<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997.
REGISTRATION NO. 333-17871
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUN SPORTSWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 2396
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
91-1132690
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
------------------------
KEVIN C. JAMES
6520 SOUTH 190TH STREET SENIOR VICE PRESIDENT AND SECRETARY
KENT, WASHINGTON 98032 SUN SPORTSWEAR, INC.
(206) 251-3565 6520 SOUTH 190TH STREET
(ADDRESS INCLUDING ZIP CODE, AND KENT, WASHINGTON 98032
TELEPHONE (206) 251-3565
NUMBER, INCLUDING AREA CODE, OF (NAME, ADDRESS, INCLUDING ZIP CODE, AND
REGISTRANT'S PRINCIPAL EXECUTIVE TELEPHONE NUMBER, INCLUDING AREA CODE OF
OFFICES) AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
MARION V. LARSON
GRAHAM & JAMES LLP/RIDDELL WILLIAMS RICHARD L. WYNNE
P.S. PORTER & HEDGES, L.L.P.
1001 FOURTH AVENUE PLAZA, SUITE 4500 700 LOUISIANA, 35TH FLOOR
SEATTLE, WASHINGTON 98154-1065 HOUSTON, TEXAS 77002-2370
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value per
share.............................. 1,948,500(1) $ 2.156(2) $4,200,966(2) $1,273
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value per
share.............................. 18,380,049(3) $ .29(4) $5,330,214(4) $1,615
- -----------------------------------------------------------------------------------------------------------------
Preferred Stock, par value $.01 per
share.............................. 10,125,892(5) $.9469212(6) $9,588,422(6) $2,905
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value per
share.............................. 4,170,860(7) -- -- None
- -----------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock.... 3,030,592(8) $.77476229(9) $3,911,840(9) $1,185
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value per
share.............................. 3,030,592(10) -- -- None
- -----------------------------------------------------------------------------------------------------------------
Total...................... -- -- $23,031,442 $6,979
=================================================================================================================
</TABLE>
(NOTES ON NEXT PAGE)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
(NOTES CONTINUED FROM COVER)
(1) Registration of shares held immediately prior to the Effective Date of the
Merger by the Sun Shareholders other than Seafirst.
(2) Pursuant to Rule 457(c), the registration fee is calculated based on the
average of the high and low prices for the Sun Common Stock, as reported by
the Nasdaq National Market on December 11, 1996, of $2.156 per Sun share.
(3) Shares issuable in exchange for BSI Common Stock.
(4) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of the shares of BSI Common Stock of $.29, computed as of
September 30, 1996.
(5) Sun Preferred Stock issuable in exchange for shares of BSI Preferred Stock
Series A-1, A-2, B-1, B-2 and B-3.
(6) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of the shares of BSI Preferred Stock of $.9469212, computed as
of December 31, 1996.
(7) Sun Common Stock issuable upon conversion of the Sun Convertible Preferred
Stock. Also includes an indeterminate number of shares of Sun Common Stock
as may be required for issuance upon conversion of additional shares of
Sun Convertible Preferred Stock issued as dividends to the holders thereof
or as a result from adjustments to the conversion ratio. Pursuant to Rule
457(i), no additional fee is payable with respect to the shares.
(8) Warrants ("Sun Warrants") issuable in exchange for warrants to purchase
shares of BSI Common Stock ("BSI Warrants").
(9) Pursuant to Rule 457(f)(2), the registration fee is calculated based on the
book value of BSI Common Stock issuable upon exercise of the Warrants,
computed as of September 30, 1996, plus (pursuant to Rule 457(f)(3))
aggregate consideration of $3,032,968 payable upon exercise of the
warrants.
(10) Sun Common Stock issuable upon exercise of the Warrants. Pursuant to Rule
457(i), no additional fee is payable with respect to these shares.
<PAGE>
SUN SPORTSWEAR, INC.
6520 SOUTH 190TH STREET
KENT, WASHINGTON 98032
January , 1997
Dear Sun Shareholder:
A Special Meeting of Shareholders of Sun Sportswear, Inc. ("Sun") will be
held on , February , 1997, at the ,
Seattle, Washington. The meeting will start at a.m., local time.
At this important meeting, the holders of common stock of Sun will be asked
to approve (i) a Plan and Agreement of Merger dated as of November 13, 1996, as
amended (the "Merger Agreement") pursuant to which BSI Holdings, Inc., a
Delaware corporation ("BSI"), will be merged with and into Sun (the "Merger"),
which will be renamed "Brazos Sportswear, Inc." as of the effective date of the
merger (as of such date, the "Combined Company") and (ii) a reincorporation of
the Combined Company into a Delaware corporation and in connection therewith to
implement a one-for-five reverse stock split (the "Reincorporation").
Pursuant to the Merger Agreement, each holder of Sun common stock (other
than Bank of America NW, N.A., doing business as Seafirst Bank ("Seafirst"))
will receive cash in the amount of $2.20 per share for fifty percent (50%) of
his shares and will retain fifty percent (50%) of such shares; provided,
however, each such shareholder may elect to retain all Sun common stock held by
such shareholder and forego the receipt of cash. Seafirst, which owns 3.8
million shares of Sun common stock, or 66.1% of the shares outstanding, will
receive a combination of cash and a promissory note in the aggregate amount of
$4,036,287 which is $2.20 per share, for 48.3% of its shares and will retain the
remaining shares of Sun common stock it owns. To the extent other shareholders
of Sun elect not to receive cash, additional shares of Sun common stock held by
Seafirst will be purchased by the Combined Company at $2.20 per share in cash.
No fractional shares of Sun common stock will be issued in the Merger, and in
lieu thereof, Sun will make a cash payment with respect to any fractional
shares.
Based on the capitalization of Sun and BSI on September 30, 1996, holders
of Sun common stock and BSI common stock would have held approximately 12% and
88%, respectively, of the aggregate number of shares of common stock of the
Combined Company that would have been outstanding if the Merger had been
consummated as of such date, assuming the exercise of all outstanding warrants
and options to purchase Sun and BSI common stock.
Sun's board of directors believes the merger will create a stronger entity
that is better positioned to meet the challenges of the increasingly competitive
apparel industry. Sun's board of directors believes strategic advantages from
which the Combined Company may benefit include greater size and financial
flexibility, a larger customer base, a broader license portfolio, broader
manufacturing capabilities, an expanded sales force, reduced seasonality and
stronger domestic and international sourcing of products.
Sun will undergo a change in control as of the effective date of the Merger
(the "Effective Date"). As of the Effective Date, the current directors of Sun
will resign and six directors designated by BSI will become all of the directors
of the Combined Company. In addition, the undersigned, along with the executive
vice president and the two senior vice presidents of Sun, have given notice of
intent to resign on or before the Effective Date of the Merger.
The Sun Board of Directors has received the opinion of its financial
advisor, Rodman & Renshaw, Inc., that as of the date hereof and based on the
factors and assumptions described in such opinion, the consideration to be paid
in the Merger to the shareholders of Sun, other than Seafirst, is fair from a
financial point of view; however, Rodman & Renshaw, Inc. was not asked to render
an opinion with respect to the consideration to be received by Seafirst.
Approval of the Merger Agreement by holders of two-thirds of the
outstanding shares of Sun common stock, as well as by holders of a majority of
the outstanding shares of BSI common stock, is a condition to
<PAGE>
consummation of the Merger. The consummation of a transaction will only happen
after certain regulatory approvals are received and other conditions are
satisfied or waived.
THE BOARD OF DIRECTORS OF SUN HAVE CAREFULLY REVIEWED AND CONSIDERED THE
TERMS AND CONDITIONS OF THE MERGER AGREEMENT, BELIEVE THAT THEY ARE FAIR TO AND
IN THE BEST INTERESTS OF SUN SHAREHOLDERS, HAVE UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMEND A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
The accompanying Joint Proxy Statement/Prospectus contains important
information with respect to the proposed Merger and the transactions
contemplated thereby, certain related matters, including a procedure for
electing to retain all of your Sun common stock and a proposal to reincorporate
the Combined Company as a Delaware corporation under the name of "Brazos
Sportswear, Inc." You are urged to review it carefully.
Seafirst holds 3.8 million shares of Sun common stock, or 66.1% of all
outstanding shares, and has agreed to vote its shares in favor of the Merger
Agreement and the reincorporation. Seafirst's agreement to vote its shares is
irrevocable, except in certain limited circumstances. Absent such circumstances,
because Seafirst has agreed to vote its shares in favor of the Merger and the
Reincorporation, if an additional 32,335 shares of Sun common stock or .56% of
the outstanding shares, vote in favor of the Merger and the reincorporation,
such proposals will be approved by the Sun shareholders.
Even if you plan to attend the meeting, you are urged to COMPLETE, SIGN,
DATE AND MAIL THE ENCLOSED PROXY CARD at your earliest convenience. Your shares
will be voted in accordance with the instructions you give in your proxy. If no
instructions are indicated, your shares will be voted in favor of the Merger.
You retain the option to revoke your proxy at any time, or to vote your shares
personally if you attend the meeting in person. Voting in person will constitute
a revocation of any prior proxy. If you do not return the proxy card(s) and do
not vote at the meeting, it will have the same effect as if you voted against
the Merger.
The accompanying Joint Proxy Statement/Prospectus sets forth the voting
rights of holders of Sun common stock with respect to these matters, and
describes the matters to be acted upon at the shareholders meeting. Shareholders
are urged to review carefully the attached Joint Proxy Statement/Prospectus,
which contains a detailed description of the Merger Agreement, the election
procedure to retain Sun common stock, the terms and conditions thereof and the
transactions contemplated thereby and the Reincorporation. Holders of Sun common
stock may exercise dissenters' rights with respect to the Merger and the
Reincorporation by complying with the procedural requirements of the Washington
Business Corporation Act, including making a written demand for payment before
the date of the shareholders' meetings and not voting in favor of the Merger
Agreement or the Reincorporation.
Enclosed with this Joint Proxy Statement/Prospectus is a Form of Election,
which will allow such holder, other than Seafirst, to elect to retain all of his
or her Sun common stock in lieu of receiving cash in the amount of $2.20 per
share for fifty percent (50%) of such holder's Sun common stock.
HOLDERS OF SUN COMMON STOCK WHO DO NOT ELECT TO RETAIN SUCH SHARES SHOULD
NOT SEND IN THE CERTIFICATES REPRESENTING THEIR SHARES UNTIL THEY RECEIVE A
TRANSMITTAL FORM, WHICH WILL INCLUDE INSTRUCTIONS AS TO THE PROCEDURES TO BE
FOLLOWED IN SENDING IN SUCH CERTIFICATES.
Sincerely,
William S. Wiley
CHAIRMAN OF THE BOARD OF DIRECTORS
2
<PAGE>
BSI HOLDINGS, INC.
3860 VIRGINIA AVENUE
CINCINNATI, OHIO 45227
January , 1997
Dear BSI Stockholders:
You are cordially invited to attend a special meeting of
stockholders (the "BSI Meeting") of BSI Holdings, Inc.
("BSI") to be held on February , 1997 at a.m., local
time, at .
At the BSI Meeting, you will be asked to approve the Plan
and Agreement of Merger dated November 13, 1996, as amended
(the "Merger Agreement") between BSI and Sun Sportswear,
Inc., a Washington corporation ("Sun"), and the transactions
contemplated thereby. If the Merger Agreement is approved by
the stockholders of BSI and Sun, BSI will merge into Sun, the
surviving corporation, and the outstanding capital stock of
BSI will automatically be converted into shares of Sun stock
(the "Merger"). No fractional shares of Sun stock will be
issued in the Merger, and in lieu thereof, Sun will make a
cash payment with respect to any fractional shares.
Immediately after the Merger, it is anticipated that Sun will
reincorporate in Delaware. The name of the surviving
corporation will be "Brazos Sportswear, Inc." Details of the
Merger Agreement are contained in the Joint Proxy
Statement/Prospectus being delivered with this letter.
In view of the importance of the actions to be taken at
the BSI Meeting, you are urged to read the accompanying Joint
Proxy Statement/Prospectus carefully, and regardless of the
number of shares you own, we request that you complete, sign,
date and return the enclosed proxy card promptly in the
accompanying prepaid envelope. You may, of course, attend the
BSI Meeting and vote in person, even if you have previously
returned your proxy card. BSI's board of directors has
carefully considered the terms and conditions of the Merger
Agreement and believes it to be in the best interest of BSI
and its stockholders. Therefore, the board of directors
strongly recommends that you vote FOR the Merger Agreement.
On behalf of the Board of Directors,
RANDALL B. HALE,
CHAIRMAN OF THE BOARD OF DIRECTORS
<PAGE>
SUN SPORTSWEAR, INC.
6520 SOUTH 190TH STREET
KENT, WASHINGTON 98032
(206) 251-3565
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY , 1997
To the Shareholders of
Sun Sportswear, Inc.:
Sun Sportswear, Inc. is pleased to announce that a special meeting of
Shareholders (the "Sun Meeting") will be held , February ,
1997 at , Seattle, Washington. The Sun Meeting will
begin at a.m., local time. At the Sun Meeting, shareholders will be asked
to consider and vote upon the following matters, which are more fully described
in the accompanying Joint Proxy Statement/Prospectus:
1. A proposal to approve the Plan and Agreement of Merger dated as of
November 13, 1996, as amended (the "Merger Agreement"), by and among Sun
Sportswear, Inc., a Washington corporation ("Sun"), and BSI Holdings,
Inc. a Delaware corporation ("BSI"). Pursuant to the Merger Agreement,
BSI will be merged with and into Sun, with Sun, which will be renamed
"Brazos Sportswear, Inc." as of the effective time of such merger, being
the surviving corporation (after the effective time of such merger, the
"Combined Company") and whereby (i) each holder of outstanding shares of
common stock, no par value, of Sun ("Sun Common Stock") (except for
shares held by Bank of America NW, N.A., doing business as Seafirst Bank
("Seafirst") and except for Sun shareholders who perfect dissenters'
rights with respect thereto) will receive cash in the amount of $2.20 per
share for fifty percent (50%) of his shares and will retain the remaining
fifty percent (50%) of such shares, PROVIDED, however, Sun shareholders may
elect to retain all Sun Common Stock held by such shareholders and forego
the receipt of cash. Shares of common stock held by Seafirst will be
converted into a combination of cash and a promissory note for 48.3% of its
shares at a price of $2.20 per share, with Seafirst retaining the remaining
shares of Sun Common Stock it holds; provided however, to the extent other
Sun shareholders elect not to receive cash, one share of Sun Common Stock
held by Seafirst will be converted into cash at $2.20 per share for each
share not converted from other Sun shareholders pursuant to the merger. No
fractional shares of Sun common stock will be issued in the Merger, and in
lieu thereof, Sun will make a cash payment with respect to any fractional
shares. The Merger Agreement (a copy of which is attached as Appendix A to
the accompanying Joint Proxy Statement/Prospectus) and the transactions
contemplated thereby, including appointment of a new six person Board of
Directors, and adoption of amendments to the Restated Articles of
Incorporation of Sun, in order to increase the authorized common stock, no
par value, from 20,000,000 shares to 50,000,000 shares and to increase the
authorized preferred stock, $.01 par value, from 1,000,000 shares, to
25,000,000 shares, are described in the accompanying Joint Proxy
Statement/Prospectus.
2. A proposal to merge, immediately subsequent to consummation of the
Merger Agreement, the Combined Company into a newly formed Delaware
corporation and a wholly-owned subsidiary of the Combined Company, in order
to change the state of incorporation from Washington to Delaware, and in
connection therewith to implement a one-for-five reverse stock split with
respect to the Combined Company common stock outstanding or issuable upon
consummation of the merger (the "Reincorporation"). As a result of the
Reincorporation, former holders of Combined Company common stock will own
the same percentage of shares in the new Delaware entity ("Brazos
Delaware") as they held in the Combined Company, although they will
receive stock certificates representing one-fifth of the number of shares
previously held in the Combined Company. No fractional shares will be
issued in the Reincorporation. In lieu thereof, Brazos Delaware will make a
cash payment attributable to fractional shares based on the closing price
per share for the Sun Common Stock on the Nasdaq_/_National Market System
on the last trading day immediately preceding the effective date of the
Reincorporation.
<PAGE>
3. Any other business that may properly come before the Sun Meeting
or any adjournment or postponement thereof.
Please read carefully the information contained in the accompanying Joint
Proxy Statement/Prospectus regarding the issues to be voted upon.
Only holders of Sun Common Stock of record at the close of business on
January 31, 1997 (the "Record Date"), will be entitled to notice of and to
vote at the Sun Meeting or any adjournment or postponement thereof, by order of
the Board.
Approval of the Merger Agreement by two-thirds of the outstanding shares of
Sun Common Stock, as well as by a majority of the outstanding shares of common
stock of BSI is a condition to consummation of the merger of BSI with and into
Sun. Approval of two-thirds of the outstanding shares of Sun Common Stock as of
the Record Date is required to approve the Reincorporation. Approval of the
Reincorporation is not required in order to approve the Merger Agreement. The
Reincorporation will not be consummated if the Merger Agreement is not approved.
THE SUN BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE REINCORPORATION AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER AGREEMENT AND THE REINCORPORATION.
By Order of the Board of Directors,
Kevin C. James
SENIOR VICE PRESIDENT AND SECRETARY
Kent, Washington
January , 1997
- --------------------------------------------------------------------------------
- IMPORTANT -
PLEASE COMPLETE, SIGN, DATE AND MAIL PROMPTLY THE ENCLOSED PROXY CARD,
WHETHER OR NOT YOU PLAN TO ATTEND THE SUN MEETING. Your shares will be voted
in accordance with the instructions you give in your proxy. If you do attend
the Sun Meeting, you may vote in person, whether or not you have sent in
your proxy. A postage-paid envelope is enclosed for your convenience.
- --------------------------------------------------------------------------------
SHAREHOLDERS ELECTING TO RETAIN SUN COMMON STOCK IN THE MERGER SHOULD
RETURN THE ENCLOSED FORM OF NON-CASH ELECTION TOGETHER WITH DULY ENDORSED SUN
COMMON STOCK CERTIFICATES AS INSTRUCTED IN THE JOINT PROXY STATEMENT/PROSPECTUS.
2
<PAGE>
BSI HOLDINGS, INC.
3860 VIRGINIA AVENUE
CINCINNATI, OHIO 45227
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY , 1997
------------------------
Notice is hereby given that a special meeting (the "BSI
Meeting") of the stockholders of BSI Holdings, Inc., a Delaware
corporation ("BSI"), will be held at on
February , 1997 at a.m., local time, for the following
purposes:
1. To consider and vote upon a proposal to approve the Plan
and Agreement of Merger dated November 13, 1996, as amended (the
"Merger Agreement"), between BSI and Sun Sportswear, Inc., a
Washington corporation ("Sun"), and the transactions contemplated
thereby. Under the Merger Agreement, BSI will merge into Sun, the
surviving corporation, and the outstanding capital stock of BSI
will automatically be converted into shares of Sun stock (the
"Merger"). No fractional shares of Sun stock will be issued in
the Merger, and in lieu thereof, Sun will make a cash payment with
respect to any fractional shares. The Merger Agreement and the
transactions contemplated thereby are more fully described in the
accompanying Joint Proxy Statement/Prospectus; and
2. To transact such other business as may properly be
presented to the BSI Meeting.
A record of the stockholders of BSI has been taken as of the
close of business on January 31, 1997, and only those stockholders of
record on that date will be entitled to notice of and to vote at the
Special Meeting. A list of stockholders will be available during the
required statutory period and may be inspected prior to the Special
Meeting during normal business hours at the offices of BSI, 3860
Virginia Avenue, Cincinnati, Ohio 45227.
The respective obligations of BSI and Sun to consummate the
Merger Agreement are subject to, among other conditions, the approval
of the stockholders of BSI at the BSI Meeting. Your participation in
BSI's affairs, therefore, is very important. To ensure your
representation, if you do not expect to be present at the BSI Meeting,
please sign and date the enclosed proxy card and return it to BSI
promptly in the enclosed stamped envelope which has been provided for
your convenience.
By Order of the Board of Directors,
F. CLAYTON CHAMBERS,
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER,
SECRETARY AND TREASURER
January , 1997
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED JANUARY 24, 1997
SUN SPORTSWEAR, INC.
BSI HOLDINGS, INC.
JOINT PROXY STATEMENT/PROSPECTUS
------------------------
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Sun Sportswear, Inc., a Washington corporation ("Sun"), and BSI
Holdings, Inc., a Delaware corporation ("BSI"), pursuant to a Plan and
Agreement of Merger between Sun and BSI dated November 13, 1996, as amended (the
"Merger Agreement"). As a result of the Merger, BSI will be merged with and
into Sun. This Joint Proxy Statement/Prospectus also relates to the
reincorporation of Sun as a Delaware corporation immediately subsequent to the
Merger.
This Joint Proxy Statement/Prospectus is being furnished to holders of Sun
common stock, no par value per share ("Sun Common Stock"), and holders of BSI
common stock, par value $.01 per share ("BSI Common Stock"), in connection
with the solicitation of proxies by the respective boards of directors of Sun
and BSI for use at the special meetings of the stockholders of each company to
be held on February , 1997. This Joint Proxy Statement/Prospectus and the
accompanying forms of proxy are first being mailed to stockholders of Sun and
BSI on or about January , 1997.
At the Sun special meeting, holders of Sun Common Stock will be asked to
vote on (i) a proposal to approve the Merger Agreement and the transactions
contemplated thereby (the "Merger Proposal") and (ii) a proposal to
reincorporate Sun, immediately following consummation of the Merger, as a
Delaware corporation. At the BSI special meeting, the holders of BSI Common
Stock will be asked to authorize, approve and adopt the Merger Agreement.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of Sun
with respect to (a) 27,530,001 shares of Sun Common Stock to be (i) issued in
exchange for BSI's outstanding shares of common stock, (ii) issued upon exercise
of Sun warrants to purchase Sun Common Stock outstanding on the effective date
issued in exchange for outstanding BSI warrants, (iii) issued upon conversion of
Sun convertible preferred stock outstanding on the effective date issued in
exchange for BSI preferred stock and (iv) retained by Sun shareholders in the
Merger, (b) 10,125,892 shares of Sun preferred stock to be issued in exchange
for BSI's outstanding shares of preferred stock, and (c) warrants to purchase
Sun Common Stock to be issued in exchange for outstanding BSI warrants.
On January , 1997, the last reported sale price of Sun Common Stock as
reported in the Nasdaq/NMS was $ per share.
FOR A DISCUSSION OF RISK FACTORS REGARDING THE BUSINESS AND OPERATIONS OF
SUN AND BSI THAT SHOULD BE EVALUATED BEFORE VOTING ON THE PROPOSALS DESCRIBED
HEREIN AT THE SUN MEETING OR THE BSI SUN MEETING, SEE "RISK FACTORS,"
BEGINNING ON PAGE 12.
------------------------
THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is January , 1997.
<PAGE>
AVAILABLE INFORMATION
Sun is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information may
be inspected and copied or obtained by mail upon the payment of the Commission's
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: CitiCorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, New York, New York, 10048. Copies of such material can also be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, Sun is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. In addition,
reports, proxy statements and other information filed by Sun can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, Washington, D.C. 20006.
Sun has filed with the Commission a registration statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Sun Common Stock and Sun
Preferred Stock to be issued pursuant to the Merger Agreement. This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. The Registration Statement and any
amendments thereto, including exhibits filed as a part thereof, are available
for inspection and copying as set forth above. Statements contained in this
Joint Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein are not necessarily complete, and reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, such statement being qualified in all respects by such
reference.
No persons have been authorized to give any information or to make any
representation other than those contained in this Joint Proxy
Statement/Prospectus in connection with the solicitation of proxies or the
offering of securities made hereby and, if given or made, such information or
representation should not be relied upon as having been authorized by Sun or
BSI. This Joint Proxy Statement/Prospectus does not constitute an offer to sell,
or a solicitation of an offer to purchase, any securities, or the solicitation
of a proxy, in any jurisdiction in which, or to any person to whom, it is
unlawful to make such offer or solicitation of an offer or proxy solicitation.
Neither the delivery of this Joint Proxy Statement/Prospectus nor any
distribution of the securities offered hereby shall, under any circumstances,
create any implication that there has been no change in the affairs of Sun or
BSI since the date hereof or that the information set forth or incorporated by
reference herein is correct as of any time subsequent to its date.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
GLOSSARY OF TERMS.................... ii Licenses and Trademarks.......... 62
SUMMARY.............................. 1 Sales, Marketing and
COMPARATIVE MARKET PRICE DATA........ 10 Distribution................... 63
COMPARATIVE PER SHARE DATA........... 11 Competition...................... 63
RISK FACTORS......................... 12 Sourcing of Garments............. 63
THE MEETINGS......................... 15 Facilities and Equipment......... 64
Matters to be Considered at the Employees........................ 64
Meetings....................... 15 Executive Officers and Directors
Recommendations of the Boards of of BSI......................... 64
Directors...................... 15 BSI Executive Compensation....... 66
Voting at the Meetings; Record Employment Agreements............ 66
Dates.......................... 15 BSI SELECTED FINANCIAL DATA.......... 67
Security Ownership of Management BSI MANAGEMENT'S DISCUSSION AND
and Certain Other Persons...... 16 ANALYSIS OF FINANCIAL CONDITION AND
Proxies.......................... 16 RESULTS OF OPERATIONS.............. 68
Solicitation of Proxies.......... 17 Acquisitions..................... 68
THE MERGER........................... 17 Results of Operations............ 68
Background....................... 17 Liquidity and Capital
Reasons for the Merger........... 18 Resources...................... 70
Opinion of Rodman & Renshaw, CERTAIN TRANSACTIONS AND
Inc............................ 19 RELATIONSHIPS...................... 71
Selection and Compensation of PRINCIPAL SHAREHOLDERS OF SUN........ 72
Rodman & Renshaw, Inc.......... 23 PRINCIPAL STOCKHOLDERS OF BSI........ 73
Certain Federal Income Tax DESCRIPTION OF SUN CAPITAL STOCK..... 74
Consequences................... 23 Common Stock..................... 74
Anticipated Accounting Preferred Stock.................. 74
Treatment...................... 26 Warrants......................... 76
Listing on the Nasdaq/NMS........ 27 Washington Law................... 77
Dissenters' Rights............... 27 Liability and Indemnification of
Conflicts of Interest............ 31 Officers and Directors of
THE MERGER AGREEMENT................. 33 Sun............................ 77
Effective Date of the Merger..... 33 Transfer Agent and Registrar..... 77
Manner and Basis of Converting COMPARISON OF RIGHTS OF STOCKHOLDERS
Shares......................... 33 OF SUN AND BSI..................... 77
Management After the Merger...... 36 General.......................... 78
Terms of the Merger Agreement.... 36 Changes Principally Attributable
UNAUDITED PRO FORMA CONDENSED to Differences Between the DGCL
COMBINED FINANCIAL STATEMENTS...... 40 and the WBCA................... 78
BUSINESS OF SUN...................... 47 PROPOSED REINCORPORATION IN
Products......................... 47 DELAWARE........................... 82
Sourcing......................... 48 Introduction..................... 82
Production....................... 49 General.......................... 82
Sales and Marketing.............. 50 No Changes in Business of Sun.... 82
Seasonality...................... 50 Reasons for Reincorporation...... 82
Competition...................... 51 Consummation of the
Backlog.......................... 51 Reincorporation................ 83
Employees........................ 51 Certificate Exchange............. 83
Properties....................... 51 Federal Income Tax
Litigation....................... 52 Consequences................... 83
Executive Officers and Directors Transferability of Shares........ 83
of Sun......................... 52 Rights of Dissenting
SUN SELECTED FINANCIAL DATA.......... 54 Shareholders................... 83
SUN MANAGEMENT'S DISCUSSION AND Accounting Treatment............. 84
ANALYSIS OF FINANCIAL CONDITION AND Conditions; Termination and
RESULTS OF OPERATIONS.............. 55 Abandonment.................... 84
Results of Operations............ 55 Differences Between the
Quarterly Net Washington and Delaware
Sales-Seasonality.............. 59 Corporation Laws............... 84
Liquidity and Capital LEGAL MATTERS........................ 84
Resources...................... 59 EXPERTS.............................. 84
Inflation........................ 60 INDEX TO FINANCIAL STATEMENTS........ F-1
BUSINESS OF BSI...................... 61 Sun Sportswear, Inc.............. F-2
Business Strategy................ 61 BSI Holdings, Inc................ F-20
Products......................... 62 Plymouth Mills, Inc.............. F-52
Appendix A -- Merger Agreement
Appendix B -- Fairness Opinion of
Rodman & Renshaw, Inc.
Appendix C -- Dissenters
Rights -- Washington
Appendix D -- Appraisal
Rights -- Delaware
Appendix E -- Certificate of
Designations
Appendix F -- Reincorporation
Agreement
</TABLE>
(i)
<PAGE>
GLOSSARY OF TERMS
"BRAZOS" means Brazos Sportswear, Inc., a Texas corporation and
subsidiary of BSI.
"BRAZOS DELAWARE" means the surviving corporation resulting from the
Reincorporation.
"BSI" means BSI Holdings, Inc., a Delaware corporation.
"BSI CAPITAL STOCK" means the capital stock of BSI, authorized and
outstanding prior to the Effective Date.
"BSI COMMON STOCK" means the common stock, par value $.01 per share, of
BSI, authorized and outstanding prior to the Effective Date.
"BSI MEETING" means the special meeting of stockholders of BSI to be held
with respect to, among other things, approval by BSI stockholders of the Merger
Agreement and the transactions contemplated thereby.
"BSI PREFERRED STOCK" means the preferred stock, par value of $.01 per
share, of BSI authorized and outstanding prior to the Effective Date, including
shares of BSI's Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series
B-1 Preferred Stock, Series B-2 Preferred Stock and Series B-3 Preferred Stock.
"BSI RECORD DATE" means January 31, 1997.
"BSI STOCKHOLDERS" means the holders of BSI Common Stock.
"CASH CONSIDERATION" means the $2.20 per share to be paid to each Sun
Shareholder (other than Seafirst) in exchange for 50% of the Sun Common Stock
held by Sun Shareholders who do not elect to retain all of their Sun Common
Stock pursuant to a Non-Cash Election.
"CLOSING" means the execution and delivery of the documents required to
effectuate the transactions contemplated by the Merger Agreement and the closing
of the transactions contemplated by the Merger Agreement.
"CLOSING DATE" means February , 1997, or such other date as may be
determined by BSI and Sun.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMBINED COMPANY" means the combined companies of Sun and BSI resulting
from the Merger.
"COMMISSION" means the United States Securities and Exchange Commission.
"DGCL" means the Delaware General Corporation Law of the State of
Delaware, as amended.
"EFFECTIVE DATE" means the effective time specified in the articles or
certificate of merger filed on the Closing Date with the Secretary of State of
the State of Washington in accordance with the WBCA and with the Secretary of
State of the State of Delaware in accordance with the DGCL.
"ELECTION DATE" means the second business day preceding the date of the
Sun Meeting.
"EXCHANGE ACT" means the United States Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means U.S. Stock Transfer Corporation, the exchange
agent selected by Sun and BSI in accordance with the Merger Agreement to
facilitate the exchange of shares under the Merger and Reincorporation.
"FORM OF ELECTION" means the written election form provided to the Sun
Shareholders (other than Seafirst) to be used by such shareholder to exercise
his election to retain all, but not less than all, of his Sun Common Stock in
lieu of receiving cash for 50% of the shares of Sun Common Stock held by such
shareholder.
"GAAP" means generally accepted accounting principles.
"HSR ACT" means the United States Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(ii)
<PAGE>
"JOINT PROXY STATEMENT/PROSPECTUS" means this document relating to the
BSI Meeting and Sun Meeting and the issuance of securities in connection
therewith.
"MERGER" means the merger of BSI with and into Sun, as contemplated by
the Merger Agreement.
"MERGER AGREEMENT" means the Plan and Agreement of Merger by and between
BSI and Sun dated as of November 13, 1996, as amended, a copy of which is
attached hereto as Appendix A.
"MINORITY SHAREHOLDERS" means the Sun Shareholders excluding Seafirst.
"NASDAQ/NMS" means the National Market System of the Nasdaq Stock Market,
Inc.
"NON-CASH ELECTION" means the irrevocable election by the Sun
Shareholders (other than Seafirst) to retain Sun Common Stock instead of
receiving the cash consideration in the Merger.
"REINCORPORATION" means the merger of the Combined Company with and into
a newly created wholly-owned Delaware subsidiary of the Combined Company under
the name of "Brazos Sportswear, Inc." and in connection therewith to implement
a one-for-five reverse stock split with respect to the Sun Common Stock
outstanding immediately prior to the consummation of such merger.
"SEAFIRST" means Bank of America NW, N.A., doing business as Seafirst
Bank.
"SEAFIRST SHARES" means the shares of Sun Common Stock held by Seafirst
immediately prior to the Effective Date.
"SECURITIES ACT" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"SUBORDINATED NOTE" means the subordinated note in the original principal
amount of $1,500,000, which note is to be issued by Brazos in favor of Seafirst
pursuant to the Merger Agreement upon conversion of a portion of the Seafirst
Shares.
"SUN" means Sun Sportswear, Inc., a Washington corporation.
"SUN COMMON STOCK" means the common stock, no par value per share, of Sun.
"SUN MEETING" means the special meeting of shareholders of Sun to be held
with respect to, among other things, approval by the Sun Shareholders of the
Merger Agreement and the transactions contemplated thereby, and the
Reincorporation.
"SUN PREFERRED STOCK" means the Series A-1 Preferred Stock, Series A-2
Preferred Stock, Series B-1 Preferred Stock, Series B-2 Preferred Stock and
Series B-3 Preferred Stock, par value $.01 per share, of Sun, to be outstanding
upon conversion of the BSI Preferred Stock.
"SUN CONVERTIBLE PREFERRED STOCK" means the Series B-1 Preferred Stock,
Series B-2 Preferred Stock and Series B-3 Preferred Stock, par value $.01 per
share, to be outstanding upon the Effective Date.
"SUN SHARES" means collectively the Sun Common Stock and Sun Preferred
Stock into which the BSI Common Stock and BSI Preferred Stock is converted as a
result of the Merger and excludes currently outstanding Sun Common Stock.
"SUN SHAREHOLDERS" means the holders of Sun Common Stock.
"WBCA" means the Washington Business Corporation Act, as amended.
(iii)
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/PROSPECTUS. THE INFORMATION CONTAINED IN THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN CONJUNCTION WITH MORE
DETAILED INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO. UNLESS OTHERWISE INDICATED, CAPITALIZED TERMS USED IN THIS
SUMMARY ARE DEFINED IN THE GLOSSARY OF TERMS OR ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS ARE URGED TO CAREFULLY READ THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES IN THEIR ENTIRETY.
THE COMPANIES
Sun Sportswear, Inc................. Sun was founded in 1981 and designs,
sources, prints, markets and sells
imprinted, dyed and decorated
sportswear for adults and children,
with its core product line comprised
of screen printed T-shirts, tank tops
and sweat shirts decorated with
licensed or proprietary designs and
characters. Sun sells products
primarily to national mass mer-
chandising chains. Sun's principal
executive offices are located at 6520
South 190th Street, Kent, Washington
98032, and its telephone number is
(206) 251-3565. See "Business of
Sun."
BSI Holdings, Inc................... BSI was founded in 1974 and designs,
sources, prints and markets
moderately-priced sportswear for
adults and children decorated with
licensed classic characters and
collegiate logos, as well as
proprietary designs. BSI sells its
products to national and regional
mass merchants, department stores,
specialty retailers, souvenir and
gift shops and college bookstores.
Additionally, BSI distributes
undecorated garments to over 12,000
customers, which typically decorate
the product for later sale. BSI's
principal executive offices are
located at 3860 Virginia Avenue,
Cincinnati, Ohio 45227, and its
telephone number is (513) 272-3600.
See "Business of BSI."
THE MEETINGS
DATE, TIME AND PLACE
SUN. The Sun Meeting will be held on , February , 1997, at
at a.m. (local time).
BSI. The BSI Meeting will be held on , February , 1997, at
, at a.m. (local time).
PURPOSES OF THE MEETINGS
SUN. The purpose of the Sun Meeting is to consider and act upon (i) a
proposal to approve the Merger Agreement and the transactions contemplated
thereby, (ii) a proposal to approve the Reincorporation and (iii) such other
business as may be properly presented to the meeting.
BSI. The purpose of the BSI Meeting is to consider and act upon a proposal
to approve the Merger Agreement and the transactions contemplated thereby and
such other business as may be properly presented to the meeting.
RECORD DATES; HOLDERS ENTITLED TO VOTE
SUN. Only holders of record of shares of Sun Common Stock at the close of
business on January 31, 1997, are entitled to notice of and to vote at the Sun
Meeting. On such date, there were
1
<PAGE>
shares of Sun Common Stock outstanding, each of which
will be entitled to one vote on each matter to be acted upon at the Sun Meeting.
BSI. Only holders of record of BSI Common Stock at the close of business
on January 31, 1997, are entitled to notice of and to vote at the BSI Meeting.
On such date, there were 484,805 shares of BSI Common Stock outstanding, each of
which will be entitled to one vote on each matter to be acted upon at the BSI
Meeting.
QUORUM; VOTE REQUIRED
SUN. The presence, in person or by proxy, at the Sun Meeting of the
holders of a majority of the shares of Sun Common Stock outstanding and entitled
to vote at the Sun Meeting is necessary to constitute a quorum at the meeting.
The affirmative vote of the holders of two-thirds of the outstanding shares of
Sun Common Stock is required to approve (i) the Merger Agreement and the
transactions contemplated thereby and (ii) the Reincorporation.
Seafirst holds 3.8 million shares of Sun Common Stock, or 66.1% of all
outstanding shares, and has agreed to vote its shares in favor of the Merger and
the Reincorporation. Seafirst's agreement to vote its shares is irrevocable,
except in the event Sun's board of directors terminates the Merger upon exercise
of its fiduciary duties pursuant to the Merger Agreement. Absent such a
termination of the Merger Agreement, because Seafirst has agreed to vote its
shares in favor of the Merger and the Reincorporation, if an additional 32,335
shares of Sun Common Stock or .56% of the outstanding shares, vote in favor of
the Merger and the Reincorporation, such proposals will be approved by the Sun
Shareholders.
BSI. The presence, in person or by proxy, at the BSI Meeting of the
holders of a majority of the shares of BSI Common Stock outstanding and entitled
to vote at the BSI Meeting is necessary to constitute a quorum at the meeting.
The affirmative vote of the holders of a majority of the outstanding shares of
BSI Common Stock is required to approve the Merger Agreement and the
transactions contemplated thereby.
RECOMMENDATIONS OF BOARDS OF DIRECTORS
SUN. The board of directors of Sun believes the Merger and the
transactions contemplated thereby and the Reincorporation to be in the best
interests of the Sun Shareholders and unanimously recommends that the Sun
Shareholders vote to approve (i) the Merger Agreement and the transactions
contemplated thereby and (ii) the Reincorporation.
BSI. The board of directors of BSI believes that the Merger and the
transactions contemplated thereby is in the best interests of the BSI
Stockholders and unanimously recommends that the BSI Stockholders vote to
approve the Merger Agreement and the transactions contemplated thereby.
See "The Meetings -- Recommendations of the Boards of Directors" and
"The Merger -- Conflicts of Interest."
OPINION OF RODMAN & RENSHAW, INC.
Rodman & Renshaw, Inc. has rendered an opinion to the board of directors of
Sun that the consideration to be paid in the Merger to the Minority Shareholders
is fair, from a financial point of view. However, no opinion was rendered with
respect to the consideration to be received by Seafirst.
See "The Merger -- Opinion of Rodman & Renshaw, Inc." and the full text
of the opinion set forth in Appendix B.
2
<PAGE>
THE MERGER
GENERAL
The board of directors of Sun and BSI have approved, subject to the
approval of their respective stockholders and satisfaction or waiver of
conditions to closing, the Merger Agreement and the transactions contemplated
thereby. Under the Merger Agreement, BSI will be merged with and into Sun, the
separate existence of BSI will cease, Sun will continue as the surviving
corporation, and the surviving corporation will be renamed "Brazos Sportswear,
Inc."
Sun and BSI both design, source, print and market sportswear primarily to
mass merchandisers such as Wal-Mart and Kmart; however, their respective
operations are in significant part complementary rather than directly
competitive. Sun's licensed apparel sales are focused primarily on animated
movie characters, and classic characters which are not licensed to BSI or which
are licensed in different categories not directly competitive with BSI. Further,
BSI has significant sales of licensed collegiate and undecorated blank apparel
which are not a significant part of Sun's product mix.
Sun and BSI believe that the Merger will result in significant additional
benefits for each company, including a broader license portfolio, opportunities
to add new customers and increase penetration with existing customers, increased
sourcing capability and buying power which may result in reduced blank garment
costs, greater utilization of each company's manufacturing resources, and
increased "critical mass" which may enable the Combined Company to have access
to capital at a potentially lower cost. Management of Sun and BSI believe that
if these potential benefits can be obtained, stockholders of the two companies
will be able to participate in enhanced prospects for the Combined Company.
See "The Merger -- Background" and "-- Reasons for the Merger."
COMBINED BUSINESS STRATEGY AFTER THE EFFECTIVE DATE
The Combined Company's business strategy after the Effective Date will be
to maximize stockholder value by building a highly profitable and diversified
sportswear company through internal growth and strategic acquisitions.
Management of the Combined Company after the Effective Date intends to implement
the growth strategies described below.
INTERNAL GROWTH STRATEGY
EXPAND PRODUCT LINE. Both companies' products have expanded from a basic
line of T-shirts and sweatshirts to a broader collection of sportswear. The
Combined Company expects to continue to develop and market new products with an
emphasis on its department store sportswear line, proprietary products and
private label programs for its larger retail customers.
EXPAND LICENSE PORTFOLIO. The Combined Company intends to develop new and
enhance existing relationships with key licensors. Through these relationships,
the Combined Company intends to expand the scope of its existing licensed
properties. The Combined Company will continue to evaluate and pursue new
licensing opportunities.
INCREASE PENETRATION OF EXISTING ACCOUNTS AND SELECTIVELY EXPAND ACCOUNT
BASE. A continued expansion of the Combined Company's product lines and license
portfolio may enable it to further penetrate its existing customer base, by
expanding the number of departments that sell its products at a particular
retailer. In addition, the Combined Company intends to pursue, through its key
account sales representatives, numerous other large retail customers and will
utilize an established telemarketing program at BSI to market its products to
smaller regional retailers.
PURSUE INTERNATIONAL OPPORTUNITIES. Although the Combined Company's
primary focus will continue to be the domestic market, it plans to evaluate
opportunities to sell its products in various other countries through a
combination of direct sales and distribution arrangements.
3
<PAGE>
ACQUISITION GROWTH STRATEGY
It is anticipated that acquisitions will be a key component of the Combined
Company's long-term growth plan. The Combined Company plans to establish certain
criteria which it will use to evaluate acquisition opportunities.
A significant part of BSI's growth has resulted from its acquisition
program. BSI has completed five acquisitions since 1990, each of which it
believes brought significant strategic advantages to BSI's business. The
Combined Company intends to build upon BSI's historical acquisition program to
enhance its acquisition growth strategy.
CONVERSION OF BSI CAPITAL STOCK
On the Effective Date, each share of BSI Common Stock will be converted
into 37.912252 shares of Sun Common Stock. As a result of the conversion, the
former holders of BSI Common Stock will own approximately 88% of the outstanding
Sun Common Stock as of the Effective Date, assuming the exercise of all
outstanding BSI and Sun warrants and options but not the conversion of Sun
Convertible Preferred Stock. On the Effective Date, each share of BSI Preferred
Stock will be converted into one share of Sun Preferred Stock of the comparable
series, and as a result, the former holders of BSI Preferred Stock will own 100%
of the Sun Preferred Stock outstanding as of the Effective Date. If the Sun
Convertible Preferred Stock is immediately converted into Sun Common Stock, the
former holders of BSI Capital Stock would own 89.6% of the outstanding Sun
Common Stock as of the Effective Date, assuming the exercise of all outstanding
BSI and Sun warrants and options. No fractional shares are to be issued as a
result of the conversion of the BSI Common Stock, and in lieu thereof, Sun will
make a cash payment attributable to such fractional shares based on the lesser
of $2.20 per share or the closing price per share for the Sun Common Stock on
the Nasdaq/NMS on the last trading day preceding the Effective Date.
Additionally, on the Effective Date, each then outstanding option and warrant to
purchase BSI Common Stock will be converted into an option or warrant, as the
case may be, to purchase shares of Sun Common Stock based on the same share
conversion rate set forth above for the BSI Common Stock. The exercise price per
share of such option or warrant to purchase Sun Common Stock will be adjusted to
take into account the conversion rate; otherwise the terms and conditions of
such option or warrant will be the same as the options or warrants so converted.
See "The Merger Agreement -- Manner and Basis of Converting Shares."
CONVERSION OF SUN COMMON STOCK; NON-CASH ELECTION PROCEDURE
CONVERSION OF SUN COMMON STOCK. On the Effective Date, each holder of
shares of Sun Common Stock outstanding immediately prior to the Effective Date
(other than Seafirst, which holds 66.1% of the outstanding shares of Sun Common
Stock and shareholders who have made a Non-Cash Election) will have 50% of such
shares converted into the right to receive $2.20 in cash per share (the "Cash
Consideration") and will retain the remaining 50% of such shares. If none of
such Sun Shareholders makes a Non-Cash Election, they will own in the aggregate
4.7% of the outstanding Sun Common Stock as of the Effective Date, assuming the
exercise of all outstanding BSI and Sun warrants and options but not the
conversion of Sun Convertible Preferred Stock. In the alternative, if all such
holders elect to retain their respective shares of Sun Common Stock by making a
Non-Cash Election, they will own in the aggregate 8.3% of the outstanding Sun
Common Stock as of the Effective Date, assuming the exercise of all outstanding
BSI and Sun warrants and options but not the conversion of Sun Convertible
Preferred Stock. On the Effective Date, except as discussed below, 1,834,676
shares of Sun Common Stock held by Seafirst immediately prior to the Effective
Date (representing 48.3% of the shares of Sun Common Stock held by Seafirst)
will be converted into the right to receive $2.20 per share, payable $1.3824 in
cash and $.8176 by the issuance of the Subordinated Note. However, to the extent
the other Sun Shareholders elect to retain Sun Common Stock, for each share
retained, Seafirst will have an additional share of its Sun Common Stock
converted into cash in the amount of $2.20 per share. Upon the completion of all
conversions of shares of Sun Common Stock, (i) 48.9% of all shares of Sun Common
Stock outstanding immediately prior to the Effective Date will have been
converted into consideration totaling $6,179,637, all of which will consist of
4
<PAGE>
cash except for $1,500,000, which will be payable by the issuance of the
Subordinated Note to Seafirst, and (ii) 51.1% of all such shares of Sun Common
Stock will remain outstanding. No fractional shares will be issued upon the
conversion of the Sun Common Stock, and in lieu thereof, Sun will make a cash
payment attributable to fractional shares based on the lesser of $2.20 per share
or the closing price per share for the Sun Common Stock on the Nasdaq/NMS on the
last trading day immediately preceding the Effective Date. See "The Merger
Agreement -- Manner and Basis of Converting Shares."
The following table sets forth as of September 30, 1996 (i) the amount and
percentage of shares of Sun Common Stock held by the Sun Shareholders prior to
the Merger and (ii) the amount and percentage of shares of the Combined Company
held by such shareholders and by all BSI Stockholders after the Merger, assuming
the exercise of all outstanding options and warrants.
<TABLE>
<CAPTION>
SHAREHOLDINGS OF THE COMBINED COMPANY
AFTER THE MERGER(4)(5)
-----------------------------------------------
SHAREHOLDINGS OF SUN ASSUMING
PRIOR TO THE MERGER ALL HOLDERS
---------------------- ASSUMING EXERCISE
NUMBER OF NO NON-CASH NON-CASH
SHARES PERCENT ELECTIONS PERCENT ELECTIONS PERCENT
----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Seafirst................................ 3,800,000 62.9% 1,965,324 7.3% 991,074 3.7%
Other Shareholders:
Dimensional Fund Advisors, Inc..... 351,700 5.8 175,850 0.6 351,700 1.3
Officers and directors of Sun(1)... 261,900 4.4 234,950 0.9 261,900 1.0
All other Sun Shareholders(2)...... 1,625,150 26.9 853,700 3.2 1,625,150 6.0
----------- ------- ----------- ------- ------------ -------
Total other shareholders......... 2,238,750 37.1 1,264,500 4.7 2,238,750 8.3
----------- ------- ----------- ------- ------------ -------
Total Sun Shareholders............. 6,038,750(3) 100.0% 3,229,824 12.0% 3,229,824 12.0%
=========== ======= ----------- ------- ------------ -------
Total shares held by BSI holders........ -- -- 23,685,376 88.0% 23,685,376 88.0%
----------- ------------ =======
Aggregate shareholdings................. 6,038,750(3) 100.0% 26,915,200 100.0% 26,915,200 100.0%
=========== ======= ============ =======
</TABLE>
- ------------
(1) Includes 208,000 shares of Sun Common Stock that may be acquired upon
exercise of stock options.
(2) Includes 82,250 shares of Sun Common Stock that may be acquired upon
exercise of stock options.
(3) As of September 30, 1996, there were 5,748,500 shares of Sun Common Stock
issued and outstanding.
(4) Does not include the effects of the conversion of 9,035,567 shares of Sun
Convertible Preferred Stock at $2.20 per share into 4,107,075 shares of Sun
Common Stock. After giving effect to such conversion, existing Sun
shareholders (including Seafirst) will own an aggregate 10.4% of the shares
of the common stock of the Combined Company.
(5) Reflects the conversion of 2,808,926 shares of Sun Common Stock in the
Merger into cash of $4,679,637 and the Subordinated Note in the principal
amount of $1,500,000.
NON-CASH ELECTION PROCEDURE. Sun Shareholders who desire to make a
Non-Cash Election and retain all their Sun Common Stock must properly complete
and sign the Non-Cash Election form (the "Form of Election") accompanying this
Joint Proxy Statement/Prospectus, and such Form of Election, together with all
certificates representing shares of Sun Common Stock duly endorsed in blank or
otherwise in form acceptable for transfer on the books of the Combined Company
(or by appropriate guarantee of delivery, as set forth in such Form of
Election), must be received by the Exchange Agent at one of the addresses listed
on the Form of Election by 5:00 p.m., eastern time, on the second business day
preceding the date of the Sun Meeting (the "Election Date"). See "The Merger
Agreement -- Manner and Basis of Converting Shares -- Conversion of Sun Common
Stock."
5
<PAGE>
BOARD OF DIRECTORS AND MANAGEMENT AFTER THE MERGER
If the Merger is consummated, the Combined Company's board of directors
will consist of Randall B. Hale, Nolan Lehmann, Michael S. Chadwick, J. Ford
Taylor, Alan Elenson and F. Clayton Chambers, all of whom currently serve as
directors or executive officers of BSI.
Upon consummation of the Merger, it is anticipated that Randall B. Hale
will become the chairman of the board, J. Ford Taylor will become president and
chief executive officer, and F. Clayton Chambers will become vice president,
chief financial officer and secretary, of the Combined Company. William S. Wiley
resigned from the positions of president and chief executive officer of Sun in
January 1997, and will continue as chairman of the board until the Effective
Date. Kevin C. James, senior vice president and secretary, of Sun, will resign
from such offices as of the Effective Date. Sandra L. Teufel, senior vice
president-sales and marketing of Sun, resigned December 1996, and L. Kaye Counts
executive vice president and chief operating officer of Sun will resign from
such offices in April 1997. In view of the short period of time until the
anticipated Effective Date, the Sun board has determined not to fill the
positions of president and chief executive officer. In the interim, the board
has formed a committee of the board consisting of Larry C. Mounger, Paul R.
Rollins, Jr., James A. Walsh and William S. Wiley. Until the Effective Date,
this committee intends to meet at least weekly to review the operations of Sun.
The Combined Company's headquarters will be located at 3860 Virginia Avenue,
Cincinnati, Ohio 45227, the current headquarters of BSI. See "Merger
Agreement -- Management After the Merger."
EFFECTIVE DATE OF THE MERGER
The Merger will become effective at the time specified in the articles or
certificate of merger filed with the Secretary of State of the State of
Washington and the Secretary of State of the State of Delaware. The Effective
Date is expected to occur as soon as practicable after all conditions to the
obligations of Sun and BSI to consummate the Merger have been satisfied or
waived.
CONDITIONS TO THE MERGER
The obligations of Sun and BSI to consummate the Merger are subject to the
satisfaction or waiver of certain conditions including (i) the requisite
stockholder approvals of the Merger; (ii) the execution of a "lock-up"
agreement by Seafirst, (iii) additional financing by BSI in an amount sufficient
in BSI's reasonable judgment to consummate the Merger; (iv) BSI obtaining an
equity investment of not less than $2,000,000, which investment is expected to
result in the issuance of BSI Series B-3 Preferred Stock; (v) holders of no more
than 1% of the shares of Sun Common Stock and no more than 1% of the BSI Common
Stock and BSI Preferred Stock shall have exercised appraisal rights with respect
to the Merger; (vi) receipt of various opinions, including tax opinions; (vii)
the listing as of the Effective Date of the shares of Sun Common Stock to be
issued in connection with the Merger on the Nasdaq/NMS; and (viii) certain other
conditions customary in transactions similar to the Merger. See "The Merger
Agreement -- Terms of the Merger Agreement -- Conditions to the Merger."
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<PAGE>
TERMINATION OF THE MERGER
The Merger Agreement may be terminated by the mutual consent of the
parties, or by either Sun or BSI, if (i) any condition precedent has not been
satisfied by the other party; (ii) if the Merger has not become effective on or
before April 30, 1997, with a 60-day extension to satisfy requirements of the
Commission, obtain clearance under the HSR Act or obtain relief from any order
prohibiting consummation of the Merger or (iii) based on a third party offer or
proposal to merge, acquire a material portion of its assets or engage in some
other business combination, if that party's board of directors determines in
good faith, after giving the other party an opportunity to adjust its offer,
that its fiduciary obligations require that such offer be considered, which
determination is confirmed in writing by outside counsel. In addition, BSI may
terminate the Merger Agreement if Sun fails to implement, in accordance with the
Merger Agreement, a business plan previously provided by BSI or additional
recommendations given by BSI to Sun relating to Sun's operations pending the
Effective Date. See "Merger Agreement -- Terms of the Merger
Agreement -- Termination."
REGULATORY REQUIREMENTS
Effective December 18, 1996, both Sun and BSI obtained clearance to
consummate the Merger from the United States federal anti-trust authorities
under the HSR Act. There are no other federal or state regulatory requirements
that must be complied with or obtained in connection with the consummation of
the Merger.
CONFLICTS OF INTEREST
Under the Merger, BSI's directors and officers, certain of BSI's major
stockholders and Seafirst will convert their respective securities of BSI or
Sun, as the case be, into securities of the Combined Company.
Under the Merger Agreement, the Combined Company has agreed to indemnify
each person who has been a director, officer or employee of either BSI or Sun
(or any subsidiary thereof) from all losses, expenses or liabilities arising out
of acts or omissions occurring at or prior to the Effective Date. The Combined
Company has also agreed to maintain for a period of four years the policies of
directors' and officers' liability insurance maintained by Sun and BSI as of the
Effective Date (or substitute similar policies), but only to the extent such
policies do not exceed an annual cost of $50,000.
William S. Wiley, the current chairman of the board of Sun, will resign
such position as of the Effective Date and will receive a severance payment of
$100,000. Kevin C. James, the current senior vice president and secretary of
Sun, will resign such positions as of the Effective Date and has received a
severance payment of $30,000. L. Kaye Counts, the executive vice president and
chief operating officer of Sun, will resign such positions in April 1997, and
will receive a severance payment of $50,000.
See "The Merger -- Conflicts of Interest."
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase by BSI of Sun in accordance
with GAAP. See "The Merger -- Anticipated Accounting Treatment."
DISSENTERS' RIGHTS
ANY SUN SHAREHOLDER OR BSI STOCKHOLDER WHO DESIRES TO DISSENT MUST NOT VOTE
IN FAVOR OF THE MERGER AND MUST COMPLY WITH CERTAIN PROCEDURES. If the Merger is
consummated, the holders of record of Sun Common Stock and BSI Common Stock and
BSI Preferred Stock who strictly comply with the statutory dissenters'
procedures under the WBCA and the DGCL, respectively, will have certain
dissenters' rights. See, "The Merger -- Dissenters' Rights." Sun and BSI are
not obligated to consummate the Merger if the holders of shares representing
more than 1% of the Sun Common Stock or more than 1% of the BSI Common Stock and
the BSI Preferred Stock properly dissent from the Merger.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to constitute a tax-free reorganization under
Section 368(a)(1)(A) of the Code, such that the Sun Shareholders and the BSI
Stockholders will recognize no gain or loss for federal income tax purposes as a
result of the Merger, except to the extent they receive cash consideration (or
with respect to Seafirst, the Subordinated Note) in exchange for their
respective shares, or cash in lieu of fractional shares or in satisfaction of
their dissenters' rights. See "The Merger -- Certain Federal Income Tax
Consequences."
RISK FACTORS
For a discussion of certain considerations with respect to the business and
operations of Sun and BSI that should be considered by a stockholder before
determining how to vote at the meetings, see "Risk Factors."
PROPOSED REINCORPORATION MERGER
Subject to approval of the Reincorporation by the Sun Shareholders at the
Sun Meeting, as soon as reasonably practicable after the Effective Date, the
Combined Company will reincorporate in Delaware through the merger of the
Combined Company with and into a newly created wholly-owned subsidiary of the
Combined Company. Holders of Sun Common Stock on the effective date of the
Reincorporation will receive one share of Brazos Delaware common stock for each
five shares of Sun Common Stock held following the Merger. Holders of Sun
Preferred Stock on the effective date will receive one share of Brazos Delaware
preferred stock of the comparable series for each share of Sun Preferred Stock
held. No fractional shares will be issuable in connection with the
Reincorporation. In lieu thereof, the Combined Company will make a cash payment
attributable to fractional shares based on the closing price per share for the
Sun Common Stock on the Nasdaq/NMS on the last trading day immediately preceding
the effective date of the Reincorporation. The shares of the surviving Delaware
corporation, which will be named "Brazos Sportswear, Inc.," will have
substantially the same rights and preferences as their exchanged shares, except
to the extent such rights differ under the WBCA and DGCL. Additionally, each
then outstanding option or warrant to purchase Sun Common Stock, including
holders of former BSI options and warrants, will be converted into an option or
warrant, as the case may be, to purchase shares of common stock of Brazos
Delaware based on a one-for-five share conversion rate. The exercise price per
share of such option or warrant to purchase Brazos Delaware common stock will be
adjusted to take into account the conversion rate; otherwise the terms and
conditions of such option or warrant will be substantially the same as the
options or warrants so converted. The closing of the Merger is not conditioned
upon the Reincorporation, and the Sun Shareholders will vote separately on the
Reincorporation proposal. The Reincorporation will not be consummated if the
Merger is not completed. See "Proposed Reincorporation in Delaware."
Any Sun Shareholder who desires to dissent must not vote in favor of the
Reincorporation and must comply with certain procedures. If the Reincorporation
is consummated, the Sun Shareholders who strictly comply with the statutory
dissenters' procedures under the WBCA will have certain dissenters' rights. See
"The Reincorporation -- Rights of Dissenting Shareholders."
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus includes "forward looking
statements" within the meaning of the Securities Act and Section 21E of the
Exchange Act. All statements other than statements of historical fact included
in this Joint Proxy Statement/Prospectus are forward looking statements. Such
forward looking statements include, without limitation, statements under (a)
"Business of Sun," (b) "Business of BSI," (c) "Sun Management's Discussion
and Analysis of Financial Condition and Results of Operations," (d) "BSI
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and (e) "Risk Factors." Although Sun and BSI believe that the
expectations reflected in such forward looking statements are reasonable, they
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
Sun's and BSI's expectations are disclosed in this Joint Proxy
Statement/Prospectus under the heading "Risk Factors" and elsewhere.
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<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Pursuant to the Merger Agreement, BSI will be merged with and into Sun,
with Sun being the surviving corporation. For financial statement presentation
purposes, however, BSI has been identified as the accounting acquiror. The
following summary unaudited pro forma combined financial data presents certain
data for the Combined Company, as adjusted for (i) the effects of the Merger on
an historical basis, (ii) the effects of BSI's acquisition of the assets of
Plymouth Mills, Inc. ("Plymouth Acquisition") on an historical basis and (iii)
the effects of certain pro forma adjustments to the historical financial
statements. The Plymouth Acquisition was accounted for as a "purchase" under
generally accepted accounting principles effective August 2, 1996. The summary
unaudited pro forma combined statements of operations data presented below for
the year ended December 31, 1995, and the nine months ended September 30, 1996,
give effect to the Merger and the Plymouth Acquisition as if both had occurred
on January 1, 1995. The summary unaudited pro forma combined balance sheet data
gives effect to the Merger as if it had occurred on September 30, 1996. See
"Unaudited Pro Forma Condensed Combined Financial Statements" for additional
assumptions reflected in the following table.
PRO FORMA COMBINED(1)
--------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31, 1995
----------------- -----------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
(UNAUDITED)
Net sales............................ $ 206,993 $ 257,323
Gross profit......................... 55,171 55,503
Operating income (loss).............. 13,621 2,310
Interest expense, net................ 5,471 7,975
Income (loss) before income taxes and
extraordinary item................. 8,419 (5,336)
Net income (loss)(2)................. 6,269 (4,775)
Earnings (loss) available to common
equity(2).......................... 5,732 (5,492)
Primary earnings (loss) per share
available to common equity......... $ 0.24 $ (0.31)
Shares used in computing primary pro
forma earnings (loss) per
share(3)........................... 24,263,556 17,863,722
Fully diluted pro forma earnings
(loss) per share................... $ 0.20 $ (0.31)
Shares used in computing fully
diluted pro forma earnings (loss)
per share(3)....................... 28,370,631 17,863,722
AS OF
SEPTEMBER 30, 1996
------------------
BALANCE SHEET DATA: (UNAUDITED)
Working capital...................... $ 17,418
Total assets......................... 136,780
Long-term debt, including current
maturities......................... 32,776
Convertible mandatorily redeemable
preferred stock.................... 9,447
Stockholders' equity................. 10,133
- ------------
(1) Includes BSI financial information for the year ended December 30, 1995 and
as of and for the thirty-nine weeks ended September 28, 1996, respectively.
(2) Excludes a $500 extraordinary gain on the extinguishment of debt.
(3) Shares used in computing pro forma earnings (loss) per share include
weighted average shares outstanding for Sun, BSI (restated for a
37.912252-for-1 stock split), all dilutive options and warrants and certain
"cheap stock" warrants.
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<PAGE>
COMPARATIVE MARKET PRICE DATA
SUN COMMON STOCK
Sun Common Stock has been quoted on the Nasdaq/NMS since December 1989
under the symbol "SSPW." The following table shows the high and low closing
prices by quarter for the Sun Common Stock as reported by the Nasdaq/NMS. On
November 12, 1996, the last full trading day prior to the public announcement of
the signing of the Merger Agreement, the last sale price per share of Sun Common
Stock was $1.75. On January , 1997, the last full trading day for which
quotations were available prior to the date of this Joint Proxy
Statement/Prospectus, the last sale price per share of Sun Common Stock was
$ . As of January , 1997, there were approximately 116 holders of record of
the Sun Common Stock. Stockholders are urged to obtain current quotations for
Sun Common Stock. Sun has never paid dividends on the Sun Common Stock, and it
is anticipated that financing agreements in place after the Merger will restrict
the Combined Company's ability to pay dividends in the future.
HIGH LOW
---- ---
1994
1st Quarter..................... $ 8 1/2 $5 1/2
2nd Quarter..................... 7 4 3/4
3rd Quarter..................... 5 3 1/2
4th Quarter..................... 5 3/4 4 1/4
1995
1st Quarter..................... 5 4 1/4
2nd Quarter..................... 4 1/2 3 3/4
3rd Quarter..................... 5 4 1/4
4th Quarter..................... 4 2 9/16
1996
1st Quarter..................... 3 2 1/2
2nd Quarter..................... 3 2
3rd Quarter..................... 3 1/2 2
4th Quarter (through December
12, 1996).......................... 2 3/8 1 3/4
BSI CAPITAL STOCK
No market value information is available with respect to the securities of
BSI because there is no established trading market for the capital stock, and no
resales of such securities occurred during the relevant periods. BSI has never
paid cash dividends on its capital stock.
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COMPARATIVE PER SHARE DATA
The following table presents comparative per share information (a) for each
of Sun and BSI on a historical basis and (b) for Sun, BSI and Plymouth on an
unaudited pro forma combined basis assuming the Merger and Plymouth acquisition
had been effective during the periods presented. The pro forma information has
been prepared giving effect to the Merger as a "purchase." No cash dividends
were paid by Sun or BSI during any of the periods presented. See "Unaudited Pro
Forma Condensed Combined Financial Statements" for additional assumptions
reflected in the following table.
<TABLE>
<CAPTION>
NINE MONTHS ENDED(1) YEAR ENDED(1)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------- --------------------
<S> <C> <C>
Sun:
Historical --
Earnings (Loss) per Common Share
and Common Equivalent Share... $(.34) $ (.65)
Earnings (Loss) per Common Share
Assuming Full Dilution........ (.34) (.65)
Book Value per Common Share..... 4.19 4.53
Book Value per Common Share
Assuming Full Dilution(2)..... 4.19 4.51
Pro Forma Combined Company--
Earnings (Loss) per Common Share
and Common Equivalent Share... $ .24 $ (.31)
Earnings (Loss) per Common Share
Assuming Full Dilution........ .20 (.31)
Book Value per Common Share..... .65 N/A
Book Value per Common Share
Assuming Full Dilution(2)..... .51 N/A
BSI:
Historical--
Earnings (Loss) per Common Share
and Common Equivalent Share... $ .24 $ (.26)
Earnings (Loss) per Common Share
Assuming Full Dilution........ .23 (.26)
Book Value (Deficit) per Common
Share......................... .29 (.07)
Book Value per Common Share
Assuming Full Dilution(2)..... .27 N/A
BSI and Plymouth Combined (Pro
Forma Equivalent) --
Earnings (Loss) per Common Share
and Common Equivalent Share... $ .28 $ (.30)
Earnings (Loss) per Common Share
Assuming Full Dilution........ .26 (.30)
Book Value per Common Share..... .29 N/A
Book Value per Common Share
Assuming Full Dilution(2)..... .27 N/A
</TABLE>
- ------------
(1) Includes BSI financial information for the year ended December 30, 1995, and
for the thirty-nine weeks ended September 28, 1996, respectively. BSI
financial statements have been retroactively restated to reflect a
37.912252-for-one stock split. Therefore the exchange ratio is effectively
one-to-one.
(2) The calculation of book value per common share assuming full dilution
includes the (i) proceeds from the assumed exercise of stock options and
warrants outstanding at the end of each period as a component of net book
value, and (ii) stock options and warrants outstanding at the end of each
period as a component of common shares outstanding.
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RISK FACTORS
The following risk factors should be considered by Sun Shareholders and BSI
Stockholders in evaluating whether to approve the Merger. Some of these risk
factors relate directly to the Merger while others are present in Sun's or BSI's
general business environment independent of the Merger. These risk factors
should be considered in conjunction with the other information included in this
Joint Proxy Statement/Prospectus.
VARIABILITY OF OPERATING RESULTS
Although for the nine months ended September 30, 1996, the Combined Company
had unaudited pro forma combined net income of $6,269,000, the Combined Company
had unaudited pro forma combined net loss for the year ended 1995 in the amount
of $4,281,000. The loss was primarily attributable to a variety of factors,
including a decline in Sun's sales resulting from a soft retail environment
during part of 1995, strong competition from rival suppliers of products bearing
licensed characters and trademarks, and excess inventory reserve charges. There
can be no assurance that the Combined Company will not realize operating losses
in future years. Its future results of operations will depend on a number of
variables, such as the ability of its product lines to compete for market share
within the industry, the degree with which the Combined Company can realize cost
efficiencies in the production and distribution of its products, and the
condition of the retail environment and general economy. The inability of the
Combined Company to produce operating profits would have a material adverse
effect on its financial condition. See "Unaudited Pro Forma Condensed Combined
Financial Statements."
SUBSTANTIAL INDEBTEDNESS; LEVERAGE
The Combined Company will have significant debt service obligations after
completion of the Merger. On an unaudited pro forma combined basis, at September
30, 1996, the Combined Company had total outstanding indebtedness and total
stockholders' equity of approximately $79,186,000 and $10,133,000, respectively.
See "Unaudited Pro Forma Condensed Combined Financial Statements."
The Combined Company's level of indebtedness could have important
consequences, including the following: (i) the Combined Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or other corporate purposes may be impaired, (ii) a
substantial portion of the Combined Company's cash flow from operations will be
used to pay interest on its indebtedness, thereby reducing the funds available
to the Combined Company for its operations and future business opportunities,
(iii) the Combined Company's borrowings under certain of its credit facilities
are at floating rates of interests, which could result in higher interest
expense in the event of an increase in interest rates, (iv) the Combined
Company's credit facilities contain financial and other restrictive covenants
which could limit the Combined Company's operating and financial flexibility
and, if violated, would result in an event of default which could preclude the
Combined Company's access to credit under such facilities or otherwise have a
material adverse effect on the Combined Company, (v) the Combined Company is
more highly leveraged than many of its competitors, which may place it at an
competitive disadvantage, and (vi) the Combined Company may be more vulnerable
to general economic and industry downturns.
LICENSES
Sales of products under license agreements represented approximately 59.0%
and 60.2% of the Combined Company's unaudited pro forma combined revenues in
fiscal 1995 and the nine months ended September 30, 1996, respectively. The
Combined Company's license agreements generally require it to make minimum
annual royalty payments and advertising expenditures and maintain quality
control and retail distribution commensurate with the licensor's image. The
license agreements also generally provide that the licensor has the right to
approve products sold pursuant to the license and to terminate the license for
failure to comply with its material provisions. Typically, the licensor may
terminate the license if specified minimum levels of annual net sales for
licensed products are not met. The Combined Company's material licenses are
generally for a term of one to two years but can be terminated on 30 days
notice. The loss of one or more of the Combined Company's licenses, or the
decline in popularity of certain licensed character images could have a material
adverse effect on the Combined Company's financial condition and
12
<PAGE>
results of operation. See "Business of Sun -- Products -- Licensed Designs and
Characters," "Business of BSI -- Licenses and Trademarks" and "Unaudited Pro
Forma Condensed Combined Financial Statements."
DEPENDENCE ON MAJOR CUSTOMERS
On an unaudited pro forma combined basis, approximately 62.7% in fiscal
1995, and 70.8% for the nine months ended September 30, 1996, of the Combined
Company's sales were made to its combined ten largest customers. Sales to
Wal-Mart, Target and Kmart represented approximately 88% and 81% of Sun's total
revenues in fiscal 1995 and for the nine month period ending September 30, 1996,
respectively. BSI's sales to Wal-Mart accounted for 18.2% and 17.5% of total
revenues for fiscal 1995 and for its thirty nine weeks ended September 28, 1996,
respectively. Sales to major customers will continue to account for a
significant percentage of the Combined Company's total sales. The loss or
material adverse change in the financial condition of one or more of these
customers could have a material adverse effect on the Combined Company's
financial condition and results of operations. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
DEPENDENCE ON KEY PERSONNEL
The Combined Company's success will depend upon the efforts and abilities
of its executive officers. The loss of the services of any such officers may
have a material adverse effect on the Combined Company's financial condition and
results of operations. BSI has entered into employment agreements with certain
of its key executive officers. See, "The Merger Agreement -- Management After
the Merger" and "Business of BSI -- Executive Officers and Directors of BSI."
UNCERTAINTIES IN APPAREL RETAILING
The retail industry has experienced significant changes and difficulties
over the past several years, including consolidation of ownership, increased
centralization of buying decisions, restructurings, bankruptcies and
liquidations. If the Combined Company's customers are unable to make payments on
a timely basis or at all, it could be faced with uncollected receivables or
unsold finished goods inventory, which could adversely affect its financial
condition and results of operations. Additionally, the Combined Company's
business is impacted by the general seasonal trends that are characteristic of
the apparel industry.
SUBSTANTIAL COMPETITION
The apparel industry is highly competitive. Several of the Combined
Company's competitors have substantially greater financial, distribution,
marketing and other resources, including greater brand awareness. The Combined
Company will compete with numerous apparel vendors, including those with their
own retail stores, as well as department stores, specialty stores, retail chains
and mass merchandisers who sell apparel under their own labels and whose
merchandise displays licensed characters and symbols of professional sports
teams and colleges and universities. Competitive factors include product
quality, access to popular licenses, price, ability to meet delivery
requirements and other aspects of customer service, changes in styles and
consumer preferences, and the limited availability of customer shelf and rack
space.
MANUFACTURERS AND FOREIGN SOURCING
The Combined Company will utilize independent manufacturers to produce a
significant portion of its products. For its screen printed and decorated
apparel, the Combined Company will purchase "blanks," such as undecorated
T-shirts and sweatshirts, in large part from major domestic mills and, to a
lesser extent, from foreign sources. The inability of a supplier to ship the
Combined Company's products to it in a timely manner or to meet the Combined
Company's quality standards could adversely affect its ability to meet customer
delivery requirements. Neither Sun nor BSI has long-term contracts with any of
its suppliers. Each company believes that the loss of any one or more of such
suppliers is not likely to have a long-term material adverse effect on the
Combined Company's business because either new or existing manufacturers likely
would be available to fulfill its requirements. However, the failure of any key
supplier to perform or the loss of any key supplier could have a negative
short-term effect on the Combined Company's results of operations.
13
<PAGE>
To the extent foreign sources grow in importance, the Combined Company's
operations may be adversely affected by, among other things, political
instability resulting in disruption of trade from foreign countries in which the
Combined Company's contractors and suppliers are located; the imposition of
additional regulations and restrictions related to imports and duties, taxes and
other charges on imports, and bilateral trade agreements; any significant
fluctuation in the value of the dollar against foreign currencies; and
restrictions on the transfer of funds. An adverse change in any of the foregoing
could have a material adverse effect on the Combined Company's financial
condition and results of operations.
POTENTIAL OBSTACLES TO INTEGRATION OF THE COMBINED COMPANY
In evaluating the terms of the Merger, Sun and BSI each analyzed their
respective businesses and made certain assumptions concerning their respective
future operations and operations of the Combined Company. One principal
assumption was that through consolidation of operations, the Merger would
produce a Combined Company with operating results better than those historically
experienced by either company in the absence of the Merger. There can be no
assurance, however, that these benefits will be achieved or that the results of
Combined Company's will be improved. These anticipated benefits of the Merger
will not be achieved unless the companies are successfully combined in a timely
manner. The process of combining the organizations could cause the interruption
of, or a loss of momentum in, the activities of the combined companies'
businesses, which could have an adverse effect on their combined operations. In
addition, the success of the Merger will be partially dependent on the
integration of the current management and operations of Sun and BSI. There can
be no assurance that the Combined Company will be able to effectively integrate
management and operations or that operational or administrative efficiencies
resulting from the Merger can be attained.
NO PRIOR MARKET FOR BSI STOCK
No prior market for the BSI Common Stock has existed, and the conversion
ratio for the BSI Common Stock was determined by negotiation between
representatives of Sun and BSI. There can be no assurance that an active trading
market for the Sun Common Stock will continue after the closing of the Merger.
The market price for the Sun Common Stock after the Merger may be subject to
significant fluctuations from time to time in response to numerous factors,
including variations in the reported financial results of the Combined Company
and changing conditions in the economy in general or in the Combined Company's
industry in particular. In addition, the stock markets experience significant
price and volume volatility from time to time which may affect the market price
of the Sun Common Stock for reasons unrelated to the Combined Company's
performance at that time.
RESTRICTIONS ON DIVIDEND PAYMENTS
Sun has never paid cash dividends on shares of Sun Common Stock. The
Combined Company intends to follow this policy and retain future earnings to
provide funds for the operation and expansion of its business and does not
expect to pay cash dividends in the forseeable future. Any future cash dividends
will be at the discretion of the Combined Company's board of directors after
taking into account various factors, including the Combined Company's financial
condition, cash flow from operations and current and anticipated cash needs. The
Combined Company's credit facilities will restrict or prohibit the payment of
cash dividends after the Effective Date.
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Merger, Equus II Incorporated ("Equus II"), the
beneficial owner of 59.1% of BSI's Common Stock, will beneficially own
approximately 57.6% of the outstanding shares of Sun Common Stock. Consequently,
Equus II will have the ability to significantly influence the election of the
Combined Company's directors and the outcome of other issues submitted to the
Combined Company's stockholders for approval. At the Effective Date, two members
of the Combined Company's six person board of directors will be officers of
Equus II. This concentration of ownership may also have the effect of delaying
or preventing a change in control of the Combined Company. See "Principal
Stockholders of BSI."
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THE MEETINGS
MATTERS TO BE CONSIDERED AT THE MEETINGS
SUN MEETING. At the Sun Meeting, holders of Sun Common Stock will be asked
to consider and act upon:
1. a proposal to approve the Merger Agreement and the transactions
contemplated thereby;
2. the Reincorporation; and
3. to consider and act upon such other business as may properly be
presented to the Sun Meeting.
BSI MEETING. At the BSI Meeting, holders of BSI Common Stock will be asked
to consider and vote upon the authorization, approval and adoption of the Merger
Agreement and the transactions contemplated thereby and such other matters as
may properly be presented to the BSI Meeting.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
SUN. The board of directors of Sun has unanimously approved the Merger
Agreement and the transactions contemplated thereby and the Reincorporation and
unanimously recommends that the shareholders of Sun vote FOR approval and
adoption of such matters.
BSI. The board of directors of BSI has unanimously approved the Merger
Agreement and the transactions contemplated thereby and recommends that the
stockholders of BSI vote FOR approval and adoption of such matter.
For a discussion of certain interests in the Merger of the members of the
board of directors of Sun and BSI, see "The Merger -- Conflicts of Interests."
VOTING AT THE MEETINGS; RECORD DATES
SUN. Sun has established January 31, 1997, as the record date for the
determination of shareholders entitled to notice of and to vote at the Sun
Meeting. Only holders of record of Sun Common Stock at the close of business on
such date are entitled to notice of and to vote at the Sun Meeting. Stockholders
of BSI who are not shareholders of Sun on the record date will not be entitled
to vote on the Reincorporation proposal. On the record date for the Sun Meeting,
there were 5,748,500 shares of Sun Common Stock outstanding and entitled to be
voted. A majority of such shares, present in person or represented by proxy, is
necessary to constitute a quorum at the Sun Meeting. Each share of Sun Common
Stock is entitled to one vote with respect to approval of the Merger Agreement
and the Reincorporation.
The affirmative vote of the holders of two-thirds of the outstanding shares
of Sun Common Stock is required to approve the Merger Agreement and the
Reincorporation. Approval of the Merger Agreement will constitute approval of
each aspect of the Merger Agreement.
Seafirst holds 3.8 million shares of Sun Common Stock, or 66.1% of all
outstanding shares, and has agreed to vote its shares in favor of the Merger
Agreement and the Reincorporation. Seafirst's agreement to vote its shares is
irrevocable, except in the event Sun's board of directors terminates the Merger
upon exercise of its fiduciary duties pursuant to the Merger Agreement. Absent
such a termination of the Merger Agreement, because Seafirst has agreed to vote
its shares in favor of the Merger Agreement and the Reincorporation, if an
additional 32,335 shares of Sun Common Stock or .56% of the outstanding shares,
vote in favor of the Merger and the Reincorporation, such proposals will be
approved by the Sun Shareholders.
The respective obligations of Sun and BSI to consummate the Merger are
subject to, among other conditions, the approval and adoption by the
stockholders of Sun and BSI of the Merger Agreement. However, the approval and
adoption by the shareholders of Sun of the Reincorporation is not a condition of
the Merger Agreement. Accordingly, if the Merger Agreement is approved by the
Sun Shareholders, the Merger could be consummated notwithstanding the failure of
the Reincorporation to be adopted by the Sun Shareholders.
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BSI. BSI has established January 31, 1997, as the record date for the
determination of stockholders entitled to notice of and to vote at the BSI
Meeting. Only holders of record of BSI Common Stock at the close of business on
such date are entitled to notice of and to vote at the BSI Meeting. On the
record date for the BSI Meeting, there were 484,805 shares of BSI Common Stock
outstanding and entitled to be voted at the BSI Meeting. A majority of such
shares, present in person or represented by proxy, is necessary to constitute a
quorum at the BSI Meeting, and each issued and outstanding share of BSI Common
Stock is entitled to one vote with respect to the approval and adoption of the
Merger Agreement. The affirmative vote of holders of a majority of the
outstanding shares of BSI Common Stock is required to approve the Merger
Agreement and the transactions contemplated thereby.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER PERSONS
SUN. As of the record date for the Sun Meeting, directors and executive
officers of Sun and their affiliates owned beneficially approximately 3.8% of
the outstanding shares of Sun Common Stock. Under the Merger Agreement,
Seafirst, the holder of 3.8 million shares of Sun Common Stock, or 66.1% of all
outstanding shares, has agreed that it will vote its shares in favor of the
Merger Agreement. Seafirst's agreement to vote its shares is irrevocable, except
in the event Sun's board of directors terminates the Merger upon exercise of its
fiduciary duties pursuant to the Merger Agreement. Absent such a termination of
the Merger Agreement, because Seafirst has agreed to vote its shares in favor of
the Merger Agreement and the Reincorporation, if an additional 32,335 shares of
Sun Common Stock or .56% of the outstanding shares, vote in favor of the Merger
and the Reincorporation, such proposals will be approved by the Sun
Shareholders.
BSI. As of the record date for the BSI Meeting, the directors and
executive officers of BSI and their affiliates owned beneficially approximately
75.1% of the shares of BSI Common Stock.
PROXIES
SUN. Shares of Sun Common Stock represented by a proxy in the form
enclosed, duly executed and returned to Sun prior to or at the Sun Meeting, and
not revoked, will be voted at the Sun Meeting in accordance with the voting
instructions contained therein. Shares of Sun Common Stock represented by
proxies for which no voting instructions are given will be voted FOR approval
and adoption of the Merger Agreement and the Reincorporation.
Holders of Sun Common Stock are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted at the Sun
Meeting. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be accomplished by (i) the
execution and delivery of a later-dated proxy with respect to the same shares,
(ii) giving notice thereof in writing to the Secretary of Sun at any time prior
to the vote on the matters to be considered at the Sun Meeting or (iii)
attending the Sun Meeting and voting in person. Attendance at the Sun Meeting by
a shareholder who signed a proxy will not in itself revoke the proxy.
If a holder of Sun Common Stock does not return a signed proxy card (and
does not vote in person at the Sun Meeting), his or her shares will not be voted
at the Sun Meeting. Such failure to vote will have the effect of a vote against
the adoption of the Merger Agreement and Reincorporation. Abstentions and broker
non-votes with respect to shares of Sun Common Stock will also have the effect
of voting against the approval and adoption of the Merger Agreement and the
Reincorporation.
The board of directors of Sun knows of no matters to be presented at the
Sun Meeting other than those described in this Joint Proxy Statement/Prospectus.
If other matters are properly brought before the Sun Meeting, it is the
intention of the persons named as proxies to vote with respect to such matters
in accordance with their judgment.
BSI. Shares of BSI Common Stock represented by a proxy in the form
enclosed, duly executed and returned to BSI prior to the BSI Meeting, and not
revoked, will be voted at the BSI Meeting in accordance
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with the voting instructions contained therein. Shares of BSI Common Stock
represented by proxies for which no voting instructions are given will be voted
FOR approval and adoption of the Merger Agreement.
Holders of BSI Common Stock are requested to complete, sign, date and
return promptly the enclosed proxy card in the postage paid envelope provided
for this purpose in order to ensure that their shares are voted at the BSI
Meeting. A proxy may be revoked at any time prior to the exercise of the
authority granted thereunder. Revocation may be made by (i) the execution and
delivery of a later-dated proxy with respect to the same shares, (ii) giving
notice thereof in writing to the Secretary of BSI at any time prior to the vote
on the matters to be considered at the BSI Meeting or (iii) attending the BSI
Meeting and voting in person. Attendance at the BSI Meeting by a stockholder who
signed a proxy will not in itself revoke the proxy.
If a holder of BSI Common Stock does not return a signed proxy card (and
does not vote in person at the BSI Meeting), his or her shares will not be voted
at the BSI Meeting. Such failure to vote will have the effect of a vote against
the approval and adoption of the Merger Agreement.
The board of directors of BSI knows of no matters to be presented at the
BSI Meeting other than those described in this Joint Proxy Statement/Prospectus.
If other matters are properly brought before the BSI Meeting, it is the
intention of the persons named as proxies to vote with respect to such matters
in accordance with their judgment.
SOLICITATION OF PROXIES
Solicitation of proxies for use at the Sun Meeting and the BSI Meeting may
be made in person or by mail, telephone, telecopy or telegram. Sun and BSI will
each bear the cost of the solicitation of proxies from their respective
stockholders. Officers and employees of Sun and BSI, who will receive no
compensation in excess of their regular salaries for their services, may solicit
proxies from stockholders of Sun and BSI, respectively, in person or by mail,
telephone, telecopy or telegram. Sun has requested banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of Sun Common Stock held of
record by such entities, and Sun will, upon request of such holders, reimburse
reasonable forwarding expenses.
THE MERGER
BACKGROUND
In early 1992, given the interest at that time of its then majority
shareholder, David Sabey, to liquidate at least a portion of his holdings, Sun
retained NationsBank, N.A. to assist in facilitating a sale or merger of Sun. No
acceptable offers were obtained in connection with this effort. In November
1992, Seafirst acquired its 3,800,000 share position in Sun in partial
settlement of non-related loans that had been extended to Mr. Sabey. Efforts to
sell or merge Sun were terminated in late 1992 and in early 1993 a new chief
executive officer, Larry Mounger, was hired by Sun.
In February 1995, Sun retained a consulting firm to analyze Sun's overall
operations, with particular emphasis on sourcing and information systems, and to
advise Sun on ways to reduce expenses and increase operating efficiencies.
During July 1995, due to increased competition from screen printed apparel
companies and the concentration of retail buying power, Sun's management began
to explore ways by which shareholder value might be enhanced. Management was
also concerned with Sun's increased reliance on certain character licenses and
limitations of its core T-shirt and sweatshirt product lines. Given these
factors, Sun's strategic position, and a desire to maximize shareholder value,
Sun engaged Kurt Salmon Associates, Inc. ("Kurt Salmon") in August 1995 to
explore a sale or merger of Sun. In the September-October 1995 time-frame, based
on Sun's decision to focus on internal operational issues, Kurt Salmon was
advised to suspend its efforts, and the sales process was not initiated.
In October 1995, William S. Wiley was hired as chief executive officer of
Sun. The Kurt Salmon engagement was not officially terminated until December
1995. In December 1995, following the termination of the engagement of Kurt
Salmon, Seafirst, which as a national bank is not permitted to be a long-term
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investor in Sun under applicable banking regulations, engaged Kurt Salmon to
assist in identifying a party interested in purchasing its equity position or in
finding a merger partner for Sun.
During early 1996, Kurt Salmon approached a number of parties regarding
Seafirst's equity interest in Sun. Several parties, including BSI, made site
visits to Sun for the purpose of evaluating the acquisition of Seafirst's equity
position or a merger with Sun. In April 1996, Seafirst received a non-binding
expression of interest in acquiring all of the shares of Sun at a price that
represented a 22% discount to the common stock trading price at the date of the
expression of interest. Seafirst responded to this expression of interest by
communicating a willingness to consider an offer at a price that was at or above
the current market trading price. The party that had submitted the expression
did not amend its original offer and withdrew from further conversations. In
June 1996, BSI indicated its interest in acquiring the Seafirst position for
cash and in merging BSI into Sun, with Sun's other shareholders remaining
shareholders in the combined entity. This interest was further clarified in July
1996, along with an indication of how BSI intended to finance the proposed
transaction. As a result of indications of interest from certain parties,
including BSI, regarding a merger or acquisition involving the entirety of Sun,
Seafirst's engagement with Kurt Salmon was terminated in July 1996, at which
time Sun retained the services of Kurt Salmon.
Following approval at a July 18, 1996, meeting of the board of directors of
Sun, the board elected to enter into non-binding, exclusive discussions with BSI
with the goal of achieving a merger with BSI. A letter of intent was signed
between Sun and BSI on August 19, 1996.
Based on BSI's review of Sun's July and August 1996 financial performance
and prospects for the remainder of 1996, BSI proposed a revised letter of intent
with Sun in September 1996. The terms of the letter of intent were approved by
Sun's board of directors at a meeting held on September 19, 1996 and executed on
September 24, 1996.
Following the execution of the letter of intent, Sun and its
representatives conducted due diligence on BSI. The results of the due diligence
investigation were discussed in a teleconference meeting of the Sun board on
October 16, 1996. Upon review of the due diligence report, the Sun board agreed
to continue to move forward with BSI. At the October 16 meeting, the Sun board
engaged Rodman & Renshaw, Inc. to render a fairness opinion, from a financial
point of view, for the shareholders of Sun other than Seafirst. Seafirst
independently analyzed the transaction and has agreed to vote in favor of the
Merger. See "Opinion of Rodman & Renshaw, Inc."
As a result of continued weakness in certain sectors of the licensed
apparel market, Sun's financial performance in September and October 1996 did
not meet expectations, and Sun further revised downward its expected results for
November and December 1996. Based upon this performance and the implications on
the financing of the transaction, BSI revised the terms of the letter of intent
in discussions held the week of October 28, 1996. The October revisions to the
BSI letter of intent included a reduction in the number of shares that BSI would
purchase for cash and a corresponding increase in the common stock interest the
Sun Shareholders would retain in the Combined Company. The revisions also
included a reduction in the per share cash offer and the requirement that
Seafirst take a portion of its consideration in the form of a subordinated note.
The Sun board approved the significant terms of the revised BSI offer in a
meeting held October 31, 1996, and authorized Mr. Wiley to work toward the
execution of a definitive merger agreement. Negotiations in regard to the terms
of the BSI offer proceeded during the week of November 4, 1996. During these
negotiations the per share cash offer was further reduced to reflect expenses
and fees associated with the transfer of licenses, severance costs and
transaction expenses. The $2.20 cash offer agreed upon represented a 17% premium
to the last trade price prior to the merger announcement on November 13, 1996.
The definitive Merger Agreement was approved by the board of BSI on November 11,
1996, and the board of Sun on November 13, 1996 at which time the Merger
Agreement was executed.
REASONS FOR THE MERGER
SUN. In determining to proceed with the Merger, the Sun board considered
historical information relating to the business, financial condition and the
results of operations of Sun and BSI, the business and financial prospects of
Sun and BSI, the terms of the Merger Agreement, the condition in the Merger
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Agreement that Sun shall have received a fairness opinion from Rodman & Renshaw
to the effect that the consideration to be paid to Minority Shareholders is
fair, from a financial point of view (such firm not being requested by Sun to
render an opinion with respect to Seafirst's equity position in Sun) and Rodman
& Renshaw's presentation to the Sun board of directors on November 13, 1996. The
board of directors of Sun views the Merger as an opportunity to materially
increase Sun's sales and profitability through benefits that may be derived from
a combination of the two sales forces, customer bases, license portfolios,
design and graphic art functions, manufacturing operations and sourcing
capabilities. The board viewed the Combined Company as having increased
"critical mass" which may enable it to obtain additional capital on more
favorable terms. The board did not undertake separate analyses of each of these
factors nor did the board reach a separate conclusion with respect to each such
factor in its determination as to the fairness of the terms of the Merger,
although the board did consider all of the above factors as being supportive of
the board's conclusion. The consideration of such factors resulted from the
information relating to such factors being added to the collective business
knowledge and experience of Sun's board so as to enable the board to apply such
information in its deliberative processes. In view of the above and the variety
of factors considered by the Sun board of directors in reaching its conclusion
as to the fairness of the Merger, the board did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination as to the fairness of the terms of the
Merger.
BSI. BSI's strategy is to maximize stockholder value by building a highly
profitable and diversified sportswear company through internal growth and
strategic acquisitions. After conducting extensive due diligence, the BSI board
determined that a merger with Sun would result in numerous benefits which would
aid BSI in pursuing its strategic goal of becoming one of the leading sportswear
companies in the industry.
The board of directors of BSI believes that the terms of the Merger are
fair to and in the best interests of BSI and its stockholders and has
unanimously approved the Merger Agreement and recommends approval and adoption
of the Merger Agreement by the holders of BSI Common Stock. In reaching its
conclusion, the BSI board considered the following factors:
o The Combined Company will have a broader portfolio of products as a
result of the addition of Sun's animated movie and character
licenses.
o The Combined Company will have an expanded customer base that
includes some of the largest retailers in the United States, and a
combination of the companies may result in an enhanced reputation
and relationship with those customers, thereby providing for
greater customer penetration. The enhanced customer base will
provide geographic coverage in almost all major U.S. markets and
numerous secondary markets.
o The Combined Company will be able to increase the selling coverage
of its line by extending the scope of the sales organization of
each company to cover all of its products. Additionally, BSI's New
York City showrooms and presence in the garment district will
provide Sun with an enhanced marketing position.
o The Merger will enhance each company's sourcing capability and
buying power, thereby potentially resulting in cost advantages for
the Combined Company.
o The Combined Company will have increased "critical mass" which
may enable it to obtain additional capital on more favorable terms.
o Sun will bring to the Combined Company an advanced manufacturing
facility.
In determining that the Merger was fair to and in the best interest of BSI
and its stockholders, the BSI board considered these factors collectively and
did not assign specific or relative weight to any of such factors.
OPINION OF RODMAN & RENSHAW, INC.
Rodman & Renshaw, Inc. ("Rodman") was engaged by the board of directors
of Sun to render its opinion to the board as to whether the consideration to be
paid in the Merger to the Minority Shareholders is fair, from a financial point
of view. At the special meeting of Sun's board of directors on November 13,
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1996, Rodman delivered its oral opinion that, as of such date, based upon and
subject to the various considerations expressed in such opinion, the
consideration to be paid to the Minority Shareholders is fair from a financial
point of view. As of the date hereof, Rodman delivered its written opinion (the
"Rodman Opinion") that, as of such date, based upon and subject to the various
considerations set forth in the Rodman Opinion, the consideration to be paid to
the Minority Shareholders is fair, from a financial point of view. The Rodman
Opinion addresses only the fairness from a financial point of view of the
consideration to be paid to the Minority Shareholders and does not constitute a
recommendation to any shareholder of Sun as to how such shareholder should vote
at the Sun Meeting or whether such shareholders should make a Non-Cash Election.
The full text of the Rodman Opinion, which sets forth the assumptions made,
procedures followed, matters considered and limits of its review, is attached
hereto as Appendix B and is incorporated herein by reference. The Minority
Shareholders are urged to read the Rodman Opinion in its entirety.
