-----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, H95ln7kXEJaEd6HzL2crhwIKZsbPxjP6OtdwfYw5JQKjYZsJhvDnURxw5qGtia7n Cc3zoJF4uZnIuQpNhPs2kA== 0000950152-97-007884.txt : 19971114 0000950152-97-007884.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950152-97-007884 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: NONE 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-18054 FILM NUMBER: 97714500 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 10-Q 1 BRAZOS SPORTSWEAR, INC. 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997 COMMISSION FILE NUMBER 0-18054 ------------- BRAZOS SPORTSWEAR, INC. (Exact name of registrant as specified in its charter) DELAWARE 91-1770931 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 3860 Virginia Avenue Cincinnati, Ohio 45227 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 513-272-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date. 4,400,955 ------------------- (SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 7, 1997) 2 BRAZOS SPORTSWEAR, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of September 27, 1997 and December 28, 1996 (unaudited).................................... 1 Consolidated Condensed Statements of Operations for the thirty-nine weeks ended September 27, 1997 (unaudited) and September 28, 1996 (unaudited) and the thirteen weeks ended September 27, 1997 (unaudited) and September 28, 1996 (unaudited)................................................................ 3 Consolidated Condensed Statements of Cash Flows for the thirty-nine weeks ended September 27, 1997 (unaudited) and September 28, 1996 (unaudited).............................................. 4 Notes to Financial Statements (unaudited)................................... 5 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................. 12 PART II - OTHER INFORMATION................................................................... 17
3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 27, 1997 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS)
1997 1996 --------- -------- ASSETS - ------ CURRENT ASSETS: Cash $ 1,031 $ 561 Accounts receivable, net of allowance for doubtful accounts of $6,060 and $2,760, respectively 64,823 22,118 Inventory (Note 2(b)) 67,393 25,338 Prepaid expenses 9,434 1,786 Income tax receivable 2,451 -- Deferred tax assets 3,160 1,797 --------- -------- Total current assets 148,292 51,600 --------- -------- PROPERTY, PLANT AND EQUIPMENT-net, at cost 9,269 6,873 --------- -------- INTANGIBLE ASSETS: Costs in excess of fair value of assets acquired 57,029 21,456 Less- accumulated amortization (1,315) (624) --------- -------- 55,714 20,832 --------- -------- Other 7,521 3,359 Less- accumulated amortization (1,456) (922) --------- -------- 6,065 2,437 --------- -------- Total intangible assets 61,779 23,269 --------- -------- OTHER ASSETS 559 940 --------- -------- $ 219,899 $ 82,682 ========= ========
The accompanying notes are an integral part of these consolidated condensed balance sheets. 4 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF SEPTEMBER 27, 1997 AND DECEMBER 28, 1996 (DOLLARS IN THOUSANDS)
1997 1996 -------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement $ 31,795 $23,524 Current portion of other debt 2,401 3,070 Current portion of capital leases 358 349 Earnout payable -- 2,950 Accounts payable 41,375 9,998 Accrued liabilities 13,192 7,042 -------- ------- Total current liabilities 89,121 46,933 -------- ------- LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES: Borrowings pursuant to credit agreement -- 8,800 Senior notes payable 99,258 -- Notes payable -- 41 Subordinated debt due to related parties 5,500 13,590 Capital lease liability 887 1,175 -------- ------- 105,645 23,606 -------- ------- DEFERRED INCOME TAXES PAYABLE AND OTHER LIABILITIES 1,340 1,301 MANDATORILY REDEEMABLE PREFERRED STOCK 898 7,613 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 8,328 -- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.001 par value, 10,000,000 shares authorized and 4,400,955 and 3,676,008 shares issued and outstanding at September 27, 1997 and December 28, 1996, respectively 4 5 Additional paid-in capital 11,289 2,927 Retained earnings 3,274 297 -------- ------- Total shareholders' equity 14,567 3,229 -------- ------- $219,899 $82,682 ======== =======
