-----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, Jy2i2Q4Kxx4v5NHeuxOYgkPFpmSPwkk6bTlGLStvQRF63o0k8xXlCsoT7tmr/B3N R10mis+G0WeEweH/pUWlQQ== 0000950152-98-004767.txt : 19980520 0000950152-98-004767.hdr.sgml : 19980520 ACCESSION NUMBER: 0000950152-98-004767 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19980519 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: 98628308 BUSINESS ADDRESS: STREET 1: 4101 FOUNDERS BLVD CITY: BATAVIA STATE: OH ZIP: 45103 BUSINESS PHONE: 5132723600 MAIL ADDRESS: STREET 1: 4101 FOUNDERS BLVD CITY: BATAVIA STATE: OH ZIP: 45103 FORMER COMPANY: FORMER CONFORMED NAME: SUN SPORTSWEAR INC DATE OF NAME CHANGE: 19920703 10-Q 1 BRAZOS SPORTSWEAR, INC. FORM 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 QUARTERLY PERIOD ENDED APRIL 4, 1998 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.) 4101 FOUNDERS BOULEVARD BATAVIA, OHIO 45103 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number including area code 513-753-3400 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. 4,419,479 ---------------------- (SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 15, 1998) - -------------------------------------------------------------------------------- ================================================================================ 2 BRAZOS SPORTSWEAR, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1998 PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of April 4, 1998 and December 27, 1997 (unaudited)......................... 1 Consolidated Condensed Statements of Operations for the fourteen weeks ended April 4, 1998 (unaudited) and the thirteen weeks ended March 29, 1997 (unaudited)............ 3 Consolidated Condensed Statements of Cash Flows for the fourteen weeks ended April 4, 1998 (unaudited) and thirteen weeks ended March 29, 1997 (unaudited)......................... 4 Notes to Financial Statements (unaudited)...................... 5 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................... 10 PART II - OTHER INFORMATION................................................. 13 3 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF APRIL 4, 1998 AND DECEMBER 27, 1997 (DOLLARS IN THOUSANDS)
1998 1997 -------- -------- ASSETS CURRENT ASSETS: Cash $ 1,721 $ 2,679 Accounts receivable, net of allowance for doubtful accounts of $8,112 and $7,930, respectively 36,979 41,989 Inventory (Note 2(b)) 65,906 55,551 Prepaid expenses 9,201 8,861 Income tax receivable 6,933 2,841 Deferred tax assets 4,649 4,649 -------- -------- Total current assets 125,389 116,570 -------- -------- PROPERTY, PLANT AND EQUIPMENT-net, at cost 14,337 13,336 -------- -------- INTANGIBLE ASSETS: Costs in excess of fair value of assets acquired 50,869 50,869 Less- accumulated amortization (1,928) (1,655) -------- -------- 48,941 49,214 -------- -------- Other 7,661 7,661 Less- accumulated amortization (2,003) (1,740) -------- -------- 5,658 5,921 -------- -------- Total intangible assets 54,599 55,135 -------- -------- OTHER ASSETS 267 269 -------- -------- $194,592 $185,310 ======== ========
The accompanying notes are an integral part of these consolidated condensed balance sheets. 4 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF APRIL 4, 1998 AND DECEMBER 27, 1997 (DOLLARS IN THOUSANDS)
1998 1997 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings pursuant to revolving credit agreement (Note 2(c)) $ 39,848 $ 31,504 Current portion of other debt 969 947 Accounts payable 24,155 13,902 Accrued liabilities 14,006 16,976 -------- -------- Total current liabilities 78,978 63,329 -------- -------- LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES: Senior notes payable 99,298 99,277 Subordinated debt due to related parties 1,500 1,500 Capital lease liability 658 795 -------- -------- 101,456 101,572 -------- -------- DEFERRED INCOME TAXES PAYABLE 1,141 1,141 OTHER LIABILITIES 1,711 2,036 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 8,796 8,577 COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDERS' EQUITY: Common stock, $.001 par value, 15,000,000 shares authorized and 4,419,479 and 4,412,655 shares issued and outstanding at April 4, 1998 and December 27, 1997, respectively 4 4 Additional paid-in capital 11,331 11,312 Retained deficit (8,825) (2,661) -------- -------- Total shareholders' equity 2,510 8,655 -------- -------- $194,592 $185,310 ======== ========