In arriving at the Rodman Opinion with respect to Sun, Rodman has, among
other things: (a) reviewed, from a financial point of view, the Merger
Agreement, as amended and the exhibits thereto; (b) reviewed Sun's Annual
Reports to Shareholders and Annual Reports on Form 10-K for the years ended
December 31, 1993 through 1995 and its interim reports on Form 10-Q and 8-K
filed since December 31, 1993; (c) reviewed financial and operating data
relating to Sun's business and prospects, including financial forecasts; (d)
discussed financial information (both historical and forecast) and the business
and prospects of Sun with the management of Sun; (e) reviewed the reported
historical and recent market prices and trading volumes of the Sun Common Stock;
(f) compared the financial, operating and stock price performance of Sun with
certain other companies deemed comparable; and (g) reviewed the financial terms,
to the extent publicly available, of certain other acquisition transactions
deemed comparable. With respect to BSI, Rodman has, among other things: (a)
reviewed BSI's financial statements for the fiscal years ended December 31, 1994
and 1995 and for the interim period through September 30, 1996; (b) reviewed
certain financial and operating data relating to BSI's business and prospects,
including financial forecasts; (c) compared the financial and operating
performance of BSI with publicly available information concerning certain other
companies deemed comparable; and (d) discussed financial information (both
historical and forecast) and the business and prospects of BSI with the
management of BSI. Rodman also took into account its assessment of the economic,
market and financial conditions generally and within the industry in which Sun
and BSI are engaged.
In rendering the Rodman Opinion, Rodman assumed and relied upon the
accuracy and completeness of all information supplied or otherwise made
available to it by Sun and BSI or obtained by it from other sources, and Rodman
relied upon the representations of the respective managements of Sun and BSI
that they are unaware of any information or facts that would make the
information provided to Rodman incomplete or misleading. Rodman has not
independently verified such information, undertaken an independent appraisal of
the assets or liabilities (contingent or otherwise) of Sun or BSI or been
furnished with any such appraisals. With respect to the financial forecasts with
regard to each of Sun and BSI which Rodman reviewed, Rodman relied on the
representations of the respective managements of Sun and BSI that such available
forecasts are reasonable and that: (a) as to the respective forecasts, they are
unaware of any facts that would make such information incomplete or misleading;
and (b) there have been no material adverse developments in the business
(financial or otherwise) or prospects of Sun or BSI since September 30, 1996.
Rodman did not make any recommendations to Sun as to the terms of the
Merger. The determination as to the terms of the Merger Agreement was made by
the board of directors of Sun pursuant to arms-length negotiations with BSI.
Rodman understands that its opinion and presentation to the board of directors
of Sun was one of the many factors taken into consideration by the board of
directors of Sun in its determination to approve the Merger.
The following is a summary of all material financial analyses used by
Rodman in preparing its oral opinion to the board of directors of Sun on
November 13, 1996 and the Rodman Opinion. Rodman utilized substantially the same
types of financial analyses in preparing its oral opinion to the board of
directors of
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Sun as it did in preparing the Rodman Opinion. Utilizing these analyses, Rodman
compared the respective ranges of values per share of the Minority Shareholders
interest on a stand-along basis, assuming no Merger occurs (the "Stand-alone
Interest") and on a Combined Company basis, assuming the Merger occurs (the
"Combined Company Interest"). In its analyses, to be conservative, Rodman
assumed no benefits or synergies from the proposed Merger which would have
increased the combined projected financial results of Sun and BSI and did not
account for Sun's declining financial results for the latest twelve months ended
September 30, 1996 which would have made it appropriate to apply a discount to
Sun's projected 1997 results.
COMPARATIVE STOCK PRICE PERFORMANCE: As part of its analysis, Rodman
reviewed the recent stock market performance of Sun and compared such
performance to a group of publicly-traded apparel companies deemed comparable
including: Active Apparel Group, Inc., Donnkenny, Inc., Fruit of the Loom, Inc.,
Garan, Incorporated, Garment Graphics, Inc., Kellwood Company, Oxford
Industries, Inc., Russell Corporation and Starter Corporation (the "Apparel
Comparables"). Rodman observed that over the period from January 1, 1995
through January 20, 1997, Sun's stock price had declined approximately 50% and
traded significantly below an index of the Apparel Comparables and the S&P 500.
ANALYSIS OF CERTAIN PUBLICLY TRADED COMPANIES: Using publicly available
information, Rodman compared selected historical share prices, earnings and
operating data and financial ratios for Sun to the corresponding data and ratios
of the Apparel Comparables. Such data included the ratio of the market value of
common equity, based on closing market prices on January 20, 1997, ("Equity
Market Value") plus total debt net of cash and cash equivalents (together with
Equity Market Value, "Enterprise Value"), to earnings before interest, taxes,
depreciation and amortization ("EBITDA") for each of the Apparel Comparables'
latest twelve month period, and the ratio of Enterprise Value to earnings before
interest and taxes ("EBIT") for each of the Apparel Comparables' latest twelve
month period, as well as the ratio of Equity Market Value to each of the Apparel
Comparables' latest twelve month period net income.
An analysis of the ratio of Enterprise Value to the latest twelve month
EBITDA for the Apparel Comparables yielded a range of 4.4x to 29.1x, with a mean
ratio of 12.1x. An analysis of Enterprise Value to the latest twelve month EBIT
for the Apparel Comparables yielded a range of 5.0x to 30.0x, with a mean ratio
of 15.6x. An analysis of the ratio of Equity Market Value to the latest twelve
month net income for the Apparel Comparables yielded a range of 4.9x to 62.5x,
with a mean ratio of 27.8x. As a result of Sun's negative financial results for
EBITDA, EBIT and net income for the latest twelve month period ended September
30, 1996 and the uncertain financial outlook for Sun for the remaining three
month period ended December 31, 1996, Rodman did not deem the above analysis of
the Apparel Comparables meaningful in arriving at a range of values based on
Sun's latest twelve month results.
In order to arrive at a range of values based on the above analysis of the
Apparel Comparables, Rodman calculated a range of values per share based on
Sun's projected 1997 results and the combined projected 1997 results of an
independent Sun and BSI. Rodman first calculated the ratio of the Apparel
Comparables' Equity Market Value divided by their projected 1997 net income, to
the Apparel Comparables' Equity Market Value divided by their latest twelve
month net income, which ratio was approximately 50%. Rodman then applied this
50% ratio to the average Apparel Comparables' latest twelve month EBIT and
EBITDA multiples to arrive at projected 1997 multiples for EBIT and EBITDA of
7.8x and 6.0x, respectively. Rodman applied these multiples, as well as the
average Apparel Comparables' projected 1997 ratio of Equity Market Value to
projected 1997 net income of 14.5x to Sun's projected 1997 results and the
combined projected 1997 results of Sun and BSI, and calculated a range of values
for the Stand-alone Interest of $1.29 to $2.52 per share with an average value
of $1.93 per share, as compared to, a range of values for the Combined Company
Interest of $2.03 to $3.81 per share with an average of $2.71 per share.
DISCOUNTED CASH FLOW ANALYSIS: Rodman conducted a discounted cash flow
analysis for the years ending December 31, 1996 through 2000 for the purpose of
valuing the future streams of after-tax cash flows that each of Sun and an
independent Sun and BSI combined would produce through December 31, 2000.
After-tax cash flows were calculated at the tax-effected EBIT for each of Sun
and an independent Sun and BSI combined plus projected depreciation and
amortization less projected capital expenditures and
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projected increases in non-cash working capital. Rodman computed the terminal
value of each of Sun and an independent Sun and BSI combined by applying a range
of multiples, ranging from 7.5x to 8.5x, to projected EBITDA for each of Sun and
an independent Sun and BSI combined in December 31, 2000 and then discounted the
terminal values to present values using different discount rates, ranging from
10% to 15%. This discounted cash flow analysis indicated a range of values for
the Stand-alone Interest of $1.46 to $2.47 per share with an average of $1.94
per share, as compared to, a range of values for the Combined Company Interest
of $2.36 to $4.39 per share with an average of $3.18 per share.
TRANSACTION ANALYSIS: Rodman reviewed publicly available information on
certain merger and acquisition transactions involving companies or entities
involved in apparel manufacturing. The transactions which Rodman reviewed were
the merger/acquisition of: (i) Munsingwear, Inc. by Supreme International
Corporation; (ii) Oak Hill Sportswear by Donnkenny, Inc.; (iii) Beldoch
Industries by Donnkenny, Inc.; (iv) Apex One, Inc. by Converse Inc.; (v) M+L
International, Inc. by Biscayne Apparel, Inc.; (vi) Apparel Ventures by AVI
Holdings; (vii) Nutmeg Industries by V.F. Corporation; (viii) Salem Sportswear
Corp. by Fruit of the Loom; (ix) Chorus Line by an investor group; (x) Fenn
Wright & Mason by Cygne Designs; and (xi) Flapdoodles by Marisa Christina,
Incorporated. Rodman reviewed the consideration paid in such transactions in
terms of Equity Value and Total Consideration, as a multiple of latest twelve
month EBIT and EBITDA, and Equity Value as a multiple of net income. The average
of these multiples was 8.0x, 6.7x and 12.4x, respectively. As a result of Sun's
negative financial results for EBITDA, EBIT and net income for the latest twelve
month period ended September 30, 1996 and the uncertain financial outlook for
Sun for the remaining three month period ended December 31, 1996, Rodman did not
deem the above transaction analysis meaningful in arriving at a range of values
based on Sun's latest twelve month results.
In order to arrive at a range of values based on the above transaction
analysis, Rodman calculated a range of values per share based on Sun's projected
1997 results and the combined projected 1997 results of an independent Sun and
BSI. Rodman applied the above-cited average transaction analysis multiples to
Sun's projected 1997 results and the combined projected 1997 results of an
independent Sun and BSI and calculated a range of values for the Stand-alone
Interest of $1.33 to $2.87 per share with an average value of $1.96 per share,
as compared to, a range of values for the Combined Company Interest of $2.27 to
$3.25 per share with an average of $2.68 per share.
Such analyses were prepared solely as part of Rodman's analysis of the
fairness, from a financial point of view, of the consideration to be paid to the
Minority Shareholders and were provided to Sun's senior management and board of
directors in connection with Rodman's oral opinion to the board of directors on
November 13, 1996 and the delivery of the Rodman Opinion. The term "fair from a
financial point of view" is a standard phrase contained in investment banking
fairness opinions and refers to the fact that Rodman's opinion as to the
fairness of the consideration to be paid to the Minority Shareholders is
addressed solely to the financial attributes of such matters. The analyses were
prepared solely for purposes of enabling Rodman to provide its opinion as to the
fairness of the consideration to be paid to the Minority Shareholders pursuant
to the Merger Agreement and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results which may be significantly more or less favorable than
suggested by such analyses.
The preparation of a fairness opinion is a complex process involving
various subjective judgments and determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors summarized above, these analyses must be considered as a whole and
selected portions of these analyses and the factors considered by Rodman,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying the Rodman Opinion.
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SELECTION AND COMPENSATION OF RODMAN & RENSHAW, INC.
Rodman is a nationally recognized investment banking firm and, as part of
its investment banking activities, is regularly engaged in the valuations of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritten secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Rodman has never been involved in any prior transaction with either Sun or BSI.
Rodman was retained to provide a fairness opinion in its capacity as an
independent financial advisor. Pursuant to a letter agreement dated November 13,
1996, as amended, Sun agreed to pay Rodman a fee of $162,500, payable in cash as
follows: (i) $50,000 upon execution of the engagement letter; and (ii) $112,500
upon rendering a fairness opinion. Sun also agreed to reimburse Rodman for
expenses not to exceed $20,000, including fees and expenses of its legal counsel
incurred by it and to indemnify Rodman for certain liabilities that may arise
out of the rendering of its services or opinions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the opinions of each of Graham & James
LLP/Riddell Williams P.S., counsel to Sun, and Porter & Hedges, L.L.P., counsel
to BSI, as to certain federal income tax consequences associated with
participation in the Merger, particularly with respect to BSI, Sun and the
holders of (i) BSI Common Stock, (ii) BSI Preferred Stock, (iii) warrants to
acquire BSI Common Stock, (iv) options to acquire BSI Common Stock, and (v) Sun
Common Stock (such holders collectively referred to as the "Participants").
Copies of the opinions issued by Graham & James LLP/Riddell Williams P.S. and
Porter & Hedges, L.L.P. are included as exhibits to the Registration Statement
filed with the Commission of which this Joint Proxy/Prospectus is a part.
Participants should be aware that such opinions are not binding on the Internal
Revenue Service ("IRS") or the courts, nor are the IRS or the courts precluded
from adopting contrary positions. No ruling has been requested from the IRS with
respect to any of the opinions and statements set forth herein. Accordingly,
there can be no assurance that such opinions and statements will be sustained by
the IRS or by a court if challenged by the IRS.
An opinion of counsel is not binding on the IRS or the courts. Further, the
opinion of tax counsel is intended for general information only and is based on,
among other things, current law and certain representations as to factual
matters made by, among others, BSI and Sun which, if correct in certain material
respects, would jeopardize the conclusions reached by counsel in its opinion.
Neither Sun nor BSI is currently aware of any facts and circumstances which
would cause any such representations made by it to counsel to be untrue or
incorrect in any material respect.
This summary and the opinions of counsel do not discuss all aspects of
federal income taxation that may be relevant to a Participant in light of his or
her particular circumstances, or to certain types of Participants which are
subject to special treatment under federal income tax laws (including dealers in
securities, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, S corporations, and foreign corporations and
persons who are not citizens or residents of the United States nor does it
include persons who hold BSI or Sun capital stock as part of a hedge, straddle,
"synthetic security" or other integrated investment). In addition, this
summary and the opinions of counsel do not describe any tax consequences under
state, local or foreign tax laws.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations, IRS rulings and pronouncements, and
judicial decisions now in effect, all of which are subject to change at any time
by legislative, judicial or administrative action. Any such changes may be
applied retroactively in a manner that could adversely affect a Participant.
This summary also includes a discussion of other matters relating to the
Merger that may be relevant to the Participants, but which have not been opined
to in the legal opinions of Graham & James LLP/Riddell Williams P.S. and Porter
& Hedges, L.L.P.
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THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF GENERAL APPLICATION WHICH ARE EXPECTED TO RESULT FROM THE
MERGER. PROSPECTIVE PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES THAT MAY BE SPECIFIC TO THEM IN
CONNECTION WITH PARTICIPATING IN THE MERGER, AS WELL AS THE APPLICATION TO THEM
OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
SUN. Based on certain factual representations by Sun, BSI, and certain BSI
stockholders, as well as certain assumptions set forth in its opinion, Graham &
James LLP/Riddell Williams P.S., has rendered the following opinions to Sun as
to certain federal income tax consequences of the Merger:
1. The Merger will qualify as a reorganization under Section 368 of
the Code.
2. No gain or loss will be recognized by any holder of Sun Common
Stock as a result of the Merger, except in the case of cash or the
Subordinated Note paid to those holders of Sun Common Stock who do not
properly elect to retain their shares of Sun Common Stock and thus receive
the cash consideration or the Subordinated Note, and except for cash paid
to holders of Sun Common Stock who dissent from the Merger or cash paid in
lieu of fractional shares.
The tax consequences of the receipt of a cash payment by Sun Shareholders
and the receipt of the Subordinated Note by Seafirst will be determined in
accordance with Section 302 of the Code. Under Section 302 of the Code, a
redemption of Sun Common Stock pursuant to the Merger will, as a general rule,
be treated as a sale or exchange if such redemption (a) is "substantially
disproportionate" with respect to the shareholder, (b) results in a "complete
redemption" of the shareholder's interest in Sun or (c) is "not essentially
equivalent to a dividend" with respect to the shareholder. To the extent such
redemption is treated as a sale or exchange under Section 302 of the Code with
respect to such shareholder, such shareholder will recognize either capital gain
or loss equal to the difference between the cash proceeds allocable to the
redemption of such shareholder's Sun Common Stock by Sun and the shareholder's
adjusted tax basis in such stock. Such gain or loss generally will be long-term
capital gain or loss if the Sun Common Stock is held as a capital asset by the
shareholder for more than one year.
The redemption of a Sun Shareholder's Sun Common Stock will be
"substantially disproportionate" with respect to such shareholder if the
percentage of stock actually and constructively owned by such shareholder
immediately following the Merger is less than 80% of the percentage of Stock
actually and constructively owned by such shareholder immediately prior to the
Merger. Sun Shareholders should consult their own tax advisors with respect to
the application of the "substantially disproportionate " tests to their
particular facts and circumstances.
The redemption of a Sun Shareholder's Sun Common Stock will generally
result in a "complete redemption" of such shareholder's interest in Sun if all
of the Sun Common Stock actually and constructively owned by the shareholder is
redeemed pursuant to the Merger.
Even if the redemption of a Sun Shareholder's Sun Common Stock fails to
satisfy the "substantially disproportionate" test or the "complete
redemption" test described above, the redemption of such shareholder's Sun
Common Stock may nevertheless satisfy the "not essentially equivalent to a
dividend" test if the shareholder's redemption of Sun Common Stock pursuant to
the Merger results in a "meaningful reduction" in such shareholder's
proportionate stock interest in Sun. Whether the receipt of cash by Sun
Shareholders will be considered "not essentially equivalent to a dividend"
will depend upon such shareholder's facts and circumstances. Sun Shareholders
should consult with their own tax advisors as to the application of this test in
their particular situation.
If a Sun Shareholder cannot satisfy any of the three tests described above
and to the extent Sun has sufficient current and/or accumulated earnings and
profits, such shareholder will be treated as having received a dividend which
will be includable in gross income (and treated as ordinary income) in an amount
equal to the cash received (without regard to gain or loss, if any).
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The Merger will have no U.S. federal income tax consequences for Sun
Shareholders who retain their Sun Common Stock and receive no cash or the
Subordinated Note. Accordingly, a Sun Shareholder will not recognize any gain or
loss on any Sun Common Stock retained by such shareholder.
If the Merger fails to qualify under Section 368 of the Code, the
transaction will be treated as a taxable sale of assets and BSI would recognize
gain equal to the excess of the fair market value of the Sun capital stock
distributed to the BSI Stockholders in the Merger over BSI's basis in the assets
transferred to Sun pursuant thereto. Any resulting corporate income tax on such
gain would be payable by Sun, as the successor to BSI.
BACKUP WITHHOLDING. Under the backup withholding rules, a holder of Sun
Common Stock may be subject to backup withholding at the rate of 31% with
respect to dividends and proceeds of redemption unless such Sun Shareholder (a)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Any amount withheld under these rules may be credited against
the Sun Shareholder's federal income tax liability. Sun may require holders of
Sun Common Stock to establish an exemption from backup withholding or to make
arrangements satisfactory to Sun with respect to the payment of backup
withholding. A Sun Stockholder who does not provide Sun with his, her or its
current taxpayer identification number may be subject to penalties imposed by
the IRS.
BSI. Based on certain factual representations by Sun, BSI, the BSI
stockholders, as well as certain assumptions set forth in its opinion, Porter &
Hedges, L.L.P. has rendered the following opinions to BSI as to the material
federal income tax consequences of the Merger:
1. The Merger will qualify as a "reorganization" under Section
368(a)(1)(A) of the Code and each of Sun and BSI will constitute a "party
to the reorganization" within the meaning of Section 368(b) of the Code;
2. BSI will not recognize any income, gain or loss as a result of the
Merger;
3. No income, gain or loss will be recognized by any BSI Stockholder
as a result of the Merger with respect to the exchange of their BSI Common
Stock and/or BSI Preferred Stock for Sun Common Stock and/or Sun Preferred
Stock pursuant to the Merger, except in the case of cash paid to dissenters
or cash paid in lieu of issuing fractional shares of Sun Common Stock;
4. The payment of cash to a BSI Stockholder in lieu of a fractional
share interest in Sun Common Stock will be treated as if the fractional
share interest was distributed as part of the Merger and then redeemed by
Sun. Accordingly, the tax consequences of such a cash payment will be
determined in accordance with Section 302 of the Code. Unless the
redemption is essentially equivalent to a dividend, such a redemption will
be treated as a sale or exchange of the fractional share interest under
Section 302 of the Code and gain or loss (which will constitute capital
gain or loss if the related BSI Common Stock was held as a capital asset)
will be recognized by the BSI Stockholder measured by the difference
between the cash received in lieu of the fractional share and the portion
of the BSI Stockholder's tax basis that is allocated to such fractional
share.
5. A redemption of BSI stockholders' fractional share interest in Sun
will not be essentially equivalent to a dividend if such stockholder incurs
a "meaningful reduction" in his proportionate equity interest in Sun by
reason of the redemption. Although the determination of whether there has
been a meaningful reduction is a factual matter on which no opinion of
counsel has been rendered, generally a redemption of public company shares
held by a minority stockholder will be treated as a meaningful reduction
where such stockholder's proportionate equity interest in the corporation
has been reduced.
6. The aggregate tax basis of Sun Common Stock and/or Sun Preferred
Stock received by a BSI Stockholder in the Merger will be the same as the
aggregate tax basis of the BSI Common Stock and/or BSI Preferred Stock
exchanged for the Sun Common Stock and/or Sun Preferred Stock (less any
portion of such basis allocable to fractional shares of redeemed for cash);
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7. The holding period of Sun Common Stock and/or Sun Preferred Stock
(including any fractional shares deemed issued and then redeemed) received
by a BSI Stockholder in exchange for BSI Common Stock and/or BSI Preferred
Stock pursuant to the Merger will include the holding period of the BSI
Common Stock and/or BSI Preferred Stock that was converted into the Sun
Common Stock; provided that such BSI Common Stock and/or BSI Preferred
Stock was held as a capital asset at the Effective Date of the Merger.
8. No gain or loss will be recognized by the holders of compensatory
options to purchase BSI Common Stock upon the receipt of options to
purchase Sun Common Stock due to the conversion of their BSI options.
We express no opinion regarding the federal income tax consequences of the
conversion of BSI warrants into warrants to purchase Sun Common Stock since the
present Treasury Regulations take the position that warrants are neither stock
nor securities qualifying for tax free treatment. Proposed Treasury Regulations
which reverse this position were issued on December 23, 1996. However, such
proposals may not become final, and the scheduled effective date is expected to
be after the completion of the Merger.
If the Merger failed to qualify under Section 368(a)(1)(A) of the Code, BSI
would recognize gain equal to the excess of the fair market value of the Sun
Common Stock distributed to the BSI Stockholders in the Merger over BSI's basis
in the assets transferred to Sun pursuant thereto. Any resulting corporate
income tax on such gain would be payable by Sun, as the successor to BSI.
Further, if the Merger is ultimately determined not to constitute a
reorganization under the Code, holders of BSI Common Stock and/or BSI Preferred
Stock will recognize gain or loss equal to the difference between such holders
basis in his shares exchanged in the Merger and the sum of the fair market
values at the Effective Time of the Sun Common Stock and/or the Sun Preferred
Stock received by such holder. Such gain or loss will qualify as capital gain or
loss, assuming the holder holds the BSI Common Stock or BSI Preferred Stock as a
capital asset at the Effective Time of the Merger.
BACKUP WITHHOLDING. Under the backup withholding rules, a holder of BSI
Common Stock or BSI Preferred Stock may be subject to backup withholding at the
rate of 31% with respect to dividends and proceeds of redemption unless such BSI
Stockholder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Any amount withheld under these rules will be credited
against the BSI Stockholder's federal income tax liability. BSI may require
holders of BSI Common Stock or BSI Preferred Stock to establish an exemption
from backup withholding or to make arrangements satisfactory to BSI with respect
to the payment of backup withholding. A BSI Stockholder who does not provide BSI
with his, her or its current taxpayer identification number may be subject to
penalties imposed by the IRS.
SUN NET OPERATING LOSSES. As a result of the Merger, the utilization of
any net operating loss carryforwards that may be available to Sun may be limited
due to occurrence of an "ownership change" under Code Section 382 as a result
of the Merger, as well as the application of the consolidated return regulations
under Code Section 1502. Such limitations could defer, and possibly eliminate,
the potential tax benefit from offsetting such net operating loss carryforwards
against future income of Sun, or the Sun consolidated group.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for as a "purchase" by BSI of Sun under
GAAP. Accordingly, Sun's results of operations will be included in BSI's
consolidated results of operations from and after the Effective Date of the
Merger. For purposes of preparing BSI's consolidated financial statements, BSI
will establish a new accounting basis for Sun's assets and liabilities based
upon the fair values thereof and BSI's purchase price, including the costs of
the acquisition. A final determination of required purchase accounting
adjustments and of the fair value of the Sun assets and liabilities has not yet
been made. Accordingly, the purchase accounting adjustments made in connection
with the development of the pro forma financial
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information appearing elsewhere in this Joint Proxy Statement/Prospectus are
preliminary and have been made solely for purposes of developing such unaudited
pro forma financial information to comply with disclosure requirements of the
Commission.
LISTING ON THE NASDAQ/NMS
Sun Common Stock is currently listed for trading on the Nasdaq/NMS and it
is anticipated that Sun will file with the National Association of Securities
Dealers, Inc. with respect to the listing on the Nasdaq/NMS of the Sun Common
Stock to be issued in connection with the Merger, that may be issued upon
conversion of the Sun Preferred Stock to be issued in the Merger and that may be
issued upon exercise of warrants and options outstanding as of the Effective
Date. The consummation of the Merger is conditioned upon the approval of the
listing of such additional shares for trading on the Nasdaq/NMS.
DISSENTERS' RIGHTS
SUN SHAREHOLDERS.
THE FOLLOWING SUMMARY OF THE AVAILABILITY OF DISSENTERS' RIGHTS FOR HOLDERS
OF SUN COMMON STOCK DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO CHAPTER 23B.13 OF THE WBCA (A COPY OF WHICH IS ATTACHED
AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS).
Any shareholder contemplating the exercise of dissenters' rights is urged
to review the full text of Chapter 23B.13 of the WBCA. The procedures set forth
in such Chapter must be followed exactly or dissenters rights may be lost.
A holder of Sun Common Stock who properly follows the procedures for
dissenting and demanding payment for his or her shares pursuant to Chapter
23B.13 (as summarized below) may be entitled to receive in cash the "fair
value" of his or her shares in lieu of the consideration provided in the Merger
Agreement. The "fair value" of a dissenting shareholder's shares will be the
value of such shares immediately prior to the Effective Date, excluding any
appreciation or depreciation in anticipation of the Merger, unless exclusion
would be inequitable. The "fair value" could be more than, equal to or less
than the value of the consideration the shareholder would have received pursuant
to the Merger Agreement if the shareholder had not dissented. In the event the
dissenting shareholder and the corporation cannot agree on the "fair value" of
the dissenter's Sun Common Stock, "fair value" may ultimately be determined by
a court in an appraisal proceeding.
To properly exercise dissenters' rights with respect to the Merger and to
be entitled to payment under Chapter 23B.13 of the WBCA, a holder of Sun Common
Stock must, among other things, (a) prior to the Sun Meeting, deliver to Sun
written notice of the shareholder's intent to demand payment for his or her
shares if the Merger is effected, (b) not vote his or her shares in favor of the
Merger and (c) upon receipt of a dissenter's notice from the Combined Company
(as described below), timely deliver a demand for payment, certifying whether
the shareholder acquired beneficial ownership before the date of the first
announcement to the news media or to shareholders of the terms of the Merger,
and timely deposit the shareholder's certificates in accordance with the terms
of the dissenter's notice. Thus, any holder of Sun Common Stock who wishes to
dissent and who executes and returns a proxy on one of the accompanying forms
must specify that such holder's shares are to be voted against the Merger or
that the proxy holder should abstain from voting such holder's shares in favor
of the Merger. A vote against the Merger, without satisfying the requirement of
clause (a) above, is not a proper exercise of dissenter's rights. If the
shareholder returns a proxy without voting instructions, or with instructions to
vote in favor of the Merger, such holder's shares will automatically be voted in
favor of the Merger, and the shareholder will lose any dissenter's rights.
Within 10 days after the Effective Date, the Combined Company will send a
written dissenter's notice to each holder of Sun Common Stock who satisfied the
requirements of clauses (a) and (b) above, indicating where the payment demand
must be sent and where and when share certificates must be deposited. Such
notice will include, among other things, a form of payment demand that includes
the date of the first announcement to the news media or to shareholders of the
terms of the Merger and requires the person asserting dissenter's rights to
certify whether or not such person acquired beneficial ownership of
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the shares before that date, and will set the date by which the Combined Company
must receive the payment demand, which date may not be less than 30 or more than
60 days after the dissenter's notice is delivered. Shareholders who fail to file
timely written intent to demand payment or who vote in favor of the Merger will
not be entitled to receive the dissenter's notice and will be bound by the terms
of the Merger Agreement. Written objections to the Merger by holders of Sun
Common Stock should be addressed to Kevin C. James, Sun Sportswear, Inc., 6520
South 190th Street, Kent, Washington 98032. Such objections must be received by
Sun prior to the Sun Meeting.
A beneficial shareholder may assert dissenters' rights as to shares held on
the beneficial shareholder's behalf only if (a) the beneficial shareholder
submits to Sun the record shareholder's written consent to the dissent not later
than the time the beneficial shareholder asserts dissenter's rights and (b) the
beneficial shareholder does so with respect to all shares of which such
shareholder is the beneficial shareholder or over which such shareholder has
power to direct the vote.
Within 30 days after the later of the Effective Date and the date the
payment demand is received, the Combined Company will pay each dissenter who
complied with the conditions above the amount that the Combined Company
estimates to be the fair value of the shareholder's shares, plus accrued
interest. The payment must be accompanied by, among other things, (a) Sun's
balance sheet as of the end of a fiscal year ended not more than 16 months
before the date of payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest available interim
financial statements, if any, and (b) an explanation of how the Combined Company
estimated the fair value of the shares and how the interest was calculated.
Notwithstanding the foregoing, with respect to shares acquired after the date of
the first announcement to the news media or to shareholder's of the terms of the
Merger, the Combined Company may elect to withhold payment of the fair value of
dissenter's shares plus accrued interest and, in such event, the Combined
Company will estimate after the Effective Date the fair value of the shares,
plus accrued interest, and will offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of the dissenter's demand.
A dissenter may notify the Combined Company in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and the amount of
interest due and demand payment of the dissenter's estimate, less any payment
made, or, with respect to the after-acquired shares for which the Combined
Company elected to withhold payment, reject the Combined Company's offer of the
fair value determined for such shares and demand payment of the dissenter's
estimate of the fair value of the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid or offered is less
than the fair value of the dissenter's shares or that the interest due is
incorrectly calculated;
(b) The Combined Company fails to make payment within 60 days after
the date set for demanding payment; or
(c) The Merger is not effected, and the Combined Company does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
A dissenter will be deemed to have waived the right to demand payment
unless the dissenter notifies the Combined Company of his or her demand in
writing within 30 days after the Combined Company makes or offers payment for
the dissenter's shares.
If a demand for payment remains unsettled, the Combined Company will
commence a proceeding in the Superior Court of King County, Washington within 60
days after receiving the payment demand and petition the court to determine the
fair value of the shares and accrued interest. If the Combined Company does not
commence such proceeding within the 60-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded. The Combined Company will
make all dissenters, whether or not residents of Washington State, whose demands
remain unsettled, parties to the proceeding as in an action against their
shares, and all parties must be served with a copy of the petition. The Combined
Company may join as a party to the proceeding any shareholder who claims to be a
dissenter but who was not, in the
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Combined Company's opinion, complied with the provisions of Chapter 23B.13. If
the court determines that such shareholder has not complied with the provisions
of Chapter 23B.13, the shareholder shall be dismissed as a party. Each dissenter
made a party to the proceeding, who is not dismissed, will be entitled to
judgment (a) for the amount, if any, by which the court finds the fair value of
the shares, plus interest, exceeds the amount paid by the Combined Company or
(b) for the fair value, plus accrued interest, of the dissenter's after-acquired
shares for which the Combined Company elected to withhold payment.
If Sun does not effect the Merger within 60 days after the date set for
demanding payment and depositing share certificates, Sun shall return the
deposited certificates and release any transfer restrictions imposed on
uncertificated shares.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 23B.13 OF THE WBCA FOR
PERFECTING DISSENTER'S RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF WASHINGTON LAW, ANY HOLDER
OF SUN COMMON STOCK WHO IS CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT
A LEGAL ADVISOR.
BSI STOCKHOLDERS.
THE FOLLOWING SUMMARY OF THE AVAILABILITY OF DISSENTERS' RIGHTS FOR HOLDERS
OF BSI COMMON STOCK OR BSI PREFERRED STOCK DOES NOT PURPORT TO BE COMPLETE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262 OF THE DGCL (A COPY OF
WHICH IS ATTACHED HERETO AS APPENDIX D TO THIS JOINT PROXY
STATEMENT/PROSPECTUS).
Record holders of BSI Common Stock or BSI Preferred Stock are entitled to
appraisal rights under Section 262 ("Appraisal Rights") of the DGCL if the
Merger is effected. Under the DGCL, record holders of shares of BSI Common Stock
or BSI Preferred Stock, if they properly exercise their Appraisal Rights, will
be entitled to have their shares of BSI Common Stock or BSI Preferred Stock
appraised by the Delaware Court of Chancery and to receive payment of the fair
value of such shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such court. A person having a beneficial
interest in shares of stock held of record in the name of another person, such
as a broker or nominee, must act promptly to cause the record holder to follow
the steps required by Section 262 of the DGCL, which are summarized below,
properly and in a timely manner to perfect whatever Appraisal Rights the
beneficial owner may have.
Under Section 262 of the DGCL, where a merger is to be submitted for
approval at a meeting of stockholders, not less than 20 days prior to the
meeting, a constituent corporation in a merger must notify each of the holders
of its stock for which Appraisal Rights are available that such Appraisal Rights
are available and include in each such notice a copy of Section 262. This Joint
Proxy Statement/Prospectus shall constitute such notice to the record holders of
BSI Common Stock and BSI Preferred Stock.
A holder of shares of BSI Common Stock or BSI Preferred Stock wishing to
exercise such Appraisal Rights must deliver to BSI, before the vote on the
Merger Agreement at the BSI Meeting, a written demand for appraisal of his
shares of BSI Common Stock or BSI Preferred Stock. Such written demand will be
sufficient if it reasonably informs BSI of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of his shares. BSI
stockholders electing to exercise their Appraisal Rights must satisfy all of the
conditions of Section 262. One such condition is that the stockholder must not
vote for approval of the Merger. While the stockholder may vote against the
Merger, such a proxy or vote against the Merger does not constitute a demand for
Appraisal Rights. If a BSI stockholder returns a signed proxy but does not
specify a vote against approval of the Merger or a direction to abstain, the
proxy will be voted for approval of the Merger, which will have the effect of
waiving that stockholder's Appraisal Rights.
A holder of shares of BSI Common Stock or BSI Preferred Stock wishing to
exercise Appraisal Rights must hold of record such shares on the date the
written demand for appraisal is made and must hold such shares continuously from
the date such demand is made through the Effective Date. A demand for appraisal
should be executed by or on behalf of the holder of record fully and correctly,
as his name appears on his
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stock certificate(s). If the shares of BSI Common Stock or BSI Preferred Stock
are owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or on behalf of such fiduciaries and
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, such
demand must be accompanied by proper evidence that the agent is agent for such
owner or owners. Where no number of shares of BSI Common Stock or BSI Preferred
Stock is expressly mentioned, the demand will be presumed to cover all shares of
BSI Common Stock or BSI Preferred Stock held in the name of the record owner.
All written demands for appraisal should be sent or delivered to F. Clayton
Chambers, Secretary, BSI Holdings, Inc., 3860 Virginia Ave., Cincinnati, Ohio
45227 so as to be received prior to the date of the BSI Special Meeting.
Within ten days after the Effective Date, the Combined Company must send a
notice as to the effectiveness of the Merger to each person who has satisfied
the appropriate provisions of Section 262 and who is entitled to Appraisal
Rights under Section 262. Within 120 days after the Effective Time, but not
thereafter, the Combined Company, or any holder of shares of BSI Common Stock or
BSI Preferred Stock who has complied with the foregoing procedures and who is
entitled to Appraisal Rights, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of such shares. The
Combined Company is not under any obligation, and has no present intention, to
file such a petition with respect to the appraisal of the fair value of the
shares of BSI Common Stock or BSI Preferred Stock. Accordingly, it is the
obligation of the BSI Stockholder to initiate all necessary action to perfect
his Appraisal Rights within the time prescribed in Section 262. Upon the filing
of such petition by a stockholder, the stockholder shall cause a copy of the
petition to be served on the Combined Company. A holder of shares of BSI Common
Stock or BSI Preferred Stock will fail to perfect, or effectively lose, his
Appraisal Rights if no such petition for appraisal of shares of BSI Common Stock
or BSI Preferred Stock is filed within 120 days after the Effective Date.
Within 120 days after the Effective Date, any holder of shares of BSI
Common Stock or BSI Preferred Stock who has complied with the requirements for
exercise of Appraisal Rights will be entitled, upon written request, to receive
from the Combined Company a statement setting forth the aggregate number of
shares of each of BSI Common Stock and BSI Preferred Stock with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares. Such statements must be mailed within ten days after a written
request therefore has been received by the Combined Company or within ten days
after expiration of the period for delivery of demands for appraisal, whichever
is later.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine the holders of shares of
BSI Common Stock and/or BSI Preferred Stock entitled to Appraisal Rights and
will appraise the "fair value" of the shares of BSI Common Stock and/or BSI
Preferred Stock, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
Holders of shares of BSI Common Stock or BSI Preferred Stock considering seeking
appraisal should be aware that the fair value of their shares of BSI Common
Stock or BSI Preferred Stock as determined under Section 262 could be more than,
the same as or less than the value of the consideration they would receive
pursuant to the Merger Agreement if they did not seek appraisal of their shares
of BSI Common Stock or BSI Preferred Stock.
The costs of the appraisal action may be determined by the court and taxed
upon the parties as the court deems equitable. The court may also order that all
or a portion of the expenses incurred by any holder of shares of BSI Common
Stock or BSI Preferred Stock in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all of the shares of BSI Common Stock or BSI Preferred Stock entitled to
appraisal.
Any holder of shares of BSI Common Stock or BSI Preferred Stock who has
duly demanded an appraisal in compliance with Section 262 will not, after the
Effective Date, be entitled to vote the shares of
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BSI Common Stock or BSI Preferred Stock subject to such demand for any purpose,
or be entitled to the payment of dividends or other distributions on those
shares.
If any holder of shares of BSI Common Stock or BSI Preferred Stock who
demands appraisal of his shares under Section 262 fails to perfect, or
effectively withdraws or loses, his Appraisal Rights, the shares of BSI Common
Stock or BSI Preferred Stock of such stockholder will be converted in accordance
with the Merger Agreement. A holder may withdraw his demand for appraisal by
delivering to BSI (or the Combined Company if after the Effective Date) a
written withdrawal of such holder's demand for appraisal and acceptance of the
Merger, except that any such attempt to withdraw made more than 60 days after
the Effective Date will require the written approval of the Combined Company.
Notwithstanding this right to withdraw, no appraisal proceeding in the Delaware
Court of Chancery shall be dismissed as to any stockholder without the approval
of such court.
In addition, Delaware courts have decided that the statutory appraisal
remedy, depending on factual circumstances, may or may not be a dissenter's
exclusive remedy.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, ANY HOLDER
OF BSI COMMON STOCK OR BSI PREFERRED STOCK WHO IS CONSIDERING DISSENTING FROM
THE MERGER SHOULD CONSULT A LEGAL ADVISOR.
CONFLICTS OF INTEREST
MANAGEMENT/DIRECTOR OPTIONS AND WARRANTS. On the Effective Date,
management and director options to purchase an aggregate of 60,000 shares of BSI
Common Stock will be converted into options to purchase approximately 2,274,735
shares of Sun Common Stock based on the conversion rate under the Merger. Of the
options to be converted, Messrs. Randall B. Hale, Nolan Lehmann, Michael S.
Chadwick, J. Ford Taylor, F. Clayton Chambers and Alan Elenson own options to
purchase 2,000, 1,250, 1,250, 16,789, 3,288 and 1,498 shares of BSI Common
Stock, respectively, which options will be converted into options to purchase
approximately 75,824, 47,390, 47,390, 636,509, 124,655 and 56,792 shares of Sun
Common Stock, respectively. Each of the foregoing persons currently serve as
directors or executive officers of BSI and will serve, as of the Effective Date,
in similar positions for the Combined Company. See "-- Management After the
Merger." In addition, Michael S. Chadwick is senior vice president and a
managing director of Sanders Morris Mundy, which has received $100,000 in fees
under the terms of a financial advisory agreement, and will receive an
additional $160,000 as a success fee resulting from the consummation of the
Merger. See "Certain Transactions and Relationships."
In addition, warrants to purchase 43,937 shares of BSI Common will be
converted into warrants to purchase approximately 1,665,751 shares of Sun Common
Stock based on the conversion rate under the Merger. Messrs. Taylor and Elenson,
Equus II, and Sanders Morris Mundy beneficially own warrants to purchase 1,484,
29,175, 3,991 and 2,660 shares of BSI Common Stock, respectively, which will
convert into warrants to purchase approximately 56,261, 1,106,090, 151,308 and
100,847 shares of Sun Common Stock, respectively. Messrs. Hale and Lehmann serve
as executive officers and directors of Equus II and will serve, as of the
Effective Date, as directors of the Combined Company. Michael S. Chadwick is
senior vice president and a managing director of Sanders Morris Mundy, which has
received certain fees under the terms of a financial advisory agreement with
Brazos, and will receive an additional success fee as a result of consummation
of the Merger as discussed above. In addition, Mr. Chadwick will serve, as of
Effective Date, as a director of the Combined Company. An additional 36,000 BSI
warrants will be issued to Equus II, persons affiliated with Sanders Morris
Mundy, (including Michael S. Chadwick) and certain members of management in
connection with an equity investment of $2 million required under the Merger
Agreement, which warrants will convert into warrants to purchase approximately
1,364,841 shares of Sun Common Stock. See " -- The Merger Agreement -- Terms of
the Merger Agreement -- Conditions of the Merger."
BSI CAPITAL STOCK OWNERSHIP. Pursuant to the Merger, Equus II, Michael S.
Chadwick, F. Clayton Chambers and J. Ford Taylor will convert 284,909, 27,226.5,
26,561 and 11,585 shares, respectively, of BSI
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Common Stock into approximately 10,801,542, 1,032,218, 1,006,987 and 439,213
shares, respectively, of Sun Common Stock based on the same conversion rate for
all other holders of BSI Common Stock provided under the Merger. In addition,
Equus II, Sanders Morris Mundy, Michael S. Chadwick, F. Clayton Chambers, and J.
Ford Taylor own a significant portion of BSI's Series B-1, B-2 and B-3 Preferred
Stock which will be converted into a substantially similar series of Sun
Convertible Preferred Stock pursuant to the Merger. Each share of Sun
Convertible Preferred Stock will be convertible into .4545 of a share of Sun
Common Stock, subject to adjustment, and if all shares of Sun Convertible
Preferred Stock are immediately converted into Sun Common Stock such shares
would represent 13.2% of the outstanding Sun Common Stock as of the Effective
Date, assuming the exercise of all outstanding BSI and Sun warrants and options.
SEAFIRST. On the Effective Date of the Merger, 1,834,676 shares of Sun
Common Stock held by Seafirst (representing 48.3% of all such shares held by
Seafirst) will be converted into the right to receive $2.20 per share in
consideration, payable in part by the issuance of the Subordinated Note by
Brazos. To the extent the other Sun Shareholders elect to retain Sun Common
Stock in the Merger, for each share so retained, Seafirst will have an
additional share of its Sun Common Stock outstanding immediately prior to the
Effective Date converted into $2.20 in cash. The Subordinated Note is due upon
consummation of a qualifying public offering, and if the Subordinated Note is
not so repaid or is not paid in full at maturity, the principal amount is
convertible into Sun Common Stock at the option of Seafirst at $2.20 per share.
Seafirst shall have the right to one demand registration right with respect to
any shares obtained upon a conversion. See "The Merger Agreement -- Manner and
Basis of Converting Shares -- Conversion of Sun Common Stock."
Further, Sun has agreed that to the extent that the Combined Company grants
after the Effective Date any additional "piggyback" registration rights to
former BSI stockholders that Seafirst shall be granted pro rata rights with
respect to its shares of Sun Common Stock not converted in the Merger.
INDEMNIFICATION. The Merger Agreement provides that the Combined Company
will indemnify each person who is then, or has been or who becomes after the
Effective Date a director, officer, or employee of either BSI or Sun (or any
subsidiary thereof) from all losses, expenses or liabilities arising out of acts
or omissions occurring at or prior to the Effective Date, that are based at
least in part on such director, officer or employee status or that relate to the
transactions contemplated by the Merger Agreement. The Combined Company has also
agreed to maintain for a period of four years the policies of directors' and
officers' liability insurance maintained by Sun as of the Effective Date (or
substitute similar policies), but only to the extent such policies do not exceed
an annual cost of $50,000. See "The Merger Agreement -- Terms of the Merger
Agreement -- Indemnification of Directors and Officers."
SEVERANCE ARRANGEMENTS. William S. Wiley, the current chairman of the
board of Sun, will resign such position as of the Effective Date and will
receive a severance payment of $100,000. Kevin C. James, the current senior vice
president and secretary of Sun, will resign such positions as of the Effective
Date and has received a severance payment of $30,000. L. Kaye Counts, the
executive vice president and chief operating officer of Sun, will resign such
positions in April 1997, and will receive a severance payment of $50,000.
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THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT, A COPY OF WHICH IS INCLUDED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
AS APPENDIX A. THE FOLLOWING DISCUSSION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT.
EFFECTIVE DATE OF THE MERGER
The Merger Agreement provides that the Merger will become effective at the
time stated in the articles or certificate of merger filed with the Secretary of
State of the State of Washington and the Secretary of State of the State of
Delaware with respect to the Merger. It is anticipated that, if the Merger and
Merger Agreement are approved and adopted by the stockholders of Sun and BSI and
all of the other conditions to the Merger have been satisfied or waived, the
Effective Date will occur as soon as practicable after the Sun Meeting and BSI
Meeting.
MANNER AND BASIS OF CONVERTING SHARES
CONVERSION OF BSI CAPITAL STOCK. On the Effective Date, each share of
outstanding BSI Common Stock will automatically be converted into the right to
receive 37.912252 fully paid and nonassessable shares of Sun Common Stock. As a
result of the conversion, the former holders of BSI Common Stock will own
approximately 88% of the outstanding Sun Common Stock as of the Effective Date,
assuming conversion of all outstanding BSI and Sun warrants and options but not
the conversion of the Sun Convertible Preferred Stock. On the Effective Date,
each share of outstanding BSI Preferred Stock will automatically be converted
into one fully paid and nonassessable share of Sun Preferred Stock of the
comparable series. The Sun Preferred Stock issued will have rights, preferences
and limitations which are substantially the same as those of the BSI Preferred
Stock so converted. After the Merger, the former holders of BSI Preferred Stock
will own 100% of the Sun Preferred Stock outstanding as of the Effective Date.
If the Sun Convertible Preferred Stock is immediately converted into Sun Common
Stock, the former holders of BSI Capital Stock would own 89.6% of the
outstanding Sun Common Stock as of the Effective Date, assuming conversion of
all outstanding BSI and Sun warrants and options. As soon as practicable after
the Effective Date, Sun will cause the Exchange Agent to mail to each record
holder of BSI Common Stock and BSI Preferred Stock a letter of transmittal and
other information advising such holder of the consummation of the Merger and for
use in exchanging certificates representing BSI Common Stock and BSI Preferred
Stock for Sun Common Stock and Sun Preferred Stock, respectively. After the
Effective Date, there will be no further registration of transfers on the stock
transfer books of BSI with respect to BSI capital stock outstanding prior to the
Effective Date. BSI STOCK CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY
BSI STOCKHOLDERS PRIOR TO THE EFFECTIVE DATE AND THE RECEIPT OF A LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
No fractional shares of Sun Common Stock will be issued in the Merger, and
in lieu thereof, Sun will make cash payments attributable to such fractional
share based on the lesser of $2.20 per share or the closing price per share for
the Sun Common Stock on the Nasdaq/NMS on the last trading day before the
Effective Date. Until such time as a holder of BSI Common Stock or BSI Preferred
Stock surrenders his outstanding certificate to the Exchange Agent, together
with a letter of transmittal, such certificate shall be deemed from and after
the Effective Date to represent the right to receive a certificate representing
Sun Shares to be issued in exchange therefor.
In addition, on the Effective Date, each of the then outstanding options or
warrants to purchase shares of BSI Common Stock will automatically be converted
into an option or warrant, as the case may be, to purchase that number of shares
of Sun Common Stock determined by multiplying the number of shares of BSI Common
Stock subject to such converted option or warrant by the same share conversion
rate set forth above for the BSI Common Stock. The exercise price per share of
such option or warrant to purchase Sun Common Stock will be adjusted to take
into account the conversion rate, otherwise the term, exerciseability, vesting
schedule and other terms and conditions of such option or warrant will be the
same as the options or warrants so converted. If the foregoing calculation
results in the option or warrant being exercisable for a fractional share of Sun
Common Stock, then the number of shares covered by such option or warrant will
be
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rounded down to the nearest whole share, and the aggregate exercise price
thereof will be reduced by the exercise price attributable to such fractional
share. All shares of Sun Common Stock to be issued upon exercise of any option
which was formerly a BSI employee stock option is to be registered on an
effective Form S-8 registration statement filed with the Commission.
CONVERSION OF SUN COMMON STOCK. On the Effective Date, each holder of
shares of Sun Common Stock outstanding immediately prior to the Effective Date
(other than Seafirst, Sun Shareholders properly exercising dissenters' rights
and Sun Shareholders making a Non-Cash Election) will have 50% of the shares
held by such holder converted into the right to receive $2.20 in cash for each
share of Sun Common Stock so converted and will retain the remaining 50% of such
shares. If none of such Sun Shareholders elect to retain all of their respective
shares of Sun Common Stock, they will own in the aggregate 4.7% of the
outstanding Sun Common Stock as of the Effective Date, assuming the exercise of
all outstanding BSI and Sun warrants and options but not the conversion of Sun
Preferred Stock. In the alternative, if all such holders elect to retain all of
their respective shares of Sun Common Stock, they will own in the aggregate
approximately 8.3% of the outstanding Sun Common Stock as of the Effective Date,
assuming the exercise of all outstanding BSI and Sun warrants and options but
not the conversion of Sun Preferred Stock.
NON-CASH ELECTION. Holders of Sun Common Stock as of the record date for
the Sun Meeting (other than Seafirst) will be entitled to make an irrevocable
Non-Cash Election on or prior to the Election Date to retain all shares of Sun
Common Stock held by them as of such record date and not have 50% of such shares
converted into the Cash Consideration.
NON-CASH ELECTION PROCEDURE. The form for making a Non-Cash Election (the
"Form of Election") is being mailed to holders of record of Sun Common Stock
(other than Seafirst) together with this Joint Proxy Statement/Prospectus. FOR A
FORM OF ELECTION TO BE EFFECTIVE, HOLDERS OF SUN COMMON STOCK MUST PROPERLY
COMPLETE SUCH FORM OF ELECTION, AND SUCH FORM OF ELECTION, TOGETHER WITH ALL
CERTIFICATES FOR SHARES OF SUN COMMON STOCK HELD BY SUCH HOLDER AS OF THE RECORD
DATE, DULY ENDORSED IN BLANK OR OTHERWISE IN FORM ACCEPTABLE FOR TRANSFER ON THE
BOOKS OF SUN (OR BY APPROPRIATE GUARANTEE OF DELIVERY AS SET FORTH IN SUCH FORM
OF ELECTION), MUST BE RECEIVED BY U.S. STOCK TRANSFER CORPORATION (THE
"EXCHANGE AGENT") AT THE ADDRESS LISTED ON THE FORM OF ELECTION, BY 5:00 P.M.,
EASTERN TIME, ON THE SECOND BUSINESS DAY PRECEDING THE SUN MEETING.
The determination of the Exchange Agent as to whether or not a Non-Cash
Election has been properly made, and when such election was received, will be
binding.
After the Effective Date, the Exchange Agent will deliver to Sun
Shareholders, who have made a Non-Cash Election, in accordance with the
provisions set forth in the Form of Election, certificates representing the
common stock of the Combined Company (which will be renamed Brazos Sportswear,
Inc.) or, if the Reincorporation is approved, certificates representing shares
of Brazos Delaware.
If the Merger Agreement is not approved, or if the Effective Date is
delayed beyond June 30, 1997, certificates representing Sun Common Stock will be
returned in accordance with the instructions given in the Form of Election.
CONVERSION; PROCEDURES FOR EXCHANGE OF CERTIFICATES. The conversion of
shares of Sun Common Stock (other than Seafirst Shares, as to which dissenters'
rights are properly exercised and shares as to which a Non-Cash Election has
been made) into the right to receive the Cash Consideration will occur at the
Effective Date. As soon as practicable after the Effective Date of the Merger,
the Exchange Agent will send a letter of transmittal to each holder of Sun
Common Stock (other than Seafirst, holders of Sun Common Stock making a Non-Cash
Election who have properly submitted Forms of Election and share certificates to
the Exchange Agent, and Sun Shareholders who have exercised dissenters' rights).
The letter of transmittal will contain instructions with respect to the
surrender of certificates representing shares of Sun Common Stock to be
exchanged for Cash Consideration, the amount of cash in lieu of any resulting
fractional interest in a share of Sun Common Stock and the balance certificate.
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EXCEPT FOR SUN COMMON STOCK CERTIFICATES SURRENDERED WITH A FORM OF
ELECTION AS DESCRIBED ABOVE UNDER " -- NON-CASH ELECTION PROCEDURE,"
SHAREHOLDERS OF SUN SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Date of the Merger, each holder
of an outstanding certificate or certificates at such time which prior thereto
represented shares of Sun Common Stock shall, upon surrender to the Exchange
Agent of such certificate or certificates and acceptance thereof by the Exchange
Agent of such certificate or certificates and acceptance thereof by the Exchange
Agent, be entitled to the amount of cash into which the number of shares of Sun
Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to the Merger Agreement and a
certificate or certificates representing the number of full shares of Sun Common
Stock to be retained by the holder thereof pursuant to the Merger Agreement. The
Exchange Agent will accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. After the
Effective Date, there will be no further transfer on the records of Sun or its
transfer agent of certificates representing shares of Sun Common Stock which
have been converted, in whole or in part, pursuant to the Merger Agreement.
Until surrendered as contemplated by the Merger Agreement, each certificate for
shares of Sun Common Stock will be deemed at any time after the Effective Date
of the Merger to represent only the right to receive upon such surrender the
consideration contemplated by the Merger Agreement. No interest will be paid or
will accrue on any cash payable as consideration in the Merger or in lieu of any
fractional shares of retained Sun Common Stock.
CONVERSION OF SEAFIRST SHARES. On the Effective Date, except as provided
below, 1,834,676 shares of Sun Common Stock held by Seafirst immediately prior
to the Effective Date (representing 48.3% of Seafirst Shares) will be converted
into the right to receive $2.20 per share in consideration, payable $1.3824 in
cash and $.8176 through the issuance of the Subordinated Note by Brazos.
However, to the extent the other Sun Shareholders elect to retain Sun Common
Stock, for each share so retained, Seafirst will have an additional share of its
Sun Common Stock converted into $2.20 in cash per share. The actual number of
shares of Sun Common Stock held by Seafirst which will be converted will be
determined immediately following the other Sun Shareholders' election deadline.
The Subordinated Note to be issued to Seafirst, with an original principal
balance of $1,500,000, provides for quarterly interest payments at the rate of
10% per annum the first year, 10.5% per annum the second year and 11% per annum
the third year, with the full principal balance plus all accrued and unpaid
interest due and payable on the third anniversary date of issuance. The
Subordinated Note (i) provides for board visitation rights, (ii) is fully due
and payable on the consummation of a qualifying public offering of securities
and (iii) if the Subordinated Note is not paid in full at maturity, is
convertible into Sun Common Stock at the option of the holder at $2.20 per share
based on the remaining principal balance, with the holder entitled to one demand
registration right (at the expense of the Combined Company) with respect to such
converted shares.
Upon completion of all conversions of shares of Sun Common Stock (including
those held by Seafirst), (i) 48.9% of all shares of Sun Common Stock outstanding
immediately prior to the Effective Date will have been converted into
$6,179,637, all of which is payable in cash, except for the $1,500,000
represented by the Subordinated Note to be issued to Seafirst, and (ii)
approximately 51.1% of all Sun Common Stock outstanding immediately prior to the
Effective Date will remain outstanding.
FRACTIONAL SHARES. No fractional shares of Sun Common Stock will be issued
upon conversion of Sun Common Stock by the Sun shareholders, but in lieu
thereof, Sun will make a cash payment attributable to such fractional share
based on the lesser of $2.20 per share or the closing price per share of the Sun
Common Stock on the Nasdaq/NMS on the last trading day prior to the Effective
Date. Upon surrender of each certificate representing shares of Sun Common Stock
held by the Sun Shareholders, the Exchange Agent shall pay to such shareholder
the appropriate cash payment, without interest, for the shares converted (plus
cash in lieu of fractional shares) and issue a balance certificate for whole
number of shares of Sun Common Stock which were not converted, and Brazos will
issue to Seafirst the Subordinated Note.
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MANAGEMENT AFTER THE MERGER
On the Effective Date, the persons named in the Merger Agreement will
constitute the board of directors of the Combined Company and will hold office
until their successors are elected and qualified. Randall B. Hale, Nolan
Lehmann, Michael S. Chadwick, J. Ford Taylor, Alan Elenson and F. Clayton
Chambers will serve as such directors, all of whom are currently directors or
executive officers of BSI.
On the Effective Date, it is anticipated that Randall B. Hale will become
the Combined Company's chairman of the board, J. Ford Taylor will become its
president and chief executive officer and F. Clayton Chambers will become its
vice president, chief financial officer and secretary, all of whom currently
hold the same office or offices with BSI. William S. Wiley resigned from the
positions of president and chief executive officer of Sun in January 1997, and
will continue as chairman of the board until the Effective Date. Kevin C. James,
senior vice president and secretary, of Sun, will resign from such offices as of
the Effective Date. Sandra L. Teufel, senior vice president-sales and marketing
of Sun, resigned December 1996, and L. Kaye Counts, executive vice president and
chief operating officer of Sun, will resign from such offices in April 1997. In
view of the short period of time until the anticipated Effective Date, the Sun
board has determined not to fill the positions of president and chief executive
officer. In the interim, the board has formed a committee of the board
consisting of Larry C. Mounger, Paul R. Rollins, Jr., James A. Walsh and William
S. Wiley. Until the Effective Date, this committee intends to meet at least
weekly to review the operations of Sun. After the consummation of the Merger,
the Combined Company's headquarters will be located at 3860 Virginia Avenue,
Cincinnati, Ohio 45527, the current headquarters of BSI.
See "Business of BSI -- Executive Officers and Directors of BSI."
TERMS OF THE MERGER AGREEMENT
REPRESENTATIONS AND WARRANTIES. In the Merger Agreement, Sun and BSI each
made various customary representations and warranties as to, among other things,
their respective corporate organization and compliance with law, their
respective capitalization, the authority and validity of the Merger Agreement,
their respective businesses and financial condition, required approvals or
conflicts, financial statements, litigation, employee benefit matters, tax
matters and environmental matters. The representations and warranties of each of
Sun and BSI will expire upon consummation of the Merger.
CONDUCT OF BUSINESS PRIOR TO MERGER. Under the Merger Agreement and
subject to the discussion below as to Sun, each of Sun and BSI has agreed for
the period commencing November 13, 1996, and ending on the Effective Date to:
(i) operate its business in the ordinary course; (ii) maintain all of its
material properties and assets in customary repair, order and condition,
reasonable wear and use and damage by fire or unavoidable casualty excepted;
(iii) maintain its books of account and records in the ordinary course, in
accordance with GAAP applied on a consistent basis; (iv) comply in all material
respects with all laws applicable to it, (v) allow the other party and its
authorized representatives to inspect the records and consult with its officers,
employees, attorneys and agents for the purpose of determining the accuracy of
representations and warranties made in the Merger Agreement and the covenants
contained therein and to keep such information confidential; (vi) not enter into
any contracts of employment which cannot be terminated on 14 days notice or less
or which provides severance payments after termination except as may be required
by law; (vii) not incur any borrowings, except refinancing or additional
borrowings under its existing credit facilities, prepayments by customers, or
borrowings in the ordinary course; (viii) not enter into any commitment for
capital expenditures exceeding $500,000 in the aggregate except as is necessary
to maintain existing facilities, machinery or equipment or as may be required by
law; (ix) not sell or encumber any assets except in the ordinary course; (x)
maintain insurance on all of its properties in such amounts as is customary for
the business but not less than that presently carried by such party; (xi) not
amend its organizational documents or merge or consolidate with or into any
corporation, except as contemplated by the Merger Agreement, or change in any
manner the rights of its capital stock or character of its business; (xii) not
issue or sell or enter into any contract to issue or sell any shares of its
capital stock or subdivide or reclassify its capital stock or acquire or agree
to acquire any shares of its capital stock, except as contemplated by the Merger
Agreement or with respect to currently outstanding
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warrants and options; (xiii) not declare or pay any dividends on shares of its
capital stock or make any other distribution to its stockholders; and (xiv)
notify the other party of any material adverse effect on such party; (xv) obtain
any required governmental approvals and make all necessary statutory filings;
and (xvi) deliver to the other party a disclosure schedule certified to by its
chief financial officer.
In addition, Sun agrees to use its best efforts to cause, as of the
Effective Date, the listing of the shares of Sun Common Stock to be issued
pursuant to the Merger on the Nasdaq/NMS. Sun further agrees to implement in all
material respects the business plan provided by BSI with respect to Sun's
operations pending the Effective Date.
BSI's business plan for Sun consists of three primary objectives:
_____(i)__Reduce operating expenses and improve operating efficiencies
through the elimination of redundant positions and a realignment of Sun's
employee base with BSI's expectation for Sun's sales and operating levels;
_____(ii)__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; and
_____(iii)__Begin integration of Sun's sales, marketing and licensing
activities with those of BSI in an effort to maximize the sales and
operating profit of Sun's products.
However, Sun is not obligated to implement any particular provision of such
business plan if the Sun board of directors determines that such action, based
on more recent data, is inconsistent with the objectives of the plan or the best
interests of Sun and its shareholders. Prior to the Effective Date, Sun is to
provide to BSI reports on the first and fifteenth day of each month regarding
the status and results of the implementation of the business plan. BSI is
permitted, based on such reports, to provide to Sun additional recommendations
regarding its operations, which Sun has agreed to implement provided such
recommendations are consistent with the Plan and in the best interests of Sun
and its shareholders. Failure by Sun to implement such business plan or the
additional recommendations pursuant to the foregoing, results in BSI having the
right to terminate the Merger Agreement and entitles BSI to reimbursement of
certain out-of-pocket costs relating to the agreement. See " -- Termination."
In the event the Merger is not consummated, Sun has agreed to indemnify BSI and
its representatives from and against any claims and liabilities relating to the
business plan or the additional recommendations.
CONDITIONS TO THE MERGER. The obligation of Sun and BSI to consummate the
Merger Agreement is subject to the satisfaction of certain conditions or the
waiver thereof, including (i) representations and warranties of the respective
parties must be true as of the Effective Date, except with respect to
transactions contemplated under the Merger Agreement or failures which would not
have a material adverse effect as to such party, and the parties have complied
in all material respects with their respective covenants set forth in the Merger
Agreement; (ii) no injunction or order shall be in effect which prevents the
consummation of the Merger; (iii) the receipt of opinions of counsel covering
such matters customarily covered in opinions delivered in transactions of the
type contemplated by the Merger Agreement, including tax opinions; (iv) the
Merger Agreement and the related transactions (but not the Reincorporation) must
have been approved by the requisite stockholders of the parties on or before the
Effective Date; (v) all waiting periods required by the HSR Act must have
expired with respect to the transactions contemplated by the Merger Agreement,
or early termination thereof must have been obtained, without the imposition of
any governmental request or order requiring the sale or disposition or holding
separate particular assets or businesses of the parties, which early termination
was granted to both Sun and BSI effective December 18, 1996; (vi) the Nasdaq /
NMS must have agreed that on the Effective Date, it will list all the shares of
the Sun Common Stock to be issued in connection with the Merger and Sun Common
Stock issued upon conversion of Sun Preferred Stock to be issued in the Merger;
(vii) the holders of any material indebtedness of Sun or BSI and the parties to
any other material agreement to which either Sun or BSI is a party must have
consented to the Merger; (viii) all directors and officers of Sun must have
provided written resignations to Sun with respect
37
<PAGE>
to such positions; (ix) holders of not more than 1% of the issued and
outstanding shares of Sun Common Stock immediately prior to the Effective Date,
and holders of not more than 1% of the BSI Common Stock and the BSI Preferred
Stock, shall have delivered written demand for appraisals of such shares in the
manner provided in the WBCA and the DGCL, respectively; (x) this Joint Proxy
Statement/Prospectus shall be effective and no stop orders suspending the
effectiveness have been issued; (xi) BSI must have obtained debt financing in an
amount sufficient in its reasonable judgment for the consummation of the Merger;
(xii) Seafirst must have executed a 180 day "lock-up" agreement as to its
shares of Sun Common Stock held at the Effective Date; (xiii) Sun must have
received a favorable opinion from Rodman & Renshaw, Inc. as to the fairness,
from a financial point of view, of the consideration to be paid to the holders
of Sun Common Stock (other than Seafirst); (xiv) BSI must have obtained an
equity investment of not less than $2,000,000, which investment is expected to
result in the issuance of the BSI Series B-3 Preferred Stock; and (xv) the
parties shall have provided to the other party such additional resolutions and
certificates as may be reasonably required in connection with the consummation
of the Merger.
SOLICITATION OF THIRD PARTY OFFERS. The Merger Agreement provides that
neither Sun nor BSI will, directly or indirectly, initiate, solicit, negotiate,
encourage, take any action or provide confidential information to facilitate any
proposal or offer to acquire any substantial portion of the assets of Sun or BSI
(or any of their material subsidiaries) or any substantial equity interest in
Sun or BSI (or any of their material subsidiaries), whether by merger or other
combination, purchase of assets, tender or exchange offer or otherwise (a
"Takeover Proposal"). Notwithstanding the foregoing, the Merger Agreement does
not prevent either Sun or BSI from participating in discussions and negotiations
and furnishing information to any person in connection with any unsolicited
Takeover Proposal (unless the approval of the Merger has been obtained from both
the stockholders of Sun and BSI), provided that the board of directors of such
party is advised in a written opinion of outside counsel that such action is
required by its fiduciary duties under applicable law. Each of Sun and BSI is to
notify the other party in writing of any such Takeover Proposal within 24 hours
of its receipt and keep the other party informed of the status and details of
such Takeover Proposal, and it must give the other party five days advance
written notice of any agreement to be entered into with or any information to be
supplied to any person making such a Takeover Proposal.
TERMINATION. The Merger Agreement may be terminated by the mutual consent
of Sun or BSI or by either party if any of the conditions required for either
party's respective obligations have not been met prior to the Effective Date
(subject to notice and opportunity-to-cure provisions). Either party may
(provided such party is not otherwise in default) terminate the Merger Agreement
if the Effective Date of the Merger shall not have occurred on or before April
30, 1997, provided, that such date will be extended for up to 60 days in order
to satisfy requirements of the Commission, obtain clearance under the HSR Act or
obtain relief from any order prohibiting consummation of the Merger. BSI may
terminate the Merger Agreement if Sun fails to implement, in accordance with the
Merger Agreement, the business plan or additional recommendations provided by
BSI regarding Sun's operations pending the Effective Date. See " -- Conduct of
Business Prior to Merger." Upon two days' prior notice to the other party,
either Sun or BSI may terminate if such party receives a third party offer to
merge, acquire a material portion of its assets or to engage in some other
business combination that its board of directors determines in good faith that
the fiduciary obligations of such directors under applicable law require that
such offer be accepted; provided, that (i) prior to any such termination, such
party must cause its financial and legal advisors to negotiate with the other
party to make such adjustments in the terms and conditions of the Merger
Agreement as would enable the transaction as contemplated to proceed, and (ii)
the board of directors of such party receives a written opinion of outside
counsel that the proper exercise of its applicable fiduciary duties,
notwithstanding any proposed adjustments to be made under clause (i) above,
would require the directors to reconsider its commitment under the Merger
Agreement as a result of such third party offer.
If the Merger Agreement is terminated, all expenses will be paid by the
party incurring them, provided, that (i) if either party terminates the
agreement as a result of the breach of the other party, such breaching party
will pay all the other party's documented costs and expenses (including legal
accounting and financial advisory fees and expenses) incurred in connection with
the Merger Agreement, and provided further, if Sun is the terminating party, BSI
will reimburse Sun for 50% of the filing fees and printing costs associated
38
<PAGE>
with this Joint Proxy Statement/Prospectus, (ii) if either party terminates the
Merger Agreement pursuant to the third party offer described in the preceding
paragraph, the terminating party shall pay the other party a liquidated damage
amount of $750,000 which will constitute full payment of such party's fees and
expenses, and (iii) if BSI terminates this Agreement because of its failure to
obtain debt financing for consummation of the Merger, BSI shall pay Sun's
documented costs and expenses (including legal, accounting and advisory fees and
expenses). In addition, if BSI terminates the Merger Agreement due to the
issuance by any court of competent jurisdiction of a restraining order which
prohibits the consummation of the Merger, Sun will issue to BSI, a warrant to
purchase 1,500,000 shares of Sun Common Stock at an exercise price per share
equal to the average closing price per share for the 20 trading days immediately
prior to issuance. This warrant will be exercisable for a period of ten years,
contain customary anti-dilution protection and provide for adjustments in the
event Sun issues any shares of Sun Common Stock at less than the exercise price,
subject to customary exceptions.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Merger Agreement provides
that the Combined Company will indemnify each person who is then, or has been,
or who becomes after the Effective Date a director, officer or employee of
either Sun or BSI (or any subsidiary thereof) from all losses, expenses
(including reasonable attorneys' fees and expenses) or liabilities, arising out
of acts or omissions occurring at or prior to the Effective Date, that are based
in whole or in part on such director, officer or employee status or relating to
transactions contemplated by the Merger Agreement. In addition, for a period of
four years after the Effective Date, the Combined Company will cause to be
maintained in effect, the policies of directors' and officers' liability
insurance maintained by Sun for the benefit of the persons covered by such
policies at the Effective Date (or in lieu thereof may substitute its own
policies of equal coverage), but only to the extent that such insurance can be
maintained at an annual cost of $50,000. If such insurance annual cost exceeds
$50,000, the Combined Company must obtain as much of such insurance as can be
maintained or obtained at an annual cost of $50,000.
LOCK-UP AGREEMENT. As a condition of BSI consummating the Merger, Seafirst
must execute a 180 day "lock-up" agreement with respect to its shares of Sun
Common Stock retained at the Effective Date which prohibits Seafirst from
selling or disposing of any such shares for a period of 180 days immediately
following the Effective Date.
39
<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, Plymouth and Sun and are presented
to show (1) the acquisition of Plymouth by BSI as of August 2, 1996 and (2) the
contemplated 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 for the year ended December 30, 1995, and as of and
for the thirty-nine weeks ended September 28, 1996, respectively.
The unaudited pro forma condensed combined statements of operations for BSI
and Plymouth Combined for the year ended December 31, 1995, and the nine months
ended September 30, 1996, give effect to the acquisition of Plymouth by BSI as
if the acquisition had occurred on January 1, 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 on additional preferred stock.
The unaudited pro forma condensed combined statements of operations for the
periods above also give effect to the proposed Merger of BSI with and into Sun,
by virtue of a reverse acquisition. Pro forma adjustments include: (i)
reductions in compensation expense for the elimination of specific Sun employee
positions in connection with the Merger, (ii) reductions in depreciation for the
writedown of property, plant and equipment as well as amortization of negative
goodwill from applying purchase accounting, (iii) amortization of deferred
financing fees, (iv) additional interest expense for the Merger related debt,
(v) incremental tax effects of the pro forma adjustments and (vi) dividends on
additional preferred stock. See "The Merger."
The unaudited pro forma condensed combined balance sheet gives effect to
the proposed Merger of BSI with and into Sun by virtue of a reverse acquisition
as if such transaction occurred on September 30, 1996. The unaudited pro forma
condensed combined balance sheet of BSI as of September 30, 1996, includes the
acquired assets and liabilities of Plymouth and the related purchase accounting
adjustments since this transaction occurred on August 2, 1996. See the unaudited
September 28, 1996, financial statements of BSI included elsewhere herein for
additional information on the Plymouth acquisition. 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.
40
<PAGE>
The following is a summary of the sources and uses of cash to complete the
Merger:
(IN THOUSANDS)
SOURCES:
Borrowings under BSI credit
facilities:
Revolver................... $ 6,348
Term note.................. 1,000
Subordinated Note issued to
Seafirst...................... 1,500
---------------
Subtotal--debt............. 8,848
Issuance of BSI preferred
stock......................... 2,000
---------------
Total Sources......... $10,848
===============
USES:
Cash paid for Sun Common
Stock......................... $ 4,680
Subordinated Note issued to
Seafirst...................... 1,500
Retirement of BSI
indebtedness.................. 3,000
Transaction costs............... 1,543
Financing costs................. 125
---------------
Total Uses............ $10,848
===============
The actual acquisition entries are subject to the completion of due
diligence and will be based upon more precise appraisals, evaluations and
estimates of fair value, which are not currently complete, and may differ
substantially from the pro forma adjustments. Potential additional operating
synergies available in the future are not reflected.
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.
The unaudited pro forma condensed combined financial statements and the
accompanying notes should be read in conjunction with the historical financial
statements of BSI, Plymouth and Sun and related notes thereto appearing
elsewhere herein.
41
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
BSI(1) SUN ADJUSTMENTS COMPANY
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Current Assets:
Cash............................... $ 328 $ 142 $ 470
Accounts receivable, net........... 40,963 6,530 47,493
Inventories........................ 37,358 19,416 $ (2,500)(2) 54,274
Prepaid expenses, deferred taxes
and other....................... 1,003 2,364 42(3) 3,409
Income tax receivable.............. 300 1,042 1,342
---------- --------- ----------- --------
Total current assets............ 79,952 29,494 (2,458) 106,988
Property, Plant and Equipment, net... 6,507 3,923 (3,923)(4) 6,507
Other Noncurrent Assets.............. 484 15 83(3) 582
Goodwill............................. 22,703 0 22,703
---------- --------- ----------- --------
Total assets.................... $ 109,646 $ 33,432 $ (6,298) $136,780
========== ========= =========== ========
Liabilities and Shareholders' Equity
Current maturities of long-term
debt............................ $ 8,886 $ 0 $ 200(5) $ 9,086
Short-term debt.................... 36,662 3,400 6,348(5) 46,410
Accounts payable and accrued
liabilities..................... 28,172 5,795 107(6) 34,074
---------- --------- ----------- --------
Total current liabilities....... 73,720 9,195 6,655 89,570
Long-term debt, net of current
maturities......................... 24,390 0 (700)(5) 23,690
Deferred income taxes................ 423 156 579
Negative goodwill.................... 0 0 3,361(4) 3,361
---------- --------- ----------- --------
Total liabilities............... 98,533 9,351 9,316 117,200
Convertible mandatorily redeemable
preferred
stock.............................. 7,447 0 2,000(7) 9,447(8)
Shareholders' equity
Common stock....................... 3 21,618 (15,151)(4) 6,470
Additional paid-in capital......... 2,588 0 2,588
Retained earnings.................. 1,075 2,463 (2,463)(4) 1,075
---------- --------- ----------- --------
Total stockholders' equity...... 3,666 24,081 (17,614) 10,133
---------- --------- ----------- --------
Total liabilities and
stockholders' equity.......... $ 109,646 $ 33,432 $ (6,298) $136,780
========== ========= =========== ========
</TABLE>
- ------------
(1) Represents BSI's historical balance sheet which includes the assets and
liabilities of Plymouth and related purchase accounting entries from the
acquisition completed on August 2, 1996.
(2) Adjustment 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.
(3) To record the effects of certain financing fees ($125) expected to be
incurred as a result of and concurrent with the Merger.
(4) 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 (based on the $2.20/share conversion
price), property, plant and equipment ($3,923) is written down to zero and
the remaining deficiency, after giving effect to estimated transaction costs
of $1,543, is recorded as negative goodwill ($3,361). Shareholder's equity
accounts reflect the net amount of Sun Common Stock outstanding (2,939,574
excluding the exercise of stock options) at $2.20 per share.
(5) To record the net proceeds from the issuance of debt ($8,848) and the
repayment of certain debt obligations ($3,000) as a result of and concurrent
with the Merger.
(6) To record the effects of additional severance costs associated with the
Merger pursuant to personnel reductions in accordance with BSI's business
plan.
(7) To record the issuance of BSI preferred stock.
(8) A majority of the preferred stock will become convertible under certain
circumstances into common stock at $2.20 per share upon completion of the
Merger.
42
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
BSI AND
PRO FORMA PLYMOUTH PRO FORMA COMBINED
BSI PLYMOUTH ADJUSTMENTS COMBINED SUN ADJUSTMENTS COMPANY
----------- --------- ------------ --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 131,020 $32,338 $ 163,358 $ 93,965 $ 257,323
Cost of goods sold................... 106,576 21,813 128,389 84,570 $ (11,139)(5) 201,820
----------- --------- --------- --------- ----------- ---------
Gross profit......................... 24,444 10,525 34,969 9,395 11,139 55,503
Operating expenses................... 25,549 8,494 $ (1,154)(1) 32,889 13,964 6,340(6) 53,193
----------- --------- ------------ --------- --------- ----------- ---------
Operating income (loss).............. (1,105) 2,031 1,154 2,080 (4,569) 4,799 2,310
Other (income) expense:
Interest expense, net.............. 3,695 141 2,378(2) 6,214 1,267 494(7) 7,975
Other, net......................... (22) (106) 128 (201) (329)
----------- --------- ------------ --------- --------- ----------- ---------
Income (loss) before income taxes and
extraordinary item................. (4,778) 1,996 (1,224) (4,006) (5,635) 4,305 (5,336)
Provision (benefit) for income
taxes.............................. (338) 270 (39)(3) (29) (1,899) 1,367(8) (561)
----------- --------- ------------ --------- --------- ----------- ---------
Income (loss) before extraordinary
item............................... (4,440) 1,726 (1,163) (3,977) (3,736) 2,938 (4,775)
Less: dividends on preferred stock... -- -- 557(4) 557 -- 160(9) 717
----------- --------- ------------ --------- --------- ----------- ---------
Net income (loss) available to common
equity before extraordinary item... $ (4,440) $ 1,726 $ (1,720) $ (4,534) $ (3,736) $ 2,778 $ (5,492)
=========== ========= ============ ========= ========= =========== =========
Earnings (loss) per common and common
equivalent share................... $ (.30) $ (.30) $ (.65) $ (.31)
=========== ========= ========= =========
Shares used in computing pro forma
earnings (loss) per common and
common equivalent share............ 14,922,148 14,922,148 5,748,249 17,861,722
=========== ========= ========= =========
</TABLE>
See Notes to Pro Forma Condensed Combined Statement of Operations
Shares used in computing pro forma earnings (loss) per share include the
following (due to the losses shown, no dilution results from options, warrants
and convertible preferred stock):
BSI AND COMBINED
PLYMOUTH COMBINED COMPANY
------------------ ------------
PRIMARY PRIMARY
------------------ ------------
Sun historical....................... -- 2,939,574
BSI historical....................... 10,078,592 10,078,592
Cheap stock warrants................. 4,843,556 4,843,556
Other dilutive options and
warrants........................... -- --
Convertible preferred stock.......... -- --
------------------ ------------
14,922,148 17,861,722
================== ============
43
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE AMOUNT DESCRIPTION
- ------ ---------- -----------
<C> <C>
PLYMOUTH ACQUISITION ADJUSTMENTS
(1) $ (2,020) Elimination of historical compensation in excess of compensation levels included in
post-acquisition employment agreements.
60 Amortization of non-compete agreements of $300 over a 5-year period.
806 Increase in annual depreciation ($27), amortization of goodwill ($461) over 40 years and
intangible assets ($318) over 15 to 40 years resulting from the application of purchase
accounting.
----------
$ (1,154)
==========
(2) $ 2,378 Net increase in interest expense related to increased net indebtedness of approximately
$27,640 at a weighted average annual rate of 8.6%
(3) $ (39) Incremental income tax effect of the above pro forma adjustments and the termination of
Plymouth's S Corporation status at a 40% effective rate.
(4) $ 557 Dividends on additional preferred stock issued of $6,956 at an annual rate of 8.0%.
==========
SUN ACQUISITION ADJUSTMENTS
(5) $ (1,337) Reduction in compensation expense from the elimination of 74 specific Sun production personnel
positions in connection with the Merger.
(8,999) Reclassification of Sun royalty expenses to conform with BSI financial reporting practices.
(803) Elimination of Sun depreciation expense for the write-off of net property, plant and equipment
resulting from the application of purchase accounting.
----------
$ (11,139)
==========
(6) $ (1,894) Reduction in compensation expense from the elimination of 42 specific Sun operating personnel
positions in connection with the Merger.
(723) Elimination of Sun depreciation expense for the write-off of net property, plant and equipment
resulting from the application of purchase accounting.
(84) Amortization of negative goodwill of $3,361 over a 40 year period resulting from the
application of purchase accounting.
42 Amortization of certain deferred financing fees of $125 over a three year period.
8,999 Reclassification of Sun royalty expenses to conform with BSI financial reporting practices.
----------
$ 6,340
==========
(7) $ 494 Net increase in interest expense related to increased net indebtedness of approximately $5,848
at a weighted average annual rate of 8.44%.
(8) $ 1,367 Incremental income tax effect of the pro forma adjustments referred to above at a 40%
effective rate.
==========
(9) $ 160 Dividends on additional preferred stock issued of $2,000 at an annual rate of 8.0%.
==========
</TABLE>
44
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
BSI AND
PRO FORMA PLYMOUTH PRO FORMA
BSI(1) PLYMOUTH(2) ADJUSTMENTS COMBINED SUN ADJUSTMENTS
----------- ----------- ------------ --------- --------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $ 127,531 $25,860 $ 153,391 $ 53,602
Cost of goods sold................... 94,869 16,707 111,576 46,597 $(6,351)(7)
----------- ----------- --------- --------- -----------
Gross profit......................... 32,662 9,153 41,815 7,005 6,351
Operating expenses................... 24,171 4,636 $ 643(3) 29,450 9,499 2,601(8)
----------- ----------- ------------ --------- --------- -----------
Operating income (loss).............. 8,491 4,517 (643) 12,365 (2,494) 3,750
Other (income) expense:
Interest expense, net.............. 3,063 165 1,393(4) 4,621 492 358(9)
Other, net......................... (280) 62 (218) (51)
----------- ----------- ------------ --------- --------- -----------
Income (loss) before income taxes.... 5,708 4,290 (2,036) 7,962 (2,935) 3,392
Provision (benefit) for income
taxes.............................. 1,065 434 468(5) 1,967 (998) 1,181(10)
----------- ----------- ------------ --------- --------- -----------
Net income (loss).................... $ 4,643 $ 3,856 $ (2,504) $ 5,995 $ (1,937) 2,211
Less: dividends on preferred stock... -- -- 417(6) 417 -- 120(11)
----------- ----------- ------------ --------- --------- -----------
Net income (loss) available to common
equity............................. $ 4,643 $ 3,856 $ (2,921) $ 5,578 $ (1,937) $ 2,091
=========== =========== ============ ========= ========= ===========
Earnings per common and common
equivalent share -- primary........ $ .24 $ .28 $ (.34)
=========== ========= =========
Earnings per common and common
equivalent share -- fully
diluted............................ $ .23 $ .26 N/A
=========== =========
Shares used in computing pro
forma earnings (loss) per common
and common equivalent
share -- primary................... 19,638,395 19,913,865 5,748,500
=========== ========= =========
Shares used in computing pro
forma earnings (loss) per common
and common equivalent share --fully
diluted............................ 20,503,249 21,144,648 N/A
=========== =========
</TABLE>
COMBINED
COMPANY
---------
Net sales............................ $ 206,993
Cost of goods sold................... 151,822
---------
Gross profit......................... 55,171
Operating expenses................... 41,550
---------
Operating income (loss).............. 13,621
Other (income) expense:
Interest expense, net.............. 5,471
Other, net......................... (269)
---------
Income (loss) before income taxes.... 8,419
Provision (benefit) for income
taxes.............................. 2,150
---------
Net income (loss).................... $ 6,269
Less: dividends on preferred stock... 537
---------
Net income (loss) available to common
equity............................. $ 5,732
=========
Earnings per common and common
equivalent share -- primary........ $ .24
=========
Earnings per common and common
equivalent share -- fully
diluted............................ $ .20
=========
Shares used in computing pro
forma earnings (loss) per common
and common equivalent
share -- primary................... 24,263,556
=========
Shares used in computing pro
forma earnings (loss) per common
and common equivalent share --fully
diluted............................ 28,370,631
=========
See Notes to Pro Forma Condensed Combined Statement of Operations.
Shares used in computing pro forma earnings (loss) per share include the
following:
<TABLE>
<CAPTION>
BSI AND PLYMOUTH COMBINED COMBINED COMPANY
------------------------------- -------------------------------
PRIMARY FULLY DILUTED PRIMARY FULLY DILUTED
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Sun historical....................... -- -- 2,939,574 2,939,574
BSI historical....................... 11,828,205 11,828,205 11,828,205 11,828,205
Cheap stock warrants................. 4,843,556 4,843,556 4,843,556 4,843,556
Other dilutive options and
warrants........................... 3,242,104 4,472,887 4,652,221 4,652,221
Convertible preferred stock.......... -- -- -- 4,107,075
------------ -------------- ------------ --------------
19,913,865 21,144,648 24,263,556 28,370,631
============ ============== ============ ==============
</TABLE>
45
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTE AMOUNT DESCRIPTION
- ------ ---------- -----------
<C> <C> <S>
GENERAL
(1) Includes the results of operations of Plymouth from the date of acquisition, August 2, 1996,
through September 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) $ 154 Additional compensation to reflect compensation levels included in post-acquisition employment
agreements.
34 Amortization of non-compete agreements of $300 over a 5-year period.
455 Increase in amortization of goodwill ($269) over 40 years and intangible assets ($186) over 15
to 40 years resulting from the application of purchase accounting.
----------
$ 643
==========
(4) $ 1,393 Net increase in interest expense related to increased net indebtedness of approximately
$27,640 at a weighted average annual rate of 8.6%.
(5) $ 468 Incremental income tax effect of the above pro forma adjustments and the termination of
Plymouth's S Corporation status at a 40% effective rate.
(6) $ 417 Dividends on additional preferred stock issued of $6,956 at an annual rate of 8.0%.
==========
SUN ACQUISITION ADJUSTMENTS
(7) $ (1,003) Reduction in compensation expense from the elimination of 74 specific Sun production personnel
positions in connection with the Merger.
(4,667) Reclassification of Sun royalty expenses to conform with BSI financial reporting practices.
(681) Elimination of Sun depreciation expense for the write-off of net property, plant and equipment
resulting from the application of purchase accounting.
----------
$ (6,351)
==========
(8) $ (1,421) Reduction in compensation expense from the elimination of 42 specific Sun operating personnel
positions in connection with the Merger.
(613) Elimination of Sun depreciation expense for the write-off of net property, plant and equipment
resulting from the application of purchase accounting.
(63) Amortization of negative goodwill of $3,361 over a 40 year period resulting from the
application of purchase accounting.
31 Amortization of certain deferred financing fees of $125 over a three year period.
4,667 Reclassification of Sun royalty expenses to conform with BSI financial reporting practices.
----------
$ 2,601
==========
(9) $ 358 Net increase in interest expense related to increased net indebtedness of approximately $5,848
at a weighted average annual rate of 8.44%.
(10) $ 1,181 Incremental income tax effect of the pro forma adjustments referred to above at a 40%
effective rate.
==========
(11) $ 120 Dividends on additional preferred stock issued of $2,000 at an annual rate of 8.0%.
==========
</TABLE>
46
<PAGE>
BUSINESS OF SUN
Sun designs, sources, prints, markets and sells imprinted, dyed and
decorated casual sportswear for men, women and children, including a variety of
T-shirts, sweatshirts and bottoms. Sun sells women's and girl's and men's and
boys' apparel bearing both proprietary and licensed designs to national and
regional retail chains, including Wal-Mart, Target, Kmart, JC Penney, Montgomery
Ward and Sears. Sun maintains an internal graphics design department comprised
of artists and support personnel and operates modern screen printing facilities
in Kent, Washington (part of the Seattle metropolitan area).
Sun, for its core product line, purchases blank T-shirts, sweatshirts,
sweatpants, tank tops, nightshirts and other similar garments from domestic and
foreign suppliers and screen prints designs onto those garments. Sun licenses
from third parties the rights to use or distribute certain characters and
trademarks, which have recently included Looney TunesR, joint Looney
TunesR/Major League BaseballT, Disney's 101 Dalmatians, and Disney's Winnie the
Pooh. Sun also creates proprietary art designs based on concepts developed by
its merchandising staff and updates established designs and characters. Art
design categories range from recreational and outdoor to seasonal, regional and
"attitude" themes.
PRODUCTS
GENERAL. Sun designs, sources, prints, markets and sells imprinted, dyed
and decorated casual sportswear for adults and children, including its core
product line of screen printed T-shirts, tank tops and sweatshirts. Imprinted
garments display either licensed or proprietary designs and characters. Sun
procures garments in a variety of styles, including basic, pocket, long-sleeved
and oversized T-shirts, as well as tank tops, nightshirts and sweatpants. In
addition, Sun designs and markets more detailed, fashion-oriented garments, some
of which are also imprinted. The more detailed, fashion-oriented garments
include shorts, polo shirts, women's leggings and casual skirts, and
button-front baseball jerseys.
Sun's largest sales category since 1994 has been women's and girl's
garments. Sales of those products represented approximately 71% of total gross
sales in the first nine months of 1996 and 65% and 55% of total gross sales in
1995 and 1994, respectively.
Gross sales of men's and boys' products represented approximately 29% of
total sales in the first nine months of 1996 and 35% and 45% of total gross
sales in 1995 and 1994, respectively.
DESIGN AND PRODUCT DEVELOPMENT. Sun continually monitors current garment
and art design trends through frequent visits to retailers and trade shows,
reviews of popular trade publications, and other activities. The product
development process also involves production feasibility studies, analysis and
documentation of garment and art trends, as well as costing structure and
prototype preparation for customers and trade shows, and limited test sales.
Sun's internal graphic design department creates the art work for virtually
all of Sun's products, including designs incorporating licensed characters and
trademarks and original designs proprietary to Sun. Sun believes it responds
quickly to seasonal demands and trends involving popular characters and themes.
Historically, market acceptance of Sun's core screen printed products has been
largely dependent upon the basic appeal of their graphic designs.
Sun's product design and merchandising department participates in the
design development process and determines the particular shape, style, color and
fabric content of garments. In addition Sun's designers and merchandisers assist
in incorporating the graphic designs into the garments.
LICENSED DESIGNS AND CHARACTERS. Sun first introduced products displaying
characters and trademarks licensed or under distribution agreements from third
parties in August 1987. Characters and trademarks currently licensed include
Looney TunesR, joint Looney TunesR/Major League BaseballT, Disney's 101
Dalmatians and Disney's Winnie the Pooh. Sun's artists typically create multiple
variations and refinements of a given trademark or character, including
different lettering, poses, activities or dress.
Sun acquires rights to use trademarks and characters only on specified
types of garments, pays each licensor royalties on products sold displaying the
licensed trademark or character, and typically guarantees a
47
<PAGE>
minimum royalty, the dollar amount of which varies depending on the trademark or
character, some of which may approach several million dollars each.
Licensed products accounted for approximately 77% of total gross sales in
the first nine months of 1996, and 82% and 75% of Sun's total gross sales in
1995 and 1994, respectively. Sun's experience has been that some licenses
quickly gain intense popularity, but have relatively short sales cycles.
PROPRIETARY DESIGNS AND CHARACTERS. Sun's artists create original designs
and characters that are proprietary to Sun and continually update and refine
successful designs. Proprietary designs are based on a wide variety of themes,
including "attitude," recreational, outdoor, wildlife, western, sports,
patriotic, humor and seasonal themes. Designs are executed with different
printing techniques and inks, which in the past have included raised "puff"
ink, glitter, "goop" ink and heat sensitive inks. Proprietary products
accounted for approximately 23% of Sun's total gross sales in the first nine
months of 1996, and 18% and 25% of Sun's gross sales in 1995 and 1994,
respectively.
The level of copyright and trademark protection available to Sun for
proprietary designs and characters varies depending on a number of factors,
including the degree of originality and the distinctiveness of the associated
trademarks and designs. Sun has obtained or has applied for federal registration
of the Rude DogT, Surf OutlawT, EPICT, U.S.A. Unique Sportswear AttitudeT,
GUTST, GRRLS RuleE, Hangin' On The RimT and other trademarks for use on various
types of apparel, and may seek registration of other proprietary marks in the
future. There can be no assurance, however, that these applications will result
in registrations.
CUT-AND-SEWN PRODUCTS. Sun has also developed the capability to offer more
detailed, fashion-oriented products, such as polo shirts, women's leggings and
casual skirts, and button-front baseball shirts, by becoming more involved at
the garment manufacturing stage through use of a process called "cut-and-sew."
With the "cut-and-sew" process, Sun is able to purchase fabric and then have
garments manufactured by contractors to patterns designed by Sun. This
capability allows Sun to offer a broader variety of garment styles including
garments that are "rotary printed," a printing technique that involves
printing a design on fabric before it is "cut-and-sewn." Some of these
"cut-and-sewn" products are screen printed by Sun, and others go directly into
Sun's product lines to complement Sun's offerings. Sales of "cut-and-sewn"
products accounted for 42% of gross sales in the first nine months of 1996 and
17% and 16% of gross sales for the years ended December 31, 1995 and 1994,
respectively.
SOURCING
Sun purchases fabric, trim, blank T-shirts and other garments for its
screen printed apparel from approximately 18 domestic and six international
suppliers. Approximately 59% of the garments sold in the first nine months of
1996 were produced by domestic suppliers and the remainder by international
manufacturers. No manufacturer supplied Sun with more than 12% of total garments
sold in the first nine months of 1996. Sun's foreign suppliers are currently
located in Honduras and Mexico.
The relative proportion of garments purchased from domestic and foreign
suppliers may vary over time depending, in part, on competitive factors in the
world economy. Generally, basic garments and garments requiring short delivery
times are purchased from domestic suppliers, while products that require greater
finishing detail or allow longer delivery times are purchased overseas. Sun
believes that its relationship with a number of active suppliers in both the
domestic and foreign markets will enable Sun to continue to obtain a sufficient
supply of garments to satisfy its requirements.
Generally, each supplier agrees to produce finished garments in accordance
with samples and specifications provided by Sun. No contractual obligations
exist between Sun and suppliers except on an order-by-order basis. Sun's
representatives regularly visit the facilities of both foreign and domestic
suppliers to ensure quality and compliance with Sun's specifications. Sun also
conducts quality control inspections of garments at its facilities, which
include testing for shrinkage, dye and finish consistency, color fastness, size
specification adherence, construction strength and uniformity.
48
<PAGE>
Sun's arrangements with overseas suppliers are subject to the risks of
doing business abroad. Imports of garments are subject to bilateral textile
agreements between the United States and various foreign countries which impose
limitations on the amount of certain categories of merchandise that can be
imported from those countries into the United States.