The accompanying notes are an integral part of these consolidated condensed balance sheets. 5 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THIRTEEN FOR THE THIRTY-NINE WEEKS ENDED WEEKS ENDED ------------------------------ -------------------------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1997 1996 1997 1996 NET SALES $ 105,185 $ 57,996 $ 196,290 $ 127,535 COST OF GOODS SOLD 76,414 42,229 144,849 95,062 ----------- ----------- ----------- ----------- Gross profit 28,771 15,767 51,441 32,473 OPERATING EXPENSES: Selling, general and administrative expenses 17,293 10,267 37,316 23,535 Amortization of intangible assets and non-compete payments 638 211 1,228 366 ----------- ----------- ----------- ----------- Total operating expenses 17,931 10,478 38,544 23,901 Operating income 10,840 5,289 12,897 8,572 ----------- ----------- ----------- ----------- OTHER EXPENSE (INCOME): Interest expense 3,467 1,309 6,403 3,077 Other, net 71 (9) 126 (215) ----------- ----------- ----------- ----------- Income before provision for income taxes 7,302 3,989 6,368 5,710 PROVISION FOR INCOME TAXES 2,921 1,053 2,547 1,066 ----------- ----------- ----------- ----------- Net income before extraordinary item 4,381 2,936 3,821 4,644 EXTRAORDINARY ITEM: Loss on extinguishment of debt, net of tax (192) -- (192) -- ----------- ----------- ----------- ----------- Net income 4,189 2,936 3,629 4,644 DIVIDENDS AND ACCRETION ON PREFERRED STOCK 245 87 657 87 ----------- ----------- ----------- ----------- Net income available for common shareholders $ 3,944 $ 2,849 $ 2,972 $ 4,557 =========== =========== =========== =========== PER SHARE DATA: PRIMARY EARNINGS PER SHARE Earnings per common and common equivalent share before extraordinary item $ .81 $ .67 $ .66 $ 1.10 Extraordinary item (.04) -- (.04) -- ----------- ----------- ----------- ----------- Income after extraordinary item $ .77 $ .67 $ .62 $ 1.10 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 5,132,753 4,234,492 4,831,899 4,151,674 =========== =========== =========== =========== FULLY DILUTED EARNINGS PER SHARE Earnings per common and common equivalent share before extraordinary item $ .73 $ .60 $ .66 $ .97 Extraordinary item (.03) -- (.04) -- ----------- ----------- ----------- ----------- Income after extraordinary item $ .70 $ .60 $ .62 $ .97 =========== =========== =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 6,014,387 4,873,812 4,831,899 4,790,994 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. 6 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 (DOLLARS IN THOUSANDS)
1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,629 $ 4,644 Adjustments to reconcile net income to net cash used in operating activities- Depreciation 1,270 851 Amortization of intangible assets 1,228 366 Increase in accounts receivable (30,562) (18,757) Increase in inventory (19,832) (7,692) Increase in prepaid expenses (551) (204) Increase in deferred income taxes -- 423 Decrease in income tax receivable 997 -- Increase in other non-current assets (1,210) (1,095) Increase in accounts payable and accrued liabilities 22,449 9,423 -------- -------- Net cash used in operating activities (22,582) (12,041) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Sun Sportswear, Inc., net of cash acquired (4,613) -- Purchase of Plymouth Mills, Inc. -- (18,000) Purchase of SolarCo., Inc., net of cash acquired (29,198) -- Purchase of Premier Sports Group, Inc., net of cash acquired (1,996) -- Purchases of property, plant and equipment, net (856) (410) -------- -------- Net cash used in investing activities (36,663) (18,410) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of senior notes 99,240 -- Net borrowings (repayments) pursuant to revolving credit agreement (10,942) 15,969 Borrowings of long-term debt pursuant to credit agreement 1,000 9,568 Repayments of long-term debt pursuant to credit agreement (12,200) (1,268) Proceeds from (repayments of) subordinated debt and stock purchase warrants (15,093) 3,500 Repayment of capital lease obligations and industrial revenue bonds (366) (262) Payments made under non-compete agreements (133) (16) Payments for deferred financing costs (3,891) -- Payments received on notes receivable from shareholders -- 50 Issuance of common stock 100 -- Issuance of preferred stock and related stock purchase warrants 2,000 2,483 -------- -------- Net cash provided by financing activities 59,715 30,024 -------- -------- NET INCREASE (DECREASE) IN CASH 470 (427) CASH AT BEGINNING OF PERIOD 561 755 -------- -------- CASH AT END OF PERIOD $ 1,031 $ 328 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 4,455 $ 2,638 Cash paid for income taxes 1,546 24 Conversion of subordinated debt to mandatorily redeemable preferred stock -- 3,719 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Capital lease financing -- 650 Payments of PIK dividends and accretion on preferred stock 657 87
The accompanying notes are an integral part of these consolidated condensed statements. 