost of goods sold................... 20,623,529 16,871,903 9,101,063 11,083,115 57,679,610 -------------- -------------- -------------- -------------- -------------- Gross margin......................... 3,809,911 3,162,662 32,651 849,711 7,854,935 Operating expenses................... 3,181,998 2,984,052 3,333,181 3,652,023 13,151,254 Other expenses....................... 223,187 149,338 68,373 106,034 546,932 -------------- -------------- -------------- -------------- -------------- (Loss) income before provision for income taxes....................... 404,726 29,272 (3,368,903) (2,908,346) (5,843,251) (Benefit) provision for income taxes....................... 138,000 9,000 (1,145,000) 991,092 (6,908) -------------- -------------- -------------- -------------- -------------- Net (loss) income.................... $ 266,726 $ 20,272 $ (2,223,903) $ (3,899,438) $ (5,836,343) ============== ============== ============== ============== ============== Net (loss) income per share.......... $0.05 $0.00 $(0.39) $(0.68) $(1.02)
During the fourth quarter of 1996, the Company reevaluated the likely realization of its deferred tax assets given its continuing pre-tax losses. Accordingly, a charge of $1,567,237 was recorded to write-off the net deferred tax asset. F-47 INDEPENDENT AUDITOR'S REPORT The Board of Directors Plymouth Mills, Inc. We have audited the accompanying balance sheets of Plymouth Mills, Inc. as of September 30, 1995 and August 2, 1996, and the related statements of income and retained earnings and cash flows for the years ended September 30, 1994 and 1995 and for the period from October 1, 1995 through August 2, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Plymouth Mills, Inc. as of September 30, 1995 and August 2, 1996, and the results of its operations and its cash flows for the years ended September 30, 1994 and 1995 and for the period from October 1, 1995 through August 2, 1996, in conformity with generally accepted accounting principles. The accompanying financial statements reflect the financial position, results of operations and cash flows of Plymouth Mills, Inc., immediately prior to the sale of certain assets and assumption of certain liabilities, as further discussed in Note 1. MAHONEY COHEN RASHBA & POKART, CPA, PC New York, New York February 5, 1997 F-48 PLYMOUTH MILLS, INC. BALANCE SHEETS AS OF SEPTEMBER 30, 1995 AND AUGUST 2, 1996 SEPTEMBER 30, AUGUST 2, 1995 1996 ------------------ --------------- ASSETS (NOTE 1) CURRENT ASSETS: Cash............................ $ 33,933 $ 110,561 Accounts receivable, net of allowance for doubtful accounts of $10,000 (Notes 1 and 4)........................ 6,883,540 8,980,765 Inventories (Notes 2(a) and 3)............................ 4,954,722 6,398,180 Other current assets............ 282,857 135,876 ------------------ --------------- Total current assets............. 12,155,052 15,625,382 ------------------ --------------- PROPERTY AND EQUIPMENT, at cost (Notes 2(b) and 4): Machinery and equipment......... 1,134,749 1,224,764 Leasehold improvements.......... 537,926 537,926 Office equipment................ 254,377 254,377 Furniture and fixtures.......... 83,732 83,732 Automobiles..................... 181,439 205,459 ------------------ --------------- 2,192,223 2,306,258 Less -- accumulated depreciation and amortization.............. 1,798,779 1,911,593 ------------------ --------------- 393,444 394,665 ------------------ --------------- OTHER ASSETS......................... 458,135 360,778 ------------------ --------------- $ 13,006,631 $16,380,825 ================== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (NOTE 1) CURRENT LIABILITIES: Note payable -- bank (Note 4)... $ -- $ 1,300,000 Acceptances payable (Note 4).... -- 162,066 Subordinated notes payable to stockholders (Note 6)......... 482,792 -- Accounts payable................ 2,376,815 1,047,725 Accrued salaries, wages and payroll taxes................. 786,408 420,123 Other current liabilities....... 411,725 287,133 Income taxes payable............ 68,341 329,650 Due to stockholders (Note 5).... 848,423 531,809 ------------------ --------------- Total current liabilities........ 4,974,504 4,078,506 ------------------ --------------- COMMITMENTS (Notes 4, 8, and 9) STOCKHOLDERS' EQUITY: Common stock, no par value: Authorized -- 200 shares... Issued and outstanding -- 120 shares................. 5,000 5,000 Retained earnings............... 8,027,127 12,297,319 ------------------ --------------- Total stockholders' equity............. 8,032,127 12,302,319 ------------------ --------------- $ 13,006,631 $16,380,825 ================== =============== The accompanying notes to financial statements are an integral part of these statements. F-49 PLYMOUTH MILLS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995 AND FOR THE PERIOD FROM OCTOBER 1, 1995 THROUGH AUGUST 2, 1996 OCTOBER 1, 1995 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, AUGUST 2, 1994 1995 1996 ----------- -------------- ----------- NET SALES............................ $30,131,427 $ 31,995,743 $32,747,666 COST OF GOODS SOLD................... 19,445,328 21,575,679 21,487,363 ----------- -------------- ----------- Gross profit............... 10,686,099 10,420,064 11,260,303 OPERATING EXPENSES: Art and design.................. 1,167,555 1,398,029 1,366,877 Selling......................... 2,038,257 1,657,191 1,736,665 Royalty expense................. 918,271 452,110 478,340 Shipping........................ 745,085 878,677 852,659 General and administrative...... 1,399,856 1,712,129 1,543,614 Officers' salaries.............. 2,320,060 2,319,600 300,572 ----------- -------------- ----------- Total operating expenses........... 8,589,084 8,417,736 6,278,727 ----------- -------------- ----------- Operating income........... 2,097,015 2,002,328 4,981,576 OTHER (INCOME) EXPENSE: Rental expense, net of rental income........................ 203,302 68,290 57,488 Other rental income............. -- (273,748) -- Interest expense................ 279,681 171,448 174,119 ----------- -------------- ----------- Net other (income) expense............ 482,983 (34,010) 231,607 ----------- -------------- ----------- Income before provision for income taxes.......... 1,614,032 2,036,338 4,749,969 PROVISION FOR INCOME TAXES........... 144,800 223,200 479,777 ----------- -------------- ----------- Net income................. 1,469,232 1,813,138 4,270,192 RETAINED EARNINGS, beginning of period............................. 4,744,757 6,213,989 8,027,127 ----------- -------------- ----------- RETAINED EARNINGS, end of period..... $ 6,213,989 $ 8,027,127 $12,297,319 =========== ============== =========== The accompanying notes to financial statements are an integral part of these statements. F-50 PLYMOUTH MILLS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995 AND FOR THE PERIOD FROM OCTOBER 1, 1995 THROUGH AUGUST 2, 1996
YEAR ENDED YEAR ENDED OCTOBER 1, 1995 SEPTEMBER 30, SEPTEMBER 30, THROUGH 1994 1995 AUGUST 2, 1996 -------------- -------------- ---------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................... $ 1,469,232 $ 1,813,138 $ 4,270,192 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provisions for losses on accounts receivable..... 136,434 164,522 9,212 Depreciation and amortization............ 197,985 198,073 156,465 Gain on disposal of equipment............... (6,781) -- (949) Change in assets and liabilities: Accounts receivable... 1,670,481 (944,963) (1,965,485) Inventories........... 2,108,045 (1,228,490) (1,443,458) Other assets.......... 113,681 12,783 (43,595) Other current assets............. (129,877) (117,202) 146,981 Acceptances payable... -- -- 162,066 Accounts payable...... 348,035 307,252 (1,329,090) Income taxes payable............ -- 68,341 261,309 Accrued expenses and other current liabilities........ 180,564 31,224 (490,877) -------------- -------------- ---------------- Net cash provided by (used in) operating activities.... 6,087,799 304,678 (267,229) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment................. 7,781 -- 19,310 Purchase of property and equipment..................... (174,308) (95,680) (176,048) -------------- -------------- ---------------- Net cash used in investing activities.... (166,527) (95,680) (156,738) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of stockholders' loan -- subordinated.......... (35,221) -- (300,000) Net borrowings under revolving credit line................... (6,000,000) -- 1,300,000 Net repayment to stockholders... (127,588) (273,088) (499,405) -------------- -------------- ---------------- Net cash provided by (used in) financing activities.... (6,162,809) (273,088) 500,595 -------------- -------------- ---------------- NET INCREASE (DECREASE) IN CASH...... (241,537) (64,090) 76,628 CASH, beginning of period............ 339,560 98,023 33,933 -------------- -------------- ---------------- CASH, end of period.................. 98,023 $ 33,933 $ 110,561 ============== ============== ================ Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest........................ $ 328,522 $ 155,582 $ 232,028 Income taxes.................... 188,190 126,219 219,078