The accompanying notes are an integral part of these consolidated condensed balance sheets. 5 BRAZOS SPORTSWEAR, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE FOURTEEN WEEKS ENDED APRIL 4, 1998 AND THIRTEEN WEEKS ENDED MARCH 29, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 ---------- ----------- NET SALES $ 52,981 $ 34,907 COST OF GOODS SOLD 43,085 26,720 ---------- ----------- Gross profit 9,896 8,187 OPERATING EXPENSES: Selling, general and administrative expenses 14,871 8,117 Restructuring charge (Note 2(e)) 745 - Amortization of intangible assets 537 285 ---------- ----------- Total operating expenses 16,153 8,402 Operating loss (6,257) (215) ---------- ----------- OTHER EXPENSE (INCOME): Interest expense 3,663 1,145 Other, net (13) 125 ---------- ----------- Loss before credit for income taxes (9,907) (1,485) CREDIT FOR INCOME TAXES (3,962) (609) ---------- ----------- Net loss (5,945) (876) DIVIDENDS AND ACCRETION ON PREFERRED STOCK 219 165 ---------- ----------- Net loss available for common shareholders $ (6,164) $ (1,041) ========== =========== BASIC AND DILUTED PER SHARE DATA: (Note 2(d)) Loss per share $ (1.40) $ (.27) ========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 4,416,833 3,787,274 ========== ===========
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 FOURTEEN WEEKS ENDED APRIL 4, 1998 AND THE THIRTEEN WEEKS ENDED MARCH 29, 1997 (DOLLARS IN THOUSANDS)
1998 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,945) $ (876) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation 514 381 Amortization of intangible assets 537 285 Decrease (increase) in accounts receivable 5,010 (328) Increase in inventory (10,355) (9,244) Increase in prepaid expenses (339) (344) Increase in income tax receivable (4,092) (426) Decrease (increase) in other noncurrent assets 3 (946) Increase in accounts payable and accrued liabilities 7,028 7,663 -------- ------- Net cash used in operating activities (7,639) (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 (1,515) 21 -------- ------- Net cash used in investing activities (1,515) (4,592) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings pursuant to revolving credit agreement, net 8,344 9,045 Borrowings of long-term debt pursuant to credit agreement - 1,000 Repayments of long-term debt pursuant to credit agreement - (600) Repayments of subordinated debt - (3,000) Repayment of capital lease obligations and industrial revenue bonds (93) (157) Payments made under non-compete agreements (75) (25) Payments for deferred financing costs - (140) Issuance of common stock 20 100 Issuance of preferred stock and related stock purchase warrants - 2,000 -------- ------- Net cash provided by financing activities 8,196 8,223 -------- ------- NET DECREASE IN CASH (958) (204) CASH AT BEGINNING OF PERIOD 2,679 561 -------- ------- CASH AT END OF PERIOD $ 1,721 $ 357 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 6,338 $ 1,687 Cash paid for income taxes 144 1,404 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Payments of PIK dividends and accretion of preferred stock 219 165
The accompanying notes are an integral part of these consolidated condensed statements. 7 BRAZOS SPORTSWEAR, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) AS OF APRIL 4, 1998 AND DECEMBER 27, 1997 (1) Organization and Structure- On March 14, 1997, BSI Holdings, Inc. (Holdings) consummated a merger with Sun Sportswear, Inc. (Sun) (hereinafter referred to as the "Merger") whereby 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. (Brazos or the Company). See Note 3 for further information. Effective April 6, 1998, the Company's principal operating subsidiary, Brazos, Inc., a Texas corporation, was reincorporated in Delaware as a limited liability company and was renamed Brazos Sportswear, LLC. (2) Significant Accounting Policies- (a) Interim Financial Statements--The accompanying consolidated condensed financial statements of Brazos for the fourteen weeks ended April 4, 1998 reflect the results of operations of the Company. The accompanying historical consolidated condensed financial statements of Brazos include the results of operations of Sun from the date of acquisition and prior to March 14, 1997, reflect Holdings' historical results. 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 conjunction with the consolidated financial statements and notes thereto included in Brazos' Annual Report on Form 10-K dated March 27, 1998. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. 