7 BRAZOS SPORTSWEAR, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) AS OF SEPTEMBER 27, 1997 AND DECEMBER 28, 1996 (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 acquiror for accounting purposes. Concurrent with the Merger, Sun was reincorporated in the State of Delaware (the Reincorporation) under the name Brazos Sportswear, Inc. (Brazos). On July 2, 1997, Brazos issued $100 million of 10.5% senior notes due 2007 (hereinafter referred to as the "Offering"). The net proceeds from the Offering, after deducting discounts to the initial purchasers and other transaction costs, of $95.5 million were used to finance the acquisition by Brazos of (i) all the outstanding capital stock of SolarCo., Inc., the parent company of Morning Sun, Inc. ("Morning Sun"), (ii) all of the assets of Premier Sports Group, Inc. ("Premier"), and repay certain debt obligations of Brazos, Morning Sun and Premier. See Note 3 for further information. (2) SIGNIFICANT ACCOUNTING POLICIES- (a) INTERIM FINANCIAL STATEMENTS--The accompanying consolidated condensed financial statements of Brazos for the thirty-nine weeks ended September 27, 1997 reflect the results of operations of Sun from the date of acquisition, March 14, 1997, and the results of operations of Morning Sun and Premier from the date of acquisition, June 30, 1997. The accompanying consolidated condensed financial statements of Brazos prior to March 14, 1997, reflect Holdings' historical results prior to the Merger and acquisitions. The accompanying consolidated condensed financial statements of Brazos 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 8 conjunction with the consolidated financial statements and notes thereto included in Brazos' 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:
SEPTEMBER 27, DECEMBER 28, INVENTORY CATEGORY METHOD 1997 1996 --------------------------------------- ------------ --------------- ----------------- Raw Materials LIFO $ 3,729 $ 3,012 Work-in-Process LIFO - - Finished Goods LIFO 17,872 10,595 ------- ------- 21,601 13,607 Less--LIFO reserve (182) (182) ------- ------- Total LIFO 21,419 13,425 ------- ------- Raw Materials FIFO 32,582 8,272 Work-in-Process FIFO 2,581 150 Finished Goods FIFO 10,811 3,491 ------- ------- Total FIFO 45,974 11,913 ------- ------- Total inventory $67,393 $25,338 ======= =======
Finished goods on a LIFO basis include blank garments of $16.4 million and $9.4 million at September 27, 1997 and December 28, 1996, respectively which are sold by Brazos' wholesale distribution division. (c) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE--Earnings per share are 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 per share have 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. 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. 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 pursuant to the Merger and the 1-for-5 reverse stock split pursuant to the Reincorporation. 9 (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. Brazos 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 per share assuming the provisions of SFAS No. 128 had been applied follow.
THIRTEEN THIRTY-NINE WEEKS ENDED WEEKS ENDED ----------------------------- ---------------------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- BASIC EARNINGS PER SHARE Income before extraordinary item $.92 $.78 $.74 $1.33 Extraordinary item (.04) - (.04) - ------ ------ ------ ------ Basic earnings per share $.88 $.78 $.70 $1.33 DILUTED EARNINGS PER SHARE Income before extraordinary item $.73 $.60 $.67 $.97 Extraordinary item (.03) - (.03) - ------ ------ ------ ------ Diluted earnings per share $.70 $.60 $.64 $.97
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130), which requires that comprehensive income and the associated income tax expense or benefit be reported in a financial statement with the same prominence as other financial statements with an aggregate amount of comprehensive income reported in that same financial statement. SFAS No. 130 permits the statement of changes in shareholders' equity to be used to meet this requirement. "Other Comprehensive Income" refers to revenues, expenses, gains and losses that under GAAP are included in comprehensive income but bypass net income. The Company intends to adopt SFAS No. 130 in the first quarter of fiscal 1998. The Company anticipates that adoption of SFAS No. 130 will not have a material impact on its results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), which requires disclosures for each segment in 10 which the chief operating decision maker organizes these segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any manner in which management disaggregates a company. The Company intends to adopt SFAS No. 131 in the first quarter of fiscal 1998. The Company anticipates that adoption of SFAS No. 131 will not have a material impact on its results of operations. (3) MERGERS AND ACQUISITIONS - Pro forma results of Brazos, Sun, Morning Sun and Premier combined, including Brazos' acquisition of Plymouth Mills, Inc. ("Plymouth") effective August 2, 1996, assuming that the acquisitions had been made as of the beginning of fiscal 1996, follow. Such information reflects adjustments to reflect the 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, elimination of compensation expense to reflect compensation levels on a post-acquisition basis pursuant to post-acquisition employment and advisory agreements for Morning Sun and Premier, increased amortization expense for Plymouth, Morning Sun and Premier as a result of purchased goodwill, additional interest expense related to increased net indebtedness and dividends on additional preferred stock issued.