The accompanying notes to financial statements are an integral part of these statements. F-51 PLYMOUTH MILLS, INC. NOTES TO FINANCIAL STATEMENTS (1) THE COMPANY -- Plymouth Mills, Inc. (the "Company"), a New York corporation, is a manufacturer of women's and children's sportswear and screen printing for advertising specialty items. The Company sells primarily to department stores located throughout the United States. Effective August 2, 1996, the stockholders of the Company consummated an agreement to sell substantially all of the assets of the Company, net of the assumption of certain specified liabilities, to Brazos Sportswear, Inc., a wholly-owned subsidiary of BSI Holdings, Inc. Accounts receivable are generally due within 60 days. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management expectations. The Company had the following major customers for the periods shown: AS OF OR AS OF OR FOR AS OF OR FOR FOR THE YEAR THE YEAR THE PERIOD ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, AUGUST 2, 1994 1995 1996 -------------- -------------- ---------- Number of major customers........ 2 2 4 Percentage of outstanding accounts receivable............ 38% 31% 63% Percentage of sales.............. 40% 27% 45% (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (a) INVENTORIES -- Inventories, consisting of raw materials, work-in-process and finished goods, are stated at the lower of cost (first-in, first-out) (FIFO) method) or market. (b) PROPERTY AND EQUIPMENT -- Depreciation of property and equipment is computed by the straight-line and accelerated methods, over estimated useful lives ranging from three to ten years. Improvements to leased premises are amortized over the term of the related lease or the estimated useful life, whichever is shorter. Additions and betterments are capitalized, and repairs and maintenance are charged to operations as incurred. When property and equipment is sold or retired, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is recognized currently. (c) ADVERTISING COSTS -- Advertising costs relating to selling are charged to income during the period in which they are incurred. These costs approximated $61,800 and $16,300 for the years ended September 30, 1994 and 1995, respectively, and $22,100 for the period ended August 2, 1996. (d) INCOME TAXES -- The Company, with the consent of its stockholders, has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code and the corresponding provisions of the New York State Franchise Tax law. Under those provisions, corporate income or loss and any tax credits earned are included in the stockholders' individual income tax returns. Accordingly, no provision for federal income tax or credits is reflected in the accompanying financial statements. The Company is subject to New York State S Corporation and New York City income taxes. Undistributed Subchapter S earnings of approximately $11,642,000 are included in retained earnings as of August 2, 1996, prior to calculating any gain on the sale of the assets (see Note 1). (e) MANAGEMENT'S USE OF ESTIMATES -- The preparation of financial statements 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. F-52 PLYMOUTH MILLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) INVENTORIES -- Inventories consist of the following: AS OF AS OF SEPTEMBER 30, 1995 AUGUST 2, 1996 ------------------- --------------- Supplies............................. $ -- $ 129,689 Raw materials........................ 1,431,462 1,488,993 Work-in-process...................... 2,550,117 3,836,207 Finished goods....................... 973,143 943,291 ------------------- --------------- $ 4,954,722 $ 6,398,180 =================== =============== (4) NOTE AND ACCEPTANCES PAYABLE -- BANK -- The Company has a line of credit agreement with a commercial bank allowing the Company to borrow up to $6,000,000, based upon 80% of eligible accounts receivable. This line consists of a revolving credit line, bankers acceptances and letters of credit. Interest on this line is payable at either .5% below the bank's prime rate (7.75% at August 2, 1996) or 2% above the Eurodollar rate (7.5% at August 2, 1996). Interest on acceptances is discounted in advance at the bank's market rate plus 1.5%. The Company granted a security interest in its accounts receivable and on machinery and equipment as collateral for this revolving credit line. This line of credit was repaid on August 9, 1996. (5) DUE TO STOCKHOLDERS -- The amounts due to stockholders bear interest at the rate of 8% and 10% per annum and are payable on demand. Interest expense for the years ended September 30, 1994 and 1995 was $90,000 and $94,000, respectively and for the period ended August 2, 1996 was $86,050. (6) SUBORDINATED NOTES PAYABLE -- The subordinated notes payable to stockholders are due on demand with interest at 1 3/4% above the bank's designated rate (10 1/2% at September 30, 1995). The notes are subordinated to the bank's revolving credit agreement (see Note 4). Interest expense for the years ended September 30, 1994 and 1995 was $39,000 and $51,000, respectively. (7) INCOME TAXES -- The following reconciles the provision for state and local income taxes that would have resulted from application of the statutory state and local income tax rate to the Company's actual provision for the periods shown.
PERIOD YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, AUGUST 2, 1994 1995 1996 -------------- -------------- ---------- Statutory state and local income tax rate at 11.3% for September 30, 1994 and at 10.4% for the period ended August 2, 1996............... $182,386 $211,779 $ 493,997 Decrease in state income tax due to exemption, based on allocation of state income....................... (10,800) (10,198) (21,644) Decrease in state income tax from deducting local income tax......... (3,200) (3,014) (6,399) Other................................ (23,586) 24,633 13,823 -------------- -------------- ---------- $144,800 $223,200 $ 479,777 ============== ============== ==========
The effective state and local tax rate for the years ended September 30, 1994 and 1995 were 9.0% and 11.0%, respectively, and for the period ended August 2, 1996 was 10.1%. F-53 PLYMOUTH MILLS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (8) RELATED PARTY TRANSACTIONS -- The Company's plant facility and general office are net leased from the stockholders for $120,000 annually through March 31, 2000. The agreement with the stockholders enables the Company to receive all rental income from the tenants of the building during the lease term. As of August 2, 1996, minimum aggregate annual rental obligations, including the rent due to stockholders, are as follows: FOR THE YEAR ENDING GROSS ANNUAL SUBLET NET RENTAL AUGUST 2, RENTAL OBLIGATION INCOME EXPENSE - --------------------------------- ------------------ ------- ---------- 1997........................ $120,000 $31,378 $ 88,622 1998........................ 120,000 28,140 91,860 1999........................ 120,000 4,690 115,310 2000........................ 80,000 -- 80,000 ------------------ ------- ---------- $440,000 $64,208 $ 375,792 ================== ======= ========== In addition, the Company rents a showroom office on a month-to-month basis with an affiliate. The monthly aggregate rent is approximately $4,500. Rent expense charged to operations on the above leases for the years ended September 30, 1994 and 1995 amounted to approximately $225,000 and $174,000, respectively, and for the period ended August 2, 1996 amounted to approximately $151,000. (9) COMMITMENTS -- (a) LICENSE AGREEMENTS -- The Company presently has three licensing agreements with one organization. The agreements provide for royalty payments based on 5% of net sales of the designated products with certain annual minimum amounts based on different categories of licensed products. The following are the minimum royalty amounts payable: YEAR ENDING AUGUST 2, - ------------------------------------- 1997............................ $ 388,353 1998............................ 366,667 ---------- $ 755,020 ========== One agreement will terminate on June 30, 1997, the other agreements will terminate on June 30, 1998. All agreements have renewal options. (b) LEASE -- The Company rents showroom office space under a lease expiring in April 1999. As of August 2, 1996, minimum annual rental payments under the operating lease are as follows: YEAR ENDING AUGUST 2, - ------------------------------------- 1997............................ $ 161,244 1998............................ 161,244 1999............................ 120,933 ---------- $ 443,421 ========== Rent expense charged to operations for the years ended September 30, 1994 and 1995 amounted to approximately $67,000 and $162,000, respectively, and for the period ended August 2, 1996 amounted to approximately $138,000. (c) LETTERS OF CREDIT -- At August 2, 1996, the Company had open letters of credit of approximately $1,190,000 outstanding. F-54 INDEPENDENT AUDITORS' REPORT To the Board of Directors SolarCo, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of SolarCo, Inc. and Subsidiary as of December 31, 1995 and December 29, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended January 1, 1995, December 31, 1995 and December 29, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SolarCo, Inc. and Subsidiary as of December 31, 1995 and December 29, 1996, and the results of their operations and cash flows for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, in conformity with generally accepted accounting principles. MOSS ADAMS LLP Seattle, Washington February 7, 1997 F-55 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash............................... $ 318,000 $ 686,000 Accounts receivable Trade, net of allowance for doubtful accounts, returns and discounts of $1,328,000 and $1,559,000 at 1995 and 1996, respectively......... 8,220,000 8,152,000 Employees and other........... 48,000 73,000 Inventories........................ 4,820,000 5,229,000 Prepaid expenses................... 93,000 136,000 Deferred tax asset................. 180,000 205,000 ------------ ------------ Total current assets..... 13,679,000 14,481,000 ------------ ------------ EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net................................... 2,635,000 3,178,000 ------------ ------------ OTHER ASSETS Goodwill, net of accumulated amortization of $58,000 and $96,000 at 1995 and 1996, respectively..................... 650,000 762,000 Other.............................. 124,000 63,000 ------------ ------------ 774,000 825,000 ------------ ------------ $ 17,088,000 $ 18,484,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable -- line of credit..... $ 4,950,000 $ 4,000,000 Accounts payable -- trade.......... 