8 (b) Inventory--Inventories are comprised of: INVENTORY CATEGORY METHOD APRIL 4, DECEMBER 27, ------------------ ------ 1998 1997 ------- ------- Raw materials LIFO $ 3,791 $ 3,605 Finished goods LIFO 16,145 12,725 ------- ------- 19,936 16,330 Less -- LIFO reserve (182) (182) ------- ------- Total LIFO 19,754 16,148 ------- ------- Raw materials FIFO 28,787 24,663 Work in process FIFO 4,876 5,926 Finished goods FIFO 12,489 8,814 ------- ------- Total FIFO 46,152 39,403 ------- ------- Total inventory $65,906 $55,551 ======= ======= Finished goods on a LIFO basis include blank garments of $14.5 million and $11.3 million at April 4, 1998 and December 27, 1997, respectively which are sold by Brazos' wholesale distribution division. (c) Debt--The Company maintains a loan and security agreement which provides a revolving line of credit (the "Credit Facility") to the Company's principal operating subsidiary, Brazos Sportswear, LLC (the "Borrower") in an aggregate principal amount of up to $70.0 million, subject to collateral limitations. The Credit Facility requires compliance with certain financial covenants, as defined. At April 4, 1998, the Borrower was not in compliance with its minimum fixed charge coverage ratio. The noncompliance has been waived by the Company's senior secured lenders. Borrowings pertaining to the Credit Facility are classified as current liabilities as of April 4, 1998 and December 27, 1997. (d) Loss Per Share--In 1997, the Company adopted SFAS No. 128, "Earnings per Share". As a result, the Company's reported earnings per share for 1997 have been restated. The effect of this accounting change on previously reported earnings per share (EPS) data is as follows for the thirteen weeks ended March 29, 1997: 1997 ------ Per share amounts Primary EPS as reported $ (.27) Effect of SFAS No. 128 - ------ Basic EPS as restated $ (.27) ====== Basic earnings per share were computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share for 1998 and 1997 are equal to basic earnings per share because of the loss periods. During loss periods, all options and warrants are excluded from the dilutive calculation since they are anti-dilutive. 9
FOR THE FOURTEEN WEEKS ENDED APRIL 4, 1998 ------------------------------------------ PER-SHARE INCOME SHARES AMOUNT ------- --------- --------- (000's Omitted) Net Loss $(5,945) Less: dividends and accretion on preferred stock (219) ------- BASIC AND DILUTED EARNINGS PER SHARE Loss available to common shareholders $(6,164) 4,416,833 $(1.40) ======= ========= ======
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1997 PER-SHARE INCOME SHARES AMOUNT ------- --------- --------- (000's Omitted) Net Loss $ (876) Less: dividends and accretion on preferred stock (165) ------- BASIC AND DILUTED EARNINGS PER SHARE Loss available to common shareholders $(1,041) 3,787,274 $ (.27) ======= ========= ======
Loss per share amounts for all periods have also been computed in accordance with Securities and Exchange Commission Staff Accounting Bulletin No.98. There were no nominal shares issued as defined by SAB No. 98. (e) Restructuring of Operations--In the first quarter of 1998, the Company continued with its plan initiated in the fourth quarter of 1997 to reduce costs and improve operating efficiencies and recorded an additional restructuring charge of approximately $.7 million. This charge principally relates to additional lease termination costs and the physical movement of assets and personnel associated with the closure and consolidation of two manufacturing facilities into one existing facility. Total charges incurred from the inception of this restructuring plan are $6.4 million. The restructuring will be completed by the middle of 1998. (f) New Accounting Pronouncement--In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130), effective for fiscal years beginning after December 15, 1997. After reviewing the provisions of SFAS No. 130, the Company concluded that the statement was not applicable to the Company for any periods presented and does not anticipate it being applicable in the future. 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 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 fourth quarter of fiscal 1998. The Company anticipates that adoption of SFAS No. 131 will expand disclosures but will not have an impact on reported consolidated financial position, results of operations or cash flows. 10 (g) Reclassification--Certain amounts in the 1997 condensed consolidated financial statements have been reclassified to conform to the 1998 presentation. (3) Mergers and Acquisitions- During 1997, the Company made the following acquisitions, all of which have been accounted for as purchases. The results of operations of each acquisition are included in the Company's consolidated results of operations from the effective date of each acquisition. (a) Sun Sportswear, Inc. ("Sun")--Effective March 14, 1997, BSI Holdings, Inc. (Holdings) consummated a merger with Sun whereby the Shareholders of Holdings acquired an 86% ownership interest in Sun. The purchase price of approximately $12.7 million consisted of cash ($4.7 million), the issuance of a subordinated debenture to the former majority shareholder ($1.5 million) and the value of the Company's equity interest subsequent to the Merger ($6.5 million). (b) SolarCo, Inc.