THIRTEEN THIRTY-NINE WEEKS ENDED WEEKS ENDED ------------------------------ ------------------------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1997 1996 1997 1996 -------- ------- -------- -------- (000's except per share amounts) (000's except per share amounts) Net sales $105,185 $99,951 $226,714 $259,613 Net income 4,381 3,412 1,475 5,639 Net income available to common shareholders 4,126 3,171 721 4,926 Primary Earnings per share $ .80 $ .63 $ .14 $ 1.00 Fully Diluted Earnings per share $ .72 $ .58 $ .14 $ .97
11 (a) SUN SPORTSWEAR, INC. MERGER-- 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 former majority shareholder 1,500 Equity interest in Holdings 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 Brazos' credit agreement ($6.3 million short-term, $1.0 million long-term), the issuance of Brazos convertible, mandatorily redeemable preferred stock ($2.0 million - Series B-3), and the issuance of a subordinated debenture to the former majority shareholder ($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. On July 2, 1997, proceeds from the Offering were used to repay the subordinated debenture issued to the former majority shareholder. The Series B-3 mandatorily redeemable preferred stock contained detachable warrants to purchase 272,968 shares of Brazos' 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. 12 (b) SOLARCO., INC. ACQUISITION-- A preliminary summary of the acquisition, pending completion of certain appraisals and analysis of the net assets acquired, utilizing June 29, 1997 balances, is as follows:
(000'S OMITTED) Fair value of assets acquired, including: Accounts receivable $ 4,227 Inventories 9,846 Other current assets 1,747 Property, plant and equipment 2,642 Goodwill 28,231 Other non-current assets 31 --------- Total fair value of assets acquired 46,724 --------- Less: Purchase Price- Cash $ 29,370 Common stock issued 750 Contingent consideration 1,800 --------- 31,920 Transaction costs 150 --------- Total purchase price 32,070 --------- Liabilities assumed $ 14,654 =========
The purchase price was financed with proceeds from the Offering. Proceeds from the Offering were also used to repay $8.4 million of assumed indebtedness. (c) PREMIER SPORTS GROUP, INC. ACQUISITION-- A preliminary summary of the acquisition, pending completion of certain appraisals and analysis of the net assets acquired, utilizing June 30, 1997 balances, is as follows:
(000'S OMITTED) Fair value of assets acquired, including: Accounts receivable $ 4,569 Inventories 2,385 Other current assets 2,755 Property, plant and equipment 100 Intangible assets 250 Goodwill 7,322 Other non-current assets 67 --------- Total fair value of assets acquired 17,448 ---------
13 Less: Purchase Price- Cash $ 2,022 Subordinated note to Seller 1,500 Earnout payable 4,000 -------- 7,522 Transaction costs 45 -------- Total purchase price 7,567 -------- Liabilities assumed $ 9,881 ========
The purchase price was financed with proceeds from the Offering. Proceeds from the Offering were also used to repay $8.0 million of assumed indebtedness. (4) SIGNIFICANT CUSTOMERS- Brazos had net sales of $28.5 million to one customer for the thirty-nine weeks ended September 27, 1997 and $43.3 million to two customers for the thirty-nine weeks ended September 28, 1996. These amounts represented 15% and 34% of total net sales during the thirty-nine weeks ended September 27, 1997 and September 28, 1996, respectively. The accompanying consolidated condensed balance sheets include accounts receivable of $11.5 million and $5.4 million at September 27, 1997 and December 28, 1996, respectively, due from such customers. (5) SUBSEQUENT EVENT- On September 29, 1997, Brazos acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), a wholly owned subsidiary of The Midland Company for approximately $13.3 million in cash. The transaction will be accounted for as a purchase with the majority of the purchase price being allocated to the fair value of the assets purchased. Concurrent with the acquisition, Brazos amended its existing revolving credit agreement, increasing total permitted borrowings to $70 million, subject to collateral limitations. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Financial Statements and related Notes contained elsewhere herein. ACQUISITIONS On July 2, 1997, the Company consummated the acquisition of (i) all of the outstanding capital stock of SolarCo., Inc., the parent of Morning Sun, Inc. ("Morning Sun") and (ii) all of the assets of Premier Sports Group, Inc. ("Premier"). The Company also completed the private placement of $100 million in Senior Notes (the "Notes"). Brazos utilized the net proceeds from the Notes primarily to pay the cash portion of the aggregate purchase price of these acquisitions and to repay certain outstanding and assumed indebtedness. Morning Sun is a designer, manufacturer and marketer of moderately-priced imprinted and embroidered tops for women age 35 and over. Morning Sun sells its products under proprietary brand names and various private labels to major department store chains, catalogue companies and specialty stores. 