998,000 3,136,000 Accrued wages and bonuses.......... 1,308,000 2,308,000 Other accrued liabilities.......... 402,000 293,000 Income tax payable................. 674,000 53,000 Current portion of long-term debt............................. 676,000 831,000 ------------ ------------ Total current liabilities........... 9,008,000 10,621,000 ------------ ------------ LONG-TERM DEBT, net of current portion Notes payable...................... 1,570,000 1,845,000 Notes payable -- related parties... 3,000,000 -- ------------ ------------ 4,570,000 1,845,000 ------------ ------------ STOCKHOLDERS' EQUITY Common stock, $.25 par value, 4,950,000 shares authorized...... 1,073,000 1,073,000 Additional paid-in capital......... 7,000 7,000 Retained earnings.................. 2,430,000 4,938,000 ------------ ------------ 3,510,000 6,018,000 ------------ ------------ $ 17,088,000 $ 18,484,000 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-56 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED ---------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------ ------------ ------------ SALES, net of returns, allowances and discounts of $1,873,000, $2,975,000 and $2,920,000 at January 1, 1995, December 31, 1995 and December 29, 1996, respectively................. $ 32,497,000 $ 46,036,000 $ 54,754,000 COST OF GOODS SOLD................... 23,739,000 34,023,000 39,506,000 ------------ ------------ ------------ GROSS PROFIT......................... 8,758,000 12,013,000 15,248,000 ------------ ------------ ------------ OPERATING EXPENSES Retail outlet stores............ 850,000 786,000 654,000 Selling......................... 2,837,000 3,226,000 3,654,000 General and administrative...... 3,550,000 4,891,000 6,353,000 ------------ ------------ ------------ 7,237,000 8,903,000 10,661,000 ------------ ------------ ------------ INCOME FROM OPERATIONS............... 1,521,000 3,110,000 4,587,000 ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense................ (493,000) (700,000) (669,000) Loss on disposal of equipment... 14,000 (78,000) (57,000) Other........................... 13,000 (6,000) 4,000 ------------ ------------ ------------ (466,000) (784,000) (722,000) ------------ ------------ ------------ NET INCOME BEFORE INCOME TAX......... 1,055,000 2,326,000 3,865,000 INCOME TAX EXPENSE................... 240,000 823,000 1,357,000 ------------ ------------ ------------ NET INCOME........................... $ 815,000 $ 1,503,000 $ 2,508,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-57 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------------- ADDITIONAL NUMBER OF PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- ------------ ----------- ---------- ------------ BALANCE, January 1, 1995............. 4,293,000 $ 1,073,000 $ 7,000 $ 927,000 $ 2,007,000 Net income...................... -- -- -- 1,503,000 1,503,000 ---------- ------------ ----------- ---------- ------------ BALANCE, December 31, 1995........... 4,293,000 1,073,000 7,000 2,430,000 3,510,000 Net income...................... -- -- -- 2,508,000 2,508,000 ---------- ------------ ----------- ---------- ------------ BALANCE, December 29, 1996........... 4,293,000 $ 1,073,000 $ 7,000 $4,938,000 $ 6,018,000 ========== ============ =========== ========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-58 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED ---------------------------------------------- JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income...................... $ 815,000 $ 1,503,000 $ 2,508,000 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization............ 615,000 730,000 987,000 (Gain) Loss on disposal of equipment............... (14,000) 78,000 57,000 Deferred income tax benefit................. (7,000) (62,000) (25,000) Stock bonuses.............. 37,000 -- -- Changes in assets and liabilities Accounts receivable, net................ (2,934,000) (1,127,000) 43,000 Inventories........... (1,803,000) (843,000) (409,000) Prepaid expenses and other assets....... 45,000 (2,000) 18,000 Accounts payable...... 448,000 (654,000) 826,000 Other current liabilities........ (128,000) 377,000 891,000 Income tax payable.... 239,000 435,000 (621,000) ------------ ------------ ------------ (2,687,000) 435,000 4,275,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of equipment and leasehold improvements........ (795,000) (823,000) (1,574,000) Proceeds from sale of equipment..................... 24,000 8,000 25,000 Collections on note receivable -- officer......... -- 100,000 -- Contingent payment for acquisition of subsidiary's stock......................... -- (150,000) (150,000) ------------ ------------ ------------ (771,000) (865,000) (1,699,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowings on note payable -- line of credit, net........................... 3,633,000 380,000 362,000 Payments on notes payable -- related parties.... (125,000) (1,000,000) (3,000,000) Proceeds from long-term debt.... 598,000 1,608,000 1,100,000 Payments on long-term debt...... (463,000) (465,000) (670,000) Proceeds from issuance of common stock......................... 11,000 -- -- ------------ ------------ ------------ 3,654,000 523,000 (2,208,000) ------------ ------------ ------------ NET INCREASE IN CASH................. 196,000 93,000 368,000 CASH Beginning of period............. 29,000 225,000 318,000 ------------ ------------ ------------ End of period................... $ 225,000 $ 318,000 $ 686,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-59 SOLARCO, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996 NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS -- SolarCo, Inc. ("the Company") is a holding company incorporated in the State of Washington in 1993. Its wholly-owned subsidiary, Morning Sun, Inc. ("Subsidiary" or "Morning Sun"), designs and embellishes screen-printed and embroidered sportswear for women. It also operates a retail factory outlet store, which sells returns, misprints, and other apparel. Net retail sales totaled $2,979,000, $2,710,000 and $2,563,000 in 1994, 1995, and 1996, respectively. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of SolarCo, Inc. and its wholly-owned subsidiary, Morning Sun, Inc. All intercompany accounts and transactions have been eliminated in consolidation. ANNUAL CLOSING DATE -- The Company operates using a fiscal period of 52 or 53 weeks, ending on the Sunday nearest December 31. The 1994 fiscal period ended January 1, 1995, the 1995 fiscal period ended December 31, 1995 and the 1996 fiscal period ended December 29, 1996. USE OF ESTIMATES -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS -- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. ADVERTISING -- The Company expenses advertising costs as they are incurred. Advertising expense was $107,000, $155,000 and $151,000 in 1994, 1995, and 1996, respectively. INVENTORIES -- Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method. Work in progress and finished goods are valued using the full absorption method. EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Equipment and leasehold improvements are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the term of the related lease. Depreciation and amortization expense totaled $587,000, $709,000 and $949,000 in 1994, 1995, and 1996, respectively. GOODWILL -- Goodwill represents the excess of the cost of the Company's acquired subsidiary over the fair value of its net assets at the date of acquisition. The excess cost is being amortized over 20 years using the straight-line method. Amortization expense totaled $20,000 in 1994 and 1995, and $38,000 in 1996. INCOME TAXES -- Income taxes are provided for the tax effect of transactions reported in the financial statements. The provision consists of taxes currently due plus deferred taxes related primarily to differences in the financial statement and tax bases of certain assets and liabilities. Deferred tax expense or benefit represents the future consequences of those differences. NOTE 2 -- STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION -- The Company paid $441,000, $699,000 and $671,000 of interest and $1,000, $450,000 and $2,001,000 of income taxes in 1994, 1995, and 1996, respectively. NONCASH TRANSACTION -- During 1995, the Company recognized an additional $300,000 of contingent consideration for the acquisition of the stock of Morning Sun, Inc. The additional cost was recorded as goodwill. Of the total, $150,000 was paid in cash and the balance was accrued. F-60 SOLARCO, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- INVENTORIES Inventories consist of the following: DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Raw materials........................ $3,158,000 $3,348,000 Work in process...................... 102,000 48,000 Finished goods....................... 1,195,000 1,481,000 Factory outlet store................. 365,000 352,000 ------------ ------------ $4,820,000 $5,229,000 ============ ============ Periodically the Company discontinues production of certain products. Accordingly, inventories on hand at year end relating to these products have been written down to their estimated net realizable value. NOTE 4 -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following: DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Machinery and equipment.............. $2,488,000 $3,286,000 Computer equipment and software...... 966,000 1,548,000 Leasehold improvements............... 1,705,000 1,654,000 Office equipment..................... 117,000 121,000 Automobiles.......................... 41,000 41,000 ------------ ------------ 5,317,000 6,650,000 Less accumulated depreciation and amortization....................... 