Sun's future results could be adversely affected by additional bilateral or
unilateral trade restrictions, a loss of or significant change in existing
quotas resulting in a decrease in permissible imports, the imposition of
additional quotas, duties, taxes or other charges on imports, significant
fluctuations in the value of the dollar against foreign currencies, political
instability resulting in the disruption of trade from exporting countries or
restrictions on the transfer of funds. Imports of materials are also affected by
the cost of transportation into the United States.
Sun operates under time constraints in producing and delivering finished
screen printed products. Although customers often place orders for garment
styles as long as 20 weeks in advance, customers generally select the specific
art designs to be printed on ordered garments every 30 days for delivery within
as few as two days following the design selection. This limited lead time
requires Sun to have blank garments available for printing on short notice.
Consequently, Sun maintains a substantial inventory of blank stock and often
orders blank garments substantially in advance of the anticipated time of screen
printing and shipment.
Sales of garments obtained from "package" suppliers accounted for 58% of
gross sales in the first nine months of 1996. "Package" suppliers produce or
purchase the requisite fabric and other materials and then perform dyeing and
garment fabrication.
Sales of garments obtained from "cut-and-sew" suppliers accounted for 42%
of gross sales in the first nine months of 1996. With "cut-and-sewn" garments,
Sun purchases fabric from various mills and hires cut-and-sew contractors to
perform garment fabrication. Sun purchases fabric for use in "cut-and-sew"
operations primarily from domestic suppliers. Several of these suppliers also
provide blank garments that Sun uses for its screen printed apparel. Sun uses
approximately 14 domestic and 6 foreign "cut-and-sew" contractors.
PRODUCTION
GENERAL. Operations at Sun's production facilities in Kent, Washington
include art and design, merchandising, market research and development, receipt
and quality control inspection of incoming blank or dyed garments, screen
printing, decorating, the addition of customer price tickets and hang tags to
finished products, hangering or poly-bagging, packing and shipment.
Sun believes its ability to respond quickly to changes in customer
requirements and to meet delivery schedules consistently is an important factor
in Sun's business. Sun has expanded its bar-coding capabilities to assist in
rapid stock control of its inventory. Sun has implemented a computerized
manufacturing information system (MRP and MRPII) to make its product through-put
more efficient. Sun devotes substantial attention to preventive maintenance and
employee training for its printing equipment. Each press is operated by a group
of trained employees who work together as a team. Sun believes that this
approach contributes to the flexibility, quality and speed of its production
process.
SCREEN PRINTING. The screen printing process begins with the preparation
of a design by Sun's artists. Sun tests new designs for printability and color
dynamics, and produces sales and production samples. Sun also stocks over 140
pigment colors and numerous ink bases, which allows for in-house development of
new ink applications and techniques. In the printing process, screens are
positioned in automatic printing presses where inks are pressed through the
screen in order to duplicate the design on the garment. Garments bearing designs
on different portions of the garment may move through the printing process
several times. Following printing, the garments are dried, making the printed
design permanent and washable. In the first nine months of 1996, the cost of
blank garments represented approximately 69% of the cost of finished garments,
with labor, ink and other production and licensing costs accounting for the
remaining 31%.
49
<PAGE>
Sun has 15 automatic screen printing presses at its Kent facility. Sun's
screen printing presses have an aggregate projected maximum annual capacity of
approximately 26.7 million garments. In the first nine months of 1996, Sun sold
approximately 12.6 million garments, of which 10.6 million, or 84% were screen
printed. Sun's printing capacity at the facility includes two belt presses which
permit a design to be printed over an entire side of a garment ("overall
print" designs), eleven 12-color "spot" printing presses, and two
"Ultimate" presses which can print either "spot" designs or "overall
print" designs.
Sun has also used independent subcontractors to print garments during peak
production periods and believes that additional subcontractors are readily
available if needed in the future.
Sun also operates equipment at its Kent facility that assists in placing
garments on hangers prior to shipment. To meet customers' needs, Sun also has
the ability to affix price tags and other product information and can ship
garments poly-bagged or folded. These services reduce the time required to
prepare the garments for display and thereby enable customers to stock their
racks and shelves more quickly.
LABOR. Sun generally increases or reduces the size of its warehouse,
screen printing and distribution labor force in connection with seasonal
production demands through the use of temporary labor. Sun generally hires
seasonal laborers from a regular pool, thereby increasing both the level of
experience and the loyalty of its workforce.
REGULATIONS. Sun is subject to federal, state and local environmental laws
and regulations, including laws relating to employee knowledge of, exposures to,
and disposal of inks, dyes, photographic chemicals and cleaning solvents. Sun
believes that its operations comply with applicable environmental laws and
regulations. Although Sun continues to make capital expenditures for
environmental protection, it does not anticipate that significant expenditures
will be required to remain in compliance with environmental requirements.
SALES AND MARKETING
Sun's marketing and sales efforts emphasize development and maintenance of
close relationships with customers, regular presentation of samples and
prototypes of new styles and designs, and responsiveness to customer
requirements. Sun's in-house marketing and sales efforts are directed and
implemented by management of Sun. These individuals devote substantial time and
attention to direct dealings with customers, regularly make personal visits to
their headquarters and stores and participate in industry trade shows. Sales are
generally made by personal visits to customers by these managers and by sales
representatives, who typically meet with customers at least every 30 days to
take orders for particular designs and to show new designs and garments. Since
March 1992, virtually all marketing and sales efforts have been conducted
in-house.
Sun emphasizes customer service. Sun's employees in its customer service
areas coordinate orders and shipments and are in daily contact with customers.
Sun maintains an electronic data interchange (EDI) capability through which
customers using automated inventory management systems may communicate orders
electronically to Sun.
Sun distributes garments to national and regional retail chains in the
United States, including Wal-Mart, Target, Kmart, JC Penney, Montgomery Ward,
Hills Department Stores and Sears. Approximately 96% of Sun's gross sales in
1995 were made to its ten largest customers. Gross sales to Wal-Mart, Target and
Kmart represented approximately 81% of total gross sales in the first nine
months of 1996 and 88% of total gross sales for both 1995 and 1994. Sun is not
party to any long-term, multiple-shipment agreements with its customers.
SEASONALITY
Sun's highest sales and heaviest production demands historically occur in
the first, second and fourth quarters of each year. During the first, second and
fourth quarters, spring and summer products -- which include T-shirts, tank
tops, shorts and similar garments -- and back-to-school products are produced
and sold. During the third and part of the fourth quarter, winter season
products -- which include sweatshirts
50
<PAGE>
and long sleeve T-shirts -- and holiday products are produced and sold. See
"Sun Management's Discussion & Analysis of Financial Condition and Results of
Operation".
COMPETITION
Sun's strategy focuses on anticipating and meeting the demands of customers
with volume purchasing requirements. Sun believes that it is one of the few
screen printing companies capable of concurrently providing several large
customers with high volumes of screen printed products, together with the
variety of designs and styles required by those customers. Sun believes,
however, that other businesses possess the resources and familiarity with Sun's
customer base to enter into, and compete with Sun in its principal market.
More generally, Sun's core screen printed products compete with other
printed apparel, including apparel displaying licensed characters and the colors
and symbols of professional sports teams and colleges and universities; with
branded apparel; with apparel from vertical mills such as Hanes or Fruit of the
Loom; and with a wide variety of other clothing suitable for work, recreation or
casual wear. Competitive factors include product quality, access to popular
licenses, price, ability to meet delivery requirements and other aspects of
customer service, changes in styles and consumer preferences, degree of customer
preference for a limited number of vendors, and the limited availability of
shelf and rack space.
Sun has developed a product merchandising and manufacturing capability that
enables it to complement and expand its core screen printed product line by
offering more detailed, fashion-oriented garments. See "Products" above.
Producers of branded and other more fashion-oriented garments include companies
such as Cutler Sports Apparel, a division of VF Corporation, Allison
Manufacturing, Jerry Leigh Inc. and Jem Sportswear. Some of Sun's competitors
have greater financial, manufacturing and marketing resources than Sun.
BACKLOG
Sun typically receives information from customers concerning projected
purchases several months in advance of delivery, with written purchase orders
for particular garments being submitted shortly before shipment. In addition,
customers may cancel or reschedule orders with little or no penalty. Typically
the backlog of firm orders at any point in time represents less than 10% of
expected sales for the upcoming 12 months. For these reasons, Sun does not
believe that backlog at any one point in time is a meaningful indicator of
long-term future sales. At November 30, 1996 Sun's backlog of firm orders was
approximately $5.1 million. At December 31, 1995, Sun's backlog of firm orders
was approximately $8.6 million.
EMPLOYEES
At November 30, 1996, Sun employed 311 full-time employees, including 113
managerial, sales, creative art and clerical employees and 198 employees engaged
in manufacturing, warehousing and distribution. None of Sun's employees are
covered by a collective bargaining agreement. Sun believes that its employee
relations are good.
PROPERTIES
Sun's headquarters and production operations are located in a
230,000-square foot building in Kent, Washington (part of the Seattle
metropolitan area). The facility centralizes Sun's administrative, design,
production and the majority of its warehousing functions in one building. This
facility has allowed the installation of equipment that facilitates handling and
hangering of finished garments and equipment for on-site production of samples
and prototype garments. The lease for this facility provides for a rental of
$115,000 per month, plus insurance, taxes and other charges, and expires in
October 1999, with an option to renew for two consecutive five-year terms. Sun
also has a five year option to purchase the facility which expires in October
1999, for a mutually agreeable fair market price.
Sun also leases a 51,500 square foot satellite warehouse in Kent,
Washington. The lease, which expires in January 1997, provides for a rental of
$14,800 per month, plus insurance, taxes and other charges.
51
<PAGE>
Sun devotes substantial attention to preventive maintenance of the
equipment and believes that its plants and equipment are maintained in good
operating condition.
LITIGATION
A lawsuit is pending in the Supreme Court of the State of New York, County
of Oneida, the basis of which is a Complaint filed on February 14, 1994 against
Sun Sportswear, Inc.; E.R.O. Industries, Inc.; Toys "R Us, Inc.; Grace
International Apparel, Inc.; and Bradlees Department Store; by plaintiff Dustin
Allen Pack. The 8 year-old plaintiff allegedly caught fire while lying in a
polyester slumber sack (manufactured by E.R.O. Industries, Inc. and sold by Toys
"R Us, Inc.), watching television and playing with a butane lighter. He was
allegedly wearing a flannel shirt (manufactured by Grace International Apparel,
Inc. and sold by Bradlees Department Stores) over a T-shirt (printed by Sun and
sold by Bradlees Department Stores).
Plaintiff seeks compensatory damages of $150 million and punitive damages
of $50 million against all defendants under various tort law theories, including
false labeling and flammability of the slumber sack against its manufacturer and
for negligence against all defendants together. Sun has tendered the defense of
this suit to its insurance carrier, which is opposing the suit vigorously. Sun
believes its coverage is sufficient in the event it is held liable for
compensatory damages. While its coverage may not extend to punitive damage
awards, Sun believes there are no grounds for such damages. Although it cannot
predict with certainty the outcome of this suit, Sun believes its disposition
should not result in a material adverse effect on the results of operations or
the financial condition of Sun.
In July of 1995, Bradlees Department Stores filed for Chapter 11
protection. The effect of Bradlees Chapter 11 filing, if any, on this lawsuit
has not been determined at this time.
The only other legal proceedings to which Sun is a party involve routine
matters that are incidental to its business. Sun does not believe that the
resolution of these matters will have a material effect on the results of
operations or financial condition of Sun.
EXECUTIVE OFFICERS AND DIRECTORS OF SUN
The table below sets forth certain information regarding the current
executive officers and directors of Sun:
NAME AGE POSITION(S)
- ----------------------------------- --- -------------------------------------
William S. Wiley................... 49 Chairman of the Board
Larry C. Mounger................... 58 Director
Paul R. Rollins, Jr................ 55 Director
James A. Walsh..................... 73 Director
James H. Williams.................. 52 Director
L. Kaye Counts..................... 42 Executive Vice President and Chief
Operating Officer
Kevin C. James..................... 39 Senior Vice President and Chief
Financial Officer
WILLIAM S. WILEY. Mr. Wiley was appointed president and chief executive
officer and elected to the board of directors in October 1995. Mr. Wiley was
engaged by Sun as a re-engineering consultant from February to October 1995. Mr.
Wiley was an active principal in Wiley, Pene & Company, a business
building/turnaround consulting firm from 1990 to 1995. From 1987 to 1990, Mr.
Wiley served as a consultant and manager in the business building/restructuring
consulting firm of Clyde, Hamstreet and Company. Mr. Wiley practiced law for
Gleaves, Swearingen, Larsen and Potter from 1975 to 1987, where he became
partner in 1980. From 1969 through 1972, Mr. Wiley served as a process and
operations engineer for Atlantic Richfield.
LARRY C. MOUNGER. Mr. Mounger was elected to the board of directors in
April 1991 and served as chairman of the board from January 1993 to April 1996.
Mr. Mounger served as chief executive officer and president from January 1993 to
October 1995. Mr. Mounger served as chairman and chief executive officer
52
<PAGE>
and other positions of Pacific Trail from 1955 to 1993. Pacific Trail was an
outerwear garment company located in Seattle, Washington, which designed,
manufactured and marketed garments throughout the United States. He is a past
president of the National Apparel and Textile Association.
PAUL R. ROLLINS, JR. Mr. Rollins was appointed to the board of directors
in March 1995, and was reelected to the board in May 1995. Mr. Rollins is senior
vice president and commercial real estate division manager for Seafirst. Mr.
Rollins has served as senior vice president and other positions of Seafirst
since 1966.
JAMES A. WALSH. Mr. Walsh was elected to the board of directors in May
1993. Mr. Walsh is the retired president of Allied Stores, the parent
corporation of the Bon Marche department store chain. Mr. Walsh served on the
board of directors of Security Pacific Bank, Washington, N.A., and its
predecessor from 1968 until 1992. From May 1992 until March of 1993, he served
on the board of directors of Seafirst.
JAMES H. WILLIAMS. Mr. Williams was appointed to the board of directors to
fill a vacancy in January 1993, and was reelected to the board in May 1993. Mr.
Williams has been executive vice president -- Bank of America (the parent of
Seafirst) since 1994. Mr. Williams served as chief financial officer and
executive vice president, and other positions, of Seafirst from 1973 until 1994.
Prior to joining Seafirst, he worked as a budget analyst of the U.S. Department
of Agriculture in Washington, D.C.
L. KAYE COUNTS. Ms. Counts has been chief operating officer since December
1990 and became executive vice president in February 1994. Ms. Counts joined Sun
in June 1982 and served as a custom sales manager and plant manager from June
1982 to March 1984, as operations manager from March 1984 to December 1986, then
as vice president operations from December 1986 through February 1994. Prior to
joining Sun, she was production coordinator from 1980 to 1982 for Sunrise
Design, Inc., a custom screen printing business located in Seattle.
KEVIN C. JAMES. Mr. James became senior vice president and chief financial
officer in February 1994, and served as vice president finance of Sun from March
1991 until February 1994. Prior to joining Sun, Mr. James served from 1989 to
1991 as vice president finance and other positions for Fone America, Inc., a
telecommunications company located in Portland, Oregon. From 1983 to 1988, he
served as chief financial officer and other positions for Klukwan, Inc., a
diversified forest products company located in Juneau, Alaska. From 1980 to
1983, Mr. James worked in public accounting.
53
<PAGE>
SUN SELECTED FINANCIAL DATA
The following selected financial data presented below as of December 31,
1991 through 1995, have been derived from the audited financial statements of
Sun. The information presented as of and for the nine months ended September 30,
1996 and for the nine months ended September 30, 1995, are derived from the
unaudited financial statements of Sun. The unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments, which
Sun considers necessary for a fair presentation of the financial condition and
result of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire year ending December 31 1996. The selected financial
information should be read in conjunction with the "Sun Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements of Sun and the Notes thereto included elsewhere.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------- YEAR ENDED DECEMBER 31,
SEPT 30 SEPT 30 -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................ $ 53,602 $ 72,527 $ 93,965 $ 113,213 $ 104,773 $ 70,645 $ 71,795
Cost of goods sold................... 46,597 64,930 84,570 95,879 87,911 59,770 58,170
-------- -------- --------- --------- --------- --------- ---------
Gross profit......................... 7,005 7,597 9,395 17,334 16,862 10,875 13,625
Operating expenses................... 9,499 10,794 13,964 13,092 12,340 10,967 9,818
-------- -------- --------- --------- --------- --------- ---------
Operating income (loss).............. (2,494) (3,197) (4,569) 4,242 4,522 (92) 3,807
-------- -------- --------- --------- --------- --------- ---------
Other (income) expense:
Interest expense, net............ 492 969 1,267 677 519 483 605
Other, net....................... (51) (172) (201) (112) (228) 207 (119)
-------- -------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income
taxes.............................. (2,935) (3,994) (5,635) 3,677 4,231 (782) 3,321
Provision (benefit) for income
taxes.............................. (998) (1,358) (1,899) 1,228 1,494 (265) 1,129
-------- -------- --------- --------- --------- --------- ---------
Net income (loss).................... $ (1,937) $ (2,636) $ (3,736) $ 2,449 $ 2,737 $ (517) $ 2,192
======== ======== ========= ========= ========= ========= =========
Net income (loss) per share.......... $ (0.34) $ (0.46) $ (0.65) $ 0.43 $ 0.49 $ (0.09) $ 0.39
======== ======== ========= ========= ========= ========= =========
Weighted average common
shares and equivalents............. 5,748,500 5,748,165 5,748,249 5,722,121 5,610,996 5,609,000 5,609,000
======== ======== ========= ========= ========= ========= =========
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital...................... $20,299 $ 21,419 $ 25,031 $ 22,981 $ 19,418 $ 22,497
Total assets......................... 33,432 47,315 62,384 42,247 40,278 36,089
Long-term debt, including current
portion............................ -- 338 715 3,273 3,259 4,008
Shareholders' equity................. 24,082 26,018 29,750 26,820 23,902 24,419
</TABLE>
54
<PAGE>
SUN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE SUN FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS JOINT
PROXY/PROSPECTUS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain income statement items to net sales.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross sales
Proprietary sales............... 24.9% 18.3% 18.6% 25.5% 45.4%
Licensed sales.................. 77.8 84.7 84.4 78.3 57.6
Sales deductions..................... (2.7) (3.0) (3.0) (3.8) (3.0)
--------- --------- --------- --------- ---------
Net sales............................ 100.0 100.0 100.0 100.0 100.0
Cost of goods sold................... 86.9 89.5 90 84.7 83.9
Gross margin......................... 13.1 10.5 10 15.3 16.1
Operating expenses................... 17.7 14.9 14.9 11.5 11.8
Interest expenses.................... 0.9 1.3 1.3 0.6 0.5
Other (income)....................... (0.1) (0.2) (0.2) (0.1) (0.2)
(Benefit) provision for income
taxes.............................. (1.9) (1.9) (2.0) 1.1 1.4
--------- --------- --------- --------- ---------
Net (loss) income.................... (3.6)% (3.6)% (4.0)% 2.2% 2.6%
========= ========= ========= ========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995.
NET SALES. Net sales for the nine months ended September 30, 1996
decreased 26% to $53.6 million from $72.5 million in the same period of 1995.
Gross sales of women's and girls' apparel decreased 20% to $38.8 million in 1996
from $48.2 million in 1995. Sales of men's and boys' products decreased 39% to
$16.2 million in the first nine months of 1996 from $26.5 million in the same
period of 1995. Sun believes the primary reason for these decreases was a soft
retail environment in certain sectors of the screenprinted apparel market.
Gross sales of licensed products decreased by 32% to $41.7 million in the
first nine months of 1996 from $61.4 million in the first nine months of 1995.
Sun believes the primary reason for this decrease was a soft retail environment
in certain sectors of the screenprinted apparel market.
Gross sales of proprietary products remained unchanged at $13.3 million in
the first nine months of 1996 versus $13.3 million in the first nine months of
1995. Sun believes that sales of proprietary products held relatively firm
primarily as a result of Sun's concerted effort to increase its private label
business.
Gross sales to Sun's largest three customers decreased 31% in the first
nine months of 1996 versus the comparable period in 1995, primarily as a result
of a soft retail environment in certain sectors of the screenprinted apparel
market. Gross sales to Sun's other customers remained virtually unchanged in the
first nine months of 1996 versus the first nine months of 1995, primarily as a
result of Sun's concerted efforts to increase its private label business.
Sales deductions, consisting of sales returns, discounts and allowances,
decreased to $1.4 million in 1996 from $2.1 million in the first nine months of
1995. This decrease was primarily due to decreases in sales allowances due to
the overall sales volume decrease for the nine months ending September 30, 1996.
GROSS MARGIN. Gross margin as a percentage of net sales increased to 13.1%
in the first nine months of 1996 from 10.5% in 1995. This increase was primarily
the result of three factors. First, in the third
55
<PAGE>
quarter of 1995, Sun accrued over $2.0 million in inventory markdowns arising
from expected losses on the sale of surplus inventory. Second, 1995 margins were
negatively impacted by efforts to reduce men's inventory, including customer
incentives and substitution of existing, higher value inventory to fill customer
orders for lower value product. Third, in the third quarter of 1995, Sun
recorded over $350,000 in charges arising from minimum royalty commitments Sun
made pursuant to its license contracts that are not anticipated to be recovered
through licensed product sales. The above factors were partially offset by the
fact that the reduced overall sales level in 1996 had a disproportionate effect
on gross margin (as a percentage of net sales) due to the diminished capacity to
cover Sun's fixed costs.
OPERATING EXPENSES. Operating expenses decreased to $9.5 million (or 17.7%
of net sales) in 1996 from $10.8 million (or 14.9% of net sales) in the first
nine months of 1995. The dollar decrease was primarily attributable to decreases
in selling and general and administrative expenses. The increase as a percentage
of sales is a result of the lower sales volume in 1996, compared to 1995.
General and administrative expenses decreased to $4.7 million (or 9.2% of
net sales) in 1996 from $6.0 million (or 8.3% of net sales) in 1995. This dollar
decrease was primarily the result of elimination of positions under a
restructuring plan implemented by Sun in the first quarter of 1996, and the fact
that consulting expenses were $490,000 lower in the first nine months of 1996
than in the same period of 1995 (the 1995 consulting expenses were associated
with Sun's 1995 re-engineering efforts).
Selling expense decreased to $2.6 million (or 4.9% of net sales) in the
first nine months of 1996 from $2.8 million (or 3.9% of net sales) in the same
period of 1995. The dollar decrease was primarily the result of elimination of
positions under a restructuring plan implemented by Sun in the first quarter of
1996.
INTEREST EXPENSE. Interest expense decreased 49% to $492,000 in the first
nine months of 1996 from $970,000 in 1995 primarily as a result of lower
borrowing levels in the nine months of 1996.
NET LOSS. Sun's net loss decreased to a loss of $1.9 million in the first
nine months of 1996 from a loss of $2.6 million in the same period of 1995, as a
result of the factors described above.
1995 COMPARED WITH 1994.
NET SALES. Net sales for 1995 decreased 17% to $94.0 million from $113.2
million in 1994. The primary reason for this decrease was the sales decline
suffered by Sun in the second half of 1995 caused by the soft retail
environment, and decreases in the sales of men's and boys' products.
Gross sales of men's and boys' products decreased 38% to $29.8 million in
1995 from $48.2 million in 1994. Sun believes this decrease was primarily the
result of the Major League Baseball strike, the non-renewal of Sun's joint
Looney TunesR/National Football LeagueT license and a difficult retail sales
environment.
Women's and girls' gross sales decreased by 3.5% to $67.0 million in 1995
from $69.4 million in 1994. Sun believes this decrease was due to the soft
retail environment in the second half of 1995.
Gross sales of licensed products decreased by 11% to $79.3 million in 1995
from $88.7 million in 1994. The decrease in licensed product sales was primarily
the result of the Major League Baseball strike, the non-renewal of Sun's joint
Looney TunesR/National Football LeagueT license and a difficult retail sales
environment.
Gross sales of proprietary products decreased by 40% to $17.4 million in
1995 from $28.9 million in 1994. Sun believes this decrease was primarily the
result of the soft retail environment and strong competition from garments
bearing licensed characters and trademarks.
Gross sales to Sun's largest three customers decreased 18% in 1995 versus
sales in 1994. Gross sales to Sun's other customers decreased 18% in 1995 versus
1994. These decreases were primarily the result of the factors discussed above.
Sales deductions, consisting of sales returns, discounts and allowances,
decreased to $2.8 million in 1995 from $4.4 million in 1994. This decrease was
primarily due to decreases in the amount of product returns.
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<PAGE>
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 10.0%
in 1995 from 15.3% in 1994 (see "Note 1 to Financial Statements" above). This
decrease was primarily the result of four factors. First, the reduced overall
sales levels in 1995 had a disproportionate effect on gross margin due to the
diminished capacity to cover Sun's fixed costs. Second, in the last half of
1995, Sun accrued over $2 million in one-time inventory markdowns arising from
expected losses on the sale of surplus inventory. Sun believes these markdowns
were necessary because of the sluggish retail market and competitive selling
pressures in the screenprint environment. Third, 1995 margins were negatively
impacted by efforts to reduce men's inventory, including customer incentives and
substitution of existing, higher value inventory to fill customer orders for
lower value product. Fourth, in the third quarter of 1995, Sun recorded over
$350,000 in charges arising from minimum royalty commitments Sun made (with
regard to certain of its license contracts) which are not anticipated to be
recovered through licensed product sales. Sun believes these reserves for unmet
minimum royalty obligations were necessary because of the overall sluggish
retail market and competitive selling pressures in the screenprint environment.
OPERATING EXPENSES. Operating expenses increased to $14.0 million (or
14.9% of net sales) in 1995 from $13.1 million (or 11.6% of net sales) in 1994
(see "Note 1 to Financial Statements -- Reclassifications" below). This
increase was primarily attributable to an increase in general and administrative
expenses.
General and administrative expenses increased to $7.7 million (or 8.2% of
net sales) in 1995 from $6.7 million (or 5.9% of net sales) in 1994. This
increase was primarily the result of added costs associated with Sun's
management information system, and $747,000 in consulting costs associated with
Sun's ongoing re-engineering efforts to reduce its sourcing, printing and
distribution costs.
INTEREST EXPENSE. Interest expense increased 87% to $1,267,000 in 1995
from $677,000 in 1994 primarily as a result of higher borrowing levels and
higher interest rates in 1995.
NET (LOSS) INCOME. Sun experienced a net loss of $3.7 million for 1995
compared to net income of $2.4 million in 1994, as a result of the factors
described above.
NON-RENEWAL OF JOINT LOONEY TUNESR/NATIONAL FOOTBALL LEAGUET LICENSE. The
National Football LeagueT did not renew Sun's joint license for Looney Tunes
(RWarner Bros.) characters combined with National Football LeagueT team
trademarks (the sell-off period under this license expired June 30, 1995). The
National Football League indicated to Sun that the NFL did not renew in order to
strategically consolidate the number of licensees holding rights to its
properties. Sun believes its other Looney TunesR and joint Looney TunesR
licenses will not be affected by this action. Sales of Looney TunesR/National
Football LeagueT products were $1.8 million in 1995 and $4.5 million in 1994.
1994 COMPARED WITH 1993.
NET SALES. Net sales for 1994 increased 8.1% to $113.2 million from $104.8
million in 1993. The primary reason for that increase was the increase in gross
sales of licensed goods from $60.4 million in 1993 to $88.7 million during 1994.
The increase in licensed sales was primarily attributable to the popularity of
the Warner Bros. Looney TunesR, joint Looney TunesR/Major League BaseballT and
joint Looney TunesR/National Football LeagueT licensed products, and the
popularity of Disney's The Lion King licensed products.
Partially offsetting the increase in licensed products was a decrease in
gross sales of proprietary products by 39.2% from $47.6 million in 1993 to $28.9
million in 1994. Sun believes this decrease was the result of increased
competition from garments bearing licensed designs, and of the overall sales
decrease in men's and boys' products.
Gross sales of women's and girls' apparel increased 91% to $69.4 million in
1994 from $36.3 million in 1993. Sun believes this increase was due to the
strong design and merchandising abilities of this division, coupled with a
strong license portfolio, which resulted in strong sell-through at retail.
Gross sales of men's and boys' products decreased 32% to $48.2 million in
1994 from $71.2 million in 1993. Sun believes this decrease was primarily
attributable to reduced sales calling efforts and garment
57
<PAGE>
sourcing issues caused by staff turnover that occurred in 1994 and the Major
League BaseballT and National Hockey LeagueT strikes.
Gross sales to Sun's largest three customers increased 16.2% in 1994 versus
1993. This increase was primarily the result of sales increases to Sun's third
largest customer in 1994. Gross sales to Sun's other customers decreased 27.2%
in 1994 versus 1993. This decrease was primarily the result of decreases in
sales of men's and boys' products.
Sales deductions, consisting of sales returns, discounts and allowances,
increased to $4.4 million in 1994 from $3.2 million in 1993. The increase was
primarily due to two factors. First, sales allowances increased due to the
higher sales levels in 1994. Second, one large order was returned in the second
quarter of 1994 due to distribution errors.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 15.3%
in 1994 from 16.1% in 1993. This decrease was primarily the result of the fact
that sales of "cut-and-sewn" products -- which generally carried lower margins
than package products -- were higher in the 1994 period, sales returns and
allowances were higher in 1994 than in 1993, and distribution costs increased in
1994 due to expanded sales to Sun's third largest customer (this customer had
greater requirements for product ticketing, hangering and packaging). The above
factors were partially offset by lower levels of sub-contract printing (which is
less profitable than in-house printing) in 1994 versus 1993; and higher levels
of licensed products sales (which generally carried higher margins than
proprietary products) in 1994 than in 1993.
OPERATING EXPENSES. Operating expenses increased to $13.1 million (or
11.6% of net sales) in 1994 compared to $12.3 million (or 11.8% of net sales)
for 1993. This dollar increase was primarily attributable to increases in
selling, design-pattern, and general-administrative expenses in 1994. The 1994
increase was partially offset by $898,000 in charges recorded in 1993 associated
with the closure of Sun's Johnson City, Tennessee "cut-and-sew" facility. See
"Note 4 to Financial Statements" below.
Selling expense increased to $3.8 million or 3.3% of net sales in 1994 from
$3.4 million or 3.2% of net sales in 1993. The dollar increase was primarily the
result of the costs of additional personnel hired to support the higher 1994
sales volume in the Women's and Girls' Division and non-recurring severance
payments.
Design and pattern expense increased to $2.5 million or 2.2% of net sales
in 1994 from $2.3 million or 2.2% of net sales in 1993. The dollar increase was
primarily due to "learning curve" costs associated with Sun's
computer-aided-design system.
General and administrative expense increased to $6.7 million or 5.9% of net
sales in 1994 from $5.7 million or 5.4% of net sales in 1993. This increase was
primarily the result of the start-up costs associated with Sun's management
information system and the costs of additional personnel hired to support the
higher 1994 sales volume in the Women's and Girls' Division.
INTEREST EXPENSE. Interest expense for 1994 was $676,000 versus $519,000
in 1993, as a result of higher borrowing levels and higher interest rates.
NET INCOME. Net income decreased to $2.4 million in 1994 from $2.7 million
in 1993, as a result of the factors described above.
58
<PAGE>
QUARTERLY NET SALES-SEASONALITY
Sun's net sales fluctuate from quarter to quarter. Quarterly net sales for
the first nine months of 1996, and the years 1995 and 1994 are set forth below.
<TABLE>
<CAPTION>
NET SALES
(DOLLAR AMOUNTS IN THOUSANDS)
--------------------------------------------------------------
FIRST NINE
MONTHS YEAR ENDING YEAR ENDING
OF 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------- -------------------- ---------------------
AMOUNT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
First Quarter........................ $24,433 $25,720 27.4% $ 27,224 24.0%
Second Quarter....................... 20,035 30,582 32.5 27,375 24.2
Third Quarter........................ 9,134 16,225 17.3 26,634 23.6
Fourth Quarter....................... n/a 21,438 22.8 31,980 28.2
Total................................ $53,602 $93,965 100.0% $113,213 100.0%
</TABLE>
Sun's highest sales and heaviest production demands generally occur in the
first, second and fourth quarters of each year. During the first, second and
fourth quarters, spring and summer products (which include T-shirts, tank tops,
shorts and similar garments) and back-to-school products are produced and sold.
During the third and part of the fourth quarter, winter season products (which
include sweatshirts and long sleeve T-shirts) and holiday products are produced
and sold.
LIQUIDITY AND CAPITAL RESOURCES
Sun finances working capital needs primarily from "internally generated
funds" (which Sun defines as net income plus depreciation) and short term
borrowing under a credit agreement. In February 1996, Sun entered into a credit
agreement with Heller Financial, Inc. ("Heller"). The Heller credit agreement
provides for a line of credit (including commercial letters of credit) of up to
$24 million and expires in February 1998. At September 30, 1996, approximately
$9.0 million was available for borrowing. The borrowing rate for the revolving
portion of the line is the prime rate. All Sun's assets, including accounts
receivable and inventories, are pledged as security for borrowings under the
Heller credit agreement. Under the agreement, the amount borrowed at any time,
together with letters of credit issued on behalf of Sun, may not exceed 85% of
eligible accounts receivable plus 60% of eligible inventory, up to $8.5 million.
The Heller credit agreement requires compliance with certain financial covenants
principally relating to working capital, tangible net worth, ratio of debt to
equity, capital expenditures, minimum earnings (before taxes, interest and
depreciation), restrictions on the payment of dividends and restrictions on the
incurrence of long-term debt. In September 1996 the Heller agreement was amended
to relax certain of these debt covenants. Sun was in compliance with the amended
Heller debt covenants at September 30, 1996.
Inventory levels decreased by $4.2 million or 18% from December 31, 1995 to
September 30, 1996 primarily as a result of Sun's concerted efforts to operate
its business with lower levels of inventory. Sun believes there was
approximately $1.3 million (net of previously recorded markdown reserves of $1.9
million) of impaired inventory on hand at September 30, 1996, which is expected
to be sold at little or no margin by year end 1996. As a result, Sun believes
its gross margin will be negatively impacted in the last three months of 1996 by
1% to 2% of net sales.
Accounts receivable decreased by 50% to $6.5 million at September 30, 1996
from $13.1 million at December 31, 1995, primarily as a result of lower sales in
the third quarter of 1996 than in the fourth quarter of 1995.
Sun has an agreement with Heller Financial, Inc., that is intended to
transfer Sun's accounts receivable collection risk to Heller, for essentially
all of its customers other than Target and Wal-Mart. Under the agreement, Heller
assumes 100% of the collection risk associated with Sun's covered receivables
and Heller receives a fee equal to .65% of the gross amount of the Kmart
receivable and .55% of the gross amount of all other covered receivables for
assuming such collection risk.
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<PAGE>
Notes payable (borrowings under Sun's line of credit) decreased $10.1
million or 75% from December 31, 1995 to September 30, 1996. The decrease in
notes payable was primarily the result of the reduction in inventory and
accounts receivable that occurred during the first nine months of 1996.
During the first nine months of 1996, Sun purchased approximately $400,000
of machinery and equipment for production, warehouse, distribution and office
use. Sun anticipates that total expenditures for machinery and equipment will be
less than $120,000 during the remainder of 1996.
Sun's primary ongoing cash needs are for working capital and capital
expenditures. Sun believes that its cash needs through the remainder of 1996
will be met by borrowings under its Heller credit facility.
INFLATION
From time to time, Sun's suppliers of blank garments and materials increase
their prices. Further, Sun increases its employees' compensation relative to
increases in the cost of living. Sun's mass merchant customers have historically
sold Sun's more basic products at predetermined sales price points, many of
which have not risen during the last few years. Because Sun's customers
generally operate on a fixed markup percentage, their strategy of not increasing
their sales price points has made it difficult for Sun to pass on any cost
increases relative to its more basic products.
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<PAGE>
BUSINESS OF BSI
BSI designs, sources, prints and markets moderately-priced sportswear,
including sportswear featuring various licensed character images. BSI also
markets sportswear decorated with its proprietary designs and creates private
label programs for its major retail customers. In addition, BSI distributes
undecorated garments to over 12,000 customers, which typically decorate the
product for later sale. BSI's strategy is to maximize shareholder value through
strategic acquisitions and by introducing new products, broadening its customer
base and expanding its channels of distribution.
BSI began operations in 1974 as a distributor of undecorated garments,
primarily T-shirts and sweatshirts. Since that time, BSI has expanded its
products to include sportswear decorated with licensed character images and
proprietary graphic designs. BSI's products are developed by its in-house
merchandising and art staff, sourced through a network of domestic and
international suppliers, decorated by BSI and marketed through a combination of
in-house and outside sales representatives.
BUSINESS STRATEGY
BSI's business strategy is to maximize stockholder value by building a
highly profitable and diversified sportswear company through internal growth and
strategic acquisitions. BSI has adopted the strategies described below.
INTERNAL GROWTH STRATEGY
Expand product line. Since BSI's inception, its products have expanded
from a basic line of T-shirts and sweatshirts to a broader collection of
sportswear. BSI expects to continue to develop and market new products with an
emphasis on its department store sportswear line, proprietary products and
private label programs for its larger retail customers.
Expand license portfolio. BSI's significant growth has been achieved, in
part, as a result of its ability to develop and enhance long-term relationships
with key licensors. Through these relationships, BSI has been successful in
expanding the scope of its existing licensed properties. In addition, BSI
continuously evaluates and pursues new licensing opportunities. BSI believes it
has been successful in obtaining new licenses as a result of its historical
performance with its existing license portfolio.
Increase penetration of existing accounts and selectively expand account
base. A continued expansion in BSI's product lines and license portfolio may
enable BSI to further penetrate its existing customer base by expanding the
number of departments that sell its products at a particular retailer. In
addition, BSI is pursuing, through its key account sales representatives,
numerous other large retail customers and has established a telemarketing
program to market its products to smaller regional retailers.
Pursue international opportunities. Although BSI's primary focus is the
domestic market, it is currently evaluating opportunities to sell its products
in various other countries through a combination of direct sales and
distribution arrangements.
ACQUISITION GROWTH STRATEGY
BSI's acquisition program has resulted in significant growth for the
company over the last five years. BSI has completed five acquisitions since
1990, each of which it believes brought significant strategic advantages to its
business. In September 1990, BSI purchased the operating assets of CC Creations
("CC Creations"), its then largest subcontract screen printer, in order to
improve costs and control the quality of its screen printing operations. In July
1991, BSI purchased Capital Industries, Inc. ("Capital Industries") to enter
the uniform and specialty products business. In November 1994, BSI purchased
Velva Sheen, an operating division of American Marketing Industries, Inc.
("Velva Sheen"), to enter the licensed character market and expand its
decorated sportswear business. In December 1995, BSI purchased the operating
assets of Needleworks, Inc. ("Needleworks"), a contract embroidery operation
in Millersburg, Pennsylvania, in order to improve costs and control quality in
its embroidery product line. Most recently, in August 1996, BSI purchased the
operating assets of Plymouth Mills, Inc. ("Plymouth"), which expanded
61
<PAGE>
the company's participation in the proprietary and private label markets and
strengthened its sales, marketing and sourcing capabilities.
BSI has established certain criteria which are used to evaluate acquisition
opportunities. It is anticipated that acquisitions will remain a key component
of BSI's long-term growth plan.
PRODUCTS
BSI's principal products are T-shirts and fleecewear, in youth and adult
sizes. Presently, BSI's products consist of four distinct lines: (i) licensed
character, (ii) collegiate logo, (iii) private label, and (iv) proprietary. A
variety of decorating techniques are used to decorate blank garments with
graphic designs. The techniques include screen printing in up to ten colors,
belt printing, direct embroidery, applique, combination applique and screen
print and flock transfer. A significant portion of the graphic designs involve
creative enhancements of fictional cartoon characters, collegiate logos and
other identifying marks made available under license agreements from licensors,
including Disney Enterprises, Inc. ("Disney"), Warner Bros., Chic by H.I.S.,
Major League BaseballT and most major colleges and universities.
BSI's products are available in a wide variety of colors, styles and fabric
weights. T-shirts are available in solid, stripe, roll sleeve, weathered natural
and micro-stripe styles, and range in fiber content from 50 percent cotton/50
percent polyester to 100 percent cotton. BSI's fleecewear products range from
seven ounce to eleven ounce in weight. Garments are sourced from domestic and
foreign mills and are decorated at BSI's facilities in Cincinnati, Ohio, Staten
Island, New York, Millersburg, Pennsylvania and College Station, Texas. In
addition to basic sportswear, products offered by BSI include windsuits, denim
jackets, parkas, canvas shorts and knit shirts.
Screen print designs are developed from ideas obtained from the company's
evaluation of industry trends, visits to fashion and trade shows, and most
significantly, frequent meetings with apparel label owners and major customers.
Sales managers work closely with BSI's merchandisers, designers and artists to
develop appropriate styles and color shades. The design process is interactive,
requiring the creation and delivery of numerous samples for customer feedback
and further changes. For larger customers, the design staff typically
incorporates minor styling changes to a basic design to create a unique line for
the customer.
BSI designers are responsible for new product development. The designers
are dedicated to licensed character products and the various sportswear
divisions. Each designer heads a design studio staffed by dedicated artists.
BSI devotes considerable resources to ensuring that its products are of a
high quality. The quality control department is responsible for monitoring all
phases of screen print production and ensuring that purchased garments meet the
company's quality standard. BSI believes that its product quality is among the
highest in its market segment.
BSI's blank distribution operations are conducted under the name Gulf Coast
Sportswear ("Gulf Coast"). Gulf Coast sells basic T-shirts and sweatshirts,
golf shirts, baseball shirts, athletic jackets, athletic jerseys and shorts to
screen printers, embroiderers, advertising and specialty companies, retailers,
sporting good outlets and uniform suppliers, which in turn typically decorate
the product for later sale. Gulf Coast purchases its inventory in bulk
quantities and distributes products to over 12,000 customers from eight
warehouses. BSI believes that its blank distribution operation offers one of the
broadest product lines in the industry.
LICENSES AND TRADEMARKS
BSI has increased sales and expanded its product line by obtaining rights
through licenses to manufacture and market products with recognizable character
images. These license agreements include the rights to use fictional character
images and trade names such as Disney's Mickey Mouse, Disney's Winnie the Pooh
and various Looney TunesQcharacters (including Bugs BunnyQ and the Tazmanian
DevilQ). In addition, BSI has e ntered into license agreements with respect to
the manufacturing and marketing of collegiate apparel for most major colleges
and universities, as well as Major League BaseballT.
62
<PAGE>
Many of BSI's license agreements limit sales of products to certain market
categories. BSI's licenses are typically for a term of one-to-two years but are
terminable on 30 days notice. These license agreements generally require minimum
annual payments and certain quality control procedures. Further, these license
agreements give the licensor the right to approve licensed products offered by
BSI and to terminate the license if BSI does not satisfy its contractual
obligations in any material respect. Pursuant to these license agreements,
royalties generally range from 7% to 13% of net sales for products sold.
BSI has registered and owns a variety of trademarks under which a number of
BSI's products are sold. BSI believes that its trademarks have significant value
in the marketing and sale of its proprietary products.
SALES, MARKETING AND DISTRIBUTION
BSI utilizes approximately 45 independent sales representatives that sell
one or more of the company's product lines. In addition, 11 key account
executives concentrate on national retail accounts including Wal-Mart, Kmart,
J.C. Penney, Target, Hills Stores Co. and Venture Stores Inc. Given the
importance of serving major accounts, BSI assigns a national sales manager to
oversee all Wal-Mart activities and more than thirty sales representatives to
service the Wal-Mart account. Management believes that a combination of key
account sales representatives and independent sales representatives gives BSI a
thorough penetration of the retail marketplace. Independent sales
representatives are compensated on a commission-only basis with rates averaging
6.0% and ranging from 1% to 10% of net sales. Key account sales representatives
are salaried employees with bonus incentives tied to sales and profitability.
Territories for independent sales representatives are determined by geographical
location, markets covered, and products sold.
In addition to independent sales representatives, BSI has a presence in New
York City's garment district. BSI has a 4,200 square foot showroom, specializing
in women's, men's and boys' apparel, located at 1411 Broadway, and a 1,900
square foot showroom, specializing in children's apparel, located at 112 West
34th Street. BSI's products are presented at a number of trade shows, including
the semi-annual MAGIC Show.
In 1995, sales to mass merchants such as Wal-Mart, Kmart and Target,
accounted for approximately 23%, department stores and souvenir and gift stores
accounted for approximately 22%, and other customers accounted for approximately
54% of BSI's net sales. In 1995, net sales to Wal-Mart accounted for 19.3% of
BSI's net sales, and no other single customer accounted for more than 5% of
BSI's net sales. The loss of, or significantly decreased sales to, Wal-Mart or
other significant customers could have a material adverse effect on BSI's
financial condition and results of operations.
COMPETITION
The apparel industry is highly competitive. Several of BSI's competitors
have substantially greater financial, distribution, marketing and other
resources, including greater brand awareness. BSI competes with numerous apparel
vendors, including those with their own retail stores, as well as department
stores, specialty stores, retail chains and mass merchandisers who sell apparel
under their own labels and whose merchandise displays licensed characters, and
colors and symbols of professional sports teams and colleges and universities.
Competitive factors include product quality, price, ability to meet delivery
requirements and other aspects of customer service, changes in styles and
consumer preferences, and the limited availability of customer shelf and rack
space.
SOURCING OF GARMENTS
BSI sources each of its product lines based on the individual design,
styling and quality specifications of such products. BSI sources the majority of
its products through large domestic mills and independently owned contractors
with manufacturing facilities primarily in the United States, China, Guatemala,
Pakistan and Mexico. BSI believes that outsourcing the manufacture of blank
garments allows it to enhance production flexibility and capacity while
substantially reducing capital expenditures and avoiding the expense of managing
a large production work force.
63
<PAGE>
BSI contracts for the manufacture and sewing of its products with numerous
domestic and overseas contractors. During 1995, approximately 60% of BSI's
products purchased were manufactured by four major domestic suppliers. The
balance of BSI's products were manufactured by smaller domestic mills or in
foreign countries. BSI anticipates that the percentage of garments which are
imported may increase primarily due to its increasing decorated sportswear
sales.
BSI utilizes sourcing agents which assist it in selecting and overseeing
foreign third-party contractors and monitoring quotas and other trade
regulations. BSI's production staff and sourcing agents oversee all aspects of
apparel manufacturing and production. BSI and its sourcing agents separately
negotiate with suppliers for the purchase of fabrics which are then purchased
either by BSI or by its contractors.
BSI generally orders products from foreign sources in situations where the
magnitude of the order received and the amount of lead time prior to delivery of
the order are sufficient. Since many customer orders change with respect to
colors, sizes, allotments or assortments prior to the delivery date, BSI must
estimate production requirements in order to secure necessary fabrics and
manufacturing capacity.
There are no formal arrangements between BSI and any of its contractors or
suppliers; however, BSI believes that its relationships with its contractors and
suppliers are good.
BSI's quality control program is designed to ensure that all goods bearing
BSI's or its licensor's trademarks meet its standards. With respect to its
products, BSI develops and inspects prototypes of each product type, establishes
fittings based on the prototype, inspects samples and, through its employees or
sourcing agents, inspects fabric prior to cutting. BSI or its sourcing agents
inspect the final product prior to shipment to BSI's facilities.
FACILITIES AND EQUIPMENT
BSI has advanced computerized art and graphic equipment, 32 fully automatic
screen printers, and 12 manual screen printers used for shorter production runs.
This equipment enables BSI to design and produce products to customer
specifications. In addition, BSI operates embroidery production facilities,
which operate 32 advanced embroidery machines from facilities located in
Millersburg, Pennsylvania and College Station, Texas.
BSI's printing and embroidery operations are performed from five facilities
aggregating approximately 310,000 square feet. The distribution of undecorated
blank apparel is conducted from eight warehouses with an aggregate of
approximately 205,000 square feet located throughout the southern United States.
BSI also maintains a cut and sew facility in Dallas, Texas, two showrooms in the
garment district of New York City, and an administrative office in Clute, Texas.
EMPLOYEES
As of November 30, 1996, BSI had approximately 1,154 full time employees of
whom 166 were salaried, 974 were hourly and 14 were paid on a combination of
salary and commission basis. In addition, at such date, 119 persons were engaged
as independent contractors working on a commission only basis. BSI believes
relations with its employees are good.
EXECUTIVE OFFICERS AND DIRECTORS OF BSI
The table below sets forth certain information regarding the executive
officers and directors of BSI:
NAME AGE POSITION(S)
- ------------------------ --- -----------------------------------------------
Randall B. Hale......... 34 Chairman of the Board, Director
J. Ford Taylor.......... 39 Chief Executive Officer, President and Director
Nolan Lehmann........... 52 Director
Michael S. Chadwick..... 45 Director
Alan Elenson............ 47 Director
F. Clayton Chambers..... 37 Vice President, Chief Financial Officer,
Treasurer and Secretary
64
<PAGE>
RANDALL B. HALE. Mr. Hale has been a director of BSI since February 1993
and chairman of the board since May 1994. He has served as a vice president of
Equus II and Equus Capital Management Co. ("Equus") since November 1992 and a
director of Equus since February 1996. From June 1985 to October 1992, he was
employed by Andersen Worldwide. Mr. Hale is a director of American Residential
Services, Inc. Mr. Hale is also a director of numerous privately-owned
companies. Mr. Hale is a certified public accountant.
J. FORD TAYLOR. Mr. Taylor has been employed by BSI since August 1990 when
a company he founded, CC Creations was purchased by BSI. From August 1990 to
December 1993 he served as president of the Red Oak/CC Creations facility in
College Station, Texas. In December 1993, he was promoted to vice
president -- operations of the decorated sportswear operations of BSI. In August
1995, Mr. Taylor was promoted to chief operating officer of the decorated
sportswear operations and in August 1996, he was elected to his present position
of president and chief executive officer of BSI.
NOLAN LEHMANN. Mr. Lehmann has been a director of BSI since February 1989.
He has served as a director and president of Equus since 1980, and as a director
and president of Equus II since inception. Prior to joining Equus, Mr. Lehmann
served in a number of executive management positions with Service Corporation
International from 1973 to 1980. Mr. Lehmann is also a director of Allied Waste
Industries, Inc., American Residential Services, Inc., Drypers Corporation and
Garden Ridge Corporation. In addition, he serves as a director of numerous
privately-owned companies. Mr. Lehmann is a certified public accountant.
MICHAEL S. CHADWICK. Mr. Chadwick has been a director of BSI since
February 1989. He is senior vice president and a managing director of the
corporate finance department of Sanders Morris Mundy, a Houston-based financial
services and investment banking firm. From 1988 to August 1994, Mr. Chadwick
served as president of Chadwick, Chambers & Associates, Inc., an investment and
merchant banking firm specializing in corporate finance services. Mr. Chadwick
presently serves on the Board of Directors of Watermarc Food Management Company
and Blue Dolphin Energy Company, publicly traded corporations, and Moody-Price,
Inc., a privately-held corporation.
ALAN ELENSON. Mr. Elenson has been a director of BSI since August 1996. He
founded Plymouth in 1975 and owned and operated Plymouth prior to its
acquisition by BSI in August 1996. Mr. Elenson is president of BSI's Plymouth
Mills operation.
F. CLAYTON CHAMBERS. Mr. Chambers has been vice president, chief financial
officer, treasurer and secretary of BSI since November 1994. Mr. Chambers was a
principal in the firm of Chadwick, Chambers & Associates, Inc., an investment
banking firm located in Houston, Texas, from June 1988 until October 1994.
65
<PAGE>
BSI EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued during the fiscal years ended December 31, 1995,
1994 and 1993 by BSI to the executive officers of BSI who are anticipated to
become executive officers of Sun:
ANNUAL COMPENSATION
-------------------------------
YEAR SALARY BONUS
--------- --------- ---------
Randall B. Hale(1)................... 1995 -- --
1994 -- --
1993 -- --
J. Ford Taylor....................... 1995 $ 92,311 $ 55,000
1994 $ 75,000 $ 55,000
1993 $ 75,000 $ 55,000
F. Clayton Chambers.................. 1995 $ 95,308 --
1994 $ 28,000 --
1993 -- --
- ------------
(1) Mr. Hale is an officer of Equus II, BSI's controlling stockholder, and
serves as chairman of the board of BSI in connection with his position at
Equus II.
No options were granted to or exercised by the BSI executive officers named
above during the fiscal year ended December 30, 1995.
Each non-employee BSI board member receives an annual fee of $16,000 for
his service on the BSI board of directors and reimbursement of travel expenses
incurred for attendance at meetings.
BRAZOS ANNUAL INCENTIVE COMPENSATION PLAN.
Effective December 30, 1995, Brazos implemented its Annual Incentive
Compensation Plan (the "Incentive Plan"), a nonqualified compensation plan for
its full-time employees which provides that a percentage of the company's annual
net income after taxes be distributed among participating employees based on
their annual base salaries.
Prior to each fiscal year, the board of directors of Brazos establishes a
minimum income threshold (the "Threshold") which the company must attain
before payouts to Incentive Plan participants will be made under the Incentive
Plan. At the end of each fiscal year, after annual financial results have been
finalized, a percentage of the company's after-tax income, net of the Threshold,
is distributed to each participating employee up to a maximum percentage of his
or her annual base income.
The Incentive Plan is administered by a compensation committee and is
subject to amendment, modification or termination by the board of directors of
Brazos at any time in its sole discretion.
EMPLOYMENT AGREEMENTS
BSI has entered into employment agreements with Messrs. Taylor and Chambers
which provide for current annual salaries of $250,000 and $150,000,
respectively. The agreements with Messrs. Taylor and Chambers provide for terms
expiring December 31, 1999. Mr. Taylor's agreement provides for minimum cash
bonuses of $15,000, $17,500 and $20,000 for calendar years ending 1997, 1998 and
1999, respectively, and for discretionary bonuses. Mr. Chambers' agreement
provides for minimum cash bonuses of $5,000, $7,500 and $10,000 for calendar
years ending 1997, 1998 and 1999, respectively, and for discretionary bonuses.
In addition, the agreements with Messrs. Taylor and Chambers provide that upon
termination of employment, each officer shall be prohibited from competing with
BSI for a period of two years.
66
<PAGE>
BSI SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1991 through 1994 and as of and for the year ended December 30,
1995, has been derived from the audited financial statements of BSI. The
information presented as of and for the thirty-nine weeks ended September 28,
1996 and September 30, 1995, was derived from the unaudited financial statements
of BSI. The unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, which BSI considers necessary for a fair
presentation of the financial position and result of operations for these
periods. Operating results for the thirty-nine weeks ended September 28, 1996
are not necessarily indicative of the results that may be expected for the
entire year ending December 28, 1996. The selected financial information should
be read in conjunction with the "BSI Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
BSI and the Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS AS OF AND FOR THE YEAR ENDED
-------------------- ------------------------------------------------------
SEPT 28, SEPT 30, DEC. 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1996 1995 1995 1994 1993 1992 1991
-------- -------- ---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $127,531 $ 99,995 $ 131,020 $ 76,754 $ 60,850 $ 48,069 $ 41,275
Costs of good sold................... 94,869 80,202 106,576 64,846 51,640 39,376 33,938
-------- -------- ---------- --------- --------- --------- ---------
Gross profit......................... 32,662 19,793 24,444 11,908 9,210 8,693 7,337
Operating expenses................... 24,171 19,043 25,549 10,221 7,285 7,511 5,920
-------- -------- ---------- --------- --------- --------- ---------
Operating income (loss).............. 8,491 750 (1,105) 1,687 1,925 1,182 1,417
Other (income) expense
Interest expense, net........... 3,063 2,529 3,695 1,663 1,153 1,056 1,013
Other, net...................... (280) -0- (22) -0- 89 80 (14)
-------- -------- ---------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item................. 5,708 1,779 (4,778) 24 683 46 418
Provision (benefit) for income
taxes.............................. 1,065 (512) (338) 99 254 87 165
-------- -------- ---------- --------- --------- --------- ---------
Income (loss) before extraordinary
item............................... 4,643 (1,267) (4,440) (75) 429 (41) 253
Extraordinary item -- Gain on
extinguishment of debt............. -0- 500 500 -0- -0- -0- -0-
-------- -------- ---------- --------- --------- --------- ---------
Net income (loss).................... $ 4,643 $ (767) $ (3,940) $ (75) $ 429 $ (41) $ 253
======== ======== ========== ========= ========= ========= =========
Primary net income (loss) per common
and common equivalent share........ $0.24 $(0.05) $(0.26) $(0.01) $0.03 $ -- $0.03
======== ======== ========== ========= ========= ========= =========
Fully diluted net income (loss) per
common and common equivalent
share.............................. $0.23 N/A N/A N/A N/A N/A N/A
======== ======== ========== ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital...................... $ 6,232 $ (1,592) $ 5,927 $ 1,409 $ 1,951 $ 1,176
Total assets......................... 109,646 47,070 45,049 20,565 23,092 17,690
Long term debt, including current
portion............................ 33,276 9,143 9,621 2,496 3,118 3,808
Mandatorily redeemable preferred
stock.............................. 7,447 945 -- -- -- --
Shareholders' equity (deficit)....... 3,666 (689) 3,221 2,654 2,130 957
</TABLE>
- ------------
Note 1: See "BSI Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Acquisitions" and Note 1 of "Notes to
Consolidated Financial Statements" for information on the Company's
acquisitions.
Note 2: All per share information has been retroactively restated for the
37.912252-for-1 stock split to be effected in the Merger.
67
<PAGE>
BSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE BSI
FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
ACQUISITIONS
BSI's acquisition program has resulted in significant growth for the
company over the last five years. BSI has completed five acquisitions since
1990, each of which it believes brought strategic advantages to its business. In
September 1990, BSI acquired CC Creations, its then largest subcontract screen
printer, in order to improve costs and control the quality of its screen
printing operations. In July 1991, BSI acquired Capital Industries to enter the
uniform and specialty products business. In November 1994, BSI acquired Velva
Sheen to enter the licensed character market and expand its decorated sportswear
business. In December 1995, BSI acquired Needleworks, a contract embroidery
operation, in order to improve costs and control quality in its embroidery
product line. Most recently, in August 1996, BSI acquired Plymouth, which
expanded the company's presence in the proprietary and private label markets and
strengthened its sales and marketing and sourcing capabilities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of BSI's statements of operations expressed as a percentage of net sales. In
1995, BSI changed its year-end from December 31 to a 52-53 week accounting
period ending on the Saturday closest to December 31.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED YEAR ENDED
---------------------- --------------------------------
SEPT. 28 SEPT 30, DEC. 31 DEC. 31 DEC. 30
1996 1995 1995 1994 1993
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................... 74.4% 80.2% 81.3% 84.5% 84.9%
--------- --------- -------- -------- --------
Gross profit......................... 25.6% 19.8% 18.7% 15.5% 15.1%
Operating expenses................... 18.9% 19.0% 19.5% 13.3% 12.0%
--------- --------- -------- -------- --------
Operating income (loss).............. 6.7% .8% (.8)% 2.2% 3.1%
Other expense (income)
Interest expense................ 2.4% 2.5% 2.8% 2.2% 1.9%
Other, net...................... (.2%) .0% .0% .0% 1%
--------- --------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item................. 4.5% (1.8%) (3.6%) .0% 1.1%
Provision for income taxes........... .8% (.5%) (.2%) .1% 4%
--------- --------- -------- -------- --------
Income (loss) before extraordinary
item................................. 3.7% (1.3%) (3.4%) (.1%) 7%
Extraordinary item-gain on
extinguishment of debt............. -- .5% .4 -- --
--------- --------- -------- -------- --------
Net income........................... 3.7% (.8%) (3.0%) (.1%) .7%
========= ========= ======== ======== ========
</TABLE>
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 COMPARED WITH THE THIRTY-NINE
WEEKS ENDED SEPTEMBER 30, 1995.
BSI's net sales increased approximately $27.5 million, or 27.5%, from
$100.0 million in 1995 to $127.5 million in 1996. This increase was primarily
attributable to increased unit sales resulting from new character licenses
acquired in late 1994 and early 1995 and the completion of the acquisition of
Plymouth, which contributed $7.9 million of sales during the period.
BSI's gross profit increased $12.9 million, or 65.0%, from $19.8 million in
1995 to $32.7 million in 1996, principally as a result of the increase in
decorated product sales. Overall gross profit margin increased to 25.6% in 1996
from 19.8% in 1995, primarily as a result of: (i) increased sales volume which
resulted in improved operating efficiencies; (ii) improved sourcing and
manufacturing which resulted in lower cost of
68
<PAGE>
goods sold; (iii) improved pricing for BSI's imported fleece product line; and
(iv) reduced embroidery production costs as a result of BSI's acquisition of
Needleworks. In addition, gross profit margins were lower in 1995 as a result of
costs incurred in connection with a restructuring of the Velva Sheen operations
implemented during 1995 and increased reserves recorded for slow moving
inventory at Velva Sheen.
Operating expenses increased $5.1 million, or 26.9%, from $19.0 million in
1995 to $24.2 million in 1996. The increase principally resulted from higher
commission and royalty expense due to increased decorated product sales and
additional administrative costs as a result of the Needleworks and Plymouth
acquisitions. Additionally, in 1996 BSI recorded increased compensation expense
pursuant to its incentive compensation plan. As a percentage of sales, operating
expenses remained substantially unchanged at 19.0% in 1995 and 18.9% in 1996.
Interest expense increased $0.5 million, or 21.1%, from $2.5 million in
1995 to $3.1 million in 1996, primarily as a result of increased borrowings
under BSI's credit facility to fund its greater working capital needs and
borrowings incurred in connection with the Plymouth acquisition.
Income tax expense is recorded in 1996 net of an operating loss
carryforward of approximately $3.0 million.
YEAR ENDED DECEMBER 30, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1994
BSI's net sales increased $54.3 million, or 70.7%, from $76.8 million in
1994 to $131.0 million in 1995. The increase in sales was primarily the result
of the completion of the acquisition of Velva Sheen in November 1994. In
addition, BSI's undecorated product sales increased during 1995 primarily as a
result of the introduction of a fulfillment program for Wal-Mart.
BSI's gross profit increased $12.5 million, or 105.3%, from $11.9 million
in 1994 to $24.4 million in 1995, as a result of the increase in sales from the
Velva Sheen acquisition. Overall gross profit margin increased from 15.5% in
1994 to 18.7% in 1995, primarily as a result of a change in sales mix toward
higher margin decorated product sales due to the Velva Sheen acquisition.
Operating expenses increased $15.3 million from $10.2 million in 1994 to
$25.5 million in 1995. As a percentage of sales, operating expenses increased
from 13.3% in 1994 to 19.5% in 1995. The increase was attributable primarily to
increased commissions and royalties on decorated product sales from Velva
Sheen's operations and increased administrative costs related to the integration
of its business.
Interest expense increased $2.0 million from $1.7 million in 1994 to $3.7
million in 1995. The increase in interest expense was primarily attributable to
an increase in borrowings under BSI's credit facility to fund its increased
working capital needs and borrowings incurred in connection with the Velva Sheen
acquisition.
YEAR ENDED DECEMBER 30, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
BSI's net sales increased $15.9 million, or 26.1%, from $60.8 million in
1993 to $76.8 million in 1994. This increase was primarily attributable to
increased sales of undecorated products and the completion of the acquisition of
Velva Sheen, which contributed $5.5 million of sales during the year.
BSI's gross profit increased $2.7 million, or 29.3%, from $9.2 million in
1993 to $11.9 million in 1994, as a result of the increased decorated product
sales related to the completion of the Velva Sheen acquisition and improved
margins on sales of undecorated products.
Operating expenses increased $2.9 million, or 40.3%, from $7.3 million in
1993 to $10.2 million in 1994. As a percentage of sales, operating expenses
increased from 12.0% in 1993 to 13.3% in 1994, primarily due to increased
general and administrative expenses incurred in anticipation of the acquisition
of Velva Sheen and increased sales and marketing expenses related to the
development of a new sportswear line in 1994.
Interest expense increased $0.5 million, or 44.2%, from $1.2 million in
1993 to $1.7 million in 1994, as a result of increased borrowings under BSI's
credit facility to fund its increased working capital needs and borrowings
incurred in connection with the Velva Sheen acquisition.
69
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
BSI has financed its acquisitions and sales growth through a combination of
borrowings under its bank lines of credit, bank term loans and normal trade
credit, private placements of equity and debt securities and operating cash
flow.
BSI, through its principal operating subsidiary, Brazos, maintains a $53
million line of credit, subject to collateral limitations, and a $12 million
term loan facility. As of September 28, 1996, Brazos had an aggregate borrowing
base under the line of credit of $48.6 million, based on existing collateral.
Advances under this line are based on a percentage of Brazos' inventory and
receivables. Of its borrowing base, $8.6 million remained unused at September
28, 1996. Interest on the line of credit is payable at prime plus .5% or the
Eurodollar base rate plus 2.75%. Brazos' term loan facility requires principal
payments of $0.2 million per month and had an outstanding balance of $11.8
million on September 28, 1996. Interest on the term loan facility is payable at
prime plus 1.5% or the Eurodollar base rate plus 3.5%.
Since the beginning of 1994, BSI's capital expenditures, including
facilities and equipment, totaled $1.4 million. BSI presently has no significant
commitments to incur capital expenditures.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 COMPARED WITH THE THIRTY-NINE
WEEKS ENDED SEPTEMBER 30, 1995.
BSI used $12.1 million of cash from operating activities in 1996 versus
$4.7 million in 1995. Although the company experienced an increase in net income
of $5.4 million during the period, substantial investments in accounts
receivable and inventories were made due to increased sales and the Plymouth
acquisition, which offset the impact of the higher earnings.
BSI invested $18.0 million of cash in 1996 to acquire Plymouth and incurred
capital expenditures of $0.4 million for each period.
Financing activities provided $30.0 million of cash in 1996 through
borrowings of $27.5 million under existing credit facilities and through the
issuance of $2.5 million in preferred stock. In 1995, net borrowings amounted to
$5.0 million.
YEAR ENDED DECEMBER 30, 1995 COMPARED WITH THE YEAR ENDED DECEMBER 31,
1994.
Net cash provided from operating activities was $0.7 million in 1995,
although BSI experienced a net loss of $3.9 million. Accounts payable and
accrued liabilities increased $3.6 million without a significant increase in
accounts receivable or inventory. Accounts receivable and inventory increased by
$4.4 million in 1994.
BSI invested $1.0 million in 1995 to acquire Needleworks through the
issuance of preferred stock and incurred capital expenditures of $0.5 million.
During 1994, BSI invested $11.7 million in connection with its acquisition of
Velva Sheen and incurred capital expenditures of $0.5 million.
Financing activities provided $0.4 million of cash in 1995 versus net
borrowings of $15.6 million in 1994, which were utilized to fund the Velva Sheen
acquisition.
OTHER.
Simultaneous with the Merger, BSI expects to increase its revolving line of
credit facility to $73.2 million. BSI has obtained a commitment letter from its
senior lenders with regard to such increase in its credit facility, which
commitment is subject to the satisfaction of numerous conditions, including
completion of the Reincorporation, contribution of all operating assets of the
Combined Company to Brazos subsequent to the Merger and repayment of Sun's
existing credit facility. BSI believes that funds generated from operations and
funds available from the increased bank facility will be sufficient to meet
BSI's capital requirements and operating needs for the foreseeable future.
BSI is continually evaluating opportunities for growth, including
acquisitions of businesses which distribute complementary apparel products.
There can be no assurance that any such acquisitions will be consummated.
70
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
In August 1996, Brazos entered into a financial advisory agreement with
Sanders Morris Mundy ("SMM") in connection with the proposed merger with Sun.
Mr. Chadwick is a senior vice president and a managing director of SMM and will
become a director of the Combined Company. The agreement provides for a success
fee of approximately $160,000 based on the transaction price in addition to
$100,000 previously paid in financial advisory fees.
Pursuant to an asset purchase agreement consummated in August 1996, Brazos
acquired substantially all of the assets of Plymouth for a purchase price of
approximately $36 million. Upon consummation of the Merger, Mr. Elenson, the
controlling shareholder of Plymouth, became a member of the board of directors
of BSI. As part of the purchase price for the acquisition of Plymouth's assets,
BSI agreed to pay certain contingent consideration and issued to Plymouth junior
subordinated debentures in the amounts of $3 million and $4 million which
provide for periodic interest payments and which mature in December 1997 and
December 2003, respectively. Upon consummation of the Merger, the $3 junior
subordinated debenture will be repaid in full.
In order to finance the acquisition of the Plymouth assets, Brazos issued
shares of its preferred stock and warrants to purchase BSI Common Stock, with an
exercise price of $.01 per share for aggregate consideration of $2,500,000.
Equus II purchased 1,200,000 shares of preferred stock and a warrant for 31,926
shares of BSI Common Stock for the purchase price of $1.2 million. Equus II also
received warrants to purchase 3,991 shares of BSI Common Stock at an exercise
price of $35 per share. Mr. Chadwick purchased 100,000 shares of preferred stock
and a warrant for 2,660.5 shares of BSI Common Stock for the purchase price of
$100,000. Mr. Taylor purchased 75,000 shares of preferred stock and a warrant
for 1,995 shares of BSI Common Stock for the purchase price of $75,000. Mr.
Chambers purchased 50,000 shares of preferred stock and a warrant for 1,330
shares of BSI Common Stock for the purchase price of $50,000. In addition, Mr.
Chambers, as trustee for the Chambers Family Trust, purchased 25,000 shares of
preferred stock and a warrant for 665 shares of BSI Common Stock for the
purchase price of $25,000.
In addition, in connection with the Plymouth acquisition, the following
subordinated debt of Brazos was converted into shares of BSI Series B Preferred
Stock: Equus II converted notes in the amount of $3,350,000 and $178,500 into
3,728,500 shares; Mr. Chadwick converted notes in the amount of $75,000 and
$29,750 into 104,750 shares; Mr. Chambers converted notes in the amount of
$75,000 and $29,750 into 104,750 shares; and J. Ford and Sandra Taylor converted
a note in the amount of $190,000 into 190,000 shares.
Brazos leases a 77,500 square foot office and production facility in
College Station, Texas from a partnership that includes Equus II and Messrs.
Taylor, Chambers, and Chadwick, each of whom will be directors of the Combined
Company upon consummation of the Merger. The lease is for a ten year term
expiring June 2002, and provides for monthly lease payments of $18,000.
Management of BSI is of the opinion that all of the above transactions were
on terms at least as favorable to BSI as could have been obtained from
unaffiliated third parties at the times negotiated and under the conditions then
applicable.
71
<PAGE>
PRINCIPAL SHAREHOLDERS OF SUN
The following table presents certain information regarding the beneficial
ownership of Sun's equity securities at December 11, 1996 by (i) each person
known to Sun to beneficially owns more than five percent of the outstanding
shares of Sun Common Stock, (ii) each director of Sun, (iii) each executive
officer of Sun and (iv) all directors and executive officers as a group.
NUMBER OF PERCENT OF
SHARES CLASS
---------- -----------
NAME OF BENEFICIAL HOLDER
Bank of America NW, N.A.,
doing business as Seafirst Bank.... 3,800,000 66.1%
701 Fifth Avenue
Seattle, Washington 98104
Dimensional Fund Advisors, Inc....... 351,700(1) 6.1%
1299 Ocean Avenue, Suite 630
Santa Monica, California 90401
Directors and Executive Officers:
William S. Wiley................ 0 *
Larry C. Mounger................ 53,500(2) *
Paul R. Rollins, Jr............. 0 *
James A. Walsh.................. 7,000(3) *
James H. Williams............... 0 *
L. Kaye Counts.................. 69,000(4) 1.2%
Kevin C. James.................. 32,000(5) *
Sandra Teufel................... 64,066(6) 1.1%
All directors and executive
officers as a group (8
persons)....................... 225,566(7) 3.8%
- ------------
(1) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 351,700 shares of Sun
Common Stock as of December 11, 1996, all of which shares are held in
portfolios of DFA Investment Dimensions Group Inc., a registered open-end
investment company, or in a series of the DFA Investment Trust Company, a
Delaware business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(2) Includes 1,000 shares which may be acquired upon exercise of stock options.
(3) Includes 7,000 shares which may be acquired upon exercise of stock options.
(4) Includes 68,000 shares which may be acquired upon exercise of employee stock
options.
(5) Includes 32,000 shares which may be acquired upon exercise of employee stock
options.
(6) Includes 63,666 shares which may be acquired upon exercise of employee stock
options. Ms. Teufel resigned as of December 31, 1996, and as a result, all
options must be exercised within seven months after such date.
(7) Includes an aggregate of 171,666 shares which may be acquired upon exercise
of stock options.
* less than 1%.
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PRINCIPAL STOCKHOLDERS OF BSI
The following table presents certain information regarding (a) the
beneficial ownership of BSI's Common Stock at December 12, 1996 by (i) each
person who beneficially owns more than five percent of the outstanding shares of
BSI Common Stock, (ii) each director of BSI, (iii) each executive officer of BSI
and (iv) all directors and officers as a group (b) the beneficial ownership of
such persons of the Combined Company's common stock immediately after the
Merger.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO MERGER AFTER THE MERGER(8)
-------------------------- ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES CLASS SHARES CLASS
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NAME OF BENEFICIAL HOLDER
Equus II Incorporated................ 288,900(1) 59.1% 14,263,630 57.6%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Allied Investment Corporation........ 45,228 9.3% 1,714,695 8.0%
Allied Investment Corporation II
1666 K Street, N.W., Suite 901
Washington, D.C. 20006
Alan Elenson......................... 30,673(2) 6.0% 1,162,883 5.2%
330 Tompkins Avenue
Staten Island, NY 10304
F. Clayton Chambers.................. 29,349(3) 6.0% 1,252,171 5.8%
3860 Virginia Avenue
Cincinnati, OH 45227
Michael S. Chadwick.................. 28,477(4) 5.9% 1,230,586 5.7%
3100 Texas Commerce Tower
Houston, TX 77002
Randall B. Hale...................... 290,900(5)(6) 59.3% 14,339,455 57.7%
Nolan Lehmann........................ 290,150(4)(5) 59.2% 14,311,020 57.6%
J. Ford Taylor....................... 24,858(7) 5.0% 1,121,098 5.1%
All directors and officers as a group
(6 persons)........................ 405,507(2)-(7) 75.1% 19,153,582 70.4%
</TABLE>
- ------------
(1) Includes 3,991 shares which may be acquired upon exercise of warrants.
(2) Includes 30,673 shares which may be acquired upon exercise of warrants and
options; includes shares held by Joann Elenson, Mr. Elenson's spouse.
(3) Includes 2,788 shares which may be acquired upon exercise of stock options.
Includes shares held in trust for Mr. Chambers' children.
(4) Includes 1,250 shares which may be acquired upon exercise of stock options.
(5) Includes 288,900 shares beneficially owned by Equus II; each holder
disclaims beneficial ownership of such shares.
(6) Includes 2,000 shares which may be acquired upon exercise of stock options.
(7) Includes 13,273 shares which may be acquired upon exercise of warrants and
stock options.
(8) Includes those shares which may be acquired on exercise of options and
warrants as reflected in the column "Beneficial Ownership Prior to
Merger," except such shares are multiplied by the 37.912252 conversion rate
applicable to the Merger. In addition, such shares include shares of common
stock of the Combined Company which may be acquired by the following upon
the conversion of the Sun Convertible Preferred Stock, as follows: Equus
II -- 2,628,360; F. Clayton Chambers -- 105,363; Michael S.
Chadwick -- 116,856; Randall B. Hale -- 2,628,360 (to be beneficially owned
by Equus II, beneficial ownership disclaimed); Nolan Lehmann -- 2,628,360
(to be beneficially owned by Equus II, beneficial ownership disclaimed); and
J. Ford Taylor -- 144,555).
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DESCRIPTION OF SUN CAPITAL STOCK
Sun's Articles provide for authorized capital of 21,000,000 shares
consisting of 20,000,000 shares of Sun Common Stock, no par value, and 1,000,000
shares of Sun Preferred Stock. In connection with the approval of the Merger
Agreement, Sun has proposed to amend its Articles of Incorporation to increase
the authorized shares of Common Stock to 50,000,000 shares, and to increase the
authorized shares of Preferred Stock to 25,000,000 shares.
COMMON STOCK
As of January 6, 1997, there were 5,748,500 shares of Sun Common Stock
issued and outstanding and held of record by approximately 116 individuals or
entities. Holders of Common Stock are entitled to cast one vote for each share
held of record on all matters acted upon at any shareholders meeting. Holders of
Common Stock are entitled to receive ratably such dividends if, as and when
declared by Sun's board of directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Sun Preferred
Stock. There are no cumulative voting rights, the absence of which will, in
effect, allow the holders of a majority of the outstanding shares of Sun Common
Stock to elect all the directors then standing for election. The absence of
cumulative voting rights could have the effect of delaying, deterring or
preventing a change of control of Sun. In the event of any liquidation,
dissolution or winding up of Sun, each holder of Sun Common Stock will be
entitled to participate, subject to the rights of any outstanding Sun Preferred
Stock, ratably in all assets of Sun remaining after payment of liabilities.
Holders of Sun Common Stock have no preemptive or conversion rights. All
outstanding shares of Sun Common Stock are, and all shares of Sun Common Stock
offered in this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Sun board of directors has the authority to issue 1,000,000 shares of
Sun Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, redemption rights, liquidation preferences and the number
of shares constituting any series, without any further vote or action by the
shareholders. The issuance of Sun Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Sun Common Stock.
In addition, because the terms of such Sun Preferred Stock may be fixed by the
Sun board of directors without shareholder action, the Sun Preferred Stock could
be designated and issued quickly in the event that Sun requires additional
equity capital. The Sun Preferred Stock could also be designated and issued with
terms calculated to defeat a proposed takeover of Sun, or with terms that may
have the effect of delaying, deterring or preventing a change of control of Sun.
Under certain circumstances, this could have the effect of decreasing the market
price of the Sun Common Stock.
Prior to the Effective Date, the board of directors intends to designate
the rights and preferences for the following five series of Sun Preferred Stock:
the Series A-1 Preferred Stock, the Series A-2 Preferred Stock, the Series B-1
Preferred Stock, the Series B-2 Preferred Stock and Series B-3 Preferred Stock
with authorized shares of 650,000, 300,000, 8,000,000, 4,000,000 and 3,500,000,
respectively. Currently no shares of any of the five series are issued and
outstanding. As of the Effective Date, outstanding shares of BSI Preferred Stock
will automatically be converted into shares of Sun Preferred Stock of a
comparable series. A brief summary of the designations, preferences, rights and
limitations of each of the five series of Sun Preferred Stock is set forth
below. This summary is qualified in its entirety by reference to the full text
of the proposed Certificate of Designation (the "Certificate of Designations")
of the Sun Preferred Stock, a copy of which is attached as Appendix E.
SERIES A-1 PREFERRED STOCK. Pursuant to the Merger, 650,000 shares of Sun
Series A-1 Preferred Stock (the "Series A-1 Preferred Stock") will be issued,
out of the 650,000 shares to be authorized. Holders of Series A-1 Preferred
Stock are entitled to receive ratably such dividends if, as and when declared by
Sun's board of directors out of funds legally available therefor. Additionally,
to the extent such board declares or pays a dividend in respect of the Sun
Series A-2 Preferred Stock, Sun must simultaneously therewith declare or pay a
dividend in respect of the Series A-1 Preferred Stock. No dividends are payable
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<PAGE>
on the Series A-1 Preferred Stock to the extent any cumulative dividends exist
on the Sun Convertible Preferred Stock. The Series A-1 Preferred Stock is
mandatorily redeemable by Sun, out of funds legally available therefor, at a
redemption price of $1.00 per share, on the earlier to occur of the (i)
consummation of a Major Transaction or a Qualified Public Offering (as such
terms are defined in the respective Certificate of Designations) or (ii) the
Mandatory Redemption Date. A Major Transaction is defined to include: (i) a sale
of all or substantially all of the assets or outstanding capital stock of Sun or
(ii) a merger or consolidation of Sun with or into another corporation or
entity, other than a merger or consolidation in which Sun is the surviving
corporation or in which the former Sun shareholders control (i.e., 50% of the
common stock and voting power) of the surviving corporation. The Mandatory
Redemption date is the later of (i) the date that all of the shares of Sun
Convertible Preferred Stock are redeemed or converted or (ii) December 31, 2003.
The Series A-1 Preferred Stock is also redeemable at any time at the option of
Sun, out of funds legally available therefor, at a redemption price of $1.00
(currently at $.919 based on the offset provision described below), provided
that there is not then outstanding any shares of Sun Series A-2 Preferred Stock
or Sun Convertible Preferred Stock, and PROVIDED FURTHER, that Sun is not in
default under its Senior Loan Agreement (as defined in the Certificate of
Designation). The Series A-1 Preferred Stock is not convertible. Holders of Sun
Preferred Stock have no voting rights, except as otherwise provided by law or
generally with respect to any amendment which would adversely alter the powers,
preferences and rights associated with the Series A-1 Preferred Stock. Upon the
liquidation, dissolution or winding up of the affairs of Sun, the holders of
Series A-1 Preferred Stock are entitled to a liquidation preference of $1.00 per
share (currently at $.919 based on the offset provision described below),
subject to the prior liquidation preference of the Sun Convertible Preferred
Stock. The Series A-1 Preferred Stock is subject to an offset provision on its
redemption proceeds and liquidation preference as provided under an asset
purchase agreement entered into by, among others, Brazos Embroidery, Inc. and
Needleworks, Inc.
SERIES A-2 PREFERRED STOCK. As of the Effective Date of the Merger,
300,000 shares of Sun Series A-2 Preferred Stock (the "Series A-2 Preferred
Stock") will be issued and outstanding, of the 300,000 shares authorized. The
preferences, rights and limitations associated with the Series A-2 Preferred
Stock are identical to those in respect of the Series A-1 Preferred Stock,
except that the ability of Sun to redeem shares of Series A-2 Preferred Stock at
$1.00 per share is not affected by the existence of outstanding shares of Series
A-1 Preferred Stock and no offset has occurred with respect to the Series A-2
Preferred Stock.
SERIES B-1 PREFERRED STOCK. As of the Effective Date of the Merger,
4,596,968 shares of Sun Series B-1 Preferred Stock (the "Series B-1 Preferred
Stock") will be issued and outstanding, of the 8,000,000 shares authorized.
Holders of Sun Series B-1 Preferred Stock are entitled to receive, in preference
to the Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the Sun
Common Stock (collectively, the "Junior Stock"), out of funds legally
therefor, cumulative dividends of $.08 per share per annum, payable quarterly on
the last day of March, June, September and December. Except with accrued and
unpaid dividends payable on redemption or conversion of the Series B-1 Preferred
Stock, the dividends are payable by the issuance of additional shares of Series
B-1 Preferred Stock based on the $1.00 per share liquidation value. Fractional
share dividends will be settled for cash. The mandatory redemption provisions
associated with the Series B-1 Preferred Stock are the same as those described
above in respect of the Series A-1 Preferred Stock and Series A-2 Preferred
Stock, except the Mandatory Redemption Date is fixed at December 31, 2003, the
Qualified Public Offering does not trigger the mandatory redemption unless the
offering price per share in such offering is less than $3.50 per share (as
adjusted for stock splits, combinations and other similar corporate events) and
in addition to the $1.00 per share liquidation price, the holders of shares of
Series B-1 Preferred Stock are entitled to a cash payment for any declared and
unpaid dividends thereon through the date of redemption. Series B-1 Preferred
Stock is redeemable at the option of Sun at any time, at a redemption price of
$1.00 per share, provided that no shares of Sun Series B-2 and B-3 Preferred
Stock are then outstanding and Sun is not in default under its Senior Loan
Agreement (as defined in the Certificate of Designation). In addition, the
Series B-1 is redeemable at the option of Sun at any time, at a redemption price
of $.01 per share, if the Market Price (as defined in the respective Certificate
of Designation) of a share of Sun Common Stock trades at or above $3.50 (subject
to adjustment for certain customary corporate events) for a period of 20
consecutive trading days. Sun is to give holders of the Series
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<PAGE>
B-1 Preferred Stock 30 days prior written notice for either a mandatory or
optional 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
.4545 shares of Sun Common Stock, and is automatically convertible into the same
.4545 shares of Sun Common Stock upon the consummation of a Qualified Public
Offering (or defined in the Certificate of Designation), provided that the
offering price per share in such public offering is at least $3.50 per share
(subject to adjustment for certain customary corporate events). The conversion
right is subject to standard anti-dilution protection provisions on the
occurrence of certain corporate events. In addition to the redemption price and
issuance of the Sun Common Stock on conversion, Sun must also pay in cash to the
holders of the Series B-1 Preferred Stock accrued and unpaid dividends
associated with any redeemed or converted shares. Upon the liquidation,
dissolution or winding up of the affairs of Sun, the holders of Series B-1
Preferred Stock are entitled to a liquidation preference of $1.00 per share,
plus the amount of any accrued and unpaid dividends on such share. Such
preference is paid prior to any payments in respect of the Junior Stock but is
subject to the prior liquidation preference of the Sun Series B-2 and B-3
Preferred Stock. Holders of Shares of Series B-1 Preferred Stock have the same
limited voting rights as those provided for the Series A-1 and A-2 Preferred
Stock. Additionally, Sun and the other holders of Series B-1 Preferred Stock
have a right of first refusal to purchase all (but not less than all) of the
shares of Series B-1 Preferred Stock desired to be transferred by any holder of
such shares at the third party offering price.
SERIES B-2 PREFERRED STOCK. As of the Effective Date of the Merger,
2,578,924 shares of Sun Series B-2 Preferred Stock (the "Series B-2 Preferred
Stock") will be issued and outstanding, of the 4,000,000 shares authorized. The
preferences, rights, and limitations associated with the Series B-2 Preferred
Stock are identical to those in respect of the Series B-1 Preferred Stock,
except the Series B-2 Preferred Stock is entitled to (i) voting rights similar
to holders of Common Stock based on the number of shares of Sun Common Stock
into which the Series B-2 Preferred Stock could then be converted and (ii) a
liquidation preference of $1.00 per share, plus the amount of any accrued but
unpaid dividends on such share, with such preference being paid prior to any
payments in respect of the Series B-1 Preferred Stock and the Junior Stock. In
addition, Sun may not redeem the Series B-2 Preferred Stock at the $1.00 per
share redemption price if any shares of Sun Series B-3 Preferred Stock are then
outstanding. Sun and the other holders of Series B-2 Preferred Stock also have a
right of first refusal to purchase all (but not less than all) of the shares of
Series B-2 Preferred Stock desired to be transferred by any holder of such
shares at the third party offering price.
SERIES B-3 PREFERED STOCK. As of the Effective Date of the Merger,
2,000,000 shares of Sun Series B-3 Preferred Stock (the "Series B-3 Preferred
Stock") will be issued and outstanding, of the 3,500,000 shares authorized. The
preferences, rights, and limitations associated with the Series B-3 Preferred
Stock are identical to those in respect of the Series B-1 Preferred Stock,
except the Series B-3 Preferred Stock is entitled to a liquidation preference of
$1.00 per share, plus the amount of any accrued but unpaid dividends on such
share, such preference is paid prior to any payouts in respect of the Series B-1
and B-2 Preferred Stock and the Junior Stock. Sun and the other holders of
Series B-3 Preferred Stock have a right of refusal similar to the Series B-1 and
B-2 Preferred Stock.
WARRANTS
As a result of the Merger, Sun will issue to holders of BSI warrants
outstanding immediately preceding the Effective Date warrants to purchase an
aggregate of 3,030,592 shares of Sun Common Stock, of which, warrants to
purchase an aggregate of approximately 252,154 shares with an exercise price
(subject to certain adjustments) of $.92 per share will expire in August 2006,
warrants to purchase an aggregate of approximately 1,137,368 shares with an
exercise price (subject to certain adjustments) of $.79 per share will expire in
August 2006, warrants to purchase an aggregate of 276,229 shares with an
exercise price (subject to certain adjustments) of $.36 per share will expire in
March 1997, and warrants to purchase 1,364,841 shares with an exercise price of
$1.32 per share will expire in March 2007. If Sun issues any Sun Common Stock or
other security convertible or exercisable into Sun Common Stock, other than
certain excluded stock, at a price per share less than the exercise price per
share then in effect with respect to such warrants (or in certain situations a
base value if greater than such exercise price), the exercise price is reduced
to take
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into account such issuance at the lesser price. If Sun should increase or
decrease the number of issued shares of Sun Common Stock as a result of, among
other things, a stock split, reverse stock split, stock dividend or combination
of the Sun Common Stock, the number of shares of Sun Common Stock underlying the
warrants and the exercise price per share of Sun Common Stock will be
proportionately adjusted. In the case of certain extraordinary transactions,
including a capital reorganization or reclassification, certain distributions of
cash, a merger, consolidation or similar occurrence, or any sale of all or
substantially all of Sun's assets, the warrants become exerciseable for the
number of shares of stock, securities or other property which the Sun Common
Stock issuable upon exercise of such warrants would have been entitled upon such
transactions, together with any necessary adjustments.
WASHINGTON LAW
Washington law contains certain provisions that may have the effect of
delaying or discouraging a takeover of Sun. Chapter 23B.19 of the WBCA prohibits
a corporation having a class of securities registered pursuant to Section 12 or
15 of the Securities Exchange Act of 1934, as amended, with certain exceptions,
from engaging in certain significant business transactions with a person or
group of persons acting in concert or under common control which beneficially
acquires 10% or more of the corporation's outstanding voting securities
(collectively, the "Acquiring Persons") for a period of five years after such
acquisition. The prohibited transactions include, among others, a merger with,
disposition of assets to, or issuance or redemption of stock to or from such
Acquiring Persons, or allowing such Acquiring Persons to receive a
disproportionate benefit as a shareholder. Notwithstanding the foregoing, an
otherwise prohibited transaction may be consummated if such transaction is
approved by a majority of the members of the board of directors prior to the
date that the third parties became Acquiring Persons.
Sun's Bylaws may be amended or repealed by the board of directors or
holders of a majority of the outstanding Sun Common Stock and any other stock
entitled to vote thereon.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF SUN
As permitted by Section 23B.08.320 of the WBCA, Article 9 of Sun's Articles
eliminates in certain circumstances the personal liability of Sun's directors to
Sun or its shareholders for monetary damages resulting from their conduct as an
officer or director. This provision does not eliminate the liability of
directors for (i) acts or omissions that involve intentional misconduct or a
knowing violation of law, (ii) improper declarations of dividends, or (iii)
transactions from which a director received an improper personal benefit.
Sun's Bylaws require Sun to indemnify its directors and officers to the
fullest extent permitted by Washington law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Sun's Common Stock is U.S. Stock
Transfer Corporation.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SUN AND BSI
If the Merger is consummated, holders of shares of BSI Common Stock will
become holders of shares of Sun Common Stock and holders of BSI Preferred Stock
will become holders of Sun Preferred Stock and the rights of the former BSI
stockholders will be governed by the laws of the State of Washington and by
Sun's Articles of Incorporation and Bylaws. The rights of the Sun shareholders
under the Articles of Incorporation and Bylaws of Sun differ in certain respects
from the rights of BSI's stockholders under BSI's Certificate of Incorporation
and Bylaws. Certain differences between the rights of the Sun shareholders and
BSI stockholders are summarized below. This summary is qualified in its entirety
by reference to the full text of such documents. Notwithstanding the foregoing,
if the Sun Shareholders approve the Reincorporation, it is anticipated that the
Combined Company will be reincorporated in Delaware under the name of Brazos
Sportswear, Inc., as soon as practicable after the Effective Date of the Merger.
Upon the effective date of the Reincorporation, the shareholders of the Combined
Company after the Effective Date, including the former shareholders of Sun and
the former stockholders of BSI, will be governed by the laws of the
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State of Delaware and by Brazos Delaware's Certificate of Incorporation and
Bylaws. See "Proposed Reincorporation in Delaware." Accordingly, Sun
Shareholders should consider the following discussion in the light of the
proposed Reincorporation.
GENERAL
Upon consummation of the Merger, the stockholders of BSI will become
shareholders of Sun. Accordingly, the rights of BSI stockholders following the
Merger will, subject to consummation of the Reincorporation and the limitations
set forth in the following paragraph, be governed by Washington law, as well as
by the Sun's Articles of Incorporation and its Bylaws. However, if the
Reincorporation is consummated, the shareholders of the Combined Company,
including the former Sun shareholders and former BSI stockholders, will become
stockholders of Brazos Delaware, and be governed by Delaware law, as well as
Brazos Delaware's Certificate of Incorporation and Bylaws. See, "Proposed
Reincorporation in Delaware."
While it is not practical to discuss all changes in the rights of the BSI
Stockholders (or the Sun Shareholders if the Reincorporation is consummated) as
a result of the application of Washington law in lieu of Delaware law (or
Delaware law in lieu of Washington law if the Reincorporation is consummated),
the following is a summary of material differences. As indicated in the
following discussion, the DGCL contains certain provisions applicable only to
"registered corporations," which in essence are publicly held corporations
that have a class of voting shares registered under the Exchange Act, such as
Brazos Delaware.
CHANGES PRINCIPALLY ATTRIBUTABLE TO DIFFERENCES BETWEEN THE DGCL AND THE WBCA
AMENDMENT OF ARTICLES/CERTIFICATE OF INCORPORATION. The WBCA authorizes a
corporation's board of directors to make various changes of an administrative
nature to the corporation's articles of incorporation, including changes of
corporate name, changes to the number of outstanding shares in order to
effectuate a stock split or stock dividend in the corporation's own shares, and
changes to or elimination of provisions with respect to the corporation's
stock's par value. Other amendments to a corporation's articles of incorporation
must be recommended to the shareholders by the board of directors, unless the
board determines that because of a conflict of interest or other special
circumstances, it should make no recommendation, and must be approved by
two-thirds (if the corporation is not a public company), or a majority (if the
corporation is a public company), of all votes entitled to be cast by each
voting group that has a right to vote on the amendment. The articles of
incorporation of a corporation other than a public company may provide for a
lower percentage of shareholder approval (but not less than a majority of the
votes entitled to be cast). Sun's Articles of Incorporation do not specify a
different proportion. Under the DGCL, all amendments to a corporation's
certificate of incorporation require the approval of stockholders holding a
majority of the voting power of the corporation unless a different proportion is
specified in the certificate of incorporation. BSI's Certificate of
Incorporation does not specify a different proportion. The Certificate of
Incorporation of Brazos Delaware will not specify a different proportion.
PROVISIONS AFFECTING ACQUISITIONS AND BUSINESS COMBINATIONS. The WBCA
imposes restrictions on certain transactions between a corporation and certain
significant shareholders.
Chapter 23B.19 of the WBCA prohibits a "target corporation," with certain
exceptions, from engaging in certain "significant business transactions" with
an Acquiring Person who acquires 10% or more of the voting securities of a
target corporation for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the date of the
acquisition. The prohibited transactions include, among others, merger, share
exchange or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or more
of the employees of the target corporation as a result of the Acquiring Person's
acquisition of 10% or more of the shares of the corporation, or allowing the
Acquiring Person to receive any disproportionate benefit as a shareholder.
Target corporations include domestic corporations having a class of voting
shares registered pursuant to Section 12 or 15 of the Securities Exchange Act of
1934 or that elect to be subject to Chapter 23B.19 of WBCA, and foreign
corporations that meet additional statutory requirements. A corporation may not
"opt out" of this statute.