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. The Morning Sun and Premier acquisitions have broadened Brazos' product lines and expanded and diversified its customer base. In addition, Brazos expects these acquisitions to result in certain economies of scale in purchasing, manufacturing, marketing, distribution and administration. See Note 3 of the Notes to Financial Statements for further information. On September 29, 1997, the Company acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), a wholly owned subsidiary of The Midland Company. Crable is a designer, embroiderer and marketer of officially licensed sports apparel for colleges and professional sports teams. Crable sells its product to major department store chains and to specialty shops. The Crable purchase enables the Company to expand its embroidery capabilities and overall presence in the collegiate and professional sports markets with new licenses for embroidered product lines. Concurrent with the acquisition, the Company entered into a ten year lease for the Crable facility and has relocated its corporate headquarters to that facility in the fourth quarter. Also in the fourth quarter, the Company determined that it would consolidate its Kent facility (formerly Sun Sportswear) into the Crable facility in order to effectively utilize existing capacity in the new facility and take advantage of economies of scale. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of Brazos' statements of operations expressed as a percentage of net sales on a historical basis. 15
Thirteen Thirty - Nine Weeks Ended Weeks Ended ------------------------------ ----------------------------- September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 72.6% 72.8% 73.8% 74.5% ----- ----- ----- ----- Gross profit 27.4% 27.2% 26.2% 25.5% Operating expense 17.1% 18.1% 19.6% 18.8% ----- ----- ----- ----- Operating income 10.3% 9.1% 6.6% 6.7% Other expense (income) Interest expense 3.3% 2.2% 3.3% 2.4% Other, net .1% -- .1% (.1%) ----- ----- ----- ----- Income before provision for income taxes 6.9% 6.9% 3.2% 4.4% Provision for income taxes 2.8% 1.8% 1.3% .8% ----- ----- ----- ----- Net income before extraordinary item 4.1% 5.1% 1.9% 3.6% Extraordinary loss on extinguishment of debt, net of tax (.1%) -- (.1%) -- ----- ----- ----- ----- Net income 4.0% 5.1% 1.8% 3.6% ===== ===== ===== =====
Thirteen weeks ended September 27, 1997 compared with the thirteen weeks ended September 28, 1996 Brazos' net sales increased $47.2 million, or 81.4%, from $58.0 million in 1996 to $105.2 million in 1997. This increase was primarily attributable to the acquisition of the assets of Plymouth Mills, Inc. ("Plymouth") on August 2, 1996, the merger with Sun Sportswear, Inc. ("Sun") on March 14, 1997, and the acquisitions of Morning Sun and Premier on July 2, 1997. These acquisitions contributed $49.8 million of sales during the period. The Company's gross profit increased $13.0 million, or 82.5%, from $15.8 million in 1996 to $28.8 million in 1997, principally as a result of the increase in sales volume resulting from the acquired companies. Overall gross profit margin remained stable, increasing slightly to 27.4% in 1997 from 27.2% in 1996. Operating expenses increased $7.4 million, or 71.1%, from $10.5 million in 1996 to $17.9 million in 1997. As a percentage of sales, operating expenses decreased from 18.1% in 1996 to 17.1% in 1997. The increase in operating expenses was attributable to the Company's acquisitions, which added $7.7 million in operating expenses for the quarter. Excluding the acquisitions, operating expenses fell $0.3 million or 2.8%. This decline in operating expenses resulted primarily from reduced commission expenses. Interest expense increased $2.2 million, or 164.9%, from $1.3 million in 1996 to $3.5 million in 1997, primarily as a result of increased borrowings pursuant to the Company's issuance of $100 million in Senior Notes. The Notes were issued to fund the Company's acquisitions of Morning Sun and Premier and to repay outstanding debt incurred in connection with the Plymouth acquisition and Sun merger. Proceeds from the issuance of the Notes were also used to fund increased working capital requirements resulting from these acquisitions. Income tax expense is recorded in 1997 at an effective tax rate of 40%. In 1996, income tax expense was partially offset by the reversal of a valuation allowance on the Company's net deferred tax assets, most of which related to a net operating loss carryforward. 