--Effective July 2, 1997, the Company acquired all of the outstanding capital stock of SolarCo, Inc. the parent company to Morning Sun, Inc. ("Morning Sun") for approximately $31.3 million, consisting of approximately $30.5 million in cash and deferred payments, and the issuance of 73,171 shares of common stock valued at approximately $.8 million. Goodwill from this acquisition (approximately $25.9 million) is being amortized over a period of 40 years. (c) Premier Sports Group, Inc. ("Premier")--Effective July 2, 1997, the Company also acquired certain assets and assumed certain liabilities of Premier for approximately $3.5 million, consisting of approximately $2.0 million in cash and $1.5 million in subordinated debt to the selling shareholders. The purchase price for Premier also includes a contingent earnout of up to $4.0 million to the former owner of Premier. The payment of the earnout is contingent upon financial performance measures being achieved for calendar years 1997 through 2000. No earnout payments were achieved in 1997. Goodwill from this acquisition (approximately $3.5 million, subject to revision pending the outcome of the contingent earnout) is being amortized over a period of 40 years. (d) CS Crable Sportswear, Inc.--Effective September 29, 1997, the Company acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), a wholly owned subsidiary of The Midland Company ("Midland"), for approximately $13.3 million in cash. Concurrent with this transaction, the Company entered into a long term lease commitment with Midland for the former Crable facility. Pro forma results of the Company, Sun, Morning Sun, Premier, and Crable combined, assuming the acquisitions were consummated at the beginning of fiscal 1997, follow. Such pro forma 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, elimination of 11 severance costs for Crable employees terminated as a result of the acquisition, increased rent expense for the lease of the Crable facility, increased amortization expense for 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. PERIOD ENDED ------------ MARCH 29, 1997 ------------ (000's omitted except per share amounts) Net sales $57,278 Net loss (4,182) Loss available to common shareholders (4,397) Loss per share $ (1.01) (4) Significant Customers- Brazos had net sales of $12.0 million to two customers for the fourteen weeks ended April 4, 1998 and $7.1 million to two customers for the thirteen weeks ended March 29, 1997. These amounts represented 23% and 20% of total net sales during the fourteen weeks ended April 4, 1998 and the thirteen weeks ended March 29, 1997, respectively. The accompanying consolidated condensed balance sheets include accounts receivable of $12.9 million and $11.7 million at April 4, 1998 and December 27, 1997, respectively, due from such customers. (5) Commitments and 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 consolidated financial position, results of operations or cash flows. 12 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. RESULTS OF OPERATIONS Restructuring Plan During the fourth quarter of 1997, the Company initiated a restructuring plan (the "Restructuring Plan") that included, as a key component, the consolidation of three facilities into one facility located in Cincinnati, Ohio. The Restructuring Plan is intended to improve operating efficiencies by combining manufacturing operations. The Company's results of operations have been negatively impacted during implementation of the Restructuring Plan, as the Company has experienced unexpected operational inefficiencies resulting in (i) increased personnel training and outsourcing costs, (ii) lower sales due to shipment delays, and (iii) higher levels of returns and markdowns due to difficulties in meeting certain customer performance expectations on product shipments from the Cincinnati facility. The Company is evaluating the impact of the increased costs and production inefficiencies that have resulted from the implementation of the Restructuring Plan and is aggressively addressing these issues to bring the Cincinnati facility to full capacity and meet customer deliveries in an efficient and profitable manner. As a result of ongoing and further improvements, the Company anticipates a decline in its reliance upon contract services and expects that the facility will be fully operational in the third quarter of fiscal 1998 resulting in lower production costs and improved operating margins. 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.