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Delaware has enacted a business combination statute that is contained in
Section 203 of the DGCL providing that any person who acquires 15% or more of a
corporation's voting stock (thereby becoming an "interested stockholder") may
not engage in certain "business combinations" with the target corporation for
a period of three years following the date the person became an interested
stockholder, unless (i) the corporation's board of directors has approved, prior
to that acquisition date, either the business combination or the transaction
that resulted in the person becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the person becoming an
interested stockholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced (excluding
shares owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer),
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66 2/3% of the outstanding voting stock not owned
by the interested stockholder.
For purposes of determining whether a person is the "owner" of 15% or
more of a corporation's voting stock for purposes of Section 203, ownership is
defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A "business
combination" is also defined broadly to include (i) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested stockholder, (ii) certain transactions resulting in the issuance or
transfer to the interested stockholder of any stock of the corporation or its
subsidiaries, (iii) certain transactions that would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested stockholder, and (iv) receipt by the interested stockholder of
the benefit (except proportionately as a stockholder) of any loans, advances,
guarantees, pledges or other financial benefits.
These restrictions placed on interested stockholders by Section 203 do not
apply under certain circumstances, including, but not limited to, the following:
(i) if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203, (ii) if the
corporation, by action of its stockholders, adopts an amendment to its bylaws or
certificate of incorporation expressly electing not to be governed by Section
203, provided that such an amendment is approved by the affirmative vote of not
less than a majority of the outstanding shares entitled to vote and that such an
amendment will not be effective until 12 months after its adoption and will not
apply to any business combination with a person who became an interested
shareholder at or prior to such adoption or (iii) the corporation does not have
a class of voting securities (x) listed on a national securities exchange, (y)
authorized for quotation on an inter-dealer quotation system of a registered
national securities organization or (z) held of record by more than 2,000
stockholders. BSI has not expressly elected in its original Certificate of
Incorporation to take itself outside of the coverage of Section 203. The
original Certificate of Incorporation of Brazos Delaware will not provide for
the election to remove itself from the coverage of Section 203.
MERGERS, ACQUISITIONS AND OTHER TRANSACTIONS. Under the WBCA, a merger,
consolidation, sale of substantially all of a corporation's assets other than in
the regular course of business, or dissolution of a public corporation must be
approved by the affirmative vote of a majority of directors when a quorum is
present, and by two-thirds of all votes entitled to be cast by each voting group
entitled to vote as a separate group, unless another proportion (but not less
than a majority of all votes entitled to be cast) is specified in the articles
of incorporation. Sun's Articles of Incorporation does not specify a different
proportion. Under the DGCL, a merger, consolidation, sale of all or
substantially all of a corporation's assets other than in the regular course of
business or dissolution of a corporation must be approved by a majority of the
outstanding shares entitled to vote.
ACTION WITHOUT A MEETING. Under the WBCA, shareholder action may be taken
without a meeting if written consents setting forth such action are signed by
all holders of outstanding shares entitled to vote thereon. Unless otherwise
provided in the certificate of incorporation, the DGCL authorizes stockholder
action without a meeting if consents are received from holders of a majority of
the outstanding shares
79
<PAGE>
entitled to vote. BSI's Certificate of Incorporation does not vary the DGCL
statutory provisions regarding stockholder action by written consent. The
Certificate of Incorporation of Brazos Delaware will not vary the DGCL statutory
provisions regarding written consent of stockholders.
CLASS VOTING. Under the WBCA, the articles of incorporation may authorize
one or more classes of shares that have special, conditional or limited voting
rights, including the right to vote on certain matters as a group. The articles
of incorporation may not limit the rights of holders of a class to vote as a
group with respect to certain amendments to the articles of incorporation and
certain mergers that adversely affect the rights of holders of that class. Sun
has two authorized classes of stock. See, "Description of Sun Capital Stock."
The DGCL requires voting by separate classes only with respect to amendments to
the certificate of incorporation that adversely affect the holders of those
classes or that increase or decrease the aggregate number of authorized shares
or the par value of the shares of any of those classes. BSI has two authorized
classes of stock consisting of the BSI Common Stock and the BSI Preferred Stock.
Brazos Delaware will have two authorized classes of stock with substantially
identical rights, preferences and limitations to those described for Sun's class
of stock, except to the extent such rights, preferences and limitations differ
under Delaware law as described herein.
TRANSACTIONS WITH OFFICERS OR DIRECTORS. The WBCA sets forth a safe harbor
for transactions between a corporation and one or more of its directors. A
conflicting interest transaction may not be enjoined, set aside or give rise to
damages if: (i) it is approved by a majority of qualified directors; (ii) it is
approved by the affirmative vote of a majority of all qualified shares; or (iii)
at the time of commitment, the transaction was fair to the corporation. For
purposes of this provision, a "qualified director" is one who does not have
(a) a conflicting interest respecting the transaction or (b) a familial,
financial, professional or employment relationship with a second director, which
relationship would reasonably be expected to exert an influence on the first
directors judgment when voting on the transaction. "Qualified shares" are
defined generally as shares other than those beneficially owned, or the voting
of which is controlled, by a director who has a conflicting interest respecting
the transaction.
The DGCL provides that contracts or transactions between a corporation and
one or more of its officers or directors or an entity in which they have an
interest is not void or voidable solely because of such interest or the
participation of the director or officer in a meeting of the board or a
committee that authorizes the contract or transaction if: (i) the material facts
as to the relationship or interest and as to the contract or transaction are
disclosed or are known to the board or the committee, and the board or the
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of disinterested directors; (ii) the material
facts as to the relationship or interest and as to the contract or transaction
are disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by a vote of the
stockholders; or (iii) the contract or transaction is fair to the corporation as
of the time it is authorized, approved or ratified by the board of directors, a
committee thereof or the stockholders.
APPRAISAL OR DISSENTERS' RIGHTS. Under the WBCA, a shareholder is entitled
to dissent from and, upon perfection of his or her appraisal rights, to obtain
fair value of his or her shares in the event of certain corporate actions,
including certain mergers, consolidations, share exchanges, sales of
substantially all the assets of the corporation, and amendments to the
corporation's articles of incorporation that materially and adversely affect
shareholder rights.
Under the DGCL, appraisal rights are available only in connection with
certain mergers or consolidations, unless otherwise provided in the
corporation's certificate of incorporation. Even in the event of those mergers
or consolidations, unless the certificate of incorporation otherwise provides,
the DGCL does not provide appraisal rights if (i) the shares of the corporation
are listed on a national securities exchange, designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 shareholders
(as long as in the merger the shareholders receive shares of the surviving
corporation or any other corporation the shares of which are listed on a
national securities exchange, designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by
80
<PAGE>
more than 2,000 shareholders) or (ii) the corporation is the surviving
corporation and no vote of its stockholders is required for the merger.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under the WBCA, if authorized
by the articles of incorporation, a bylaw adopted or ratified by shareholders,
or a resolution adopted or ratified, before or after the event, by the
shareholders, a corporation has the power to indemnify a director or officer
made a party to a proceeding, or advance or reimburse expenses incurred in a
proceeding, under any circumstances, except that no such indemnification shall
be allowed on account of: (i) acts or omissions of a director or officer finally
adjudged to be intentional misconduct or a knowing violation of the law; (ii)
conduct of a director or officer finally adjudged to be an unlawful
distribution; or (iii) any transaction with respect to which it was finally
adjudged that such director or officer personally received a benefit in money,
property or services to which the director or officer was not legally entitled.
Unless limited by the corporation's articles of incorporation, Washington law
requires indemnification if the director or officer is wholly successful on the
merits of the action or otherwise. Any indemnification of a director in a
derivative action must be reported to the shareholders in writing. Written
commentary by the drafters of the WBCA, which has the status of legislative
history, specifically indicates that a corporation may indemnify its directors
and officers for amounts paid in settlement of derivative actions, provided that
the director's or officer's conduct does not fall within one of the categories
set forth above. Sun's Articles of Incorporation provide for the limitation of
director liability to the full extent permitted by the WBCA.
Under the DGCL, indemnification of directors and officers is authorized to
cover judgments, amounts paid in settlement, and expenses arising out of
nonderivative actions where the director or officer acted in good faith and in
or not opposed to the best interests of the corporation. Indemnification is
required to the extent of a director's or officer's successful defense.
Additionally, under the DGCL, a corporation may reimburse directors and officers
for expenses incurred in a derivative action. While the DGCL provides that these
indemnification provisions are not exclusive, there is some uncertainty as to
the extent to which a corporation may indemnify its directors and officers for
judgments and amounts paid in settlement of derivative actions. There are no
definitive decisions and this uncertainty exists because certain legal
commentators have argued that such indemnification would be circular and thus
against public policy. Also, a proposal to permit such indemnification was
specifically rejected by the General Corporation Law Section of the Delaware Bar
Association. This uncertainty may adversely affect Brazos Delaware's ability to
recruit and retain highly qualified directors and officers in the future.
DIVIDENDS. Under the WBCA, a corporation may make a distribution in cash
or in property to its shareholders upon the authorization of its board of
directors unless, after giving effect to such distribution, (i) the corporation
would be unable to pay its debts as they become due in the usual course of
business or (ii) the corporations total assets would be less than the sum of its
total liabilities plus the amount that would be needed, if the corporation were
to be dissolved at the time of the distribution, to satisfy the preferential
rights of shareholders whose preferential rights are superior to those receiving
the distribution.
A Delaware corporation may pay dividends out of any surplus and, if it has
no surplus, out of any net profits for the fiscal year in which the dividend was
declared or for the preceding fiscal year (provided that such payment will not
reduce capital below the amount of capital represented by all classes of shares
having a preference upon the distribution of assets).
81
<PAGE>
PROPOSED REINCORPORATION IN DELAWARE
INTRODUCTION
The proposed reincorporation of the Combined Company is intended to be
undertaken, subject to requisite stockholder approval, as soon as practicable
after the Effective Date, to move its jurisdiction of incorporation to Delaware
from Washington and to implement a one-for-five reverse stock split with respect
to its then outstanding shares of Sun Common Stock. Sun is soliciting the vote
of its shareholders to act upon a proposal that it be reincorporated in Delaware
as soon as practicable after the Effective Date.
GENERAL
At the Sun Meeting, holders of Sun Common Stock as of the record date for
the Sun Meeting will be asked to approve and adopt a plan and agreement of
merger (the "Reincorporation Agreement"), a form of which is attached hereto
as Appendix F. Under the Reincorporation Agreement, the Combined Company is to
merge into a newly created wholly-owned Delaware subsidiary, to be renamed
Brazos Sportswear, Inc. ("Brazos Delaware"), with (i) each outstanding share
of Sun Common Stock to be automatically converted into .20 of a substantially
identical share of Brazos Delaware common stock, par value $.001 per share
("Brazos Common"), (ii) each outstanding share of Sun Preferred Stock to be
automatically converted into one substantially identical share of the respective
series of Brazos Delaware preferred stock, par value $.001 per share
(collectively, the "Brazos Preferred"), and (iii) each outstanding option or
warrant to purchase Combined Company common stock shall be converted into
options or warrants to purchase .20 of a share of Brazos Delaware Common, with a
corresponding adjustment to the exercise price, as of the effective date of the
merger (the "Reincorporation"). Brazos Delaware will be the surviving
corporation and will continue to be governed by the laws of Delaware. On the
effective date of the Reincorporation, Brazos Delaware will succeed to the
properties, assets, and other rights of the Combined Company, and will be
subject to and responsible for the liabilities and obligations of the Combined
Company.
On the effective date of the Reincorporation, the former holders of shares
of Sun Common Stock and Sun Preferred Stock immediately prior to the effective
date will own a substantially identical interest (except to account for the
one-for-five reverse stock split and insofar as the rights of stockholders may
differ under the corporation laws of Washington and Delaware) in Brazos
Delaware, which corporation will continue to own and operate the identical
assets and business (subject to the same liabilities and obligations) which were
owned and operated by the Combined Company before the Reincorporation.
The Reincorporation will be consummated if it is approved by requisite
shareholders of Sun and all conditions for its consummation are met or waived.
The approval of the Reincorporation by the shareholders of Sun is not a
condition to the consummation of the Merger with BSI. However, if the Merger is
not consummated, the Reincorporation will not be effected.
NO CHANGES IN BUSINESS OF SUN
No change in the business of the Combined Company will result from the
Reincorporation. Brazos Delaware's business will be carried on in the same
places and in the same manner as the business of the Combined Company under the
name Brazos Sportswear, Inc. Brazos Delaware will possess all the assets and
will be responsible for all liabilities of the Combined Company. The certificate
of incorporation and bylaws of Brazos Delaware will be as nearly as practicable
identical to the articles of incorporation and bylaws applicable to the Combined
Company as existed immediately prior to the effective date of the
Reincorporation. The sole purpose for the Reincorporation is to change the
jurisdiction of the Combined Company's incorporation from Washington to Delaware
and to implement the one-for-five reverse stock split.
REASONS FOR REINCORPORATION
In connection with the negotiation of the Merger Agreement, Sun's board of
directors agreed to submit to its shareholders for approval the Reincorporation.
Approval of the Reincorporation is not a condition to
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<PAGE>
the closing of the Merger and is independent of the proposal to approve the
Merger Agreement. However, if the Merger is not consummated, the Reincorporation
will not be effected.
CONSUMMATION OF THE REINCORPORATION
No specific effective date is provided for with respect to the
Reincorporation; however, if the Reincorporation is approved and adopted by the
requisite vote of Sun's shareholders, it is contemplated that the
Reincorporation will be consummated as promptly as practicable after the
Effective Date of the Merger, and after all other conditions have been satisfied
or waived. The Reincorporation will become effective upon the filing of the
articles or certificate of merger with each of the Secretaries of State of
Washington and Delaware.
CERTIFICATE EXCHANGE
Commencing immediately following the effective date of the Reincorporation,
certificates for Brazos Common and Brazos Preferred will be issued to the
holders of Sun Common Stock and Sun Preferred Stock outstanding immediately
prior to the effective time of the Reincorporation, respectively, upon surrender
of their certificates evidencing Brazos Common and Brazos Preferred to the
Exchange Agent. Such shareholders will be notified by the Exchange Agent
promptly after the effective date of the Reincorporation as to the procedures
necessary to complete the certificate exchange. SHAREHOLDERS SHOULD NOT SUBMIT
THEIR COMBINED COMPANY STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED
A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT, BUT ARE URGED
TO DO SO PROMPTLY THEREAFTER SINCE, UNTIL SO EXCHANGED, SUCH SUN COMMON STOCK
CERTIFICATES WILL NOT BE IN GOOD DELIVERY FORM FOR EXECUTING TRADES IN BRAZOS
COMMON ON THE NASDAQ/NMS, WHERE IT IS ANTICIPATED SUCH STOCK WILL BE LISTED.
Certificates representing fractional share interests in Brazos Common and Brazos
Preferred represented by Sun Common Stock and Sun Preferred Stock certificates
will not be issued in the Reincorporation, but in lieu thereof any fractional
share interests otherwise issuable to stockholders upon surrender of such
certificates will be settled in cash.
FEDERAL INCOME TAX CONSEQUENCES
No gain or loss will be recognized to the shareholders of the Combined
Company for federal income tax purposes as a result of the Reincorporation,
except with respect to cash received for fractional shares. The adjusted basis
of each share of Brazos Common and Brazos Preferred will be equal to the
adjusted basis of the Sun Common Stock and Sun Preferred Stock for which it was
exchanged, less the basis attributable to any fractional share settled for cash.
The holding period of each share of Brazos Common and Brazos Preferred will
include the combined period during which the Sun Common Stock and Sun Preferred
Stock for which it was exchanged were held.
TRANSFERABILITY OF SHARES
The issuance of certificates evidencing shares of Brazos Common and Brazos
Preferred is exempt from registration under the Securities Act by virtue of the
exemption from the registration requirements of the Securities Act afforded by
Section 3(a)(9) and, in general, the Brazos Common will be freely transferable
by the holders thereof; however, persons who are "affiliates" (within the
meaning of the Securities Act) of Brazos Delaware will continue to be subject to
limitations as to timing and manner of sale and the number of shares of Brazos
Common which may be sold, all as specified by Rule 144 and 145 under the
Securities Act.
RIGHTS OF DISSENTING SHAREHOLDERS
Sun Shareholders who might otherwise wish to do so will have the right in
accordance with Washington law to dissent from the Reincorporation and receive
an agreed or judicially appraised value of their shares. Under Washington law,
the former BSI Stockholders who become stockholders of the Combined Company will
not have the right to dissent from the Reincorporation. For procedures regarding
dissenter's rights under the WBCA, see "The Merger -- Dissenters' Rights -- Sun
Shareholders."
83
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the Reincorporation will be treated as a
reorganization of affiliated entities, with all assets and liabilities of the
Combined Company recorded on the books of Brazos Delaware at their historical
cost basis book carrying values.
CONDITIONS; TERMINATION AND ABANDONMENT
The Reincorporation is subject to the approval of the shareholders of Sun.
The Combined Company is not obligated to consummate the Reincorporation if
holders of shares representing more than 1% of the Sun Common Stock dissent from
the Reincorporation. The board of directors of the Combined Company (or Sun if
the Merger is not consummated) may abandon the Reincorporation notwithstanding
its approval by the shareholders of Sun.
DIFFERENCES BETWEEN THE WASHINGTON AND DELAWARE CORPORATION LAWS
If the Reincorporation is consummated, holders of Sun Common Stock and Sun
Preferred Stock on the Effective Date of the Merger will become holders of
shares of Brazos Common and Brazos Preferred, and the rights of such holders
will be governed by the laws of the State of Delaware and by Brazos Delaware's
Certificate of Incorporation and Bylaws. The rights of the holders of shares of
the Brazos Common and Brazos Preferred under the Certificate of Incorporation
and Bylaws of Brazos Delaware differ in certain respects from the rights of the
holders of the Sun Common Stock and Sun Preferred Stock under the Restated
Articles of Incorporation and Restated Bylaws of the Combined Company adopted as
of the Effective Date of the Merger. For a discussion of these differences see
"Comparison of Rights of Stockholders of Sun and BSI."
LEGAL MATTERS
The validity of the shares of Sun Common Stock and Sun Preferred Stock
offered by this Joint Proxy Statement/Prospectus will be passed upon for Sun by
Graham & James, LLP/Riddell Williams P.S., Seattle, Washington.
EXPERTS
The financial statements of Sun Sportswear, Inc. as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
included in this Joint Proxy Statement/Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The audited consolidated financial statements and schedules of BSI
Holdings, Inc. included in this Joint Proxy Statement/Prospectus and elsewhere
in the Registration Statement, to the extent and for the periods indicated in
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
The audited financial statements of Plymouth Mills, Inc. included in this
Joint Proxy Statement/Prospectus have been audited by Mahoney Cohen Rashba &
Pokart, CPA, PC, independent public accountants, as indicated in their report
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
SUN SPORTSWEAR, INC.
Report of independent public
accountants.......................... F-2
Balance sheets as of December 31,
1995 and 1994........................ F-3
Statements of income for each of the
years ended December 31, 1995, 1994
and 1993........................... F-4
Statements of changes in
shareholders' equity for the years
ended December 31, 1995, 1994 and
1993............................... F-5
Statements of cash flows for the
years ended December 31, 1995, 1994
and 1993........................... F-6
Notes to financial statements........ F-7
Balance sheets as of September 30,
1996 and December 31, 1995
(unaudited)........................ F-15
Statements of income for the
nine-months ended September 30,
1996 and 1995 (unaudited).......... F-16
Statements of cash flows for the
nine-months ended Sepember 30, 1996
and 1995 (unaudited)............... F-17
Notes to financial statements
(unaudited)........................ F-18
BSI HOLDINGS, INC.
Report of independent public
accountants.......................... F-20
Consolidated balance sheets as of
December 30, 1995 and December 31,
1994................................. F-21
Consolidated statements of operations
for the years ended December 30,
1995, December 31, 1994 and
December 31, 1993.................. F-23
Consolidated statements of
shareholders' equity (deficit) for
the years ended December 30, 1995,
December 31, 1994 and December 31,
1993............................... F-24
Consolidated statements of cash flows
for the years ended December 30,
1995, December 31, 1994, and
December 31, 1993.................. F-25
Notes to consolidated financial
statements......................... F-26
Consolidated condensed balance sheets
at September 28, 1996 and December
30, 1995 (unaudited)............... F-42
Consolidated condensed statements of
operations for the thirty-nine
weeks ended September 28, 1996 and
September 30, 1995 (unaudited)..... F-44
Consolidated condensed statements of
cash flows for the thirty-nine
weeks ended September 28, 1996 and
September 30, 1995 (unaudited)..... F-45
Notes to consolidated condensed
financial statements (unaudited)... F-46
PLYMOUTH MILLS, INC.
Report of independent public
accountants.......................... F-53
Balance sheet as of September 30,
1995................................. F-54
Statement of income and retained
earnings for the year ended
September 30, 1995................. F-55
Statement of cash flows for the year
ended September 30, 1995........... F-56
Notes to financial statements........ F-57
Balance sheets as of August 2, 1996
(unaudited) and September 30,
1995............................... F-60
Statements of income and retained
earnings for the periods from
October 1, 1995 to August 2, 1996,
and October 1, 1994 to June 30,
1995 (unaudited)................... F-61
Statements of cash flows for the
periods from October 1, 1995 to
August 2, 1996, and
October 1, 1994 to June 30, 1995
(unaudited)........................ F-62
Notes to financial statements
(unaudited)........................ F-63
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
and Shareholders of
Sun Sportswear, Inc.
In our opinion, the accompanying balance sheets and related statements of
income, of changes in shareholders' equity and of cash flows present, fairly, in
all material respects, the financial position of Sun Sportswear, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Seattle, Washington
February 23, 1996
F-2
<PAGE>
SUN SPORTSWEAR, INC.
BALANCE SHEETS
DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 2,006,633 $ 1,217,171
Accounts receivable, net of
allowance for doubtful accounts
of $46,317and $46,524,
respectively (Note 11)......... 13,102,275 24,424,834
Inventories, net (Note 3)....... 23,631,358 30,155,618
Prepaid expenses and other
current assets................. 959,872 596,919
Deferred income taxes (Note
9)............................. 788,332 760,710
Federal income tax receivable... 1,979,535 -0-
-------------- --------------
Total current assets....... 42,468,005 57,155,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net:
(Note 4)........................ 4,831,994 5,216,920
OTHER ASSETS:........................ 15,107 11,943
-------------- --------------
Total assets............... $ 47,315,106 $ 62,384,115
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5).......... $ 13,500,000 $ 15,987,000
Accounts payable................ 4,985,953 13,038,144
Accrued royalties payable....... 1,753,745 1,720,536
Accrued wages and taxes
payable......................... 512,078 781,651
Accrued interest payable........ 51,263 53,813
Accrued income taxes payable.... -- 166,059
Current portion of long-term
debt (Note 6)................... 245,652 376,636
Total current
liabilities.................. 21,048,691 32,123,839
-------------- --------------
NONCURRENT LIABILITIES:
Long-term debt, net of current
portion (Note 6)............... 92,354 338,005
Deferred income taxes (Note
9).............................. 155,642 172,046
-------------- --------------
Total noncurrent
liabilities.................. 247,996 510,051
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
20,000,000 shares authorized;
5,748,500 shares at December
31, 1995 and 5,747,125 shares
at December 31, 1994 issued and
outstanding.................... 21,618,339 21,613,691
Retained earnings............... 4,400,080 8,136,534
-------------- --------------
Total shareholders'
equity....................... 26,018,419 29,750,225
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 2
and Note 10)
Total liabilities and
shareholders' equity... $ 47,315,106 $ 62,384,115
============== ==============
See accompanying notes to financial statements
F-3
<PAGE>
SUN SPORTSWEAR, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1994 1993
-------------- --------------- ---------------
<S> <C> <C> <C>
Proprietary sales....................... $ 17,454,421 $ 28,922,739 $ 47,571,508
Licensed sales.......................... 79,335,040 88,665,196 60,365,230
Sales deductions........................ (2,824,136) (4,375,039) (3,164,246)
-------------- --------------- ---------------
Net sales (Note 8)...................... 93,965,325 113,212,896 104,772,492
Cost of goods sold................. 84,569,855 95,878,764 87,910,600
-------------- --------------- ---------------
Gross margin....................... 9,395,470 17,334,132 16,861,892
-------------- --------------- ---------------
Operating expenses:
Selling............................ 3,649,256 3,781,116 3,357,862
Design and pattern................. 2,492,222 2,527,013 2,297,864
General and administrative......... 7,690,321 6,712,365 5,655,760
Provision for doubtful accounts and
factoring fees (Note 11)......... 132,284 71,586 130,264
Manufacturing cessation (Note 4)... -0- -0- 898,450
-------------- --------------- ---------------
13,964,083 13,092,080 12,340,200
-------------- --------------- ---------------
Operating (loss) income............ (4,568,613) 4,242,052 4,521,692
-------------- --------------- ---------------
Other (income) expense:
Interest expense................... 1,267,442 676,612 519,006
Other, net......................... (200,981) (111,236) (227,903)
-------------- --------------- ---------------
1,066,461 565,376 291,103
-------------- --------------- ---------------
(Loss) income before provision for
income taxes.......................... (5,635,074) 3,676,676 4,230,589
(Benefit) provision for income taxes
(Note 9).............................. (1,898,620) 1,228,000 1,494,000
-------------- --------------- ---------------
Net (loss) income....................... $ (3,736,454) $ 2,448,676 $ 2,736,589
============== =============== ===============
(Loss) earnings per share............... $ (0.65) $ 0.43 $ 0.49
============== =============== ===============
Weighted average shares outstanding..... 5,748,249 5,722,121 5,610,996
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
SUN SPORTSWEAR, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........... 5,609,000 $ 20,950,447 $ 2,951,269 $ 23,901,716
Exercise of stock options including
tax benefit of $80,074............. 28,500 182,074 182,074
Net income for the year ended
December 31, 1993.................. 2,736,589 2,736,589
----------- -------------- -------------- --------------
Balance, December 31, 1993........... 5,637,500 21,132,521 5,687,858 26,820,379
Exercise of stock options including
tax benefit of $109,498............ 109,625 481,170 481,170
Net income for the year ended
December 31, 1994.................. 2,448,676 2,448,676
----------- -------------- -------------- --------------
Balance, December 31, 1994........... 5,747,125 21,613,691 8,136,534 29,750,225
Exercise of stock options, -0- tax
benefit............................ 1,375 4,648 4,648
Net loss for the year ended December
31, 1995........................... (3,736,454) (3,736,454)
----------- -------------- -------------- --------------
Balance, December 31, 1995........... 5,748,500 $ 21,618,339 $ 4,400,080 $ 26,018,419
=========== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
SUN SPORTSWEAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............... $ (3,736,454) $ 2,448,676 $ 2,736,589
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............ 1,526,015 1,225,139 1,102,448
(Gain) loss on disposal of
equipment............... (18,054) 1,025 730,025
Decrease (increase) in
accounts receivable..... 11,322,559 (10,644,227) (1,840,415)
Decrease (increase) in
inventories............. 6,524,260 (8,094,570) 20,180
(Increase) decrease in
federal income tax
receivable, accrued and
deferred................ (2,189,620) 92,158 544,695
(Increase) decrease in
other assets............ (366,117) (84,790) 273,505
(Decrease) increase in
accounts payable........ (6,754,384) 5,925,735 (1,801,897)
(Decrease) increase in
accrued liabilities..... (238,914) 938,153 375,318
-------------- -------------- --------------
Net cash provided by (used in)
operating activities.......... 6,069,291 (8,192,701) 2,140,448
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures............ (1,169,168) (1,953,218) (2,215,259)
Proceeds from sale of
equipment..................... 46,133 70,956 202,031
-------------- -------------- --------------
Net cash used in investing
activities.................... (1,123,035) (1,882,262) (2,013,228)
-------------- -------------- --------------
Cash flows from financing activities:
(Decrease) increase in
outstanding checks in excess
of funds on deposit........... (1,297,807) 186,329 1,170,819
Net (repayments) borrowings
under line of credit
agreement..................... (2,487,000) 12,534,000 (864,000)
Proceeds from issuance of
long-term debt................ -0- -0- 923,052
Principal payments under
long-term debt................ (376,635) (2,558,454) (909,258)
Proceeds from issuance of common
stock for employee stock
options....................... 4,648 481,171 102,000
-------------- -------------- --------------
Net cash (used in) provided by
financing activities.......... (4,156,794) 10,643,046 422,613
-------------- -------------- --------------
Net increase in cash................. 789,462 568,083 549,833
Cash at beginning of period.......... 1,217,171 649,088 99,255
-------------- -------------- --------------
Cash at end of period................ $ 2,006,633 $ 1,217,171 $ 649,088
============== ============== ==============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest........................ $ 1,269,992 $ 688,174 $ 541,360
Income taxes.................... $ 291,000 $ 1,251,000 $ 1,462,000
</TABLE>
F-6
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS
The Company is engaged in designing, sourcing, printing and wholesale
distributing of imprinted, dyed, and decorated casual apparel. Products consist
primarily of garments printed with designs which are subject to license or
distributor agreements with third parties, and proprietary designs developed by
the Company. Revenues from operations are principally generated in the United
States.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts (including
reclassification of distribution costs from "operating expenses" to "cost of
goods sold") to conform to the presentation of the December 31, 1995 financial
statements.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. Cost includes the
purchase price of unprinted garments, the cost of manufacturing "cut-and-sewn"
garments and the cost of production of printed garments.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, vehicles, equipment and leasehold improvements are stated at
cost. Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the respective assets for furniture, vehicles
and equipment and over the lease term or useful life for leasehold improvements.
ACCOUNTS PAYABLE
Outstanding checks in excess of funds on deposit of $1,003,000 and
$2,299,000 at December 31, 1995 and 1994, respectively, have been classified as
accounts payable.
ACCRUED ROYALTIES PAYABLE
Royalties are accrued when the related licensed garments are shipped.
Additionally, the Company periodically reviews its royalty agreements, which
contain guaranteed minimum payments, and accrues the amount of the guaranteed
minimum royalties not expected to be met by sales of the licensed product.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), ACCOUNTING FOR INCOME TAXES.
Deferred taxes have been provided on income and expense items that are reported
in different periods for financial and tax reporting purposes.
REVENUE RECOGNITION
Sales are recognized when finished garments are shipped from the Company's
facilities.
SALES DEDUCTIONS
Sales discounts and allowances are accrued as sales are recorded. Sales
returns, the other component of sales deductions, are accrued when the Company
believes sales returns will occur.
ESTIMATES BY MANAGEMENT
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-7
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share has been computed based upon the weighted average number
of shares outstanding for all periods presented. Fully diluted earnings per
share does not differ materially from primary earnings per share.
NOTE 2 COMMITMENTS:
The Company has historically leased office, warehouse and manufacturing
space in Kent, Washington from a company owned by David Sabey, the majority
shareholder until December 1992 (at which time Mr. Sabey divested himself of all
his shares in the Company). The current lease requires monthly payments of
$115,000 plus operating and maintenance expense of the facility. Rent expense
for leases with Sabey totaled $1,389,000, $1,386,000 and $1,404,000 in 1995,
1994 and 1993 respectively. The Company has an option to purchase the facility
it presently occupies during the five year period October 6, 1994 through
October 5, 1999 for a mutually agreeable fair market price. This lease expires
in 1999.
The Company also leases warehouse space in Kent, Washington from a third
party. The lease expires in January 1997. Rent expense for this third party
lease, and other expired leases, in 1995, 1994 and 1993 totaled $181,000,
$89,000 and $198,000, respectively.
Future minimum rent commitments under all operating leases for periods
after December 31, 1995 are as follows:
RENT COMMITMENTS
- ------------------------------------------------------
1996.................................... $ 1,572,100
1997.................................... 1,380,000
1998.................................... 1,380,000
1999.................................... 1,035,000
------------
$ 5,367,100
============
Sun acquires rights to use trademarks and characters on specified types of
garments, under license agreements from third parties. At December 31, 1995, the
Company was party to approximately 52 such license agreements. Under these
license agreements, the Company pays royalties of between 4% and 14% of the
sales price of products sold displaying the licensed character or trademark.
Royalty expense for Sun's license agreements totaled $9,004,513, $9,354,684 and
$6,350,413 in 1995, 1994 and 1993 respectively. These license agreements
typically require that the Company guarantee a minimum royalty payment. Unmet
guaranteed minimum royalty commitments under all licensing agreements in place
at December 31, 1995, are as follows:
ROYALTY COMMITMENTS
- ------------------------------------------------------
1996.................................... $ 920,000
1997.................................... 429,000
------------
$ 1,349,000
============
At December 31, 1995, the Company had an allowance of $691,000 recorded on
its balance sheet primarily to cover 1996 and 1997 minimum royalty commitments
which are not anticipated to be recovered through licensed product sales. (See
"Note 11--Valuation and Qualifying Accounts")
F-8
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 INVENTORIES:
Inventories are composed of:
DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
Garments in process.................. $ 2,244,781 $ 2,205,577
Unprinted finished garments.......... 19,827,823 24,544,341
Printed finished garments............ 5,617,347 5,965,455
Supplies............................. 407,064 521,000
Lower of cost or market allowance.... (4,465,657) (3,080,755)
-------------- --------------
$ 23,631,358 $ 30,155,618
============== ==============
NOTE 4 EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are summarized by major
classifications as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------------------
USEFUL LIVES 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
Production equipment................. 5-7 $ 3,658,352 $ 3,500,342
Leasehold improvements............... 5-10 1,271,542 1,157,422
Computer hardware and software....... 3-5 2,996,638 1,507,205
Furniture and fixtures............... 5 1,116,112 1,111,640
Distribution equipment............... 5-10 1,452,716 1,395,543
Warehouse equipment.................. 5-7 395,797 338,507
Vehicles............................. 5 12,417 27,317
-------------- --------------
10,903,574 9,037,976
Construction in progress............. 509 922,373
Less -- Accumulated depreciation..... (6,072,089) (4,743,429)
-------------- --------------
$ 4,831,994 $ 5,216,920
============== ==============
</TABLE>
In October 1993, the Company permanently discontinued all operations,
including "cut-and-sew" garment manufacturing operations, at its Tennessee
facility which resulted in charges to operations for shutdown expense of
$898,000 during the year ended December 31, 1993.
NOTE 5 NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
INTEREST RATE AT DECEMBER 31,
DECEMBER 31, ------------------------------
1995 1995 1994
------------------ -------------- --------------
<S> <C> <C> <C>
Bank line of credit, portion
Prime based........................ 8.50% $ -0- $ 3,987,000
Bank line of credit, portion
LIBOR based........................ 7.94% 13,500,000 12,000,000
-------------- --------------
$ 13,500,000 $ 15,987,000
============== ==============
</TABLE>
At December 31, 1995, the Company's Bank credit agreement provided for a
line of credit facility (including commercial and standby letters of credit) of
up to $27,000,000. At December 31, 1995, total outstanding commercial letters of
credit were $919,245 and approximately $1.8 million was available for borrowing.
The borrowing rate for the revolving portion of the line was the prime rate or
lower. All the
F-9
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's assets, including accounts receivable and inventories, were pledged as
security for borrowings under the Bank credit agreement.
In February 1996, the Company replaced its Bank credit agreement with a
credit agreement provided by Heller Financial, Inc. The Heller credit agreement
provides for a line of credit (including commercial letters of credit) of up to
$24,000,000. The borrowing rate for the revolving portion of the line is the
prime rate and all the Company's assets, including accounts receivable and
inventories, are pledged as security for borrowings under the Heller credit
agreement. The Heller credit agreement requires compliance with certain
financial covenants principally relating to working capital, tangible net worth,
ratio of debt to equity, expenditures for fixed assets, minimum earnings (before
taxes, interest and depreciation), interest coverage, restrictions on the
payment of dividends and restrictions on the incurrence of long-term debt.
The weighted average interest rate for the Bank line of credit was 8.06%
for 1995 and 6.73% for 1994.
NOTE 6 LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
INTEREST RATE AT DECEMBER 31,
DECEMBER 31, --------------------------
1995 1995 1994
------------------ ------------ ------------
<S> <C> <C> <C>
Notes payable to GE Capital in
monthly installments of $25,694.... Variable -- 5.91% $ 338,006 $ 617,112
Other notes payable.................. Various -0- 97,529
------------ ------------
338,006 714,641
LESS -- Current installments......... (245,652) (376,636)
------------ ------------
Long-term debt....................... $ 92,354 $ 338,005
============ ============
</TABLE>
The notes payable to GE Capital were paid off in February 1996.
NOTE 7 CASH PROFIT SHARING, 401-K PROFIT SHARING PLAN, STOCK OPTION PLANS, AND
RETIREMENT BENEFITS:
The Company has a Cash Profit Sharing Plan for its employees ("Cash
Plan"). Under the Cash Plan, the Board of Directors determines, at its
discretion, a percentage of the Company's net profits to be distributed to
employees on an annual basis. The amount of the distribution to any employee is
based upon the employee's compensation level and in some instances, length of
service with the Company. The Cash Plan is administered by a committee of senior
management employees appointed by the Board of Directors. The amount charged to
expense under the Cash Plan totaled $94,000, $194,000 and $321,000 in 1995, 1994
and 1993, respectively.
Effective January 1, 1992, the Company established a 401-K profit sharing
plan for qualifying employees. Employee contributions to the 401-K plan are
matched by the Company dollar for dollar on the first $200 contributed to the
plan; then $.25 for every $1 up to 6.0% of the employee's gross earnings.
Employees are fully vested in the 401-K plan after three years of service. The
401-K plan is administered by a non-related, third party. The amount charged to
expense under the 401-K plan totaled $66,000, $57,000 and $54,000 in 1995, 1994
and 1993, respectively.
In October 1989, the Board of Directors approved stock option plans for
Company employees and directors coincident with the completion of the public
offering of common stock of the Company. The plans provide for the issuance of
options to purchase common stock to employees and non-employee directors of the
Company, at an exercise price in most cases equal to the fair market value at
the date of grant. The maximum term of options granted is ten years. Options to
employees are granted at the discretion of the Compensation Committee of the
Board of Directors. Options granted to non-employee directors are granted
F-10
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in accordance with a formula set forth in the director plan. A total of 660,000
common stock shares have been reserved for issuance under these plans.
Options granted and outstanding during the three years ended December 31,
1995 are:
<TABLE>
<CAPTION>
DIRECTOR PLAN EMPLOYEE PLAN
------------------------ ------------------------
SHARES PRICE/SHARE SHARES PRICE/SHARE
--------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Options at December 31, 1992......... 22,000 $6.00-$11.25 252,250 $3.25-$6.25
Options granted................. 11,000 $3.75 173,750 $3.19-$3.38
Options canceled................ (17,000) $ 6.00-11.25 (36,250) $3.25-$6.25
Options exercised............... -- -- (28,500) $3.25-$4.50
--------- ----------
Options at December 31, 1993......... 16,000 $ 3.75-$6.00 361,250 $3.19-$6.00
Options granted................. 2,000 $5.88 141,750 $4.38-$5.88
Options canceled................ -- -- (72,125) $3.19-$6.00
Options exercised............... -- -- (109,625) $3.25-$4.50
--------- ----------
Options at December 31, 1994......... 18,000 $ 3.75-$6.00 321,250 $3.38-$5.88
Options granted................. 2,000 $4.125 54,500 $4.125
Options canceled................ (1,000) $4.125 (8,875) $4.38-$5.88
Options exercised............... -- -- (1,375) $3.38
--------- ----------
Options at December 31, 1995......... 19,000 $ 3.75-$6.00 365,500 $3.25-$5.88
========= ==========
</TABLE>
Options outstanding under the Director Plan are subject to one year vesting
periods, carry a five year term, and at December 31, 1995, options for 18,000
shares were exercisable. Options outstanding under the Employee Plan are subject
tovesting periods of up to four years, carry a ten year term, and at December
31, 1995, options for 268,541 shares were exercisable.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
non-employees. The Company has not determined the method of adoption for the
year ended December 31, 1996.
NOTE 8 INDUSTRY PROFILE AND MAJOR CUSTOMERS:
The Company operates almost exclusively in one industry, which is the
wholesale distribution of imprinted, dyed and decorated casual apparel. The
Company's customers consist of large retail mass merchants. A substantial
portion of the Company's customers' ability to honor their obligations is
dependent on the retail apparel economic sector.
The Company has three major customers who are mass merchants. The
percentage of gross sales for each customer and the total percentage of gross
sales for the three customers are as follows:
PERCENTAGE OF
GROSS
SALES FOR KMART,
TARGET, TOTAL PERCENTAGE
AND WAL-MART, OF GROSS SALES FOR
RESPECTIVELY THE THREE CUSTOMERS
----------------- --------------------
For the year ended December 31,
1995............................ 17%, 24% and 47% 88%
1994............................ 19%, 29% and 40% 88%
1993............................ 8%, 38% and 36% 82%
F-11
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 INCOME TAXES:
In January 1993, the Company prospectively adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), ACCOUNTING FOR INCOME TAXES. FAS 109 is
an asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. The
impact of adopting FAS 109 was not significant to the Company.
The provision (benefit) for income taxes was as follows :
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
-------------- ------------ ------------
Current................... $ (1,854,594) $ 1,554,000 $ 1,299,668
Deferred.................. (44,026) (326,000) 194,332
-------------- ------------ ------------
$ (1,898,620) $ 1,228,000 $ 1,494,000
============== ============ ============
Deferred tax assets (liabilities) at December 31 comprised the following:
1995 1994
------------ ------------
Inventory capitalization............. $ 463,749 $ 599,749
Allowance for doubtful accounts...... 15,748 15,818
Accrued expenses..................... 39,116 42,774
Accrued royalties.................... 235,077 102,369
Other................................ 78,907 44,265
------------ ------------
Gross deferred tax assets............ 832,597 804,975
Less -- Depreciation................. (199,907) (216,311)
------------ ------------
$ 632,690 $ 588,664
------------ ------------
1995 1994
------------ ------------
Net current deferred tax asset....... $ 788,332 $ 760,710
Net noncurrent deferred tax
liability............................ (155,642) (172,046)
------------ ------------
$ 632,690 $ 588,664
============ ============
NOTE 10 CONTINGENCIES:
The only legal proceedings to which the Company is a party involve routine
matters that are incidental to its business. The Company does not believe that
the resolution of these matters will have a material effect on the results of
operations or financial condition of the Company.
NOTE 11 VALUATION AND QUALIFYING ACCOUNTS:
Activity of the Company's allowance for doubtful accounts follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- ---------- ------------
Balance, beginning of the year.......... $ 46,524 $ 88,000 $ 258,000
Provision for doubtful accounts......... -0- -0- -0-
Chargeoffs/collections.................. (207) (41,476) (170,000)
--------- ---------- ------------
Balance, end of the year................ $ 46,317 $ 46,524 $ 88,000
========= ========== ============
F-12
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, 1994 and 1995, the Company had an agreement with Heller
Financial, Inc. intended to transfer the collection risk to Heller for Sun's
accounts receivable for essentially all of its customers other than Target,
Kmart and Wal-Mart. Under the agreement, Heller assumed 100% of the collection
risk associated with the Company's covered receivables. Heller received a fee
equal to.55% of the gross amount of covered receivables for assuming such
collection risk. The amount charged to expense for factoring fees was $48,000,
$80,000 and $169,000 in 1995, 1994 and 1993, respectively. This agreement
expires in 1997.
In February 1996, Sun amended the risk-transfer agreement with Heller,
whereby Heller also assumes 70% of the collection risk associated with the Kmart
receivables for a fee equal to. 65% of the gross amount of such receivables.
Activity of the Company's lower of cost or market inventory reserves
follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
-------------- ------------ ------------
Balance, beginning of the year. $ 3,080,755 $ 1,501,876 $ 919,725
Accruals....................... 3,773,078 2,470,097 895,360
Chargeoffs..................... (2,388,176) (891,218) (313,209)
-------------- ------------ ------------
Balance, end of the year....... $ 4,465,657 $ 3,080,755 $ 1,501,876
============== ============ ============
Activity of the Company's unmet guaranteed minimum royalty reserves
follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
------------ ------------ ----------
Balance, beginning of the year.......... $ 301,085 $ 147,333 $ -0-
Accruals................................ 693,643 350,000 147,333
Chargeoffs.............................. (303,325) (196,248) -0-
------------ ------------ ----------
Balance, end of the year................ $ 691,403 $ 301,085 $ 147,333
============ ============ ==========
NOTE 12 RELATED PARTY TRANSACTIONS:
During 1995, Sun hired the consulting firm of Wiley, Pene and Company to
assist in the Company's re-engineering efforts. Wiley, Pene and Company was paid
$243,000 from March to October 1995 for its services. Wiley, Pene and Company is
owned by Robert Pene, a former director of Sun, who resigned from the Company's
Board of Directors in September 1995; and by William S. Wiley, who was appointed
as the Company's Chief Executive Officer, President and Director in October
1995.
F-13
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly financial information for the years ended December 31, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1995
Net sales............................... $ 25,720,562 $ 30,581,505 $ 16,224,578 $ 21,438,680 $ 93,965,325
-------------- -------------- -------------- -------------- ---------------
Cost of goods sold...................... 22,522,498 25,310,087 17,097,761 19,639,509 84,569,855
-------------- -------------- -------------- -------------- ---------------
Gross margin............................ 3,198,064 5,271,418 (873,183) 1,799,171 9,395,470
Operating expenses...................... 3,627,428 3,662,095 3,504,743 3,169,817 13,964,083
Other expense........................... 330,034 314,033 152,794 269,600 1,066,461
-------------- -------------- -------------- -------------- ---------------
(Loss) income before provision for
income taxes.......................... (759,398) 1,295,290 (4,530,720) (1,640,246) (5,635,074)
(Benefit) provision for income taxes.... (258,000) 440,000 (1,540,500) (540,120) (1,898,620)
-------------- -------------- -------------- -------------- ---------------
Net (loss) income....................... $ (501,398) $ 855,290 $ (2,990,220) $ (1,100,126) $ (3,736,454)
============== ============== ============== ============== ===============
Net (loss) income per share............. $(0.09) $0.15 $(0.52) $(0.19) $(0.65)
1994
Net sales............................... $ 27,224,201 $ 27,374,640 $ 26,633,787 $ 31,980,268 $ 113,212,896
Cost of goods sold...................... 22,394,136 22,778,232 23,230,396 27,476,000 95,878,764
-------------- -------------- -------------- -------------- ---------------
Gross margin............................ 4,830,065 4,596,408 3,403,391 4,504,268 17,334,132
Operating expenses...................... 3,304,038 3,373,498 3,129,524 3,285,020 13,092,080
Other expense........................... 59,258 69,235 167,585 269,298 565,376
-------------- -------------- -------------- -------------- ---------------
Income before provision for income
taxes................................. 1,466,769 1,153,675 106,282 949,950 3,676,676
Provision for income taxes.............. 498,000 377,579 51,808 300,613 1,228,000
-------------- -------------- -------------- -------------- ---------------
Net income.............................. $ 968,769 $ 776,096 $ 54,474 $ 649,337 $ 2,448,676
============== ============== ============== ============== ===============
Net income per share.................... $0.17 $0.14 $0.01 $0.11 $0.43
</TABLE>
The sum of quarterly earnings per share will not necessarily equal the
earnings per share reported for the entire year, due to rounding.
F-14
<PAGE>
SUN SPORTSWEAR, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash............................ $ 141,773 $ 2,006,633
Accounts receivable, net of
allowance for doubtful
accounts of $45,904 and
$46,317, respectively......... 6,530,384 13,102,275
Inventories, net (Note 2)....... 19,415,919 23,631,358
Prepaid expenses and other
current assets................ 1,225,966 959,872
Deferred income taxes........... 1,138,332 788,332
Federal income tax receivable... 1,042,387 1,979,535
-------------- --------------
Total current assets....... 29,494,761 42,468,005
EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net
(Note 3)........................ 3,923,159 4,831,994
OTHER ASSETS......................... 14,506 15,107
-------------- --------------
Total assets............... $ 33,432,426 $ 47,315,106
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable................... $ 3,400,208 $ 13,500,000
Accounts payable................ 3,552,640 4,985,953
Accrued royalties payable....... 1,309,865 1,753,745
Accrued wages and taxes
payable....................... 912,711 512,078
Accrued interest payable........ 19,846 51,263
Current portion of long-term
debt.......................... -0- 245,652
-------------- --------------
Total current
liabilities............. 9,195,270 21,048,691
-------------- --------------
NONCURRENT LIABILITIES:
Long-term debt, net of current
portion....................... -0- 92,354
Deferred income taxes........... 155,642 155,642
-------------- --------------
Total noncurrent liabilities.... 155,642 247,996
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
20,000,000 shares authorized;
5,748,500 shares at 9/30/96
and 12/31/95 issued and
outstanding................... 21,618,339 21,618,339
Retained earnings............... 2,463,175 4,400,080
-------------- --------------
Total shareholders'
equity.................. 24,081,514 26,018,419
-------------- --------------
COMMITMENTS AND CONTINGENCIES
Total liabilities and
shareholders' equity.... $ 33,432,426 $ 47,315,106
============== ==============
See accompanying notes to financial statements
F-15
<PAGE>
SUN SPORTSWEAR, INC.
STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1995
-------------- --------------
Proprietary sales.................... $ 13,317,282 $ 13,273,455
Licensed sales....................... 41,706,383 61,403,890
Sales deductions..................... (1,421,946) (2,150,700)
-------------- --------------
Net sales (Note 4)................... 53,601,719 72,526,645
Cost of goods sold................... 46,596,495 64,930,346
-------------- --------------
Gross margin......................... 7,005,224 7,596,299
-------------- --------------
Operating expenses:
Selling......................... 2,604,171 2,801,000
Design and pattern.............. 1,978,307 1,830,082
General and administrative...... 4,816,007 6,042,717
Provision for doubtful accounts
and factoring fees............. 100,746 120,467
-------------- --------------
9,499,231 10,794,266
-------------- --------------
Operating income..................... (2,494,007) (3,197,967)
-------------- --------------
Other expense (income):
Interest expense................ 492,359 969,506
Other, net...................... (51,461) (172,645)
-------------- --------------
440,898 796,861
-------------- --------------
Income before provision for income
taxes.............................. (2,934,905) (3,994,828)
Provision for income taxes........... (998,000) (1,358,500)
-------------- --------------
Net loss............................. $ (1,936,905) $ (2,636,328)
============== ==============
Earnings per share: $(0.34) $(0.46)
============== ==============
Weighted average shares
outstanding........................ 5,748,500 5,748,165
See accompanying notes to financial statements
F-16
<PAGE>
SUN SPORTSWEAR, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1995
-------------- --------------
Cash flows from operating activities:
Net loss........................ $ (1,936,905) $ (2,636,328)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization............ 1,294,076 1,131,097
Loss (gain) on disposal of
equipment............... 699 (11,252)
Decrease in accounts
receivable.............. 6,571,891 11,247,195
Decrease in inventories.... 4,215,439 352,345
Decrease (increase) in
federal income tax
receivable,
accrued and deferred.... 587,148 (1,649,500)
Increase in other assets... (265,493) (130,628)
Decrease in accounts
payable................. (1,068,892) (3,491,769)
(Decrease) increase in
accrued liabilities..... (74,664) 55,604
-------------- --------------
Net cash provided by operating
activities.................... 9,323,299 4,866,764
-------------- --------------
Cash flows from investing activities:
Capital expenditures............ (399,048) (966,203)
Proceeds from sale of
equipment..................... 13,108 39,283
-------------- --------------
Net cash used in investing
activities.................... (385,940) (926,920)
-------------- --------------
Cash flows from financing activities:
Decrease in outstanding checks
in excess of funds on
deposit....................... (364,421) (1,274,043)
Net repayments under line of
credit agreement.............. (10,099,792) (3,391,000)
Principal payments under
long-term debt................ (338,006) (207,751)
Proceeds from issuance of common
stock for employee stock
options....................... -0- 4,648
-------------- --------------
Net cash used in financing
activities.................... (10,802,219) (4,868,146)
-------------- --------------
Net decrease in cash................. 1,864,860 928,302
Cash at beginning of period.......... 2,006,633 1,217,171
-------------- --------------
Cash at end of period................ $ 141,773 $ 288,869
============== ==============
Supplemental disclosure of cash flow
information:
Cash paid (received) during the
period for:
Interest........................ $ 523,775 $ 967,052
Income taxes.................... $ (1,585,148) $ 291,000
See accompanying notes to financial statements
F-17
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The accompanying financial statements at September 30, 1996 for the three
and nine months ended September 30, 1996 and September 30, 1995 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 condensed financial
statements include all adjustments, consisting only of normal recurring
accruals, necessary for a fair statement of the results for the interim periods.
The results of operations and cash flows for the nine months ended September 30,
1996 and 1995 are not necessarily indicative of the results of operations and
cash flows that may be expected for the entire year, which are subject to
year-end adjustments in conjunction with the annual audit by the Company's
independent public accountants. The accompanying condensed financial statements
and related notes should be read in conjunction with the financial statements
and footnotes thereto included in Sun Sportswear, Inc.'s (the "Company") 1995
Form 10-K and Annual Report to Shareholders. See also "Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Net Sales -- Seasonality" on page 11 of this report.
NOTE 2 INVENTORIES:
Inventories are composed as follows:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
Garments in process.................. $ 32,119 $ 2,244,781
Unprinted finished garments.......... 17,823,307 19,827,823
Printed finished garments............ 2,554,484 5,617,347
Supplies............................. 980,725 407,064
Lower of cost or market allowance.... (1,974,716) (4,465,657)
-------------- -------------
$ 19,415,919 $ 23,631,358
============== =============
F-18
<PAGE>
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are summarized by major
classifications as follows:
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30, DECEMBER 31,
USEFUL LIVES 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Production equipment................. 5-7 $ 3,722,949 $ 3,658,861
Leasehold improvements............... 5-10 2,369,879 2,380,317
Design system hardware and
software............................. 3-5 963,417 851,056
Information system hardware and
software............................. 3-5 1,840,880 2,145,582
Furniture and fixtures............... 5 937,672 1,116,112
Distribution equipment............... 5-10 371,033 343,941
Warehouse equipment.................. 5-7 357,814 395,797
Vehicles............................. 5 12,417 12,417
-------------- -------------
10,576,061 10,904,083
-------------- -------------
Less -- Accumulated depreciation..... (6,652,902 ) (6,072,089)
-------------- -------------
$ 3,923,159 $ 4,831,994
============== =============
</TABLE>
NOTE 4 MAJOR CUSTOMERS:
The Company operates almost exclusively in one industry, which is the
wholesale distribution of imprinted, dyed and decorated casual apparel. The
Company has three major customers, all of whom are mass merchants. The
percentage of gross sales for each customer and the total percentage of gross
sales for the three customers are as follows:
PERCENTAGE OF GROSS SALES TOTAL PERCENTAGE
FOR THE COMPANY'S THREE OF GROSS SALES FOR
LARGEST CUSTOMERS THE THREE CUSTOMERS
------------------------- -------------------
For the nine months ended
September 30,
1996................... 11%, 26% and 44% 81%
1995................... 19%, 25% and 44% 88%
For the year ended
December 31, 1995........ 17%, 24% and 47% 88%
F-19
<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 30,
1995, and December 31, 1994 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the years ended
December 30, 1995, December 31, 1994, and December 31, 1993. These financial
statements are the responsibility of the Company' s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BSI Holdings, Inc. and
subsidiaries as of December 30, 1995, and December 31, 1994, and the results of
their operations and their cash flows for the years ended December 30, 1995,
December 31, 1994 and December 31, 1993 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
April 22, 1996, except for Note 9,
as to which the date is
January 23, 1997
F-20
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
1995 1994
--------- ---------
ASSETS
CURRENT ASSETS:
Cash............................ $ 755 $ 154
Accounts receivable, net of
allowance for doubtful accounts
of $967 and $573,
respectively................... 13,294 12,650
Inventory (Note 2(e))........... 23,571 25,117
Prepaid expenses................ 690 793
Income tax receivable........... 300 318
Deferred tax assets (Note 4).... -- 193
--------- ---------
Total current assets....... 38,610 39,225
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at
cost (Note 2(f))
Land............................ 90 58
Buildings....................... 670 --
Machinery and equipment......... 3,866 2,415
Furniture and fixtures.......... 2,598 1,760
--------- ---------
7,224 4,233
Less -- accumulated
depreciation................... (2,144) (1,334)
--------- ---------
5,080 2,899
--------- ---------
INTANGIBLE ASSETS (Note 2(g))
Costs in excess of fair value of
assets acquired................ 2,461 1,807
Less -- accumulated
amortization................... (336) (276)
--------- ---------
2,125 1,531
--------- ---------
Other........................... 1,320 1,260
Less -- accumulated
amortization................... (541) (346)
--------- ---------
779 914
--------- ---------
Total intangible assets.... 2,904 2,445
--------- ---------
OTHER ASSETS......................... 476 480
--------- ---------
$ 47,070 $ 45,049
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-21
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
1995 1994
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Borrowings pursuant to revolving
credit agreement (Note 3(a))... $ 20,693 $ 18,885
Current portion of other debt
(Notes 3(a), (c) and (d))...... 2,531 1,206
Accounts payable................ 13,771 10,925
Accrued liabilities............. 3,207 2,282
--------- ---------
Total current
liabilities............. 40,202 33,298
--------- ---------
BORROWINGS PURSUANT TO CREDIT
AGREEMENT (Note 3(a)).............. 1,900 2,703
--------- ---------
NOTES PAYABLE (Note 3(c))............ 118 --
--------- ---------
SUBORDINATED DEBT DUE TO RELATED
PARTIES (Note 3(b))................ 3,716 5,712
--------- ---------
CAPITAL LEASE LIABILITY (Note
3(d)).............................. 878 --
--------- ---------
DEFERRED INCOME TAXES PAYABLE (Note
4)................................. -- 115
--------- ---------
MANDATORILY REDEEMABLE PREFERRED
STOCK (Note 6)..................... 945 --
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note
8).................................
SHAREHOLDERS' EQUITY (DEFICIT) (Note
5):
Preferred stock, $.01 par,
25,000,000 shares authorized... -- --
Common stock; $.01 par,
50,000,000 shares authorized
and 10,078,593 shares
outstanding.................... 2 2
Additional paid-in capital...... 2,861 2,861
Retained earnings (deficit)..... (3,490) 450
Notes receivable from
shareholders................... (62) (92)
--------- ---------
Total shareholders' equity
(deficit)............... (689) 3,221
--------- ---------
$ 47,070 $ 45,049
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-22
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
------------ ------------ ------------
NET SALES............................ $ 131,020 $ 76,754 $ 60,850
COST OF GOODS SOLD................... 106,576 64,846 51,640
------------ ------------ ------------
Gross profit.................... 24,444 11,908 9,210
OPERATING EXPENSES:
Selling, general and administrative
expenses........................ 25,264 9,997 7,062
Amortization of intangible assets
and noncompete payments......... 285 224 223
------------ ------------ ------------
Total operating expenses........ 25,549 10,221 7,285
Operating income (loss)......... (1,105) 1,687 1,925
------------ ------------ ------------
OTHER EXPENSE (INCOME):
Interest........................... 3,695 1,663 1,153
Other, net (Note 1(b)(iii))........ (22) -- 89
------------ ------------ ------------
Income (loss) before income
taxes and extraordinary
item.......................... (4,778) 24 683
PROVISION (CREDIT) FOR INCOME TAXES
(Note 4)........................... (338) 99 254
------------ ------------ ------------
Net income (loss) before
extraordinary item............ (4,440) (75) 429
EXTRAORDINARY ITEM:
Gain on extinguishment of debt
(Note 3(b))..................... 500 -- --
------------ ------------ ------------
Net income (loss)............... $ (3,940) $ (75) $ 429
============ ============ ============
PER SHARE DATA:
Earnings (loss) per common and
common equivalent share before
extraordinary item............ $ (.29) $ (.01) $ .03
------------ ------------ ------------
Extraordinary gain per common
and common equivalent share... .03 -- --
------------ ------------ ------------
Earnings (loss) per common and
common equivalent share....... $ (.26) $ (.01) $ .03
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note
2(i)).............................. 14,922,148 14,922,148 14,936,403
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
F-23
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
------------------ --------------------- PAID-IN EARNINGS FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDERS
--------- ------- ------------ ------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1992.................. 150,000 $ 15 9,889,032 $ 26 $ 2,188 $ 101 $ (200)
Common stock issued.............. -- -- 189,561 -- 40 -- --
Change in par value of stock
pursuant to plan of merger..... -- (14) -- (24) 38 -- --
Payments received from
shareholders................... -- -- -- -- -- -- 60
Dividends paid on preferred
stock.......................... -- -- -- -- -- (5) --
Net income....................... -- -- -- -- -- 429 --
--------- ------- ------------ ------- ----------- --------- -------------
BALANCES AT
DECEMBER 31, 1993.................. 150,000 1 10,078,593 2 2,266 525 (140)
Stock purchase warrants issued... -- -- -- -- 744 -- --
Payments received from
shareholders................... -- -- -- -- -- -- 48
Redemption (Note 5).............. (150,000) (1) -- -- (149) -- --
Net loss......................... -- -- -- -- -- (75) --
--------- ------- ------------ ------- ----------- --------- -------------
BALANCES AT
DECEMBER 30, 1994.................. -- -- 10,078,593 2 2,861 450 (92)
Payments received from
shareholders................... -- -- -- -- -- -- 30
Net loss......................... -- -- -- -- -- (3,940)
--------- ------- ------------ ------- ----------- --------- -------------
BALANCES AT
DECEMBER 30, 1995.................. -- $ -- 10,078,593 $ 2 $ 2,861 $ (3,490) $ (62)
========= ======= ============ ======= =========== ========= =============
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
--------------
BALANCES AT
DECEMBER 31, 1992.................. $ 2,130
Common stock issued.............. 40
Change in par value of stock
pursuant to plan of merger..... --
Payments received from
shareholders................... 60
Dividends paid on preferred
stock.......................... (5)
Net income....................... 429
--------------
BALANCES AT
DECEMBER 31, 1993.................. 2,654
Stock purchase warrants issued... 744
Payments received from
shareholders................... 48
Redemption (Note 5).............. (150)
Net loss......................... (75)
--------------
BALANCES AT
DECEMBER 30, 1994.................. 3,221
Payments received from
shareholders................... 30
Net loss......................... (3,940)
--------------
BALANCES AT
DECEMBER 30, 1995.................. $ (689)
==============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
F-24
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
1995 1994 1993
--------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (3,940) $ (75) $ 429
--------- ---------- ---------
Adjustments to reconcile net
loss to net cash provided by
operating activities net of
acquisition related items --
Depreciation............... 824 435 296
Amortization of intangible
assets.................. 253 192 168
Gain on extinguishment of
debt.................... (500) -- --
Decrease (increase) in
deferred income taxes... 78 (120) (73)
Increase in accounts
receivable.............. (614) (1,495) (433)
Decrease (increase) in
inventory............... 906 (2,945) 2,872
Decrease (increase) in
prepaid expenses........ 113 (522) 34
Decrease (increase) in
income tax receivable... 18 (318) --
Decrease (increase) in
other noncurrent
assets.................. (20) 166 (113)
Increase in accounts
payable and accrued
liabilities............. 3,621 1,094 (3,143)
--------- ---------- ---------
Net cash provided by
(used in) operating
activities......... 739 (3,588) (392)
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Velva Sheen
Manufacturing Co., net of cash
acquired...................... -- (11,735) --
Purchases of property, plant and
equipment, net................ (518) (528) (602)
Additional payments on
prior-year asset purchase..... -- (10) (10)
--------- ---------- ---------
Net cash used in
investing
activities......... (518) (12,273) (612)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings pursuant to revolving
credit agreement, net......... 1,808 9,846 630
Borrowings of long-term debt
pursuant to credit
agreement..................... 1,000 3,569 528
Repayments of long-term debt
pursuant to credit
agreement..................... (1,409) (203) (489)
Proceeds from (repayments of)
subordinated debt and stock
purchase warrants............. (996) 2,500 (338)
Repayment of capital lease
obligations and industrial
revenue bonds................. (48) -- --
Payments for deferred financing
costs......................... (5) (119) (112)
Payments received on notes
receivable from
shareholders.................. 30 48 60
Dividends paid on preferred
stock......................... -- -- (5)
--------- ---------- ---------
Net cash provided by
financing
activities......... 380 15,641 274
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH...... 601 (220) (301)
CASH AT BEGINNING OF YEAR............ 154 374 675
--------- ---------- ---------
CASH AT END OF YEAR.................. $ 755 $ 154 $ 374
========= ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 3,500 $ 1,434 $ 1,166
Cash paid for income taxes
(refunds received)............ (453) 648 194
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Capital lease financing......... 377 -- --
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-25
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
(1) ORGANIZATION, NATURE OF OPERATIONS AND ACQUISITIONS --
(a) ORGANIZATION AND NATURE OF OPERATIONS -- BSI Holdings, Inc. (BSIH or
the Company), a Delaware Corporation, is the parent company for two wholly-owned
subsidiaries: Brazos Sportswear, Inc. (BSI), a Texas Corporation, and Brazos
Embroidery, Inc. (BEI), a Pennsylvania corporation.
BSI designs, manufactures and distributes sportswear for adults and
children. Products manufactured and sold by BSI under license agreements include
those decorated with classic cartoon characters and collegiate logos. BSI also
markets sportswear decorated with its proprietary designs and creates garments
under private labels of major retailers. In addition, BSI distributes
undecorated garments to other imprinters of sportswear.
On December 1, 1995, BEI was formed as a wholly-owned subsidiary of the
Company to acquire certain of the assets and assume certain of the liabilities
of Needleworks, Inc. See Note 1(b)(i) for further discussion.
The Company had net sales of $29 million, $24 million and $18 million,
which represented 22%, 32% and 30% of total net sales during 1995, 1994, and
1993, respectively, to a single customer. The accompanying consolidated balance
sheets include accounts receivable of $3.7 million and $4.2 million at December
30, 1995 and December 31, 1994, respectively, due from such customer.
The three largest suppliers of blank garments to the Company represented
approximately 59%, 51% and 57% of the total purchases of these products in 1995,
1994 and 1993, respectively. Management believes that a loss of any single
supplier would not significantly impact operations as alternative products are
available from other sources.
(b) ACQUISITIONS --
(i) NEEDLEWORKS, INC. ACQUISITION -- This acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
assets and liabilities acquired and assumed have been included in the
consolidated balance sheet at their estimated fair values as of the
acquisition date (December 1, 1995) as shown below (in thousands except
share amounts):
Assumed debt......................... $ 1,598
Liabilities assumed and acquisition
costs.............................. 150
Issuance of 650,000 shares of A-1
preferred stock.................... 647
Issuance of 300,000 shares of A-2
preferred stock.................... 298
Issuance of warrants to purchase
620,282 shares (16,361 shares on a
pre-split basis) of the Company's
common stock....................... --
---------
2,693
---------
Fair value of tangible assets
acquired:
Receivables..................... 30
Inventory....................... 110
Prepaids........................ 10
Property, plant and equipment... 2,110
Other assets.................... 67
---------
2,327
---------
Goodwill............................. $ 366
=========
F-26
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operations of BEI for the periods from December 1, 1995 have been
included in the Company's consolidated statements of operations. Pro forma
information is not included due to the relative immateriality of this
acquisition.
(ii) VELVA SHEEN ACQUISITION -- On November 10, 1994, BSI acquired
certain of the assets and assumed certain liabilities of Velva Sheen
Manufacturing Co. (Velva Sheen) from American Marketing Industries (AMI).
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the assets and liabilities acquired and
assumed have been included in the consolidated balance sheet at their
estimated fair values as of the acquisition date and which have
subsequently been adjusted in 1995 as shown below (in thousands):
AS
ORIGINALLY CHANGES IN REVISED
RECORDED 1995 ALLOCATION
----------- ----------- ----------
Revolver borrowings.................. $ 6,085 $ $ 6,085
Term financing....................... 3,600 -- 3,600
Subordinate debt to existing
shareholders....................... 2,500 -- 2,500
Subordinated debt to AMI............. 2,000 (500) 1,500
Liabilities assumed and acquisition
costs.............................. 6,100 20 6,120
----------- ----------- ----------
20,285 (480) 19,805
----------- ----------- ----------
Fair value of tangible assets
acquired:
Cash............................ 296 -- 296
Receivables..................... 6,733 -- 6,733
Inventory....................... 10,444 (750) 9,694
Prepaids........................ 810 -- 810
Property, plant and equipment... 1,557 -- 1,557
----------- ----------- ----------
19,840 (750) 19,090
----------- ----------- ----------
Cost in excess of fair value of
assets............................. $ 445 $ 270 $ 715
=========== =========== ==========
The operations of Velva Sheen for the periods from November 10, 1994,
have been included in the Company's consolidated statements of operations.
(iii) COSTS ASSOCIATED WITH UNSUCCESSFUL ACQUISITIONS -- During 1995
and 1993, BSI incurred costs of $55,000 and $89,000, respectively, related to
unsuccessful acquisition ventures. These costs are classified as other
expense in the accompanying consolidated statements of operations.
(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, BSI 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. Previously, the Company's year-end was December
31.
F-27
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) REVENUE RECOGNITION -- Sales are recognized when finished garments are
shipped 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 1995 1994
- ------------------------------------- ------ --------- ---------
Blank garments....................... LIFO $ 11,074 $ 9,124
Printed garments..................... LIFO 3,174 2,570
--------- ---------
14,248 11,694
Less -- LIFO reserve................. (231) (195)
--------- ---------
Total LIFO................. 14,017 11,499
--------- ---------
Manufactured garments................ FIFO 1,676 1,989
Blank and printed garments........... FIFO 7,878 11,629
--------- ---------
Total FIFO................. 9,554 13,618
--------- ---------
Total inventory............ $ 23,571 $ 25,117
========= =========
For financial statement purposes, the Company follows the specific
identification method whereby LIFO is determined on an item-by-item basis. For
federal income tax reporting purposes, LIFO is determined utilizing the
dollar-value method using one homogenous pool. For federal income tax reporting
purposes, the Company's LIFO inventories were as follows (in thousands):
1995 1994
--------- ---------
Tax LIFO cost........................ $ 12,991 $ 10,671
Book LIFO cost....................... 14,017 11,499
Cost of goods sold reflects a LIFO charge of $36,000 and $4,000 in 1995 and
1994, respectively, and a benefit of $84,000 in 1993.
(f) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
stated at cost. Depreciation is provided over the estimated useful lives of the
respective assets using the straight-line method. Expenditures for additions,
major renewals and betterments are capitalized, and expenditures for maintenance
and repairs are charged against income as incurred. When properties are retired
or otherwise disposed of, the cost thereof and the applicable accumulated
depreciation are removed from the respective accounts and the resulting gain or
loss is reflected in the consolidated statements of operations.
The estimated useful life for each of the major asset categories is as
follows:
Land................................. --
Building............................. 39 years
Machinery and equipment.............. 5-7 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. Subsequent to acquisitions, the Company evaluates whether later events
and circumstances have occurred that indicate the remaining estimated useful
life of costs in excess of fair value of tangible assets acquired may warrant
revisions or that the remaining balance of such costs may not be recoverable.
F-28
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other intangible assets at December 30, 1995 and December 31, 1994 include
non-competition agreements, deferred financing costs and licenses. The costs of
noncompetition 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.
(h) ADVERTISING -- The Company expenses the production cost of advertising
the first time the advertising takes place, except for direct-response
advertising which is capitalized and amortized over its expected period of
future benefits.
Direct-response advertising consists primarily of catalogues that include
order phone numbers for the Company's products. The capitalized costs of the
advertising are amortized over the year to which the catalogue relates.
At December 30, 1995, $176,000 of advertising was reported as an asset.
Advertising expense was approximately $930,000, $579,000 and $140,000, in 1995,
1994 and 1993, 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 4,844,125 shares
(127,772 shares on a pre-split basis) of common stock at $.0003 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 pursuant to the
Merger Agreement (See Note 9).
(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 Company will adopt the provisions of SFAS No. 121 during the
first quarter of 1996. Management does not expect such adoption to have a
material effect on the Company's financial condition or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION(SFAS No. 123). SFAS
No. 123 provides that entities may recognize expense for stock-based awards
based on their fair value at the date of grant. For those entities who elect not
to follow this methodology of expense recognition, SFAS No. 123 requires pro
forma disclosure of what earnings and earnings per share would have been had
this methodology of expense recognition been applied. The Company does not
intend to adopt the expense recognition provisions of SFAS No. 123, but will be
required to provide the pro forma disclosures beginning in 1996.
F-29
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(k) RECLASSIFICATIONS -- Certain amounts in the 1994 and 1993 consolidated
financial statements have been reclassified to conform to the 1995 presentation.
(3) DEBT --
(a) CREDIT AGREEMENT -- BSI has a credit agreement, as amended on June 2,
1995, with a financial institution which provides for borrowings of up to $35
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
two term loans of up to an aggregate of $4 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
November 10, 1997, with an option to renew for an additional one-year period.
Amounts borrowed pursuant to the revolver and $1 million of the term loan bear
interest at the lender's base rate, as defined, plus 1.5% (10% at December 30,
1995 and December 31, 1994). Amounts borrowed pursuant to the $3 million term
loan bear interest at the lender's base rate, as defined, plus 3% (11.5% at
December 30, 1995 and December 31, 1994), and both loans are payable in monthly
installments aggregating $133,333, plus interest, through November 10, 1997,
when all unpaid principal is due. Available borrowings under the credit
agreement are subject to the level of the eligible accounts receivable and
inventory. At year-end, BSI had $2.5 million 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 BSI. The credit agreement requires compliance with certain
financial covenants, as defined, including a minimum adjusted net worth,
interest coverage ratio, debt service coverage ratio, current ratio and a
maximum debt service coverage ratio and leverage ratio, and prohibits BSI from
paying cash dividends on common stock, incurring additional debt and prepaying
subordinated debt. BSI was not in compliance with these provisions at year-end.
Subsequent to year-end, BSI amended its loan agreement with its primary lender,
Fleet Capital (Fleet). The amendment waived existing covenant violations and
established new financial covenants. BSI was in compliance with the new
financial covenants at March 31, 1996.
In a separate amendment subsequent to year-end, BSI amended its loan
agreement with Fleet whereby the borrowing base is redefined and allows for the
issuance of additional documentary letters of credit for a period of time
without reducing BSI's collateral limitation. The Company's largest shareholder,
Equus II, Inc., has provided a limited guaranty in favor of Fleet to support the
letters of credit. Warrants representing 834,752 common shares of the Company
have been issued to Equus as consideration for the guarantee. The warrants have
an estimated fair value of zero at the date of grant.
Amounts borrowed pursuant to the credit agreement consist of the following
at year-end (in thousands):
1995 1994
--------- ---------
Revolving loan....................... $ 20,693 $ 18,885
Term loans........................... 3,500 3,909
--------- ---------
24,193 22,794
Less -- Current portion.............. (22,293) (20,091)
--------- ---------
Long-term portion.................... $ 1,900 $ 2,703
========= =========
F-30
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) SUBORDINATED DEBT -- The following summarizes the borrowings at
year-end (dollars in thousands):
INTEREST
1995 1994 RATE
--------- --------- -----------
Senior subordinated debt............. $ 2,760 $ 2,756 12%
Other subordinated debt.............. 956 956 10% to 12%
Subordinated debt due to
nonshareholders.................... -- 2,000 8%
--------- ---------
$ 3,716 $ 5,712
========= =========
On November 10, 1994, in connection with the Velva Sheen acquisition, BSI
incurred additional indebtedness as follows:
a. Three existing shareholders of the Company purchased $2.5 million
in new senior subordinated debt and one shareholder converted $1 million of
other subordinated debt to senior subordinated debt. The debt was issued at
a discount of $744,000 to give effect to the estimated fair value of stock
purchase warrants issued in connection with the new debt (see Note 5). The
discount is being amortized into interest expense using the effective
interest rate method during the period from issuance through the maturity
date of the senior debt which is December 31, 2001. Interest is payable
quarterly beginning March 31, 1995, and 16 quarterly principal payments of
$218,750 are due beginning March 31, 1998.
b. Other subordinated debt matures December 31, 2002; interest is
payable quarterly beginning March 31, 1995, and 20 quarterly principal
payments of $47,814 are due beginning March 31, 1998. The interest rate is
12% on $468,785 of this debt and 10% on the balance.
c. Subordinated debt due to nonshareholders is due to AMI. The
Company exercised its option as part of the purchase agreement to prepay
this debt in 1995 whereby a discount of $500,000 was realized and recorded
as a reduction of previously recorded goodwill (Note 1(c)). In addition, an
additional discount of $500,000 was negotiated subsequent to the
acquisition date and recorded as extraordinary income.
(c) BRAZOS EMBROIDERY DEBT -- The following summarizes the borrowings at
year-end (in thousands):
1995
---------
Industrial revenue bonds............. $ 681
Term loan............................ 150
---------
831
Less -- Current portion.............. (713)
---------
Long-term portion.................... $ 118
=========
On December 1, 1995, in connection with the Needleworks, Inc. acquisition,
BEI assumed indebtedness as follows:
a. The Industrial Revenue Bonds (the Bonds) bear interest at a
floating weekly rate which approximates 5.8% at year-end. 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 of $2,083 through
April 1996, $4,166 through April 2002 and $6,250 through April 2007. 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
F-31
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 sheet.
b. The term loan bears interest at prime plus 1% which approximates
9.5% at year-end. The loan is secured by certain equipment and is to be
repaid with monthly payments of interest beginning February 1, 1995 and 33
equal monthly principal payments of $4,545 beginning June 1, 1996.
(d) CAPITAL LEASES -- The Company has entered into capital leases for
various equipment. The debt associated with such leases at year-end is as
follows (in thousands):
1995
---------
Capital lease obligation (net of $270
of interest)....................... $ 1,096
Less -- Current portion.............. (218)
---------
Long-term portion.................... $ 878
=========
Maturities of all of the borrowings discussed above are as follows at
year-end (in thousands):
AMOUNT
-------
1996................................. $23,224
1997................................. 2,198
1998................................. 325
1999................................. 297
2000................................. 77
Thereafter........................... 3,715
-------
$29,836
=======
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 rates offered for debt of the same remaining maturities. The
estimated fair value of the fixed rate subordinated debt at year-end is
$3,857,000 and its carrying amount is $3,716,000.
(4) INCOME TAXES --
The Company adopted, effective January 1, 1993, Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires that deferred tax liabilities or assets be recorded using the tax rate
expected to be in effect when taxes are actually paid or recovered.
F-32
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (credit) for income taxes includes the following components
(in thousands):
1995 1994 1993
--------- --------- ---------
Currently payable (receivable):
Federal......................... $ (300) $ 136 $ 317
State and local................. -- 83 10
--------- --------- ---------
(300) 219 327
--------- --------- ---------
Deferred:
Federal --
Depreciation............... 240 32 (19)
Tax net operating loss
carryforward............ (1,411) -- --
LIFO inventory............. 12 9 19
Inventory reserves......... 219 24 (143)
Inventory cost
capitalization.......... (115) (138) 114
Accounts receivable
reserves................ (158) 20 (59)
Valuation allowance........ 1,339 -- --
Other, net................. (164) (67) 15
--------- --------- ---------
(38) (120) (73)
--------- --------- ---------
State and local................. -- -- --
--------- --------- ---------
$ (338) $ 99 $ 254
========= ========= =========
The following is a reconciliation between the statutory federal income tax
rate and the effective rate shown above (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Computed provision (credit) for
federal income taxes at the
statutory rate..................... $(1,459) 34 % $ 8 34 % $ 233 34 %
State and local income taxes, net of
federal income tax benefit......... -- -- 24 100 % 30 4 %
Valuation allowance.................. 1,339 (31 )% -- --
Other................................ (218) 5 % 67 279 % (9 ) (1 )%
------- ---- ------ ---- ------ ----
$ (338) 8 % $ 99 413 % $ 254 37 %
======= ==== ====== ==== ====== ====
</TABLE>
F-33
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At year-end the net deferred tax asset consisted of the following (in
thousands):
1995 1994
--------- ---------
Deferred tax liabilities:
Tax depreciation over book
depreciation.................. $ (361) $ (120)
LIFO inventory.................. (455) (442)
Inventory reserves.............. (133) 86
Other........................... (187) 361
--------- ---------
(1,136) (115)
--------- ---------
Deferred tax assets:
Inventory cost capitalization... 476 360
Accounts receivable reserves.... 276 118
Employee benefits............... 139 83
Other, net...................... 173 (368)
Net operating loss
carryforward.................. 1,411 --
Valuation allowance............. (1,339) --
--------- ---------
1,136 193
--------- ---------
Net deferred tax
asset.............. $ -- $ 78
========= =========
The regular tax net operating loss of approximately $4.3 million was
partially utilized in 1995 to offset approximately $900,000 of taxable income
from prior years as a loss carryback claim. The remainder can be carried forward
and used to reduce future taxable income through 2010. The valuation allowance
is required due to the uncertainty of realizing the net deferred tax asset
through future operations.
(5) SHAREHOLDERS' EQUITY --
(a) COMMON STOCK -- During 1992, the Company issued 1,895,613 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.
During 1993, BSI issued 189,561 shares (5,000 shares on a pre-split basis)
of common stock to an existing shareholder and former owner of a division of BSI
as a final adjustment to the purchase price paid for such division.
Shareholders' equity and costs in excess of fair value of assets acquired were
increased by $40,000, respectively, in order to record these shares.
(b) PREFERRED STOCK -- On August 29, 1994, BSI distributed its investment
in another company to its shareholders to redeem its preferred stock (Series 1).
(c) EMPLOYEE STOCK OPTIONS -- During 1994, the board of directors of the
Company authorized a stock option plan which provides that options may be
granted to key employees and officers. Common stock issued under this plan may
not exceed 2,274,735 shares (60,000 shares on a pre-split basis). In
management's opinion, options granted under this plan are at exercise prices
which are not less than the fair value of the Company's stock at the date of
grant. There were no options issued under this plan during 1994. Options granted
under this plan during 1995 generally vest ratably over a period of three years
beginning January 1, 1996.
During 1991 and 1992, the Company granted to an employee options to
purchase 85,682 shares (2,260 shares on a pre-split basis) of its common stock
at prices ranging from $.13 to $.36 per share ($5.00 to $13.75 per share on a
pre-split basis). In management's opinion, these options were at exercise prices
which
F-34
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were not less than the fair value of the Company's stock at the date of grant.
These options were canceled during 1995 upon resignation from employment by this
employee.
Option activity for 1993, 1994 and 1995 is summarized as follows:
SHARES RANGE OF
SUBJECT TO OPTION PRICES
OPTION PER YEAR
----------- --------------
Balance at January 1, 1993........... 85,682 $ .13 - $.36
Options granted................. -- --
Options exercised............... -- --
-----------
Balance at December 31, 1993......... 85,682 $ .13 - $.36
Options granted................. -- --
Options exercised............... -- --
-----------
Balance at December 31, 1994......... 85,682 $ .13 - $.36
Options granted................. 2,159,103 $ .40 - $.79
Options exercised............... -- --
Options canceled................ (85,682) $ .13 - $.36
-----------
Balance at December 30, 1995......... 2,159,103 $ .40 - $.79
===========
Exercisable at December 30, 1995..... --
===========
Shares reserved for future grants:
At December 31, 1994............ 2,274,735
At December 30, 1995............ 115,632
(d) STOCK PURCHASE WARRANTS -- In 1992, warrants to purchase 276,229
shares (7,286 shares on a pre-split basis) at prices ranging from $.24 to $.36
per share were granted to three shareholders. The exercise price is determined
by the date of exercise as specified in the warrant. The warrants are
exercisable in whole or in part at any time until March 31, 1997, when any
remaining warrants expire. In management's opinion, warrants granted were at
exercise prices which were not less than fair value of the Company's stock at
the date of grant.
On November 10, 1994, 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 2,610,145 shares (68,847 shares on a
pre-split basis) of the Company's common stock at a purchase price of $.0003 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 2,610,145 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 (see Note 3). The warrants are exercisable in
whole or in part until December 31, 2004.
On December 1, 1995, in connection with the Needleworks, Inc. acquisition,
the Company issued warrants to the seller to purchase 620,282 shares (16,361
shares on a pre-split basis) of the Company's common stock at a purchase price
of $.0003 per share. The warrants were valued at zero at the date of the
acquisition. The warrants expire December 31, 2003. The exercise period begins
on the earlier of the date the Company completes an initial public stock
offering, the Company releases all indemnification claims against the seller,
other major transactions (as defined) occur or June 30, 1997.
As discussed in Note 3(a), warrants representing 834,752 common shares
(22,018 shares on a pre-split basis) were issued to Equus in January 1996. The
warrants, which have an exercise price of $.0003 per
F-35
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share were valued at zero on the date of grant. The warrants are exercisable in
whole or in part at any time prior to January 2006, when any remaining warrants
expire.
Warrant activity for 1993, 1994 and 1995 is summarized as follows:
SHARES SUBJECT RANGE OF EXERCISE
TO WARRANTS PRICES PER YEAR
-------------- -----------------
Balance at January 1, 1993.............. 276,228 $ .2400 - $.3600
Warrants granted................... -- --
Warrants exercised................. -- --
-------------- -----------------
Balance at December 31, 1993............ 276,228 $ .2400 - $.3600
Warrants granted................... 2,610,145 $ .0003
Warrants exercised................. -- --
-------------- -----------------
Balance at December 31, 1994............ 2,886,373 $ .0003 - $.3600
Warrants granted................... 620,282 $ .0003
Warrants exercised................. -- --
-------------- -----------------
Balance at December 30, 1995............ 3,506,655 $ .0003 - $.3600
============== =================
(6) MANDATORILY REDEEMABLE PREFERRED STOCK --
The Company has authorized 25,000,000 shares of preferred stock, $.01 par
value, issuable in series. The Company issued 650,000 and 300,000 shares of its
A-1 and A-2 preferred stock, respectively, in connection with the Needleworks,
Inc. acquisition (see Note 1). These shares were assigned a fair value and
redemption value of $1 per share for a total value of $950,000 less
approximately $5,000 of reductions as stipulated in the purchase agreement.
These shares do not pay dividends and are not convertible into common stock.
These shares are redeemable together at any time at the option of the Company
and have a mandatory redemption date at the earlier of (i) the date the Company
completes an initial public stock offering or major transaction occurs, as
defined, or (ii) the later of the date the subordinated debt is repaid or
December 31, 2003. Accordingly, these shares have been presented outside of
shareholders' equity in the accompanying consolidated balance sheets.
(7) 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 $159,000 and $89,000,
respectively, pursuant to the Plan.
(b) DEFINED BENEFIT PENSION PLAN -- Certain Velva Sheen division employees
covered by a collective bargaining agreement participate in a defined benefit
plan. The benefits to eligible employees are based primarily on years of
service. The Company's policy is to contribute at least the amount required by
the Employee Retirement Income Security Act of 1977 as determined by consulting
actuaries. The assets of this plan are invested primarily in mutual funds.
F-36
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the net periodic pension cost, the status of the
defined benefit plan and the assumptions used in computing this information at
year-end (in thousands):
1995 1994
--------- ---------
Service cost......................... $ 25 $ 4
Interest cost........................ 79 14
Actual loss (return) on plan
assets............................. (161) 6
Net amortization and deferral........ 57 (24)
--------- ---------
Total net periodic pension
cost.................... $ -- $ --
========= =========
Actuarial present value of benefit
obligations:
Vested benefit obligation....... $ (1,207) $ (1,018)
Non-vested benefit obligation... (38) (32)
--------- ---------
Accumulated benefit obligation....... (1,245) (1,050)
Plan assets at fair value............ 1,498 1,417
--------- ---------
Plan assets in excess of
projected benefit
obligation.............. 253 367
Unrecognized net loss................ 118 4
--------- ---------
Prepaid pension cost....... $ 371 $ 371
========= =========
The actuarial assumptions were:
1995 1994
--------- ---------
Discount rate........................ 7.0% 7.75%
Rate of return on assets............. 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.
(8) 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 BSIH's
shareholders. The Company also has two leases for facilities in College Station,
Texas, with a partnership which is controlled by certain shareholders of BSIH.
The Company is obligated to pay all applicable taxes and insurance expenses
pursuant to the terms of both of these leases. Future minimum lease payments
under noncancellable operating leases with initial or remaining terms of one
year or more at year-end, are as follows (in thousands):
RELATED UNRELATED
PARTIES PARTIES
------- ---------
1996................................. $ 258 $ 986
1997................................. 258 529
1998................................. 258 342
1999................................. 225 326
2000................................. 222 309
Thereafter........................... 412 122
------- ---------
$ 1,633 $ 2,614
======= =========
Total lease expense recorded during 1995, 1994 and 1993 was approximately
$1,713,000, $793,000 and $638,000, respectively, of which $258,000, $266,000 and
$354,000, respectively, was to related parties.
During 1993, BSI paid consulting fees of $30,000 to two shareholders for
investment advisory services.
F-37
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) EMPLOYMENT AND NONCOMPETITION AGREEMENTS -- The Company has entered
into employment and noncompetition 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 noncompetition
agreements expire at various times through December 31, 1998. The minimum
payments for salaries to be made under these agreements subsequent to year-end
are $294,000 in 1996, $272,000 in 1997 and $275,000 in 1998. During 1995, 1994
and 1993, respectively, compensation expense recognized by the Company pursuant
to such employment and noncompetition agreements was $416,000, $489,000 and
$855,000, 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 30, 1995, the Company was
committed to purchase approximately $3.8 million under such agreements.
(9) SUBSEQUENT EVENTS (UNAUDITED) --
(a) AGREEMENT OF MERGER WITH SUN SPORTSWEAR, INC. -- On November 13, 1996,
the board of directors of BSI executed a merger agreement with Sun Sportswear,
Inc. ("Sun") whereby BSI will merge with and into Sun in a reverse acquisition
(the "Merger"). Following the Merger, Sun, as the surviving corporation, will
change its name to Brazos Sportswear, Inc. The principal business operations
following the Merger will consist of the businesses previously conducted by BSI
and Sun, which is the design, sourcing, printing and marketing of sportswear
primarily to mass merchandisers in the United States. The Merger is expected to
be completed during the first quarter of 1997.
The Merger will be treated as a recapitalization of BSI, with BSI as the
accounting acquiror (I.E., a "reverse acquisition") and will be accounted for
under the "purchase" method of accounting, in accordance with generally
accepted accounting principles.
CONVERSION OF BSI CAPITAL STOCK
On the effective date of the Merger (the "Effective Date"), each share of
BSI Common Stock will be converted into 37.912252 shares of Sun Common Stock. As
a result of the conversion, the former holders of BSI Common Stock will own
approximately 88% of the outstanding Sun Common Stock as of the Effective Date,
assuming the exercise of all outstanding BSI and Sun warrants and options but
not the conversion of Sun Convertible Preferred Stock. On the Effective Date,
each share of BSI Preferred Stock will be converted into one share of Sun
Preferred Stock of the comparable series, and as a result, the former holders of
BSI Preferred Stock will own 100% of the Sun Preferred Stock outstanding as of
the Effective Date. A majority of the Preferred Stock series will be
convertible, under certain circumstances, into Sun Common Stock at $2.20 per
share. If the Sun Convertible Preferred Stock is immediately converted into Sun
Common Stock, the former holders of BSI Capital Stock would own 89.6% of the
outstanding Sun Common Stock as of the Effective Date, assuming the exercise of
all outstanding BSI and Sun warrants and options. No fractional shares are to be
issued as a result of the conversion of the BSI Common Stock, and in lieu
thereof, Sun will make a cash payment attributable to such fractional shares
based on the lesser of $2.20 per share or the closing price per share for the
Sun Common Stock on the Nasdaq/NMS on the last trading day preceding the
Effective Date. Additionally, on the Effective Date, each then outstanding
option and warrant to purchase BSI Common Stock will be converted into an option
or warrant, as the case may be, to purchase shares of Sun Common Stock based on
the 37.912252 share conversion rate. The exercise price per share of such option
or warrant to purchase Sun Common Stock will be adjusted to take into account
the conversion rate; otherwise the terms and conditions of such option or
warrant will be the same as the options or warrants so converted.
F-38
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONVERSION OF SUN COMMON STOCK
On the Effective Date, each holder of shares of Sun Common Stock
outstanding immediately prior to the Effective Date (other than Seafirst, which
holds approximately 66% of the outstanding shares of Sun Common Stock and
shareholders who have made a non-cash election), will have 50% of such shares
converted into the right to receive $2.20 in cash per share and will retain the
remaining 50% of such shares. If none of such Sun shareholders makes a non-cash
election they will own in the aggregate approximately 4.7% of the outstanding
Sun Common Stock as of the Effective Date, assuming the exercise of all
outstanding BSI and Sun warrants and options but not the conversion of Sun
Convertible Preferred Stock. In the alternative, if all such holders elect to
retain their respective shares of Sun Common Stock, they will own in the
aggregate 8.3% of the outstanding Sun Common Stock as of the Effective Date,
assuming the exercise of all outstanding BSI and Sun warrants and options but
not the conversion of Sun Convertible Preferred Stock. On the Effective Date,
except as discussed below, 1,834,676 shares of Sun Common Stock held by Seafirst
immediately prior to the Effective Date (representing 48.3% of the shares of Sun
Common Stock held by Seafirst) will be converted into the right to receive $2.20
per share, payable $1.3824 per share in cash and $.8176 per share by the
issuance of the Subordinated Note. However, to the extent the other Sun
Shareholders elect to retain Sun Common Stock, for each share retained, Seafirst
will have an additional share of its Sun Common Stock converted into cash in the
amount of $2.20 per share. Upon the completion of all conversions of shares of
Sun Common Stock, (i) 48.9% of all shares of Sun Common Stock outstanding
immediately prior to the Effective Date will have been converted into
consideration totaling $6,179,637, all of which will consist of cash except for
$1,500,000, which will be payable by the issuance of the subordinated note to
Seafirst, and (ii) 51.1% of all such shares of Sun Common Stock will remain
outstanding. No fractional shares will be issued upon the conversion of the Sun
Common Stock, and in lieu thereof, Sun will make a cash payment attributable to
fractional shares based on the lesser of $2.20 per share or the closing price
per share for the Sun Common Stock on the Nasdaq/NMS on the last trading day
immediately preceding the Effective Date.
A preliminary summary of the Merger, utilizing September 30, 1996 balances,
is as follows:
(000'S OMITTED)
----------------
Fair value of assets acquired
including:
Accounts receivable............. $ 6,530
Inventories..................... 16,916
Other current assets............ 3,591
Noncurrent assets............... 98
Negative goodwill............... (3,361)
----------------
Total fair value of assets
acquired........................... 23,774
----------------
Less:
Purchase price (5,748,500 shares
at $2.20 per share)............. 12,647
Transaction costs............... 1,543
Financing costs................. 125
Severance costs................. 108
----------------
Total purchase price................. 14,423
----------------
Liabilities assumed.................. $ 9,351
================
It is anticipated that the purchase price will be financed through a
combination of borrowings under BSI's credit agreements ($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
F-39
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Seafirst ($1.5 million). In connection with this transaction, the above proceeds
will be used to retire $3.0 million of the subordinated debentures payable to
the seller of Plymouth. In connection with this transaction, the Company intends
to increase its credit facility from $65 million to $85 million. The credit
facility will include a $73.2 million revolving line of credit.
The following is a summary of the sources and uses of cash to complete the
Merger (000's omitted):
Funding requirements:
Purchase of Sun shares
Cash consideration......... $ 4,680
Debt consideration......... 1,500
Transaction costs............... 1,543
Financing costs................. 125
Prepayment of subordinated
debt............................ 3,000
----------------
$ 10,848
================
Funding sources:
Borrowings under credit
facility........................ $ 7,348
Subordinated note to Seafirst... 1,500
Mandatorily redeemable preferred
stock........................... 2,000
----------------
$ 10,848
================
The Merger, which has been approved by the boards of directors of both the
Company and Sun, is subject to approval by regulatory authorities and the
shareholders of the Company and Sun.