16 During the current period, a portion of the Note offering proceeds were used to repay subordinated debt that was issued at a discount in connection with the Plymouth acquisition. The Company expensed the unamortized discount associated with the early extinguishment of a $3.5 million note with a carrying amount of $3.2 million. The extraordinary loss was $0.3 million before income taxes, and $0.2 million net of taxes. Thirty-nine weeks ended September 27, 1997 compared with the thirty-nine weeks ended September 28, 1996 Brazos' net sales increased $68.8 million, or 53.9%, from $127.5 million in 1996 to $196.3 million in 1997. This increase was attributable to the Company's acquisitions. Acquisitions contributed $82.5 million of sales during the period. Excluding acquisitions, sales fell $13.7 million or 10.7%. This decline was principally attributable to lower sales of certain licensed character products resulting from (i) a decrease in customer demand for Mickey Mouse products which was partially offset by an increase in Winnie the Pooh product sales, (ii) a strategic decision by management to stop selling licensed character products to one of its major customer's men's and boy's department in order to position the Company to sell to that customer's women's department, which management believes has significantly higher long-term revenue potential, (iii) repositioned foreign sales relationships in the Far East and (iv) delays in restructuring the Company's sales force during the period prior to the completion of the Sun merger. The extended period prior to the closing of the Sun merger prohibited the Company from effectively integrating the sales and marketing programs among the Company, Plymouth and Sun, which caused 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 spring offering. Subsequent to the completion of the Sun merger, the Company effectively realigned its sales and marketing personnel in a manner which it believes maximizes future sales opportunities. The Company's gross profit increased $18.9 million, or 58.4%, from $32.5 million in 1996 to $51.4 million in 1997, principally as result of the increase in sales volume attributable to the Company's acquisitions. Overall gross margin increased to 26.2% in 1997 from 25.5% in 1996, primarily as a result of a more favorable sales mix of higher margin screen-printed products compared to lower margin undecorated products. Operating expenses increased $14.6 million, or 61.3%, from $23.9 million in 1996 to $38.5 million in 1997. As a percentage of sales, operating expenses increased from 18.8% in 1996 to 19.6% in 1997. The increase in operating expenses was directly attributable to Brazos' acquisitions, which added $15.9 million for the period. Excluding the acquisitions, operating expenses fell $1.3 million or 5.6%. The decline in operating expenses resulted primarily from reduced commission and royalty expenses. Interest expense increased $3.3 million, or 108.1%, from $3.1 million in 1996 to $6.4 million in 1997, primarily as a result of increased borrowings pursuant to the Company's issuance of the Notes. Income tax expense is recorded in 1997 at an effective tax rate of 40%. In 1996, income tax expense was partially offset by the reversal of a valuation allowance on the Company's net deferred tax assets, most of which related to a net operating loss carryforward. During the current period, a portion of the Note offering proceeds were used to 17 repay subordinated debt that was issued at a discount in connection with the Plymouth acquisition. The Company expensed the unamortized discount associated with the early extinguishment of a $3.5 million note with a carrying amount of $3.2 million. The extraordinary loss was $0.3 million before income taxes, and $0.2 million net of taxes. LIQUIDITY AND CAPITAL RESOURCES Brazos has financed its acquisitions and sales growth through borrowings under its bank lines of credit, private placements of debt and equity securities, seller financing and operating cash flow. The Company's cash requirements consist of its general working capital needs, capital expenditures, and obligations under its leases. On July 2, 1997, Brazos completed the sale of $100 million of 10.5% Senior Notes due 2007. The Notes were issued at a discount of $0.8 million. The net proceeds of the Notes were used to pay the cash portion of the aggregate purchase price of the Morning Sun and Premier acquisitions and to repay certain outstanding and assumed indebtedness. Interest on the Notes is payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1998. The Notes contain certain covenants, including covenants limiting the incurrence of additional indebtedness and the consummation of mergers, consolidations and sales of assets. At any time prior to July 1, 2000, Brazos may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net proceeds of one or more public equity offerings, at a redemption price of 110.5% of the principal amount thereof. In addition, on or after July 1, 2002, Brazos may redeem at its option, in whole or in part, at various premiums depending on when the redemption occurs, any or all of the Notes outstanding. On July 2, 1997, the Company entered into a Third Amended and Restated Loan and Security Agreement with its primary lender, which makes a revolving line of credit (the "Credit Facility") available to its principal operating subsidiary, Brazos, Inc. (the "Borrower"), in an aggregate principal amount of up to $50.0 million, subject to collateral limitation. Advances under this line are based on a percentage of Brazos' inventory and receivables and various other reserves