2,682,000 3,472,000 ------------ ------------ $2,635,000 $3,178,000 ============ ============ NOTE 5 -- NOTE PAYABLE -- LINE OF CREDIT A line of credit agreement with a bank provides for borrowings up to $13,000,000, as limited by accounts receivable and inventories. The line bears interest at prime with an option to borrow specific amounts over pre-determined periods at fixed rates. The underlying promissory note matures June 1, 1998 and is cross-collateralized with the Company's long-term debt. NOTE 6 -- LONG-TERM DEBT NOTES PAYABLE -- Notes payable consist of the following: DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Various notes payable to a bank in total monthly installments of $76,000 plus interest at rates that vary with prime, maturing September 1997 through August 2001........... $2,246,000 $2,676,000 Less current portion................. 676,000 831,000 ------------ ------------ $1,570,000 $1,845,000 ============ ============ F-61 SOLARCO, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Principal payments on long-term debt for future years are summarized as follows: 1997................................. $ 831,000 1998................................. 826,000 1999................................. 520,000 2000................................. 349,000 2001 and thereafter.................. 150,000 ------------ $ 2,676,000 ============ The notes payable and line of credit are subject to a credit agreement with the bank. Under the terms of the agreement, the Company has granted as collateral to the bank a security interest in accounts receivable, inventories, and equipment. The credit agreement contains certain covenants, including requirements to maintain certain financial ratios and minimum levels of tangible net worth, and to limit capital expenditures and payment of dividends. NOTES PAYABLE -- RELATED PARTIES -- At December 31, 1995, the Company had notes payable to stockholders and an affiliate of certain stockholders. The notes were repaid in full during 1996. NOTE 7 -- INCOME TAX Income tax expense consists of the following: JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ---------- ------------ ------------ Current expense........... $ 246,500 $ 885,000 $1,382,000 Deferred benefit.......... (6,500) (62,000) (25,000) ---------- ------------ ------------ $ 240,000 $ 823,000 $1,357,000 ========== ============ ============ Total income tax expense differs from the amount computed by applying federal statutory rates to net income before income tax due to differences in the deductibility of certain expenses, the inclusion of state income tax, and the application of certain tax credits. Deferred taxes are computed based on temporary differences between the financial statement and tax bases of certain assets and liabilities. Differences relate primarily to allowance for doubtful accounts, accumulated depreciation, inventories, and accrued vacation, all of which result in deferred tax assets. NOTE 8 -- COMMITMENTS At December 31, 1995 the Company has noncancellable operating lease agreements for its manufacturing and office facility and a showroom. Future annual obligations under the terms of these lease agreements are as follows: 1997................................. $ 856,000 1998................................. 830,000 ------------ Total future minimum payments........ $ 1,686,000 ============ Rent expense for the Company's facilities totaled $730,000, $751,000 and $830,000 in 1994, 1995, and 1996, respectively. NOTE 9 -- RELATED PARTY TRANSACTIONS NOTE RECEIVABLE -- OFFICER -- Included in other assets is a $32,000 unsecured promissory note from the President of the Company's Subsidiary. The note bears interest at 6% and is due in full December 2001 or upon a change in control of the Company or its subsidiary. A second note from the President was paid in full during 1995. F-62 SOLARCO, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTES PAYABLE -- The Company had short-term and long-term notes payable to stockholders and an affiliate of certain stockholders. The short-term notes were paid in full during 1995 and the long-term notes were paid in full during 1996. Interest paid to these related parties totaled $241,000, $290,000 and $157,000 in 1994, 1995, and 1996, respectively. NOTE 10 -- RETIREMENT PLANS The Company has adopted a salary deferral plan ("the Plan") meeting the requirements of Internal Revenue Code 401(k) for qualified plans. The Plan covers substantially all employees over the age of 21 with one year of service. Employees may defer up to 15% of their annual salary, subject to certain limitations established by the Internal Revenue Service. Company contributions are discretionary and may not exceed 25% of employees' compensation or $30,000. No Company contributions were made to the Plan in 1994, 1995 or 1996. NOTE 11 -- STOCK INCENTIVE PLAN The Company has adopted a stock incentive plan ("the Plan") covering key directors, employees, and other individuals. Under the terms of the Plan, the Board of Directors may award incentive stock options, as defined by the Internal Revenue Code, non-statutory stock options, stock bonus rights, and stock bonuses. A total of 878,000 shares have been reserved for issuance under the terms of the Plan. During 1994, the Company awarded 78,000 shares of stock bonuses. A total of $37,000 of compensation expense was recognized for value of shares issued. During 1995 and 1996, respectively, the Company awarded 15,000 and 80,000 of stock options to employees and directors. Vesting of the options to employees are contingent on a change in control of the Company or its Subsidiary, and no compensation cost has been recognized for these options. The Company has recorded no compensation cost for the remainder of the options, as the amount is not material. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123). The new standard measures compensation cost using a fair value method, which computes compensation cost as the difference between the options' fair value and the option price on the grant date. However, SFAS No. 123 allows companies to continue to measure compensation cost using the intrinsic value method, which computes compensation cost as the difference between a company's stock price and the option price at the grant date. The Company has elected to continue to use the intrinsic value method. SFAS No. 123 requires pro forma disclosure of net income as if the fair value method were used. The effect of applying the fair value method to the stock options issued in 1996 results in net income that is not materially different from the amount reported in the financial statements. NOTE 12 -- CONCENTRATIONS OF CREDIT RISK Financial instruments that subject the Company to concentrations of credit risk are cash and accounts receivable. The Company places its temporary cash investments with major financial institutions. At times, deposits with any one institution exceed federally insured limits. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Customers are concentrated in the retail department and specialty apparel store industry and are dispersed geographically throughout the United States and Canada. The Company has not experienced a history of significant credit-related losses. F-63 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED) DECEMBER 29, MARCH 30, 1996 1997 ------------ ----------- ASSETS CURRENT ASSETS: Cash............................ $ 686,000 $ 77,000 Accounts receivable, net of allowance for doubtful accounts, returns and discounts of $1,559,000 and $1,163,000 at December 29, 1996 and March 30, 1997, respectively.................. 8,225,000 2,740,000 Inventories..................... 5,229,000 6,279,000 Other........................... 341,000 1,680,000 ------------ ----------- Total current assets....... 14,481,000 10,776,000 ------------ ----------- EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net................................ 3,178,000 3,110,000 ------------ ----------- OTHER ASSETS......................... 825,000 781,000 ------------ ----------- $ 18,484,000 $14,667,000 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Note payable -- line of credit........................ $ 4,000,000 $ 2,822,000 Current portion of long-term debt.......................... 831,000 831,000 Accounts payable and accrued liabilities................... 5,790,000 5,485,000 ------------ ----------- 10,621,000 9,138,000 ------------ ----------- LONG-TERM DEBT, net of current portion............................ 1,845,000 1,652,000 ------------ ----------- STOCKHOLDERS' EQUITY: Common stock, $.25 par value, 4,950,000 shares authorized, 4,293,000 shares outstanding................... 1,073,000 1,073,000 Additional paid-in capital...... 7,000 7,000 Retained earnings............... 4,938,000 2,797,000 ------------ ----------- 6,018,000 3,877,000 ------------ ----------- $ 18,484,000 $14,667,000 ============ =========== The accompanying notes are an integral part of these consolidated financial statements F-64 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MARCH 31, 1996 MARCH 30, 1997 ---------------------- ---------------------- NET SALES............................ $5,629,000 $ 6,239,000 COST OF GOODS SOLD................... 4,826,000 5,078,000 ---------------------- ---------------------- GROSS PROFIT......................... 803,000 1,161,000 ---------------------- ---------------------- OPERATING EXPENSES Retail outlet stores............ 149,000 177,000 Selling......................... 535,000 578,000 General and administrative...... 1,133,000 3,599,000 ---------------------- ---------------------- 1,817,000 4,354,000 ---------------------- ---------------------- LOSS FROM OPERATIONS................. (1,014,000) (3,193,000) ---------------------- ---------------------- OTHER EXPENSE Interest........................ (107,000) (94,000) Other........................... (9,000) (9,000) ---------------------- ---------------------- (116,000) (103,000) ---------------------- ---------------------- NET LOSS BEFORE INCOME TAX CREDIT.... (1,130,000) (3,296,000) INCOME TAX CREDIT.................... 397,000 1,155,000 ---------------------- ---------------------- NET LOSS............................. $ (733,000) $ (2,141,000) ====================== ======================