FOURTEEN WEEKS THIRTEEN WEEKS ENDED APRIL 4, 1998 ENDED MARCH 29, 1997 -------------------- -------------------- Net sales 100.0% 100.0% Cost of goods sold 81.3% 76.5% ------- ------ Gross profit 18.7% 23.5% Operating expenses, excluding restructuring charge 29.1% 24.1% Restructuring charge 1.4% - ------- ------ Operating loss (11.8%) (.6%) Other expense Interest expense 6.9% 3.3% Other, net - .4% ------- ------ Loss before credit for income taxes (18.7%) (4.3%) Credit for income taxes (7.5%) (1.7%) ------- ------ Net loss (11.2%) (2.5%) ======= ======
Fourteen Weeks Ended April 4, 1998 compared with the Thirteen Weeks Ended March 29, 1997 The Company's net sales increased approximately $18.1 million, or 51.8%, from $34.9 million in 1997 to $53.0 million in 1998. This increase was attributable to the four acquisitions completed by the Company in 1997 as well as the additional week of operations provided by a fourteen week accounting period in 1998. See Note 3 of the Notes to Financial Statements for 13 further information related to the acquisitions made in 1997. Net sales were significantly less than expected due to (i) the disruption in operations resulting from implementation of the Restructuring Plan and (ii) overall weakness in the decorated apparel industry. Brazos' gross profit increased $1.7 million, or 20.9%, from $8.2 million in 1997 to $9.9 million in 1998, as a result of the increase in sales volume. Overall gross profit margin decreased to 18.7% in 1998 from 23.5% in 1997, primarily as a result of increased costs associated with the Restructuring Plan. In addition, the seasonality of the acquired businesses contributed a lower gross profit margin than Brazos' historical gross profit margin. Operating expenses increased $7.8 million, or 92.3%, from $8.4 million in 1997 to $16.2 million in 1998. The increase in operating expenses was directly attributable to the acquisitions completed in 1997 as well as an additional non-recurring restructuring charge of $.7 million. Excluding the restructuring charge, as a percentage of sales, operating expenses increased from 24.1% in 1997 to 29.1% in 1998. This increase principally relates to difficulties associated with the implementation of the Restructuring Plan. Also, the seasonality of the acquired businesses contributed higher operating expenses as a percentage of sales than Brazos' historical operating expenses as a percentage of sales. Interest expense increased $2.5 million, or 219.9%, from $1.1 million in 1997 to $3.7 million in 1998. The increase was a result of the issuance of $100 million of 10.5% Senior Notes (the "Notes") in July, 1997 and increased borrowings under Brazos' credit facility to fund its greater working capital needs in connection with the acquisitions made by the Company in 1997. An income tax benefit of $4.0 million has been recorded in 1998 at an effective tax rate of 40%, as management believes that future taxable income will be sufficient to realize this benefit. In 1997, an income tax benefit of $.6 million was recorded at an effective tax rate of 41%. LIQUIDITY AND CAPITAL RESOURCES Brazos has financed its acquisitions and operations through borrowings under its bank lines of credit, public and 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, required interest payments, including those on the Notes, capital expenditures and obligations under its leases. The Company has entered into a loan and security agreement with its senior secured lenders, which provides a revolving line of credit (the "Credit Facility") to the Company's principal operating subsidiary, Brazos Sportswear LLC (the "Borrower"), in the amount of up to $70.0 million, subject to collateral limitations. Advances under this line are based on a percentage of the Borrower's 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 1.75%. The Credit Facility requires the Borrower to maintain certain levels of working capital and stockholders' equity and contains certain other restrictive covenants. The Credit Facility has an initial expiration of July 1, 2000, subject to extension, and borrowings under the Credit Facility are guaranteed by the Company. Under the Company's Credit 14 Facility, as of April 4, 1998, Brazos had an aggregate borrowing base of $54.4 million, based on existing collateral. Of its borrowing base, $13.6 million remained unused at April 4, 1998. During the first quarter, the Company incurred a net loss of $5.9 million. As a result, the Company was not in compliance with its minimum fixed charge coverage ratio under its Credit Facility. The noncompliance has been waived by the Company's senior secured lenders. The Company is in discussions with its senior secured lenders to amend its Credit Facility to bring the financial covenants in line with expected operating results for the year. If such an amendment is not obtained, management believes that the Company will be in violation of certain financial covenants as of the end of the Company's second quarter and throughout the remainder of the fiscal year. Management is evaluating its working capital needs in light of its current level of operations and cost structure. If the Company's cash requirements cannot be met by its currently available financing sources, the Company may seek to increase available borrowings under its Credit Facility. There can be no assurance that such additional borrowings, if necessary, will be available. Other sources of financing may include additional bank debt or the public or private sale of equity or debt securities. In connection with any such financing, the Company may be required to issue securities that would dilute the interests of the shareholders of the Company. There can be