(b) ACQUISITION OF PLYMOUTH MILLS, INC. -- Effective August 2, 1996, BSI
acquired substantially all of the assets, net of the assumption of certain
specified liabilities, of Plymouth Mills, Inc. (Plymouth), a New York
corporation. The purchase price is expected to be approximately $36 million,
pending the outcome of an earnout period and finalization of appraisals,
evaluations and estimates of fair value, which are not currently complete.
Pursuant to the related asset purchase agreement, the purchase price has been
financed through a combination of borrowings under BSI's revolving credit
agreement ($18.6 million), the issuance of subordinated debentures in the
capital markets ($3.5 million), the issuance of BSI mandatorily redeemable
preferred stock, series A ($2.5 million), and the issuance of subordinated
debentures to the seller ($10.0 million). In connection with this transaction,
the maximum amount available under BSI's credit facility was increased from $35
million to $65 million. This transaction will be accounted for as a "purchase"
under generally accepted accounting principles.
In connection with the acquisition of Plymouth, BSI exchanged subordinated
debt payable to related parties (carrying value of $3,719,000 at August 2, 1996)
for 4,456,000 shares of a newly created series of the Company's mandatorily
redeemable preferred stock (Series B). This preferred stock will be recorded at
its fair value, estimated to be $4,456,000 based on its redemption price of
$1.00 per share. The related loss on this exchange transaction of $737,000 will
be recorded to additional paid in capital as the transaction is between related
parties.
The Series A mandatorily redeemable preferred stock contains detachable
warrants to purchase 2,294,677 shares (60,526 shares on a pre-split basis) of
the Company's common stock at a purchase price of $.0003 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 2,294,677 shares
of the Company's common stock issuable pursuant to the exercise of the warrants
at the date of grant. The warrants are exercisable in whole or in part until
August 2006.
The $3.5 million principal amount of subordinated debt contains detachable
warrants to purchase 1,714,695 shares (45,228 shares on a pre-split basis) of
the Company's common stock at a purchase price of
F-40
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$.0003 per share. These warrants also provide put rights to the holders. The
puts, which survive and apply to the underlying common stock upon exercise, may
be exercised beginning in 2001 and prior to a qualified initial public offering
(as defined). 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 1,714,695 shares of the Company's common stock issuable pursuant
to the exercise of the warrants at the date of grant. These warrants expire on
the earlier of August 2006 or six years after repayment of the $3.5 million
subordinated note.
The Company also issued to the seller warrants to purchase 1,137,368 shares
(30,000 shares on a pre-split basis) of its common stock at a purchase price of
$.79 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.
F-41
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 28, 1996 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS)
SEPTEMBER 28, DECEMBER 30,
1996 1995
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash............................ $ 328 $ 755
Accounts receivable, net of
allowance for doubtful
accounts of $1,610 and $967 in
1996 and 1995, respectively... 40,963 13,294
Inventories..................... 37,358 23,571
Other current assets............ 1,303 990
-------------- -------------
Total current assets....... 79,952 38,610
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at
cost, net.......................... 6,507 5,080
OTHER ASSETS:
Intangible assets, net.......... 22,703 2,904
Other........................... 484 476
-------------- -------------
Total other assets......... 23,187 3,380
-------------- -------------
Total assets............... $109,646 $47,070
============== =============
The accompanying notes to consolidated condensed financial statements
are an integral part of these consolidated condensed financial statements.
F-42
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 28, 1996 AND DECEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Borrowings pursuant to revolving credit
agreement............................. $ 36,662 $ 20,693
Current portion of long-term debt....... 3,186 2,531
Current portion of subordinated debt due
to related parties.................... 5,700 --
Accounts payable and accrued expenses... 28,172 16,978
------------- ------------
Total current liabilities.......... 73,720 40,202
------------- ------------
NONCURRENT LIABILITIES:
Long-term obligations................... 10,890 2,896
Subordinated debt due related parties... 10,000 3,716
Subordinated debt....................... 3,500 --
Deferred income taxes................... 423 --
------------- ------------
Total non-current liabilities...... 24,813 6,612
------------- ------------
MANDATORILY REDEEMABLE PREFERRED
STOCK................................. 7,447 945
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par, 50,000,000
shares authorized, 12,532,084 and
10,078,593 shares outstanding at
September 28, 1996 and
December 30, 1995, respectively....... 3 2
Additional Paid-in capital.............. 2,588 2,799
Retained earnings (deficit)............. 1,075 (3,490)
------------- ------------
Total shareholders' equity
(deficit)......................... 3,666 (689)
------------- ------------
Total liabilities and shareholders'
equity............................ $ 109,646 $ 47,070
============= ============
The accompanying notes to consolidated condensed financial statements
are an integral part of these consolidated condensed financial statements.
F-43
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1996 1995
------------ ------------
NET SALES............................... $ 127,531 $ 99,995
COSTS OF GOODS SOLD..................... 94,869 80,202
------------ ------------
Gross Profit....................... 32,662 19,793
OPERATING EXPENSES:
Selling, general and administrative
expenses.......................... 23,805 18,824
Amortization of intangible assets
and non-compete payments.......... 366 219
------------ ------------
Total operating
expenses............. 24,171 19,043
Operating income................... 8,491 750
------------ ------------
OTHER EXPENSE (INCOME):
Interest expense................... 3,063 2,529
Other, net......................... (280) --
------------ ------------
Total other (income)
expense, net......... 2,783 2,529
------------ ------------
Income (loss) before provision for
income taxes and extraordinary
item.............................. 5,708 (1,779)
PROVISION (CREDIT) FOR INCOME TAXES..... 1,065 (512)
------------ ------------
Net income (loss) before
extraordinary item................ 4,643 (1,267)
EXTRAORDINARY ITEM, GAIN ON
EXTINGUISHMENT OF DEBT................ -- 500
------------ ------------
Net income (loss).................. $ 4,643 $ (767)
============ ============
PER SHARE DATA:
Earnings (loss) per common and
common equivalent share:
Primary -- before extra-
ordinary item................. $ .24 $ (.08)
-- extraordinary item... -- .03
------------ ------------
-- net income (loss).... $ .24 $ (.05)
============ ============
Fully Diluted -- before
extraordinary item............ $ .23 N/A
-- extraordinary
item........... -- N/A
------------
-- net income
(loss)......... .23 N/A
============
Weighted average number of common
and common equivalent shares......
Primary.................. 19,638,395 14,922,148
============ ============
Fully Diluted............ 20,503,249 N/A
============ ============
The accompanying notes to consolidated condensed financial statements
are an integral part of these consolidated condensed financial statements.
F-44
<PAGE>
BSI HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 (UNAUDITED)
(DOLLARS IN THOUSANDS)
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ 4,643 $ (767)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation.................... 851 530
Amortization of intangible
assets......................... 366 219
Change in assets and liabilities
net of effects of acquisition
related items
Gain in extinguishment of
debt.................... -- (500)
Accounts receivable........ (18,757) (12,201)
Inventories................ (7,692) (4,123)
Other current assets....... (204) 144
Other noncurrent assets.... (1,095) (312)
Accounts payable and
accrued expenses............. 9,408 12,419
Deferred income taxes...... 423 (62)
--------- ---------
Net cash used in
operating activities............... (12,057) (4,653)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Purchase of certain net assets
of Plymouth Mills, Inc......... (18,000) --
Purchases of property and
equipment, net................. (410) (449)
--------- ---------
Net cash used in inventing
activities................... (18,410) (449)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings pursuant to
revolving credit agreement..... 15,969 6,494
Payments on shareholder notes... 50 24
Borrowings of long-term debt
pursuant to credit
agreements..................... 11,538 (1,496)
Issuance of Preferred Stock..... 2,483 --
--------- ---------
Net cash provided by (used
in) financing
activities.............. 30,040 5,022
--------- ---------
NET INCREASE (DECREASE) IN CASH...... (427) (80)
CASH AT BEGINNING OF PERIOD.......... 755 154
--------- ---------
CASH AT END OF PERIOD................ $ 328 $ 74
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......... $ 2,638 $ 2,380
Cash paid (refunded) for income
taxes........................... 24 (453)
Conversion of subordinated debt
to mandatorily redeemable
preferred stock............... 4,456 --
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Capital lease financing......... 650 377
The accompanying notes to consolidated condensed financial statements
are an integral part of these consolidated condensed financial statements.
F-45
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION --
(a) GENERAL -- The consolidated condensed financial statements included
herein of BSI Holdings, Inc. (BSIH or the Company) have not been audited by
independent public accountants, but include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the requirements of the Securities and Exchange
Commission, although management believes that the disclosures included in these
financial statements are adequate to make the information not misleading.
It is suggested that these financial statements be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
included in this registration statement.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
(b) 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 4,844,125 shares
(127,772 shares on a pre-split basis) of common stock at $.0003 per share were
subject to this requirement.
All share and per share information included in the accompanying
consolidated condensed financial statements has been retroactively restated for
all periods presented to reflect a 37.912252-for-1 stock split pursuant to the
Merger Agreement. (see Note 4).
Fully diluted earnings per share reflects additional dilution due to the
use of the market price at the end of the period (assumed to be the market price
at the effective date of the Merger) as it is higher than the market price for
the period.
F-46
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(2) INVENTORIES --
The following is a summary of inventories:
AS OF AS OF
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------- ------------
Blank garments.......................... $18,602 $ 11,074
Printed garments........................ 2,645 3,174
------------- ------------
21,247 14,248
Less -- LIFO Reserve.................... (231) (231)
------------- ------------
Total LIFO......................... 21,016 14,017
------------- ------------
Manufactured garments................... 1,306 1,676
Blank and printed garments.............. 15,036 7,878
------------- ------------
Total FIFO......................... 16,342 9,554
------------- ------------
Total Inventory.................... $37,358 $ 23,571
============= ============
(3) ACQUISITION --
Effective August 2, 1996, BSIH acquired certain assets and assumed certain
liabilities of Plymouth Mills, Inc. ("Plymouth") for approximately $36
million, pending the outcome of an earnout period and finalization of
appraisals, evaluations and estimates of fair value, which are not currently
complete. This transaction has been accounted for as a purchase and,
accordingly, the results of operations of Plymouth from August 2, 1996 are
included in the consolidated condensed statements of operations for the
thirty-nine weeks ended September 28, 1996.
In connection with the acquisition, 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...... 1,216
Intangible assets.................. 1,387
Goodwill........................... 18,423
----------
36,108
Less: Cash paid for net assets.......... (18,000)
----------
$ 18,108
==========
Liabilities assumed, including:
Subordinated debt to sellers....... $ 10,000
Liabilities assumed and acquisition
costs............................. 2,851
Portion of estimated earnout (for
the 12-month period ended
September 30, 1996) and net worth
(as of August 2, 1996) payments... 5,257
----------
$ 18,108
==========
F-47
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Pursuant to the related asset purchase agreement, the purchase price has
been financed through a combination of borrowings under BSI's revolving credit
agreement ($18.6 million), the issuance of subordinated debentures in the
capital markets ($3.5 million), the issuance of BSI mandatorily redeemable
preferred stock, Series A ($2.5 million), and the issuance of subordinated
debentures to the seller ($10.0 million). In connection with this transaction,
the maximum amount available under BSI's credit facility was increased from $35
million to $65 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(a)......... $ 3,000
Note bearing annual interest at 7.75%,
maturing December 31, 2003............ 4,000
Note bearing annual interest at 7.75%,
payable in two equal installments on
March 31, 1998 and March 31, 1999..... 3,000
---------
$ 10,000
=========
- ------------
(a) This note will be repaid as part of the Sun merger transaction. See Note 5.
In connection with the acquisition of Plymouth, BSI exchanged subordinated
debt payable to related parties (carrying value of $3,719,000 at August 2, 1996)
for 4,456,000 shares of a newly created series of the Company's mandatorily
redeemable preferred stock (Series B). This preferred stock was recorded at its
fair value, estimated to be $4,456,000 based on its redemption price of $1.00
per share. The related loss on this exchange transaction of $737,000 was
recorded to additional paid-in capital as the transaction is between related
parties.
The Series A mandatorily redeemable preferred stock contains detachable
warrants to purchase 2,294,677 shares (60,526 shares on a pre-split basis) of
the Company's common stock at a purchase price of $.0003 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 2,294,677 shares
of the Company's common stock issuable pursuant to the exercise of the warrants
at the date of grant. The warrants are exercisable in whole or in part until
August 2006.
The $3.5 million principal amount of subordinated debt contains detachable
warrants to purchase 1,714,695 shares (45,228 shares on a pre-split basis) of
the Company's common stock at a purchase price of $.0003 per share. These
warrants also provide put rights to the holders. The puts, which survive and
apply to the underlying common stock upon exercise, may be exercised beginning
in 2001 and prior to a qualified initial public offering (as defined). 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 1,714,695
shares of the Company's common stock issuable pursuant to the exercise of the
warrants at the date of grant. These warrants expire on the earlier of August
2006 or six years after repayment of the $3.5 million subordinated note.
The Company also issued to the seller warrants to purchase 1,137,368 shares
(30,000 shares on a pre-split basis) of its common stock at a purchase price of
$.79 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.
F-48
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(4) PREFERRED STOCK
MANDATORILY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock consisted of the following at
September 28, 1996 and December 30, 1995:
SEPTEMBER 28, DECEMBER 30,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
BSI HOLDINGS, INC.
Series B--Redeemable preferred stock,
$.01 par, 8,000,000 shares authorized;
4,507,074 shares issued and
outstanding at September 28, 1996,
redeemable at $1.00 per share......... $ 4,507 --
Series A-1--Redeemable preferred stock,
$.01 par, 650,000 shares authorized;
650,000 shares issued and outstanding
at September 28, 1996 and December 30,
1995; $597,000 and $645,000 redemption
value at September 28, 1996 and
December 30, 1995, respectively....... 597 $ 645
Series A-2--Redeemable preferred stock,
$.01 par, 300,000 shares authorized;
300,000 shares issued and outstanding
at September 28, 1996 and December 30,
1995; $300,000 redemption value at
September 28, 1996 and December 30,
1995.................................. 300 300
BRAZOS SPORTWEAR, INC.
Series A--Redeemable preferred stock,
$.01 par, 5,000,000 shares authorized,
2,528,493 shares issued and
outstanding at September 28, 1996,
redeemable at $1.00 per share......... 2,043 --
------------- ------------
$ 7,447 $ 945
============= ============
Pursuant to the Merger, BSI Holdings, Inc. Series B Preferred Stock will be
exchanged for an equivalent number of shares of Series B-1 Preferred Stock.
Holders of the Sun Series B-1 Preferred Stock are entitled to receive cumulative
dividends of 8% annually, payable "in-kind" on a quarterly basis. The Sun
Series B-1 Preferred Stock is redeemable at the option of Sun at any time, at a
redemption price of $.01 per share, if the market price of a share of Sun Common
Stock trades at or above $3.50 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 $3.50, (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 Preferred Stock is convertible at the option of the
holder at any time prior to the time set for redemption into .4545 shares of Sun
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 Sun Series A-1
and Series A-2 Preferred Stock, respectively. The Sun Series A-1 Preferred
Shares are redeemable at any time at $.919 per share at the option of Sun 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 Sun Convertible Preferred Stock are redeemed or
converted or December 31, 2003. The preferences, rights and limitations
associated with the Sun Series A-2 Preferred Stock are identical to those in
respect of the Sun Series A-1 Preferred Stock, except that the redemption price
is $1.00 per share. The Sun Series A-1 and A-2 Preferred Stock are not
convertible.
F-49
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 Sun Series B-2 Preferred
Stock. The preferences, rights and limitations associated with the Sun Series
B-2 Preferred Stock are identical to those in respect of the Sun Series B-1
Preferred Stock, except such stock will have voting rights similar to holders of
Sun Common Stock based on the number of shares of Sun Common Stock into which it
is convertible and such shares have a redemption and liquidation preference over
the Sun Series B-1 Preferred Stock.
(5) MERGER
On November 13, 1996, the board of directors of BSI executed a merger
agreement with Sun Sportswear, Inc. ("Sun") whereby BSI will merge with and
into Sun in a reverse acquisition (the "Merger"). Following the Merger, Sun,
as the surviving corporation, will change its name to Brazos Sportswear, Inc.
The principal business operations following the Merger will consist of the
businesses previously conducted by BSI and Sun, which is the design, sourcing,
printing and marketing of sportswear primarily to mass merchandisers in the
United States. The Merger is expected to be completed during the first quarter
of 1997.
The Merger will be treated as a recapitalization of BSI, with BSI as the
accounting acquiror (I.E., a "reverse acquisition") and will be accounted for
under the "purchase" method of accounting, in accordance with generally
accepted accounting principles.
CONVERSION OF BSI CAPITAL STOCK
On the effective date of the Merger (the "Effective Date"), each share of
BSI Common Stock will be converted into 37.912252 shares of Sun Common Stock. As
a result of the conversion, the former holders of BSI Common Stock will own
approximately 88% of the outstanding Sun Common Stock as of the Effective Date,
assuming the exercise of all outstanding BSI and Sun warrants and options but
not the conversion of Sun Convertible Preferred Stock. On the Effective Date,
each share of BSI Preferred Stock will be converted into one share of Sun
Preferred Stock of the comparable series, and as a result, the former holders of
BSI Preferred Stock will own 100% of the Sun Preferred Stock outstanding as of
the Effective Date. A majority of the Preferred Stock series will be
convertible, under certain circumstances, into Sun Common Stock at $2.20 per
share. If the Sun Convertible Preferred Stock is immediately converted into Sun
Common Stock, the former holders of BSI Capital Stock would own 89.6% of the
outstanding Sun Common Stock as of the Effective Date, assuming the exercise of
all outstanding BSI and Sun warrants and options. No fractional shares are to be
issued as a result of the conversion of the BSI Common Stock, and in lieu
thereof, Sun will make a cash payment attributable to such fractional shares
based on the lesser of $2.20 per share or the closing price per share for the
Sun Common Stock on the Nasdaq/NMS on the last trading day preceding the
Effective Date. Additionally, on the Effective Date, each then outstanding
option and warrant to purchase BSI Common Stock will be converted into an option
or warrant, as the case may be, to purchase shares of Sun Common Stock based on
the 37.912252 share conversion rate. The exercise price per share of such option
or warrant to purchase Sun Common Stock will be adjusted to take into account
the conversion rate; otherwise the terms and conditions of such option or
warrant will be the same as the options or warrants so converted.
F-50
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
CONVERSION OF SUN COMMON STOCK
On the Effective Date, each holder of shares of Sun Common Stock
outstanding immediately prior to the Effective Date (other than Seafirst, which
holds approximately 66% of the outstanding shares of Sun Common Stock and
shareholders who have made a non-cash election), will have 50% of such shares
converted into the right to receive $2.20 in cash per share and will retain the
remaining 50% of such shares. If none of such Sun shareholders makes a non-cash
election they will own in the aggregate approximately 4.7% of the outstanding
Sun Common Stock as of the Effective Date, assuming the exercise of all
outstanding BSI and Sun warrants and options but not the conversion of Sun
Covertible Preferred Stock. In the alternative, if all such holders elect to
retain their respective shares of Sun Common Stock, they will own in the
aggregate 8.3% of the outstanding Sun Common Stock as of the Effective Date,
assuming the exercise of all outstanding BSI and Sun warrants and options but
not the conversion of Sun Convertible Preferred Stock. On the Effective Date,
except as discussed below, 1,834,676 shares of Sun Common Stock held by Seafirst
immediately prior to the Effective Date (representing 48.3% of the shares of Sun
Common Stock held by Seafirst) will be converted into the right to receive $2.20
per share, payable $1.3824 per share in cash and $.8176 per share by the
issuance of the Subordinated Note. However, to the extent the other Sun
Shareholders elect to retain Sun Common Stock, for each share retained, Seafirst
will have an additional share of its Sun Common Stock converted into cash in the
amount of $2.20 per share. Upon the completion of all conversions of shares of
Sun Common Stock, (i) 48.9% of all shares of Sun Common Stock outstanding
immediately prior to the Effective Date will have been converted into
consideration totaling $6,179,637, all of which will consist of cash except for
$1,500,000, which will be payable by the issuance of the subordinated note to
Seafirst, and (ii) 51.1% of all such shares of Sun Common Stock will remain
outstanding. No fractional shares will be issued upon the conversion of the Sun
Common Stock, and in lieu thereof, Sun will make a cash payment attributable to
fractional shares based on the lesser of $2.20 per share or the closing price
per share for the Sun Common Stock on the Nasdaq/NMS on the last trading day
immediately preceding the Effective Date.
A preliminary summary of the Merger, utilizing September 30, 1996 balances,
is as follows:
(000'S OMITTED)
----------------
Fair value of assets acquired
including:
Accounts receivable............. $ 6,530
Inventories..................... 16,916
Other current assets............ 3,591
Noncurrent assets............... 98
Negative goodwill............... (3,361)
----------------
Total fair value of assets
acquired........................... 23,649
----------------
Less:
Purchase price (5,748,500 shares
at $2.20 per share)............. 12,647
Transaction costs............... 1,543
Financing costs................. 125
Severance costs................. 108
----------------
Total purchase price................. 14,423
----------------
Liabilities assumed.................. $ 9,351
================
F-51
<PAGE>
BSI HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
It is anticipated that the purchase price will be financed through a
combination of borrowings under BSI's credit agreements ($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 will be used to retire $3.0 million of the
subordinated debentures payable to the seller of Plymouth. In connection with
this transaction, the Company intends to increase its credit facility from $65
million to $85 million. The credit facility will include a $73.2 million
revolving line of credit.
F-52
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Plymouth Mills, Inc.:
We have audited the accompanying balance sheet of PLYMOUTH MILLS, INC. as
of September 30, 1995, and the related statements of income and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Plymouth Mills, Inc. as of
September 30, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
November 17, 1995
F-53
<PAGE>
PLYMOUTH MILLS, INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1995
ASSETS (NOTE 10)
CURRENT ASSETS:
Cash............................ $ 33,933
Accounts receivable, net of
allowance for doubtful accounts
of $10,000 (Notes 1 and 4)..... 6,883,540
Inventories (Notes 2(a) and
3)............................. 4,954,722
Other current assets............ 282,857
--------------
Total current
assets............... 12,155,052
--------------
PROPERTY AND EQUIPMENT, at cost
(Notes 2(a) and 4):
Machinery and equipment......... 1,134,749
Leasehold improvements.......... 537,926
Office equipment................ 254,377
Furniture and fixtures.......... 83,732
Automobiles..................... 181,439
--------------
2,192,223
Less -- accumulated depreciation
and amortization............... 1,798,779
--------------
393,444
--------------
OTHER ASSETS......................... 458,135
--------------
$ 13,006,631
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(NOTE 10)
CURRENT LIABILITIES:
Subordinated notes payable to
stockholders (Note 6).......... $ 482,792
Accounts payable................ 2,376,815
Accrued salaries, wages and
payroll taxes.................. 786,408
Other current liabilities....... 411,725
Income taxes payable............ 68,341
Due to stockholders (Note 5).... 848,423
--------------
Total current
liabilities.......... 4,974,504
--------------
COMMITMENTS (Notes 4, 8, and 9)
STOCKHOLDERS' EQUITY:
Common stock, no par value:
Authorized -- 200 shares...
Issued and
outstanding -- 120
shares.................... 5,000
Retained earnings............... 8,027,127
--------------
Total stockholders'
equity............... 8,032,127
--------------
$ 13,006,631
==============
The accompanying notes to financial statements
are an integral part of these statements.
F-54
<PAGE>
PLYMOUTH MILLS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
NET SALES (Note 1)................... $ 31,995,743
COST OF GOODS SOLD................... 21,575,679
--------------
Gross profit............... 10,420,064
OPERATING EXPENSES:
Art and design.................. 1,398,029
Selling......................... 1,657,191
Royalty expense................. 452,110
Shipping........................ 878,677
General and administrative...... 1,712,129
Officers' salaries.............. 2,319,600
--------------
Total operating expense.... 8,417,736
--------------
Operating income........... 2,002,328
OTHER (INCOME) EXPENSE:
Rental expense,net of rental
income (Note 8)................ 68,290
Other rental income............. (273,748)
Interest expense................ 171,448
--------------
Net other (income)
expense................... (34,010)
--------------
Income before provision for
income taxes.............. 2,036,338
PROVISION FOR INCOME TAXES (Note
7)................................... 223,200
--------------
Net income................. 1,813,138
RETAINED EARNINGS, beginning of
year................................. 6,213,989
--------------
RETAINED EARNINGS, end of year....... $ 8,027,127
==============
AVERAGE COMMON SHARES OUTSTANDING.... $ 120
==============
EARNINGS PER SHARE................... $ 15,109
==============
The accompanying notes to financial statements are an integral part of these
statements.
F-55
<PAGE>
PLYMOUTH MILLS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,813,138
------------
Adjustments to reconcile net income
to net cash provided by
operating activities --
Bad debts....................... 164,522
Depreciation and amortization... 198,073
Change in assets and
liabilities --
Accounts receivable........... (944,963)
Inventories................... (1,228,490)
Other current assets.......... 12,783
Other assets.................. (117,202)
Accounts payable.............. 307,252
Income taxes payable.......... 68,341
Accrued expenses and other
current liabilities.......... 31,224
------------
Net cash provided by
operating activities...... 304,678
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property
and equipment................... --
Proceeds of property and
equipment....................... (95,680)
------------
Net cash used in investing
activities................ (95,680)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to stockholders.......... (273,088)
------------
Net cash used in financing
activities................ (273,088)
------------
NET DECREASE IN CASH................. (64,090)
CASH, beginning of year.............. 98,023
------------
CASH, end of year.................... $ 33,933
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest........................ $ 155,582
============
Income taxes.................... $ 126,219
============
The accompanying notes to financial statements are an integral part of these
statements.
F-56
<PAGE>
PLYMOUTH MILLS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY --
Plymouth Mills, Inc. (the "Company"), a New York Corporation, is a
manufacturer of women's and children's sportswear and screen printing for
advertising specialty items. The Company sells primarily to department stores
located throughout the United States.
At September 30, 1995, two customers comprised approximately 31% of the
outstanding accounts receivable and accounted for approximately 27% of the
Company's sales. Accounts receivable are generally due within 60 days. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management expectations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(a) INVENTORIES -- Inventories, consisting of raw materials, work-in
process and finished goods, are stated at the lower of cost (first-in,
first-out) (FIFO) method) or market.
(b) PROPERTY AND EQUIPMENT -- Depreciation of property and equipment is
computed by the straight-line and accelerated methods, over estimated useful
lives ranging from three to ten years. Improvements to leased premises are
amortized over the term of the related lease or the estimated useful life,
whichever is shorter. Additions and betterments are capitalized, and repairs and
maintenance are charged to operations as incurred. When property and equipment
is sold or retired, the cost and related accumulated depreciation or
amortization are removed from the accounts and any gain or loss is recognized
currently.
(c) ADVERTISING COSTS -- Advertising costs relating to selling are charged
to income during the period in which they are incurred. These costs amounted to
$16,314 for the year ended September 30, 1995.
(d) INCOME TAXES -- The Company, with the consent of its stockholders, has
elected to be taxed under the provisions of Subchapter S of the Internal Revenue
Code and the corresponding provisions of the New York State Franchise Tax law.
Under those provisions, corporate income or loss and any tax credits earned are
included in the stockholders' individual income tax returns. Accordingly, no
provision for federal income tax or credits is reflected in the accompanying
financial statements. The Company is subject to New York State S Corporation and
New York City income tax.
Undistributed Subchapter S earnings of approximately $7,341,000 are
included in retained earnings as of September 30, 1995.
(e) MANAGEMENT'S USE OF ESTIMATES -- The preparation of financial
statements in accordance 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 amount of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) INVENTORIES --
At September 30, 1995, inventories consist of:
1995
------------
Raw materials........................ $ 1,431,462
Work-in process...................... 2,550,117
Finished goods....................... 973,143
------------
$ 4,954,722
============
F-57
<PAGE>
PLYMOUTH MILLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) REVOLVING CREDIT LOAN -- BANK --
The Company has a revolving credit line agreement with a commercial bank
allowing the Company to borrow up to $6,000,000, based upon 80% of eligible
accounts receivable. Interest on this loan is 1/4% above the bank's prime rate
(9% at September 30, 1995). The Company granted a security interest in its
accounts receivable and on machinery and equipment as collateral for this
revolving credit line. At September 30, 1995, there was no outstanding bank
debt.
(5) DUE TO STOCKHOLDERS --
These amounts, which bear interest at the rate of 8%, are payable on
demand. Interest expense for the year ended September 30, 1995 was $94,000.
(6) SUBORDINATED NOTES PAYABLE --
The subordinated notes payable to stockholders are due on demand with
interest at 1 3/4% above the bank's designated rate (10 1/2% at September 30,
1995). The notes are subordinated to the bank's revolving credit agreement (see
Note 4). Interest expense for the year ended September 30, 1995 was $51,000.
(7) INCOME TAXES --
The following reconciles the provision for state and local income taxes
that would have resulted from application of the statutory state and local
income tax rate to the Company's actual provision for the year ended September
30, 1995.
1995
----------
Statutory state and local income tax
rate at 10.4%...................... $ 211,779
Decrease in state income tax due to
exemption, based on allocation of
state income....................... (10,198)
Decrease in state income tax from
deducting local income tax......... (3,014)
Other................................ 24,633
----------
$ 223,200
==========
The effective state and local tax rate for the year ended September 30,
1995 was 11.0%.
(8) RELATED PARTY TRANSACTIONS --
The Company's plant facilities and general office are net leased from the
stockholders for $120,000 annually through March 31, 2000. The agreement with
the stockholders enables the Company to receive all rental income from the
tenants of the building during the lease term.
As of September 30, 1995, minimum aggregate annual rental obligations,
including the rent due to stockholders, are as follows:
FOR THE YEAR ENDING GROSS ANNUAL SUBLET NET RENTAL
SEPTEMBER 30, RENTAL OBLIGATION INCOME EXPENSE
- -------------------------------- ------------------ ------- ----------
1996............................ $120,000 $30,500 $ 89,500
1997............................ 120,000 28,700 91,300
1998............................ 120,000 26,100 93,900
1999 120,000 -- 120,000
2000............................ 60,000 -- 60,000
------------------ ------- ----------
$540,000 $85,300 $ 454,700
================== ======= ==========
In addition, the Company rents a showroom office on a month-to-month basis
with an affiliate. The monthly aggregate rent is approximately $4,500.
F-58
<PAGE>
PLYMOUTH MILLS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense charged to operations on the above leases for the year ended
September 30, 1995 amounted to approximately $174,000.
(9) COMMITMENTS --
(a) LICENSE AGREEMENTS -- The Company presently has three licensing
agreements with one organization. The agreements provide for royalty payments
based on 5% of net sales of the designated products with certain annual minimum
amounts based on different categories of licensed products. The following are
the minimum royalty amounts payable:
YEAR ENDING
SEPTEMBER 30,
- -------------------------------------
1996............................ $ 325,000
1997............................ 400,000
1998............................ 300,000
------------
$ 1,025,000
============
One agreement will terminate on June 30, 1997, the other agreements will
terminate on June 30, 1998. All agreements have renewal options.
(b) LEASE -- The Company rents showroom office space under a lease
expiring in April 1999. As of September 30, 1995, minimum annual rental payments
under the operating lease are as follows:
YEAR ENDING
SEPTEMBER 30,
- -------------------------------------
1996............................ $ 161,244
1997............................ 161,244
1998............................ 161,244
1999............................ 94,059
----------
$ 577,791
==========
Rent expense charged to operations for the year ended September 30, 1995
amounted to approximately $162,000.
(c) LETTERS OF CREDIT -- At September 30, 1995, the Company had open
letters of credit of approximately $185,500 outstanding.
F-59
<PAGE>
PLYMOUTH MILLS, INC.
BALANCE SHEETS (UNAUDITED)
AUGUST 2, 1996 AND SEPTEMBER 30, 1995
1996 1995
-------------- --------------
ASSETS (Note 4)
Current assets:
Cash............................ $ 110,561 $ 33,933
Accounts receivable, net of
allowance for doubtful
accounts of $10,000........... 8,980,765 6,883,540
Inventories (Note 2)............ 6,398,180 4,954,722
Other current assets............ 135,876 282,857
-------------- --------------
Total current
assets............. 15,625,382 12,155,052
Property and equipment -- at cost,
net (Note 3)....................... 394,665 393,444
Other assets......................... 360,778 458,135
-------------- --------------
$ 16,380,825 $ 13,006,631
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
(Note 4)
Current liabilities:
Note payable -- bank............ $ 1,300,000 $ --
Acceptances payable............. 162,066 --
Accounts payable................ 1,047,725 2,376,815
Accrued expenses and other
current liabilities........... 707,256 1,198,133
Income taxes payable............ 329,650 68,341
Due to stockholders............. 531,809 1,331,215
-------------- --------------
Total current
liabilities........ 4,078,506 4,974,504
Commitments
Stockholders' equity:
Common stock, no par value:
Authorized -- 200 shares...
Issued and
outstanding -- 120
shares.................. 5,000 5,000
Retained earnings............... 12,297,319 8,027,127
-------------- --------------
Total stockholders'
equity............. 12,302,319 8,032,127
-------------- --------------
$ 16,380,825 $ 13,006,631
============== ==============
The accompanying notes to financial statements are an integral part of these
statements.
F-60
<PAGE>
PLYMOUTH MILLS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS (UNAUDITED)
FOR THE PERIODS FROM OCTOBER 1, 1995 THROUGH AUGUST 2, 1996, AND
OCTOBER 1, 1994 THROUGH JUNE 30, 1995
1996 1995
-------------- --------------
Net sales............................ $ 32,747,666 $ 22,062,072
Cost of goods sold................... 21,487,363 15,311,078
-------------- --------------
Gross profit......................... 11,260,303 6,750,994
Operating expenses:
Art and design.................. 1,366,877 1,020,931
Selling......................... 1,736,665 1,230,358
Royalty expense................. 478,340 364,406
Shipping........................ 852,659 624,934
General and administrative...... 1,543,614 1,190,682
Officers' salaries.............. 300,572 295,906
-------------- --------------
Total operating
expenses........... 6,278,727 4,727,217
-------------- --------------
Operating income..................... 4,981,576 2,023,777
Other expense:
Rental expense, net of rental
income........................ 57,488 52,363
Other rental income............. -- (203,481)
Interest expense................ 174,119 124,837
-------------- --------------
Total other expense... 231,607 (26,281)
-------------- --------------
Income before provision for income
taxes.............................. 4,749,969 2,050,058
Provision for income taxes........... 479,777 222,566
-------------- --------------
Net income........................... 4,270,192 1,827,492
Retained earnings, beginning of
period............................. 8,027,127 6,213,989
-------------- --------------
Retained earnings, end of period..... $ 12,297,319 $ 8,041,481
============== ==============
Weighted average shares
outstanding........................ 120 120
============== ==============
Earnings per share................... $ 35,585 $ 15,229
============== ==============
The accompanying notes to financial statements are an integral part of these
statements.
F-61
<PAGE>
PLYMOUTH MILLS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE PERIODS FROM OCTOBER 1, 1995 THROUGH AUGUST 2, 1996, AND
OCTOBER 1, 1994 THROUGH JUNE 30, 1995
1996 1995
-------------- ------------
Cash flows from operating activities:
Net income...................... $ 4,270,192 $ 1,827,492
Adjustments to reconcile net
income to net cash used in
operating activities:
Provisions of losses on
accounts receivable..... 9,212 --
Depreciation and
amortization............ 156,465 163,219
Gain on disposal of
equipment............... (949) --
Change in assets and
liabilities:
Accounts receivable... (1,965,485) (389,698)
Inventories........... (1,443,458) (951,598)
Other assets.......... (43,595) (117,202)
Other current
assets............ 146,981 91,850
Acceptances payable... 162,066 --
Accounts payable...... (1,329,090) (892,139)
Income taxes
payable........... 261,309 107,710
Accrued expenses and
other current
liabilities....... (490,877) (412,591)
-------------- ------------
Net cash used in
operating
activities... (267,229) (572,957)
Cash flows from investing activities:
Proceeds from sale of property
and equipment.................. 19,310 --
Purchase of property and
equipment...................... (176,048) (95,680)
-------------- ------------
Net cash used in
investing
activities... (156,738) (95,680)
Cash flows from financing activities:
Repayment of stockholders'
loan -- subordinated........... (300,000) --
Net borrowings under revolving
credit line.................... 1,300,000 900,000
Net repayment to stockholders... (499,405) (130,740)
-------------- ------------
Net cash
provided by
financing
activities... 500,595 769,260
-------------- ------------
Net increase in cash................. 76,628 100,623
Cash, beginning of period............ 33,933 98,023
-------------- ------------
Cash, end of period.................. $ 110,561 198,646
============== ============
Supplemental Disclosures of Cash flow Information
Cash paid during the period for:
Interest........................ $ 232,028 $ 59,561
Income taxes.................... 219,078 14,027
The accompanying notes to financial statements are an integral part of these
statements.
F-62
<PAGE>
PLYMOUTH MILLS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION --
The financial statements included herein have not been audited by
independent public accountants, but include all adjustments (consisting of
normal recurring entries) which are, in the opinion of management, necessary for
a fair presentation of the results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the requirements of the Securities and Exchange
Commission, although management believes that the disclosures included in these
financial statements are adequate to make the information not misleading.
It is suggested that these financial statements be read in conjunction with
the Company's audited financial statements and notes thereto included in this
registration statement.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the year.
(2) INVENTORIES --
Inventories are comprised of the following:
AUGUST 2, SEPTEMBER 30,
1996 1995
---------- -------------
Supplies............................. $ 129,689 $ --
Raw materials........................ 1,488,993 1,431,462
Work-in-process...................... 3,836,207 2,550,117
Finished goods....................... 943,291 973,143
---------- -------------
$6,398,180 $ 4,954,722
========== =============
(3) PROPERTY AND EQUIPMENT --
Property and equipment are comprised of the following:
AUGUST 2, SEPTEMBER 30,
1996 1995
---------- -------------
Machinery and equipment.............. $1,224,764 $ 1,134,749
Leasehold improvements............... 537,926 537,926
Office equipment..................... 254,377 254,377
Furniture and fixtures............... 83,732 83,732
Automobiles.......................... 205,459 181,439
---------- -------------
2,306,258 2,192,223
Less: accumulated depreciation....... 1,911,593 1,798,779
---------- -------------
$ 394,665 $ 393,444
========== =============
(4) LETTERS OF CREDIT --
At August 2, 1996, the Company had open letters of credit of approximately
$1,190,000 outstanding.
(5) ACQUISITION BY BRAZOS SPORTSWEAR, INC. --
Effective August 2, 1996, the stockholders of the Company consummated an
agreement to sell substantially all of the assets of the Company, net of the
assumption of certain specified liabilities, to Brazos Sportswear, Inc., a
wholly-owned subsidiary of BSI Holdings, Inc.
F-63
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
OF
SUN SPORTSWEAR, INC.
AND
BSI HOLDINGS, INC.
--------------------------------------------
NOVEMBER 13, 1996
- --------------------------------------------------------------------------------
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TABLE OF CONTENTS
PAGE NO.
ARTICLE I
MERGER.................................................................1
1.1. SURVIVING CORPORATION...........................................1
1.2. STOCKHOLDER APPROVAL............................................1
1.3. EFFECTIVE DATE..................................................2
1.4. NAME AND CONTINUED CORPORATE EXISTENCE OF SURVIVING
CORPORATION; TAX TREATMENT......................................2
1.4.1. NAME AND EXISTENCE......................................2
1.4.2. TAX TREATMENT WITH RESPECT TO CONVERSION
OF BSI CAPITAL STOCK....................................2
1.5. GOVERNING LAW AND ARTICLES OF INCORPORATION OF
SURVIVING CORPORATION...........................................2
1.5.1. WASHINGTON LAW GOVERNS AND SUN ARTICLES OF
INCORPORATION, AS AMENDED AND RESTATED, SURVIVE.........2
1.6. BYLAWS OF SURVIVING CORPORATION.................................2
1.6.1. SUN BYLAWS SURVIVE......................................2
1.7. DIRECTORS OF SURVIVING CORPORATION..............................3
1.7.1. DIRECTORS OF SURVIVING CORPORATION......................3
1.7.2. VACANCIES...............................................3
1.8. CAPITAL STOCK OF SURVIVING CORPORATION..........................3
1.8.1. CAPITAL STOCK OF SURVIVING CORPORATION..................3
1.9. CONVERSION OF BSI SECURITIES UPON MERGER........................3
1.9.1. GENERAL.................................................3
1.9.2. CANCELLATION OF CERTAIN BSI COMMON AND
PREFERRED STOCK. ......................................4
1.9.3. CONVERSION OF BSI CAPITAL STOCK.........................4
1.9.4. EXCHANGE OF CERTIFICATES................................4
1.9.4.1. DEPOSIT WITH EXCHANGE AGENT................4
1.9.4.2. EXCHANGE PROCEDURES........................5
1.9.4.3. DISTRIBUTIONS WITH RESPECT TO
UNEXCHANGED SHARES.........................5
1.9.4.4. NO FRACTIONAL SECURITIES...................6
1.9.4.5. CLOSING OF TRANSFER BOOKS..................6
1.9.4.6. TERMINATION OF DUTIES OF EXCHANGE AGENT....6
1.10. CONVERSION OF SUN SECURITIES UPON MERGER........................7
1.10.1. GENERAL.................................................7
1.10.2. CONVERSION OF SUN COMMON STOCK HELD BY ELECTION
RIGHT HOLDERS...........................................7
1.10.3. PROCEDURE FOR ELECTION BY ELECTION RIGHT HOLDERS........7
1.10.4. REVOCATION OF ELECTION; RETURN OF CERTIFICATES..........7
1.10.5. CONVERSION OF SUN COMMON STOCK HELD BY SEAFIRST.........7
(i)
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1.10.6. EFFECT OF CONVERSIONS OF SUN COMMON STOCK...............8
1.10.7. FRACTIONAL SHARES.......................................8
1.10.8. EXCHANGE OF SUN COMMON STOCK CERTIFICATES...............8
1.11. DISSENTING SHARES...............................................9
1.11.1 BSI DISSENTING COMMON SHARES............................9
1.11.2 BSI DISSENTING PREFERRED SHARES.........................9
1.11.3 SUN DISSENTING COMMON SHARES............................9
1.12. EFFECTS OF THE MERGER..........................................10
1.12.1. GENERAL................................................10
1.12.2. ACCOUNTING TREATMENT...................................10
1.13. AGREEMENT OF SEAFIRST...................................10
1.14. CLOSING........................................................10
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF BSI................................................................11
2.1. REPRESENTATIONS AND WARRANTIES OF BSI..........................11
2.1.1. ORGANIZATION AND STANDING..............................11
2.1.2. AUTHORITY; NONCONTRAVENTION; STATUTORY
APPROVALS; COMPLIANCE..................................11
2.1.2.1. AUTHORITY.....................................11
2.1.2.2. NONCONTRAVENTION..............................12
2.1.2.3. STATUTORY APPROVALS...........................12
2.1.2.4. COMPLIANCE....................................13
2.1.3. CAPITALIZATION.........................................13
2.1.4. BSI SUBSIDIARIES.......................................14
2.1.5. FINANCIAL STATEMENTS...................................14
2.1.6. LIABILITIES............................................14
2.1.7. ADDITIONAL BSI INFORMATION.............................14
2.1.7.1. REAL ESTATE...................................15
2.1.7.2. MACHINERY AND EQUIPMENT.......................15
2.1.7.3. INVENTORY.....................................15
2.1.7.4. RECEIVABLES...................................15
2.1.7.5. PAYABLES......................................15
2.1.7.6. INSURANCE.....................................15
2.1.7.7. MATERIAL CONTRACTS............................15
2.1.7.8. EMPLOYEE COMPENSATION PLANS...................15
2.1.7.9. CERTAIN SALARIES..............................16
2.1.7.10. EMPLOYEE AGREEMENTS..........................16
2.1.7.11. PATENTS......................................16
2.1.7.12. TRADE NAMES..................................16
2.1.7.13. PROMISSORY NOTES.............................16
2.1.7.14. GUARANTIES...................................16
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2.1.7.15. FINANCIAL STATEMENTS.........................16
2.1.8. NO UNDISCLOSED DEFAULTS................................16
2.1.9. ABSENCE OF CERTAIN CHANGES OR EVENTS...................16
2.1.10. TAXES..................................................17
2.1.11. INTELLECTUAL PROPERTY..................................17
2.1.12. TITLE TO PROPERTIES....................................18
2.1.13. LITIGATION.............................................18
2.1.14. ENVIRONMENTAL COMPLIANCE...............................18
2.1.14.1. ENVIRONMENTAL CONDITIONS.....................18
2.1.14.2. PERMITS, ETC.................................19
2.1.14.3. COMPLIANCE...................................19
2.1.14.4. PAST COMPLIANCE..............................19
2.1.14.5. ENVIRONMENTAL CLAIMS.........................19
2.1.14.6. RENEWALS.....................................19
2.1.15. COMPLIANCE WITH OTHER LAWS.............................19
2.1.16. FINDER'S FEE...........................................20
2.1.17. COMPLIANCE WITH ERISA..................................20
2.1.18. INVESTIGATIONS; LITIGATION.............................21
2.1.19. INFORMATION FOR REGISTRATION STATEMENT AND
PROXY STATEMENT/PROSPECTUS.............................21
2.1.20. OWNERSHIP OF SUN COMMON STOCK..........................22
2.1.21. VOTE REQUIRED..........................................22
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SUN.................................22
3.1. REPRESENTATIONS AND WARRANTIES OF SUN..........................22
3.1.1. ORGANIZATION AND STANDING..............................22
3.1.2. AUTHORITY; NONCONTRAVENTION; STATUTORY
APPROVALS; COMPLIANCE..................................23
3.1.2.1. AUTHORITY.....................................23
3.1.2.2. NONCONTRAVENTION..............................23
3.1.2.3. STATUTORY APPROVALS...........................24
3.1.2.4. COMPLIANCE....................................24
3.1.3. CAPITALIZATION.........................................24
3.1.4. SUN SUBSIDIARIES.......................................25
3.1.5. REPORTS AND FINANCIAL STATEMENTS.......................25
3.1.6. LIABILITIES............................................26
3.1.7. ADDITIONAL SUN INFORMATION.............................26
3.1.7.1. REAL ESTATE...................................26
3.1.7.2. MACHINERY AND EQUIPMENT.......................26
3.1.7.3. INVENTORY.....................................26
3.1.7.4. RECEIVABLES...................................26
3.1.7.5. PAYABLES......................................26
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3.1.7.6. INSURANCE.....................................26
3.1.7.7. MATERIAL CONTRACTS............................26
3.1.7.8. EMPLOYEE COMPENSATION PLANS...................27
3.1.7.9. CERTAIN SALARIES..............................27
3.1.7.10. EMPLOYEE AGREEMENTS..........................27
3.1.7.11. PATENTS......................................27
3.1.7.12. TRADE NAMES..................................27
3.1.7.13. PROMISSORY NOTES.............................27
3.1.7.14. GUARANTIES...................................27
3.1.7.15. FINANCIAL STATEMENTS.........................27
3.1.8. NO UNDISCLOSED DEFAULTS................................28
3.1.9. ABSENCE OF CERTAIN CHANGES OR EVENTS...................28
3.1.10. TAXES..................................................28
3.1.11. INTELLECTUAL PROPERTY..................................28
3.1.12. TITLE TO PROPERTIES....................................29
3.1.13. LITIGATION.............................................29
3.1.14. ENVIRONMENTAL COMPLIANCE...............................29
3.1.14.1. ENVIRONMENTAL CONDITIONS.....................29
3.1.14.2. PERMITS, ETC.................................30
3.1.14.3. COMPLIANCE...................................30
3.1.14.4. PAST COMPLIANCE..............................30
3.1.14.5. ENVIRONMENTAL CLAIMS.........................30
3.1.14.6. RENEWALS.....................................30
3.1.15. COMPLIANCE WITH OTHER LAWS.............................30
3.1.16. FINDER'S FEE...........................................30
3.1.17. COMPLIANCE WITH ERISA..................................31
3.1.18. INVESTIGATIONS; LITIGATION.............................32
3.1.19. INFORMATION FOR REGISTRATION STATEMENT AND
PROXY STATEMENT/PROSPECTUS.............................32
3.1.20. OWNERSHIP OF BSI COMMON STOCK..........................33
3.1.21. VOTE REQUIRED..........................................33
ARTICLE IV
OBLIGATIONS PENDING EFFECTIVE DATE....................................33
4.1. AGREEMENTS OF SUN AND BSI......................................33
4.1.1. MAINTENANCE OF PRESENT BUSINESS........................33
4.1.2. MAINTENANCE OF PROPERTIES..............................33
4.1.3. MAINTENANCE OF BOOKS AND RECORDS.......................33
4.1.4. COMPLIANCE WITH LAW....................................33
4.1.5. INSPECTION OF EACH MERGING CORPORATION.................33
4.2. ADDITIONAL AGREEMENTS OF SUN AND BSI...........................34
4.2.1. HART-SCOTT-RODINO......................................34
(iv)
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4.2.2. PROXY STATEMENT/PROSPECTUS.............................35
4.2.3. NOTICE OF MATERIAL DEVELOPMENTS........................35
4.3. ADDITIONAL AGREEMENTS OF BSI...................................35
4.3.1. PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS............35
4.3.2. PROHIBITION OF CERTAIN LOANS...........................35
4.3.3. PROHIBITION OF CERTAIN COMMITMENTS.....................35
4.3.4. DISPOSAL OF ASSETS.....................................35
4.3.5. MAINTENANCE OF INSURANCE...............................35
4.3.6. NO AMENDMENT TO CERTIFICATE OF
INCORPORATION, ETC.....................................36
4.3.7. NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES...........36
4.3.8. PROHIBITION ON DIVIDENDS...............................36
4.4. ADDITIONAL AGREEMENTS OF SUN...................................36
4.4.1. PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS............36
4.4.2. PROHIBITION OF CERTAIN LOANS...........................36
4.4.3. PROHIBITION OF CERTAIN COMMITMENTS.....................37
4.4.4. DISPOSAL OF ASSETS.....................................37
4.4.5. MAINTENANCE OF INSURANCE...............................37
4.4.6. NO AMENDMENT TO ARTICLES OF INCORPORATION, ETC.........37
4.4.7. NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES...........37
4.4.8. PROHIBITION ON DIVIDENDS...............................37
4.4.9. LISTING OF SUN COMMON STOCK............................37
4.4.10. NOTICE OF CERTAIN DEVELOPMENTS.........................38
4.5. STOCKHOLDERS' MEETINGS..........................................38
4.6. JOINT PROXY STATEMENT AND REGISTRATION STATEMENT...............38
4.6.1. PREPARATION AND FILING.................................38
4.6.2. FAIRNESS OPINIONS......................................38
4.7. ADDITIONAL AGREEMENTS REGARDING OPERATION OF SUN
PENDING EFFECTIVE DATE.........................................39
4.8. DISCLOSURE STATEMENT...........................................41
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS...................................41
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BSI.....................41
5.1.1. REPRESENTATIONS AND WARRANTIES OF SUN;
PERFORMANCE OF OBLIGATIONS.............................42
5.1.2. NO INJUNCTION..........................................42
5.1.3. OPINION OF SUN COUNSEL.................................42
5.1.4. TAX OPINION............................................43
5.1.5. STOCKHOLDER APPROVAL...................................43
5.1.6. HART-SCOTT-RODINO, ETC.................................43
5.1.7. LISTING OF SUN COMMON STOCK............................43
5.1.8. CONSENT OF CERTAIN PARTIES IN PRIVITY WITH SUN.........43
5.1.9. RESIGNATIONS...........................................43
(v)
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5.1.10. SUN DISSENTERS.........................................43
5.1.11. REGISTRATION STATEMENT EFFECTIVE.......................44
5.1.12. FINANCING..............................................44
5.1.13. LOCK-UP AGREEMENT OF SEAFIRST..........................44
5.1.14. ADDITIONAL MATTERS.....................................44
5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF SUN.....................44
5.2.1. REPRESENTATIONS AND WARRANTIES OF BSI;
PERFORMANCE OF OBLIGATIONS.............................44
5.2.2. NO INJUNCTION..........................................45
5.2.3. OPINION OF BSI'S COUNSEL...............................45
5.2.4. TAX OPINION............................................45
5.2.5. STOCKHOLDER APPROVAL...................................45
5.2.6. HART-SCOTT-RODINO, ETC.................................45
5.2.7. FAIRNESS OPINION.......................................45
5.2.8. CONSENT OF CERTAIN PARTIES IN PRIVITY WITH BSI.........46
5.2.9. REGISTRATION STATEMENT EFFECTIVE.......................46
5.2.10. BSI DISSENTERS.........................................46
5.2.11. EQUITY INVESTMENT......................................46
5.2.12. ADDITIONAL MATTERS.....................................46
5.3. ADDITIONAL CONDITION PRECEDENT.................................46
ARTICLE VI
TERMINATION AND ABANDONMENT...........................................47
6.1. TERMINATION....................................................47
6.1.1. BY MUTUAL CONSENT.......................................47
6.1.2. BY SUN BECAUSE OF CONDITIONS PRECEDENT..................47
6.1.3. BY BSI BECAUSE OF CONDITIONS PRECEDENT..................47
6.1.4. BY SUN OR BSI IF MERGER NOT EFFECTIVE BY APRIL 30, 1997.47
6.1.5. BY BSI UNDER SECTION 4.7................................48
6.1.6. BY BSI OR SUN UNDER SECTION 5.3.........................48
6.1.7. BY SUN OR BSI BECAUSE OF ALTERNATE BUSINESS COMBINATION.48
6.2. TERMINATION BY BOARD OF DIRECTORS..............................49
6.3. EFFECT OF TERMINATION..........................................49
6.4. WAIVER OF CONDITIONS...........................................49
6.5. EXPENSE ON TERMINATION.........................................49
ARTICLE VII
ADDITIONAL AGREEMENTS.................................................50
7.1. DIRECTORS' AND OFFICERS' INDEMNIFICATION.......................50
7.2. UNDERTAKING TO FILE REPORTS AND COOPERATE IN RULE 144 AND
RULE 145 TRANSACTIONS; RULE 14 AFFILIATES......................52
7.3. BSI OPTIONS AND WARRANTS. .....................................53
(vi)
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7.4. WARN ACT ISSUES. ..............................................53
ARTICLE VIII
MISCELLANEOUS.........................................................53
8.1. ENTIRETY.......................................................53
8.2. COUNTERPARTS...................................................53
8.3. NOTICES AND WAIVERS............................................53
8.4. TERMINATION OF REPRESENTATIONS, WARRANTIES, ETC................54
8.5. TABLE OF CONTENTS AND CAPTIONS.................................54
8.6. SUCCESSORS AND ASSIGNS.........................................54
8.7. SEVERABILITY...................................................54
8.8. APPLICABLE LAW.................................................55
8.9. PUBLIC ANNOUNCEMENTS...........................................55
(vii)
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PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER, dated as of November 13, 1996, by and
between Sun Sportswear, Inc., a Washington corporation ("Sun" or the "Surviving
Corporation"), and BSI Holdings, Inc., a Delaware corporation ("BSI"). Sun and
BSI are hereinafter collectively referred to as the "Merging Corporations."
WHEREAS, the respective boards of directors of Sun and BSI deem it
desirable and in the best interests of their respective corporations and their
respective stockholders that BSI be merged into Sun, pursuant to the provisions
of Section 252 of the General Corporation Law of the State of Delaware (the
"DGCL") and Section 23B.11.070 of the Washington Business Corporation Act (the
"WBCA"), in exchange for the consideration herein provided for, and have
proposed, declared advisable, and approved such merger pursuant to this Plan and
Agreement of Merger (the "Agreement"), which Agreement has been duly approved by
resolutions of the respective boards of directors of Sun and BSI; and
WHEREAS, immediately subsequent to the consummation of the merger
contemplated herein, the Surviving Corporation will merge into a Delaware
corporation which is a wholly-owned subsidiary of the Surviving Corporation
("Sun Delaware"), on the terms set forth in Appendix I hereto, which shall
include the conversion of each outstanding share of Surviving Corporation common
stock into 0.2 of a share of Sun Delaware common stock (the "Reincorporation").
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties and covenants herein contained, the parties hereto
agree as follows:
ARTICLE I
MERGER
1.1. SURVIVING CORPORATION. Subject to the adoption and approval of this
Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, Sun and BSI
shall be, upon the Effective Date of the merger as defined in Section 1.3
hereof, merged into a single surviving corporation (the "Merger"), which shall
be Sun, one of the Merging Corporations, which shall continue, prior to the
Reincorporation, its corporate existence and remain a Washington corporation
governed by and subject to the laws of that state.
1.2. STOCKHOLDER APPROVAL. This Agreement shall be submitted for
adoption and approval by the stockholders of each of the Merging Corporations in
accordance with their respective articles or certificates of incorporation and
the applicable laws of the State of Washington and the State of Delaware,
respectively, at separate meetings called and held for such purpose.
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1.3. EFFECTIVE DATE. On the Closing Date (as hereinafter defined),
articles or a certificate of merger shall be executed by the parties to the
Merger and filed with the Secretary of State of the State of Washington pursuant
to Section 23B.11.050 of the WBCA and with the Secretary of State of the State
of Delaware in accordance with Section 252(c) of the DGCL. The Merger shall
become effective at the time specified in the articles or certificate of merger
as so filed, such time being herein called the "Effective Date."
1.4. NAME AND CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION;
TAX TREATMENT
1.4.1. NAME AND EXISTENCE. On the Effective Date, the Articles of
Incorporation of Sun, the corporation whose corporate existence is to
survive the Merger and continue thereafter as the surviving corporation,
shall be amended and restated in its entirety into the form annexed
hereto as Appendix II (the "Restated Articles of Incorporation"), which
shall provide that the name of the Surviving Corporation shall be
changed to "Brazos Sportswear, Inc." In all other respects the identity,
existence, purposes, powers, objects, franchises, rights, and immunities
of Sun, the surviving corporation of the Merger, shall continue
unaffected and unimpaired by the Merger, and the corporate identity,
existence, purposes, powers, objects, franchises, rights, and immunities
of BSI shall be wholly merged into Sun, and Sun shall be fully vested
therewith. Accordingly, on the Effective Date, the separate existence of
BSI, except insofar as continued by statute, shall cease.
1.4.2. TAX TREATMENT WITH RESPECT TO CONVERSION OF BSI CAPITAL
STOCK. With respect to the conversion of shares of BSI common stock, par
value $.01 per share (the "BSI Common Stock"), and BSI Preferred Stock
(as hereinafter defined) the merger is intended to qualify as and,
subject to the requirements of ss. 368(a)(1)(A) of the Internal Revenue
Code of 1986, as amended (the "Code"), shall be characterized as a
tax-free merger transaction described in ss. 368(a)(1)(A) of the Code.
1.5. GOVERNING LAW AND ARTICLES OF INCORPORATION OF SURVIVING
CORPORATION
1.5.1. WASHINGTON LAW GOVERNS AND SUN ARTICLES OF INCORPORATION,
AS AMENDED AND RESTATED, SURVIVE. The laws of the State of Washington
shall continue to govern the Surviving Corporation. On the Effective
Date, the Restated Articles of Incorporation shall be the articles of
incorporation of Sun until further amended in the manner provided by
law.
1.6. BYLAWS OF SURVIVING CORPORATION
1.6.1. SUN BYLAWS SURVIVE. Effective as of the Effective Date,
the bylaws of Sun shall be amended and restated in their entirety in the
form attached hereto as Appendix III (the "Restated Bylaws"), and the
Restated Bylaws shall be the bylaws of the Surviving Corporation until
altered, amended, or repealed, or until new bylaws shall be adopted in
accordance with the provisions of law, the Restated Articles of
Incorporation and the Restated Bylaws.
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1.7. DIRECTORS OF SURVIVING CORPORATION
1.7.1. DIRECTORS OF SURVIVING CORPORATION. The names and
addresses of the persons who, upon the Effective Date, shall constitute
the board of directors of the Surviving Corporation, and who shall hold
office until their successors are duly elected and qualified, are as
follows:
NAME ADDRESS
---- -------
Randall B. Hale 2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Nolan Lehmann 2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Alan Elenson 330 Tompkins Avenue
Staten Island, NY 10304
Michael S. Chadwick 3100 Texas Commerce Tower
Houston, Texas 77002
Ford Taylor 3860 Virgina Avenue
Cincinnati, Ohio 45243
1.7.2. VACANCIES. On or after the Effective Date, if a vacancy
shall exist for any reason in the board of directors of the Surviving
Corporation, such vacancy shall be filled in the manner provided in the
Restated Articles of Incorporation and/or Restated Bylaws of the
Surviving Corporation.
1.8. CAPITAL STOCK OF SURVIVING CORPORATION
1.8.1. CAPITAL STOCK OF SURVIVING CORPORATION. The authorized
number of shares of capital stock of the Surviving Corporation, and the
par value, designations, preferences, rights, and limitations thereof,
and the express terms thereof, shall be as set forth in the Restated
Articles of Incorporation.
1.9. CONVERSION OF BSI SECURITIES UPON MERGER
1.9.1. GENERAL. The manner and basis of converting the issued and
outstanding shares of the capital stock of BSI into shares of the
capital stock of Sun shall be as hereinafter set forth in this Section
1.9.
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1.9.2. CANCELLATION OF CERTAIN BSI COMMON AND PREFERRED STOCK.
Each share of BSI Common Stock or BSI Preferred Stock owned by any BSI
subsidiary shall be cancelled and shall cease to exist.
1.9.3. CONVERSION OF BSI CAPITAL STOCK. (a) On the Effective
Date, each share of BSI Common Stock then issued and outstanding, other
than BSI Dissenting Common Shares (as defined in Section 1.11.1) and the
shares cancelled pursuant to Section 1.9.2, without any action on the
part of the holders thereof, shall automatically become and be converted
into the right to receive certificates evidencing 40.2 fully paid and
nonassessable shares of issued and outstanding Sun common stock, no par
value per share ("Sun Common Stock"), upon surrender, in accordance with
Section 1.9.4.2 hereof, of certificates theretofore evidencing shares of
BSI Common Stock. Upon such conversion, all such shares of BSI Common
Stock shall be cancelled and cease to exist, and each holder of a
certificate representing any such shares shall cease to have any rights
with respect thereto, except the right to receive the shares of Sun
Common Stock to be issued in consideration therefor upon the surrender
of such certificate in accordance herewith.
(b) On the Effective Date, each share of preferred stock of BSI
("BSI Preferred Stock") then issued and outstanding, other than BSI
Dissenting Preferred Shares (as defined in Section 1.11.2) and the
shares cancelled pursuant to Section 1.9.2, without any action on the
part of the holders thereof, shall automatically become and be converted
into the right to receive certificates evidencing one fully paid and
nonassessable share of issued and outstanding Sun preferred stock ("Sun
Preferred Stock") (which shall be convertible into Sun Common Stock at
$2.20 per share) upon surrender, in accordance with Section 1.9.4.2, of
certificates theretofore evidencing shares of BSI Preferred Stock. All
shares of Sun Preferred Stock so issued shall have the same rights and
preferences as the outstanding preferred stock of BSI, as the terms
thereof shall be amended after the date hereof with respect to
conversion (at $2.20 per share of Sun Common Stock) and mandatory
redemption rights which exist as of the date hereof and which will be in
effect upon and after the Effective Date. Upon such conversion, all such
shares of BSI Preferred Stock shall be cancelled and cease to exist, and
each holder of a certificate representing any such shares shall cease to
have any rights with respect thereto, except the right to receive the
shares of Sun Preferred Stock to be issued in consideration therefor
upon the surrender of such certificate in accordance with Section
1.9.4.2. Prior to the Effective Date, the terms of the outstanding
preferred stock of Brazos Sportswear, Inc., a subsidiary of BSI, shall
be amended to permit exchange for BSI Preferred Stock, which upon
issuance will have terms substantially comparable to the BSI Preferred
Stock.
1.9.4. EXCHANGE OF CERTIFICATES
1.9.4.1. DEPOSIT WITH EXCHANGE AGENT. As soon as
practicable after the Effective Date, the Surviving Corporation
shall deposit with a bank or trust company mutually agreeable to
BSI and Sun (the "Exchange Agent") certificates
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representing shares of Sun Common Stock and Sun Preferred Stock,
required to effect the exchanges completed hereby, together with
cash payable in respect of fractional shares.
1.9.4.2. EXCHANGE PROCEDURES. As soon as practicable after
the Effective Date, the Exchange Agent shall mail to each holder
of record a certificate or certificates which immediately prior
to the Effective Date represented outstanding shares of BSI
Common Stock or BSI Preferred Stock (the "Certificates") that
were converted (the "Converted Shares") into the right to receive
shares of Sun Common Stock or Sun Preferred Stock, as applicable
(together, the "Sun Shares"), (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon actual
delivery of the Certificates to the Exchange Agent) and (ii)
instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing Sun
Shares. Upon surrender of a Certificate to the Exchange Agent (or
to such other agent or agents as may be appointed by agreement of
Sun and BSI), together with a duly executed letter of transmittal
and such other documents as the Exchange Agent shall require, the
holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole
Sun Shares which such holder has the right to receive pursuant to
the provisions of this Section 1.9.4.2. In the event of a
transfer of ownership of Converted Shares which is not registered
in the transfer records of BSI or Sun, as the case may be, a
certificate representing the proper number of Sun Shares may be
issued to a transferee if the Certificate representing such
Converted Shares is presented to the Exchange Agent, accompanied
by all documents required to evidence and effect such transfer
and by evidence satisfactory to the Exchange Agent that any
applicable stock transfer taxes have been paid. If any
Certificate shall have been lost, stolen, mislaid or destroyed,
upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, stolen, mislaid or
destroyed, (ii) such bond, security or indemnity as the Surviving
Corporation or the Exchange Agent may reasonably require, and
(iii) any other documentation necessary to evidence and effect
the bona fide exchange thereof, the Exchange Agent shall issue to
such holder a certificate representing the number of Sun Shares
into which the shares represented by such lost, stolen, mislaid
or destroyed Certificate shall have been converted. Until
surrendered as contemplated by this Section 1.9.4.2, each
Certificate shall be deemed at any time after the Effective Date
to represent only the right to receive upon such surrender a
certificate representing Sun Shares and cash in lieu of any
fractional shares of Sun Common Stock as contemplated by this
Section 1.9.4.2.
1.9.4.3. DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES.
No dividends or other distributions declared or made after the
Effective Date with respect to Sun Shares with a record date
after the Effective Date shall be paid to the holder of any
unsurrendered Certificate with respect to the Sun Shares
represented
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thereby, and no cash payment in lieu of fractional shares shall
be paid to any such holder, until the holder of record of such
Certificate shall surrender such Certificate as contemplated
hereby. Subject to the effect of unclaimed property, escheat and
other applicable laws, following surrender of any such
Certificate, there shall be paid to the record holder of the
certificates representing whole Sun Shares issued in exchange
therefor, without interest, (i) at the time of such surrender,
the amount of any cash payable in lieu of a fractional share of
Sun Common Stock to which such holder is entitled hereto and the
amount of dividends or other distributions with a record date
after the Effective Date theretofore paid with respect to such
whole Sun Shares and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date
after the Effective Date but prior to surrender and a payment
date subsequent to surrender payable with respect to such whole
Sun Shares.
1.9.4.4. NO FRACTIONAL SECURITIES. Notwithstanding any
other provision of this Agreement, the Surviving Corporation
shall not issue any fractional share of Sun Common Stock upon the
surrender for exchange of Certificates. In lieu of any such
fractional shares, any holder of BSI Common Stock who would
otherwise have been entitled to a fractional share of Sun Common
Stock shall be entitled to receive a cash payment in lieu of such
fractional share on the basis of the lesser of $2.20 per share or
the product of such fraction multiplied by the closing price for
Sun Common Stock on the Nasdaq Stock Market on the last trading
day before the Effective Date without any interest thereon.
1.9.4.5. CLOSING OF TRANSFER BOOKS. From and after the
Effective Date, the stock transfer books of BSI shall be closed
and no transfer of any capital stock of BSI shall thereafter be
made. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for registration or transfer, they
shall be cancelled and exchanged for certificates representing
the appropriate Sun Shares.
1.9.4.6. TERMINATION OF DUTIES OF EXCHANGE AGENT. Any
certificates representing Sun Shares deposited with the Exchange
Agent pursuant hereto and not exchanged within one year after the
Effective Date pursuant to this section shall be returned by the
Exchange Agent to the Surviving Corporation, which shall
thereafter act as Exchange Agent. All funds held by the Exchange
Agent for payment to the holders of unsurrendered Certificates
and unclaimed at the end of one year from the Effective Date
shall be returned to the Surviving Corporation, whereupon any
holder of unsurrendered Certificates shall look as a general
unsecured creditor only to the Surviving Corporation for payment
of any funds to which any holder may be entitled, subject to
applicable law. The Surviving Corporation shall not be liable to
any person for such shares or funds delivered to a public
official pursuant to any applicable abandoned property, escheat
or similar law.
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1.10. CONVERSION OF SUN SECURITIES UPON MERGER
1.10.1. GENERAL. The manner and basis of converting the issued
and outstanding shares of Sun Common Stock shall be as hereinafter set
forth in this Section 1.10.
1.10.2. CONVERSION OF SUN COMMON STOCK HELD BY ELECTION RIGHT
HOLDERS. On the Effective Date, each holder of an outstanding
certificate or certificates representing shares of Sun Common Stock
(other than SeaFirst Bank, N.A. ("SeaFirst") and Sun Dissenting Common
Shares, as hereinafter defined) shall have 50% of the shares held by
such holder converted into the right to receive $2.20 in cash (the "Cash
Consideration") for each share of Sun Common Stock so converted in
accordance with this section; provided, however, such holders (the
"Election Right Holders") shall have the right to elect to retain all
shares of Sun Common Stock (and not have 50% of such shares converted)
in accordance with Section 1.10.3 hereof.
1.10.3. PROCEDURE FOR ELECTION BY ELECTION RIGHT HOLDERS.
Elections to retain shares of Sun Common Stock must be made as to all,
but not less than all, of the shares of Sun Common Stock held by an
Election Right Holder on a form to be mutually agreed upon by Sun and
BSI (a "Form of Election") to be provided by the Exchange Agent promptly
after the Effective Date for that purpose to holders of record of Sun
Common Stock who are Election Right Holders, together with appropriate
transmittal materials. Elections shall be made by mailing to the
Exchange Agent a duly completed Form of Election. To be effective, a
Form of Election must be properly completed, signed and submitted to the
Exchange Agent at its designated office by 5:00 p.m. not later than 60
days subsequent to the Effective Date (the "Election Deadline"). Neither
Sun nor the Exchange Agent will be under any obligation to notify any
person of any defect in a Form of Election submitted to the Exchange
Agent. A holder of shares of Sun Common Stock that does not submit an
effective Form of Election prior to the Election Deadline shall be
deemed to have made a non-election (a "Non- Election"). All shares of
Sun Common Stock which are subject to a Non-Election ("Non- Election
Shares") shall be converted as set forth in Section 1.10.2 hereof.
1.10.4. REVOCATION OF ELECTION; RETURN OF CERTIFICATES. An
election may be revoked, but only by written notice received by the
Exchange Agent prior to the Election Deadline. Upon any such revocation,
unless a duly completed Form of Election is thereafter submitted in
accordance with Section 1.10.3, such shares shall be Non-Election
Shares.
1.10.5. CONVERSION OF SUN COMMON STOCK HELD BY SEAFIRST. On the
Effective Date, except as provided below, 48.28% of all shares of Sun
Common Stock held by SeaFirst shall be converted into the right to
receive consideration of $2.20 for each share of Sun Common Stock so
converted, consisting of $1.3824 in cash and $.8176 in the form of a
subordinated note (the "Subordinated Note") issued by Brazos Sportswear,
Inc., a Delaware corporation which shall be a subsidiary of the
Surviving Corporation, substantially in the form attached hereto as
Appendix IV; provided, however, to the extent that the Election Right
Holders elect
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to retain Sun Common Stock, for each such share so retained, SeaFirst
shall have an additional share of Sun Common Stock converted into cash
in the amount of $2.20 per share. The number of shares of Sun Common
Stock held by SeaFirst which shall be converted shall be calculated
immediately following the Election Deadline. The Subordinated Note will
contain customary provisions regarding covenants and financial reporting
obligations, will provide for the holder to have board visitation
rights, and will be automatically due and payable upon the Surviving
Corporation completing a qualifying public offering of securities; in
addition, if the Subordinated Note is not paid in full at maturity, any
remaining principal balance will be convertible at the option of the
holder into Sun Common Stock at a price of $2.20 per share, and the
holder shall be entitled to one demand registration right (at the
expense of the Surviving Corporation) with respect to such shares.
1.10.6. EFFECT OF CONVERSIONS OF SUN COMMON STOCK. Upon
completion of all conversions of shares of Sun Common Stock under this
Section 1.10, (i) 48.86% of all shares of Sun Common Stock outstanding
immediately prior to the Effective Date shall have been converted into
consideration in the aggregate amount of $6,179,637, which shall be in
cash except with respect to certain of the consideration payable to
SeaFirst, which shall receive $1,500,000 of such the consideration in
the form of the Subordinated Note, and (ii) 51.14% of all shares of Sun
Common Stock outstanding immediately prior to the Effective Date shall
remain outstanding.
1.10.7. FRACTIONAL SHARES. No fractional shares shall be issued
upon conversion of the Sun Common Stock as provided in this section, but
in lieu thereof, Sun will settle all such fractional share interests in
cash on the basis of the lesser of $2.20 per share or the closing price
for the Sun Common Stock on The Nasdaq Stock Market on the last trading
day before the Effective Date.
1.10.8. EXCHANGE OF SUN COMMON STOCK CERTIFICATES. (a) Upon the
surrender of each certificate representing shares of Sun Common Stock
converted hereunder, the Exchange Agent shall pay the holder of such
certificate the consideration to which such holder is entitled
multiplied by the number of shares of Sun Common Stock formerly
represented by such certificate in exchange therefor (and cash in lieu
of fractional interests in accordance with Section 1.10.7), such
certificate shall forthwith be cancelled and a balance certificate will
be issued for the shares not converted. No interest shall be paid or
accrue on the consideration paid. Immediately following the Election
Deadline, the Exchange Agent shall calculate the number of shares of Sun
Common Stock held by SeaFirst which are converted, and upon surrender by
SeaFirst of certificates, the consideration payable upon conversion
shall be delivered by the Exchange Agent, Sun or Brazos Sportswear,
Inc., as appropriate, and SeaFirst shall be issued a balance certificate
for the shares not converted. The Subordinated Note shall be delivered
to SeaFirst upon the surrender of certificates as provided herein.
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(b) On the Effective Date, BSI, on behalf of Sun, shall deposit
or cause to be deposited, in trust with the Exchange Agent, for the
benefit of the holders of shares of Sun Common Stock, for exchange in
accordance with this Article, the aggregate cash consideration (a total
of $4,679,637) payable upon conversion of the Sun Common Stock.
(c) If prior to mailing of the Joint Proxy Statement/Prospectus
(as hereinafter defined) to the shareholders of Sun and BSI, Sun settles
a currently outstanding dispute with Samsung, which is described in the
Sun Disclosure Statement, which results in a cash payment to Sun in
excess of $200,000, then the cash consideration to be paid to the Sun
Common Stock holders (as exist prior to Effective Date) upon
consummation of the Merger shall be increased to reflect such excess
recovery (net of expenses in connection with such settlement).
1.11. DISSENTING SHARES.
1.11.1 BSI DISSENTING COMMON SHARES. Shares of BSI Common Stock
held by any holder entitled to and seeking relief as a dissenting
shareholder under Section 262 of the DGCL (the "BSI Dissenting Common
Shares") shall not be converted into the right to receive Sun Common
Stock but shall be converted into such consideration as may be due with
respect to such shares pursuant to the applicable provisions of the
DGCL, unless and until the right of such holder to receive fair cash
value for such BSI Dissenting Common Shares terminates in accordance
with Section 262 of the DGCL. If such right is terminated otherwise than
by the purchase of such shares by the Surviving Corporation, then such
shares shall cease to be BSI Dissenting Common Shares and shall be
converted into and represent the right to receive Sun Common Stock as
provided in Section 1.9.3(a).
1.11.2 BSI DISSENTING PREFERRED SHARES. Shares of BSI Preferred
Stock held by any holder entitled to and seeking relief as a dissenting
shareholder under Section 262 of the DGCL (the "BSI Dissenting Preferred
Shares" and, together with the BSI Dissenting Common Shares, the "BSI
Dissenting Shares") shall not be converted into the right to receive Sun
Preferred Stock but shall be converted into such consideration as may be
due with respect to such shares pursuant to the applicable provisions of
the DGCL, unless and until the right of such holder to receive fair cash
value for such BSI Dissenting Preferred Shares terminates in accordance
with Section 262 of the DGCL. If such right is terminated otherwise than
by the purchase of such shares by the Surviving Corporation, then such
shares shall cease to be BSI Dissenting Preferred Shares and shall be
converted into and represent the right to receive Sun Preferred Stock as
provided in Section 1.9.3(b).
1.11.3 SUN DISSENTING COMMON SHARES. Shares of Sun Common Stock
held by any holder entitled to and seeking relief as a dissenting
shareholder under Section 23B.13 of the WBCA (the "Sun Dissenting Common
Shares") shall be converted into such consideration as may be due with
respect to such shares pursuant to the applicable provisions of the
WBCA, unless and until the right of such holder to receive fair cash
value for such Sun
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Dissenting Common Shares terminates in accordance with Section 23B.13 of
the WBCA. If such right is terminated otherwise than by the purchase of
such shares by the Surviving Corporation, then such shares shall cease
to be Sun Dissenting Common Shares and shall be accorded the treatment
of Sun Common Stock pursuant to 1.10.2 (other than Sun Common Stock held
by SeaFirst and Sun Dissenting Common Shares).
1.12. EFFECTS OF THE MERGER.
1.12.1. GENERAL. The Merger shall have the effects set forth in
the WBCA and DGCL, respectively. Without limiting the generality of the
foregoing and subject thereto, at the Effective Date, all of the
properties, rights, privileges, powers and franchises of Sun and BSI
shall vest in the Surviving Corporation, and all debts, liabilities,
obligations and duties of BSI shall become the debts, liabilities and
duties of the Surviving Corporation.
1.12.2. ACCOUNTING TREATMENT. The assets and liabilities of the
Merging Corporations shall be taken up on the books of the Surviving
Corporation in accordance with generally accepted accounting principles,
and the retained earnings and shareholders' equity accounts of the
Surviving Corporation shall be determined, in accordance with generally
accepted accounting principles, by the board of directors of the
Surviving Corporation. Nothing herein shall prevent the board of
directors of the Surviving Corporation from making any future changes in
its accounts in accordance with law.
1.13. AGREEMENT OF SEAFIRST. Upon execution of this Agreement, SeaFirst,
the holder of 3,800,000 shares of Sun Common Stock, shall agree to vote all of
SeaFirst's Sun Common Stock for the approval of this Agreement (including the
Reincorporation) and the transactions contemplated hereby as required by the
WBCA at the Sun Meeting; provided, however, that notwithstanding the foregoing,
in the event that Sun's Board of Directors shall terminate this Agreement
pursuant to Section 6.1.7(a), SeaFirst shall be free to vote its Sun Common
Stock for such other transaction as shall be presented to the shareholders of
Sun for their approval at the Sun Meeting or such other meeting as may be called
by Sun. In addition, upon execution of this Agreement, SeaFirst shall agree that
prior to the closing of the Merger, unless this Agreement shall have been
terminated in accordance with Article VI hereof, it will not transfer or assign,
directly or indirectly, any shares of Sun Common Stock.
1.14. CLOSING. The closing (the "Closing") of the Merger shall take
place at the offices of Porter & Hedges, L.L.P., 700 Louisiana, Houston, Texas
77002 at 10:00 a.m., local time, on the second business day immediately
following the date on which the last of the conditions set forth in Article V
hereof is fulfilled or waived, or at such other time and date and place as BSI
and Sun shall mutually agree (the "Closing Date").
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF BSI
2.1. REPRESENTATIONS AND WARRANTIES OF BSI. BSI represents and warrants
to Sun as follows:
2.1.1. ORGANIZATION AND STANDING. BSI is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and
operate the properties currently owned and operated by it, and is duly
qualified or licensed to do business and is in good standing as a
foreign corporation authorized to do business in all jurisdictions in
which the character of the properties owned or the nature of the
business conducted by it would make such qualification or licensing
necessary other than in such jurisdictions where the failure to be so
qualified and in good standing would not, when taken together with all
other such failures, have a material adverse effect on the business,
operations, properties, assets, financial condition, results of
operations or prospects of BSI or the BSI Subsidiaries taken as a whole
or on the consummation of this Agreement (any such material adverse
effect being hereinafter referred to as a "BSI Material Adverse
Effect"). As used in this Agreement, (a) the term "subsidiary" of a
person shall mean any corporation or other entity (including
partnerships and other business associations) in which such person
directly or indirectly owns at least a majority of any class of the
outstanding voting securities or equity and (b) the term "BSI
Subsidiaries" means all direct or indirect subsidiaries of BSI. True,
accurate and complete copies of the Certificate of Incorporation and
Bylaws of BSI, in effect on the date hereof, have been delivered to Sun.
In addition, for the purposes of this Agreement, "knowledge" with
respect to any person or entity shall mean the actual knowledge of any
director, officer or other person in a supervisory or managerial role,
and the knowledge such person would be expected to have upon making due
inquiry with respect to the matter in question.
2.1.2. AUTHORITY; NONCONTRAVENTION; STATUTORY APPROVALS;
COMPLIANCE
2.1.2.1. AUTHORITY. BSI has all requisite power and
authority to enter into this Agreement and, subject to the
applicable BSI Shareholders' Approval (as defined in Section
4.5), to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation by
BSI of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action on the part of BSI,
subject in the case of this Agreement to obtaining the applicable
BSI Shareholders' Approval. This Agreement has been duly and
validly executed and delivered by BSI and, assuming the due
authorization, execution and delivery hereof and thereof by Sun,
constitutes the valid and binding obligation of BSI enforceable
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against BSI in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, debtor relief or similar laws affecting the
rights of creditors' generally.
2.1.2.2. NONCONTRAVENTION. Except as set forth in Section
2.1.2.2 of the BSI Disclosure Statement, the execution and
delivery of this Agreement by BSI do not, and the consummation of
the transactions contemplated hereby will not, violate, conflict
with, or result in a breach of any provision of, or constitute a
default (with or without notice or lapse of time or both) under,
or result in the termination or modification of, or accelerate
the performance required by, or result in a right of termination,
modification, cancellation or acceleration of any obligation or
the loss of a material benefit under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of
the properties or assets (any such violation, conflict, breach,
default, right of termination, modification, cancellation or
acceleration, loss or creation, a "Violation" with respect to BSI
or any of the BSI Subsidiaries; such term when used in Article
III having a correlative meaning with respect to Sun or any of
the Sun Subsidiaries) of BSI or any of the BSI Subsidiaries
pursuant to any provisions of (i) the articles of incorporation,
bylaws or similar governing documents of BSI or any of the BSI
Subsidiaries, (ii) subject to obtaining the BSI Shareholders'
Approvals, any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of
any Governmental Authority (as defined in Section 2.1.2.3)
applicable to BSI or any of the BSI Subsidiaries or any of their
respective properties or assets or (iii) subject to obtaining the
third-party consents or other approvals set forth in Section
2.1.2.2 of the BSI Disclosure Statement (the "BSI Required
Consents"), any note, bond, mortgage, indenture, deed of trust,
license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which BSI or
any of the BSI Subsidiaries is now a party or by which it or any
of its properties or assets may be bound or affected, excluding
from the foregoing clauses (ii) and (iii) such Violations that
would not, in the aggregate, have a BSI Material Adverse Effect.
2.1.2.3. STATUTORY APPROVALS. No declaration, filing or
registration with, or notice to or authorization, consent or
approval of, any court, federal, state, local or foreign
governmental or regulatory body (including a stock exchange or
other self-regulatory body) or authority (each, a "Governmental
Authority"), the failure to obtain, make or give which would
have, in the aggregate, a BSI Material Adverse Effect, is
necessary for the execution and delivery of this Agreement by BSI
or the consummation by BSI of the transactions contemplated
hereby, except as described in Section 2.1.2.3 of the BSI
Disclosure Statement (the "BSI Required Statutory Approvals," it
being understood that references in this Agreement to "obtaining"
such BSI Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notices;
obtaining such authorizations, consents or
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approvals; and having such waiting periods expire as are
necessary to avoid a violation of law).
2.1.2.4. COMPLIANCE. Except as set forth in Section
2.1.2.4 of the BSI Disclosure Statement, neither BSI nor any BSI
Subsidiary, is in violation of or is under investigation with
respect to any violation of, or has been given notice or been
charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any
Governmental Authority except for violations which in the
aggregate do not and, insofar as reasonably can be foreseen, will
not have a BSI Material Adverse Effect. Except as set forth in
Section 2.1.2.4 of the BSI Disclosure Statement, BSI and the BSI
Subsidiaries have all permits, licenses, franchises and other
governmental authorizations, consents and approvals necessary to
conduct their businesses as currently conducted in all material
respects except for those which the failure to obtain would not,
in the aggregate, have a BSI Material Adverse Effect. Except as
set forth in Section 2.1.2.4 of the BSI Disclosure Statement,
neither BSI nor any BSI Subsidiary is in material breach or
violation of or in material default in the performance or
observance of any term or provision of, and no event has occurred
which, with lapse of time or action by a third party, could
result in a material default under, (i) its articles of
incorporation or bylaws or (ii) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease,
bond, license, approval or other instrument to which it is a
party or by which it is bound or to which any of its property is
subject except in the case of clause (ii) for violations and
defaults which would not, in the aggregate, have a BSI Material
Adverse Effect.
2.1.3. CAPITALIZATION. (a) The authorized capitalization of BSI
consists of 10,000,000 shares of preferred stock, par value $.01 per
share, 650,000 of which have been designated Series A-1 Preferred Stock,
650,000 of which are issued and outstanding, 300,000 of which have been
designated Series A-2 Preferred Stock, 300,000 of which are issued and
outstanding, 8,000,000 of which have been designated Series B Preferred
Stock, 4,456,285 of which are issued and outstanding and 10,000,000
shares of common stock, par value $.01 per share (the "BSI Common
Stock"), of which at the date hereof, 330,555 shares were issued and
outstanding. Except as set forth in Section 2.1.3 of the BSI Disclosure
Statement, there exist no (a) outstanding options, subscriptions,
warrants, calls, or similar commitments to purchase, issue or sell or to
convert any securities or obligations into any of the authorized or
issued capital stock of BSI or any securities or obligations convertible
into or exchangeable for such capital stock or (b) registration rights,
stockholder agreements or voting agreements with respect to the
outstanding shares of capital stock of BSI.
(b) BSI has obtained commitments from its shareholders and/or
third parties with respect to such parties' agreement to invest not less
than $2,000,000 and up to $3,500,000 in equity funds (or funds which are
substantially equivalent to equity funds) into BSI on or before the
Effective Date. To the extent that warrants or options to purchase BSI
capital
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stock are issued in connection with such equity investment, the exchange
ratio for the BSI Common Stock shall be proportionately adjusted.
Written commitments will be provided to Sun upon its request.
2.1.4. BSI SUBSIDIARIES. All outstanding shares of stock of the
BSI Subsidiaries are validly issued, fully paid, and nonassessable and
owned by BSI, and BSI has good and indefeasible title thereto free and
clear of any mortgage, pledge, lien, charge, security interest, option,
right of first refusal, preferential purchase right, defect, encumbrance
or other right or interest of any other person (collectively, an
"Encumbrance"). Each such subsidiary is a corporation duly organized,
validly existing, and in good standing under the laws of the
jurisdiction under which it is incorporated and has full requisite
corporate power and authority to own its property and carry on its
business as presently conducted by it and is duly qualified or licensed
to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed would not have a BSI Material Adverse Effect with
respect to such subsidiary. As hereinafter used in this Article II, the
term "BSI" also includes any and all of its directly and indirectly held
subsidiaries, except where the context indicates to the contrary.
2.1.5. FINANCIAL STATEMENTS. BSI has delivered to Sun copies of
BSI's audited consolidated balance sheet and related statements of
income, shareholders' equity (deficit), and cash flows, with appended
notes which are an integral part of such statements, as at and for BSI's
fiscal year ended December 31, 1995, and its unaudited balance sheet and
related statement of income for the nine-month period ending September
30, 1996. In addition, BSI has delivered to Sun the financial statements
of each of the BSI Subsidiaries. Such financial statements are complete
in all material respects, present fairly, in all material respects, the
financial condition of BSI and the BSI Subsidiaries as at the dates
indicated, and the results of operations for the respective periods
indicated (in the case of unaudited statements, subject to year-end
audit adjustments and the absence of complete footnotes), and have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis, except as noted therein.
2.1.6. LIABILITIES. BSI does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which would
constitute or result in a BSI Material Adverse Effect, other than those
(i) reflected or reserved against in the September 30, 1996 unaudited
consolidated balance sheet of BSI, (ii) incurred in the ordinary course
of business since September 30, 1996 or (iii) set forth in Section 2.1.6
of the BSI Disclosure Statement.
2.1.7. ADDITIONAL BSI INFORMATION. Section 2.1.7 of the BSI
Disclosure Statement contains true, complete and correct lists of the
following items, and BSI has furnished to Sun true, complete and correct
copies of all documents referred to in such lists:
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2.1.7.1. REAL ESTATE. All real property and structures
thereon owned, leased or subject to a contract of purchase and
sale, or lease commitment, by BSI, with a description of the
nature and amount of any Encumbrances thereto;
2.1.7.2. MACHINERY AND EQUIPMENT. All machinery,
transportation equipment, tools, equipment, furnishings, and
fixtures (excluding such items as did not have a cost basis of
$5,000 or more at their respective dates of acquisition by BSI)
owned, leased or subject to a contract of purchase and sale, or
lease commitment, by BSI with a description of the nature and
amount of any Encumbrances thereon;
2.1.7.3. INVENTORY. All inventory items or groups of
inventory items owned by BSI, together with the amount of any
Encumbrances thereon;
2.1.7.4. RECEIVABLES. All accounts and notes receivable of
BSI, together with (i) aging schedules by invoice date and due
date, (ii) the amounts provided for as an allowance for bad
debts, (iii) the identity and location of any asset in which BSI
holds a security interest to secure payment of the underlying
indebtedness, and (iv) a description of the nature and amount of
any Encumbrances on such accounts and notes receivable;
2.1.7.5. PAYABLES. All accounts and notes payable of BSI,
together with an appropriate aging schedule;
2.1.7.6. INSURANCE. All insurance policies or bonds
currently maintained by BSI, including title insurance policies,
with respect to BSI, including those covering BSI's properties,
buildings, machinery, equipment, fixtures, employees and
operations, as well as a listing of any premiums, audit
adjustments or retroactive adjustments due or pending on such
policies or any predecessor policies;
2.1.7.7. MATERIAL CONTRACTS. All material contracts and
license agreements, which shall include, but shall not be limited
to, agreements which are to be performed in whole or in part
after the Effective Date, and which involve or may involve
aggregate payments by or to BSI of $50,000 or more after such
date ("Material Contracts");
2.1.7.8. EMPLOYEE COMPENSATION PLANS. All bonus, incentive
compensation, deferred compensation, profit-sharing, retirement,
pension, welfare, group insurance, death benefit, or other fringe
benefit plans, arrangements or trust agreements of BSI, together
with copies of the most recent reports with respect to such
plans, arrangements, or trust agreements filed with any
governmental agency and all Internal Revenue Service
determination letters that have been received with respect to
such plans (collectively, "Employee Plans");
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2.1.7.9. CERTAIN SALARIES. The names and salary rates of
all present officers and employees of BSI whose current regular
annual salary rate is $50,000 or more, together with any bonuses
paid or payable to such persons for the year ended December 31,
1995, or since that date, and, to the extent existing on the date
of this Agreement, all arrangements with respect to any bonuses
to be paid to them from and after the date of this Agreement;
2.1.7.10. EMPLOYEE AGREEMENTS. Any collective bargaining
agreements of BSI with any labor union or other representative of
employees, including amendments and supplements, and all
employment and consulting agreements of BSI;
2.1.7.11. PATENTS. All patents, trademarks, copyrights and
other material intellectual property rights owned, licensed, or
used by BSI;
2.1.7.12. TRADE NAMES. All trade names and fictitious
names used or held by BSI, whether and where such names are
registered and where used;
2.1.7.13. PROMISSORY NOTES. All long-term and short-term
promissory notes, installment contracts, loan agreements, credit
agreements, and any other agreements of BSI relating thereto or
with respect to collateral securing the same;
2.1.7.14. GUARANTIES. All indebtedness, liabilities and
commitments of others and as to which BSI is a guarantor,
endorser, co-maker, surety, or accommodation maker, or is
contingently liable therefor (excluding liabilities as an
endorser of checks and the like in the ordinary course of
business) and all letters of credit, whether stand-by or
documentary, issued by any third party;
2.1.7.15. FINANCIAL STATEMENTS. Financial statements
containing the information described in Paragraphs 2.1.5;
Section 2.1.7 of the BSI Disclosure Statement shall be true,
complete and correct as of the Effective Date, except for items
contained in Paragraphs 2.1.7.3; 2.1.7.4; 2.1.7.5; and 2.1.7.15 which
are true, complete and correct as of September 30, 1996 or such other
date as therein indicated.
2.1.8. NO UNDISCLOSED DEFAULTS. Except as may be specified in
Section 2.1.8 of the BSI Disclosure Statement, BSI is not a party to, or
bound by, any material contract or arrangement of any kind to be
performed after the Effective Date, nor is BSI in default in any
material obligation or covenant on its part to be performed under any
material obligation, lease, contract, order, plan or other arrangement
except as identified in such section.
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2.1.9. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed
in the BSI Disclosure Statement, from September 30, 1996, through the
date hereof, (a) BSI and each of the BSI Subsidiaries has conducted its
business only in the ordinary course of business consistent with past
practice and (b) there has not been, and no fact or condition exists
which would have or, insofar as reasonably can be foreseen, could have,
a BSI Material Adverse Effect.
2.1.10. TAXES. Except as set forth in Section 2.1.10 of the BSI
Disclosure Statement, and except with respect to failures which, in the
aggregate, would not result in a material adverse change with respect to
BSI, proper and accurate federal, state and local income, value added,
sales, use, franchise, gross revenue, turnover, excise, payroll,
property, employment, customs duties and any and all other tax returns,
reports, and estimates have been filed with appropriate governmental
agencies, domestic and foreign, by BSI for each period for which any
returns, reports, or estimates were due (taking into account any
extensions of time to file before the date hereof); all taxes shown by
such returns to be payable and any other taxes due and payable have been
paid other than those being contested in good faith by BSI; and the tax
provision reflected in BSI's financial statements as of September 30,
1996 is adequate, in accordance with generally accepted accounting
principles, to cover liabilities of BSI at the date thereof for all
taxes, including any interest, penalties and additions to taxes of any
character whatsoever applicable to BSI or its assets or business. Except
as set forth on Section 2.1.10 of the BSI Disclosure Statement, no
waiver of any statute of limitations executed by BSI with respect to
federal or state income or other tax is in effect for any period. The
federal income tax returns of BSI have never been examined by the
Internal Revenue Service. There are no tax liens on any assets of BSI
except for taxes not yet currently due and those which could not
reasonably be expected to result in a Material Adverse Effect.