The accompanying notes are an integral part of these consolidated financial statements. F-65 SOLARCO, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED MARCH 31, 1996 MARCH 30, 1997 --------------------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................ $ (733,000) $(2,142,000) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization............ 209,000 235,000 Changes in assets and liabilities: Accounts receivable, net................ 5,788,000 5,485,000 Inventories........... (1,262,000) (1,050,000) Other current assets............. (112,000) (1,339,000) Other noncurrent assets............. 35,000 33,000 Accounts payable and accrued liabilities........ (568,000) (305,000) --------------------- --------------------- 3,357,000 917,000 --------------------- --------------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of equipment and leasehold improvements, net... (367,000) (155,000) --------------------- --------------------- (367,000) (155,000) --------------------- --------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings/payments on notes payable, net.................. (3,106,000) (1,178,000) Payments on long-term debt...... (156,000) (193,000) --------------------- --------------------- (3,262,000) (1,371,000) --------------------- --------------------- NET DECREASE IN CASH................. (272,000) (609,000) CASH Beginning of period............. 318,000 686,000 --------------------- --------------------- End of period................... $ 46,000 $ 77,000 ===================== ===================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest................... $ 110,000 $ 96,000 Income taxes............... $ 651,000 $ 15,000
The accompanying notes are an integral part of these consolidated financial statements. F-66 SOLARCO, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) SUBSEQUENT EVENT During May 1997, SolarCo, Inc. (SolarCo) agreed to sell all of its outstanding common stock to Brazos Sportswear, Inc. (Brazos) for approximately $30 million plus the assumption of indebtedness ($5.3 million at March 30, 1997) and certain contractual obligations not to exceed $2.5 million. The sale, which is subject to the satisfactory completion of due diligence and other conditions, including regulatory approvals and Brazos' ability to obtain financing, is expected to close during the third quarter of 1997. (2) SIGNIFICANT ACCOUNTING POLICIES (a) INTERIM FINANCIAL STATEMENTS -- The accompanying consolidated condensed financial statements of SolarCo are unaudited. These unaudited interim financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated condensed financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. These consolidated condensed financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto of SolarCo included herein. (b) NEW ACCOUNTING PRONOUNCEMENT -- During February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128). SFAS No. 128 replaces the current presentation of primary and fully-diluted earnings per share with a presentation of basic and diluted earnings per share. Pursuant to the provisions of SFAS No. 128, basic earnings per share excludes any dilution. The current presentation of primary earnings per share includes the dilutive effect of common stock equivalents such as options. SolarCo intends to adopt the provisions of SFAS No. 128 during the fourth quarter of 1997. Assuming profitable results of operations, management expects that the adoption of the provisions of SFAS No. 128 will have the effect of reporting an amount of basic earnings per share which is greater than the current presentation of primary earnings per share because the dilutive effect of common stock equivalents, such as options, will be excluded from the calculation of basic earnings per share. (3) INVENTORIES Inventories consist of the following: DECEMBER 29, MARCH 30, 1996 1997 ------------- ---------- Raw materials........................ $ 3,348,000 $4,210,000 Work in process...................... 48,000 176,000 Finished goods....................... 1,481,000 1,348,000 Factory outlet store................. 352,000 545,000 ------------- ---------- $ 5,229,000 $6,279,000 ============= ========== F-67 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information............................................................................................ 2 Prospectus Summary............................................................................................... 3 Summary Financial Information.................................................................................... 11 Risk Factors..................................................................................................... 12 Disclosure Regarding Forward Looking Statements.................................................................. 16 The Company...................................................................................................... 17 Ratio of Earnings to Fixed Charges............................................................................... 19 Capitalization................................................................................................... 20 Pro Forma Financial Information.................................................................................. 21 Selected Financial Data.......................................................................................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 33 The Exchange Offer............................................................................................... 56 Certain Federal Income Tax Consequences of the Exchange Offer.................................................... 63 Description of Certain Indebtedness.............................................................................. 63 Description of the Exchange Notes................................................................................ 64 Certain Federal Income Tax Consequences of an Investment in the Exchange Notes................................... 95 Plan of Distribution............................................................................................. 99 Legal Matters.................................................................................................... 100 Experts.......................................................................................................... 100 Financial Statements............................................................................................. F-1
[LOGO] BRAZOS SPORTSWEAR, INC. ------------------------ $100,000,000 OFFER TO EXCHANGE ITS 10 1/2% SENIOR NOTES DUE 2007 FOR 10 1/2% SENIOR NOTES DUE 2007 THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 August 6, 1997 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action. In an action brought to obtain a judgment in the corporation's favor, whether by the corporation itself or derivatively by a stockholder, the corporation may only indemnify for expenses, including attorney's fees, actually and reasonably incurred in connection with the defense or settlement of such action, and the corporation may not indemnify for amounts paid in satisfaction of a judgment or in settlement of the claim. In any such action, no indemnification may be paid in respect of any claim, issue or matter as to which such person shall have been adjudged liable to the corporation except as otherwise approved by the Delaware Court of Chancery or the court in which the claim was brought. In any other type of proceeding, the indemnification may extend to judgments, fines and amounts paid in settlement, actually and reasonably incurred in connection with such other proceeding, as well as to expenses. The statute does permit indemnification unless the person seeking indemnification has acted in good faith and in a manner be reasonably believed to be in, or not opposed to, the best interests of the corporation and, in the case of criminal actions or proceedings, the person had no reasonable cause to believe his conduct was unlawful. The statute contains additional limitations applicable to criminal actions and to actions brought by or in the name of the corporation. The determination as to whether a person seeking indemnification has met the required standard of conduct is to be made (1) by a majority vote of a quorum of disinterested members of the Board of Directors, (2) by independent legal counsel in a written opinion, if such a quorum does not exist or if the disinterested directors so direct, or (3) by the stockholders. The Company's Certificate of Incorporation and Bylaws require the Company to indemnify its directors to the fullest extent permitted under Delaware law. Pursuant to employment agreements entered into by the Company with its executive officers and certain other key employees, the Company must indemnify such officers and employees in the same manner and to the same extent that the Company is required to indemnify its directors under the Company's Bylaws. The Company's Certificate limits the personal liability of a director to the corporation or its stockholders to damages for breach of the director's fiduciary duty. The Company has purchased insurance on behalf of its directors and officers, in such amounts as it deems reasonable, against certain liabilities that may be asserted against, or incurred by, such persons in their capacities as directors or officers of the registrant, or that may arise out of their status as directors or officers of the registrant, including liabilities under the federal and state securities laws. II-1 ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES. (A) EXHIBITS The following is a list of all the exhibits filed as part of the Registration Statement.