no assurance that the Company will be successful in arranging such financing at all or on terms commercially acceptable to the Company. If the Company is unable to amend its Credit Facility or obtain future waivers of any noncompliance, or if necessary, obtain additional financing, the Company's operations and financial condition could be adversely impacted. Brazos used $7.6 million of cash for operating activities in 1998 versus cash used for operating activities in 1997 of $3.8 million. Contributing to the use of cash in 1998 were: (i) a net loss of approximately $5.9 million and (ii) working capital investments of $2.7 million, offset by depreciation and amortization of $1.0 million. Working capital investments consisted primarily of an increase in inventory financed by accounts payable as the Company began building stock to support the seasonable nature of higher sales levels in the second and third quarters of fiscal 1998. The Company incurred capital expenditures net of disposals of $1.5 million in 1998. Capital expenditures consisted primarily of computer hardware and software, embroidery equipment and leasehold improvements related to the consolidation of facilities into the new Batavia facility. Financing activities provided $8.2 million of cash in 1998 principally through net borrowings under existing credit facilities. In 1997, net borrowings of debt and the issuance of preferred stock with detachable common stock purchase warrants provided $8.2 million. YEAR 2000 The Company expects its financial systems to become Year 2000 compliant during the second quarter of 1998. The Company has not completed an assessment of its current operating systems. However, in 1997, the Company began the implementation of a new operating software package as part of a reorganization and consolidation of the Company's numerous operating systems. The software package being implemented is Year 2000 compliant. The Company is implementing the new software in phases and expects the process to be complete 15 by the end of the third quarter of fiscal 1999. In addition, the Company has not completed an assessment of the effects on the Company of Year 2000 issues at third party suppliers, vendors and customers. 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 seasonable 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. PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. Subsequent to the end of the first quarter, Brazos' Board of Directors accepted the resignation of the Company's president and CEO, J. Ford Taylor, and appointed his successor, Robert C. Klein, as the new president and CEO of the Company. Mr. Klein was also appointed to fill the vacancy on the board of directors created by Mr. Taylor's resignation as a director. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Brazos, Inc. 1998 Annual Incentive Compensation Plan 27 Financial Data Schedule (b) Reports on Form 8-K. The Company filed a report on Form 8-K dated March 27, 1998, with respect to the Company's change in fiscal year. 16 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 Controller and Principal Accounting Officer DATE: May 19, 1998 EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 BRAZOS, INC. ANNUAL INCENTIVE COMPENSATION PLAN JANUARY 1998 2 BRAZOS, INC. ANNUAL INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS PAGE ---- PURPOSE.......................................................................1 DEFINITIONS...................................................................1 ADMINISTRATION................................................................2 PARTICIPATION/ELIGIBILITY.....................................................2 TIMING OF AWARD PAYMENTS......................................................3 AWARD DETERMINATION...........................................................3 DURATION OF PLAN..............................................................4 TERMINATION OF PLAN...........................................................4 MISCELLANEOUS PLAN PROVISIONS.................................................5 EFFECTIVE DATE................................................................5 3 PURPOSE Brazos, Inc. (the "Company") has adopted an Annual Incentive Compensation Plan (the "Plan") to reward employees for enhancing the value of the Company. The purpose of this Plan is to motivate employees to think and act like owners. The Plan is intended to reward the Participants in the Plan for the Company's financial performance. The Plan is an annual plan that coincides with the fiscal year of the Company. Awards made under the Plan are in addition to base salary and base salary adjustments to maintain market competitiveness. The Plan is a bonus program and is, therefore, not subject to ERISA and Internal Revenue Service reporting requirements for certain qualified deferred compensation plans. The Board of Directors (the "Board") of the Company reserves the right to amend, modify or revoke the Plan at any time at its discretion, without prior notice to participants, provided however, any amendments, modifications or revocation shall not cause a participant to forfeit an Award that has been awarded to him prior to any such amendment, modification or revocation. No contractual right to any benefit described herein is intended to be created by this document or any related action of the Company or Compensation Committee and none should be inferred from the descriptions of this Plan. No Participant shall have a vested right to an Award until actually paid to or on behalf of such Participant. DEFINITIONS Annual Incentive Pool - Represents the Funding Percentages for the level of EBITDA achieved multiplied by each Plan Participant Groups' total Base Pay. Award - Total cash awarded to a Participant due to the Company's performance and results achieved under the Plan. Base Pay - Regular W-2 earnings (box 1) excluding incentive compensation, bonuses, benefits, moving allowances, pension and profit-sharing contributions, determined as of the end of the immediately preceding Plan Year. Compensation Committee - The Compensation Committee of the Board as comprised from time to time. EBITDA - The earnings before interest, taxes, depreciation and amortization of the Company for a given Plan Year, determined in accordance with generally accepted accounting principles. Funding Percentages - Percentages determined annually by the Board for Plan Participant Groups for various target levels of EBITDA. 