2.1.11. INTELLECTUAL PROPERTY. Except as set forth in Section
2.1.11 of the BSI Disclosure Statement, BSI owns or possesses licenses
to use all patents, patent applications, trademarks and service marks
(including registrations and applications therefor), trade names,
copyrights and written know-how, trade secrets and all other similar
proprietary data and the goodwill associated therewith (collectively,
the "Intellectual Property") that are either material to the business of
BSI or that are necessary for the manufacture, use or sale of any
products manufactured, used or sold by BSI, including all such
Intellectual Property listed in Section 2.1.11 of the BSI Disclosure
Statement. The Intellectual Property is owned or licensed by BSI free
and clear of any Encumbrance other than such Encumbrances as are listed
in Section 2.1.11 of the BSI Disclosure Statement. Except as otherwise
indicated in such schedule, BSI has not granted to any other person any
license to use any Intellectual Property. Except as described in Section
2.1.11 of the BSI Disclosure Statement, to the knowledge of BSI, none of
the Intellectual Property violates, conflicts with or infringes the
rights of any third parties. BSI has not received any notice of
infringement, misappropriation, or conflict with, the intellectual
property rights of others in connection with the use by BSI of the
Intellectual Property.
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2.1.12. TITLE TO PROPERTIES. With exceptions which in the
aggregate are not material, and except for merchandise and other
property sold, used or otherwise disposed of in the ordinary course of
business for fair value, BSI has good and indefeasible title to all its
properties, interests in properties and assets, real and personal,
reflected in the September 30, 1996 financial statements referred to in
Paragraph 2.1.5 or in Section 2.1.7 of the BSI Disclosure Schedule, free
and clear of any Encumbrance of any nature whatsoever, except (i) liens
and Encumbrances reflected in the balance sheet of BSI dated September
30, 1996 referred to in Paragraph 2.1.5 or in Section 2.1.7 of the BSI
Disclosure Statement, (ii) liens for current taxes not yet due and
payable, and (iii) such imperfections of title, easements and
Encumbrances, if any, as are not substantial in character, amount, or
extent and do not and will not materially detract from the value, or
interfere with the present use, of the property subject thereto or
affected thereby, or otherwise materially impair business operations.
All leases pursuant to which BSI leases (whether as lessee or lessor)
any real or personal property for rental or lease payments in excess of
$100,000 on an annualized basis are in good standing, valid, and
effective; and there is not, under any such leases, any existing or
prospective default or event of default or event which with notice or
lapse of time, or both, would constitute a default by BSI and in respect
to which BSI has not taken adequate steps to prevent a default from
occurring. The buildings and premises of BSI that are used in its
business are in good operating condition and repair, subject only to
ordinary wear and tear. All equipment of BSI and the BSI Subsidiaries is
in good operating condition and in a state of reasonable maintenance and
repair, ordinary wear and tear excepted, and is free from any known
defects except as may be repaired by routine maintenance and such minor
defects as to not substantially interfere with the continued use thereof
in the conduct of normal operations.
2.1.13. LITIGATION. Except as set forth in Section 2.1.13 of the
BSI Disclosure Statement, (a) there are no material claims, suits,
actions or proceedings, pending or, to the knowledge of BSI, threatened,
nor are there, to the knowledge of BSI, any material investigations or
reviews pending or threatened against, relating to or affecting BSI, any
BSI Subsidiary or any BSI Benefit Plan (as defined in Section 2.1.17
hereof), (b) there are no material judgments, decrees, injunctions,
rules or orders of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator applicable to BSI
or any BSI Subsidiary, and (c) there have not been any material
developments with respect to such disclosed claims, suits, actions,
proceedings, investigations or reviews.
2.1.14. ENVIRONMENTAL COMPLIANCE. Except as set forth in Section
2.1.14 of the BSI Disclosure Statement:
2.1.14.1. ENVIRONMENTAL CONDITIONS. There are no
environmental conditions or circumstances, such as the presence
or release of any hazardous substance, on any property presently
or previously owned by BSI that could result in a BSI Material
Adverse Effect.
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2.1.14.2. PERMITS, ETC. BSI has in full force and effect
all environmental permits, licenses, approvals and other
authorizations required to conduct its operations and is
operating in material compliance thereunder.
2.1.14.3. COMPLIANCE. BSI's operations and use of its
assets do not violate any applicable federal, state or local law,
statute, ordinance, rule, regulation, order or notice requirement
pertaining to (a) the condition or protection of air,
groundwater, surface water, soil, or other environmental media,
(b) the environment, including natural resources or any activity
which affects the environment, or (c) the regulation of any
pollutants, contaminants, waste, substances (whether or not
hazardous or toxic), including, without limitation, the
Comprehensive Environmental Response Compensation and Liability
Act (42 U.S.C. ss. 9601 ET SEQ.), the Hazardous Materials
Transportation Act (49 U.S.C. ss. 1801 ET SEQ.), the Resource
Conservation and Recovery Act (42 U.S.C. ss. 1609 ET SEQ.), the
Clean Water Act (33 U.S.C. 1251 ET SEQ.), the Clean Air Act (42
U.S.C. ss. 7401 ET SEQ.), the Toxic Substances Control Act (17
U.S.C. ss. 2601 ET SEQ.), the Federal Insecticide Fungicide and
Rodenticide Act (7 U.S.C. ss. 136 ET SEQ.), the Safe Drinking
Water Act (42 U.S.C. ss. 201 and ss. 300f ET SEQ.), the Rivers
and Harbors Act (33 U.S.C. ss. 401 ET SEQ.), the Oil Pollution
Act (33 U.S.C. ss. 2701 ET SEQ.) and analogous state and local
provisions, as any of the foregoing may have been amended or
supplemented from time to time (collectively the "Applicable
Environmental Laws"), except for violations which, either singly
or in the aggregate, would not result in a BSI Material Adverse
Effect.
2.1.14.4. PAST COMPLIANCE. None of the operations or
assets of BSI has ever been conducted or used in such a manner as
to constitute violation of any of the Applicable Environmental
Laws, except for violations which, either singly or in the
aggregate, would not result in a BSI Material Adverse Effect.
2.1.14.5. ENVIRONMENTAL CLAIMS. No notice has been served
on BSI from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or
inquiry related to alleged violations under any Applicable
Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental
Laws, other than any of the foregoing which, either singly or in
the aggregate, would not result in a material adverse change with
respect to BSI Material Adverse Effect.
2.1.14.6. RENEWALS. BSI does not know of any reason Sun
would not be able to renew any of the permits, licenses, or other
authorizations required pursuant to any Applicable Environmental
Laws to operate and use any of BSI's assets for their current
purposes and uses.
2.1.15. COMPLIANCE WITH OTHER LAWS. Except as set forth in
Section 2.1.15 of the BSI Disclosure Statement, BSI is not in violation
of or in default with respect to, or in
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alleged violation of or alleged default with respect to, the
Occupational Safety and Health Act (29 U.S.C. ss.ss.651 ET SEQ.) as
amended ("OSHA"), or any other applicable law or any applicable rule,
regulation, or any writ or decree of any court or any governmental
commission, board, bureau, agency, or instrumentality, or delinquent
with respect to any report required to be filed with any governmental
commission, board, bureau, agency or instrumentality, except for
violations which, either singly or in the aggregate, do not and are not
expected to result in a BSI Material Adverse Effect.
2.1.16. FINDER'S FEE. Except as set forth on Section 2.1.16 of
the BSI Disclosure Statement, all negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on
by BSI and its counsel directly with Sun and its counsel, without the
intervention of any other person as the result of any act of BSI, and so
far as is known to BSI, without the intervention of any other person in
such manner as to give rise to any valid claim against any of the
parties hereto for a brokerage commission, finder's fee or any similar
payments.
2.1.17. COMPLIANCE WITH ERISA. (a) BSI has delivered to, or upon
request will deliver to, Sun copies of the health and life insurance
plans, bonus, deferred compensation, pension, profit sharing and
retirement plans and all other employee benefit plans, programs or
arrangements providing benefits for employees (or former employees) of
BSI, all of which are listed on Section 2.1.7.8 of the BSI Disclosure
Statement (the "BSI Benefit Plans"); a copy of the most recent favorable
determination letter received with respect to a BSI Benefit Plan from
the Internal Revenue Service (if the plan is a tax-qualified plan under
the Code); the most recent annual report (Form 5500) filed with the
Internal Revenue Service with respect to each BSI Benefit Plan (if any
such report was required); and the most recent summary plan description
for each BSI Benefit Plan for which a summary plan description is
required. Each of the BSI Benefit Plans has been administered and
maintained in material compliance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and, if
applicable, the Code and all other applicable laws. There is no
"accumulated funding deficiency" (as such term is defined in Section 302
of ERISA or Section 412 of the Code) with respect to a BSI Benefit Plan
that is an "employee pension benefit plan" (as defined in Section 3(2)
of ERISA), and there has been no application for a waiver of the minimum
funding standards imposed by Code Section 412 with respect to any such
plan. There are no pending or, to the knowledge of BSI, threatened
claims by or on behalf of the BSI Benefit Plans, the United States
Department of Labor, the Internal Revenue Service, or by any current or
former employee of BSI or beneficiary of such current or former employee
alleging a breach of any fiduciary duties or a violation of applicable
state or federal law which could result in a material liability on the
part of BSI or a BSI Benefit Plan under ERISA or any other law (other
than benefit claims and funding obligations in the ordinary course of
business). BSI has not suffered or otherwise caused a "complete
withdrawal" or "partial withdrawal," as such terms are respectively
defined in Sections 4203 and 4205 of ERISA, from any Multiemployer
Pension Plan, as such term is defined in Section 3(37) of ERISA; BSI is
not a party to any such Multiemployer Pension Plan.
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(b) Except as set forth in Section 2.1.17 of the BSI Disclosure
Statement, (i) neither BSI nor any BSI Subsidiary is a party to any
collective bargaining agreement or other labor agreement with any union
or labor organization; (ii) to the knowledge of BSI, there is no current
union representation election or controversy involving employees of BSI
or any of the BSI Subsidiaries, nor does BSI know of any activity or
proceeding of any labor organization (or representative thereof) or
employee group (or representative thereof) to organize any such
employees; (iii) there is no material unfair labor practice charge or
material grievance arising out of a collective bargaining agreement or
other material grievance procedure against BSI or any of the BSI
Subsidiaries pending, or to the knowledge of BSI, threatened; (iv) there
is no material complaint, lawsuit or proceeding in any forum by or on
behalf of any present or former employee, any applicant for employment
or classes of the foregoing alleging breach of any express or implied
contract of employment, any law or regulation governing employment or
the termination thereof or other discriminatory, wrongful or tortious
conduct in connection with the employment relationship against BSI or
any of the BSI Subsidiaries pending, or to the knowledge of BSI,
threatened; (v) there is no strike, dispute, slowdown, work stoppage or
lockout pending, or to the knowledge of BSI , threatened, against or
involving BSI or any of the BSI Subsidiaries; (vi) BSI and the BSI
Subsidiaries are in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms
and conditions of employment, wages, hours of work and occupational
safety and health; and (vii) there is no proceeding, claim, suit, action
or governmental investigation pending or, to the knowledge of BSI,
threatened, in respect of which any director, officer, employee or agent
of BSI or any of the BSI Subsidiaries is or may be entitled to claim
indemnification from BSI or any of the BSI Subsidiaries pursuant to
their respective articles of incorporation or bylaws or as provided in
any indemnification agreements.
2.1.18. INVESTIGATIONS; LITIGATION. Except as required pursuant
to the Hart-Scott- Rodino Antitrust Improvements Act of 1976 and the
rules and regulations promulgated thereunder (collectively, "HSR"), (i)
no investigation or review by any governmental entity with respect to
BSI or any of the transactions contemplated by this Agreement is pending
or, to the best of BSI's knowledge, threatened, nor has any governmental
entity indicated to BSI an intention to conduct the same, and (ii) there
is no action, suit or proceeding pending or, to the best of BSI's
knowledge, threatened against or affecting BSI at law or in equity, or
before any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, which either
individually or in the aggregate, does or is likely to result in a BSI
Material Adverse Effect.
2.1.19. INFORMATION FOR REGISTRATION STATEMENT AND PROXY
STATEMENT/PROSPECTUS. None of the information supplied or to be supplied
by or on behalf of BSI for inclusion in or incorporation by reference in
(a) the registration statement on form S-4 to be filed with the SEC by
Sun in connection with the issuance of shares of Sun Common Stock and
Sun Preferred Stock in the Merger (the "Registration Statement") will,
at the time the Registration Statement is filed with the SEC and at the
time it becomes effective under the
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Securities Act, contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements
contained therein not misleading and (b) the proxy and information
statement in definitive form relating to the meetings of the
shareholders of Sun and BSI to be held in connection with the Merger and
the prospectus relating to the Sun Common Stock and Sun Preferred Stock
to be issued in the Merger (the "Joint Proxy Statement/Prospectus")
will, at the dates mailed to such shareholders and, as the same may be
amended or supplemented, at the times of such meetings, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading, and will comply as to form in all material
respects with the provisions of the Securities Act and the Securities
Exchange Act and the rules and regulations thereunder.
2.1.20. OWNERSHIP OF SUN COMMON STOCK. BSI does not
"beneficially own" (as such term is defined for purposes of Section
13(d) of the Securities Exchange Act) any shares of Sun Common Stock.
2.1.21. VOTE REQUIRED. The approval of the Merger by a majority
of all votes entitled to be cast by all holders of BSI Common Stock at a
BSI Meeting at which a quorum is present, are the only votes of the
holders of any class or series of the capital stock of BSI required to
approve this Agreement, the Merger and the other transactions
contemplated hereby (herein the "BSI Shareholders' Approval").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SUN
3.1. REPRESENTATIONS AND WARRANTIES OF SUN. Sun represents and warrants
to BSI as follows:
3.1.1. ORGANIZATION AND STANDING. Sun is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Washington, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and
operate the properties currently owned and operated by it, and is duly
qualified or licensed to do business and is in good standing as a
foreign corporation authorized to do business in all jurisdictions in
which the character of the properties owned or the nature of the
business conducted by it would make such qualification or licensing
necessary other than in such jurisdictions where the failure to be so
qualified and in good standing would not, when taken together with all
other such failures, have a material adverse effect on the business,
operations, properties, assets, financial condition, results of
operations or prospects of Sun or the Sun Subsidiaries taken as a whole
or on the consummation of this Agreement (any such material adverse
effect being hereinafter referred to as a "Sun Material Adverse
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Effect"). As used in this Agreement, (a) the term "subsidiary" of a
person shall mean any corporation or other entity (including
partnerships and other business associations) in which such person
directly or indirectly owns at least a majority of any class of the
outstanding voting securities or equity and (b) the term "Sun
Subsidiaries" means all direct or indirect subsidiaries of Sun. True,
accurate and complete copies of the Certificate of Incorporation and
Bylaws of Sun, in effect on the date hereof, have been delivered to BSI.
3.1.2. AUTHORITY; NONCONTRAVENTION; STATUTORY APPROVALS;
COMPLIANCE.
3.1.2.1. AUTHORITY. Sun has all requisite power and
authority to enter into this Agreement and, subject to the
applicable Sun Shareholders' Approval (as defined in Section
4.5), to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation by
Sun of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action on the part of Sun,
subject in the case of this Agreement to obtaining the applicable
Sun Shareholders' Approval. This Agreement has been duly and
validly executed and delivered by Sun and, assuming the due
authorization, execution and delivery hereof and thereof by BSI,
constitutes the valid and binding obligation of Sun enforceable
against Sun in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, debtor relief or similar laws affecting the
rights of creditors' generally.
3.1.2.2. NONCONTRAVENTION. Except as set forth in Section
3.1.2.2 of the Sun Disclosure Statement, the execution and
delivery of this Agreement by Sun do not, and the consummation of
the transactions contemplated hereby will not, violate, conflict
with, or result in a breach of any provision of, or constitute a
default (with or without notice or lapse of time or both) under,
or result in the termination or modification of, or accelerate
the performance required by, or result in a right of termination,
modification, cancellation or acceleration of any obligation or
the loss of a material benefit under, or result in the creation
of any lien, security interest, charge or encumbrance upon any of
the properties or assets (any such violation, conflict, breach,
default, right of termination, modification, cancellation or
acceleration, loss or creation, a "Violation" with respect to Sun
or any of the Sun Subsidiaries) pursuant to any provisions of (i)
the articles of incorporation, bylaws or similar governing
documents of Sun or any of the Sun Subsidiaries, (ii) subject to
obtaining the Sun Shareholders' Approvals, any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any Governmental Authority (as defined
in Section 3.1.2.3) applicable to Sun or any of the Sun
Subsidiaries or any of their respective properties or assets or
(iii) subject to obtaining the third-party consents or other
approvals set forth in Section 3.1.2.2 of the Sun Disclosure
Statement (the "Sun Required Consents"), any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or
agreement of any kind to which Sun or any
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of the Sun Subsidiaries is now a party or by which it or any of
its properties or assets may be bound or affected, excluding from
the foregoing clauses (ii) and (iii) such Violations that would
not, in the aggregate, have a Sun Material Adverse Effect.
3.1.2.3. STATUTORY APPROVALS. No declaration, filing or
registration with, or notice to or authorization, consent or
approval of, any court, federal, state, local or foreign
governmental or regulatory body (including a stock exchange or
other self-regulatory body) or authority (each, a "Governmental
Authority"), the failure to obtain, make or give which would
have, in the aggregate, a Sun Material Adverse Effect, is
necessary for the execution and delivery of this Agreement by Sun
or the consummation by Sun of the transactions contemplated
hereby, except as described in Section 3.1.2.3 of the Sun
Disclosure Statement (the "Sun Required Statutory Approvals," it
being understood that references in this Agreement to "obtaining"
such Sun Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notices;
obtaining such authorizations, consents or approvals; and having
such waiting periods expire as are necessary to avoid a violation
of law).
3.1.2.4. COMPLIANCE. Except as set forth in Section
3.1.2.4 of the Sun Disclosure Statement, neither Sun nor any Sun
Subsidiary, is in violation of or is under investigation with
respect to any violation of, or has been given notice or been
charged with any violation of, any law, statute, order, rule,
regulation, ordinance or judgment (including, without limitation,
any applicable environmental law, ordinance or regulation) of any
Governmental Authority except for violations which in the
aggregate do not and, insofar as reasonably can be foreseen, will
not have a Sun Material Adverse Effect. Except as set forth in
Section 3.1.2.4 of the Sun Disclosure Statement, Sun and the Sun
Subsidiaries have all permits, licenses, franchises and other
governmental authorizations, consents and approvals necessary to
conduct their businesses as currently conducted in all material
respects except for those which the failure to obtain would not,
in the aggregate, have a Sun Material Adverse Effect. Except as
set forth in Section 3.1.2.4 of the Sun Disclosure Statement,
neither Sun nor any Sun Subsidiary is in material breach or
violation of or in material default in the performance or
observance of any term or provision of, and no event has occurred
which, with lapse of time or action by a third party, could
result in a material default under, (i) its articles of
incorporation or bylaws or (ii) any contract, commitment,
agreement, indenture, mortgage, loan agreement, note, lease,
bond, license, approval or other instrument to which it is a
party or by which it is bound or to which any of its property is
subject except in the case of clause (ii) for violations and
defaults which would not, in the aggregate, have a Sun Material
Adverse Effect.
3.1.3. CAPITALIZATION. The authorized capitalization of Sun
consists of 20,000,000 shares of common stock, no par value (the "Sun
Common Stock"), of which at the date hereof, 5,748,500 shares were
issued and outstanding and 1,000,000 shares of preferred
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stock, $.01 par value per share (the "Sun Preferred Stock"), at which at
the date hereof no shares were issued and outstanding. Except as set
forth in Section 3.1.3 of the Sun Disclosure Statement, there exist no
(a) outstanding options, subscriptions, warrants, calls, or similar
commitments to purchase, issue or sell or to convert any securities or
obligations into any of the authorized or issued capital stock of Sun or
any securities or obligations convertible into or exchangeable for such
capital stock or (b) registration rights, stockholder agreements or
voting agreements with respect to the outstanding shares of capital
stock of Sun. The Sun Disclosure Schedule shall disclose that as of the
date hereof and as of the Effective Date, there are outstanding not less
than 290,250 options to purchase Sun Common Stock under Sun's existing
stock option plans, such number of options otherwise will be available
under the plans for issuance.
3.1.4. SUN SUBSIDIARIES. All outstanding shares of stock of the
Sun Subsidiaries are validly issued, fully paid, and nonassessable and
owned by Sun, and Sun has good and indefeasible title thereto free and
clear of any Encumbrance. Each such subsidiary is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction under which it is incorporated and has full requisite
corporate power and authority to own its property and carry on its
business as presently conducted by it and is duly qualified or licensed
to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed would not have a Sun Material Adverse Effect with
respect to such subsidiary. As hereinafter used in this Article III, the
term "Sun" also includes any and all of its directly and indirectly held
subsidiaries, except where the context indicates to the contrary.
3.1.5. REPORTS AND FINANCIAL STATEMENTS. Sun has previously
furnished to BSI true and complete copies of (a) all annual reports on
Form 10-K and quarterly reports on Form 10-Q filed with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), since December
31, 1991, (b) Sun's other reports filed with the Commission since
December 31, 1991, (c) all definitive proxy solicitation materials filed
with the Commission since December 31, 1991, (d) any registration
statements declared effective by the Commission since December 31, 1991
and (e) any other reports filed with the Commission by Sun after the
date hereof under the Exchange Act (collectively, the "Reports"), and
such Reports were, or will be, prepared in accordance with generally
accepted accounting principles applied on a consistent basis as of and
for the periods involved and fairly present, or will present, the
consolidated financial position for Sun and the Sun Subsidiaries as of
the dates thereof and the consolidated results of their operations and
changes in financial position as of and for the periods then ended; and
the Reports did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Since December
31, 1991, Sun has filed with the Commission all reports required to be
filed by
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Sun under the Exchange Act and the rules and regulations of the
Commission.
3.1.6. LIABILITIES. Sun does not have any liabilities or
obligations, either accrued, absolute, contingent, or otherwise, or have
any knowledge of any potential liabilities or obligations, which would
constitute or result in a Sun Material Adverse Effect, other than those
(i) disclosed in the Reports, (ii) reflected or reserved against in the
September 30, 1996 unaudited consolidated balance sheet of Sun, (iii)
incurred in the ordinary course of business since September 30, 1996 or
(iv) set forth in Section 3.1.6 of the Sun Disclosure Statement.
3.1.7. ADDITIONAL SUN INFORMATION. Section 3.1.7 of the BSI
Disclosure Statement contains true, complete and correct lists of the
following items, and Sun has furnished to BSI true, complete and correct
copies of all documents referred to in such lists:
3.1.7.1. REAL ESTATE. All real property and structures
thereon owned, leased or subject to a contract of purchase and
sale, or lease commitment, by Sun, with a description of the
nature and amount of any Encumbrances thereto;
3.1.7.2. MACHINERY AND EQUIPMENT. All machinery,
transportation equipment, tools, equipment, furnishings, and
fixtures (excluding such items as did not have a cost basis of
$5,000 or more at their respective dates of acquisition by Sun)
owned, leased or subject to a contract of purchase and sale, or
lease commitment, by Sun with a description of the nature and
amount of any Encumbrances thereon;
3.1.7.3. INVENTORY. All inventory items or groups of
inventory items owned by Sun, together with the amount of any
Encumbrances thereon;
3.1.7.4. RECEIVABLES. All accounts and notes receivable of
Sun, together with (i) aging schedules by invoice date and due
date, (ii) the amounts provided for as an allowance for bad
debts, (iii) the identity and location of any asset in which Sun
holds a security interest to secure payment of the underlying
indebtedness, and (iv) a description of the nature and amount of
any Encumbrances on such accounts and notes receivable;
3.1.7.5. PAYABLES. All accounts and notes payable of Sun,
together with an appropriate aging schedule;
3.1.7.6. INSURANCE. All insurance policies or bonds
currently maintained by Sun, including title insurance policies,
with respect to Sun, including those covering Sun's properties,
buildings, machinery, equipment, fixtures, employees and
operations, as well as a listing of any premiums, audit
adjustments or retroactive adjustments due or pending on such
policies or any predecessor policies;
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3.1.7.7. MATERIAL CONTRACTS. All material contracts and
license agreements, which shall include, but shall not be limited
to, all agreements or commitments to purchase raw materials or
inventory and all agreements which are to be performed in whole
or in part after the Effective Date, and which involve or may
involve aggregate payments by or to Sun of $50,000 or more after
such date ("Material Contracts"); such list shall also include
any obligations of Sun or its affiliates to make any payments or
provide any consideration to any person as a result of the
consummation of this Agreement;
3.1.7.8. EMPLOYEE COMPENSATION PLANS. All Employee Plans;
3.1.7.9. CERTAIN SALARIES. The names and salary rates of
all present officers and employees of Sun whose current regular
annual salary rate is $50,000 or more, together with any bonuses
paid or payable to such persons for the fiscal year ended
December 31, 1995, and, to the extent existing on the date of
this Agreement, all arrangements with respect to any bonuses to
be paid to them from and after the date of this Agreement;
3.1.7.10. EMPLOYEE AGREEMENTS. Any collective bargaining
agreements of Sun with any labor union or other representative of
employees, including amendments and supplements, and all
employment and consulting agreements of Sun;
3.1.7.11. PATENTS. All patents, trademarks, copyrights and
other material intellectual property rights owned, licensed, or
used by Sun;
3.1.7.12. TRADE NAMES. All trade names and fictitious
names used or held by Sun, whether and where such names are
registered and where used;
3.1.7.13. PROMISSORY NOTES. All long-term and short-term
promissory notes, installment contracts, loan agreements, credit
agreements, and any other agreements of Sun relating thereto or
with respect to collateral securing the same;
3.1.7.14. GUARANTIES. All indebtedness, liabilities and
commitments of others and as to which Sun is a guarantor,
endorser, co-maker, surety, or accommodation maker, or is
contingently liable therefor (excluding liabilities as an
endorser of checks and the like in the ordinary course of
business) and all letters of credit, whether stand-by or
documentary, issued by any third party;
3.1.7.15. FINANCIAL STATEMENTS. The September 30, 1996
unaudited consolidated balance sheet and related statement of
income of Sun.
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Section 3.1.7 of the Sun Disclosure Statement shall be true,
complete and correct as of the Effective Date, except for items
contained in Paragraphs 3.1.7.3; 3.1.7.4; 3.1.7.5; and 3.1.7.15, which
are true, complete and correct as of September 30, 1996 or such other
date as therein indicated. In addition, Sun shall, on BSI's request,
furnish BSI copies of all Reports filed by Sun with the Commission after
the date hereof through the Effective Date.
3.1.8. NO UNDISCLOSED DEFAULTS. Except as may be specified in the
Reports or in Section 3.1.8 of the Sun Disclosure Statement, Sun is not
a party to, or bound by, any material contract or arrangement of any
kind to be performed after the Effective Date, nor is Sun in default in
any material obligation or covenant on its part to be performed under
any material obligation, lease, contract, order, plan or other
arrangement except as identified in the Reports or in such section.
3.1.9. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed
in the Sun Disclosure Statement, from September 30, 1996, through the
date hereof, (a) Sun and each of the Sun Subsidiaries has conducted its
business only in the ordinary course of business consistent with past
practice and (b) there has not been, and no fact or condition exists
which would have or, insofar as reasonably can be foreseen, could have,
a Sun Material Adverse Effect.
3.1.10. TAXES. Except as set forth in Section 3.1.10 of the Sun
Disclosure Statement, and except with respect to failures which in the
aggregate, would not result in a material adverse change with respect to
Sun, proper and accurate federal, state and local income, value added,
sales, use, franchise, gross revenue, turnover, excise, payroll,
property, employment, customs duties and any and all other tax returns,
reports, and estimates have been filed with appropriate governmental
agencies, domestic and foreign, by Sun for each period for which any
returns, reports, or estimates were due (taking into account any
extensions of time to file before the date hereof); all taxes shown by
such returns to be payable and any other taxes due and payable have been
paid other than those being contested in good faith by Sun; and the tax
provision reflected in Sun's financial statements as of September 30,
1996 (which have been or will be delivered to BSI) is adequate, in
accordance with generally accepted accounting principles, to cover
liabilities of Sun at the date thereof for all taxes, including any
interest, penalties and additions to taxes of any character whatsoever
applicable to Sun or its assets or business. Except as set forth on
Section 3.1.10 of the Sun Disclosure Statement, no waiver of any statute
of limitations executed by Sun with respect to federal or state income
or other tax is in effect for any period. The federal income tax returns
of Sun have never been examined by the Internal Revenue Service. There
are no tax liens on any assets of Sun except for taxes not yet currently
due and those which could not reasonably be expected to result in a Sun
Material Adverse Effect.
3.1.11. INTELLECTUAL PROPERTY. Except as set forth in Section
3.1.11 of the Sun Disclosure Statement, Sun owns or possesses licenses
to use all Intellectual Property that is either material to the business
of Sun or that is necessary for the manufacture, use or sale of
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any products manufactured, used or sold by Sun, including all such
Intellectual Property listed in the Reports. The Intellectual Property
is owned or licensed by Sun free and clear of any Encumbrance other than
such Encumbrances as are listed in Section 3.1.11 of the Sun Disclosure
Statement. Except as otherwise indicated in such section, Sun has not
granted to any other person any license to use any Intellectual
Property. Except as described in Section 3.1.11 of the Sun Disclosure
Statement, none of the Intellectual Property violates, conflicts with or
infringes the rights of any third parties. Sun has not received any
notice of infringement, misappropriation, or conflict with, the
intellectual property rights of others in connection with the use by Sun
of its Intellectual Property.
3.1.12. TITLE TO PROPERTIES. With exceptions which in the
aggregate are not material, and except for merchandise and other
property sold, used or otherwise disposed of in the ordinary course of
business for fair value, Sun has good and indefeasible title to all its
properties, interests in properties and assets, real and personal,
reflected in the financial statements contained in the Reports, free and
clear of any Encumbrance of any nature whatsoever, except (i) liens and
Encumbrances reflected in the balance sheet of Sun included in the
Reports, (ii) liens for current taxes not yet due and payable, and (iii)
such imperfections of title, easements and Encumbrances, if any, as are
not substantial in character, amount, or extent and do not and will not
materially detract from the value, or interfere with the present use, of
the property subject thereto or affected thereby, or otherwise
materially impair business operations. All leases pursuant to which Sun
leases (whether as lessee or lessor) any real or personal property for
rental or lease payments in excess of $100,000 on an annualized basis
are in good standing, valid, and effective; and there is not, under any
such leases, any existing or prospective default or event of default or
event which with notice or lapse of time, or both, would constitute a
default by Sun and in respect to which Sun has not taken adequate steps
to prevent a default from occurring. The buildings and premises of Sun
that are used in its business are in good operating condition and
repair, subject only to ordinary wear and tear. All equipment of Sun and
the Sun Subsidiaries is in good operating condition and in a state of
reasonable maintenance and repair, ordinary wear and tear excepted, and
is free from any known defects except as may be repaired by routine
maintenance and such minor defects as to not substantially interfere
with the continued use thereof in the conduct of normal operations.
3.1.13. LITIGATION. Except as set forth in Section 3.1.13 of the
Sun Disclosure Statement, (a) there are no material claims, suits,
actions or proceedings, pending or, to the knowledge of Sun, threatened,
nor are there, to the knowledge of Sun, any material investigations or
reviews pending or threatened against, relating to or affecting Sun, any
Sun Subsidiary or any Sun Benefit Plan (as defined in Section 3.1.17
hereof), (b) there are no material judgments, decrees, injunctions,
rules or orders of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator applicable to Sun
or any Sun Subsidiary, and (c) there have not been any material
developments with respect to such disclosed claims, suits, actions,
proceedings, investigations or reviews.
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3.1.14. ENVIRONMENTAL COMPLIANCE. Except as set forth in Section
3.1.14 of the Sun Disclosure Statement:
3.1.14.1. ENVIRONMENTAL CONDITIONS. There are no
environmental conditions or circumstances such as the presence or
release of any hazardous substance on any property presently or
previously owned by Sun that could result in a Sun Material
Adverse Effect.
3.1.14.2. PERMITS, ETC. Sun has in full force and effect
all environmental permits, licenses, approvals and other
authorizations required to conduct its operations and is
operating in material compliance thereunder.
3.1.14.3. COMPLIANCE. Sun's operations and use of its
assets do not violate any Applicable Environmental Laws, except
for violations which, either singly or in the aggregate, would
not result in a Sun Material Adverse Effect.
3.1.14.4. PAST COMPLIANCE. None of the operations or
assets of Sun has ever been conducted or used in such a manner as
to constitute violation of any of the Applicable Environmental
Laws except for violations which, either singly or in the
aggregate, would not result in a Sun Material Adverse Effect.
3.1.14.5. ENVIRONMENTAL CLAIMS. No notice has been served
on Sun from any entity, governmental agency or individual
regarding any existing, pending or threatened investigation or
inquiry related to alleged violations under any Applicable
Environmental Laws, or regarding any claims for remedial
obligations or contribution under any Applicable Environmental
Laws, other than any of the foregoing which, either singly or in
the aggregate, would not result in a Sun Material Adverse Effect.
3.1.14.6. RENEWALS. Sun does not know of any reason Sun
would not be able to renew any of the permits, licenses, or other
authorizations required pursuant to any Applicable Environmental
Laws to operate and use any of Sun's assets for their current
purposes and uses.
3.1.15. COMPLIANCE WITH OTHER LAWS. Except as set forth in the
Reports or in Section 3.1.15 of the Sun Disclosure Statement, Sun is not
in violation of or in default with respect to, or in alleged violation
of or alleged default with respect to, OSHA or any other applicable law
or any applicable rule, regulation, or any writ or decree of any court
or any governmental commission, board, bureau, agency, or
instrumentality, or delinquent with respect to any report required to be
filed with any governmental commission, board, bureau, agency or
instrumentality, except for violations which, either singly or in the
aggregate, do not and are not expected to result in a Sun Material
Adverse Effect.
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3.1.16. FINDER'S FEE. Except as set forth in Section 3.1.16 of
the Sun Disclosure Statement, all negotiations relative to this
Agreement and the transactions contemplated hereby have been carried on
by Sun and its counsel, directly with BSI or its counsel, without the
intervention of any other person as the result of an act of Sun and, so
far as known to Sun, without the intervention of any other person in
such manner as to give rise to any valid claim against any of the
parties hereto for a brokerage commission, finder's fee, or any similar
payments.
3.1.17. COMPLIANCE WITH ERISA. (a) Sun has delivered to, or upon
request will deliver to, BSI copies of the health and life insurance
plans, bonus, deferred compensation, pension, profit sharing and
retirement plans and all other employee benefit plans, programs or
arrangements providing benefits for employees (or former employees) of
Sun, all of which are listed on Section 3.1.7.8 of the Sun Disclosure
Statement (the "Sun Benefit Plans"); a copy of the most recent favorable
determination letter received with respect to a Sun Benefit Plan from
the Internal Revenue Service (if the plan is a tax-qualified plan under
the Code); the most recent annual report (Form 5500) filed with the
Internal Revenue Service with respect to each Sun Benefit Plan (if any
such report was required); and the most recent summary plan description
for each Sun Benefit Plan for which a summary plan description is
required. Each of the Sun Benefit Plans has been administered and
maintained in material compliance with the requirements of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and, if
applicable, the Code and all other applicable laws. There is no
"accumulated funding deficiency" (as such term is defined in Section 302
of ERISA or Section 412 of the Code) with respect to a Sun Benefit Plan
that is an "employee pension benefit plan" (as defined in Section 3(2)
of ERISA), and there has been no application for a waiver of the minimum
funding standards imposed by Code Section 412 with respect to any such
plan. There are no pending or, to the knowledge of Sun, threatened
claims by or on behalf of the Sun Benefit Plans, the United States
Department of Labor, the Internal Revenue Service, or by any current or
former employee of Sun or beneficiary of such current or former employee
alleging a breach of any fiduciary duties or a violation of applicable
state or federal law which could result in a material liability on the
part of Sun or a Sun Benefit Plan under ERISA or any other law (other
than benefit claims and funding obligations in the ordinary course of
business). Sun has not suffered or otherwise caused a "complete
withdrawal" or "partial withdrawal," as such terms are respectively
defined in Sections 4203 and 4205 of ERISA, from any Multiemployer
Pension Plan, as such term is defined in Section 3(37) of ERISA; Sun is
not a party to any such Multiemployer Pension Plan.
(b) Except as set forth in Section 3.1.17 of the Sun Disclosure
Statement, (i) neither Sun nor any Sun Subsidiary is a party to any
collective bargaining agreement or other labor agreement with any union
or labor organization; (ii) to the knowledge of Sun, there is no current
union representation election or controversy involving employees of Sun
or any of the Sun Subsidiaries, nor does Sun know of any activity or
proceeding of any labor organization (or representative thereof) or
employee group (or representative thereof) to organize any such
employees; (iii) there is no material unfair labor practice charge or
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material grievance arising out of a collective bargaining agreement or
other material grievance procedure against Sun or any of the Sun
Subsidiaries pending, or to the knowledge of Sun, threatened; (iv) there
is no material complaint, lawsuit or proceeding in any forum by or on
behalf of any present or former employee, any applicant for employment
or classes of the foregoing alleging breach of any express or implied
contract of employment, any law or regulation governing employment or
the termination thereof or other discriminatory, wrongful or tortious
conduct in connection with the employment relationship against Sun or
any of the Sun Subsidiaries pending, or to the knowledge of Sun,
threatened; (v) there is no strike, dispute, slowdown, work stoppage or
lockout pending, or to the knowledge of Sun, threatened, against or
involving Sun or any of the Sun Subsidiaries; (vi) Sun and the Sun
Subsidiaries are in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms
and conditions of employment, wages, hours of work and occupational
safety and health; and (vii) there is no proceeding, claim, suit, action
or governmental investigation pending or, to the knowledge of Sun,
threatened, in respect of which any director, officer, employee or agent
of Sun or any of the Sun Subsidiaries is or may be entitled to claim
indemnification from Sun or any of the Sun Subsidiaries pursuant to
their respective articles of incorporation or bylaws or as provided in
any indemnification agreements.
3.1.18. INVESTIGATIONS; LITIGATION. Except as required pursuant
to HSR, (i) no investigation or review by any governmental entity with
respect to Sun in connection with any of the transactions contemplated
by this Agreement is pending or, to the best of Sun's knowledge,
threatened, nor has any governmental entity indicated to Sun an
intention to conduct the same and (ii) there is no action, suit or
proceeding pending or, to the best of Sun's knowledge, threatened
against or affecting Sun or the Sun Subsidiaries at law or in equity, or
before any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, which either
individually or in the aggregate, does or is likely to result in a Sun
Material Adverse Effect.
3.1.19. INFORMATION FOR REGISTRATION STATEMENT AND PROXY
STATEMENT/PROSPECTUS. None of the information supplied or to be supplied
by or on behalf of Sun for inclusion in or incorporation by reference in
(a) the registration statement on form S-4 to be filed with the SEC by
Sun in connection with the issuance of shares of Sun Common Stock and
Sun Preferred Stock in the Merger (the "Registration Statement") will,
at the time the Registration Statement is filed with the SEC and at the
time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading and (b)
the proxy and information statement in definitive form relating to the
meetings of the shareholders of BSI and Sun to be held in connection
with the Merger and the prospectus relating to the Sun Common Stock and
Sun Preferred Stock to be issued in the Merger (the "Joint Proxy
Statement/Prospectus") will, at the dates mailed to such shareholders
and, as the same may be amended or supplemented, at the times of such
meetings, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary
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in order to make the statements therein, in light of the circumstances
under which they are made, not misleading, and will comply as to form in
all material respects with the provisions of the Securities Act and the
Securities Exchange Act and the rules and regulations thereunder.
3.1.20. OWNERSHIP OF BSI COMMON STOCK. Sun does not "beneficially
own" (as such term is defined for purposes of Section 13(d) of the
Securities Exchange Act) any shares of BSI Common or Preferred Stock.
3.1.21. VOTE REQUIRED. The approval of the Merger by two-thirds
of all votes entitled to be cast by all holders of Sun Common Stock at a
Sun Meeting at which a quorum is present are the only votes of the
holders of any class or series of the capital stock of Sun required to
approve this Agreement, the Merger and the other transactions
contemplated hereby (herein, the "Sun Shareholders' Approval").
ARTICLE IV
OBLIGATIONS PENDING EFFECTIVE DATE
4.1. AGREEMENTS OF SUN AND BSI. Subject to the provisions of Section 4.7
hereof with respect to Sun, each of Sun and BSI agrees that from the date hereof
to the Effective Date, except as otherwise set forth in the Disclosure
Statement, it will (and unless otherwise indicated by the context, since
September 30, 1996 or the date of the last Report, it has):
4.1.1. MAINTENANCE OF PRESENT BUSINESS. Other than as
contemplated by this Agreement, operate its business only in the usual,
regular, and ordinary manner so as to maintain the goodwill it now
enjoys and, to the extent consistent with such operation, use all
reasonable efforts to preserve intact its present business organization,
keep available the services of its present officers and employees, and
preserve its relationships with customers, suppliers, jobbers,
distributors, and others having business dealings with it;
4.1.2. MAINTENANCE OF PROPERTIES. At its expense, maintain all of
its property and assets in customary repair, order, and condition,
reasonable wear and use and damage by fire or unavoidable casualty
excepted;
4.1.3. MAINTENANCE OF BOOKS AND RECORDS. Maintain its books of
account and records in the usual, regular, and ordinary manner, in
accordance with generally accepted accounting principles applied on a
consistent basis;
4.1.4. COMPLIANCE WITH LAW. Duly comply in all material respects
with all laws applicable to it and to the conduct of its business;
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4.1.5. INSPECTION OF EACH MERGING CORPORATION. Permit the other
party hereto, and its officers, directors, employees, accountants,
counsel, investment bankers, financial advisors and other authorized
representatives (collectively the "Representatives"), during normal
business hours, to inspect its records and to consult with its officers,
employees, attorneys, and agents for the purpose of determining the
accuracy of the representations and warranties hereinabove made and the
compliance with covenants contained in this Agreement. Sun and BSI each
agrees that it and its officers and representatives shall hold all data
and information obtained with respect to the other party hereto in
confidence and each further agrees that it will not use such data or
information or disclose the same to others, except to the extent such
data or information either are, or become, published or a matter of
public knowledge; and
4.1.6. NO SOLICITATION. No party hereto shall, and each such
party shall cause its subsidiaries not to, permit any of its
Representatives to, and shall use its best efforts to cause such persons
not to, directly or indirectly, initiate, solicit or encourage, or take
any action to facilitate the making of any offer or proposal which
constitutes or is reasonably likely to lead to any Takeover Proposal (as
defined below), or, in the event of any unsolicited Takeover Proposal,
engage in negotiations or provide any confidential information or data
to any person relating to any Takeover Proposal. Notwithstanding the
foregoing, in the event of an unsolicited Takeover Proposal, unless the
Sun Shareholder Approval and the BSI Shareholder Approval shall have
both been obtained, Sun or BSI may, to the extent that its Board of
Directors is advised in a written, reasoned opinion of outside counsel
that such action is required by its fiduciary duties under law,
participate in discussions or negotiations with and furnish information
to any person in connection with an unsolicited Takeover Proposal made
by such person. Each party hereto shall notify the other party orally
and in writing of any such inquiries, offers or proposals (including,
without limitation, the terms and conditions of any such proposal and
the identity of the person making it), within 24 hours of the receipt
thereof, shall keep the other party informed of the status and details
of any such inquiry and shall give the other party five days' advance
notice of any agreement to be entered into with or any information to be
supplied to any person making such inquiry, offer or proposal. Each
party hereto shall immediately cease and cause to be terminated all
existing discussions and negotiations, if any, with any parties
conducted heretofore with respect to any Takeover Proposal. As used in
this Section 4.1.6, "Takeover Proposal" shall mean any tender or
exchange offer, proposal for a merger, consolidation or other business
combination involving any party to this Agreement or any of its material
subsidiaries, or any proposal or offer (in each case, whether or not in
writing and whether or not delivered to the stockholders of a party
generally) to acquire in any manner, directly or indirectly, a
substantial equity interest in, or a substantial portion of the assets
of any party to this Agreement or any of its material subsidiaries,
other than pursuant to the transactions contemplated by this Agreement.
Nothing contained herein shall prohibit a party from taking and
disclosing to its shareholders a position contemplated by Rule 14c-2(a)
under the Exchange Act with respect to a Takeover Proposal by means of a
tender offer.
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4.2. ADDITIONAL AGREEMENTS OF SUN AND BSI. Sun and BSI agree to take the
following actions after the date hereof:
4.2.1. HART-SCOTT-RODINO. Within 20 days of the date hereof, each
party (or their affiliates) shall file such materials as are required
under the HSR Act with respect to the transaction contemplated hereby
and shall cooperate with the other party to the extent necessary to
assist the other party in the preparation of such filings.
4.2.2. PROXY STATEMENT/PROSPECTUS. Sun and BSI shall cooperate in
the preparation and prompt filing of the Joint Proxy
Statement/Prospectus contemplated by Section 4.6 hereof with the
Commission with respect to, among other things, the meetings of Sun's
and BSI's stockholders called for the purpose of securing stockholder
approval of the merger contemplated by this Agreement. Each of Sun and
BSI shall use all reasonable efforts to have such proxy
statement/prospectus cleared by the Commission.
4.2.3. NOTICE OF MATERIAL DEVELOPMENTS. Each of Sun and BSI will
promptly notify the other party in writing of any Material Adverse
Effect with respect Sun or BSI, respectively.
4.3. ADDITIONAL AGREEMENTS OF BSI. Except as otherwise set forth in the
BSI Disclosure Statement, BSI agrees that from September 30, 1996 it has not,
and from the date hereof to the Effective Date, it will:
4.3.1. PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS. Not enter
into any contracts of employment which (i) cannot be terminated on
notice of 14 days or less or (ii) provide for any severance payments or
benefits covering a period beyond the termination date except as may be
required by law;
4.3.2. PROHIBITION OF CERTAIN LOANS. Not incur any borrowings
except (i) the refinancing of indebtedness now outstanding or additional
borrowings under its existing revolving credit facilities, (ii) the
prepayment by customers of amounts due or to become due for goods sold
or services rendered or to be rendered in the future, (iii) trade
payables incurred in the ordinary course of business, (iv) other
borrowings incurred in the ordinary course of business to finance normal
operations or (v) as is otherwise agreed to in writing by Sun;
4.3.3. PROHIBITION OF CERTAIN COMMITMENTS. Not enter into
commitments for capital expenditures which would exceed $100,000 in the
aggregate, except (i) as may be necessary for the maintenance of
existing facilities, machinery and equipment in good operating condition
and repair in the ordinary course of business, (ii) as may be required
by law or (iii) as is otherwise agreed to in writing by Sun;
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4.3.4. DISPOSAL OF ASSETS. Not sell, dispose of, or encumber, any
property or assets, except (i) in the ordinary course of business or
(ii) as is otherwise agreed to in writing by Sun;
4.3.5. MAINTENANCE OF INSURANCE. Maintain insurance upon all its
properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it
is engaged, but not less than that presently carried by it, which
insurance may be added to from time to time in its discretion; PROVIDED,
that if during the period from the date hereof to and including the
Effective Date any of its property or assets are damaged or destroyed by
fire or other casualty, the obligations of Sun and BSI under this
Agreement shall not be affected thereby (subject, however, to the
provision that the coverage limits of such policies are adequate in
amount to cover the replacement value of such property or assets and
loss of profits during replacement, less commercially reasonable
deductible, if of material significance to the assets or operations of
BSI) but it shall promptly notify Sun in writing thereof and proceed
with the repair or restoration of such property or assets in such manner
and to such extent as may be approved by Sun, and upon the Effective
Date all proceeds of insurance and claims of every kind arising as a
result of any such damage or destruction shall remain the property of
Surviving Corporation;
4.3.6. NO AMENDMENT TO CERTIFICATE OF INCORPORATION, ETC. Not
amend its certificate of incorporation or bylaws or other organizational
documents or merge or consolidate with or into any other corporation or
change in any manner the rights of its capital stock or the character of
its business;
4.3.7. NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES. Except with
respect to exercises of currently outstanding warrants or options and
the proposed equity investment described in Section 2.1.3(b) hereof, not
issue or sell, or issue options or rights to subscribe to (or cancel or
amend any options currently outstanding), or enter into any contract or
commitment to issue or sell (upon conversion or otherwise), any shares
of its capital stock or subdivide or in any way reclassify any shares of
its capital stock, or acquire, or agree to acquire, any shares of its
capital stock; and
4.3.8. PROHIBITION ON DIVIDENDS. Not declare or pay any dividend
on shares of its capital stock or make any other distribution of assets
to the holders thereof.
4.4. ADDITIONAL AGREEMENTS OF SUN. Except as otherwise set forth in the
Sun Disclosure Statement, subject to the provisions of Section 4.7 hereof, Sun
agrees that from the date of its last Report, it has not, and from the date
hereof to the Effective Date, it will:
4.4.1. PROHIBITION OF CERTAIN EMPLOYMENT CONTRACTS. Not enter
into any contracts of employment which (i) cannot be terminated on
notice of 14 days or less or (ii) provide for any severance payments or
benefits covering a period beyond the termination date except as
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may be required by law, PROVIDED, HOWEVER, any severance agreement or
payment or any incentive bonus plan entered into prior to the date
hereof is subject to approval by BSI;
4.4.2. PROHIBITION OF CERTAIN LOANS. Not incur any borrowings
except (i) the refinancing of indebtedness now outstanding or additional
borrowings under its existing revolving credit facilities, (ii) the
prepayment by customers of amounts due or to become due for goods sold
or services rendered or to be rendered in the future, (iii) trade
payables incurred in the ordinary course of business, (iv) other
borrowings incurred in the ordinary course of business to finance normal
operations or (v) as is otherwise agreed to in writing by BSI;
4.4.3. PROHIBITION OF CERTAIN COMMITMENTS. Not (a) enter into
commitments for capital expenditures which would exceed $500,000, in the
aggregate, except (i) as may be necessary for the maintenance of
existing facilities, machinery and equipment in good operating condition
and repair in the ordinary course of business, (ii) as may be required
by law or (iii) as is otherwise agreed to in writing by BSI or (b) enter
into any agreement with any affiliate of Sun without BSI's written
consent;
4.4.4. DISPOSAL OF ASSETS. Not sell, dispose of, or encumber, any
property or assets, except (i) in the ordinary course of business or
(ii) as is otherwise agreed to in writing by BSI;
4.4.5. MAINTENANCE OF INSURANCE. Maintain insurance upon all its
properties and with respect to the conduct of its business of such kinds
and in such amounts as is customary in the type of business in which it
is engaged, but not less than that presently carried by it, which
insurance may be added to from time to time in its discretion; PROVIDED,
that if during the period from the date hereof to and including the
Effective Date any of its property or assets are damaged or destroyed by
fire or other casualty, the obligations of Sun and BSI under this
Agreement shall not be affected thereby (subject, however, to the
provision that the coverage limits of such policies are adequate in
amount to cover the replacement value of such property or assets and
loss of profits during replacement, less commercially reasonable
deductible, if of material significance to the assets or operations of
Sun) but it shall promptly notify BSI in writing thereof and proceed
with the repair or restoration of such property or assets in such manner
and to such extent as may be approved by BSI, and upon the Effective
Date all proceeds of insurance and claims of every kind arising as a
result of any such damage or destruction shall remain the property of
Surviving Corporation;
4.4.6. NO AMENDMENT TO ARTICLES OF INCORPORATION, ETC. Except as
otherwise provided herein, not amend its articles of incorporation or
bylaws or other organizational documents or merge into any other
corporation or change in any manner the rights of its capital stock or
the character of its business;
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4.4.7. NO ISSUANCE, SALE, OR PURCHASE OF SECURITIES. Except with
respect to exercises of currently outstanding warrants or options, not
issue or sell, or issue options or rights to subscribe to (or cancel or
amend any options currently outstanding), or enter into any contract or
commitment to issue or sell (upon conversion or otherwise), any shares
of its capital stock or subdivide or in any way reclassify any shares of
its capital stock, or acquire, or agree to acquire, any shares of its
capital stock;
4.4.8. PROHIBITION ON DIVIDENDS. Not declare or pay any dividend
on shares of its capital stock or make any other distribution of assets
to the holders thereof;
4.4.9. LISTING OF SUN COMMON STOCK. Use its best efforts to
cause, as of the Effective Date, the listing on The Nasdaq Stock Market
of the shares of Sun Common Stock to be issued pursuant to this
Agreement; and
4.4.10. NOTICE OF CERTAIN DEVELOPMENTS. Promptly furnish to BSI
copies of all communications from Sun to its stockholders and all
reports filed by it with the Commission and The Nasdaq Stock Market, and
relating to periodic or other material developments concerning Sun's
financial condition, business, or affairs.
4.5. STOCKHOLDERS' MEETINGS. Each party shall promptly call and hold a
meeting of stockholders (the "BSI Meeting" and the "Sun Meeting", respectively)
for the purpose of considering and acting upon proposals to approve the Merger
contemplated by this Agreement (and the Reincorporation with respect to
Surviving Corporation) and any other matters requiring stockholder approval in
connection herewith (the "BSI Shareholder Approval" and the "Sun Shareholder
Approval", respectively).
4.6. JOINT PROXY STATEMENT AND REGISTRATION STATEMENT.
4.6.1. PREPARATION AND FILING. As promptly as reasonably
practicable after the date hereof, Sun will prepare and file (with the
cooperation of BSI) with the Securities and Exchange Commission (the
"Commission") in accordance with the Securities Act and Securities
Exchange Act, a combined joint proxy statement (the "Joint Proxy
Statement/Prospectus") and registration statement on Form S-4 (the
"Registration Statement"), relating to approval and adoption of this
Agreement and the transactions contemplated hereby by the stockholders
of Sun and BSI. The parties will take such actions as may be reasonably
required to cause the Registration Statement to be declared effective
under the Securities Act as promptly as practicable after such filing
and to cause the shares of Sun Common Stock and Sun Preferred Stock
issuable in connection with the Merger to be registered or to obtain an
exemption from registration under applicable state "blue sky" or
securities laws; provided, however, that no party shall be required to
register or qualify as a foreign corporation or to take other action
which would subject it to general service of process in any jurisdiction
where it will not be, following the Merger, so subject. Each of the
parties hereto shall furnish all information concerning itself which is
required or
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customary for inclusion in the Registration Statement or the Joint Proxy
Statement/Prospectus. As soon as reasonably practicable after the
Registration Statement has been declared effective by the Commission,
Sun and BSI shall promptly mail to each of the respective stockholders
in Sun and BSI the Joint Proxy Statement/Prospectus. Subject to the
exercise of fiduciary obligations under applicable law as advised in
writing by outside counsel (a copy of which will be provided promptly to
BSI), Sun shall, through its Board of Directors, include in the Joint
Proxy Statement/Prospectus the recommendation of the Board of Directors
of Sun that the stockholders of Sun adopt this Agreement, and shall use
its best efforts to obtain such adoption.
4.6.2. FAIRNESS OPINIONS. It shall be a condition to the mailing
of the Joint Proxy Statement/Prospectus to the shareholders of BSI and
Sun that Sun shall have received an opinion from Rodman & Renshaw dated
the date of the Joint Proxy Statement/Prospectus, to the effect that, as
of the date thereof, the consideration to be paid in the Merger is fair
from a financial point of view to the holders of Sun Common Stock;
PROVIDED, HOWEVER, that the opinion need not address the consideration
to be paid to SeaFirst.
4.7. ADDITIONAL AGREEMENTS REGARDING OPERATION OF SUN PENDING EFFECTIVE
DATE.
(a) On or prior to the date hereof, Sun's Board of Directors has
approved the business plan prepared by BSI with respect to Sun's
operations pending the Effective Date ("Plan"), which approval includes
the direction by such board to Sun's management to implement the Plan.
Accordingly, subject to the following provisions, Sun hereby agrees to
implement the Plan in all material respects. Sun shall not be obligated
to implement any particular provision of the Plan if the Board
determines that such actions are, based on more recent information or
events, inconsistent with the objectives of the Plan and are not in the
best interests of Sun and its shareholders. Sun and BSI agree that BSI
shall have no authority to take any action on behalf of Sun with respect
to the Plan (or the Additional Recommendations, as defined below) and
shall not be involved in the implementation of the Plan except as
requested by Sun.
(b) Prior to the Effective Date, Sun agrees to provide to BSI on
the first and fifteenth day of each month a written summary report
regarding the status of the Plan and the results thereof, which report
shall include a listing of all matters which have not yet been
implemented in material compliance with the Plan. Based on these reports
and BSI's independent inspection of Sun's operations, BSI will make
other recommendations and suggestions regarding Sun's operations prior
to the Effective Date (the "Additional Recommendations"). BSI will
discuss with Sun's management and/or Board of Directors the Additional
Recommendations, the reasons for the Additional Recommendations and how
such Additional Recommendations affect or complement the Plan. Sun
hereby agrees to implement the Additional Recommendations in all
material respects; provided, however, that Sun shall have no obligation
to implement the Additional Recommendations unless the
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Board finds that the Additional Recommendations are consistent with the
Plan and are in the best interest of Sun and its shareholders.
(c) Notwithstanding any other term or provision of this
Agreement, BSI hereby agrees that all actions taken by Sun in accordance
with the Plan or the Additional Recommendations (and the consequences
thereof) shall in no event constitute a breach of any representation,
warranty, covenant or agreement herein.
(d) Sun hereby agrees that in the event the Plan and the
Additional Recommendations are not timely implemented in all material
respects notwithstanding any determination by the Sun Board of Directors
regarding the advisability of the Plan or the Additional
Recommendations, BSI may elect to notify Sun of its intent to terminate
this Agreement, and upon such termination shall have the right to
reimbursement of all documented legal, accounting and other
out-of-pocket expenses incurred by BSI in connection with the
negotiation, execution and performance of this Agreement (such expenses
not to exceed $500,000 for the purposes of this section only); provided,
however, BSI shall give Sun ten days prior written notice of any such
proposed termination, and Sun shall have such ten day period in which to
cure its failure to implement the Plan and/or the Additional
Recommendations. If such failure is not cured within such ten day
period, BSI shall be entitled to terminate this Agreement and to
immediate expense reimbursement as hereinabove provided.
(e) (i) In the event the Merger is not consummated, Sun hereby
agrees to indemnify and hold harmless BSI, and its officers, directors,
affiliates, shareholders and agents (collectively, "indemnitees"), from
and against any and all claims, damages, lawsuits, expenses, costs,
judgments and liabilities (including counsel fees and expenses) of any
nature whatsoever ("Losses") relating to the Plan or the Additional
Recommendations, to the extent the indemnitees incur any Losses as a
result of Sun's implementation thereof, or with respect to any
third-party claim against the indemnitees with respect to the actions
taken by Sun which relate to the Plan or the Additional Recommendations.
(ii) Promptly after BSI becomes aware of one or more
facts, occurrences, happenings or events (including, without limitation,
the commencement of any action) which may give rise to a claim for
indemnification under this section, BSI shall notify Sun in writing of
such facts, occurrences, happenings or events, but failure to give such
notice shall not relieve Sun of any liability hereunder except for any
fees or expenses unreasonably incurred in connection therewith or to the
extent such failure actually prejudices Sun with respect to such claim
or action. Thereafter, BSI shall deliver to Sun, promptly after BSI's
receipt thereof, copies of all notices and documents received by BSI
relating to such claim or action. Any claims for indemnification under
this section must be asserted in writing (setting forth in reasonable
detail a description of such claim) to Sun.
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(iii) BSI shall provide Sun with prompt notice of the
payment or occurrence of any Losses. Upon the payment or occurrence of
any Loss, Sun shall pay the indemnitee the amount of such Loss.
(iv) If, pursuant to this section, BSI notifies Sun of any
claim or legal proceeding by any person (other than BSI or any other
indemnitee) which might give rise to a claim for indemnification against
Sun, Sun, at its sole cost and expense, may, upon written notice to BSI,
assume the defense of such claim or related legal proceeding. If Sun
assumes the defense of any such claim or legal proceeding, Sun shall
select counsel reasonably acceptable to BSI to conduct the defense of
such claim or legal proceeding and, at the sole cost and expense of Sun,
shall take all steps reasonably necessary in the defense, compromise or
settlement thereof; provided, that Sun shall not expressly consent to a
settlement or compromise of, or expressly consent to the entry of any
judgment arising from, any such claim or legal proceeding without the
prior written consent of BSI (which consent shall not be unreasonably
withheld or delayed, although BSI may, in considering whether or not to
give such consent, assess the implications of such settlement,
compromise or judgment on the current or future conduct of BSI's
business activities). BSI and any other indemnitee shall be entitled to
participate in (but not control) the defense of any such action, with
their own counsel and at their own expense.
If, with respect to a third-party claim, Sun neither acknowledges
nor disclaims in writing to BSI Sun's obligation to indemnify the
indemnitees pursuant hereto, BSI or any other indemnitee may defend
against such claim or related legal proceeding with such counsel and in
such manner as they deem appropriate, and may consent to the settlement
or compromise of, or consent to the entry of a judgment arising from,
such claim or legal proceeding without the consent of Sun. Sun and its
agents and representatives shall be entitled to participate in (but not
control) the defense of any such action, with Sun's own counsel and at
its own expense.
Whether or not Sun chooses to defend any claim or litigation for
which BSI or any other indemnitee may be entitled to indemnification
under this section, each of the parties hereto shall cooperate in the
defense thereof. Such cooperation shall include the retention and the
provision of records and information that are reasonably relevant to
such claim or litigation, and making employees available on a mutually
convenient basis to provide additional information and explanation of
any material provided hereunder.
4.8. DISCLOSURE STATEMENT. On the date of this Agreement, (i) BSI has
delivered to Sun a Statement (the "BSI Disclosure Statement"), accompanied by a
certificate signed by the chief financial officer of BSI stating that the BSI
Disclosure Statement is being delivered pursuant to this Section 4.8(i), and
(ii) Sun has delivered to BSI a Statement (the "Sun Disclosure Statement"),
accompanied by a certificate signed by the chief financial officer of Sun
stating that the Sun Disclosure Statement is being delivered pursuant to this
Section 4.8(ii). The BSI Disclosure Statement and the Sun Disclosure Statement
are collectively referred to herein as the "Disclosure
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Statements." The Disclosure Statements, when so delivered, shall be deemed to
constitute an integral part of this Agreement and to modify or otherwise affect
the respective representations, warranties, covenants or agreements of the
parties hereto contained herein to the extent that such representations,
warranties, covenants or agreements expressly refer to the Disclosure
Statements. Except as otherwise contained herein or in the Disclosure
Statements, any and all statements, representations, warranties or disclosures
set forth in the Disclosure Statements shall be deemed to have been made on and
as of the date of this Agreement.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BSI. The obligations of BSI
to consummate and effect the Merger hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by BSI in the
manner contemplated by Section 6.4 on or before the Closing Date:
5.1.1. REPRESENTATIONS AND WARRANTIES OF SUN; PERFORMANCE OF
OBLIGATIONS. The representations and warranties of Sun herein contained
shall be true and correct as of the date hereof and as of the Closing
Date with the same effect as though made at such date (except to the
extent such representations and warranties speak only as of any other
date, which need only be true and correct as of such other date), except
as affected by transactions permitted or contemplated by this Agreement;
except in each case for such failures of representations and warranties
to be true and correct (without regard to any materiality qualifications
contained therein) which individually, or in the aggregate, have not had
and would not be reasonably likely to result in a Sun Material Adverse
Effect. Sun shall have performed and complied, in all material respects,
with all its agreements and covenants contained in or contemplated by
this Agreement to be performed or complied with by Sun before the
Closing Date; and Sun shall have delivered to BSI a certificate, dated
the Closing Date and signed by its chairman of the board or its
president, and by its chief financial or accounting officer, and its
secretary, to the effect that, to the best of such officer's knowledge,
such conditions have been satisfied; provided however, BSI acknowledges
that Sun has delivered to BSI, on or before the date of this Agreement,
its business plan for the remainder of 1996 and for the first quarter of
1997 the (the "Sun Business Plan") and BSI agrees that if Sun achieves
the results forecasted in the Sun Business Plan in all material
respects, BSI will not assert that such financial results constitute a
Sun Material Adverse Effect even though such financial results show a
decline from the results of operations set forth in the financial
statements dated September 30, 1996 delivered to BSI pursuant to the
Agreement (it being acknowledged by the parties that the Sun Business
Plan has not been delivered to BSI as of the date hereof and is subject
to the approval of BSI in its sole discretion); provided further, the
foregoing provisions shall not preclude BSI from asserting that a Sun
Material Adverse Effect has occurred as a result of other occurrences
which might constitute a Sun Material Adverse Effect.
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5.1.2. NO INJUNCTION. No injunction or restraining order shall be
in effect in any court of competent jurisdiction which would restrain or
prohibit the consummation of the merger contemplated hereby.
5.1.3. OPINION OF SUN COUNSEL. BSI shall have received a
favorable opinion, dated as of the Effective Date, from Graham & James,
LLP/Riddell Williams P.S., counsel for Sun, in form and substance
reasonably satisfactory to BSI, to the effect that (i) Sun has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Washington; (ii) all corporate
proceedings required to be taken by or on the part of Sun to authorize
the execution of this Agreement and the implementation of the merger
contemplated hereby have been taken; (iii) the shares of Sun Common and
Preferred Stock which are to be delivered in accordance with this
Agreement will, when issued, be validly issued, fully paid and
nonassessable outstanding securities of Sun; and (iv) this Agreement has
been duly executed and delivered by, and is the legal, valid and binding
obligation of Sun and is enforceable against Sun in accordance with its
respective terms, except as enforceability may be limited by (a)
equitable principles of general applicability or (b) bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws
affecting the rights of creditors generally. Such opinion also shall
cover such other matters incident to the transactions herein
contemplated as BSI and its counsel may reasonably request. In rendering
such opinion, such counsel may rely upon (i) certificates of public
officials and of officers of Sun as to matters of fact and (ii) the
opinion or opinions of other counsel, which opinions shall be reasonably
satisfactory to BSI, as to matters other than federal or Washington law.
5.1.4. TAX OPINION. BSI shall have received an opinion of Porter
& Hedges, L.L.P., in form and substance satisfactory to BSI, dated the
Effective Date, that BSI and holders of BSI Common Stock and BSI
Preferred Stock (except to the extent any stockholders receive cash in
lieu of fractional shares and except for payments to any dissenting
stockholder) will recognize no gain or loss for federal income tax
purposes as a result of consummation of the Merger.
5.1.5. STOCKHOLDER APPROVAL. The approval of a requisite majority
of the stockholders of Sun of the Merger contemplated by this Agreement
shall have been obtained.
5.1.6. HART-SCOTT-RODINO, ETC. All waiting periods required by
HSR shall have expired with respect to the transactions contemplated by
this Agreement, or early termination with respect thereto shall have
been obtained without the imposition of any governmental request or
order requiring the sale or disposition or holding separate (through a
trust or otherwise) of particular assets or businesses of Sun, its
affiliates or any component of BSI or other actions as a precondition to
the expiration of any waiting period or the receipt of any necessary
governmental approval or consent.
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5.1.7. LISTING OF SUN COMMON STOCK. The Nasdaq Stock Market shall
have agreed that on the Effective Date it will list the shares of Sun
Common Stock issuable at the Effective Date of this Agreement.
5.1.8. CONSENT OF CERTAIN PARTIES IN PRIVITY WITH SUN. The
holders of any material indebtedness of Sun, the lessors of any material
property leased by Sun, and the other parties to any other material
agreements (including those licensors listed in Section 5.1.8 of the Sun
Disclosure Statement hereto) to which Sun is a party shall have, if
required by the terms of the respective agreement, consented to the
Merger contemplated hereby (which consents shall have been obtained
without any material charge or expense imposed by the consenting party
and without any material adverse amendments to any underlying
agreements).
5.1.9. RESIGNATIONS. All officers and directors of Sun shall have
provided written resignations to BSI with respect to such positions.
5.1.10. SUN DISSENTERS. The holders of not more than 1% of the
issued and outstanding shares of Sun Common Stock (the "Sun Dissenting
Shareholders") shall have delivered a written demand for appraisal of
such shares in the manner provided in the WBCA.
5.1.11. REGISTRATION STATEMENT EFFECTIVE. The Registration
Statement shall have been declared effective by the Commission, the
information contained therein shall be true and correct in all material
respects, no stop order shall have been issued or proceedings instituted
or threatened suspending the effectiveness of the Registration Statement
and all approvals, consents, permits, licenses or qualifications from
authorities administering the securities or "blue-sky" laws of any state
having jurisdiction, required in the reasonable judgment of BSI for the
consummation of the merger, shall have been obtained and shall be
effective, and no such approval, consent, permit, license, or
qualification shall contain any condition which in the judgment of BSI
is unduly burdensome.
5.1.12. FINANCING. BSI shall have obtained debt financing in an
amount sufficient in its reasonable judgment for the consummation of the
Merger.
5.1.13. LOCK-UP AGREEMENT OF SEAFIRST. SeaFirst shall have
executed a 180 day "Lock-up" agreement with respect to its shares of Sun
Common Stock held at the Effective Date, such agreement to be in a form
acceptable to BSI.
5.1.14. ADDITIONAL MATTERS. Sun shall have provided to BSI such
additional resolutions and certificates as may be reasonably required in
connection with the consummation of the Merger.
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5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF SUN. The obligations of Sun
to consummate and effect the Merger hereunder shall be subject to the
satisfaction of the following conditions, or to the waiver thereof by Sun in the
manner contemplated by Section 6.4 on or before the Closing Date:
5.2.1. REPRESENTATIONS AND WARRANTIES OF BSI; PERFORMANCE OF
OBLIGATIONS. The representations and warranties of BSI herein contained
shall be true and correct as of the date hereof and as of the Closing
Date with the same effect as though made at such date (except to the
extent such representations and warranties speak only as of any other
date, which need only be true and correct as of such other date), except
as affected by transactions permitted or contemplated by this Agreement;
except in each case for such failures of representations and warranties
to be true and correct (without regard to any materiality qualifications
contained therein) which individually, or in the aggregate, have not had
and would not be reasonably likely to result in a BSI Material Adverse
Effect. BSI shall have performed and complied, in all material respects,
with all its agreements and covenants contained in or contemplated by
this Agreement to be performed or complied with by BSI before the
Closing Date; and BSI shall have delivered to Sun a certificate, dated
the Closing Date and signed by its chairman of the board or its
president, and by its chief financial or accounting officer, and its
secretary, to the effect that, to the best of such officer's knowledge,
such conditions have been satisfied.
5.2.2. NO INJUNCTION. No injunction or restraining order shall be
in effect in any court of competent jurisdiction which would restrain or
prohibit the consummation of the merger contemplated hereby.
5.2.3. OPINION OF BSI'S COUNSEL. Sun shall have received a
favorable opinion, dated the Effective Date, from Porter & Hedges,
L.L.P., counsel to BSI, in form and substance reasonably satisfactory to
Sun, to the effect that (i) BSI has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware; (ii) all corporate or other proceedings required to
be taken by or on the part of BSI to authorize the execution of this
Agreement and the implementation of the merger contemplated hereby have
been taken; and (iii) this Agreement has been duly executed and
delivered by, and is the legal, valid and binding obligation of BSI and
is enforceable against BSI in accordance with its terms, except as the
enforceability may be limited by (a) equitable principles of general
applicability or (b) bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws affecting the rights of creditors generally.
Such opinion shall also cover such other matters incident to the
transactions herein contemplated as Sun and its counsel may reasonably
request. In rendering such opinion, such counsel may rely upon (i)
certificates of public officials and of officers of BSI as to matters of
fact and (ii) on the opinion or opinions of other counsel, which
opinions shall be reasonably satisfactory to Sun, as to matters other
than federal or Texas law.
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5.2.4. TAX OPINION. Sun shall have received an opinion of Graham
& James LLP/Riddell Williams P.S. in form and substance satisfactory to
Sun, dated the Effective Date, that Sun and holders of Sun Common Stock
(except to the extent any stockholders receive the Cash Consideration or
cash in lieu of fractional shares and except for payments to any
dissenting shareholder) will recognize no gain or loss for federal
income tax purposes as a result of consummation of the Merger.
5.2.5. STOCKHOLDER APPROVAL. The approval of the requisite
majority of the stockholders of BSI and Sun of the Merger contemplated
by this Agreement shall have been obtained.
5.2.6. HART-SCOTT-RODINO, ETC. All waiting periods required by
HSR shall have expired with respect to the transactions contemplated by
this Agreement, or early termination with respect thereto shall have
been obtained without the imposition of any governmental request or
order requiring the sale or disposition or holding separate (through a
trust or otherwise) of particular assets or businesses of Sun, its
affiliates or any component of BSI or other actions as a precondition to
the expiration of any waiting period or the receipt of any necessary
governmental approval or consent.
5.2.7. FAIRNESS OPINION. Sun shall have received a favorable
opinion from Rodman & Renshaw for inclusion in the Joint Proxy
Statement/Prospectus as to the fairness, from a financial point of view,
to the holders of Sun Common Stock (other than SeaFirst) of the
consideration to be paid in the merger.
5.2.8. CONSENT OF CERTAIN PARTIES IN PRIVITY WITH BSI. The
holders of any material indebtedness of BSI, the lessors of any material
property leased by BSI, and the other parties to any other material
agreements (including those licensors listed on Section 5.2.8 of the BSI
Disclosure Statement hereto) to which BSI is a party shall have, if
required by the terms of the respective agreements, consented to the
Merger contemplated hereby (which consents shall have been obtained
without any material charge or expense imposed by the consenting party
and without any material adverse amendments to any underlying
agreements).
5.2.9. REGISTRATION STATEMENT EFFECTIVE. The Registration
Statement shall have been declared effective by the Commission, the
information contained therein shall be true and correct in all material
respects, no stop order shall have been issued or proceedings instituted
or threatened suspending the effectiveness of the Registration Statement
or, in the reasonable opinion of Sun's counsel, the issuance of the Sun
Common Stock and Sun Preferred Stock to the BSI stockholders shall be
exempt from registration under federal securities laws.
5.2.10. BSI DISSENTERS. The holders of not more than 1% of the
issued and outstanding BSI Common Stock and BSI Preferred Stock shall
have dissented with respect to the Merger as provided in the DGCL.
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5.2.11. EQUITY INVESTMENT. BSI shall have obtained the equity
investment as contemplated by Section 2.1.3(b) hereof.
5.2.12. ADDITIONAL MATTERS. BSI shall have provided to Sun such
additional resolutions and certificates as may be reasonably required in
connection with the consummation of the merger.
5.3. ADDITIONAL CONDITION PRECEDENT. The obligations of BSI and Sun to
consummate and effect the Merger also shall be subject to the condition that BSI
shall have secured, on or prior to the earlier to occur of the mailing of the
Joint Proxy Statement/Prospectus or January 15, 1997 (the "Financing Termination
Date"), a commitment letter in customary form (the "Commitment") for debt
financing in addition to that already in place of not less than $5,000,000 for
purposes of the consummation of the Merger. The Commitment shall be from a
lender reasonably acceptable to Sun. BSI shall deliver a copy of the Commitment
to Sun on or prior to the Financing Termination Date. In the event that BSI has
not secured the Commitment and delivered a copy of the same to Sun on or prior
to the Financing Termination Date, BSI or Sun each shall be entitled to
terminate this Agreement at any time thereafter upon written notice to the other
in the manner provided for in Article VI of this Agreement.
ARTICLE VI
TERMINATION AND ABANDONMENT
6.1. TERMINATION. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
hereby abandoned at any time (whether before or after the approval and adoption
thereof by the stockholders of BSI or Sun contemplated by this Agreement) before
the Effective Date:
6.1.1. BY MUTUAL CONSENT. By mutual written consent of Sun and
BSI.
6.1.2. BY SUN BECAUSE OF CONDITIONS PRECEDENT. By Sun, if any
condition set forth in Paragraph 5.2 hereof has not been met and has not
been waived prior to the Effective Date; provided however, that prior to
any termination of this Agreement by Sun on the basis that BSI has not
met the conditions of Section 5.2.1, Sun shall first provide written
notice to BSI, of (i) any breaches of the representations and warranties
of BSI made herein as of the date hereof which breaches, individually or
in the aggregate, have had, would or would be reasonably likely to
result in a BSI Material Adverse Effect, and BSI shall have 20 days to
remedy such breaches after receipt by BSI of notice in writing from Sun,
specifying the nature of such breaches and requesting that they be
remedied, or (ii) any failure to perform and comply with in all material
respects its agreements and covenants hereunder, and BSI shall have 20
days to perform such agreement or covenants after receipt by BSI of
notice in writing from Sun, specifying the nature of such failure and
requesting that it be remedied.
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6.1.3. BY BSI BECAUSE OF CONDITIONS PRECEDENT. By BSI, if any
condition set forth in Paragraph 5.1 hereof has not been met and has not
been waived prior to the Effective Date; provided however, that prior to
any termination of this Agreement by BSI on the basis that Sun has not
met the conditions of Section 5.1.1, BSI shall first provide written
notice to Sun, of (i) any breaches of the representations and warranties
of Sun made herein as of the date hereof which breaches, individually or
in the aggregate, have had, would or would be reasonably likely to
result in a Sun Material Adverse Effect, and Sun shall have 20 days to
remedy such breaches after receipt by Sun of notice in writing from BSI,
specifying the nature of such breaches and requesting that they be
remedied, or (ii) any failure to perform and comply with in all material
respects its agreements and covenants hereunder, and Sun shall have 20
days to perform such agreement or covenants after receipt by Sun of
notice in writing from BSI, specifying the nature of such failure and
requesting that it be remedied.
6.1.4. BY SUN OR BSI IF MERGER NOT EFFECTIVE BY APRIL 30, 1997.
By either Sun or BSI, if the Merger shall not have become effective on
or before April 30, 1997; provided, such date shall be extended for up
to 60 additional days in order (a) to satisfy the requirements of the
Commission (or any condition to Closing related to the requirements of
the Commission), (b) to obtain clearance under HSR or (c) to obtain
relief from any injunction or restraining order prohibiting consummation
of the merger; provided, further, that a party in default or in breach
of its obligations or agreements under this Agreement shall have no
right to terminate the Agreement under this Section 6.1.4.
6.1.5. BY BSI UNDER SECTION 4.7. By BSI under the provisions of
Section 4.7 hereof.
6.1.6. BY BSI OR SUN UNDER SECTION 5.3. By BSI or Sun under the
provisions of Section 5.3 hereof.
6.1.7. BY SUN OR BSI BECAUSE OF ALTERNATE BUSINESS COMBINATION.
(a) by Sun, upon two days' prior notice to BSI, if, as a result
of a tender offer by a party other than BSI or any of its affiliates or
any written offer or proposal with respect to a merger, sale of a
material portion of its assets or other business combination (each, a
"Business Combination") by a party other than BSI or any of its
affiliates, the Board of Directors of Sun determines in good faith that
the fiduciary obligations of such directors under applicable law require
that such tender offer or other written offer or proposal be accepted;
PROVIDED, HOWEVER, that (i) the Board of Directors of Sun shall have
been advised in writing by outside counsel that notwithstanding a
binding commitment to consummate an agreement of the nature of this
Agreement entered into in the proper exercise of their applicable
fiduciary duties, and notwithstanding all concessions which may be
offered by BSI in negotiations entered into pursuant to clause (ii)
below, such fiduciary duties would also require the directors to
reconsider such commitment as a result of such tender offer or other
written offer or proposal; and (ii) prior to any such termination, Sun
shall, and shall cause its respective financial and legal advisors to,
negotiate with BSI to make such adjustments
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in the terms and conditions of this Agreement as would enable Sun to
proceed with the transactions contemplated herein; PROVIDED FURTHER,
that BSI and Sun acknowledge and affirm that, notwithstanding anything
in this Section 6.1.7(a) to the contrary, BSI and Sun intend this
Agreement to be an exclusive agreement and, accordingly, nothing in this
Agreement is intended to constitute a solicitation of an offer or
proposal for a Business Combination, it being acknowledged and agreed
that any such offer or proposal would interfere with the strategic
advantages and benefits that BSI and Sun expect to derive from the
Merger and other transactions contemplated hereby;
(b) by BSI, upon two days' prior notice to Sun, if, as a result
of a tender offer by a party other than Sun or any of its affiliates or
any written offer or proposal with respect to a Business Combination by
a party other than Sun or any of its affiliates, the Board of Directors
of BSI determines in good faith that the fiduciary obligations of such
directors under applicable law require that such tender offer or other
written offer or proposal be accepted; PROVIDED, HOWEVER, that (i) the
Board of Directors of BSI shall have been advised in writing by outside
counsel that notwithstanding a binding commitment to consummate an
agreement of the nature of this Agreement entered into in the proper
exercise of their applicable fiduciary duties and notwithstanding all
concessions which may be offered by Sun in negotiations entered into
pursuant to clause (ii) below, such fiduciary duties would also require
the directors to reconsider such commitment as a result of such tender
offer or other written offer or proposal; and (ii) prior to any such
termination, BSI shall, and shall cause its respective financial and
legal advisors to, negotiate with Sun to make such adjustments in the
terms and conditions of this Agreement as would enable BSI to proceed
with the transactions contemplated herein; provided, further, that Sun
and BSI acknowledge and affirm that, notwithstanding anything in this
Section 6.1.7(b) to the contrary, Sun and BSI intend this Agreement to
be an exclusive agreement and, accordingly, nothing in this Agreement is
intended to constitute a solicitation of an offer or proposal for a
Business Combination, it being acknowledged and agreed that any such
offer or proposal would interfere with the strategic advantages and
benefits that Sun and BSI expect to derive from the Merger and other
transactions contemplated hereby;
6.2. TERMINATION BY BOARD OF DIRECTORS. An election of Sun or BSI to
terminate this Agreement and abandon the merger as provided in Paragraph 6.1
shall be exercised by such party's board of directors.
6.3. EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to and in accordance with the provisions
of Paragraph 6.1 hereof, this Agreement shall become void and have no effect and
there shall be no liability on the part of either BSI or Sun or their respective
officers or directors hereunder, except as provided in Section 6.5 and except
that (i) Sections 4.7, 6.5 and the agreement contained in the last sentence of
Section 4.1.5 shall survive any such termination and (ii) no such termination
shall relieve any party from liability for breach of any representation,
warranty or agreement contained herein; PROVIDED, HOWEVER, that no party hereto
shall waive any term or condition hereof, unless in the judgment of the board of
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directors taking the action, such waiver will not have a materially adverse
effect on the benefits intended under this Agreement to the stockholders of its
corporation.
6.4. WAIVER OF CONDITIONS. Subject to the requirements of any applicable
law, any of the terms or conditions of this Agreement may be waived in writing
at any time by the party which is entitled to the benefit thereof, by action
taken by its board of directors, the executive committee of its board of
directors, or its chief executive officer.
6.5. EXPENSE ON TERMINATION. If the merger contemplated hereby is
terminated pursuant to and in accordance with the provisions of Paragraph 6.1
hereof, all expenses will be paid by the party incurring them, PROVIDED,
HOWEVER, (i) that if either Sun or BSI terminates this Agreement as a result of
a breach of or default in the other party's obligations hereunder, then the
party that so breached or defaulted hereunder shall pay all of the other party's
documented costs and expenses, including legal, accounting and financial
advisory fees and expenses, incurred in connection with the negotiation and
implementation of this Agreement (and if Sun is the terminating party, BSI shall
reimburse Sun for 50% of the filing fee and printing costs associated with the
Joint Proxy Statement/Prospectus), (ii) that if Sun or BSI, respectively,
terminates this Agreement pursuant to Section 6.1.7(a) or 6.1.7(b),
respectively, the terminating party shall pay the other party the sum of
$750,000 (which amount shall be deemed to constitute full payment of such
parties' fees and expenses incurred in connection with the negotiation and
implementation of this Agreement) and (iii) if BSI terminates the agreement
because the condition precedent contained in Section 5.1.12 (Financing) has not
been satisfied prior to the Closing Date (so long as the Commitment has been
received not later than the Financing Termination Date), BSI shall pay Sun's
documented costs and expenses, including legal, accounting and financial
advisory fees and expenses. In addition to the foregoing provisions, if BSI
terminates this Agreement pursuant to Section 5.1.2, upon such termination Sun
shall issue to BSI a warrant (the "Warrant") to purchase 1,500,000 shares of Sun
Common Stock (as adjusted to reflect any changes in the capital structure of
Sun) at an exercise price equal to the average closing price for 20 trading days
prior to issuance. The Warrant shall be exercisable for a period of ten years
after the date of issuance, shall contain customary anti-dilution and "cheap
stock" protection and shall contain a "cashless exercise" provision. BSI and Sun
shall mutually agree on the form of such warrant within 15 days of the date
hereof.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) INDEMNIFICATION. To the extent, if any, not provided by an
existing right under one of the parties' directors and officers
liability insurance policies, from and after the Effective Date, the
Surviving Corporation shall, to the fullest extent permitted by
applicable law, indemnify, defend and hold harmless each person who is
now, or has been at any time prior to the date hereof, or who becomes
prior to the Effective Date, a director, officer or
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employee of the parties hereto or any subsidiary thereof (each an
"Indemnified Party" and, collectively, the "Indemnified Parties")
against all losses, expenses (including reasonable attorneys' fees and
expenses), claims, damages or liabilities or, subject to the proviso of
the next succeeding sentence, amounts paid in settlement, arising out of
actions or omissions occurring at or prior to the Effective Date and
whether asserted or claimed prior to, at or after the Effective Date)
that are in whole or in part (i) based on, or arising out of the fact
that such person is or was a director, officer or employee of such party
or a subsidiary of such party or (ii) based on, arising out of or
pertaining to the transactions contemplated by this Agreement. In the
event of any such loss, expense, claim, damage or liability (whether or
not arising before the Effective Date), (i) the Surviving Corporation
shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Parties, which counsel shall be reasonably satisfactory to
the Surviving Corporation, promptly after statements therefor are
received and otherwise advance to such Indemnified Party upon request
reimbursement of documented expenses reasonably incurred, in either case
to the extent not prohibited by the WBCA (or the law of jurisdiction of
incorporation of the Surviving Corporation) and upon receipt of any
affirmation and undertaking required by the WBCA (or the law of
jurisdiction of incorporation of the Surviving Corporation), (ii) the
Surviving Corporation will cooperate in the defense of any such matter
and (iii) any determination required to be made with respect to whether
an Indemnified Party's conduct complies with the standards set forth
under Washington law (or the law of jurisdiction of incorporation of the
Surviving Corporation) and the Surviving Corporation's Restated Articles
of Incorporation or Bylaws shall be made by independent counsel mutually
acceptable to the Surviving Corporation and the Indemnified Party;
provided, however, that the Surviving Corporation shall not be liable
for any settlement effected without its written consent (which consent
shall not be unreasonably withheld). The Indemnified Parties as a group
may retain only one law firm with respect to each related matter except
to the extent, there is, in the opinion of counsel to an Indemnified
Party, under applicable standards of professional conduct, a conflict on
any significant issue between positions of any two or more Indemnified
Parties.
(b) INSURANCE. For a period of four years after the Effective
Date, the Surviving Corporation shall cause to be maintained in effect
the policies of directors' and officers' liability insurance maintained
by BSI and Sun for the benefit of those persons who are covered by such
policies at the Effective Date (or the Surviving Corporation may
substitute therefor policies of at least the same coverage with respect
to matters occurring prior to the Effective Time), to the extent that
such liability insurance can be maintained annually at a cost to the
Surviving Corporation not greater than $50,000; provided that if such
insurance cannot be so maintained or obtained at such cost, the
Surviving Corporation shall maintain or obtain as much of such insurance
as can be so maintained or obtained at a cost equal to $50,000 annually.
(c) SUCCESSORS. In the event the Surviving Corporation or any of
its successors or assigns (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or
entity of such consolidation or merger or (ii) transfers
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all or substantially all of its properties and assets to any person,
then and in either such case, proper provision shall be made so that the
successors and assigns of the Surviving Corporation shall assume the
obligations set forth in this Section 7.1.
(d) SURVIVAL OF INDEMNIFICATION. To the fullest extent permitted
by law, from and after the Effective Date, all rights to indemnification
now existing in favor of the employees, agents, directors or officers of
BSI, Sun and their respective subsidiaries with respect to their
activities as such prior to the Effective Date, as provided in their
respective Articles of or Certificate of Incorporation or Bylaws, in
effect on the date thereof or otherwise in effect on the date hereof,
shall survive the Merger and shall continue in full force and effect for
a period of not less than six years from the Effective Date.
(e) BENEFIT. The provisions of this Section 7.1 are intended to
be for the benefit of, and shall be enforceable by, each Indemnified
Party, his or her heirs and his or her representatives.
7.2. UNDERTAKING TO FILE REPORTS AND COOPERATE IN RULE 144 AND RULE 145
TRANSACTIONS; RULE 14 AFFILIATES.
(a) For as long as any stockholders of BSI who are subject to
Rule 144 or Rule 145 of the Securities Act continue to hold the shares
of Sun Common Stock issued pursuant to the terms hereof, Sun will use
reasonable commercial efforts to timely file all annual, quarterly and
other reports required to be filed by it under Section 13 or 15(d) of
the Exchange Act and the rules and regulations of the Commission
thereunder, as amended from time to time. If any such stockholder
proposes to sell any Sun Common Stock pursuant to Rule 144 and 145, Sun
shall cooperate with such stockholders so as to enable such sales to be
made in accordance with applicable laws, rules and regulations, the
requirements of Sun's transfer agent, and the reasonable requirements of
the broker through which the sales are proposed to be executed. Without
limiting the generality of the foregoing, Sun shall, upon request,
furnish with respect to each such sale (i) a written statement
certifying that Sun has complied with the public information
requirements of Rule 144 and 145 and (ii) an opinion of Sun's counsel
regarding such matters as Sun's transfer agent or such stockholder's
broker may reasonably desire to confirm.
(b) BSI shall identify in a letter to Sun all persons who will
be, at the Closing Date, "affiliates" of BSI, as such term is used in
Rule 145 under the Securities Act. BSI shall use all reasonable efforts
to cause its affiliates to deliver to Sun on or prior to the Closing
Date a written agreement substantially in the form attached as Appendix
V (each, an "Affiliate Agreement"). If any affiliate refuses to provide
such a written agreement, Sun shall, in lieu of receipt of such written
agreement, be entitled to place appropriate legends on the certificates
evidencing the Sun Common Stock to be received by such affiliate
pursuant to the terms of this Agreement, and to issue appropriate stock
transfer instructions to the
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transfer agent for Sun Common Stock, to the effect that the shares of
Sun Common Stock received or to be received by such affiliate pursuant
to the terms of this Agreement may only be sold, transferred or
otherwise conveyed, and the holder thereof may only reduce his interest
in or risks relating to such shares of Sun Common Stock, pursuant to an
effective registration statement under the Securities Act, in compliance
with Rule 145, as amended from time to time, or in a transaction which,
in the opinion of legal counsel satisfactory to the Sun, is exempt from
the registration requirements of the Securities Act. The foregoing
restrictions on the transferability of Sun Common Stock shall apply to
all purported sales, transfers and other conveyances of the shares of
Sun Common Stock received or to be received by such affiliate pursuant
to this Agreement and to all purported reductions in the interest in or
risks relating to such shares of Sun Common Stock, whether or not such
affiliate has exchanged the certificates previously evidencing such
affiliates' shares of BSI Common Stock for certificates evidencing the
shares of Sun Common Stock into which such shares were converted. The
Joint Proxy Statement/Prospectus and the Registration Statement shall
disclose the foregoing in a reasonably prominent manner.
7.3. BSI OPTIONS AND WARRANTS. As of the Effective Date, each of the
then outstanding options and warrants to purchase BSI Common Stock will and
without further action on the part of the holder thereof be exchanged for an
option or warrant, as the case may be, to purchase that number of shares of Sun
Common Stock determined by multiplying the number of shares of BSI Common Stock
subject to such BSI option or warrant at the Effective Date, times the
applicable exchange rate for the BSI Common Stock set forth in Article I hereof,
and the exercise price thereof shall adjust in accordance with the terms and
provisions of such option or warrant. If the foregoing calculation results in an
exchanged BSI option or warrant being exercisable for a fraction of a share of
Sun Common Stock, then the number of shares of Sun Common Stock subject to such
option or warrant will be rounded down to the nearest whole number of shares,
and the total exercise price for the option or warrant will be reduced by the
exercise price of the fractional share. The term, exerciseability, vesting
schedule and all other terms and conditions of the BSI options or warrants will
otherwise be unchanged by the provisions of this paragraph and shall operate in
accordance with their terms. All shares of Sun Common Stock issued upon exercise
of any BSI employee stock options shall be registered under an effective form
S-8 Registration Statement filed with the Commission.
7.4. WARN ACT ISSUES. Prior to the Effective Date, Sun shall be
responsible for providing and discharging any and all notifications, benefits
and liabilities to Sun employees, former employees and government agencies
required by the Worker Adjustment and Retraining Notification Act of 1988 ("WARN
Act") or any other applicable law including any requirements that may be imposed
as a result of the transactions contemplated by this Agreement. Sun shall
provide to BSI copies of all such notifications provided under the WARN Act or
similar laws or regulations.
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ARTICLE VIII
MISCELLANEOUS
8.1. ENTIRETY. This Agreement and the agreements to be entered into in
connection herewith embody the entire agreement between the parties with respect
to the subject matter hereof, and all prior agreements between the parties with
respect thereto are hereby superseded in their entirety.
8.2. COUNTERPARTS. Any number of counterparts of this Agreement may be
executed and each such counterpart shall be deemed to be an original instrument,
but all such counterparts together shall constitute but one instrument.
8.3. NOTICES AND WAIVERS. Any notice or waiver to be given to any party
hereto shall be in writing and shall be delivered by courier, sent by facsimile
transmission or first class registered or certified mail, postage prepaid.
IF TO BSI
Addressed to: With a copy to:
BSI Holdings, Inc. Porter & Hedges, L.L.P.
3860 Virginia Avenue 700 Louisiana, 35th Floor
Cincinnati, Ohio 45243 Houston, Texas 77210-4744
Attention: President Attention: Richard L. Wynne
Facsimile: (513) 272-2812 Facsimile: (713) 228-1331
IF TO SUN
Addressed to: With a copy to:
Graham & James LLP/Riddell
Williams P.S.
Sun Sportswear, Inc. 1001 Fourth Avenue Plaza
6520 South 190th Street Suite 4500
Kent, Washington 98032 Seattle, Washington 98154-1065
Attention: President Attention: Marion V. Larson
Facsimile: (206) 251-3565 Facsimile: (206) 389-1708
Any communication so addressed and mailed by first-class registered or
certified mail, postage prepaid, shall be deemed to be received on the third
business day after so mailed, and if
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delivered by courier or facsimile to such address, upon delivery during normal
business hours on any business day.