established from time to time by the lenders. Interest on the line of credit is payable at prime plus .25% or the Eurodollar base rate plus 2.00%. The Credit Facility includes 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. As of September 27, 1997, Brazos had an aggregate borrowing base under its line of credit of $47.9 million, based on existing collateral. Of its borrowing base, $13.7 million remained unused at September 27, 1997. On September 29, 1997, in connection with the Crable acquisition, the Borrower amended the Credit Facility to provide a revolving line of credit in an aggregate principal amount of up to $70.0 million, subject to collateral limitation. Interest on the line of credit was reduced to prime plus .25% or the Eurodollar base rate plus 1.75%. Under the amended Credit Facility, the Borrower had a borrowing base of $67.2 million at October 31, 1997. Of its borrowing base, $30.0 million was unused. Brazos used $22.6 million of cash from operating activities in 1997 versus cash used in operating activities in 1996 of $12.0 million. Contributing to the use of cash were; (i) working capital investments of $27.5 million; and (ii) transaction costs for the purchase of Sun of $1.0 million and for the purchase of Morning Sun and Premier of $0.2 million. Brazos invested $36.7 million of cash in 1997 to acquire Sun, Morning Sun and Premier and $18.0 million of cash in 1996 to acquire Plymouth Mills. The Company incurred capital expenditures net of disposals of $0.9 million in 1997 and $0.4 million in 1996. 18 Financing activities provided $59.7 million of cash in 1997 principally through the issuance of $99.2 million of Notes. Proceeds from the Notes were used to repay the Company's existing credit facility including the remaining balance of the term loan, $10.7 million, and $20.7 million of the line of credit. In addition, $12.1 million of subordinated debt and $3.8 million of deferred financing costs associated with the Notes were paid with the proceeds. Additional proceeds were acquired through the issuance of $2.0 million in preferred stock with detachable common stock purchase warrants, additional net borrowings on the Company's credit facility of $6.2 million and the issuance of $0.1 million in common stock. Brazos also repaid $3.0 million of subordinated debt in connection with the Sun merger. Capital lease payments, deferred financing costs for the Sun merger, non-compete payments and industrial revenue bond payments aggregating $0.5 million further reduced the cash flow from financing activities. In 1996, net borrowings of debt amounted to $30.0 million. Management believes that funds available under its principal credit facility, together with cash generated from operations, will be sufficient to meet the Company's anticipated cash requirements for 1997. SEASONALITY The Company's sales levels are generally higher in the second and third quarters of each year. During these periods, spring, summer, back-to-school and pre-holiday season products are produced and sold. The Company expects that the seasonal nature of apparel sales will continue in future periods. INFORMATION REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that such expectations will be achieved. Other factors could cause actual results to differ materially from those in the forward-looking statements herein. 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As described in the Company's Form 10-K dated April 11, 1997, a lawsuit is pending in the Supreme Court of the State of New York against the Company, E.R.O. Industries, Inc., Toys "R" Us, Grace International Apparel, Inc., and Bradlees Department Store. The plaintiff in that lawsuit seeks compensatory and punitive damages against each defendant under various tort theories. Subsequent to the date of the Company's Form 10-K, the punitive damage claims against the Company were dismissed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 16, 1997, the Company held its annual meeting of stockholders, the purpose of which was to approve (i) an amendment to the Company's certificate of incorporation, (ii) the election of the nominees as directors of the Company and (iii) the Company's 1997 Incentive Plan. The results of the votes were as follows:
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES VOTED FOR VOTED AGAINST ABSTAINED APPROVAL AND ADOPTION OF THE PROPOSED CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION 2,597,312 200 0 ------------------ ------------------- ------------------ ELECTION OF DIRECTORS NAME OF NOMINEE NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES VOTED FOR VOTED AGAINST ABSTAINED Class I Directors: Randall B. Hale........ 2,597,512 0 0 ------------------ ------------------- ------------------ J. Ford Taylor......... 2,597,512 0 0 ------------------ ------------------- ------------------ Class II Directors: Nolan Lehmann........... 2,597,512 0 0 ------------------ ------------------- ------------------ F. Clayton Chambers..... 2,597,512 0 0 ------------------ ------------------- ------------------ Class III Directors: Alan B. Elenson.......... 2,597,512 0 0 ------------------ ------------------- ------------------ Michael S. Chadwick...... 2,597,512 0 0 ------------------ ------------------- ------------------ NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES VOTED FOR VOTED AGAINST ABSTAINED APPROVAL AND ADOPTION OF THE COMPANY'S 1997 INCENTIVE PLAN 2,597,312 200 0 ------------------ ------------------- ------------------