4 Plan - The Company Annual Incentive Compensation Plan as set forth in this document and as it may be amended by the Compensation Committee from time to time. Participant - Any full-time employee of the Company if approved for participation in the Plan by the Compensation Committee or its delegate. Plan Participant Group - Classes created by the Compensation Committee of Participants designated "Executives", "Class A", "Class B", "Class C", Class "D" Classes A, B, C and D may further be divided by location. Plan Year - The fiscal year of the Company. Unusual/Nonrecurring Items - Income or expense items which may be excluded from EBITDA. Such items may include, but are not limited to, the effect of changes in accounting principles and gains on disposition of assets. It is intended that these items represent items outside the influence of management and employees of the Company. The Compensation Committee shall have the discretion to determine which items shall be defined as Unusual/Nonrecurring Items. ADMINISTRATION The Board shall establish the following for each Plan Year: o Target levels of EBITDA. o Funding Percentages for the Plan Participant Groups for the various target levels of EBITDA. The Compensation Committee shall establish the following for each Plan Year: o Participants o Plan Participant Groups The Compensation Committee will be responsible for Plan administration. The Compensation Committee will follow the following guidelines and procedures with respect to Plan operation. PARTICIPATION/ELIGIBILITY All full-time employees of the Company, if approved by the Compensation Committee or its delegate, will be eligible to participate in the Plan. The Compensation Committee may delegate the authority to select Participants to any officer or officers of the Company subject to final approval by the Compensation Committee. Participants whose employment is terminated due to death, disability, or retirement on or after attaining age 65, shall be eligible for an Award for the Plan Year in which such 2 5 termination occurred. Participants whose employment is terminated for any other reason during a Plan Year shall not be entitled to an Award for such Plan Year, unless otherwise determined by the Compensation Committee in its discretion as exercised on a case-by-case basis taking into account such factors that the Compensation Committee deems to be relevant. The Compensation Committee shall determine whether a termination of employment was voluntary, for cause or for any other reason, in its complete discretion. All determinations of the Compensation Committee shall be final, non-appealable and need not be uniform with respect to similarly situated employees or classes of employees. TIMING OF AWARD PAYMENTS After the Company's annual financial results have been finalized for a Plan Year, the Annual Incentive Pool, if any, will be determined and Awards will be allocated to Participants. Awards for the Plan Year will be paid to Participants as soon as administratively practicable after the end of the Plan Year for which the Award was made. AWARD DETERMINATION The Compensation Committee shall calculate the Annual Incentive Pool for each Plan Year as follows: Financial statement EBITDA will be increased or decreased for any Unusual/Nonrecurring Items resulting in EBITDA for purposes of the Plan. Funding Percentages corresponding to a target level of EBITDA will be determined for each Plan Participant Group. Those Funding Percentages will be multiplied by the Base Pay for each corresponding Plan Participant Group. The sum of all Plan Participant Group calculations will be the Annual Incentive Pool. For example, if the Board targets Plan EBITDA at $28,000,000 for a Plan Year and such target is achieved, the Annual Incentive Pool for that Plan Year would be calculated as follows:
- ------------------------------------------------------------------------------------------------------------- FUNDING PLAN PARTICIPANT GROUP PLAN PARTICIPANT GROUP BASE PAY PERCENTAGE ANNUAL INCENTIVE POOL - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Executives $850,000 29.17% $247,917 - ------------------------------------------------------------------------------------------------------------- Class A - Tacoma, Batavia, $1,581,413 20.83% $329,461 Embroidery, Corp., Boulder - ------------------------------------------------------------------------------------------------------------- Class A - Other $834,160 14.583% $121,648 - ------------------------------------------------------------------------------------------------------------- Class B - Tacoma, Batavia, $1,859,748 12.5% $232,468 Embroidery, Corp., Boulder - ------------------------------------------------------------------------------------------------------------- Class B - Other $1,033,464 8.75% $90,428 - ------------------------------------------------------------------------------------------------------------- Class C - Tacoma, Batavia, $2,806,640 6.25% $175,415 Embroidery, Corp., Boulder - ------------------------------------------------------------------------------------------------------------- Class C - Other $2,443,396 4.375% $106,899 - ------------------------------------------------------------------------------------------------------------- Class D Not available Discretionary $537,800 - -------------------------------------------------------------------------------------------------------------