8.4. TERMINATION OF REPRESENTATIONS, WARRANTIES, ETC. The respective
representations and warranties contained in Articles II and III shall expire
with, and be terminated and extinguished by, the merger pursuant to this
Agreement at the time of the consummation thereof on the Effective Date. This
Paragraph 8.4 shall have no effect upon any other right or obligation of the
parties in connection with this Agreement or otherwise, whether to be exercised
or performed before or after the Effective Date.
8.5. TABLE OF CONTENTS AND CAPTIONS. The table of contents and captions
contained in this Agreement are solely for convenient reference and shall not be
deemed to affect the meaning or interpretation of any article, section, or
paragraph hereof.
8.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of and be enforceable by the successors and assigns
of the parties hereto.
8.7. SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void,
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
8.8. APPLICABLE LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware (except to the
extent that the form and content of the Articles of Merger and the consequences
of the filing thereof shall be governed by the WBCA).
8.9. PUBLIC ANNOUNCEMENTS. The parties agree that before the Effective
Date that they shall consult with each other before the making of any public
announcement regarding the existence of this Agreement, the contents hereof or
the transactions contemplated hereby, and to obtain the prior approval of the
other party as to the content of such announcement, which approval shall not be
unreasonably withheld. However, the foregoing shall not apply to any
announcement or written statement which, upon the written advice of counsel, is
required by law or the National Association at Securities Dealers (the "NASD")
to be made, except that the party required to make such announcement shall,
whenever practicable, consult with and solicit prior approval from such other
party concerning the timing and content of such legally required announcement or
statement before it is made.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective duly authorized
representatives, all as of the day and year first above written.
BSI HOLDINGS, INC.
By: /s/ RANDALL B. HALE
Randall B. Hale, Chairman of the Board
SUN SPORTSWEAR, INC.
By: /s/ WILLIAM S. WILEY
William S. Wiley, President
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FIRST AMENDMENT TO PLAN AND AGREEMENT OF MERGER
THIS FIRST AMENDMENT ("First Amendment") dated December 13, 1996, to Plan
and Agreement of Merger is between Sun Sportswear Inc., a Washington corporation
("Sun"), and BSI Holdings, Inc., a Delaware corporation ("BSI"). All
capitalized terms used but not defined herein shall have the meaning set forth
in the Plan and Agreement of Merger dated as of November 13, 1996 (the "Merger
Agreement") between Sun and BSI.
WHEREAS, Sun and BSI desire to amend the Merger Agreement.
NOW, THEREFORE, for and in consideration of the premises, and the mutual
and dependent promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. The second recital on page 1 of the Merger Agreement is hereby deleted
and replaced in its entirety with the following:
WHEREAS, immediately subsequent to the consummation of the merger
contemplated herein, it is intended that the Surviving Corporation will
merger into a Delaware corporation which is a wholly-owned subsidiary of
the Surviving Corporation ("Sun Delaware"), on the terms set forth in
Appendix I hereto, which shall include the conversion of each outstanding
share of Surviving Corporation common stock into 0.2 of a share of Sun
Delaware common stock (the "Reincorporation").
2. Section 1.6.1 of the Merger Agreement is hereby deleted and replaced in
its entirety with the following:
1.6.1 SUN BYLAWS SURVIVE. Effective as of the Effective Date, the
bylaws of Sun as in effect immediately prior to the Effective Date shall be
the bylaws of the Surviving Corporation until altered, amended, or
repealed, or until new bylaws shall be adopted in accordance with the
provisions of law, the Restated Articles of Incorporation and the bylaws.
3. Section 1.7.1 of the Merger is hereby amended to add F. Clayton
Chamber, 3860 Virginia Avenue, Cincinnati, Ohio 45227, as a member of the board
of directors of the Surviving Corporation as of the Effective Date.
4. Section 1.9.3(a) of the Merger Agreement is hereby amended to reduce
the conversion rate set forth therein from 40.2 shares of Sun Common Stock to
37.912252 shares of Sun Common stock to account for certain changes in the
capitalization of BSI to be effected prior to the Effective Date.
In addition, Section 1.9.3(b) of the Merger Agreement is hereby deleted and
replaced in its entirety with the following:
(b) On the Effective Date, each issued and outstanding share of BSI
Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series B-1
Preferred Stock, Series B-2 Preferred Stock, Series B-3 Preferred Stock, if
any, and any other series of preferred stock (collectively, the "BSI
Preferred Stock"), other than BSI Dissenting Preferred Shares (as defined
in Section 1.11.2) and the shares cancelled pursuant to Section 1.9.2,
without any action on the part of the holders thereof, shall automatically
become and converted into the right to receive one fully paid and
nonassessable share of issued and outstanding Sun Series A-1 Preferred
Stock, Series A-2 Preferred Stock, Series B-1 Preferred Stock, Series B-2
Preferred Stock, Series B-3 Preferred Stock and any another series of
preferred stock (collectively, the "Sun Preferred Stock"), respectively.
All shares of Sun Preferred Stock so issued shall have substantially the
same rights and preferences as the respective series of outstanding BSI
Preferred Stock as of the Effective Date. Upon such conversion, all such
shares of BSI Preferred Stock shall be cancelled and cease to exist, and
each holder of a certificate representing any such shares shall cease to
have any rights with respect thereto, except the right to receive the
shares of Sun Preferred Stock to be issued in consideration therefor upon
the surrender of such certificate in accordance with Section 1.9.4.2.
5. Section 1.9.4.1 of the merger Agreement is hereby deleted and replaced
in their entirety with the following:
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1.9.4.1 DEPOSIT WITH EXCHANGE AGENT. As soon as practical after the
Effective Date, the Surviving Corporation shall deposit with a bank or
trust company mutually agreeable to BSI and Sun (the "Exchange Agent")
certificates representing shares of Sun Common Stock and Sun Preferred
Stock, (or certificates representing common stock and preferred stock of
Sun Delaware in the event the Reincorporation is consummated) required to
effect the exchanges completed hereby, together with cash payable in
respect of fractional shares.
6. The first sentence of Section 1.9.4.2 is hereby deleted and replaced in
its entirety with the following:
As soon as practicable after the Effective Date, the Exchange Agent
shall mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
BSI Common Stock or BSI Preferred Stock (the "Certificates") that were
converted (the "Converted Shares") into the right to receive shares of
Sun Common Stock or Sun Preferred Stock, as applicable, or common stock or
preferred stock of Sun Delaware if the Reincorporation is consummated
(together, the "Sun Shares"), (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual delivery of the Certificates to
the Exchange Agent) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing Sun
Shares.
7. Section 1.10.2 of the Merger Agreement is hereby deleted and replaced
in its entirety with the following:
1.10.2 CONVERSION OF SUN COMMON STOCK HELD BY ELECTION RIGHT
HOLDERS. On the Effective Date, each holder of an outstanding certificate
or certificates representing shares of Sun Common Stock (other than Bank of
America NW, N.A., doing business as Seafirst Bank ("Seafirst") and Sun
Dissenting Common Shares, as hereinafter defined) shall have 50% of the
shares held by such holder converted into the right to receive $2.20 in
cash (the "Cash Consideration") for each share of Sun Common Stock so
converted in accordance with this section; provided, however, the holders
of Sun Common Stock on the Record Date (other than Seafirst) (collectively,
the "Election Right Holders") shall have the right to elect to retain all
shares of Sun Common Stock held by them on the Record Date (and not have
50% of such shares converted) in accordance with Section 1.10.3 hereof.
8. Section 1.10.3 is hereby deleted and replaced in its entirety with the
following:
Elections to retain shares of Sun Common Stock must be made as to all,
but not less than all, of the shares of Sun Common Stock held by an
Election Right Holder as of the Record Date on a form to be mutually agreed
upon by Sun and BSI (a "Form of Election") to be provided for that
purpose to holders of record of Sun Common Stock who are Election Right
Holders. Elections shall be made by mailing to the Exchange Agent a duly
completed Form of Election. To be effective, a Form of Election must be
properly completed, signed and submitted to the Exchange Agent at its
designated office by 5:00 p.m. not later than 2 business days prior to the
Sun Special Meeting Date (the "Election Deadline") and be accompanied by
a certificate representing the Sun Common Stock, duly executed for
transfer, or appropriate guarantee of delivery. Neither Sun nor the
Exchange Agent will be under any obligation to notify any person of any
defect in a Form of Election submitted to the Exchange Agent. A holder of
shares of Sun Common Stock that does not submit an effective Form of
Election prior to the Election Deadline shall be deemed to have made a
non-election (a "Non-Election"). All shares of Sun Common Stock which are
subject to a Non-Election ("Non-Election Shares") shall be converted as
set forth in Section 1.10.2 hereof.
9. Section 1.10.4 of the Merger Agreement is hereby deleted.
10. The first sentence of Section 1.10.5 of the Merger Agreement is hereby
deleted and replaced in its entirety with the following:
On the Effective Date, except as provided below, 48.28% of all shares
of Sun Common Stock held by Seafirst shall be converted into the right to
receive consideration of $2.20 for each share of Sun Common Stock so
converted, consisting of $1.3824 in cash and $.8176 in the form of a
subordinated
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note (the "Subordinated Note") which BSI shall cause to be issued by
Brazos Sportswear, Inc., a Texas corporation which shall be a subsidiary of
the Surviving Corporation, substantially in the form attached hereto as
Appendix IV; provided, however, to the extent that the Election Right
Holders elect to retain Sun Common Stock, for each such share so retained,
on the Effective Date Seafirst shall have an additional share of Sun Common
Stock converted into cash in the amount of $2.20 per share.
11. Section 4.3.3 of the Merger Agreement is hereby amended to increase
BSI's allowable commitments for capital expenditures from $100,000 to $500,000.
12. Section 7.1(b) of the Merger Agreement is hereby amended to delete the
reference to BSI with respect to the Surviving Corporation's obligation to
maintain directors' and officers' liability insurance policies since BSI does
not have, nor will it have prior to the Effective Date, any such policies.
13. Except as amended by this First Amendment, the Merger Agreement
remains in full force and effect.
EXECUTED THIS 12th day of December, 1996.
SUN SPORTSWEAR, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
BSI HOLDINGS, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
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APPENDIX B
January , 1997
Board of Directors
Sun Sportswear, Inc.
6520 South 190th Street
Kent, Washington 98032
Gentlemen:
We understand that Sun Sportswear, Inc., a Washington corporation ("Sun"
or the "Company"), has entered into an Agreement and Plan of Merger (the
"Merger Agreement") with BSI Holdings, Inc., a Delaware corporation ("BSI"),
relating to the proposed merger of Sun with BSI (the "Merger") pursuant to
which, among other things: (a) BSI will be merged into Sun, with Sun being the
surviving corporation; (b) upon closing of the Merger, all shares of BSI will be
converted into shares of Sun Common Stock ("Company Common Stock")
representing approximately 88% of the outstanding shares of Company Common
Stock, on a fully diluted basis; (c) each holder of Company Common Stock, except
for Seafirst Bank, (such holders, the "Minority Shareholders"), will receive
cash consideration in the amount of $2.20 per share of Company Common Stock for
50% of their shares of Company Common Stock and retain the remaining 50% of
their Company Common Stock (the "Standard Consideration"), subject to the
right to retain 100% of their shares of Company Common Stock and forego the cash
consideration (the "Alternate Consideration", and together with Standard
Consideration, the "Merger Consideration"); (d) Seafirst Bank, the owner of
3.8 million shares or 66.1% of the outstanding Company Common Stock, will
receive consideration in the form of cash and a convertible promissory note in
exchange for 48.3% of its shares of Company Common Stock (cash in an amount
equal to the number of shares equal to 48.3% of its total holdings of Company
Common Stock times $2.20 less $1.5 million together with a $1.5 million
subordinated convertible promissory note); and (e) Seafirst Bank will retain its
remaining shares of Company Common Stock, subject to the right to exchange
additional shares of Company Common Stock which it holds for cash in the amount
of $2.20 per share to the extent that Minority Shareholders retain 100% of their
shares of Company Common Stock and forego the cash consideration.
The Merger is expected to be considered by the shareholders of the Company
at a special meeting of shareholders and to be consummated on or shortly after
the date of such meeting.
You have asked for our opinion, as investment bankers, as to whether the
Merger Consideration is fair to the Minority Shareholders from a financial point
of view.
Rodman & Renshaw, Inc., as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We have performed certain
financial advisory services for the Board of Directors of the Company and are
presenting our opinion to the Board of Directors of Sun in connection with the
Merger and have received compensation for these services and will receive
additional compensation upon delivery of this opinion.
In arriving at the opinion set forth below, with respect to Sun, Rodman
has, among other things: (a) reviewed, from a financial point of view, the
Merger Agreement, as amended and the Appendices thereto; (b) reviewed Sun's
Annual Reports to Shareholders and Annual Reports on Form 10-K for the years
ended December 31, 1993 through 1995 and its interim reports on Form 10-Q and
8-K filed since December 31, 1993; (c) reviewed financial and operating data
relating to Sun's business and prospects, including financial forecasts; (d)
discussed financial information (both historical and forecast) and the business
and prospects of Sun with the management of Sun; (c) reviewed the reported
historical and recent market prices and trading volumes of the Sun Common Stock;
(f) compared the financial, operating and stock price performance of Sun with
certain other companies deemed comparable; and (g) reviewed the financial terms
to the extent publicly available, of certain other acquisition transactions
deemed comparable. With respect to BSI, Rodman has, among other things: (a)
reviewed BSI's financial statements for the fiscal years ended December 31, 1994
and 1995 and for the interim period
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through September 30, 1996; (b) reviewed certain financial and operating data
relating to BSI's business and prospects, including financial forecasts; (c)
compared the financial and operating performance of BSI with publicly available
information concerning other companies deemed comparable, and (d) discussed
financial information (both historical and forecast) and the business and
prospects of BSI with the management of BSI. Rodman also took into account its
assessment of the economic, market and financial conditions generally and within
the industry in which the Company and BSI are engaged.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all information supplied or otherwise made available to us by
Sun and BSI or obtained by us from other sources, and we have relied upon the
representations of the respective managements of Sun and BSI that they are
unaware of any information or facts that would make the information provided to
us incomplete or misleading. We have not independently verified such
information, undertaken an independent appraisal of the assets or liabilities
(contingent or otherwise) of Sun or BSI or been furnished with any such
appraisals. With respect to the financial forecasts with regard to each of Sun
and BSI which we have reviewed, we have relied on the representations of the
respective managements of Sun and BSI that such available forecasts are
reasonable and that: (a) as to the respective forecasts, they are unaware of any
facts that would make such information incomplete, or misleading; and (b) there
have been no material adverse developments in the business (financial or
otherwise) or prospects of Sun or BSI, since September 30, 1996.
Our opinion is necessarily based on economic, market and other conditions
as they exist, and the information made available to us, as of the date hereof.
We disclaim any undertaking or obligation to advise any person of any change in
any fact or matter affecting our opinion which may come or be brought to our
attention after the date of this opinion. In the performance of our financial
advisory services, we were not authorized to solicit, and did not solicit,
interest from any party with respect to the acquisition of Sun or any of its
assets. No other limitations were imposed upon us by Sun with respect to the
investigations to be made or procedures to be followed by us in rendering our
opinion.
The opinion expressed herein does not constitute a recommendation as to any
action the Board of Directors or any shareholder of Sun should take in
connection with the Merger. We have expressed no opinion as to the value of
Company Common Stock upon consummation of the Merger, or the prices at which
such securities may trade at any time. Further, we express no opinion herein as
to the structure, terms or effect of any other aspect of the Merger, including,
without limitation, the tax consequences thereof.
It is understood that this letter is for the information of the Board of
Directors of Sun in connection with its evaluation of the fairness, from a
financial point of view, as of the date hereof, of the Merger Consideration to
the Minority Shareholders and for inclusion in the Joint Proxy
Statement / Registration Statement of Sun and BSI relating to the Merger.
Without limiting the foregoing, in rendering this opinion, we have not been
engaged to act as an agent or fiduciary for holders of Company Common Stock or
any other third party.
Based on and subject to the foregoing, we are of the opinion that the
Merger Consideration is fair to the Minority Shareholders from a financial point
of view.
Very truly yours,
RODMAN & RENSHAW, INC.
By: __________________________________
Julia S. Heckman
Managing Director
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APPENDIX C
WASHINGTON BUSINESS CORPORATION ACT
CHAPTER 23B.13.
DISSENTERS' RIGHTS
CURRENT THROUGH END OF 1996 REG. SESS.
23B.13.010. Definitions -- As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
23B.13.020. Right to Dissent. -- (1) A shareholder is entitled to dissent
from, and obtain fair value of the shareholder's shares in the event of, any of
the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is entitled to
vote on the merger, or (ii) if the corporation is a subsidiary that is merged
with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
(d) An amendment of the articles of incorporation that materially reduces
the number of shares owned by the shareholder to a fraction of a share if the
fractional share so created is to be acquired for cash under RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
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(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events.
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030 Dissent of Nominees and Beneficial Owners. -- (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the dissenter
dissents and the dissenter's other shares were registered in the names of
different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such shareholder
has power to direct the vote.
23B.13.200. Notice of dissenters' rights -- (1) If proposed corporate
action creating dissenters' rights under RCW 23B.13.020 is submitted to a vote
at a shareholders' meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020
is taken without a vote of shareholders, the corporation, within ten days after
[the] effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken and
send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210. Notice of intent to demand payment -- (1) If proposed
corporate action creating dissenters' rights under RCW 23B.13.020 is submitted
to a vote at a shareholders' meeting, a shareholder who wishes to assert
dissenters' rights must (a) deliver to the corporation before the vote is taken
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effected, and (b) not vote such
shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.
23B.13.220 Dissenters' notice -- (1) If proposed corporate action
creating dissenters' rights under RCW 23B.13.020 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
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(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not the person acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230. Duty to Demand Payment. -- (1) A shareholder sent a
dissenters' notice described in RCW 23B.13.220 must demand payment, certify
whether the shareholder acquired beneficial ownership of the shares before the
date required to be set forth in the dissenters' notice pursuant to RCW
23B.13.220(2)(c), and deposit the shareholder's certificates in accordance with
the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.240. Share restrictions. -- (1) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effected or the restriction is
released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
23B.13.250. Payment. -- (1) Except as provided in RCW 23B.13.270, within
thirty days of the later of the effective date of the proposed corporate action,
or the date the payment demand is received, the corporation shall pay each
dissenter who complied with RCW 23B.13.230 the amount the corporation estimates
to be the fair value of the shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income statement for
that year, a statement of changes in shareholder's equity for that year, and the
latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260. Failure to take action -- (1) If the corporation does not
effect the proposed action within sixty days after the date set for demanding
payment and depositing share certificates, the corporation shall return the
deposited certificates and release any transfer restrictions imposed on
uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment demand
procedure.
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23B.13.270. After-acquired shares -- (1) A corporation may elect to
withhold payment required by RCW 23B.13.250 from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
23B.13.280. Procedure if shareholder dissatisfied with payment or
offer -- (1) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and amount
of interest due, and demand payment of the dissenter's estimate, less any
payment under RCW 23B.13.250, or reject the corporation's offer under RCW
23B.13.270 and demand payment of the dissenter's estimate of the fair value of
the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.13.270 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for demanding
payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
23B.13.300. Court action. -- (1) If a demand for payment under RCW
23B.13.280 remains unsettled, the corporation shall commence a proceeding within
sixty days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this chapter. If the court determines that such
shareholder has not complied with the provisions of this chapter, the
shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive
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evidence and recommend decision on the question of fair value. The appraisers
have the powers described in the order appointing them, or in any amendment to
it. The dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under RCW 23B.13.270.
23B.13.310. Court costs and counsel fees. -- (1) The court in a proceeding
commenced under RCW 23B.13.300 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against the corporation, except that
the court may assess the costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under RCW
23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of RCW 23B.13.200 through 23B.12.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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APPENDIX D
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
CURRENT THROUGH THE END OF THE 1995 SPECIAL SESSION
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and
also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sec. 251, Sec. 252, Sec. 254, Sec. 257, Sec. 258, Sec. 263
or Sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsections (f) or (g) of Sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant
to Secs. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository
receipts at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Sec. 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Sec. 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement
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shall be mailed to the stockholder within 10 days after his written request for
such a statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
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dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
Amended by 69 L.1993, ch. 262, Secs. 1 to 9, eff. July 1, 1994; 70 L.1995, ch.
79, Sec. 16, eff. July 1, 1995.
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APPENDIX E
CERTIFICATE OF DESIGNATION
OF
SUN SPORTSWEAR, INC.
A. RESOLVED, that pursuant to the authority expressly granted and vested
in the Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, there shall be established
and authorized for issuance a series of the Corporation's Preferred Stock,
$.01 par value per share, designated "Series A-1 Preferred Stock" (herein
referred to as "Series A-1 Preferred Stock"), consisting of Six Hundred
Fifty Thousand (650,000) shares, each of the par value of $.01 per share,
and having the voting powers, preferences and relative, participating,
optional and other rights, and the qualifications, limitations or
restrictions set forth below:
1. DEFINITIONS. For purposes hereof, the following terms shall have the
following definitions or shall be subject to the following rules of
construction:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Common Stock" means shares of the Corporation's Common
Stock, no par value per share.
(c) "Major Transaction" means a single transaction or a series
of transactions having the effect of (i) the sale, transfer, lease
or conveyance of all or substantially all of the properties and
assets of the Corporation to any other corporation or corporations
or other person or persons (other than a subsidiary of the
Corporation), (ii) the sale, transfer or conveyance (other than in a
merger or consolidation of the Corporation) of all or substantially
all of the issued and outstanding voting securities of the
Corporation to any other corporation or corporations or other person
or persons or (iii) the merger or consolidation of the Corporation
with or into any other corporation or corporations or entity or
entities in which the Corporation is not the sole surviving
corporation or continuing corporation, other than a consolidation or
merger in which the holders of shares of the Common Stock
immediately preceding such consolidation or merger receive, directly
or indirectly, (A) 50% or more of the common stock of the sole
surviving or continuing corporation outstanding immediately
following the consummation of such merger or consolidation and (B)
securities representing 50% or more of the combined voting power of
the voting stock of the sole surviving or continuing corporation
outstanding immediately following the consummation of such merger or
consolidation.
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(d) "Mandatory Redemption Date" means the later of (i) the
redemption or conversion of all of the shares of Senior Preferred
Stock or (ii) December 31, 2003.
(e) The term "outstanding", when used with reference to shares
of capital stock, shall mean issued shares, excluding shares held by
the Corporation or a subsidiary of the Corporation.
(f) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(g) "Qualified Public Offering" means the underwritten public
offering of Common Stock by the Corporation for cash for its own
account pursuant to a registration statement filed under the
Securities Act (other than any registration statement relating to
warrants, options or shares of capital stock of the Corporation
granted or to be granted or sold primarily to employees, directors,
or officers of the Corporation, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule,
a registration statement relating to employee benefit plans or
interests therein or any registration statement covering securities
issued in connection with any debt financing of the Corporation), in
which the net offering proceeds to be received by the Corporation
are at least $15,000,000.
(h) "Securities Act" means the Securities Act of 1933, as
amended.
(i) "Senior Loan Agreement" means (i) any loan, credit or
other similar agreement, together with all notes, debentures,
security agreements and other loan documents executed and delivered
in connection therewith, evidencing any indebtedness of the
Corporation or any successor entity for money heretofore, now or
hereafter borrowed by the Corporation or any successor entity (or by
any subsidiary of the Corporation or any successor entity and
guaranteed by the Corporation or any successor entity) from one or
more banks, financial institutions or other institutional lenders
and (ii) upon consummation of the merger contemplated under that
certain Plan and Agreement of Merger dated November 13, 1996
("Merger Agreement"), between the Corporation and BSI Holdings, Inc.
("BSI"), (A) any item set forth in clause (i) above with respect to
BSI or any successor entity (or by any subsidiary of BSI or any
successor entity and guaranteed by BSI) including, without
limitation, (x) the Second Amended and Restated Loan and Security
Agreement dated as of August 9, 1996, among Brazos Sportswear, Inc.,
a Texas corporation and subsidiary of BSI ("Brazos"), and Fleet
Capital Corporation, as agent for itself and The First National Bank
of Boston, as such Agreement may thereafter from time to time be
amended, supplemented or restated and (y) those certain Debentures
of Brazos dated August 9, 1996, payable to Allied Investment
Corporation and Allied Investment Corporation II, in the original
maximum principal amount of $3,500,000,
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(B) the Company's Junior Subordinated Debenture dated as of August
2, 1996, payable to the order of Plymouth Mills, Inc., in the
original principal balance of $4,000,000 and (C) the Company's
Junior Subordinated Debenture dated as of September 30, 1996,
payable to the order of Plymouth Mills, Inc., with respect to 50% of
the Earnout Amount determined pursuant to Section 1.2(d) of that
certain Asset Purchase Agreement, dated August 2, 1996, between,
among others, Brazos and Plymouth Mills, Inc.
(j) "Senior Preferred Stock" means, collectively, the Series
B-1 Preferred Stock, the Series B-2 Preferred Stock and the Series
B-3 Preferred Stock.
(k) "Series A-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-1 Preferred
Stock, $.01 par value per share.
(l) "Series A-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-2 Preferred
Stock, $.01 par value per share.
(m) "Series B-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-1 Preferred
Stock, $.01 par value per share.
(n) "Series B-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-2 Preferred
Stock, $.01 par value per share.
(o) "Series B-3 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-3 Preferred
Stock, $.01 par value per share.
2. DIVIDENDS. The holders of shares of Series A-1 Preferred Stock shall
be entitled to receive dividends on account of such shares only when
and as declared by the Board of Directors out of funds legally
available therefor. The declaration or payment of dividends in
respect of any other class or series of the Corporation's stock by
authority of the Board of Directors shall not confer upon the
holders of the Series A-1 Preferred Stock any right or preference to
receive any dividend in respect of such shares. If the Corporation
declares or pays any dividend in respect of any shares of its Series
A-2 Preferred Stock, the Corporation shall simultaneously therewith
declare or pay a dividend in respect of the Series A-1 Preferred
Stock in the same form and the same amount per share as declared or
paid in respect of the Series A-2 Preferred Stock.
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3. REDEMPTION.
(a) MANDATORY REDEMPTION. On the earliest to occur of (i)
consummation of (x) a Major Transaction or (y) a Qualified Public
Offering or (ii) the Mandatory Redemption Date, the Corporation
shall redeem, out of funds legally available therefor, all of the
shares of Series A-1 Preferred Stock then outstanding, at a
redemption price of $1.00 per share.
(b) OPTIONAL REDEMPTION. At any time while any shares of
Series A-1 Preferred Stock are outstanding, and provided that no
shares of Series A-2 Preferred Stock or Senior Preferred Stock are
then outstanding, the Corporation, at the option of the Board of
Directors, may redeem from the holders of Series A-1 Preferred
Stock, out of funds legally available therefor, at a redemption
price of $1.00 per share, all or any portion of the shares of Series
A-1 Preferred Stock outstanding on such date. Written notice of such
redemption of the shares of Series A-1 Preferred Stock to be so
redeemed shall be mailed, postage prepaid, to the holders of record
of the shares to be so redeemed at their respective addresses then
appearing on the stock books of the Corporation, not less than ten
nor more than 60 days prior to the date designated for such
redemption. In case less than all of the outstanding shares of
Series A-1 Preferred Stock are to be redeemed under this Section
3(b), the Corporation's notice shall state and such redemption shall
be made on a pro rata basis in accordance with each holder's
respective holdings of Series A-1 Preferred Stock. Notwithstanding
any provision contained in this Section 3(b) to the contrary, in no
event shall the Corporation redeem any shares of Series A-1
Preferred Stock under this Section 3(b), nor shall any holders of
such shares accept payment upon such redemption, if at the time of
such redemption there exists a default or event of default within
the meaning of any Senior Loan Agreement or such redemption would
cause a default or event of default under any Senior Loan Agreement.
(c) GENERAL. From and after the effective date of redemption
and the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series A-1
Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares to be redeemed shall no
longer be deemed outstanding, and the holders of certificates
representing such shares shall have with respect to such shares no
rights in or with respect to the Corporation except the right to
receive, upon the surrender of such certificates, the redemption
price therefor. Shares of Series A-1 Preferred Stock redeemed by the
Corporation pursuant to this Section 3, or shares of Series A-1
Preferred Stock otherwise purchased by the Corporation, shall not be
reissued and shall be canceled and retired.
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4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation,
a sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within
the meaning of this Section 4.
(b) SERIES A-1 PREFERRED STOCK. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation and subject to the rights of the
Senior Preferred Stock, the holders of the Series A-1 Preferred
Stock shall be entitled to receive, PARI PASSU with the holders of
the Series A-2 Preferred Stock in accordance with their respective
interests (subject to offset as provided under the Purchase
Agreement as defined in Section 8), but before any distribution of
the assets of the Corporation shall be made in respect of the
outstanding Common Stock, an amount in cash for each share of Series
A-1 Preferred Stock equal to $1.00, or funds necessary for such
payment shall have been set aside in trust for the account of the
holders of the outstanding Series A-1 Preferred Stock so as to be
and continue available therefor. If upon such liquidation,
dissolution or winding up, the assets distributable to the holders
of the Series A-1 Preferred Stock as aforesaid shall be insufficient
to permit the payment to them of $1.00 per share and the payment to
the holders of the Series A-2 Preferred Stock as aforesaid, the
assets of the Corporation shall be distributed to the holders of the
Series A-1 Preferred Stock and the Series A-2 Preferred Stock
ratably (subject to such offset provisions) until they shall have
received the full amount to which they would otherwise be entitled.
If the assets of the Corporation are sufficient to permit the
payment of such amounts to the holders of the Series A-1 Preferred
Stock and the Series A-2 Preferred Stock as aforesaid, the remainder
of the assets of the Corporation, if any, after the distribution as
aforesaid shall be distributed and divided ratably among the holders
of the Common Stock then outstanding according to their respective
shares.
5. NO CONVERSION. The Series A-1 Preferred Stock shall not be
convertible into Common Stock or any other stock or other securities
of the Corporation.
6. VOTING RIGHTS.
(a) The Corporation shall not, without the consent of the
holders of at least a majority of the shares of the outstanding
Series A-1 Preferred Stock, adopt any amendment to this Certificate
which would alter or change the powers, preferences or special
rights of the Series A-1 Preferred Stock so as to affect them
adversely, PROVIDED that no such consent shall be required with
respect to (i) any amendment to this
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Certificate that increases or decreases the number of shares of
Series A-1 Preferred Stock which the Corporation is authorized to
issue (provided that no such amendment shall reduce the number of
authorized shares to below the number of shares then outstanding),
or (ii) the establishment or issuance of any other series of
Preferred Stock or any other class of stock of the Corporation that
has any powers, preferences or rights that are different from,
greater than, superior to or in preference of the Series A-1
Preferred Stock.
(b) Except as provided in paragraph (a) above or otherwise
required by law, the holders of Series A-1 Preferred Stock shall
have no right or power to vote on the election of directors or on
any other question or in any proceedings involving the Corporation.
7. FINANCIAL STATEMENTS. For so long as any shares of Series A-1
Preferred Stock are outstanding, the Corporation shall deliver to
each holder of Series A-1 Preferred Stock, at such holder's address
then appearing on the books of the Corporation, a copy of the
following financial statements of the Corporation:
(a) Within 45 days after the end of each fiscal quarter of the
Corporation, the unaudited interim consolidated financial statements
of the Corporation and its consolidated subsidiaries at the end of
such fiscal quarter and for the period of operations then ended; and
(b) Within 120 days after the end of each fiscal year of the
Corporation, the audited consolidated financial statements of the
Corporation and its consolidated subsidiaries at the end of such
fiscal year and for the period of operations then ended, together
with the audit report of the Corporation's independent certified
public accountants thereon.
8. OFFSET. All shares of Series A-1 Preferred Stock shall (unless
otherwise expressly indicated in any resolution of the Board of
Directors authorizing the issuance of any such shares, which fact
shall be noted on any certificate representing such shares) be
issued pursuant to an Asset Purchase Agreement dated effective
December 1, 1995 (the "Purchase Agreement") among Brazos Embroidery,
Inc., a Pennsylvania corporation, Needleworks, Inc., a Pennsylvania
corporation, and Old Mill Holdings, Inc., a Delaware corporation,
reference to which is made herein for all pertinent purposes. The
redemption price per share determined pursuant to Section 3 of this
Certificate, and the amount per share to which each holder of the
Series A-1 Preferred Stock is entitled to receive upon any
liquidation, dissolution or winding up of the affairs of the
Corporation pursuant to Section 4 of this Certificate, are subject
to a right of offset in favor of the Corporation to the extent and
in the manner set forth in Section 10.4 of the Purchase Agreement.
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9. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, the
shares of Series A-1 Preferred Stock shall not have any voting
powers, preferences or relative, participating, optional or other
special rights other than those specifically set forth herein.
B. RESOLVED, that pursuant to the authority expressly granted and vested
in the Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, there shall be established
and authorized for issuance a series of the Corporation's Preferred Stock,
$.01 par value per share, designated "Series A-2 Preferred Stock" (herein
referred to as "Series A-2 Preferred Stock"), consisting of Three Hundred
Thousand (300,000) shares, each of the par value of $.01 per share, and
having the voting powers, preferences and relative, participating,
optional and other rights, and the qualifications, limitations or
restrictions set forth below:
1. DEFINITIONS. For purposes hereof, the following terms shall have the
following definitions or shall be subject to the following rules of
construction:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Common Stock" means shares of the Corporation's Common
Stock, no par value per share.
(c) "Major Transaction" means a single transaction or a series
of transactions having the effect of (i) the sale, transfer, lease
or conveyance of all or substantially all of the properties and
assets of the Corporation to any other corporation or corporations
or other person or persons (other than a subsidiary of the
Corporation), (ii) the sale, transfer or conveyance (other than in a
merger or consolidation of the Corporation) of all or substantially
all of the issued and outstanding voting securities of the
Corporation to any other corporation or corporations or other person
or persons or (iii) the merger or consolidation of the Corporation
with or into any other corporation or corporations or entity or
entities in which the Corporation is not the sole surviving
corporation or continuing corporation, other than a consolidation or
merger in which the holders of shares of the Common Stock
immediately preceding such consolidation or merger receive, directly
or indirectly, (A) 50% or more of the common stock of the sole
surviving or continuing corporation outstanding immediately
following the consummation of such merger or consolidation and (B)
securities representing 50% or more of the combined voting power of
the voting stock of the sole surviving or continuing corporation
outstanding immediately following the consummation of such merger or
consolidation.
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(d) "Mandatory Redemption Date" means the later of (i) the
redemption or conversion of all of the shares of Senior Preferred
Stock or (ii) December 31, 2003.
(e) The term "outstanding", when used with reference to shares
of capital stock, shall mean issued shares, excluding shares held by
the Corporation or a subsidiary of the Corporation.
(f) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(g) "Qualified Public Offering" means the underwritten public
offering of Common Stock by the Corporation for cash for its own
account pursuant to a registration statement filed under the
Securities Act (other than any registration statement relating to
warrants, options or shares of capital stock of the Corporation
granted or to be granted or sold primarily to employees, directors,
or officers of the Corporation, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule,
a registration statement relating to employee benefit plans or
interests therein or any registration statement covering securities
issued in connection with any debt financing of the Corporation), in
which the net offering proceeds to be received by the Corporation
are at least $15,000,000.
(h) "Securities Act" means the Securities Act of 1933, as
amended.
(i) "Senior Loan Agreement" means (i) any loan, credit or
other similar agreement, together with all notes, debentures,
security agreements and other loan documents executed and delivered
in connection therewith, evidencing any indebtedness of the
Corporation or any successor entity for money heretofore, now or
hereafter borrowed by the Corporation or any successor entity (or by
any subsidiary of the Corporation or any successor entity and
guaranteed by the Corporation or any successor entity) from one or
more banks, financial institutions or other institutional lenders
and (ii) upon consummation of the merger contemplated under that
certain Plan and Agreement of Merger dated November 13, 1996
("Merger Agreement"), between the Corporation and BSI Holdings, Inc.
("BSI"), (A) any item set forth in clause (i) above with respect to
BSI or any successor entity (or by any subsidiary of BSI or any
successor entity and guaranteed by BSI) including, without
limitation, (x) the Second Amended and Restated Loan and Security
Agreement dated as of August 9, 1996, among Brazos Sportswear, Inc.,
a Texas corporation and subsidiary of BSI ("Brazos"), and Fleet
Capital Corporation, as agent for itself and The First National Bank
of Boston, as such Agreement may thereafter from time to time be
amended, supplemented or restated and (y) those certain Debentures
of Brazos dated August 9, 1996, payable to Allied Investment
Corporation and Allied Investment Corporation II, in the original
maximum principal amount of $3,500,000,
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(B) the Company's Junior Subordinated Debenture dated as of August
2, 1996, payable to the order of Plymouth Mills, Inc., in the
original principal balance of $4,000,000 and (C) the Company's
Junior Subordinated Debenture dated as of September 30, 1996,
payable to the order of Plymouth Mills, Inc., with respect to 50% of
the Earnout Amount determined pursuant to Section 1.2(d) of that
certain Asset Purchase Agreement, dated August 2, 1996, between,
among others, Brazos and Plymouth Mills, Inc.
(j) "Senior Preferred Stock" means, collectively, the Series
B-1 Preferred Stock, the Series B-2 Preferred Stock and the Series
B-3 Preferred Stock.
(k) "Series A-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-1 Preferred
Stock, $.01 par value per share.
(l) "Series A-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-2 Preferred
Stock, $.01 par value per share.
(m) "Series B-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-1 Preferred
Stock, $.01 par value per share.
(n) "Series B-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-2 Preferred
Stock, $.01 par value per share.
(o) "Series B-3 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-3 Preferred
Stock, $.01 par value per share.
2. DIVIDENDS. The holders of shares of Series A-2 Preferred Stock shall
be entitled to receive dividends on account of such shares only when
and as declared by the Board of Directors out of funds legally
available therefor. The declaration or payment of dividends in
respect of any other class or series of the Corporation's stock by
authority of the Board of Directors shall not confer upon the
holders of the Series A-2 Preferred Stock any right or preference to
receive any dividend in respect of such shares. If the Corporation
declares or pays any dividend in respect of any shares of its Series
A-1 Preferred Stock, the Corporation shall simultaneously therewith
declare or pay a dividend in respect of the Series A-2 Preferred
Stock in the same form and the same amount per share as declared or
paid in respect of the Series A-1 Preferred Stock.
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3. REDEMPTION.
(a) MANDATORY REDEMPTION. On the earliest to occur of (i)
consummation of a (x) Major Transaction or (y) a Qualified Public
Offering or (ii) the Mandatory Redemption Date, the Corporation
shall redeem, out of funds legally available therefor, all of the
shares of Series A-2 Preferred Stock then outstanding, at a
redemption price of $1.00 per share.
(b) OPTIONAL REDEMPTION. At any time while any shares of
Series A-2 Preferred Stock are outstanding, and provided that no
shares of Senior Preferred Stock are then outstanding, the
Corporation, at the option of the Board of Directors, may redeem
from the holders of Series A-2 Preferred Stock, out of funds legally
available therefor, at a redemption price of $1.00 per share, all or
any portion of the shares of Series A-2 Preferred Stock outstanding
on such date. Written notice of such redemption of the shares of
Series A-2 Preferred Stock to be so redeemed shall be mailed,
postage prepaid, to the holders of record of the shares to be so
redeemed at their respective addresses then appearing on the stock
books of the Corporation, not less than ten nor more than 60 days
prior to the date designated for such redemption. In case less than
all of the outstanding shares of Series A-2 Preferred Stock are to
be redeemed under this Section 3(b), the Corporation's notice shall
state and such redemption shall be made on a pro rata basis in
accordance with each holder's respective holdings of Series A-2
Preferred Stock. Notwithstanding any provision contained in this
Section 3(b) to the contrary, in no event shall the Corporation
redeem any shares of Series A-2 Preferred Stock under this Section
3(b), nor shall any holders of such shares accept payment upon such
redemption, if at the time of such redemption there exists a default
or event of default within the meaning of any Senior Loan Agreement
or such redemption would cause a default or event of default under
any Senior Loan Agreement.
(c) GENERAL. From and after the effective date of redemption
and the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series A-2
Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares to be redeemed shall no
longer be deemed outstanding, and the holders of certificates
representing such shares shall have with respect to such shares no
rights in or with respect to the Corporation except the right to
receive, upon the surrender of such certificates, the redemption
price therefor. Shares of Series A-2 Preferred Stock redeemed by the
Corporation pursuant to this Section 3, or shares of Series A-2
Preferred Stock otherwise purchased by the Corporation, shall not be
reissued and shall be canceled and retired.
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4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation,
a sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within
the meaning of this Section 4.
(b) SERIES A-2 PREFERRED STOCK. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation and subject to the rights of the
Senior Preferred Stock, the holders of the Series A-2 Preferred
Stock shall be entitled to receive, PARI PASSU with the holders of
the Series A-1 Preferred Stock in accordance with their respective
interests (subject to offset as provided under the Purchase
Agreement as defined in Section 8), but before any distribution of
the assets of the Corporation shall be made in respect of the
outstanding Common Stock, an amount in cash for each share of Series
A-2 Preferred Stock equal to $1.00, or funds necessary for such
payment shall have been set aside in trust for the account of the
holders of the outstanding Series A-2 Preferred Stock so as to be
and continue available therefor. If upon such liquidation,
dissolution or winding up, the assets distributable to the holders
of the Series A-2 Preferred Stock as aforesaid shall be insufficient
to permit the payment to them of $1.00 per share and the payment to
the holders of the Series A-1 Preferred Stock as aforesaid, the
assets of the Corporation shall be distributed to the holders of the
Series A-2 Preferred Stock and the Series A-1 Preferred Stock
ratably (subject to such offset provisions) until they shall have
received the full amount to which they would otherwise be entitled.
If the assets of the Corporation are sufficient to permit the
payment of such amounts to the holders of the Series A-2 Preferred
Stock and the Series A-1 Preferred Stock as aforesaid, the remainder
of the assets of the Corporation, if any, after the distribution as
aforesaid shall be distributed and divided ratably among the holders
of the Common Stock then outstanding according to their respective
shares.
5. NO CONVERSION. The Series A-2 Preferred Stock shall not be
convertible into Common Stock or any other stock or other securities
of the Corporation.
6. VOTING RIGHTS.
(a) The Corporation shall not, without the consent of the
holders of at least a majority of the shares of the outstanding
Series A-2 Preferred Stock, adopt any amendment to this Certificate
which would alter or change the powers, preferences or special
rights of the Series A-2 Preferred Stock so as to affect them
adversely, PROVIDED that no such consent shall be required with
respect to (i) any amendment to this Certificate
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that increases or decreases the number of shares of Series A-2
Preferred Stock which the Corporation is authorized to issue
(provided that no such amendment shall reduce the number of
authorized shares to below the number of shares then outstanding),
or (ii) the establishment or issuance of any other series of
Preferred Stock or any other class of stock of the Corporation that
has any powers, preferences or rights that are different from,
greater than, superior to or in preference of the Series A-2
Preferred Stock.
(b) Except as provided in paragraph (a) above or otherwise
required by law, the holders of Series A-2 Preferred Stock shall
have no right or power to vote on the election of directors or on
any other question or in any proceedings involving the Corporation.
7. FINANCIAL STATEMENTS. For so long as any shares of Series A-2
Preferred Stock are outstanding, the Corporation shall deliver to
each holder of Series A-2 Preferred Stock, at such holder's address
then appearing on the books of the Corporation, a copy of the
following financial statements of the Corporation:
(a) Within 45 days after the end of each fiscal quarter of the
Corporation, the unaudited interim consolidated financial statements
of the Corporation and its consolidated subsidiaries at the end of
such fiscal quarter and for the period of operations then ended; and
(b) Within 120 days after the end of each fiscal year of the
Corporation, the audited consolidated financial statements of the
Corporation and its consolidated subsidiaries at the end of such
fiscal year and for the period of operations then ended, together
with the audit report of the Corporation's independent certified
public accountants thereon.
8. OFFSET. All shares of Series A-2 Preferred Stock shall (unless
otherwise expressly indicated in any resolution of the Board of
Directors authorizing the issuance of any such shares, which fact
shall be noted on any certificate representing such shares) be
issued pursuant to an Asset Purchase Agreement dated effective
December 1, 1995 (the "Purchase Agreement") among Brazos Embroidery,
Inc., a Pennsylvania corporation, Needleworks, Inc., a Pennsylvania
corporation, and Old Mill Holdings, Inc., a Delaware corporation,
reference to which is made herein for all pertinent purposes. The
redemption price per share determined pursuant to Section 3 of this
Certificate, and the amount per share to which each holder of the
Series A-2 Preferred Stock is entitled to receive upon any
liquidation, dissolution or winding up of the affairs of the
Corporation pursuant to Section 4 of this Certificate, are subject
to a right of offset in favor of the Corporation to the extent and
in the manner set forth in Section 10.4 of the Purchase Agreement.
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9. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, the
shares of Series A-2 Preferred Stock shall not have any voting
powers, preferences or relative, participating, optional or other
special rights other than those specifically set forth herein.
C. RESOLVED, that pursuant to the authority expressly granted and vested
in the Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, there shall be established
and authorized for issuance a series of the Corporation's Preferred Stock,
$.01 par value per share, designated "Series B-1 Preferred Stock" (herein
referred to as "Series B-1 Preferred Stock"), consisting of Eight Million
(8,000,000) shares, each of the par value of $.01 per share, and having
the voting powers, preferences and relative, participating, optional and
other rights, and the qualifications, limitations or restrictions set
forth below:
1. DEFINITIONS. For purposes of the Series B-1 Preferred Stock, the
following terms shall have the following definitions or shall be
subject to the following rules of construction:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Brazos" means Brazos Sportswear, Inc., a Texas
corporation and subsidiary of the Corporation.
(c) "Common Stock" means shares of the Corporation's Common
Stock, no par value per share.
(d) "Junior Stock" means, collectively, the Common Stock, the
Series A-1 Preferred Stock and the Series A-2 Preferred Stock.
(e) "Mandatory Redemption Date" means the earlier to occur of
(i) the date of consummation of a Qualified Public Offering, but
only to the extent the offering price per share of Common Stock is
less than $3.50 (as adjusted for stock splits, combinations and
other similar corporate events), (ii) the date of consummation of a
Sale, or (iii) December 31, 2003.
(f) "Market Price" of a share of Common Stock on any given
date means (i) the closing sales price of a share of Common Stock as
reported on the principal securities exchange on which shares of
Common Stock are then listed or admitted to trading or (ii) if not
so reported, the average of the closing bid and asked prices for a
share of Common Stock as quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or (iii) if
not quoted on NASDAQ, the average of the closing bid and asked
prices for a share of Common Stock as quoted by the National
Quotation Bureau's "Pink Sheets" or the National
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<PAGE>
Association of Securities Dealers OTC Bulletin Board System. If the
price of a share of Common Stock shall not be so reported, the
Market Price of a share of Common Stock shall be determined by the
Board in its absolute discretion.
(g) The term "outstanding," when used with reference to shares
of capital stock, shall mean issued shares, excluding shares held by
the Corporation or a subsidiary of the Corporation.
(h) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(i) "Qualified Public Offering" means the underwritten public
offering of Common Stock by the Corporation for cash for its own
account pursuant to a registration statement filed under the
Securities Act (other than any registration statement relating to
warrants, options or shares of capital stock of the Corporation
granted or to be granted or sold primarily to employees, directors,
or officers of the Corporation, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule,
a registration statement relating to employee benefit plans or
interests therein or any registration statement covering securities
issued in connection with any debt financing of the Corporation), in
which the net offering proceeds to be received by the Corporation
are at least $15,000,000.
(j) "Quarterly Dividend Date" means the last day of each
March, June, September and December in each year in which any shares
of Series B-1 Preferred Stock are outstanding.
(k) "Sale" means a single transaction or a series of related
transactions having the effect of (i) the sale, transfer, lease or
conveyance of all or substantially all of the properties and assets
of the Corporation to any other corporation or corporations or other
person or persons (other than a subsidiary of the Corporation), (ii)
the sale, transfer or conveyance (other than in a merger or
consolidation of the Corporation) of all or substantially all of the
issued and outstanding voting securities of the Corporation to any
other corporation or corporations or other person or persons or
(iii) the merger or consolidation of the Corporation with or into
any other corporation or corporations or entity or entities in which
the Corporation is not the sole surviving corporation or continuing
corporation, other than a consolidation or merger in which the
holders of shares of the Common Stock immediately preceding such
consolidation or merger receive, directly or indirectly, (A) 50% or
more of the common stock of the sole surviving or continuing
corporation outstanding immediately following the consummation of
such merger or consolidation and (B) securities representing 50% or
more of the combined voting power of the voting
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<PAGE>
stock of the sole surviving or continuing corporation outstanding
immediately following the consummation of such merger or
consolidation.
(l) "Securities Act" means the Securities Act of 1933, as
amended.
(m) "Senior Loan Agreement" means (i) any loan, credit or
other similar agreement, together with all notes, debentures,
security agreements and other loan documents executed and delivered
in connection therewith, evidencing any indebtedness of the
Corporation or any successor entity for money heretofore, now or
hereafter borrowed by the Corporation or any successor entity (or by
any subsidiary of the Corporation or any successor entity and
guaranteed by the Corporation or any successor entity) from one or
more banks, financial institutions or other institutional lenders
and (ii) upon consummation of the merger contemplated under that
certain Plan and Agreement of Merger dated November 13, 1996
("Merger Agreement"), between the Corporation and BSI Holdings, Inc.
("BSI"), (A) any item set forth in clause (i) above with respect to
BSI or any successor entity (or by any subsidiary of BSI or any
successor entity and guaranteed by BSI) including, without
limitation, (x) the Second Amended and Restated Loan and Security
Agreement dated as of August 9, 1996, among Brazos Sportswear, Inc.,
a Texas corporation and subsidiary of BSI ("Brazos"), and Fleet
Capital Corporation, as agent for itself and The First National Bank
of Boston, as such Agreement may thereafter from time to time be
amended, supplemented or restated and (y) those certain Debentures
of Brazos dated August 9, 1996, payable to Allied Investment
Corporation and Allied Investment Corporation II, in the original
maximum principal amount of $3,500,000, (B) the Company's Junior
Subordinated Debenture dated as of August 2, 1996, payable to the
order of Plymouth Mills, Inc., in the original principal balance of
$4,000,000 and (C) the Company's Junior Subordinated Debenture dated
as of September 30, 1996, payable to the order of Plymouth Mills,
Inc., with respect to 50% of the Earnout Amount determined pursuant
to Section 1.2(d) of that certain Asset Purchase Agreement, dated
August 2, 1996, between, among others, Brazos and Plymouth Mills,
Inc.
(n) "Senior Preferred Stock" means, collectively, the Series
B-2 Preferred Stock and the Series B-3 Preferred Stock.
(o) "Series A-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-1 Preferred
Stock, $.01 par value per share.
(p) "Series A-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-2 Preferred
Stock, $.01 par value per share.
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<PAGE>
(q) "Series B-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-1 Preferred
Stock, $.01 par value per share.
(r) "Series B-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-2 Preferred
Stock, $.01 par value per share.
(s) "Series B-3 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-3 Preferred
Stock, $.01 par value per share.
(t) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
2. DIVIDENDS. The holders of Series B-1 Preferred Stock, in preference
to the holders of Junior Stock, shall be entitled to receive, but
only to the extent of funds legally available therefor, cumulative,
preferential dividends at the annual rate of $.08 per share, payable
as hereafter described. Such dividends shall commence to accrue on
the shares of Series B-1 Preferred Stock and be cumulative from and
after the date of issuance of such shares of Series B-1 Preferred
Stock and shall be deemed to accumulate and accrue from day to day
thereafter. Dividends under this Section 2 shall be payable
quarterly in arrears so long as the Series B-1 Preferred Stock is
outstanding, on or before each Quarterly Dividend Date. Other than
dividends payable incident to a redemption of the Series B-1
Preferred Stock under Section 3 below or a conversion of the Series
B-1 Preferred Stock under Section 5 below or in respect of
fractional shares as described below, all dividends on the Series
B-1 Preferred Stock hereunder shall be payable not in cash, but
rather by the Corporation's issuance and delivery to each record
holder of Series B-1 Preferred Stock of a number of additional
shares of Series B-1 Preferred Stock determined by dividing the
amount of each such dividend by $1.00. Within 30 days after each
Quarterly Dividend Date, the Corporation shall issue and deliver to
each record holder of Series B-1 Preferred Stock on such Quarterly
Dividend Date one or more certificates evidencing the number of
whole shares of Series B-1 Preferred Stock payable as a dividend to
such holder as provided above, and such shares, when so issued and
delivered, shall be deemed fully paid and nonassessable shares of
the Corporation's Series B-1 Preferred Stock. No fractional shares
of Series B-1 Preferred Stock or scrip will be issued in respect of
fractional interests resulting from any dividend hereunder; in lieu
of any fractional shares of Series B-1 Preferred Stock which may be
issued as aforesaid, the holders thereof instead shall receive a
cash payment in an amount equal to the product of such
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fraction multiplied by $1.00. So long as any of the Series B-1
Preferred Stock remains outstanding, no dividends or distributions
(other than dividends or distributions on Common Stock payable in
Common Stock) shall be paid upon, or declared or set apart for, any
Junior Stock, nor shall any Junior Stock (other than Common Stock
acquired in exchange for, or out of the cash proceeds of, the issue
of other Common Stock or out of cash contributions to the capital of
the Corporation) be purchased, redeemed, retired or otherwise
acquired by the Corporation, unless and until in either case all
cumulative dividends on the then outstanding shares of Series B-1
Preferred Stock shall have been or concurrently shall be paid.
3. REDEMPTION.
(a) MANDATORY REDEMPTION. Subject to the provisions of Section
3(d), on the Mandatory Redemption Date, the Corporation shall
redeem, out of funds legally available therefor, all of the shares
of Series B-1 Preferred Stock then outstanding, at a redemption
price of $1.00 per share (plus all accrued and unpaid dividends
thereon through such date as provided in Section 3(c) below).
(b) OPTIONAL REDEMPTION.
(i) Subject to the provisions of Section 3(d) and
provided no shares of Senior Preferred Stock are then
outstanding, at any time while any shares of Series B-1
Preferred Stock are outstanding, the Corporation, at the
option of the Board of Directors, may redeem from the holders
of the Series B-1 Preferred Stock, at a redemption price of
$1.00 per share (plus all accrued and unpaid dividends thereon
through the date designated for redemption as provided in
Section 3(c) below), all or any portion of Series B-1
Preferred Stock outstanding on the date designated for such
redemption. In case less than all of the outstanding shares of
Series B-1 Preferred Stock are to be redeemed under this
Section 3(b)(i), such redemption shall be made on a pro rata
basis in accordance with each holder's respective holdings of
such shares as of the date designated for redemption.
(ii) In addition to the optional redemption pursuant to
Section 3(b)(i) and subject to the provisions of Section 3(d),
at any time while any shares of Series B-1 Preferred Stock are
outstanding, the Corporation, at the option of the Board of
Directors, may redeem from the holders of Series B-1 Preferred
Stock, out of funds legally available therefor, at a
redemption price of $.01 per share (plus all accrued and
unpaid dividends thereon through the date designated for
redemption as provided in Section 3(c) below), all but not
less than
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all, of the shares of Series B-1 Preferred Stock outstanding
on the date set for redemption, provided that the right of the
Corporation to redeem the shares of Series B-1 Preferred Stock
under this Section 3(b)(ii) is subject to the Company mailing
the redemption notice in accordance with Section 3(d) within
30 days following any period of 20 consecutive trading days
during which the Market Price per share of the Common Stock is
at or above $3.50 per share (as adjusted for stock splits,
combinations and other similar corporate events).
(iii) Notwithstanding any provision contained in this
Section 3(b) to the contrary, in no event shall the
Corporation redeem any shares of Series B-1 Preferred Stock
under this Section 3(b), nor shall any holders of such shares
accept payment upon such redemption, if at the time of such
redemption there exists a default or event of default within
the meaning of any Senior Loan Agreement or such redemption
would cause a default or event of default under any Senior
Loan Agreement.
(c) ACCRUED DIVIDENDS. Upon any mandatory or optional
redemption under paragraph (a) or (b) above, the Corporation shall,
simultaneously with the making of any such redemption, pay to the
holders of the Series B-1 Preferred Stock being redeemed all
dividends accrued and unpaid on the shares being redeemed through
the date of redemption; provided, however, that in case of the
payment of dividends under this paragraph (c), such dividends shall
be paid in cash, and not in shares of Series B-1 Preferred Stock as
provided in Section 2 above.
(d) GENERAL.
(i) The Corporation shall provide written notice of any
mandatory or optional redemption under this Section 3, not
less than 30 days prior to the date fixed or designated for
such redemption, to the holders of record as of the relevant
record date of the shares of Series B-1 Preferred Stock to be
so redeemed at their respective addresses then appearing on
the stock books of the Corporation. Each redemption notice to
be provided under this Section 3 shall be by certified mail,
return receipt requested and shall specify (i) the redemption
date, (ii) the redemption price per share and (iii) the place
for payment and for delivering necessary transfer instruments
to be executed by the holder in order for the holder to
receive the redemption price. No holder of shares of Series
B-1 Preferred Stock redeemed in accordance with this Section 3
shall be entitled to
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receive payment of the redemption price for such shares until
such holder causes to be delivered in accordance with the
redemption notice the stock certificate representing the
shares so redeemed and transfer instructions satisfactory to
the Company.
(ii) From and after the effective date of redemption and
the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series B-1
Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares to be redeemed shall
no longer be deemed outstanding, and the holders of
certificates representing such shares shall have with respect
to such shares no rights in or with respect to the Corporation
except the right to receive, upon the surrender of such
certificates, the redemption price therefor. Shares of Series
B-1 Preferred Stock redeemed by the Corporation pursuant to
this Section 3 shall not be reissued and shall be canceled and
retired.
4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation,
a sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within
the meaning of this Section 4.
(b) SERIES B-1 PREFERRED STOCK. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation and subject to the rights of the
Senior Preferred Stock, the holders of the Series B-1 Preferred
Stock shall be entitled to receive $1.00 in cash for each share of
Series B-1 Preferred Stock (together with all accrued and unpaid
dividends on each share of Series B-1 Preferred Stock), before any
distribution of the assets of the Corporation shall be made in
respect of the outstanding Junior Stock, or funds necessary for such
payment shall have been set aside in trust for the account of the
holders of the outstanding Series B-1 Preferred Stock so as to be
and continue available therefor. If upon such liquidation,
dissolution or winding up, the assets distributable to the holders
of the Series B-1 Preferred Stock as aforesaid shall be insufficient
to permit the payment to them of such $1.00 per share (plus such
accrued and unpaid dividends), the assets of the Corporation shall
be distributed to the holders of the Series B-1 Preferred Stock
ratably until they shall have received the full amount to which they
would otherwise be entitled. If the assets of the Corporation are
sufficient to permit the payment of such amounts to the holders of
the Series B-1 Preferred Stock, the remainder of the assets of the
Corporation, if any, after the distribution as aforesaid shall be
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distributed and divided ratably among the holders of the Junior
Stock then outstanding according to their respective shares,
interests and priorities.
5. CONVERSION RIGHTS. The Series B-1 Preferred Stock shall be
convertible as follows:
(a) OPTIONAL CONVERSION. Subject to and upon compliance with
the provisions of this Section 5, the holder of any shares of Series
B-1 Preferred Stock shall have the right at such holder's option, at
any time prior to the close of business on the date fixed for
redemption, and without the payment of any additional consideration
therefor, to convert any of such shares of Series B-1 Preferred
Stock into fully paid and nonassessable shares of Common Stock at
the Conversion Ratio (as defined in Section 5(d) below) in effect on
any Conversion Date (as defined in Section 5(e) below) upon the
terms hereinafter set forth.
(b) AUTOMATIC CONVERSION. Each outstanding share of Series B-1
Preferred Stock shall automatically convert, without any further act
of the Corporation or its stockholders, at the Conversion Ratio then
in effect, into fully paid and nonassessable shares of Common Stock
upon the consummation of a Qualified Public Offering, provided that
the per share offering price to the public is not less than $3.50
per share (as adjusted for stock splits, combinations and similar
corporate events).
(c) ACCRUED DIVIDENDS. Upon any optional or automatic
conversion under paragraph (a) or (b) above, the Corporation shall
simultaneously with such conversion, pay to the holders of the
Series B-1 Preferred Stock being converted all dividends accrued and
unpaid on the shares being converted through the date of conversion;
provided, however, that in case of payment of dividends under this
paragraph (c), such dividends shall be paid in cash, and not in
shares of Series B-1 Preferred Stock as provided in Section 2 above.
(d) CONVERSION RATIO. Each share of Series B-1 Preferred Stock
shall be convertible pursuant to Sections 5(a) and 5(b) into a
number of shares of Common Stock determined by dividing (x) $1.00
(the liquidation value per share) by (y) the Conversion Factor in
effect on any Conversion Date (the "Conversion Ratio"). For the
purposes of this Section 5, the term "Conversion Factor" initially
shall mean $2.20.
(e) MECHANICS OF CONVERSION. The holder of any shares of
Series B-1 Preferred Stock may exercise the conversion right
specified in Section 5(a) by surrendering to the Corporation or any
transfer agent of the Corporation the certificate or certificates
for the shares to be converted,
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accompanied by written notice specifying the number of shares to be
converted. Upon the occurrence of automatic conversion pursuant to
Section 5(b), the outstanding shares of Series B-1 Preferred Stock
shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its
transfer agent; provided that the Corporation shall not be obligated
to issue to any holder certificates evidencing the shares of Common
Stock issuable upon such conversion unless certificates evidencing
such shares of Series B-1 Preferred Stock are delivered either to
the Corporation or any transfer agent of the Corporation. Conversion
shall be deemed to have been effected on the date when delivery of
notice of an election to convert and of certificates for shares
being converted is made or on the date specified in Section 5(b), as
the case may be, and such date is referred to herein as the
"Conversion Date." Subject to the provisions of Section 5(g)(iii),
as promptly as practicable thereafter (and after surrender of the
certificate or certificates representing shares of Series B-1
Preferred Stock to the Corporation or any transfer agent of the
Corporation in the case of conversion pursuant to Section 5(b)) the
Corporation shall issue and deliver to or upon the written order of
such holder a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled and a check
or cash with respect to any fractional interest in a share of Common
Stock as provided in Section 5(f). Subject to the provisions of
Section 5(g)(iii), the person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed to
have become a holder of record of such Common Stock on the
applicable Conversion Date. Upon conversion of only a portion of the
number of shares covered by a certificate representing shares of
Series B-1 Preferred Stock surrendered for conversion (in the case
of conversion pursuant to Section 5(a)), the Corporation shall issue
and deliver to or upon the written order of the holder of the
certificate so surrendered for conversion, at the expense of the
Corporation, a new certificate covering the number of shares of
Series B-1 Preferred Stock representing the unconverted portion of
the certificate so surrendered.
(f) FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series B-1
Preferred Stock. If more than one share of Series B-1 Preferred
Stock is surrendered for conversion at any one time by the same
holder or is held by the same holder at the time of any automatic
conversion, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate
number of shares so surrendered or held, as the case may be. Instead
of any fractional shares of Common Stock which would
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otherwise be issuable upon conversion of any shares of Series B-1
Preferred Stock, the Corporation shall pay out of funds legally
available therefor a cash adjustment in respect of such fractional
interest, rounded to the nearest one hundredth (1/100th) of a share,
in an amount equal to that fractional interest of the then Market
Price, rounded to the nearest cent ($.01), of one share of Common
Stock.
(g) CONVERSION FACTOR ADJUSTMENTS. The Conversion Factor shall
be subject to adjustment from time to time as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS OR
COMBINATIONS. If the Corporation shall (x) declare a dividend
or make a distribution on its Common Stock in shares of its
Common Stock, (y) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares of
Common Stock or (z) combine or reclassify the outstanding
shares of Common Stock into a smaller number of shares of
Common Stock, the Conversion Factor in effect at the time of
the record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be adjusted to that number determined
by multiplying the Conversion Factor in effect by a fraction
(x) the numerator of which shall be the total number of issued
and outstanding shares of Common Stock immediately prior to
such dividend, distribution, subdivision, combination or
reclassification and (y) the denominator of which shall be the
total number of issued and outstanding shares of Common Stock
immediately after such dividend, distribution, subdivision,
combination or reclassification. Successive adjustments in the
Conversion Factor shall be made whenever any event specified
above shall occur.
(ii) ROUNDING OF CALCULATIONS: MINIMUM ADJUSTMENT. All
calculations under this Section 5(g) shall be made to the
nearest cent ($.01) or to the nearest one hundredth (1/100th)
of a share, as the case may be. Any provision of this Section
5 to the contrary notwithstanding, no adjustment in the
Conversion Factor shall be made if the amount of such
adjustment would be less than 1% of the then current
Conversion Factor until the end of one year after such
adjustment otherwise would have been required; but any such
amount shall be carried forward and an adjustment with respect
thereto shall be made at the time of and together with any
subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate 1%
of the then current Conversion Factor or more, provided that
if the events giving rise to such adjustments occur within
three months of each other, then such
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adjustments shall be calculated as if the events giving rise
to them had occurred simultaneously on the date of the first
such event.
(iii) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON
CERTAIN ADJUSTMENTS. In any case in which the provisions of
this Section 5(g) provide that an adjustment shall become
effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (x)
issuing to the holder of any share of Series B-1 Preferred
Stock converted after such record date and before the
occurrence of such event, the additional shares of Common
Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of
Common Stock issuable upon such conversion before giving
effect to such adjustment and (y) paying to such holder any
amount of cash in lieu of a fractional share of Common Stock
pursuant to Section 5(f); provided that the Corporation upon
request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to
receive such additional shares, and such cash, upon the
occurrence of the event requiring such adjustment.
(h) COSTS. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance
or delivery of shares of Common Stock upon conversion of any shares
of Series B-1 Preferred Stock; provided that the Corporation shall
not be required to pay any taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificate
for such shares in the name other than that of the holder of the
shares of Series B-1 Preferred Stock in respect of which such shares
are being issued.
6. VOTING RIGHTS.
(a) The Corporation shall not, without the consent of the
holders of at least a majority of the shares of the outstanding
Series A-1 Preferred Stock, adopt any amendment to this Certificate
which would alter or change the powers, preferences or special
rights of the Series A-1 Preferred Stock so as to affect them
adversely, PROVIDED that except as otherwise required by law, no
such consent shall be required with respect to (i) any amendment to
this Certificate that increases or decreases the number of shares of
Series A-1 Preferred Stock which the Corporation is authorized to
issue (provided that no such amendment shall reduce the number of
authorized shares to below the number of shares then outstanding),
or (ii) the establishment or issuance of any other series of
Preferred Stock or any other class of stock of the Corporation that
has any powers, preferences or rights that are different from,
greater than, superior to or in preference of the Series A-1
Preferred Stock.
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<PAGE>
(b) Except as provided in paragraph (a) above or otherwise
required by law, the holders of Series A-1 Preferred Stock shall
have no right or power to vote on the election of directors or on
any other question or in any proceedings involving the Corporation.
7. RIGHT OF FIRST REFUSAL. If any holder of Series B-1 Preferred Stock
desires to sell, assign, transfer or otherwise dispose of any shares
of Series B-1 Preferred Stock, then such holder (for purposes of
this Section 7, the "Selling Stockholder"), prior to making any such
sale, shall first offer such shares of Series B-1 Preferred Stock
(for purposes of this Section 7, the "Option Shares") for sale to
the Corporation and then to the other holders of the Series B-1
Preferred Stock on a pro rata basis as hereafter provided, in
accordance with the following provisions of this Section 7.
(a) OPTION PRICE, TERMS; OFFERING NOTICES. The price per
Option Share at which the Selling Stockholder shall be required to
offer the Option Shares (for purposes of this Section 7, the "Option
Price") and the terms of such offer, shall be the price at which and
the terms upon which any proposed third party purchaser shall have
offered to purchase the Option Shares from the Selling Stockholder
and which the Selling Stockholder is prepared to accept. Each offer
required to be made by the Selling Stockholder pursuant to this
Section 7 shall be made by a written notice (for purposes of this
Section 7, the "Offering Notice") which shall state that the offer
is being made pursuant to this Section 7 and which shall set forth
the number of Option Shares, the name or names of the proposed
purchaser or purchasers of the Option Shares, the price per share
offered by such proposed purchaser or purchasers for the Option
Shares, the method of payment of the purchase price and the
scheduled date of consummation of such proposed sale. A copy of the
written offer from any proposed third-party purchaser shall be
attached to each Offering Notice.
(b) OFFER TO THE CORPORATION. The Selling Stockholder shall
offer the option Shares to the Corporation by delivering an offering
Notice to the Corporation. Within 30 days following the
Corporation's receipt of such Offering Notice, the Corporation shall
deliver to the Selling Stockholder a reply notice accepting the
offer of the Selling Stockholder with respect to all (but not less
than all) of the Option Shares or rejecting such offer. If by such
reply notice the Corporation accepts the offer made by the Selling
Stockholder, the reply notice shall constitute an agreement binding
on the Selling Stockholder and the Corporation to sell and purchase
the option Shares at a price per share equal to the option Price. If
within such 30-day period, the Corporation shall have failed to
deliver a reply notice accepting the offer of the Selling
Stockholder as to all of the Option Shares, the Corporation shall be
deemed to have rejected such offer. If the Corporation rejects or
intends to reject such offer, it shall mail a notice to such effect
to
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<PAGE>
every record holder (other than the Selling Stockholder) of the
Series B-1 Preferred Stock as of the date of the Corporation's
receipt of the Offering Notice. (collectively, "Remaining
Stockholders"); which notice of the Corporation shall also include a
copy of the Offering
Notice.
(c) OFFER TO REMAINING STOCKHOLDERS. If the Corporation
rejects or is deemed to have rejected the foregoing offer under
paragraph (b) above, then the Selling Stockholder shall thereupon be
deemed to have offered the Option Shares to the Remaining
Stockholders on the same price and terms set forth in the Offering
Notice. Such offer shall be made on a pro rata basis in accordance
with each Remaining Stockholder's holdings of Series B-1 Preferred
Stock on the date of the Offering Notice; provided, however, that
prior to acceptance of such offer, any one or more Remaining
Stockholders may agree among themselves as to a different allocation
for purposes of accepting such offer. Within 30 days following the
date of the Corporation's notice referred to in paragraph (b) above,
each Remaining Stockholder desiring to accept such offer shall
deliver to the Selling Stockholder a reply notice accepting the
offer of the Selling Stockholder with respect to all (but not less
than all) of such Remaining Stockholder's pro rata portion of the
Option Shares, or rejecting such offer; provided, however, that
prior to expiration of such 30-day period, the Selling Stockholder
shall have received reply notices from Remaining Stockholders as to
all (but not less than all) of all Option Shares being offered. If
by such reply notice(s) the Remaining Stockholders collectively
accept the offer made by the Selling Stockholder, such reply
notice(s) shall constitute an agreement binding on the Selling
Stockholder and each such Remaining Stockholder (severally, but not
jointly) to sell and purchase the Option Shares at a price per share
equal to the Option Price. If within such 30-day period, the
Remaining Stockholders collectively shall have failed to deliver one
or more reply notices accepting the offer of the Selling Stockholder
as to all of the Option Shares, the Remaining Stockholders shall be
deemed to have rejected such offer.
(d) LAPSE OF OPTION. If the foregoing offer to sell Option
Shares has been made by the Selling Stockholder and has not been
accepted by the Corporation or the Remaining Stockholders, then the
Selling Stockholder may sell not less than all of the Option Shares
at any time within, but not sub sequent to, 60 days after the lapse
of the option granted pursuant to this Section 7; provided, however,
that no sale of the option Shares shall be made at any price lower
than the Option Price or on terms materially different from those
specified in the Offering Notice or to any person or persons other
than the persons specified in the Offering Notice. If after the
lapse of such 60-day period the Option Shares shall not have been
sold, all of the provisions of this Section 7 shall apply to any
future sale or other disposition of shares of Series B-1 Preferred
Stock owned by the Selling Stockholder.
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<PAGE>
(e) CONSUMMATION OF PURCHASES. Each transaction of purchase
and sale of Option Shares pursuant to this Section 7 shall be
completed by delivery of the stock certificates representing the
Option Shares endorsed in blank, or accompanied by duly executed
stock powers, and by actual registration of the transfer of the
Option Shares on the books of the Corporation upon payment of the
purchase price to the Selling Stockholder. Any such transaction
shall be closed at such time and place as shall be agreed upon by
the parties thereto, or, if no such agreement is reached, at the
principal office of the Corporation on the 30th day following the
date of delivery of the last reply notice given in connection with
such transaction or, if such day shall not be a business day, on the
first business day thereafter during normal business hours.
8. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, the
shares of Series B-1 Preferred Stock shall not have any voting
powers, preferences or relative, participating, optional or other
special rights other than those specifically set forth herein.
D. RESOLVED, that pursuant to the authority expressly granted and vested
in the Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, there shall be established
and authorized for issuance a series of the Corporation's Preferred Stock,
$.01 par value per share, designated "Series B-2 Preferred Stock" (herein
referred to as "Series B-2 Preferred Stock"), consisting of Four Million
(4,000,000) shares, each of the par value of $.01 per share, and having
the voting powers, preferences and relative, participating, optional and
other rights, and the qualifications, limitations or restrictions set
forth below:
1. DEFINITIONS. For purposes of the Series B-2 Preferred Stock, the
following terms shall have the following definitions or shall be
subject to the following rules of construction:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Brazos" means Brazos Sportswear, Inc., a Texas
corporation and subsidiary of the Corporation.
(c) "Common Stock" means shares of the Corporation's Common
Stock, no par value per share.
(d) "Junior Stock" means, collectively, the Common Stock, the
Series A-1 Preferred Stock, the Series A-2 Preferred Stock and the
Series B-1 Preferred Stock.
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<PAGE>
(e) "Mandatory Redemption Date" means the earlier to occur of
(i) the date of consummation of a Qualified Public Offering, but
only to the extent the offering price per share of Common Stock is
less than $3.50 (as adjusted for stock splits, combinations and
other similar corporate events), (ii) the date of consummation of a
Sale, or (iii) December 31, 2003.
(f) "Market Price" of a share of Common Stock on any given
date means (i) the closing sales price of a share of Common Stock as
reported on the principal securities exchange on which shares of
Common Stock are then listed or admitted to trading or (ii) if not
so reported, the average of the closing bid and asked prices for a
share of Common Stock as quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or (iii) if
not quoted on NASDAQ, the average of the closing bid and asked
prices for a share of Common Stock as quoted by the National
Quotation Bureau's "Pink Sheets" or the National Association of
Securities Dealers OTC Bulletin Board System. If the price of a
share of Common Stock shall not be so reported, the Market Price of
a share of Common Stock shall be determined by the Board in its
absolute discretion.
(g) The term "outstanding," when used with reference to shares
of capital stock, shall mean issued shares, excluding shares held by
the Corporation or a subsidiary of the Corporation.
(h) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(i) "Qualified Public Offering" means the underwritten public
offering of Common Stock by the Corporation for cash for its own
account pursuant to a registration statement filed under the
Securities Act (other than any registration statement relating to
warrants, options or shares of capital stock of the Corporation
granted or to be granted or sold primarily to employees, directors,
or officers of the Corporation, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule,
a registration statement relating to employee benefit plans or
interests therein or any registration statement covering securities
issued in connection with any debt financing of the Corporation), in
which the net offering proceeds to be received by the Corporation
are at least $15,000,000.
(j) "Quarterly Dividend Date" means the last day of each
March, June, September and December in each year in which any shares
of Series B-2 Preferred Stock are outstanding.
(k) "Sale" means a single transaction or a series of related
transactions having the effect of (i) the sale, transfer, lease or
conveyance of all or substantially all of the properties and assets
of the Corporation to any
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<PAGE>
other corporation or corporations or other person or persons (other
than a subsidiary of the Corporation), (ii) the sale, transfer or
conveyance (other than in a merger or consolidation of the
Corporation) of all or substantially all of the issued and
outstanding voting securities of the Corporation to any other
corporation or corporations or other person or persons or (iii) the
merger or consolidation of the Corporation with or into any other
corporation or corporations or entity or entities in which the
Corporation is not the sole surviving corporation or continuing
corporation, other than a consolidation or merger in which the
holders of shares of the Common Stock immediately preceding such
consolidation or merger receive, directly or indirectly, (A) 50% or
more of the common stock of the sole surviving or continuing
corporation outstanding immediately following the consummation of
such merger or consolidation and (B) securities representing 50% or
more of the combined voting power of the voting stock of the sole
surviving or continuing corporation outstanding immediately
following the consummation of such merger or consolidation.
(l) "Securities Act" means the Securities Act of 1933, as
amended.
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<PAGE>
(m) "Senior Loan Agreement" means (i) any loan, credit or
other similar agreement, together with all notes, debentures,
security agreements and other loan documents executed and delivered
in connection therewith, evidencing any indebtedness of the
Corporation or any successor entity for money heretofore, now or
hereafter borrowed by the Corporation or any successor entity (or by
any subsidiary of the Corporation or any successor entity and
guaranteed by the Corporation or any successor entity) from one or
more banks, financial institutions or other institutional lenders
and (ii) upon consummation of the merger contemplated under that
certain Plan and Agreement of Merger dated November 13, 1996
("Merger Agreement"), between the Corporation and BSI Holdings, Inc.
("BSI"), (A) any item set forth in clause (i) above with respect to
BSI or any successor entity (or by any subsidiary of BSI or any
successor entity and guaranteed by BSI) including, without
limitation, (x) the Second Amended and Restated Loan and Security
Agreement dated as of August 9, 1996, among Brazos Sportswear, Inc.,
a Texas corporation and subsidiary of BSI ("Brazos"), and Fleet
Capital Corporation, as agent for itself and The First National Bank
of Boston, as such Agreement may thereafter from time to time be
amended, supplemented or restated and (y) those certain Debentures
of Brazos dated August 9, 1996, payable to Allied Investment
Corporation and Allied Investment Corporation II, in the original
maximum principal amount of $3,500,000, (B) the Company's Junior
Subordinated Debenture dated as of August 2, 1996, payable to the
order of Plymouth Mills, Inc., in the original principal balance of
$4,000,000 and (C) the Company's Junior Subordinated Debenture dated
as of September 30, 1996, payable to the order of Plymouth Mills,
Inc., with respect to 50% of the Earnout Amount determined pursuant
to Section 1.2(d) of that certain Asset Purchase Agreement, dated
August 2, 1996, between, among others, Brazos and Plymouth Mills,
Inc.
(n) "Series A-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-1 Preferred
Stock, $.01 par value per share.
(o) "Series A-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-2 Preferred
Stock, $.01 par value per share.
(p) "Series B-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-1 Preferred
Stock, $.01 par value per share.
(q) "Series B-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-2 Preferred
Stock, $.01 par value per share.
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<PAGE>
(r) "Series B-3 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-3 Preferred
Stock, $.01 par value per share.
(s) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
2. DIVIDENDS. The holders of Series B-2 Preferred Stock, in preference
to the holders of Series A-2 Preferred Stock, Series A-1 Preferred
Stock and the Common Stock, shall be entitled to receive, but only
to the extent of funds legally available therefor, cumulative,
preferential dividends at the annual rate of $.08 per share, payable
as hereafter described. Such dividends shall commence to accrue on
the shares of Series B-2 Preferred Stock and be cumulative from and
after the date of issuance of such shares of Series B-2 Preferred
Stock and shall be deemed to accumulate and accrue from day to day
thereafter. Dividends under this Section 2 shall be payable
quarterly in arrears so long as the Series B-2 Preferred Stock is
outstanding, on or before each Quarterly Dividend Date. Other than
dividends payable incident to a redemption of the Series B-2
Preferred Stock under Section 3 below or a conversion of the Series
B-2 Preferred Stock under Section 5 below or in respect of
fractional shares as described below, all dividends on the Series
B-2 Preferred Stock hereunder shall be payable not in cash, but
rather by the Corporation's issuance and delivery to each record
holder of Series B-2 Preferred Stock of a number of additional
shares of Series B-2 Preferred Stock determined by dividing the
amount of each such dividend by $1.00. Within 30 days after each
Quarterly Dividend Date, the Corporation shall issue and deliver to
each record holder of Series B-2 Preferred Stock on such Quarterly
Dividend Date one or more certificates evidencing the number of
whole shares of Series B-2 Preferred Stock payable as a dividend to
such holder as provided above, and such shares, when so issued and
delivered, shall be deemed fully paid and nonassessable shares of
the Corporation's Series B-2 Preferred Stock. No fractional shares
of Series B-2 Preferred Stock or scrip will be issued in respect of
fractional interests resulting from any dividend hereunder; in lieu
of any fractional shares of Series B-2 Preferred Stock which may be
issued as aforesaid, the holders thereof instead shall receive a
cash payment in an amount equal to the product of such fraction
multiplied by $1.00. So long as any of the Series B-2 Preferred
Stock remains outstanding, no dividends or distributions (other than
dividends or distributions on Common Stock payable in Common Stock)
shall be paid upon, or declared or set apart for, any Series A-2
Preferred Stock, Series A-1 Preferred Stock and Common Stock, nor
shall any of such stock (other than Common Stock acquired in
exchange for, or out of the cash proceeds of, the issue of other
Common Stock or out of cash contributions to
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<PAGE>
the capital of the Corporation) be purchased, redeemed, retired or
otherwise acquired by the Corporation, unless and until in either
case all cumulative dividends on the then outstanding shares of
Series B-2 Preferred Stock shall have been or concurrently shall be
paid.
3. REDEMPTION.
(a) MANDATORY REDEMPTION. Subject to the provisions of Section
3(d), on the Mandatory Redemption Date, the Corporation shall
redeem, out of funds legally available therefor, all of the shares
of Series B-2 Preferred Stock then outstanding, at a redemption
price of $1.00 per share (plus all accrued and unpaid dividends
thereon through such date as provided in Section 3(c) below).
(b) OPTIONAL REDEMPTION.
(i) Subject to the provisions of Section 3(d) and
provided no shares of Series B-3 Preferred Stock are then
outstanding, at any time while any shares of Series B-2
Preferred Stock are outstanding, the Corporation, at the
option of the Board of Directors, may redeem from the holders
of the Series B-2 Preferred Stock, at a redemption price of
$1.00 per share (plus all accrued and unpaid dividends thereon
through the date designated for redemption as provided in
Section 3(c) below), all or any portion of Series B-2
Preferred Stock outstanding on the date designated for such
redemption. In case less than all of the outstanding shares of
Series B-2 Preferred Stock are to be redeemed under this
Section 3(b)(i), such redemption shall be made on a pro rata
basis in accordance with each holder's respective holdings of
such shares as of the date designated for redemption.
(ii) In addition to the optional redemption pursuant to
Section 3(b)(i) and subject to the provisions of Section 3(d),
at any time while any shares of Series B-2 Preferred Stock are
outstanding, the Corporation, at the option of the Board of
Directors, may redeem from the holders of Series B-2 Preferred
Stock, out of funds legally available therefor, at a
redemption price of $.01 per share (plus all accrued and
unpaid dividends thereon through the date designated for
redemption as provided in Section 3(c) below), all but not
less than all, of the shares of Series B-2 Preferred Stock
outstanding on the date set for redemption, provided that the
right of the Corporation to redeem the shares of Series B-2
Preferred Stock under this Section 3(b)(ii) is subject to the
Company mailing the redemption notice in accordance with
Section 3(d) within 30 days following any period of 20
consecutive trading days during which the Market Price per
share of the Common Stock is at or above $3.50 per share (as
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<PAGE>
adjusted for stock splits, combinations and other
similar corporate events).
(iii) Notwithstanding any provision contained in this
Section 3(b) to the contrary, in no event shall the
Corporation redeem any shares of Series B-2 Preferred Stock
under this Section 3(b), nor shall any holders of such shares
accept payment upon such redemption, if at the time of such
redemption there exists a default or event of default within
the meaning of any Senior Loan Agreement or such redemption
would cause a default or event of default under any Senior
Loan Agreement.
(c) ACCRUED DIVIDENDS. Upon any mandatory or optional
redemption under paragraph (a) or (b) above, the Corporation shall,
simultaneously with the making of any such redemption, pay to the
holders of the Series B-2 Preferred Stock being redeemed all
dividends accrued and unpaid on the shares being redeemed through
the date of redemption; provided, however, that in case of the
payment of dividends under this paragraph (c), such dividends shall
be paid in cash, and not in shares of Series B-2 Preferred Stock as
provided in Section 2 above.
(d) GENERAL.
(i) The Corporation shall provide written notice of any
mandatory or optional redemption under this Section 3 shall be
not less than 30 days prior to the date fixed or designated
for such redemption to the holders of record as of the
relevant record date of the shares of Series B-2 Preferred
Stock to be so redeemed at their respective addresses then
appearing on the stock books of the Corporation. Each
redemption notice to be provided under this Section 3 shall be
by certified mail, return receipt requested and shall specify
(i) the redemption date, (ii) the redemption price per share
and (iii) the place for payment and for delivering necessary
transfer instruments to be executed by the holder in order for
the holder to receive the redemption price. No holder of
shares of Series B-2 Preferred Stock redeemed in accordance
with this Section 3 shall be entitled to receive payment of
the redemption price for such shares until such holder causes
to be delivered in accordance with the redemption notice the
stock certificate representing the shares so redeemed and
transfer instructions satisfactory to the Company.
(ii) From and after the effective date of redemption and
the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series B-2
Preferred Stock so called for redemption shall not have been
surrendered for
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cancellation, the shares to be redeemed shall no longer be
deemed outstanding, and the holders of certificates
representing such shares shall have with respect to such
shares no rights in or with respect to the Corporation except
the right to receive, upon the surrender of such certificates,
the redemption price therefor. Shares of Series B-2 Preferred
Stock redeemed by the Corporation pursuant to this Section 3
shall not be reissued and shall be canceled and retired.
4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation,
a sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within
the meaning of this Section 4.
(b) SERIES B-2 PREFERRED STOCK. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation and subject to the rights of the
Series B-3 Preferred Stock, the holders of the Series B-2 Preferred
Stock shall be entitled to receive $1.00 in cash for each share of
Series B-2 Preferred Stock (together with all accrued and unpaid
dividends on each share of Series B-2 Preferred Stock), before any
distribution of the assets of the Corporation shall be made in
respect of the outstanding Junior Stock, or funds necessary for such
payment shall have been set aside in trust for the account of the
holders of the outstanding Series B-2 Preferred Stock so as to be
and continue available therefor. If upon such liquidation,
dissolution or winding up, the assets distributable to the holders
of the Series B-2 Preferred Stock as aforesaid shall be insufficient
to permit the payment to them of such $1.00 per share (plus such
accrued and unpaid dividends), the assets of the Corporation shall
be distributed to the holders of the Series B-2 Preferred Stock
ratably until they shall have received the full amount to which they
would otherwise be entitled. If the assets of the Corporation are
sufficient to permit the payment of such amounts to the holders of
the Series B-2 Preferred Stock, the remainder of the assets of the
Corporation, if any, after the distribution as aforesaid shall be
distributed and divided ratably among the holders of the Junior
Stock then outstanding according to their respective shares,
interests and priorities.
5. CONVERSION RIGHTS. The Series B-2 Preferred Stock shall be
convertible as follows:
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(a) OPTIONAL CONVERSION. Subject to and upon compliance with
the provisions of this Section 5, the holder of any shares of Series
B-2 Preferred Stock shall have the right at such holder's option, at
any time prior to the close of business on the date fixed for
redemption, and without the payment of any additional consideration
therefor, to convert any of such shares of Series B-2 Preferred
Stock into fully paid and nonassessable shares of Common Stock at
the Conversion Ratio (as defined in Section 5(d) below) in effect on
any Conversion Date (as defined in Section 5(e) below) upon the
terms hereinafter set forth.
(b) AUTOMATIC CONVERSION. Each outstanding share of Series B-2
Preferred Stock shall automatically convert, without any further act
of the Corporation or its stockholders, at the Conversion Ratio then
in effect, into fully paid and nonassessable shares of Common Stock
upon the consummation of a Qualified Public Offering, provided that
the per share offering price to the public is not less than $3.50
per share (as adjusted for stock splits, combinations and similar
corporate events).
(c) ACCRUED DIVIDENDS. Upon any optional or automatic
conversion under paragraph (a) or (b) above, the Corporation shall
simultaneously with such conversion, pay to the holders of the
Series B-2 Preferred Stock being converted all dividends accrued and
unpaid on the shares being converted through the date of conversion;
provided, however, that in case of payment of dividends under this
paragraph (c), such dividends shall be paid in cash, and not in
shares of Series B-2 Preferred Stock as provided in Section 2 above.
(d) CONVERSION RATIO. Each share of Series B-2 Preferred Stock
shall be convertible pursuant to Sections 5(a) and 5(b) into a
number of shares of Common Stock determined by dividing (x) $1.00
(the liquidation value per share) by (y) the Conversion Factor in
effect on any Conversion Date (the "Conversion Ratio"). For the
purposes of this Section 5, the term "Conversion Factor" initially
shall mean $2.20.
(e) MECHANICS OF CONVERSION. The holder of any shares of
Series B-2 Preferred Stock may exercise the conversion right
specified in Section 5(a) by surrendering to the Corporation or any
transfer agent of the Corporation the certificate or certificates
for the shares to be converted, accompanied by written notice
specifying the number of shares to be converted. Upon the occurrence
of automatic conversion pursuant to Section 5(b), the outstanding
shares of Series B-2 Preferred Stock shall be converted
automatically without any further action by the holders of such
shares and whether or not the certificates representing such shares
are surrendered to the Corporation or its transfer agent; provided
that the Corporation shall not be obligated to issue to any holder
certificates
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evidencing the shares of Common Stock issuable upon such conversion
unless certificates evidencing such shares of Series B-2 Preferred
Stock are delivered either to the Corporation or any transfer agent
of the Corporation. Conversion shall be deemed to have been effected
on the date when delivery of notice of an election to convert and of
certificates for shares being converted is made or on the date
specified in Section 5(b), as the case may be, and such date is
referred to herein as the "Conversion Date." Subject to the
provisions of Section 5(g)(iii), as promptly as practicable
thereafter (and after surrender of the certificate or certificates
representing shares of Series B-2 Preferred Stock to the Corporation
or any transfer agent of the Corporation in the case of conversion
pursuant to Section 5(b)) the Corporation shall issue and deliver to
or upon the written order of such holder a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided in
Section 5(f). Subject to the provisions of Section 5(g)(iii), the
person in whose name the certificate or certificates for Common
Stock are to be issued shall be deemed to have become a holder of
record of such Common Stock on the applicable Conversion Date. Upon
conversion of only a portion of the number of shares covered by a
certificate representing shares of Series B-2 Preferred Stock
surrendered for conversion (in the case of conversion pursuant to
Section 5(a)), the Corporation shall issue and deliver to or upon
the written order of the holder of the certificate so surrendered
for conversion, at the expense of the Corporation, a new certificate
covering the number of shares of Series B-2 Preferred Stock
representing the unconverted portion of the certificate so
surrendered.
(f) FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series B-2
Preferred Stock. If more than one share of Series B-2 Preferred
Stock is surrendered for conversion at any one time by the same
holder or is held by the same holder at the time of any automatic
conversion, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate
number of shares so surrendered or held, as the case may be. Instead
of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series B-2 Preferred
Stock, the Corporation shall pay out of funds legally available
therefor a cash adjustment in respect of such fractional interest,
rounded to the nearest one hundredth (1/100th) of a share, in an
amount equal to that fractional interest of the then Market Price,
rounded to the nearest cent ($.01), of one share of Common Stock.
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(g) CONVERSION FACTOR ADJUSTMENTS. The Conversion Factor shall
be subject to adjustment from time to time as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS OR
COMBINATIONS. If the Corporation shall (x) declare a dividend
or make a distribution on its Common Stock in shares of its
Common Stock, (y) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares of
Common Stock or (z) combine or reclassify the outstanding
shares of Common Stock into a smaller number of shares of
Common Stock, the Conversion Factor in effect at the time of
the record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be adjusted to that number determined
by multiplying the Conversion Factor in effect by a fraction
(x) the numerator of which shall be the total number of issued
and outstanding shares of Common Stock immediately prior to
such dividend, distribution, subdivision, combination or
reclassification and (y) the denominator of which shall be the
total number of issued and outstanding shares of Common Stock
immediately after such dividend, distribution, subdivision,
combination or reclassification. Successive adjustments in the
Conversion Factor shall be made whenever any event specified
above shall occur.
(ii) ROUNDING OF CALCULATIONS: MINIMUM ADJUSTMENT. All
calculations under this Section 5(g) shall be made to the
nearest cent ($.01) or to the nearest one hundredth (1/100th)
of a share, as the case may be. Any provision of this Section
5 to the contrary notwithstanding, no adjustment in the
Conversion Factor shall be made if the amount of such
adjustment would be less than 1% of the then current
Conversion Factor until the end of one year after such
adjustment otherwise would have been required; but any such
amount shall be carried forward and an adjustment with respect
thereto shall be made at the time of and together with any
subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate 1%
of the then current Conversion Factor or more, provided that
if the events giving rise to such adjustments occur within
three months of each other, then such adjustments shall be
calculated as if the events giving rise to them had occurred
simultaneously on the date of the first such event.
(iii) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON
CERTAIN ADJUSTMENTS. In any case in which the provisions of
this Section 5(g) provide that an adjustment shall become
effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (x)
issuing to the holder of
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any share of Series B-2 Preferred Stock converted after such
record date and before the occurrence of such event, the
additional shares of Common Stock issuable upon such
conversion by reason of the adjustment required by such event
over and above the shares of Common Stock issuable upon such
conversion before giving effect to such adjustment and (y)
paying to such holder any amount of cash in lieu of a
fractional share of Common Stock pursuant to Section 5(f);
provided that the Corporation upon request shall deliver to
such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional
shares, and such cash, upon the occurrence of the event
requiring such adjustment.
(h) COSTS. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance
or delivery of shares of Common Stock upon conversion of any shares
of Series B-2 Preferred Stock; provided that the Corporation shall
not be required to pay any taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificate
for such shares in the name other than that of the holder of the
shares of Series B-2 Preferred Stock in respect of which such shares
are being issued.
6. VOTING RIGHTS. Such share of Series B-2 Preferred Stock shall have
the right to one vote for each share of Common Stock into which such
share of Series B-2 Preferred Stock could then be converted (with
any fractional shares determined on an aggregate conversion basis
being rounded to the nearest whole share), and with respect to such
vote such holder shall have full voting rights and powers equal to
the voting rights and powers of the holders of Common Stock, and
shall be entitled to notice of any stockholders' meeting in
accordance with the bylaws of the Corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any
questions or action upon which holders of Common Stock have the
right to vote and shall not vote as a separate class except as
required by law.
7. RIGHT OF FIRST REFUSAL. If any holder of Series B-2 Preferred Stock
desires to sell, assign, transfer or otherwise dispose of any shares
of Series B-2 Preferred Stock, then such holder (for purposes of
this Section 7, the "Selling Stockholder"), prior to making any such
sale, shall first offer such shares of Series B-2 Preferred Stock
(for purposes of this Section 7, the "Option Shares") for sale to
the Corporation and then to the other holders of the Series B-2
Preferred Stock on a pro rata basis as hereafter provided, in
accordance with the following provisions of this Section 7.