20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 3.1 Certificate of Amendment to Restated Certificate of Incorporation of Brazos Sportswear, Inc. 3.2 Certificate of Amendment of Certificate of Incorporation of Brazos Sportswear, Inc. (Incorporated by reference to Exhibit A to the Company's definitive information statement dated August 25, 1997) 10.1 Brazos Sportswear, Inc. 1997 Incentive Plan (Incorporated by reference to Appendix A to the Company's definitive proxy statement dated August 29, 1997) 27 -- Financial Data Schedule (b) Reports on Form 8-K. The Company filed a report on Form 8-K dated July 2, 1997, with respect to the acquisitions of Solar Co., Inc. and Premier Sports Group, Inc. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BRAZOS SPORTSWEAR, INC. /s/ F. CLAYTON CHAMBERS --------------------------------- F. Clayton Chambers, Vice President and Chief Financial Officer /s/ STEVEN P. RATTERMAN --------------------------------- Steven P. Ratterman Corporate Controller and Chief Accounting Officer DATE: November 11, 1997 EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION OF BRAZOS SPORTSWEAR, INC. Brazos Sportswear, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the board of directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Restated Certificate of Incorporation of the Corporation be amended to change Article VII thereto, so that as amended, Article VII shall be and read in its entirety as follows: ARTICLE VII. BOARD OF DIRECTORS 7.1 CLASSIFICATION. Except as otherwise provided by law, the business and affairs of the Corporation shall be managed by, or under the direction of, its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed from time to time by a majority of the directors then in office and shall be divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. At the annual meeting of stockholders to be held in 1997, or any special meeting held in lieu thereof, Class I Directors shall be elected for a term expiring at the annual meeting of stockholders to be held in 2000, Class II Directors shall be elected for a term expiring at the annual meeting of stockholders to be held in 1999, and Class III Directors shall be elected for a term expiring at the annual meeting of stockholders to be held in 1998, with each director to hold office until his or her successor is elected and qualified. At each annual meeting of stockholders subsequent to 1997, the successor(s) of the class of directors whose term expires at that annual meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in the third year following the year of such director's election. None of the directors need be a stockholder or a resident of the State of Delaware. The election of directors need not be by written ballot unless so provided in the Corporation's Bylaws. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any newly created or eliminated directorship resulting from an increase or decrease in the Board of Directors shall be appointed by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. In furtherance and not in limitation of the rights, powers, privileges and discretionary authority conferred by the General Corporation Law of Delaware, or other applicable law, the Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation. 1 2 7.2 VACANCIES. Except as otherwise provided for in this Restated Certificate of Incorporation, vacancies resulting from newly-created directorships, death, resignation, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director. Any director elected in accordance with the preceding sentence of this Section 7.2 shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred until such director's successor shall have been elected and qualified. 7.3 REMOVAL. No director of the Corporation shall be removed from office as a director by vote or other action of the stockholders or otherwise except for cause, and then only by the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of capital stock of the Corporation generally entitled to vote in the election of directors, voting together as a single class. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the 1997 annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by F. Clayton Chambers, its Vice President, this 16th day of September, 1997. /s/ F. CLAYTON CHAMBERS ----------------------------------- F. Clayton Chambers, Vice President 2 EX-27 3 EXHIBIT 27
5 1,000 9-MOS DEC-27-1997 SEP-27-1997 1,031 0 70,883 6,060 67,393 148,292 13,489 4,220 219,899 89,121 105,645 9,226 0 4 14,563 219,899 105,185 105,185 76,414 76,414 18,002 607 3,467 7,302 2,921 4,381 0 (192) 0 4,189 .77 .70
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