3 6
- ------------------------------------------------------------------------------------------------------------- Annual Incentive Pool $1,839,036 - -------------------------------------------------------------------------------------------------------------
The Funding Percentages for target levels of EBITDA shall be determined by the Board in its discretion based on expected earnings per share performance. The Funding Percentages for target levels of EBITDA will be set annually and communicated to Participants as soon as administratively practicable for the Plan Year. If no Annual Incentive Pool is generated in any Plan Year, then any incentive that may be awarded for that Plan Year is completely discretionary based on achievement of individual performance criteria and other factors as determined by the Compensation Committee in its sole discretion. If an Annual Incentive Pool is generated for a Plan Year, the pool will be allocated to the Plan Participant Group classes and then allocated to Participants within each group based on the relative Base Pay of such Participants and the discretion of the Compensation Committee. Participant Awards may also be based on achievement of individual performance criteria in the discretion of the Compensation Committee. The Compensation Committee will assign Participants to a Plan Participant Group at the beginning of the Plan Year or for the portion of the Plan Year for which the Participant was an employee if not an employee at the beginning of the Plan Year. Participants cannot change Plan Participant Groups during the year except as permitted in the discretion of the Compensation Committee. PLAN PROGRESS REPORTS Plan progress reports summarizing performance to date may be posted on a periodic basis in the discretion of the Compensation Committee. DURATION OF PLAN The Plan is part of the Company's compensation program. The Board reserves the right, in its discretion, at any time, and from time to time, to modify amend or terminate (in whole or in part) for any reason, any or all of the provisions of the Plan without notice; provided, however, that no such modification, amendment or termination shall be retroactive to reduce or affect any Awards that are earned, due and payable under the Plan at the time of such action. TERMINATION OF PLAN The incentive computation for the Plan Year in which termination of the Plan occurs will be based on the period ending on the last business day immediately prior to the effective date of the Plan termination. All performance calculations (e.g., threshold, financial performance, etc.) will be adjusted to coincide with such period as determined by the Compensation Committee in its discretion, provided, however, the Board in its discretion may terminate the Plan during a Plan Year without providing for any Awards in the year of termination. 4 7 MISCELLANEOUS PLAN PROVISIONS A Participant shall have no right or interest in any Award before it is actually awarded to him. A Participant's right and interest in any Award that is earned any payable may not be assigned or transferred except in the event of the Participant's death. Upon the death of a Participant who was entitled to and had earned an Award that was payable at the date of his death, such Award (and only such Award) shall become payable, pursuant to the Plan, to the Participant's lawful spouse if then living and not legally separated from the Participant at the time of death ("Qualifying Spouse"). If there is no Qualifying Spouse, the Participant's beneficiary will be the same as the beneficiary designated under the Company's group term life insurance program. If the Participant does not have a Qualifying Spouse, nor participate in such group life insurance program, the Award will be payable to the Participant's estate. After payment of such Award to the Participant's Qualifying Spouse, beneficiary or estate, as applicable, the Company shall be relieved of any liability therefor to the extent of such payment and, in addition, the Company and any other entity shall not be required to oversee the application of any such payment. The Company shall deduct all minimum required federal tax and any required state or local tax withholding from the Awards. The administrative expense of the Plan will be borne by the Company. Neither the establishment of the Plan nor the making of Awards hereunder shall be deemed to create a trust or a fund of any type, nor create any fiduciary relationship between the Participant and the Company, Board or Compensation Committee. The Plan shall constitute an unfunded, unsecured liability of the Company to make payments in accordance with the provisions of the Plan, and no Participant shall have any security or other interest in any assets of the Company resulting from his participation in the Plan. EFFECTIVE DATE This Plan is effective January 1, 1998 and shall continue until terminated. 5 EX-27 3 EXHIBIT 27
5 3-MOS JAN-02-1999 DEC-28-1997 APR-04-1998 1,721 0 45,091 8,112 65,906 125,389 20,057 5,719 194,592 78,978 101,456 8,796 0 4 2,506 194,592 52,981 52,981 43,085 43,085 16,153 346 3,663 (9,907) (3,962) (5,945) 0 0 0 (5,945) (1.40) (1.40)
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