NUMBER DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 3.1 -- Restated Certificate of Incorporation of the Company. Exhibit 3.1 of the Company's Registration Statement on Form S-1, No. 33-31688, is incorporated herein by reference. 3.2 -- Bylaws of the Company. Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1991 is incorporated herein by reference 4.1 -- Indenture, dated as of July 2, 1997, by and among the Company, the Subsidiary Guarantors and Norwest Bank Minnesota, National Association with respect to the Notes and Exchange Notes. 4.2 -- Form of Exchange Note.* 5.1 -- Opinion of Porter & Hedges, L.L.P., as to the legality of the Exchange Notes. 10.1 -- Registration Rights Agreement, dated as of July 2, 1997, by and among the Company, Dillon, Read & Co. and SBC Warburg Inc. 11.1 -- Statement re: Computation of Earnings per Share 11.2 -- Statement re: Computation of Pro Forma Earnings per Share 12.1 -- Statement re: Computation of Ratios 23.1 -- Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1). 23.2 -- Consent of Arthur Andersen LLP. 23.3 -- Consent of Moss Adams LLP. 23.4 -- Consent of Price Waterhouse LLP. 23.5 -- Consent of Mahoney Cohen & Company, CPA, PC. 24.1 -- Power of Attorney (included as part of the signature page of this Registration Statement). 25.1 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of Norwest Bank Minnesota, National Association under the Trust Indenture Act of 1934.* 99.1 -- Letter of Transmittal for the Notes.*
- ------------ * filed herewith (B) FINANCIAL STATEMENT SCHEDULES Schedules are omitted since the information required to be submitted has been included in the Consolidated Financial Statements of Brazos Sportswear, Inc. or the notes thereto, or the required information is not applicable. ITEM 22. UNDERTAKINGS. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS ON AUGUST , 1997. BRAZOS SPORTSWEAR, INC. By: /s/ F. CLAYTON CHAMBERS F. CLAYTON CHAMBERS VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER POWER OF ATTORNEY Each of the undersigned hereby appoints each of J. Ford Taylor and F. Clayton Chambers, with full power to act alone, as attorney and agent for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Commission under the Securities Act any and all amendments and exhibits to this Registration Statement and any and all applications, instruments and other documents to be filed with the Commission pertaining to the registration of the securities covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite or desirable. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON AUGUST , 1997. SIGNATURE TITLE - ------------------------------------------------------ ------------------------ /s/RANDALL B. HALE* Chairman of the Board of Directors RANDALL B. HALE /s/J. FORD TAYLOR* Director, President and Chief Executive Officer J. FORD TAYLOR (Principal Executive Officer) /s/F. CLAYTON CHAMBERS Director, Vice President, Chief Financial Officer, F. CLAYTON CHAMBERS Secretary and Treasurer (Principal Financial and Accounting Officer) ______________________ Director and President of Plymouth Mills Facility ALAN B. ELENSON /s/NOLAN LEHMANN* Director NOLAN LEHMANN _______________________ Director MICHAEL S. CHADWICK *by /s/ F. CLAYTON CHAMBERS F. Clayton Chambers II-3 EXHIBIT INDEX NUMBER DESCRIPTION ------ ----------- 3.1 -- Restated Certificate of Incorporation of the Company. Exhibit 3.1 of the Company's Registration Statement on Form S-1, No. 33-31688, is incorporated herein by reference. 3.2 -- Bylaws of the Company. Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1991 is incorporated herein by reference 4.1 -- Indenture, dated as of July 2, 1996, by and among the Company, the Subsidiary Guarantors and Norwest Bank Minnesota, National Association with respect to the Notes and Exchange Notes. 4.2 -- Form of Exchange Note (included in Exhibit 4.1). 5.1 -- Opinion of Porter & Hedges, L.L.P., as to the legality of the Exchange Notes. 10.1 -- Registration Rights Agreement, dated as of July 2, 1997, by and among the Company, Dillon, Read & Co. and SBC Warburg Inc. 11.1 -- Statement re: Computation of Earnings per Share 11.2 -- Statement re: Computation of Pro Forma Earnings per Share 12.1 -- Statement re: Computation of Ratios 23.1 -- Consent of Porter & Hedges, L.L.P. (included in Exhibit 5.1). 23.2 -- Consent of Arthur Andersen LLP. 23.3 -- Consent of Moss Adams LLP. 23.4 -- Consent of Price Waterhouse LLP. 23.5 -- Consent of Mahoney Cohen & Company, CPA, PC. 24.1 -- Power of Attorney (included as part of the signature page of this Registration Statement). 25.1 -- Statement of Eligibility and Qualification of Trustee on Form T-1 of Norwest Bank Minnesota, National Association under the Trust Indenture Act of 1934.* 99.1 -- Letter of Transmittal for the Notes.* - ------------ * filed herewith. EX-25.1 2 EXHIBIT 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ----------------------------- [ ] CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b) (2) NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) A U.S. NATIONAL BANKING ASSOCIATION 41-1592157 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national Identification No.) bank) SIXTH STREET AND MARQUETTE AVENUE Minneapolis, Minnesota 55479 (Address of principal executive offices) (Zip code) Stanley S. Stroup, General Counsel NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479 (612) 667-1234 (Agent for Service) ----------------------------- BRAZOS SPORTSWEAR, INC. (Exact name of obligor as specified in its charter) DELAWARE 91-1770931 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3860 VIRGINIA AVENUE CINCINNATI, OHIO 45227 (Address of principal executive offices) (Zip code) ----------------------------- 10 1/2% SENIOR NOTES DUE 2007 (Title of the indenture securities) Item 1. GENERAL INFORMATION. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Treasury Department Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. The Board of Governors of the Federal Reserve System Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee. No responses are included for Items 3-14 of this Form T-1 because the obligor is not in default as provided under Item 13. Item 15. FOREIGN TRUSTEE. Not applicable. Item 16. LIST OF EXHIBITS. List below all exhibits filed as a part of this Statement of Eligibility. Norwest Bank incorporates by reference into this Form T-1 the exhibits attached hereto. Exhibit 1. a. A copy of the Articles of Association of the trustee now in effect.* Exhibit 2. a. A copy of the certificate of authority of the trustee to commence business issued June 28, 1872, by the Comptroller of the Currency to The Northwestern National Bank of Minneapolis.* b. A copy of the certificate of the Comptroller of the Currency dated January 2, 1934, approving the consolidation of The Northwestern National Bank of Minneapolis and The Minnesota Loan and Trust Company of Minneapolis, with the surviving entity being titled Northwestern National Bank and Trust Company of Minneapolis.* c. A copy of the certificate of the Acting Comptroller of the Currency dated January 12, 1943, as to change of corporate title of Northwestern National Bank and Trust Company of Minneapolis to Northwestern National Bank of Minneapolis.* d. A copy of the letter dated May 12, 1983 from the Regional Counsel, Comptroller of the Currency, acknowledging receipt of notice of name change effective May 1, 1983 from Northwestern National Bank of Minneapolis to Norwest Bank Minneapolis, National Association.* e. A copy of the letter dated January 4, 1988 from the Administrator of National Banks for the Comptroller of the Currency certifying approval of consolidation and merger effective January 1, 1988 of Norwest Bank Minneapolis, National Association with various other banks under the title of "Norwest Bank Minnesota, National Association."* Exhibit 3. A copy of the authorization of the trustee to exercise corporate trust powers issued January 2, 1934, by the Federal Reserve Board.* Exhibit 4. Copy of By-laws of the trustee as now in effect.* Exhibit 5. Not applicable. Exhibit 6. The consent of the trustee required by Section 321(b) of the Act. Exhibit 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority.** Exhibit 8. Not applicable. Exhibit 9. Not applicable. * Incorporated by reference to exhibit number 25 filed with registration statement number 33-66026. ** Incorporated by reference to exhibit number 25 filed with registration statement number 333-7575. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Norwest Bank Minnesota, National Association, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Minneapolis and State of Minnesota on the 1st day of August, 1997. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION /s/ CURTIS D. SCHWEGMAN Curtis D. Schwegman Assistant Vice President EXHIBIT 6 August 1, 1997 Securities and Exchange Commission Washington, D.C. 20549 Gentlemen: In accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, the undersigned hereby consents that reports of examination of the undersigned made by Federal, State, Territorial, or District authorities authorized to make such examination may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Very truly yours, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION /s/ CURTIS D. SCHWEGMAN Curtis D. Schwegman Assistant Vice President EX-99.1 3 EXHIBIT 99.1 LETTER OF TRANSMITTAL BRAZOS SPORTSWEAR, INC. OFFER TO EXCHANGE 10 1/2% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF THE OUTSTANDING 10 1/2% SENIOR NOTES DUE 2007 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 4, 1997, UNLESS EXTENDED EXCHANGE AGENT: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION BY COURIER Norwest Bank Minnesota, National Association Norwest Center 6th and Marquette Avenue Minneapolis, Minnesota 55479-0069 Attn: Corporate Trust Operations BY MAIL BY FACSIMILE Norwest Bank Minnesota, (Eligible Institutions Only) National Association (612) 667-4927 P.O. Box 1517 Minneapolis, Minnesota 55480-1517 FOR TELEPHONE INQUIRES Attn: Corporate Trust Operations (612) 667-9764 BY HAND DELIVERY Norwest Bank Minnesota, National Association Northstar East, 12th Floor 608 2nd Avenue Minneapolis, Minnesota 55479-0113 Attn: Corporate Trust Operations PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY AND PRINT OR TYPE ALL RESPONSES DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONES LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. The undersigned hereby acknowledges receipt of the Prospectus dated August 6, 1997 (the "Prospectus") of Brazos Sportswear Inc. (the "Company") and this Letter of Transmittal, which together constitute the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 10 1/2% Senior Notes Due 2007 (the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus is a part, for each $1,000 principal amount of their outstanding 10 1/2% Senior Notes due 2007 (the "Notes"). The term "Expiration Date" shall mean 5:00 p.m., New York City time, on September 4, 1997, unless the Company extends the Exchange Offer, in which case the term shall mean the latest date and time to which the Exchange Offer is extended. Capitalized terms used but not defined herein have the meaning given to them in the Prospectus. YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT. List below the notes to which this Letter of Transmittal relates. If the space indicated below is inadequate, the Certificate or Registration Numbers and Principal Amounts should be listed on a separately signed schedule affixed hereto.
