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