- ------------------------------------------------------------------------------------------------------------- DESCRIPTION OF NOTES TENDERED HEREBY - ------------------------------------------------------------------------------------------------------------- AGGREGATE PRINCIPAL CERTIFICATE OR AMOUNT REPRESENTED NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) REGISTRATION NUMBERS* BY NOTES - ------------------------------------------------------------------------------------------------------------- ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ TOTAL - ------------------------------------------------------------------------------------------------------------- * NEED NOT BE COMPLETED BY BOOK-ENTRY HOLDERS. ** UNLESS OTHERWISE INDICATED, THE HOLDER WILL BE DEEMED TO HAVE TENDERED THE FULL AGGREGATE PRINCIPAL AMOUNT REPRESENTED BY SUCH NOTES. ALL TENDERS MUST BE IN INTEGRAL MULTIPLES OF $1,000. - ------------------------------------------------------------------------------------------------------------- DESCRIPTION OF NOTES TENDERED HEREBY - ------------------------------------------------------------------------------------- PRINCIPAL AMOUNT NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) TENDERED** - ------------------------------------------------------------------------------------------------------------- ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ - ------------------------------------------------------------------------------------------------------------- * NEED NOT BE COMPLETED BY BOOK-ENTRY HOLDERS. ** UNLESS OTHERWISE INDICATED, THE HOLDER WILL BE DEEMED AMOUNT REPRESENTED BY SUCH NOTES. ALL TENDERS MUST BE - -------------------------------------------------------------------------------------------------------------
This Letter of Transmittal is to be used (i) if certificates of Notes are to be forwarded herewith, (ii) if delivery of Notes is to be made by book-entry transfer to an account maintained by the Exchange Agent at The Depository Trust Company, ("DTC") pursuant to the procedures set forth in "The Exchange Offer -- Procedures for Tendering Notes" in the Prospectus or (iii) tender of the Notes is to be made according to the guaranteed delivery procedures described in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. Delivery of documents to a book-entry transfer facility does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person in whose name Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Notes must complete this letter in its entirety. [ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution.............................................. DTC: Account Number........................................................ Transaction Code Number.................................................... Holders whose Notes are not immediately available or who cannot deliver their Notes and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date must tender their Notes according to the guaranteed delivery procedure set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." See Instruction 2. [ ] CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING: Name of Registered Holder(s)............................................... Name of Eligible Institution that Guaranteed Delivery...................... If delivery by book-entry transfer: Account Number............................................................. Transaction Code Number.................................................... [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO AND COMPLETE THE FOLLOWING: Name................................................................. Address.............................................................. LADIES AND GENTLEMEN: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of the Notes indicated above. Subject to, and effective upon, the acceptance for exchange of such Notes tendered hereby, the undersigned hereby exchanges, assigns, and transfers to or upon the order of the Company all right, title and interest in and to such Notes as are being tendered hereby, including all rights to accrued and unpaid interest thereon as of the Expiration Date. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that said Exchange Agent acts as the agent of the Company in connection with the Exchange Offer) to cause the Notes to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Notes and to acquire Exchange Notes issuable upon the exchange of such tendered Notes, and that when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. If the undersigned is not a broker-dealer, the undersigned represents that it and any other person that will receive Exchange Notes pursuant to this Letter of Transmittal is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Senior Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned and any such other person acknowledge that, if they are participating in the Exchange Offer for the purpose of distributing the Exchange Notes, (i) they cannot rely on the position of the staff of the Securities and Exchange Commission enunciated in Exxon Capital Holdings Corporation (available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5, 1991) or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale transaction and (ii) failure to comply with such requirements in such instance could result in the undersigned or any such other person incurring liability under the Securities Act for which such persons are not indemnified by the Company. If the undersigned or the person receiving the Exchange Notes covered by this letter is an affiliate (as defined under Rule 405 of the Securities Act) of the Company, the undersigned represents to the Company that the undersigned understands and acknowledges that such Exchange Notes may not be offered for resale, resold or otherwise transferred by the undersigned or such other person without registration under the Securities Act or an exemption therefrom. The undersigned also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Notes or transfer ownership of such Notes on the account books maintained by a book-entry transfer facility. The undersigned further agrees that acceptance of any tendered Notes by the Company and the issuance of Exchange Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that the Company shall have no further obligations or liabilities thereunder for the registration of the Notes or the Exchange Notes. The Exchange Offer is subject to certain conditions set forth in the Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned recognizes that as a result of these conditions (which may be waived, in whole or in part, by the Company), as more particularly set forth in the Prospectus, the Company may not be required to exchange any of the Notes tendered hereby and, in such event, the Notes not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tendered Notes may be withdrawn at any time prior to the Expiration Date. Unless otherwise indicated under the caption "Special Registration Instructions" or under the caption "Special Delivery Instructions" in this Letter of Transmittal, certificates for all Exchange Notes delivered in exchange for tendered Notes, and any Notes delivered herewith but not exchanged, will be registered in the name of the undersigned and shall be delivered to the undersigned at the address shown below the signature of the undersigned. If an Exchange Note is to be issued to a person other than the person(s) signing this Letter of Transmittal, or if the Exchange Note is to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address different than the address shown on this Letter of Transmittal, the information requested under the appropriate caption in this Letter of Transmittal should be provided. If Notes are surrendered by Holder(s) that have provided information under either the caption entitled "Special Registration Instructions" or the caption entitled "Special Delivery Instructions" in this Letter of Transmittal, signature(s) on this Letter of Transmittal must be guaranteed by an Eligible Institution (as defined in Instruction 4). - --------------------------------------------------------------------- SPECIAL REGISTRATION INSTRUCTIONS To be completed ONLY if the Exchange Notes are to be ISSUED in the name of someone other than the undersigned. Name:................................................. Address:.............................................. ...................................................... - --------------------------------------------------------------------- - --------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS To be completed ONLY if the Exchange Notes are to be DELIVERED to someone other than the undersigned, or to the undersigned at an address other than that shown under "Description of Notes Tendered Hereby." Name:................................................. Book-Entry Transfer Facility Account: ...................................................... Address:.............................................. ...................................................... ...................................................... (Employer identification or Social Security Number): ...................................................... - --------------------------------------------------------------------- - -------------------------------------------------------------------------------- REGISTERED HOLDER(S) OF NOTES SIGN HERE (IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW) X............................................................................... X............................................................................... SIGNATURE(S) OF STOCKHOLDER(S) Must be signed by registered Holder(s) exactly as name appears on the Notes or on a security position listing as the owner of the Notes or by person(s) authorized to become registered Holder(s) by properly completed bond powers transmitted herewith. If signature is by attorney-in-fact, trustee, executor, administrator, guardian, officer of a corporation or other person acting in a fiduciary capacity, please provide the following information. Name and Capacity (full title):....................................... ...................................................................... Address (include zip code):........................................... ...................................................................... Tax Identification or Social Security No.:............................ Dated:................ SIGNATURE GUARANTEE (IF REQUIRED -- SEE INSTRUCTION 4) Authorized Signature (Representative of Signature Guarantor):......... ..................................................................... Name and Title:....................................................... ..................................................................... Name of Plan:......................................................... ..................................................................... Area Code and Telephone Number:....................................... Dated:................ - -------------------------------------------------------------------------------- IMPORTANT TAX INFORMATION Under federal income tax law, a Holder tendering Notes is required to provide the Exchange Agent with such Holder's correct TIN on Substitute Form W-9 above. If such Holder is an individual, the TIN is the Holder's social security number. The Certificate of Awaiting Taxpayer Identification Number should be completed if the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future. If the Exchange Agent is not provided with the correct TIN, the Holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holder with respect to tendered Notes may be subject to backup withholding. Certain Holders (including, among other, all domestic corporations and certain foreign individuals and foreign entities) are not subject to these backup withholding and reporting requirements. Such a Holder, who satisfies one or more of the conditions set forth Part 2 of the Substitute Form W-9 should execute the certification following such Part 2. In order for a foreign Holder to qualify as an exempt recipient, that Holder must submit to the Exchange Agent a properly completed Internal Revenue Service Form W-9, signed under penalties of perjury, attesting to that Holder's exempt status. Such forms can be obtained from the Exchange Agent. If backup withholding applies, the Exchange Agent is required to withhold 31% of any amounts otherwise payable to the Holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a Holder with respect to Notes tendered for exchange, the Holder is required to notify the Exchange Agent of his or her correct TIN by completing the form herein certifying that the TIN provided on Substitute Form W-9 is correct (or that such Holder is awaiting a TIN) and that (i) each Holder is exempt, (ii) such Holder has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of failure to report all interest or dividends or (iii) the Internal Revenue Service has notified such Holder that he or she is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT Each Holder is required to give the Exchange Agent the social security number or employer identification number of the record Holder(s) of the Notes. If Notes are in more than one name or are not in the name of the actual Holder, consult the instructions on Internal Revenue Service Form W-9, which may be obtained from the Exchange Agent, for additional guidance on which number to report. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER If the tendering Holder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, write "Applied For" in the space for the TIN, sign and date the Substitute Form W-9. If such certificate is completed and the Exchange Agent is not provided with the TIN within 60 days, the Exchange Agent will withhold 31% of all payments made thereafter until a TIN is provided to the Exchange Agent. THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED Please provide your social security number or other taxpayer identification number on the following Substitute Form W-9 and certify therein that you are subject to backup withholding.
PAYER'S NAME: BRAZOS SPORTSWEAR, INC. - ----------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE Part 1 -- ENTER YOUR TAX IDENTIFICATION Social Security number FORM W-9 NUMBER IN THE APPROPRIATE BOX. FOR MOST OR INDIVIDUALS, THIS IS YOUR SOCIAL SECURITY Employer Identification number NUMBER. --------------------------------------------------------------------------------------- Part 2 -- I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me DEPARTMENT OF THE TREASURY that I am no longer subject to backup INTERNAL REVENUE SERVICE withholding [ ] --------------------------------------------------------------------------------------- PAYER'S REQUEST FOR TAXPAYER CERTIFICATION -- UNDER THE PENALTIES OF Part 3 -- I am not a nonresident alien IDENTIFICATION NUMBER (TIN) PERJURY, I CERTIFY THAT THE INFORMATION individual or foreign entity. Awaiting PROVIDED ON THIS FORM IS TRUE, CORRECT, TIN [ ] AND COMPLETE. --------------------------------------------------------------------------------------- SIGNATURE DATE , 199 - -----------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 20% OF ANY PAYMENTS MADE TO YOU. INSTRUCTIONS TO THE LETTER OF TRANSMITTAL FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. All physically delivered Notes or confirmation of any book-entry transfer to the Exchange Agent's account at a book-entry transfer facility of Notes tendered by book-entry transfer, as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at any of its addresses set forth herein on or prior to the Expiration Date (as defined in the Prospectus). The method of delivery of this Letter of Transmittal, the Notes and any other required documents is at the election and risk of the Holder, and except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. If such delivery is by mail, it is suggested that registered mail with return receipt requested, properly insured, be used. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the Notes for exchange. Delivery to an address other than as set forth herein, or instructions via a facsimile number other than the ones set forth herein, will not constitute a valid delivery. 2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes, but whose Notes are not immediately available and thus cannot deliver their Notes, the Letter of Transmittal or any other required documents to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date, may effect a tender if: (a) the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution"); (b) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the registration number(s) of such Notes and the principal amount of Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the Notes (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at DTC) and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as all tendered Notes in proper form for transfer (or a confirmation of book-entry transfer of such Notes into the Exchange Agent's account at DTC) and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. UPON REQUEST TO THE EXCHANGE AGENT, A NOTICE OF GUARANTEED DELIVERY WILL BE SENT TO HOLDERS WHO WISH TO TENDER THEIR NOTES ACCORDING TO THE GUARANTEED DELIVERY PROCEDURES SET FORTH ABOVE. ANY HOLDER WHO WISHES TO TENDER NOTES PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES MUST ENSURE THAT THE EXCHANGE AGENT RECEIVES THE NOTICE OF GUARANTEED DELIVERY RELATING TO SUCH NOTES PRIOR TO THE EXPIRATION DATE. FAILURE TO COMPLETE THE GUARANTEED DELIVERY PROCEDURES WILL NOT, OF ITSELF, AFFECT THE VALIDITY OR EFFECT A REVOCATION OF ANY LETTER OF TRANSMITTAL FORM PROPERLY COMPLETED AND EXECUTED BY A HOLDER WHO ATTEMPTED TO USE THE GUARANTEED DELIVERY PROCEDURES. 3. PARTIAL TENDERS; WITHDRAWALS. If less than the entire principal amount of Notes evidenced by a submitted certificate is tendered, the tendering Holder should fill in the principal amount tendered in the column entitled "Principal Amount Tendered" of the box entitled "Description of Notes Tendered Hereby." A newly issued Note for the principal amount of Notes submitted but not tendered will be sent to such Holder as soon as practicable after the Expiration Date. All Notes delivered to the Exchange Agent will be deemed to have been tendered in full unless otherwise indicated. NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE, AFTER WHICH TENDERS OF NOTES ARE IRREVOCABLE. To be effective, a written, telegraphic or facsimile notice of withdrawal must be timely received by the Exchange Agent. Any such notice of withdrawal must (i) specify the name of the person having deposited the Notes to be withdrawn (the Depositor"), (ii) identify the Notes to be withdrawn (including the registration number(s) and principal amount of such Notes, or, in the case of Notes transferred by book-entry transfer, the name and number of the account at DTC to be credited), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Notes register the transfer of such Notes into the name of the person withdrawing the tender and (iv) specify the name in which any such notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Notes so withdrawn are validly retendered. Any Notes which have been tendered but which are not accepted for exchange, will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of Exchange Offer. 4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the registered Holder(s) of the Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the certificates without alternation or enlargement or any change whatsoever. If this Letter of Transmittal is signed by a participant in DTC, the signature must correspond with the name as it appears on the security position listing as the owner of the Notes. IF ANY OF THE NOTES TENDERED HEREBY ARE OWNED OF RECORD BY TWO OR MORE JOINT OWNERS, ALL SUCH OWNERS MUST SIGN THIS LETTER OF TRANSMITTAL. IF A NUMBER OF NOTES REGISTERED IN DIFFERENT NAMES ARE TENDERED, IT WILL BE NECESSARY TO COMPLETE, SIGN AND SUBMIT AS MANY SEPARATE COPIES OF THIS LETTER OF TRANSMITTAL AS THERE ARE DIFFERENT REGISTRATIONS OF NOTES. Signatures of this Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an Eligible Institution unless the Notes tendered hereby are tendered (i) by a registered Holder who has not provided information under the caption "Special Registration Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If the Letter of Transmittal is signed by the registered Holder(s) of Notes (which term, for the purposes described herein, shall include a participant in DTC whose name appears on a security listing as the owner of the Notes) listed and tendered hereby, no endorsements of the tendered Notes or separate written instruments of transfer or exchange are required. In any other case, the registered Holder (or beneficial Holder) must either properly endorse the Notes or transmit properly completed bond powers with the Letter of Transmittal (in either case, executed exactly as the name(s) of the registered Holder(s) appear(s) on the Notes, and, with respect to a participant in DTC whose name appears on a security position listing as the owner of Notes, exactly as the name of the participant appears on such security position listing), with the signature on the Notes or bond power guaranteed by an Eligible Institution (except where the Notes are tendered for the account of an Eligible Institution). If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or other acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority so to act must be submitted. 5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders should indicate, in the applicable box, the name and address (or account at DTC) in which the Exchange Notes or substitute Notes for principal amounts not tendered or not accepted for exchange are to be issued (or deposited), if different from the names and addresses or accounts of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification number or social security number of the person named must also be indicated and the tendering Holder should complete the applicable box. If no instructions are given, the Exchange Notes (and any Notes not tendered or not accepted) will be issued in the name of and sent to the beneficial Holder of the Notes or deposited at such Holder's account at DTC. 6. TRANSFER TAXES. The Company shall pay all transfer taxes, if any, applicable to the transfer and exchange of Notes to it or its order pursuant to the Exchange Offer. If a transfer tax is imposed for any other reason other than the transfer and exchange of Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted herewith, the amount of such transfer taxes will be collected from the tendering Holder by the Exchange Agent. Except as provided in this Instruction 6, it will not be necessary for transfer stamps to be affixed to the Notes listed in this Letter of Transmittal. 7. WAIVER OF CONDITIONS; MUTILATED, LOST, STOLEN OR DESTROYED NOTES; VALIDITY AND FORM. The Company reserves the right, in its reasonable judgment, to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the Prospectus. Any Holder whose Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. All questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered Notes and withdrawal of tendered Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Notes not properly tendered or any Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right, in its reasonable judgment, to waive any defects, irregularities or conditions of tender as to particular Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Notes must be cured within such time as the Company shall determine. Although the Company intends to notify Holders of defects or irregularities with respect to tenders of Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder as soon as practicable following the Expiration Date. 8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number(s) set forth above. In addition, all questions relating to the Exchange Offer, as well as requests for assistance or additional copies of the Prospectus and this Letter of Transmittal, may be directed to Brazos Sportswear, Inc., 3860 Virginia Avenue, Cincinnati, Ohio 45227, Attn: Investor Relations, telephone (513) 272-3600. THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE. -----END PRIVACY-ENHANCED MESSAGE-----