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(a) OPTION PRICE, TERMS; OFFERING NOTICES. The price per
Option Share at which the Selling Stockholder shall be required to
offer the Option Shares (for purposes of this Section 7, the "Option
Price") and the terms of such offer, shall be the price at which and
the terms upon which any proposed third party purchaser shall have
offered to purchase the Option Shares from the Selling Stockholder
and which the Selling Stockholder is prepared to accept. Each offer
required to be made by the Selling Stockholder pursuant to this
Section 7 shall be made by a written notice (for purposes of this
Section 7, the "Offering Notice") which shall state that the offer
is being made pursuant to this Section 7 and which shall set forth
the number of Option Shares, the name or names of the proposed
purchaser or purchasers of the Option Shares, the price per share
offered by such proposed purchaser or purchasers for the Option
Shares, the method of payment of the purchase price and the
scheduled date of consummation of such proposed sale. A copy of the
written offer from any proposed third-party purchaser shall be
attached to each Offering Notice.
(b) OFFER TO THE CORPORATION. The Selling Stockholder shall
offer the option Shares to the Corporation by delivering an offering
Notice to the Corporation. Within 30 days following the
Corporation's receipt of such Offering Notice, the Corporation shall
deliver to the Selling Stockholder a reply notice accepting the
offer of the Selling Stockholder with respect to all (but not less
than all) of the Option Shares or rejecting such offer. If by such
reply notice the Corporation accepts the offer made by the Selling
Stockholder, the reply notice shall constitute an agreement binding
on the Selling Stockholder and the Corporation to sell and purchase
the option Shares at a price per share equal to the option Price. If
within such 30-day period, the Corporation shall have failed to
deliver a reply notice accepting the offer of the Selling
Stockholder as to all of the Option Shares, the Corporation shall be
deemed to have rejected such offer. If the Corporation rejects or
intends to reject such offer, it shall mail a notice to such effect
to every record holder (other than the Selling Stockholder) of the
Series B-2 Preferred Stock as of the date of the Corporation's
receipt of the Offering Notice. (collectively, "Remaining
Stockholders"); which notice of the Corporation shall also include a
copy of the Offering Notice.
(c) OFFER TO REMAINING STOCKHOLDERS. If the Corporation
rejects or is deemed to have rejected the foregoing offer under
paragraph (b) above, then the Selling Stockholder shall thereupon be
deemed to have offered the Option Shares to the Remaining
Stockholders on the same price and terms set forth in the Offering
Notice. Such offer shall be made on a pro rata basis in accordance
with each Remaining Stockholder's holdings of Series B-2 Preferred
Stock on the date of the Offering Notice; provided, however, that
prior to acceptance of such offer, any one or more Remaining
Stockholders may agree among themselves as to a different allocation
for purposes of
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<PAGE>
accepting such offer. Within 30 days following the date of the
Corporation's notice referred to in paragraph (b) above, each
Remaining Stockholder desiring to accept such offer shall deliver to
the Selling Stockholder a reply notice accepting the offer of the
Selling Stockholder with respect to all (but not less than all) of
such Remaining Stockholder's pro rata portion of the Option Shares,
or rejecting such offer; provided, however, that prior to expiration
of such 30-day period, the Selling Stockholder shall have received
reply notices from Remaining Stockholders as to all (but not less
than all) of all Option Shares being offered. If by such reply
notice(s) the Remaining Stockholders collectively accept the offer
made by the Selling Stockholder, such reply notice(s) shall
constitute an agreement binding on the Selling Stockholder and each
such Remaining Stockholder (severally, but not jointly) to sell and
purchase the Option Shares at a price per share equal to the Option
Price. If within such 30-day period, the Remaining Stockholders
collectively shall have failed to deliver one or more reply notices
accepting the offer of the Selling Stockholder as to all of the
Option Shares, the Remaining Stockholders shall be deemed to have
rejected such offer.
(d) LAPSE OF OPTION. If the foregoing offer to sell Option
Shares has been made by the Selling Stockholder and has not been
accepted by the Corporation or the Remaining Stockholders, then the
Selling Stockholder may sell not less than all of the Option Shares
at any time within, but not sub sequent to, 60 days after the lapse
of the option granted pursuant to this Section 7; provided, however,
that no sale of the option Shares shall be made at any price lower
than the Option Price or on terms materially different from those
specified in the Offering Notice or to any person or persons other
than the persons specified in the Offering Notice. If after the
lapse of such 60-day period the Option Shares shall not have been
sold, all of the provisions of this Section 7 shall apply to any
future sale or other disposition of shares of Series B-2 Preferred
Stock owned by the Selling Stockholder.
(e) CONSUMMATION OF PURCHASES. Each transaction of purchase
and sale of Option Shares pursuant to this Section 7 shall be
completed by delivery of the stock certificates representing the
Option Shares endorsed in blank, or accompanied by duly executed
stock powers, and by actual registration of the transfer of the
Option Shares on the books of the Corporation upon payment of the
purchase price to the Selling Stockholder. Any such transaction
shall be closed at such time and place as shall be agreed upon by
the parties thereto, or, if no such agreement is reached, at the
principal office of the Corporation on the 30th day following the
date of delivery of the last reply notice given in connection with
such transaction or, if such day shall not be a business day, on the
first
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business day thereafter during normal business hours.
8. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, the
shares of Series B-2 Preferred Stock shall not have any voting
powers, preferences or relative, participating, optional or other
special rights other than those specifically set forth herein.
E. RESOLVED, that pursuant to the authority expressly granted and vested
in the Board of Directors of the Corporation in accordance with the
provisions of its Certificate of Incorporation, there shall be established
and authorized for issuance a series of the Corporation's Preferred Stock,
$.01 par value per share, designated "Series B-3 Preferred Stock" (herein
referred to as "Series B-3 Preferred Stock"), consisting of Three Million
Five Hundred Thousand (3,500,000) shares, each of the par value of $.01
per share, and having the voting powers, preferences and relative,
participating, optional and other rights, and the qualifications,
limitations or restrictions set forth below:
1. DEFINITIONS. For purposes of the Series B-3 Preferred Stock, the
following terms shall have the following definitions or shall be
subject to the following rules of construction:
(a) "Board of Directors" means the Board of Directors of the
Corporation.
(b) "Brazos" means Brazos Sportswear, Inc., a Texas
corporation and subsidiary of the Corporation.
(c) "Common Stock" means shares of the Corporation's Common
Stock, no par value per share.
(d) "Junior Stock" means, collectively, the Common Stock, the
Series A-1 Preferred Stock, the Series A-2 Preferred Stock, the
Series B-1 Preferred Stock and the Series B-2 Preferred Stock.
(e) "Mandatory Redemption Date" means the earlier to occur of
(i) the date of consummation of a Qualified Public Offering, but
only to the extent the offering price per share of Common Stock is
less than $3.50 (as adjusted for stock splits, combinations and
other similar corporate events), (ii) the date of consummation of a
Sale, or (iii) December 31, 2003.
(f) "Market Price" of a share of Common Stock on any given
date means (i) the closing sales price of a share of Common Stock as
reported on the principal securities exchange on which shares of
Common Stock are then listed or admitted to trading or (ii) if not
so reported, the average of the closing bid and asked prices for a
share of Common Stock as quoted on the National Association of
Securities Dealers Automated Quotation System
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<PAGE>
("NASDAQ") or (iii) if not quoted on NASDAQ, the average of the
closing bid and asked prices for a share of Common Stock as quoted
by the National Quotation Bureau's "Pink Sheets" or the National
Association of Securities Dealers OTC Bulletin Board System. If the
price of a share of Common Stock shall not be so reported, the
Market Price of a share of Common Stock shall be determined by the
Board in its absolute discretion.
(g) The term "outstanding," when used with reference to shares
of capital stock, shall mean issued shares, excluding shares held by
the Corporation or a subsidiary of the Corporation.
(h) "Preferred Stock" means shares of any series of the
Corporation's Preferred Stock, $.01 par value per share.
(i) "Qualified Public Offering" means the underwritten public
offering of Common Stock by the Corporation for cash for its own
account pursuant to a registration statement filed under the
Securities Act (other than any registration statement relating to
warrants, options or shares of capital stock of the Corporation
granted or to be granted or sold primarily to employees, directors,
or officers of the Corporation, a registration statement filed
pursuant to Rule 145 under the Securities Act or any successor rule,
a registration statement relating to employee benefit plans or
interests therein or any registration statement covering securities
issued in connection with any debt financing of the Corporation), in
which the net offering proceeds to be received by the Corporation
are at least $15,000,000.
(j) "Quarterly Dividend Date" means the last day of each
March, June, September and December in each year in which any shares
of Series B-3 Preferred Stock are outstanding.
(k) "Sale" means a single transaction or a series of related
transactions having the effect of (i) the sale, transfer, lease or
conveyance of all or substantially all of the properties and assets
of the Corporation to any other corporation or corporations or other
person or persons (other than a subsidiary of the Corporation), (ii)
the sale, transfer or conveyance (other than in a merger or
consolidation of the Corporation) of all or substantially all of the
issued and outstanding voting securities of the Corporation to any
other corporation or corporations or other person or persons or
(iii) the merger or consolidation of the Corporation with or into
any other corporation or corporations or entity or entities in which
the Corporation is not the sole surviving corporation or continuing
corporation, other than a consolidation or merger in which the
holders of shares of the Common Stock immediately preceding such
consolidation or merger receive, directly or indirectly, (A) 50% or
more of the common stock of the sole surviving or continuing
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corporation outstanding immediately following the consummation of
such merger or consolidation and (B) securities representing 50% or
more of the combined voting power of the voting stock of the sole
surviving or continuing corporation outstanding immediately
following the consummation of such merger or consolidation.
(l) "Securities Act" means the Securities Act of 1933, as
amended.
(m) "Senior Loan Agreement" means (i) any loan, credit or
other similar agreement, together with all notes, debentures,
security agreements and other loan documents executed and delivered
in connection therewith, evidencing any indebtedness of the
Corporation or any successor entity for money heretofore, now or
hereafter borrowed by the Corporation or any successor entity (or by
any subsidiary of the Corporation or any successor entity and
guaranteed by the Corporation or any successor entity) from one or
more banks, financial institutions or other institutional lenders
and (ii) upon consummation of the merger contemplated under that
certain Plan and Agreement of Merger dated November 13, 1996
("Merger Agreement"), between the Corporation and BSI Holdings, Inc.
("BSI"), (A) any item set forth in clause (i) above with respect to
BSI or any successor entity (or by any subsidiary of BSI or any
successor entity and guaranteed by BSI) including, without
limitation, (x) the Second Amended and Restated Loan and Security
Agreement dated as of August 9, 1996, among Brazos Sportswear, Inc.,
a Texas corporation and subsidiary of BSI ("Brazos"), and Fleet
Capital Corporation, as agent for itself and The First National Bank
of Boston, as such Agreement may thereafter from time to time be
amended, supplemented or restated and (y) those certain Debentures
of Brazos dated August 9, 1996, payable to Allied Investment
Corporation and Allied Investment Corporation II, in the original
maximum principal amount of $3,500,000, (B) the Company's Junior
Subordinated Debenture dated as of August 2, 1996, payable to the
order of Plymouth Mills, Inc., in the original principal balance of
$4,000,000 and (C) the Company's Junior Subordinated Debenture dated
as of September 30, 1996, payable to the order of Plymouth Mills,
Inc., with respect to 50% of the Earnout Amount determined pursuant
to Section 1.2(d) of that certain Asset Purchase Agreement, dated
August 2, 1996, between, among others, Brazos and Plymouth Mills,
Inc.
(n) "Series A-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-1 Preferred
Stock, $.01 par value per share.
(o) "Series A-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series A-2 Preferred
Stock, $.01 par value per share.
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(p) "Series B-1 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-1 Preferred
Stock, $.01 par value per share.
(q) "Series B-2 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-2 Preferred
Stock, $.01 par value per share.
(r) "Series B-3 Preferred Stock" means the series of Preferred
Stock designated by the Corporation as its Series B-3 Preferred
Stock, $.01 par value per share.
(s) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them in accordance with
generally accepted accounting principles consistently applied and in
effect as of the date of the relevant calculation.
2. DIVIDENDS. The holders of Series B-3 Preferred Stock, in preference
to the holders of Series A-2 Preferred Stock, Series A-1 Preferred
Stock and the Common Stock, shall be entitled to receive, but only
to the extent of funds legally available therefor, cumulative,
preferential dividends at the annual rate of $.08 per share, payable
as hereafter described. Such dividends shall commence to accrue on
the shares of Series B-3 Preferred Stock and be cumulative from and
after the date of issuance of such shares of Series B-3 Preferred
Stock and shall be deemed to accumulate and accrue from day to day
thereafter. Dividends under this Section 2 shall be payable
quarterly in arrears so long as the Series B-3 Preferred Stock is
outstanding, on or before each Quarterly Dividend Date. Other than
dividends payable incident to a redemption of the Series B-3
Preferred Stock under Section 3 below or a conversion of the Series
B-3 Preferred Stock under Section 5 below or in respect of
fractional shares as described below, all dividends on the Series
B-3 Preferred Stock hereunder shall be payable not in cash, but
rather by the Corporation's issuance and delivery to each record
holder of Series B-3 Preferred Stock of a number of additional
shares of Series B-3 Preferred Stock determined by dividing the
amount of each such dividend by $1.00. Within 30 days after each
Quarterly Dividend Date, the Corporation shall issue and deliver to
each record holder of Series B-3 Preferred Stock on such Quarterly
Dividend Date one or more certificates evidencing the number of
whole shares of Series B-1 Preferred Stock payable as a dividend to
such holder as provided above, and such shares, when so issued and
delivered, shall be deemed fully paid and nonassessable shares of
the Corporation's Series B-3 Preferred Stock. No fractional shares
of Series B-3 Preferred Stock or scrip will be issued in respect of
fractional interests resulting from any dividend hereunder; in lieu
of any fractional shares of Series B-3 Preferred Stock which may be
issued as aforesaid, the holders thereof instead
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<PAGE>
shall receive a cash payment in an amount equal to the product of
such fraction multiplied by $1.00. So long as any of the Series B-3
Preferred Stock remains outstanding, no dividends or distributions
(other than dividends or distributions on Common Stock payable in
Common Stock) shall be paid upon, or declared or set apart for, any
Series A-2 Preferred Stock, Series A-1 Preferred Stock and Common
Stock, nor shall any of such stock (other than Common Stock acquired
in exchange for, or out of the cash proceeds of, the issue of other
Common Stock or out of cash contributions to the capital of the
Corporation) be purchased, redeemed, retired or otherwise acquired
by the Corporation, unless and until in either case all cumulative
dividends on the then outstanding shares of Series B-3 Preferred
Stock shall have been or concurrently shall be paid.
3. REDEMPTION.
(a) MANDATORY REDEMPTION. Subject to the provisions of Section
3(d), on the Mandatory Redemption Date, the Corporation shall
redeem, out of funds legally available therefor, all of the shares
of Series B-3 Preferred Stock then outstanding, at a redemption
price of $1.00 per share (plus all accrued and unpaid dividends
thereon through such date as provided in Section 3(c) below).
(b) OPTIONAL REDEMPTION.
(i) Subject to the provisions of Section 3(d), at any
time while any shares of Series B-3 Preferred Stock are
outstanding, the Corporation, at the option of the Board of
Directors, may redeem from the holders of the Series B-3
Preferred Stock, at a redemption price of $1.00 per share
(plus all accrued and unpaid dividends thereon through the
date designated for redemption as provided in Section 3(c)
below), all or any portion of Series B-3 Preferred Stock
outstanding on the date designated for such redemption. In
case less than all of the outstanding shares of Series B-3
Preferred Stock are to be redeemed under this Section 3(b)(i),
such redemption shall be made on a pro rata basis in
accordance with each holder's respective holdings of such
shares as of the date designated for redemption.
(ii) In addition to the optional redemption pursuant to
Section 3(b)(i) and subject to the provisions of Section 3(d),
at any time while any shares of Series B-3 Preferred Stock are
outstanding, the Corporation, at the option of the Board of
Directors, may redeem from the holders of Series B-3 Preferred
Stock, out of funds legally available therefor, at a
redemption price of $.01 per share (plus all accrued and
unpaid dividends thereon through such date as provided
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in Section 3(c) below), all but not less than all, of the
shares of Series B-3 Preferred Stock outstanding on the date
set for redemption provided that the right of the Corporation
to redeem the shares of Series B-3 Preferred Stock under this
Section 3(b)(ii) is subject to the Company mailing the
redemption notice in accordance with Section 3(d) within 30
days following any period of 20 consecutive trading days
during which the Market Price per share of the Common Stock is
at or above $3.50 per share (as adjusted for stock splits,
combinations and other similar corporate events).
(iii) Notwithstanding any provision contained in this
Section 3(b) to the contrary, in no event shall the
Corporation redeem any shares of Series B-3 Preferred Stock
under this Section 3(b), nor shall any holders of such shares
accept payment upon such redemption, if at the time of such
redemption there exists a default or event of default within
the meaning of any Senior Loan Agreement or such redemption
would cause a default or event of default under any Senior
Loan Agreement.
(c) ACCRUED DIVIDENDS. Upon any mandatory or optional
redemption under paragraph (a) or (b) above, the Corporation shall,
simultaneously with the making of any such redemption, pay to the
holders of the Series B-3 Preferred Stock being redeemed all
dividends accrued and unpaid on the shares being redeemed through
the date of redemption; provided, however, that in case of the
payment of dividends under this paragraph (c), such dividends shall
be paid in cash, and not in shares of Series B-3 Preferred Stock as
provided in Section 2 above.
(d) GENERAL.
(i) The Corporation shall provide written notice of any
mandatory or optional redemption under this Section 3 not less
than 30 days prior to the date fixed or designated for such
redemption, to the holders of record as of the relevant record
date of the shares of Series B-3 Preferred Stock to be so
redeemed as the case may be, at their respective addresses
then appearing on the stock books of the Corporation. Each
redemption notice to be provided under this Section 3 shall be
by certified mail, return receipt requested and shall specify
(i) the redemption date, (ii) the redemption price per share
and (iii) the place for payment and for delivering necessary
transfer instruments to be executed by the holder in order for
the holder to receive the redemption price. No holder of
shares of Series B-3
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Preferred Stock redeemed in accordance with this Section 3
shall be entitled to receive payment of the redemption price
for such shares until such holder causes to be delivered in
accordance with the redemption notice the stock certificate
representing the shares so redeemed and transfer instructions
satisfactory to the Company.
(ii) From and after the effective date of redemption and
the setting aside of the funds necessary for redemption,
notwithstanding that any certificate for shares of Series B-3
Preferred Stock so called for redemption shall not have been
surrendered for cancellation, the shares to be redeemed shall
no longer be deemed outstanding, and the holders of
certificates representing such shares shall have with respect
to such shares no rights in or with respect to the Corporation
except the right to receive, upon the surrender of such
certificates, the redemption price therefor. Shares of Series
B-3 Preferred Stock redeemed by the Corporation pursuant to
this Section 3 shall not be reissued and shall be canceled and
retired.
4. PREFERENCE ON LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) DEFINITION. A consolidation or merger of the Corporation,
a sale or transfer of substantially all of its assets as an
entirety, or any purchase or redemption of capital stock of the
Corporation of any class, shall not be regarded as "liquidation,
dissolution or winding up of the affairs of the Corporation" within
the meaning of this Section 4.
(b) SERIES B-3 PREFERRED STOCK. During any proceedings for the
voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation, the holders of the Series B-3
Preferred Stock shall be entitled to receive $1.00 in cash for each
share of Series B-3 Preferred Stock (together with all accrued and
unpaid dividends on each share of Series B-3 Preferred Stock),
before any distribution of the assets of the Corporation shall be
made in respect of the outstanding Junior Stock, or funds necessary
for such payment shall have been set aside in trust for the account
of the holders of the outstanding Series B-3 Preferred Stock so as
to be and continue available therefor. If upon such liquidation,
dissolution or winding up, the assets distributable to the holders
of the Series B-3 Preferred Stock as aforesaid shall be insufficient
to permit the payment to them of such $1.00 per share (plus such
accrued and unpaid dividends), the assets of the Corporation shall
be distributed to the holders of the Series B-3 Preferred Stock
ratably until they shall have received the full amount to which they
would otherwise be entitled. If the assets of the Corporation are
sufficient to permit the payment of such amounts to the holders of
the Series B-3 Preferred
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Stock, the remainder of the assets of the Corporation, if any, after
the distribution as aforesaid shall be distributed and divided
ratably among the holders of the Junior Stock then outstanding
according to their respective shares, interests and priorities.
5. CONVERSION RIGHTS. The Series B-3 Preferred Stock shall be
convertible as follows:
(a) OPTIONAL CONVERSION. Subject to and upon compliance with
the provisions of this Section 5, the holder of any shares of Series
B-3 Preferred Stock shall have the right at such holder's option, at
any time prior to the close of business on the date fixed for
redemption, and without the payment of any additional consideration
therefor, to convert any of such shares of Series B-3 Preferred
Stock into fully paid and nonassessable shares of Common Stock at
the Conversion Ratio (as defined in Section 5(d) below) in effect on
any Conversion Date (as defined in Section 5(e) below) upon the
terms hereinafter set forth.
(b) AUTOMATIC CONVERSION. Each outstanding share of Series B-3
Preferred Stock shall automatically convert, without any further act
of the Corporation or its stockholders, at the Conversion Ratio then
in effect, into fully paid and nonassessable shares of Common Stock
upon the consummation of a Qualified Public Offering, provided that
the per share offering price to the public is not less than $3.50
per share (as adjusted for stock splits, combinations and similar
corporate events).
(c) ACCRUED DIVIDENDS. Upon any optional or automatic
conversion under paragraph (a) or (b) above, the Corporation shall
simultaneously with such conversion, pay to the holders of the
Series B-3 Preferred Stock being converted all dividends accrued and
unpaid on the shares being converted through the date of conversion;
provided, however, that in case of payment of dividends under this
paragraph (c), such dividends shall be paid in cash, and not in
shares of Series B-3 Preferred Stock as provided in Section 2 above.
(d) CONVERSION RATIO. Each share of Series B-3 Preferred Stock
shall be convertible pursuant to Sections 5(a) and 5(b) into a
number of shares of Common Stock determined by dividing (x) $1.00
(the liquidation value per share) by (y) the Conversion Factor in
effect on any Conversion Date (the "Conversion Ratio"). For the
purposes of this Section 5, the term "Conversion Factor" initially
shall mean $2.20.
(e) MECHANICS OF CONVERSION. The holder of any shares of
Series B-3 Preferred Stock may exercise the conversion right
specified in Section 5(a) by surrendering to the Corporation or any
transfer agent of the
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Corporation the certificate or certificates for the shares to be
converted, accompanied by written notice specifying the number of
shares to be converted. Upon the occurrence of automatic conversion
pursuant to Section 5(b), the outstanding shares of Series B-3
Preferred Stock shall be converted automatically without any further
action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided that the Corporation
shall not be obligated to issue to any holder certificates
evidencing the shares of Common Stock issuable upon such conversion
unless certificates evidencing such shares of Series B-3 Preferred
Stock are delivered either to the Corporation or any transfer agent
of the Corporation. Conversion shall be deemed to have been effected
on the date when delivery of notice of an election to convert and of
certificates for shares being converted is made or on the date
specified in Section 5(b), as the case may be, and such date is
referred to herein as the "Conversion Date." Subject to the
provisions of Section 5(g)(iii), as promptly as practicable
thereafter (and after surrender of the certificate or certificates
representing shares of Series B-3 Preferred Stock to the Corporation
or any transfer agent of the Corporation in the case of conversion
pursuant to Section 5(b)) the Corporation shall issue and deliver to
or upon the written order of such holder a certificate or
certificates for the number of full shares of Common Stock to which
such holder is entitled and a check or cash with respect to any
fractional interest in a share of Common Stock as provided in
Section 5(f). Subject to the provisions of Section 5(g)(iii), the
person in whose name the certificate or certificates for Common
Stock are to be issued shall be deemed to have become a holder of
record of such Common Stock on the applicable Conversion Date. Upon
conversion of only a portion of the number of shares covered by a
certificate representing shares of Series B-3 Preferred Stock
surrendered for conversion (in the case of conversion pursuant to
Section 5(a)), the Corporation shall issue and deliver to or upon
the written order of the holder of the certificate so surrendered
for conversion, at the expense of the Corporation, a new certificate
covering the number of shares of Series B-3 Preferred Stock
representing the unconverted portion of the certificate so
surrendered.
(f) FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of shares of Series B-3
Preferred Stock. If more than one share of Series B-3 Preferred
Stock is surrendered for conversion at any one time by the same
holder or is held by the same holder at the time of any automatic
conversion, the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the
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basis of the aggregate number of shares so surrendered or held, as
the case may be. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of
Series B-3 Preferred Stock, the Corporation shall pay out of funds
legally available therefor a cash adjustment in respect of such
fractional interest, rounded to the nearest one hundredth (1/100th)
of a share, in an amount equal to that fractional interest of the
then Market Price, rounded to the nearest cent ($.01), of one share
of Common Stock.
(g) CONVERSION FACTOR ADJUSTMENTS. The Conversion Factor shall
be subject to adjustment from time to time as follows:
(i) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS OR
COMBINATIONS. If the Corporation shall (x) declare a dividend
or make a distribution on its Common Stock in shares of its
Common Stock, (y) subdivide or reclassify the outstanding
shares of Common Stock into a greater number of shares of
Common Stock or (z) combine or reclassify the outstanding
shares of Common Stock into a smaller number of shares of
Common Stock, the Conversion Factor in effect at the time of
the record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be adjusted to that number determined
by multiplying the Conversion Factor in effect by a fraction
(x) the numerator of which shall be the total number of issued
and outstanding shares of Common Stock immediately prior to
such dividend, distribution, subdivision, combination or
reclassification and (y) the denominator of which shall be the
total number of issued and outstanding shares of Common Stock
immediately after such dividend, distribution, subdivision,
combination or reclassification. Successive adjustments in the
Conversion Factor shall be made whenever any event specified
above shall occur.
(ii) ROUNDING OF CALCULATIONS: MINIMUM ADJUSTMENT. All
calculations under this Section 5(g) shall be made to the
nearest cent ($.01) or to the nearest one hundredth (1/100th)
of a share, as the case may be. Any provision of this Section
5 to the contrary notwithstanding, no adjustment in the
Conversion Factor shall be made if the amount of such
adjustment would be less than 1% of the then current
Conversion Factor until the end of one year after such
adjustment otherwise would have been required; but any such
amount shall be carried forward and an adjustment with respect
thereto shall be made at the time of and together with any
subsequent adjustment which, together with such amount and any
other amount or amounts
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so carried forward, shall aggregate 1% of the then current
Conversion Factor or more, provided that if the events giving
rise to such adjustments occur within three months of each
other, then such adjustments shall be calculated as if the
events giving rise to them had occurred simultaneously on the
date of the first such event.
(iii) TIMING OF ISSUANCE OF ADDITIONAL COMMON STOCK UPON
CERTAIN ADJUSTMENTS. In any case in which the provisions of
this Section 5(g) provide that an adjustment shall become
effective immediately after a record date for an event, the
Corporation may defer until the occurrence of such event (x)
issuing to the holder of any share of Series B-3 Preferred
Stock converted after such record date and before the
occurrence of such event, the additional shares of Common
Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of
Common Stock issuable upon such conversion before giving
effect to such adjustment and (y) paying to such holder any
amount of cash in lieu of a fractional share of Common Stock
pursuant to Section 5(f); provided that the Corporation upon
request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to
receive such additional shares, and such cash, upon the
occurrence of the event requiring such adjustment.
(h) COSTS. The Corporation shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance
or delivery of shares of Common Stock upon conversion of any shares
of Series B-3 Preferred Stock; provided that the Corporation shall
not be required to pay any taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificate
for such shares in the name other than that of the holder of the
shares of Series B-3 Preferred Stock in respect of which such shares
are being issued.
6. VOTING RIGHTS.
(a) The Corporation shall not, without the consent of the
holders of at least a majority of the shares of the outstanding
Series A-1 Preferred Stock, adopt any amendment to this Certificate
which would alter or change the powers, preferences or special
rights of the Series A-1 Preferred Stock so as to affect them
adversely, PROVIDED that except as otherwise required by law, no
such consent shall be required with respect to (i) any amendment to
this Certificate that increases or decreases the number of shares of
Series A-1 Preferred Stock which the Corporation is authorized to
issue (provided that no such amendment shall reduce the number of
authorized shares to below
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the number of shares then outstanding), or (ii) the establishment or
issuance of any other series of Preferred Stock or any other class
of stock of the Corporation that has any powers, preferences or
rights that are different from, greater than, superior to or in
preference of the Series A-1 Preferred Stock.
(b) Except as provided in paragraph (a) above or otherwise
required by law, the holders of Series A-1 Preferred Stock shall
have no right or power to vote on the election of directors or on
any other question or in any proceedings involving the Corporation.
7. RIGHT OF FIRST REFUSAL. If any holder of Series B-3 Preferred Stock
desires to sell, assign, transfer or otherwise dispose of any shares
of Series B-3 Preferred Stock, then such holder (for purposes of
this Section 7, the "Selling Stockholder"), prior to making any such
sale, shall first offer such shares of Series B-3 Preferred Stock
(for purposes of this Section 7, the "Option Shares") for sale to
the Corporation and then to the other holders of the Series B-3
Preferred Stock on a pro rata basis as hereafter provided, in
accordance with the following provisions of this Section 7.
(a) OPTION PRICE, TERMS; OFFERING NOTICES. The price per
Option Share at which the Selling Stockholder shall be required to
offer the Option Shares (for purposes of this Section 7, the "Option
Price") and the terms of such offer, shall be the price at which and
the terms upon which any proposed third party purchaser shall have
offered to purchase the Option Shares from the Selling Stockholder
and which the Selling Stockholder is prepared to accept. Each offer
required to be made by the Selling Stockholder pursuant to this
Section 7 shall be made by a written notice (for purposes of this
Section 7, the "Offering Notice") which shall state that the offer
is being made pursuant to this Section 7 and which shall set forth
the number of Option Shares, the name or names of the proposed
purchaser or purchasers of the Option Shares, the price per share
offered by such proposed purchaser or purchasers for the Option
Shares, the method of payment of the purchase price and the
scheduled date of consummation of such proposed sale. A copy of the
written offer from any proposed third-party purchaser shall be
attached to each Offering Notice.
(b) OFFER TO THE CORPORATION. The Selling Stockholder shall
offer the option Shares to the Corporation by delivering an offering
Notice to the Corporation. Within 30 days following the
Corporation's receipt of such Offering Notice, the Corporation shall
deliver to the Selling Stockholder a reply notice accepting the
offer of the Selling Stockholder with respect to all (but not less
than all) of the Option Shares or rejecting such offer. If by such
reply notice the Corporation accepts the offer made by the Selling
Stockholder, the reply notice shall constitute an agreement binding
on the
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Selling Stockholder and the Corporation to sell and purchase the
option Shares at a price per share equal to the option Price. If
within such 30-day period, the Corporation shall have failed to
deliver a reply notice accepting the offer of the Selling
Stockholder as to all of the Option Shares, the Corporation shall be
deemed to have rejected such offer. If the Corporation rejects or
intends to reject such offer, it shall mail a notice to such effect
to every record holder (other than the Selling Stockholder) of the
Series B-3 Preferred Stock as of the date of the Corporation's
receipt of the Offering Notice. (collectively, "Remaining
Stockholders"); which notice of the Corporation shall also include a
copy of the Offering Notice.
(c) OFFER TO REMAINING STOCKHOLDERS. If the Corporation
rejects or is deemed to have rejected the foregoing offer under
paragraph (b) above, then the Selling Stockholder shall thereupon be
deemed to have offered the Option Shares to the Remaining
Stockholders on the same price and terms set forth in the Offering
Notice. Such offer shall be made on a pro rata basis in accordance
with each Remaining Stockholder's holdings of Series B-3 Preferred
Stock on the date of the Offering Notice; provided, however, that
prior to acceptance of such offer, any one or more Remaining
Stockholders may agree among themselves as to a different allocation
for purposes of accepting such offer. Within 30 days following the
date of the Corporation's notice referred to in paragraph (b) above,
each Remaining Stockholder desiring to accept such offer shall
deliver to the Selling Stockholder a reply notice accepting the
offer of the Selling Stockholder with respect to all (but not less
than all) of such Remaining Stockholder's pro rata portion of the
Option Shares, or rejecting such offer; provided, however, that
prior to expiration of such 30-day period, the Selling Stockholder
shall have received reply notices from Remaining Stockholders as to
all (but not less than all) of all Option Shares being offered. If
by such reply notice(s) the Remaining Stockholders collectively
accept the offer made by the Selling Stockholder, such reply
notice(s) shall constitute an agreement binding on the Selling
Stockholder and each such Remaining Stockholder (severally, but not
jointly) to sell and purchase the Option Shares at a price per share
equal to the Option Price. If within such 30-day period, the
Remaining Stockholders collectively shall have failed to deliver one
or more reply notices accepting the offer of the Selling Stockholder
as to all of the Option Shares, the Remaining Stockholders shall be
deemed to have rejected such offer.
(d) LAPSE OF OPTION. If the foregoing offer to sell Option
Shares has been made by the Selling Stockholder and has not been
accepted by the Corporation or the Remaining Stockholders, then the
Selling Stockholder may sell not less than all of the Option Shares
at any time within, but not sub sequent to, 60 days after the lapse
of the option granted pursuant to this Section 7; provided, however,
that no sale of the option Shares shall be made
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at any price lower than the Option Price or on terms materially
different from those specified in the Offering Notice or to any
person or persons other than the persons specified in the Offering
Notice. If after the lapse of such 60-day period the Option Shares
shall not have been sold, all of the provisions of this Section 7
shall apply to any future sale or other disposition of shares of
Series B-3 Preferred Stock owned by the Selling Stockholder.
(e) CONSUMMATION OF PURCHASES. Each transaction of purchase
and sale of Option Shares pursuant to this Section 7 shall be
completed by delivery of the stock certificates representing the
Option Shares endorsed in blank, or accompanied by duly executed
stock powers, and by actual registration of the transfer of the
Option Shares on the books of the Corporation upon payment of the
purchase price to the Selling Stockholder. Any such transaction
shall be closed at such time and place as shall be agreed upon by
the parties thereto, or, if no such agreement is reached, at the
principal office of the Corporation on the 30th day following the
date of delivery of the last reply notice given in connection with
such transaction or, if such day shall not be a business day, on the
first business day thereafter during normal business hours.
8. EXCLUSION OF OTHER RIGHTS. Unless otherwise required by law, the
shares of Series B-3 Preferred Stock shall not have any voting
powers, preferences or relative, participating, optional or other
special rights other than those specifically set forth herein.
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APPENDIX F
PLAN AND AGREEMENT OF MERGER
REINCORPORATION OF SUN SPORTSWEAR, INC.
IN DELAWARE
PLAN AND AGREEMENT OF MERGER, dated as of ,
1996, by and between Sun Sportswear, Inc., a Washington corporation ("Oldco"),
and Brazos Sportswear, Inc., a Delaware corporation and wholly-owned subsidiary
of Oldco ("Newco" or the "Surviving Corporation"). Oldco and Newco are
hereinafter collectively referred to as the "Merging Corporations."
WITNESSETH:
WHEREAS, Newco is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at
, and with its principal executive offices at 3860
Virginia Avenue, Cincinnati, Ohio 45227; and
WHEREAS, the authorized capital stock of Newco consists of
shares of common stock, par value $.001 per share, of which at
, 1996, shares were issued and outstanding
and owned by Oldco and shares of preferred stock, par value $.001
per share, of which at , 1996, no shares were issued and
outstanding; and
WHEREAS, Oldco is a corporation duly organized and validly existing under
the laws of the State of Washington, with its registered office at
, and with its principal executive offices at 3860
Virginia Avenue, Cincinnati, Ohio 45227; and
WHEREAS, the authorized capital stock of Oldco consists of
shares of common stock, no par value, of which at ,
1996, shares were issued and outstanding and shares of
preferred stock, par value $.001 per share, comprised of shares of
Series A-1, shares of Series A-2, shares of Series B-1,
shares of Series B-2, and shares of Series B-3, of which
at December , 1996, 0 shares were issued and outstanding; and
WHEREAS, the respective boards of directors of Oldco and Newco deem it
desirable and in the best interests of their respective corporations and their
respective stockholders to merge Oldco into Newco, pursuant to the provisions of
Section 253 of the General Corporation Law of the State of Delaware and Chapter
23B.11.010 of the Washington Business Corporation Act, and have proposed,
declared advisable, and approved such merger pursuant to this Plan and Agreement
of Merger (the "Agreement"), which Agreement has been duly approved by
resolutions of the respective boards of directors of the Merging Corporations;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and in order to prescribe the terms
and conditions of the merger, the mode of carrying the same into effect, the
manner and basis of converting the shares of common and preferred stock of Oldco
into shares of common and preferred stock of Newco, and such other details and
provisions as are deemed necessary or proper, the parties hereby agree as
follows:
ARTICLE I
MERGER
1:1 SURVIVING CORPORATION. Subject to the adoption and approval of this
Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, the Merging
Corporations shall be, upon the effective date of the merger as defined in
Section 1:3 hereof, merged into a single surviving corporation, which shall be
Newco, one of the Merging Corporations,
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which shall continue its corporate existence and remain a Delaware corporation
governed by and subject to the laws of that State.
1:2 STOCKHOLDER APPROVAL. This Agreement shall be submitted for adoption
and approval by the stockholders of each of the Merging Corporations in
accordance with the applicable laws of the States of Delaware and Washington.
1:3 EFFECTIVE DATE. The merger shall become effective upon (i) the filing
of a Certificate of Merger and Articles of Merger with the Secretary of State of
the States of Delaware and Washington, as applicable. The date upon which the
merger shall become effective, as defined by this Section 1:3, is referred to in
this Agreement as the "Effective Date."
ARTICLE II
CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION
2:1 EXISTENCE. The identity, existence, purposes, powers, objects,
franchises, rights, and immunities of Newco, the Surviving Corporation, shall
continue unaffected and unimpaired by the merger, and the corporate identity,
existence, purposes, powers, objects, franchises, rights, and immunities of the
Merging Corporations shall be wholly merged into Newco, the Surviving
Corporation, and Newco shall be fully vested therewith. Accordingly, on the
Effective Date, the separate existence of the Merging Corporations, except
insofar as continued by statute, shall cease.
ARTICLE III
GOVERNING LAW AND CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATION
3:1 DELAWARE LAW GOVERNS AND NEWCO'S CERTIFICATE OF INCORPORATION
SURVIVES. The laws of Delaware shall continue to govern the Surviving
Corporation. On and after the Effective Date, the Certificate of Incorporation
of Newco, as in effect on the Effective Date, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in the
manner provided by law.
ARTICLE IV
BYLAWS OF SURVIVING CORPORATION
4:1 NEWCO'S BYLAWS SURVIVE. On and after the Effective Date, the Bylaws
of Newco as in effect on the Effective Date, shall be the Bylaws of the
Surviving Corporation until the same shall be altered, amended, or repealed, or
until new Bylaws shall be adopted in accordance with the provisions of law, the
Certificate of Incorporation, and the Bylaws of the Surviving Corporation.
ARTICLE V
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
5:1 DIRECTORS OF SURVIVING CORPORATION. The incumbent directors of Oldco
immediately prior to the Effective Date shall constitute the board of directors
of the Surviving Corporation from and after the Effective Date, and such persons
shall hold office until the first annual meeting of stockholders of the
Surviving Corporation next following the Effective Date, or until their
successors are, in accordance with the Bylaws of the Surviving Corporation,
elected and qualify.
5:2 OFFICERS OF SURVIVING CORPORATION. The incumbent officers of Oldco
immediately prior to the Effective Date shall hold their respective offices in
the Surviving Corporation from and after the Effective Date and until the first
meeting of directors following the next annual meeting of stockholders thereof,
or until their successors are elected in accordance with the Bylaws of the
Surviving Corporation.
5:3 VACANCIES. On or after the Effective Date, if a vacancy shall for any
reason exist in the board of directors or in any of the offices of the Surviving
Corporation, such vacancy shall be filled in the manner provided in the
Certificate of Incorporation or Bylaws of the Surviving Corporation.
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ARTICLE VI
CAPITAL STOCK OF SURVIVING CORPORATION
6:1 CAPITAL STOCK AS IN NEWCO'S CERTIFICATE OF INCORPORATION. The
authorized number of shares of capital stock of the Surviving Corporation, the
par value, designations, preferences, rights, and limitations thereof, and the
express terms thereof, shall be as set forth in the Certificate of Incorporation
of the Surviving Corporation as in effect on the Effective Date.
ARTICLE VII
CONVERSION OF SECURITIES ON MERGER
7:1 GENERAL. The manner and basis of converting the issued and
outstanding shares of the capital stock of Oldco into shares of the capital
stock of Newco shall be as hereinafter set forth in this Article VII.
7:2 CANCELLATION OF NEWCO'S CAPITAL STOCK. On the Effective Date, each
share of Newco common stock, par value $.001 per share, and Newco preferred
stock, par value $.001 per share then issued and outstanding shall be
automatically cancelled and cease to exist.
7:3 CONVERSION OF OLDCO'S COMMON STOCK. On the Effective Date, each share
of common stock, no par value, of Oldco then issued and outstanding (excluding
any Oldco shares which may then be held in the treasury of Oldco, all of which
shares shall cease to exist), without any action on the part of the holders
thereof, shall automatically become and be converted into 0.2 fully paid and
nonassessable shares of the issued and outstanding common stock, par value $.001
per share, of the Surviving Corporation.
7:4 CONVERSION OF OLDCO'S PREFERRED STOCK. On the Effective Date, each
share of Oldco Preferred Stock, Series A-1, A-2, B-1, B-2 and B-3 then issued
and outstanding, without any action on the part of the holders thereof, shall
automatically become and be converted into one fully paid and nonassessable
share of Newco Preferred Stock, Series A-1, A-2, B-1, B-2 and B-3, respectively,
and any other series of Oldco Preferred Stock then issued and outstanding shall
be converted into an equal number of fully paid and nonassessable shares of
Newco Preferred Stock, having substantially similar preferences and rights (with
any conversion feature adjusted to reflect the 5 for 1 conversion of Oldco's
common stock into Newco Common Stock).
7:5 CONVERSION OF OLDCO'S OPTIONS AND WARRANTIES. On the Effective Date,
each of the then outstanding options and warrants to purchase Oldco common
stock, without any action on the part of the holders thereof, shall
automatically become and be converted into an option or warrant, as the case may
be, to purchase that number of shares of Newco common stock determined by
multiplying the number of shares of Oldco common stock subject to such Oldco
option or warrant on the Effective Date, times the applicable exchange rate for
the Oldco common stock set forth in Section 7.3 hereof, and the exercise price
thereof shall adjust in accordance with the terms and provisions of such option
or warrant.
7:6 EXCHANGE OF THE MERGING CORPORATIONS' STOCK CERTIFICATES. As promptly
as practicable after the Effective Date, each holder of an outstanding
certificate or certificates theretofore representing shares of common or
preferred stock of Oldco (or a stock certificate representing the right to
receive such shares) may surrender the same to an exchange agent of and
designated by the Surviving Corporation and such holder shall be entitled upon
such surrender to receive in exchange therefor a certificate or certificates
representing the number of whole shares of common stock or preferred of the
Surviving Corporation into which the shares of common or preferred stock of
Oldco theretofore represented by the certificate or certificates so surrendered
shall have been converted as aforesaid. However, prior to any surrender, each
outstanding certificate representing Oldco's outstanding common or preferred
stock (or a stock certificate representing the right to receive such shares)
shall be deemed for all purposes (other than the right to receive any dividend
payable by Newco, which shall be deferred until such certificate surrender) to
evidence ownership of the number of whole shares of common or preferred stock of
the Surviving Corporation into which the same shall have been converted. At or
before the Effective Date, each holder of an outstanding certificate or
certificates theretofore representing shares of common or preferred stock of
Newco shall surrender the same to an exchange agent of, and designated by, the
Surviving Corporation.
F-3
<PAGE>
7:7 NEWCO FRACTIONAL SHARES. No certificates for fractional share
interests of Common Stock of Newco will be issued, but, in lieu thereof, Newco
will settle all such fractional share interests in cash on the basis of the
Closing price for Oldco common stock on the last trading day before the
Effective Date.
7:8 OLDCO'S TRANSFER BOOKS CLOSED. Upon the Effective Date, the stock
transfer books of Oldco shall be deemed closed, and no transfer of capital stock
of Oldco shall thereafter be made or consummated. If, after the Effective Date,
certificates for shares of Oldco Common Stock or Oldco Preferred Stock are
presented to Newco for registration or transfer, they shall be cancelled and
exchanged for certificates representing the appropriate number of shares of
Newco common stock or preferred stock, as applicable.
ARTICLE VIII
ASSETS AND LIABILITIES
8:1 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF
SURVIVING CORPORATION. On the Effective Date, all rights, privileges, powers,
immunities, and franchises of each of the Merging Corporations, both of a public
and private nature, and all property, real, personal, and mixed, and all debts
due on whatever account, as well as stock subscriptions and all other choses or
things in action, and all and every other interest of or belonging to or due to
either of the Merging Corporations, shall be taken by and deemed to be
transferred to and shall be vested in the Surviving Corporation without further
act or deed, and all such rights, privileges, powers, immunities, franchises,
property, debts, choses or things in action, and all and every other interest of
the Merging Corporations shall be thereafter as effectually the property of the
Surviving Corporation as they were of the respective Merging Corporations, and
the title to any real or other property, or any interest therein, whether vested
by deed or otherwise, in either of the Merging Corporations, shall not revert or
be in any way impaired by reason of the merger; PROVIDED, HOWEVER, that all
rights of creditors and all liens upon any properties OF EACH of the Merging
Corporations shall be preserved unimpaired, and all debts, liabilities,
restrictions obligations, and duties of the respective Merging Corporations,
including without limitation all obligations, liabilities, and duties as lessee
under any existing lease, shall thenceforth attach to the Surviving Corporation
and may be enforced against and by it to the same extent as if said debts,
liabilities, restrictions, obligations, and duties had been incurred or
contracted by it. Any action or proceeding pending by or against either of the
Merging Corporations may be prosecuted to judgment as if the merger had not
taken place, or the Surviving Corporation may be substituted in place of either
of the Merging Corporations.
8:2 ACCOUNTING TREATMENT. The assets and liabilities of the Merging
Corporations shall be taken up on the books of the Surviving Corporation in
accordance with generally accepted accounting principles, and the capital
surplus and retained earnings accounts of the Surviving Corporation shall be
determined, in accordance with generally accepted accounting principles, by the
board of directors of the Surviving Corporation. Nothing herein shall prevent
the board of directors of the Surviving Corporation from making any future
changes in its accounts in accordance with law.
8:3 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Date, whether before or after action thereon by the stockholders
of the Merging Corporation, by mutual consent of the Merging Corporation,
expressed by action of their respective boards of directors.
F-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective chairmen of the
boards, presidents, or vice presidents and their corporate seals to be hereunto
affixed and attested by their respective secretaries or assistant secretaries,
all as of the day and year first above written.
BRAZOS SPORTSWEAR, INC.
(a Delaware
corporation)
By ___________________________________
President
SUN SPORTSWEAR, INC.
(a Washington
corporation)
By ___________________________________
President
F-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article 9 of the Registrant's Restated Articles of
Incorporation and Article 11 of the Registrant's Bylaws provide for
indemnification of the Registrant's directors, officers, employees and agents to
the full extent permitted by Washington law.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, self dealing or illegal
corporate loans or distributions, or any transactions from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article 9 of the Registrant's Restated
Articles of Incorporation contains provisions implementing, to the full extent
permitted by Washington law, such limitations on a director's liability to the
Registrant and its shareholders.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or contemplated action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action.
In an action brought to obtain a judgment in the corporation's favor,
whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for expenses, including attorneys' fees, actually
and reasonably incurred in connection with the defense or settlement of such
action, and the corporation may not indemnify for amounts paid in satisfaction
of a judgment or in settlement of the claim. In any such action, no
indemnification may be paid in respect of any claim, issue or matter as to which
such person shall have been adjudged liable to the corporation except as
otherwise approved by the Delaware Court of Chancery or the court in which the
claim was brought. In any other type of proceeding, the indemnification may
extend to judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such other proceeding, as well as to
expenses.
The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner reasonably believed to
be in, or not opposed to, the best interests of the corporation and, in the case
of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made (1) by a majority vote of
a quorum of disinterested members of the board of directors, (2) by independent
legal counsel in a written opinion, if such a quorum does not exist or if the
disinterested directors so direct, or (3) by the stockholders.
The Certificate of Incorporation and Bylaws of Brazos Delaware require it
to indemnify its directors to the fullest extent authorized by the Delaware
General Corporation Law or any other applicable law in effect, but if such
statute or law is amended, Brazos Delaware may change the standard of
indemnification only to the extent that such amended statute or law permits
Brazos Delaware to provide broader indemnification rights to its directors.
Brazos Delaware's Certificate of Incorporation limits the personal liability of
a director to Brazos Delaware or its stockholders to damages for breach of the
director's fiduciary duty.
Under Section 7.1 of the Merger Agreement (Exhibit 2.1 hereto), the extent,
if any, not provided by any existing right under one of the parties' directors'
and officers' liability insurance policies, from and
II-1
<PAGE>
after the effective time of the merger, the parties have agreed that the
Registrant will, to the fullest extent permitted by applicable law, indemnify,
defend and hold harmless each person who was, as of November 13, 1996, or was at
any time prior to such date, or who becomes prior to the effective time of the
merger, a director, officer or employee of the parties to the Merger Agreement
or any subsidiary thereof against certain liabilities that are, in whole or in
part, based on, arising out of, or pertaining to the transactions contemplated
by, the Merger Agreement. In addition, to the fullest extent permitted by
applicable law, all existing rights of indemnification will continue in full
force and effect for a period of not less than six years from the effective time
of the merger. Section 7.1(b) of the Merger Agreement requires that for a period
of four years after the effective time of the merger, the Registrant shall
maintain policies of directors' and officers' liability insurance maintained by
Sun, or so much of such insurance as can be so maintained or obtained at a cost
equal to $50,000 annually.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger dated as of November 13,
1996 by and between the Registrant and BSI Holdings,
Inc. (included as Appendix A to the Joint Proxy
Statement/Prospectus)
3.1 -- Restated Articles of Incorporation of the Registrant
(Filed as an exhibit to Form S-1 Registration Statement
(No. 33-31688), and incorporated herein by reference.)
3.2 -- Bylaws of the Registrant (Filed as an exhibit to Form
10-K for the year ended December 31, 1991 and
incorporated herein by reference.)
+5.1 -- Opinion of Graham & James LLP/Riddell Williams P.S. as
to the legality of the securities being registered
*8.1 -- Opinion of Graham & James LLP/Riddell Williams, P.C.
**8.2 -- Opinion of Porter & Hedges, L.L.P.
10.1 -- 1989 Employee Stock Option Plan of the Registrant
(Filed as an exhibit to Form S-1 Registration Statement
(No. 33-31688), and incorporated herein by reference.)
10.2.1 -- 1989 Director Stock Option Plan of the Registrant, as
amended (Filed as an exhibit to Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference.)
10.4 -- Industrial Lease, dated April 3, 1989, between the
Registrant and Sabey Corporation (Filed as an exhibit
to Form S-1 Registration Statement (No. 33-31688), and
incorporated herein by reference.)
10.9 -- Tax Claims and Access Agreement, dated as of October 6,
1989, between the Registrant and David A. Sabey (Filed
as an exhibit to Form S-1 Registration Statement (No.
33-31688), and incorporated herein by reference.)
10.12 -- Form of Indemnification Agreement between the Company
and its directors (Filed as an exhibit to Form 10-K for
the year ended December 31, 1991 and incorporated
herein by reference.)
*10.18 -- Termination Agreement between Registrant and Kevin
James, Senior Vice President and Chief Financial
Officer.
10.19 -- Employment Agreement between Registrant and L. Kaye
Counts, Executive Vice President and Chief Operating
Officer (Filed as an exhibit to Form 10-K for the year
ended December 31, 1994 and incorporated herein by
reference.)
*10.19.1 -- Addendum to Employment Agreement between Registrant and
L. Kaye Counts, Executive Vice President and Chief
Operating Officer.
10.23.1 -- Employment Agreement between Registrant and Sandra L.
Teufel, Senior Vice President -- Sales and
Merchandising (Filed as an exhibit to Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference.)
10.27 -- Credit Agreement, dated as of February 13, 1996,
between the Registrant and Heller Financial, Inc.
(Filed as an exhibit to Form 10-K for the year ended
December 31, 1995 and incorporated herein by
reference.)
II-2
<PAGE>
*10.27.1 -- Second Amendment to Credit Agreement between the
Registrant and Heller Financial, Inc.
**11.1 -- BSI Holdings, Inc. Computation of Earnings (Loss) Per
Common Share
**11.2 -- Computations of Pro Forma Combined Earnings (Loss) Per
Common Share
**23.1 -- Consent of Price Waterhouse LLP
**23.2 -- Consent of Arthur Andersen LLP
**23.3 -- Consent of Mahoney Cohen Rashba & Pokart, CPA, PC
+23.4 -- Consent of Graham & James LLP/Riddell Williams P.S.
(contained in the opinion filed as Exhibit 5.1)
**23.5 -- Consent of Rodman & Renshaw, Inc. with respect to its
fairness opinion
*24.1 -- Power of Attorney (included on signature page)
*99.1 -- Form of Proxy for annual meeting of shareholders of the
Registrant
*99.2 -- Form of Proxy for special meeting of shareholders of
BSI Holdings, Inc.
**99.3 -- Form of Election for Sun Shareholders electing not to
receive cash consideration
**99.4 -- Consent of persons named in the Registration Statement
as about to become a director who have not signed the
Registration Statement to be filed pursuant to Rule
438.
- ------------
* Previously filed.
** Filed herewith.
+ To be filed by Amendment.
(a) FINANCIAL STATEMENT SCHEDULES
None.
(b) REPORTS, OPINIONS AND APPRAISALS
Opinion of Rodman & Renshaw, Inc. (included as Appendix B to the Joint
Proxy Statement/Prospectus)
ITEMS 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(a) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by
any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(b) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first-class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(e) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KENT, STATE OF
WASHINGTON, ON THE 24TH DAY OF JANUARY, 1997.
SUN SPORTSWEAR, INC.
By: /s/ KEVIN C. JAMES
KEVIN C. JAMES
SENIOR VICE PRESIDENT, SECRETARY
AND CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED BELOW ON THE 24TH DAY OF JANUARY, 1997.
SIGNATURE TITLE
- --------------------------------------------------------------------------------
* Chairman of the Board
WILLIAM S. WILEY President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/KEVIN C. JAMES Senior Vice President, Secretary and
KEVIN C. JAMES Chief Financial Officer
(Principal Financial Officer)
* Controller (Principal Accounting
MICHAEL J. SANDHORST Officer)
* Director
LARRY C. MOUNGER
* Director
JAMES A. WALSH
Director
JAMES H. WILLIAMS
* Director
PAUL R. ROLLINS, JR.
*By: /s/ KEVIN C. JAMES
KEVIN C. JAMES
SENIOR VICE PRESIDENT, SECRETARY
AND CHIEF FINANCIAL OFFICER
AS ATTORNEY-IN-FACT
II-5
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger dated as of November 13,
1996 by and between the Registrant and BSI Holdings,
Inc. (included as Appendix A to the Joint Proxy
Statement/Prospectus)
3.1 -- Restated Articles of Incorporation of the Registrant
(Filed as an exhibit to Form S-1 Registration Statement
(No. 33-31688), and incorporated herein by reference.)
3.2 -- Bylaws of the Registrant (Filed as an exhibit to Form
10-K for the year ended December 31, 1991 and
incorporated herein by reference.)
+5.1 -- Opinion of Graham & James LLP/Riddell Williams P.S. as
to the legality of the securities being registered
*8.1 -- Opinion of Graham & James LLP/Riddell Williams, P.C.
**8.2 -- Opinion of Porter & Hedges, L.L.P.
10.1 -- 1989 Employee Stock Option Plan of the Registrant
(Filed as an exhibit to Form S-1 Registration Statement
(No. 33-31688), and incorporated herein by reference.)
10.2.1 -- 1989 Director Stock Option Plan of the Registrant, as
amended (Filed as an exhibit to Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by
reference.)
10.4 -- Industrial Lease, dated April 3, 1989, between the
Registrant and Sabey Corporation (Filed as an exhibit
to Form S-1 Registration Statement (No. 33-31688), and
incorporated herein by reference.)
10.9 -- Tax Claims and Access Agreement, dated as of October 6,
1989, between the Registrant and David A. Sabey (Filed
as an exhibit to Form S-1 Registration Statement (No.
33-31688), and incorporated herein by reference.)
10.12 -- Form of Indemnification Agreement between the Company
and its directors (Filed as an exhibit to Form 10-K for
the year ended December 31, 1991 and incorporated
herein by reference.)
*10.18 -- Termination Agreement between Registrant and Kevin
James, Senior Vice President and Chief Financial
Officer.
10.19 -- Employment Agreement between Registrant and L. Kaye
Counts, Executive Vice President and Chief Operating
Officer (Filed as an exhibit to Form 10-K for the year
ended December 31, 1994 and incorporated herein by
reference.)
*10.19.1 -- Addendum to Employment Agreement between Registrant and
L. Kaye Counts, Executive Vice President and Chief
Operating Officer.
10.23.1 -- Employment Agreement between Registrant and Sandra L.
Teufel, Senior Vice President -- Sales and
Merchandising (Filed as an exhibit to Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference.)
10.27 -- Credit Agreement, dated as of February 13, 1996,
between the Registrant and Heller Financial, Inc.
(Filed as an exhibit to Form 10-K for the year ended
December 31, 1995 and incorporated herein by
reference.)
<PAGE>
*10.27.1 -- Second Amendment to Credit Agreement between the
Registrant and Heller Financial, Inc.
**11.1 -- BSI Holdings, Inc. Computation of Earnings (Loss) Per
Common Share
**11.2 -- Computations of Pro Forma Combined Earnings (Loss) Per
Common Share
**23.1 -- Consent of Price Waterhouse LLP
**23.2 -- Consent of Arthur Andersen LLP
**23.3 -- Consent of Mahoney Cohen Rashba & Pokart, CPA, PC
+23.4 -- Consent of Graham & James LLP/Riddell Williams P.S.
(contained in the opinion filed as Exhibit 5.1)
**23.5 -- Consent of Rodman & Renshaw, Inc. with respect to its
fairness opinion
*24.1 -- Power of Attorney (included on signature page)
*99.1 -- Form of Proxy for annual meeting of shareholders of the
Registrant
*99.2 -- Form of Proxy for special meeting of shareholders of
BSI Holdings, Inc.
**99.3 -- Form of Election for Sun Shareholders electing not to
receive cash consideration
**99.4 -- Consent of persons named in the Registration Statement
as about to become a director who have not signed the
Registration Statement to be filed pursuant to Rule
438.
- ------------
* Previously filed.
** Filed herewith.
+ To be filed by Amendment.
EXHIBIT 8.2
[TO BE ISSUED ON LETTERHEAD OF PORTER & HEDGES, L.L.P.]
____________, 1997
BSI Holdings, Inc.
3860 Virginia Ave.
Cincinnati, Ohio 45227
Ladies and Gentlemen:
We have acted as counsel to BSI Holdings, Inc., a Delaware corporation
("BSI"), in connection with the transactions contemplated by the Plan and
Agreement of Merger dated November 13, 1996 (the "Merger Agreement"), by and
among BSI and Sun Sportswear, Inc., a Washington corporation ("Sun"). We have
been requested by BSI to render our opinion with respect to the material federal
income tax consequences of the proposed merger (the "Merger") of BSI with and
into Sun in accordance with the Merger Agreement, with Sun to be the surviving
corporation. As a result of the Merger, all of the outstanding shares of BSI
Common Stock and BSI Preferred Stock will be converted into shares of Sun Common
Stock and Sun Preferred Stock, except for cash paid to BSI stockholders on
perfection of dissenters' rights or in lieu of receipt of fractional shares of
Sun Common Stock. All capitalized terms used herein and not otherwise defined
shall have the meaning set forth in the Merger Agreement.
We have examined (i) executed copies of the Merger Agreement and the
Lock-Up Agreements, (ii) the Registration Statement on Form S-4 filed by Sun
(Registration No. 333-17871), and (iii) have examined or relied upon originals
or copies, certified or otherwise identified to our satisfaction, of such
corporate records, documents, certificates and other instruments, as we have
deemed necessary or appropriate for the purpose of rendering the opinions
expressed below. As to certain questions of fact material to the opinions
rendered herein, we have relied upon certificates, warranties and covenants made
to us by the management of Sun and BSI (which we have relied upon as true in
this opinion without our having performed any independent verification as to
their accuracy). We have assumed that the Merger qualifies as a statutory merger
under applicable state law. We have further assumed that all signatures on all
documents we have examined are genuine, that all documents submitted to us as
originals are authentic and that all copies of documents submitted to us are
complete and conform to the originals thereof.
In addition, for purposes of rendering this opinion, we have also relied
on the following assumptions which are based on representations by Sun, BSI and
certain BSI stockholders:
<PAGE>
BSI Holdings, Inc.
____________, 1997
Page 2
(a) Sun has no plan or intention to (i) reacquire any of its
Common or Preferred Stock, or (ii) sell or otherwise dispose of any assets of
BSI acquired in the Merger except for dispositions made in the ordinary course
of business or transfers described in ss.368(a)(2)(C).
(b) There is no intercorporate indebtedness existing between Sun
and BSI that was issued, acquired or will be settled at a discount.
(c) The payment of cash to BSI stockholders in lieu of the
issuance of fractional shares of Sun Common Stock in the Merger is solely for
the purpose of avoiding the expense and inconvenience to Sun of issuing
fractional shares and does not represent separately bargained for consideration.
The total cash payment to BSI stockholders in lieu of issuing fractional shares
will not exceed 1% of the total consideration that will be issued in the Merger
to the BSI stockholders in exchange for their BSI stock interests. The
fractional share interests in Sun Common Stock of each BSI stockholder will be
aggregated, and no BSI stockholder will receive cash payments with respect to
such fractional shares in an amount equal to or greater than the value of one
full share of Sun Common Stock, as determined in accordance with Section 1.9.4.4
of the Merger Agreement.
(d) Following the Effective Date of the Merger, Sun will continue
the historic business of BSI or use a significant portion of BSI's historic
business assets in a business within the meaning of Treasury Regulation Section
1.368-1(d).
(e) The fair market value of the Sun Common Stock and Sun
Preferred Stock and other consideration, if any, received by each BSI
stockholder will be approximately equal to the fair market value of the BSI
Common Stock and/or BSI Preferred Stock surrendered by such stockholder in the
Merger. We have, with the consent of BSI, reviewed the fairness opinion of
Rodman & Renshaw and note that the conclusions of that opinion are consistent
with this assumption.
(f) There is no present plan or intention by the BSI stockholders
who own 1% or more of the BSI Common Stock or BSI Preferred Stock and, to the
best knowledge of BSI Management, there is no plan or intention on the part of
the remaining BSI stockholders, to sell, exchange or otherwise dispose of a
number of shares of Sun Common Stock or Sun Preferred Stock received in the
Merger that would reduce BSI stockholders' ownership of Sun Common Stock and Sun
Preferred Stock to a number of shares having a value, as of the date of the
Merger, of less than fifty percent of the value of all of the shares of BSI
Common Stock and BSI Preferred Stock issued and outstanding immediately prior to
the Merger. For purposes of this assumption, shares of BSI Common Stock or BSI
Preferred Stock exchanged for cash or other property, surrendered by dissenters
or exchanged for cash in lieu of fractional shares of Sun Common Stock and/or
Sun Preferred Stock will be treated as outstanding BSI Common Stock and BSI
Preferred Stock immediately prior to the Merger. Moreover, shares of BSI Common
Stock or BSI Preferred Stock
<PAGE>
BSI Holdings, Inc.
____________, 1997
Page 3
held by BSI stockholders and otherwise sold, redeemed, or disposed of prior or
subsequent to the Merger are taken into account in making this determination.
(g) The liabilities of BSI assumed by Sun, if any, and the
liabilities to which the transferred assets of BSI are subject, if any, were
incurred by BSI in the ordinary course of its business.
(h) Each of the parties to the Merger and the BSI stockholders
will pay their respective expenses, if any, incurred in connection with the
Merger.
(i) No two parties to the Merger are investment companies as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(j) BSI is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(k) At the Effective Date of the Merger, the fair market value of
the assets of BSI will equal or exceed the sum of its liabilities, plus the
amount of liabilities, if any, to which those assets are subject.
(l) None of the compensation received or to be received by any
stockholder- employee of BSI, will be separate consideration for, or allocable
to, any of their shares of BSI Common Stock and/or BSI Preferred Stock. None of
the shares of Sun Common Stock or Sun Preferred Stock received by any
stockholder-employee of BSI pursuant to the Merger will be separate
consideration for, or allocable to, any employment agreement. Any compensation
paid to any stockholder-employee of BSI subsequent to the Merger will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
(m) Following the Effective Date of the Merger, Sun and BSI will
comply with all federal income tax reporting requirements mandated by the Code
and, to the best knowledge of the management of BSI and Sun, there is no plan or
intention on the part of the BSI or Sun stockholders not to comply with such
reporting requirements.
Based on the representations and qualifications contained herein, and
assuming further that the Merger is carried out in the manner set forth in the
Merger Agreement, the Registration Statement and the Transaction Documents, we
are of the opinion that the following are the material federal income tax
consequences resulting from the consummation of the Merger and that:
<PAGE>
BSI Holdings, Inc.
____________, 1997
Page 4
1. The Merger will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) of the Code and BSI and Sun will be a party to a
reorganization within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by BSI as a result of the Merger.
3. No gain or loss will be recognized by any BSI stockholder with
respect to the exchange of their BSI Common Stock solely for Sun Common Stock
pursuant to the Merger, except in the case of cash paid to dissenters or cash
paid in lieu of issuing fractional shares of Sun Common Stock.
4. No gain or loss will be recognized by any BSI stockholder with
respect to the exchange of their BSI Preferred Stock solely for Sun Preferred
Stock pursuant to the Merger, except in the case of cash paid to dissenters or
cash paid in lieu of issuing fractional shares of Sun Preferred Stock.
5. The payment of cash to a BSI stockholder in lieu of a fractional
share interest in Sun Common Stock will be treated as if the fractional share
interest was distributed as part of the Merger and then redeemed by Sun.
Accordingly, the tax consequences of such a cash payment will be determined in
accordance with Section 302 of the Code. Unless the redemption is essentially
equivalent to a dividend, such a redemption will be treated as a sale or
exchange of the fractional share interest under Section 302 of the Code and gain
or loss (which will constitute capital gain or loss if the related BSI Common
Stock and/or BSI Preferred Stock was held as a capital asset) will be recognized
by the stockholder measured by the difference between the cash or other property
received in lieu of the fractional share and the portion of the BSI
stockholder's tax basis that is allocated to such fractional share.
A redemption of BSI stockholders' fractional share interest in
Sun will not be essentially equivalent to a dividend if such stockholder incurs
a "meaningful reduction" in his proportionate equity interest in Sun by reason
of the redemption. Although the determination of whether there has been a
meaningful reduction is a factual matter in which no opinion is being given
hereunder, generally a redemption of public company shares held by a minority
stockholder will be treated as a meaningful reduction where such stockholder's
proportionate equity interest in the corporation has been reduced.
6. The aggregate tax basis of the Sun Common Stock and/or Sun Preferred
Stock received by a BSI stockholder in the Merger will be the same as the
aggregate tax basis of the BSI Common Stock and/or BSI Preferred Stock exchanged
for the Sun Common Stock and/or Sun Preferred Stock (less any portion of such
basis allocable to fractional shares redeemed for cash).
<PAGE>
BSI Holdings, Inc.
____________, 1997
Page 5
7. The holding period of Sun Common Stock and/or Sun Preferred Stock
(including any fractional shares deemed issued and then redeemed) received by a
BSI stockholder in exchange for the BSI Common Stock and/or BSI Preferred Stock
pursuant to the Merger will include the holding period of the BSI Common Stock
and/or BSI Preferred Stock that was converted into the Sun Common Stock and/or
Sun Preferred Stock, provided that such BSI Common Stock and/or BSI Preferred
Stock was held as a capital asset at the time of the Merger.
8. No gain or loss will be recognized by the holders of options to
purchase BSI Common Stock upon the receipt of options to purchase Sun Common
Stock due to the conversion of their BSI options. However, we note that such
holders may recognize compensation income upon the future exercise or
disposition of such options.
The foregoing opinions are qualified, and no opinions are expressed, as
to the federal income tax consequences, if any, with respect to the following
matters due to the uncertainty of the law regarding such matters:
(i) We are expressing no opinion regarding the federal income tax
consequences of the conversion of BSI warrants into warrants to purchase Sun
Common Stock since the present Treasury Regulations take the position that
warrants are neither stock nor securities qualifying for tax free treatment.
Proposed Treasury Regulations which reverse this position were issued on
December 23, 1996. However, such proposals may not become final, and the
scheduled effective date is expected to be after the completion of the Merger.
(ii) The ability of Sun or the Sun consolidated group to utilize net
operating loss carryforwards of Sun and BSI subsequent to the Merger may be
restricted due to the occurrence of an "ownership change" under Section 382 of
the Code as a result of the Merger, as well as the application of the
consolidated return regulations under Section 1502 of the Code. Such limitations
could defer, and possibly eliminate, any potential tax benefit from offsetting
such net operating loss carryforwards against future income of Sun or the Sun
consolidated group.
(iii) We are expressing no opinion regarding the federal income tax
consequences of the redemption of Sun Common Stock owned by existing Sun
stockholders pursuant to the Merger. However, we note that we believe that such
redemption will not affect the requirement that there be continuity of interest
by the target corporation shareholders after a reorganization within the meaning
of ss.368(a)(1)(A) because BSI will be considered to be the target corporation.
Our opinion has been requested by BSI on behalf of (i) itself, (ii) the
BSI stockholders receiving Sun Common Stock and/or Sun Preferred Stock in
exchange for BSI Common Stock and/or BSI Preferred Stock pursuant to the Merger,
(iii) the holders of options to purchase BSI Common Stock that are receiving
options to purchase Sun Common Stock pursuant to the Merger,
<PAGE>
BSI Holdings, Inc.
____________, 1997
Page 6
and (iv) the holders of warrants to purchase BSI Common Stock that are receiving
warrants to purchase Sun Common Stock pursuant to the Merger. No other
individual or entity, whether or not party to the Merger Agreement, may rely
upon this opinion without the express, prior written consent of both BSI and the
undersigned.
Our opinion is limited to the matters discussed herein. The opinion does
not deal with the specific circumstances of any particular BSI stockholder, nor
does it cover the application of state, local, foreign or other tax laws. In
particular, the conclusions herein regarding the treatment of BSI stockholders
may not be applicable to BSI stockholders who hold BSI capital stock as part of
a straddle or hedge, or are dealers in securities, insurance companies, tax
exempt organizations, financial institutions, broker-dealers, S-corporations,
foreign corporations, or persons who are not citizens or residents of the United
States.
We note that the opinion of counsel has no binding effect or official
status of any kind with the Internal Revenue Service or the courts. We believe
that subject to the conditions and assumptions noted above, it is more likely
than not that the conclusions set forth herein would be sustained by the courts
if contested by the Internal Revenue Service. However, due to uncertainties
inherent in the application of federal tax laws to the Merger, there can be no
assurance of such success. If there were ultimately an adverse determination as
to any of the tax issues discussed herein or in the Registration Statement, Sun,
BSI and the BSI stockholders could sustain different tax consequences than are
described herein or in the Registration Statement. Further, our opinion is based
upon existing laws, regulations, administrative authorities and judicial
decisions, all of which could change with retroactive effect. We have no duty,
and do not intend, to update or modify this opinion for changes in the
applicable law, regulations or interpretations occurring after the date hereof.
Similarly, any change in the facts and assumptions stated above, upon which this
opinion is based, could modify our conclusions.
We consent to the use of this opinion as an exhibit to the Registration
Statement on Form S-4 filed by Sun and to the reference to us under the caption
"The Mergers--Certain Federal Income Tax Consequences" in the Joint Proxy
Statement/Prospectus forming a part of the Registration Statement.
Very truly yours,
PORTER & HEDGES, L.L.P.
EXHIBIT 11.1
BSI HOLDINGS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (UNAUDITED)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993 AND
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 28, SEPTEMBER 30, DECEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Net income (loss) before
extraordinary item................. $ 4,643 $ (1,267) $ (4,440) $ (75) $ 429
Extraordinary item................... -- 500 500 -- --
------------- ------------- ------------- ------------ ------------
Net income (loss).................... $ 4,643 $ (767) $ (3,940) $ (75) $ 429
============= ============= ============= ============ ============
PRIMARY SHARES
Weighted average common shares
outstanding........................ 11,828,205 10,078,592 10,078,592 10,078,592 9,937,331
Cheap stock warrants (4,844,118
warrants).......................... 4,843,556 4,843,556 4,843,556 4,843,556 4,843,556
Other options and warrants........... 2,966,634 -- -- -- 155,516
------------- ------------- ------------- ------------ ------------
Weighted average common and common
equivalent shares outstanding...... 19,638,395 14,922,148 14,922,148 14,922,148 14,936,403
============= ============= ============= ============ ============
PRIMARY EARNINGS PER SHARE
Net income (loss) before
extraordinary item................. $ 0.24 $ (0.09) $ (0.30) $ (0.01) $ 0.03
Extraordinary item................... -- 0.04 0.04 -- --
------------- ------------- ------------- ------------ ------------
Net income (loss).................... $ 0.24 $ (0.05) $ (0.26) $ (0.01) $ 0.03
============= ============= ============= ============ ============
FULLY DILUTED SHARES
Weighted average common shares
outstanding........................ 11,828,205 10,078,592 10,078,592 10,078,592 9,937,331
Cheap stock warrants (4,844,118
warrants).......................... 4,843,556 4,843,556 4,843,556 4,843,556 4,843,556
Other options and warrants........... 3,831,488 -- -- -- 155,516
------------- ------------- ------------- ------------ ------------
Weighted average common and common
equivalent shares outstanding...... 20,503,249 14,922,148 14,922,148 14,922,148 14,936,403
============= ============= ============= ============ ============
FULLY DILUTED EARNINGS PER SHARE
Net income (loss) before
extraordinary item................. $ 0.23 $ (0.09) $ (0.30) $ (0.01) $ 0.03
Extraordinary item................... -- 0.04 0.04 -- --
------------- ------------- ------------- ------------ ------------
Net income (loss).................... $ 0.23 $ (0.05) $ (0.26) $ (0.01) $ 0.03
============= ============= ============= ============ ============
</TABLE>
- ------------
Note 1: Due to net losses for the years ended December 30, 1995 and December 31,
1994, common stock equivalents, except for the cheap stock warrants, are
not included as they would be anti-dilutive.
Note 2: Cheap stock warrants have been subjected to the provisions of Securities
and Exchange Commission Staff Accounting Bulletin No. 83.
Note 3: All share and per share data have been retroactively restated for the
37.912252 for 1 stock split effective as part of the Merger.
EXHIBIT 11.2
BSI HOLDINGS, INC. / SUN SPORTSWEAR, INC. AND BSI HOLDINGS, INC./
PLYMOUTH MILLS, INC.
COMPUTATIONS OF PRO FORMA COMBINED EARNINGS (LOSS)
PER COMMON SHARE (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995 AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BSI/SUN BSI/PLYMOUTH
----------------------------- -----------------------------
THIRTY-NINE THIRTY-NINE
WEEKS ENDED YEAR ENDED WEEKS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 28, DECEMBER 30,
1996 1995 1996 1995
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
EARNINGS
Net income (loss) available to common
equity............................. $ 5,732 $ (5,492) $ 5,578 $ (4,534)
============= ============ ============= ============
PRIMARY SHARES
Weighted average common shares
outstanding........................ 14,767,779 13,018,166 11,828,205 10,078,592
Cheap stock warrants (4,844,125
warrants).......................... 4,843,556 4,843,556 4,843,556 4,843,556
Other options and warrants (5,951,741
options and warrants).............. 4,652,221 -- -- --
Other options and warrants (5,514,375
options and warrants).............. -- -- 3,242,104 --
------------- ------------ ------------- ------------
Weighted average common and common
equivalent shares outstanding...... 24,263,556 17,861,722 19,913,865 14,922,148
============= ============ ============= ============
PRIMARY EARNINGS PER SHARE
Net income (loss) available to common
equity............................. $ 0.24 $ (0.31) $ 0.28 $ (0.30)
============= ============ ============= ============
FULLY DILUTED SHARES
Weighted average common shares
outstanding........................ 14,767,779 13,018,166 11,828,205 10,078,592
Cheap stock warrants (4,844,125
warrants).......................... 4,843,556 4,843,556 4,843,556 4,843,556
Other options and warrants (5,514,375
options and warrants).............. 4,652,221 -- -- --
Other options and warrants (5,514,375
options and warrants).............. -- -- 4,472,887 --
Shares applicable to convertible
preferred stock.................... 4,107,075 -- -- --
------------- ------------ ------------- ------------
Weighted average common and common
equivalent shares outstanding...... 28,370,638 17,861,722 21,144,648 14,922,148
============= ============ ============= ============
FULLY DILUTED EARNINGS PER SHARE
Net income (loss) available to common
equity............................. $ 0.20 $ (0.31) $ 0.26 $ (0.30)
============= ============ ============= ============
</TABLE>
- ------------
Note 1: BSI/Sun -- Due to a net loss for the year ended December 31, 1995,
common stock equivalents, except for cheap stock warrants, and shares
applicable to convertible preferred stock are not included because they
would be anti-dilutive.
Note 2: BSI/Plymouth -- Due to net losses for the year ended December 30, 1995,
common stock equivalents, except for the cheap stock warrants, are not
included as they would be anti-dilutive.
Note 3: Cheap stock warrants have been subjected to the provisions of Securities
and Exchange Commission Staff Accounting Bulletin No. 83.
Note 4: All share and per share data have been retroactively restated for the
37.912252-for-1 stock split effective as part of the merger.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Joint Proxy Statement/Prospectus
constituting part of this Amendment No. 1 to Registration Statement on Form S-4
of Sun Sportswear, Inc. of our report dated February 23, 1996 relating to the
financial statements of Sun Sportswear, Inc., which appears in such Joint Proxy
Statement/Prospectus. We also consent to the references to us under the heading
"Experts" in such Joint Proxy Statement/Prospectus.
PRICE WATERHOUSE LLP
Seattle, Washington
January 23, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Amendment No. 1 to Registration Statement.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
January 23, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 1 to Registration
Statement on Form S-4 of our report dated November 17, 1995 on our audit of the
financial statements of Plymouth Mills, Inc. as of September 30, 1995 and for
the year then ended. We also consent to the reference to us under the heading
"Experts."
MAHONEY COHEN RASHBA & POKART, CPA, PC
New York, New York
January 23, 1997
EXHIBIT 23.5
OPINION OF INVESTMENT BANKER
We consent to the inclusion in this registration statement on Form S-4 of
the form of our opinion attached as Appendix B thereto regarding the fairness,
from a financial point of view, of the consideration to be paid in connection
with certain transactions. We also consent to the references to our firm
contained in such registration statement including, but not limited to,
references under the captions "Summary -- Opinion of Rodman & Renshaw and "The
Merger -- Opinion of Rodman & Renshaw and -- Selection and Compensation of
Rodman & Renshaw."
RODMAN & RENSHAW, INC.
New York, New York
December 13, 1996
EXHIBIT 99.3
NON-CASH ELECTION FORM
TO ACCOMPANY ALL CERTIFICATE(S) FOR SHARES OF COMMON STOCK OF
SUN SPORTSWEAR, INC.
IN THE EVENT A HOLDER ELECTS TO RETAIN ALL
OF HIS SHARES IN CONNECTION WITH THE
MERGER OF BSI HOLDINGS, INC. WITH AND
INTO SUN SPORTSWEAR, INC.
This Form is to accompany all of a holder's certificates for shares of
common stock, no par value ("Sun Common Stock"), of Sun Sportswear, Inc. ("Sun"
or the "Company"), if this Form is submitted pursuant to an election (a
"Non-Cash Election") to retain shares of Sun Common Stock in connection with the
proposed merger (the "Merger") of BSI Holdings, Inc., with and into Sun. Upon
consummation of the Merger, the name of the surviving Washington corporation
will be Brazos Sportswear, Inc. ("Brazos Washington"). In the event holders of
Sun Common Stock on January 31, 1997 (the "Record Date") do not vote in favor of
the Reincorporation (as defined below), individuals making a Non-Cash Election
will receive a certificate for the same number of shares of Brazos Washington as
shares of Sun Common Stock held on the Record Date. HOLDERS OF SUN COMMON STOCK
WHO DO NOT WISH TO MAKE A NON-CASH ELECTION (ANY SUCH HOLDER, A "NON-ELECTING
HOLDER") NEED NOT SUBMIT THIS FORM OR ANY CERTIFICATES AT THIS TIME. Fifty
percent (50%) of each share of Sun Common Stock owned by any such Non-Electing
Holder will automatically be converted into the right to receive an amount equal
to $2.20 in cash from Sun following the Merger. In the event holders of Sun
Common Stock on the Record Date vote in favor of a proposed reincorporation in
Delaware immediately following the Merger (the "Reincorporation"), and in
connection therewith approve a one-for-five reverse stock split, all holders of
Sun Common Stock outstanding or issuable upon consummation of the Merger,
including holders who make a Non-Cash Election, will have their shares
automatically converted into .2 shares of the new Delaware corporation, Brazos
Sportswear, Inc. ("Brazos Delaware"). No fractional shares will be issued in the
Reincorporation. In lieu thereof, Brazos Delaware will make a cash payment
attributable to fractional shares based on the closing price per share for the
Sun Common Stock on the Nasdaq/National Market System on the last trading day
immediately preceding the effective date of the Reincorporation.
To: U.S. Stock Transfer Corp. Transfer Agent:
By mail:
U.S. Stock Transfer Corp.
Attn: Richard Brown
1745 Gardena Av., 2nd floor
Glendale, CA 91204
By Facsimile: Confirm by telephone to:
(818) 502-0674 (818) 502-1404
Delivery of this Form to an address, or transmission of instructions via a
telecopy facsimile number, other than as set forth above, does not constitute a
valid delivery.
<PAGE>
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
If you are electing to retain all of your shares, you must properly fill in
the information requested in this box and return all your certificates with this
Form.
BOX I
TOTAL NUMBER OF SHARES HELD
NAME AND ADDRESS OF REGISTERED HOLDER* (ATTACH ADDITIONAL LIST
IF NECESSARY)
TOTAL NUMBER
OF SHARES NUMBER OF
CERTIFICATE REPRESENTED BY SHARES
NUMBER CERTIFICATE(S) TO BE RETAINED
Total Common Shares
* Only certificates registered in a single form may be deposited with this
Form of Election. If certificates are registered in different forms
(e.g., John R. Doe and J.R. Doe), it will be necessary to fill in, sign
and submit as many separate Forms of Election as there are different
registrations of certificates.
<PAGE>
Ladies and Gentlemen:
In connection with the merger (the "Merger") of BSI Holdings, Inc., with and
into Sun Sportswear, Inc. ("Sun" or the "Company"), the undersigned hereby
submits the certificate(s) for shares of common stock, no par value, of Sun
("Sun Common Stock") listed above (which represent all the shares of Sun Common
Stock owned by such holder) and elects, subject as set forth below 1) to have
all of the shares of Sun Common Stock represented by such certificates as set
forth above converted into the right to receive a certificate representing an
equal number of shares of the surviving Washington corporation, Brazos
Sportswear, Inc. ("Brazos Washington"), following the Merger ("Brazos Washington
Shares") or 2) in the event the holders of Sun Common Stock prior to the Merger
vote to reincorporate into a newly formed Delaware corporation, Brazos
Sportswear, Inc. ("Brazos Delaware"), and in connection therewith to implement a
one-for-five reverse stock split with respect to the Sun Common Stock
outstanding or issuable upon consummation of the Merger (the "Reincorporation"),
to receive shares of Brazos Delaware common stock issued pursuant to the
Reincorporation ("Brazos Delaware Shares") (such election, a "Non-Cash
Election," and such shares of Sun Common Stock submitted hereby, "Non-Cash
Election Shares"). No fractional shares will be issuable in connection with the
Reincorporation. In lieu thereof, Brazos Delaware will make a cash payment
attributable to fractional shares based on the closing price per share for the
Sun Common Stock on the Nasdaq/National Market System on the last trading day
immediately preceding the effective date of the Reincorporation.
It is understood that the following election is subject to (i) the terms,
conditions and limitations set forth in the Proxy Statement, dated February ,
1997, relating to the Merger and the Reincorporation (as it may be amended or
supplemented from time to time, the "Proxy Statement"), receipt of which is
acknowledged by the undersigned, (ii) the terms of the Plan and Agreement of
Merger, dated as of November 13, 1996 (as the same may be amended from time to
time, the "Merger Agreement"), a conformed copy of which appears as Appendix A
to the Proxy Statement, and (iii) the accompanying Instructions.
If certificates of Sun Common Stock are not delivered herewith, there is
furnished below a guarantee of delivery of such certificates representing shares
of Sun Common Stock from a member of a national securities exchange, a member of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office in the United States.
Unless otherwise indicated under Special Payment Instructions below, please
issue any certificate for Brazos Washington Shares or Brazos Delaware Shares
issuable in exchange for the shares of Non-Cash Election Shares represented by
the certificates submitted hereby in the name of the registered holder(s) of
such Non-Cash Election Shares. Similarly, unless otherwise indicated under
Special Delivery Instructions, please mail any certificate for Brazos Washington
Shares or Brazos Delaware Shares issuable in exchange for the shares of Non-Cash
Election Shares represented by the certificates submitted hereby to the
registered holder(s) of such Non-Cash Election Shares at the address or
addresses shown above.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
<PAGE>
BOX II BOX III
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS D(5) AND D(6)) (SEE INSTRUCTION D(7))
To be completed ONLY if the To be completed ONLY if the
certificates for Brazos Washington certificates for Brazos Washington
Shares or Brazos Delaware Shares Shares or Brazos Delaware Shares
are to be registered in the name of are to be registered in the name of
someone other than the registered the registered holder(s) of Sun
holder(s) of Sun Common Stock. Common Stock, but are to be sent to
someone other than the registered
holder(s) or to an address other
than the address of the registered
holder(s) set forth above.
Name...............................
(PLEASE PRINT)
.................................. Name................................
(PLEASE PRINT) (PLEASE PRINT)
Address............................ ....................................
(PLEASE PRINT)
...................................
(INCLUDING ZIP CODE) Address.............................
................................... ....................................
(TAX IDENTIFICATION OR (INCLUDING ZIP CODE)
SOCIAL SECURITY NUMBER)
<PAGE>
BOX IV
SIGN HERE AND HAVE SIGNATURES GUARANTEED
(SEE INSTRUCTIONS D(1) AND D(6) CONCERNING SIGNATURE GUARANTEE)
.................................... Name(s):...........................
(PLEASE PRINT)
....................................
Name(s):...........................
.................................... (PLEASE PRINT)
SIGNATURE(S) OF OWNER(S)
Name(s):...........................
Must be signed by registered (PLEASE PRINT)
holder(s) exactly as name(s)
appear(s) on stock certificate(s)
or by person(s) authorized to ...................................
become registered holder(s) by (AREA CODE AND TELEPHONE
certificates and documents NUMBERS)
transmitted herewith. If signature ...................................
is by a trustee, executor,
administrator, guardian, officer of ...................................
a corporation, attorney-in-fact or (TAX IDENTIFICATION OR SOCIAL
any other person acting in a SECURITY NUMBER(S))
fiduciary capacity, set forth full
title in such capacity and see DATED:........................1997.
Instruction D(3).
SIGNATURE(S)
GUARANTEED:........................
(SEE INSTRUCTION D(6))
BOX V
GUARANTEE OF DELIVERY
(TO BE USED ONLY IF CERTIFICATES ARE NOT SURRENDERED HEREWITH)*
The undersigned is:
.......................................
(FIRM--PLEASE PRINT)
. a member of a national securities
exchange.
.......................................
. a member of the National Association (AUTHORIZED SIGNATURE)
of Securities Dealers, Inc., or
.......................................
. a commercial bank or trust company
in the United States;
.......................................
<PAGE>
and guarantees to deliver to the .......................................
Transfer Agent the certificates for (ADDRESS)
shares of Sun Common Stock to which
this Form relates, duly endorsed in .......................................
blank or otherwise in form (AREA CODE AND
acceptable for transfer on the TELEPHONE NUMBER)
books of Sun, no later than
________________________________ .......................................
(CONTACT NAME)
- -----------------------------------
(DO NOT WRITE IN SPACES BELOW)
SHARES CONVERTED INTO
SHARES SHARES NON-CASH CERTIFICATE
SURRENDERED ACCEPTED ELECTION-SHARES NO. BLOCK NO.
DELIVERY PREPARED BY.................. CHECKED BY...............DATE............
INSTRUCTIONS
A. SPECIAL CONDITIONS.
1. TIME IN WHICH TO ELECT. To be effective, an election pursuant to the
terms and conditions set forth herein (an "Election") on this Form or a
facsimile hereof, accompanied by all of the holder's certificates representing
shares of Sun Common Stock or a proper guarantee of delivery thereof, must be
received by the Transfer Agent, at the address set forth above, no later than
____________________________ (the "Election Date"). Holders of Sun Common Stock
whose stock certificates are not immediately available may also make an
effective Election by completing this form or facsimile hereof and having the
Guarantee of Delivery box (BOX V) properly completed and duly executed (subject
to the condition that the certificates for which delivery is thereby guaranteed
are in fact delivered to the Transfer Agent, duly endorsed in blank or otherwise
in form acceptable for transfer on the books of Sun, no later than
_____________________________). Fifty percent (50%) of the shares of Sun Common
Stock with respect to which the Transfer Agent shall have not received an
effective Election prior to the Election Date, outstanding at the Effective Time
of the Merger, will be converted into the right to receive an amount equal to
$2.20 in cash from the Company following the Merger. See Instruction B.
2. TERMINATION OF MERGER. If for any reason the Merger is not consummated or
is abandoned, all Forms will be void and of no effect. Certificate(s) for Sun
Common Stock previously received by the Transfer Agent will be promptly sent by
the Transfer Agent in accordance with the instructions set forth for the
distribution of Brazos Delaware Shares.
B. ELECTION PROCEDURES.
A description of the election is set forth in the Proxy Statement under
"Summary -- The Merger --
<PAGE>
Conversion of Sun Common Stock; Non-Cash Election Procedure" and "The Merger
Agreement -- Manner and Basis of Converting Shares -- Conversion of Sun Common
Stock". A full statement of the election is contained in the Merger Agreement
and all Elections are subject to compliance with such procedures. IN CONNECTION
WITH MAKING ANY ELECTION, A HOLDER OF SUN COMMON STOCK SHOULD READ CAREFULLY,
AMONG OTHER MATTERS, THE AFORESAID DESCRIPTION AND STATEMENT AND THE INFORMATION
CONTAINED IN THE PROXY STATEMENT UNDER "PROPOSED REINCORPORATION IN DELAWARE".
C. RECEIPT OF BRAZOS WASHINGTON SHARES OR BRAZOS DELAWARE SHARES.
As soon as practicable after the Effective Time of the Merger and after the
Election Date, the Transfer Agent will mail certificate(s) for Brazos Washington
Shares or Brazos Delaware Shares, as the case may be, to the holders of Sun
Common Stock with respect to each share of Sun Common Stock which is included in
any effective Election. Holders of Sun Common Stock who declined to make an
Election, or failed to make an effective Election, with respect to all of their
shares will retain fifty percent (50%) of their shares and will receive, for the
remaining fifty percent (50%) of their shares, the right to receive an amount
equal to $2.20 per share in cash as soon as practicable after the certificate(s)
representing such share or shares have been submitted to the Transfer Agent. If
the Reincorporation is approved and effected, each retained share will be
converted into .2 shares of Brazos Delaware Common Stock.
D. GENERAL.
1. Execution and Delivery. This Form or a facsimile hereof must be properly
filled in, dated and signed in BOX IV, and must be delivered (together with all
stock certificates representing the shares of Sun Common Stock held by such
holder or with a duly signed guarantee of delivery of such certificates) to the
Transfer Agent at any of the addresses set forth above.
THE METHOD OF DELIVERY OF ALL DOCUMENTS IS AT THE OPTION AND RISK OF
THE SHAREHOLDER, BUT IF SENT BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS SUGGESTED.
2. Inadequate Space. If there is insufficient space on this Form to list all
your stock certificates, please attach a separate list.
3. Signatures. The signature (or signatures, in the case of certificates
owned by two or more joint holders) on this Form should correspond exactly with
the name(s) as written on the face of the certificate(s) submitted unless the
shares of Sun Common Stock described on this Form have been assigned by the
registered holder(s), in which event this Form should be signed in exactly the
same form as the name of the last transferee indicated on the transfers attached
to or endorsed on the certificates.
If this Form is signed by a person or persons other than the registered
owners of the certificates listed, the certificates must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name(s) of the registered owner(s) appear on the certificates.
If this Form or any stock certificate(s) or stock power(s) are signed by a
trustee, executor, administrator, guardian, officer of a corporation,
attorney-in-fact or any other person acting in a representative or fiduciary
capacity, the person signing must give such person's full title in such capacity
and appropriate evidence of authority to act in such capacity must be forwarded
with this Form.
<PAGE>
4. Lost or Destroyed Certificates. If your stock certificate(s) has been
either lost or destroyed, please make note of this fact on the front of this
Form opposite your name and address and the appropriate forms for replacement
will be sent to you. You will then be instructed as to the steps you must take
in order to receive a stock certificate(s) representing Brazos Washington Shares
or Brazos Delaware Shares in accordance with the Merger Agreement.
5. New Certificates in Same Name. If any stock certificate(s) representing
Brazos Washington Shares or Brazos Delaware Shares are to be registered in
exactly the same name(s) that appears on the certificate(s) representing shares
of Sun Common Stock submitted with this Form, no endorsement of certificate(s)
or separate stock power(s) is required.
6. New Certificates in Different Name. If any stock certificate(s)
representing Brazos Washington Shares or Brazos Delaware Shares are to be
registered in other than exactly the name that appears on the certificate(s)
representing shares of Sun Common Stock submitted for exchange herewith, such
exchange shall not be made by the Transfer Agent unless the certificates
submitted are endorsed, BOX II is completed, and the signature is guaranteed in
BOX IV by a member of a recognized Medallion guarantee program.
7. Special Delivery Instructions. If the certificates for Brazos Washington
Shares or Brazos Delaware Shares are to be registered in the name of the
registered holder(s) of shares of Sun Common Stock, but are to be sent or
returned to someone other than the registered holder(s) or to an address other
than the address of the registered holder, it will be necessary to indicate such
person or address in BOX III.
8. Miscellaneous. A single stock certificate representing Brazos Washington
Shares or Brazos Delaware Shares will be issued.
All questions with respect to this Form and the Elections will be determined
by Sun and BSI Holdings, Inc., which determination shall be conclusive and
binding.
Additional copies of this Form may be obtained from U.S. Stock Transfer
Corp. (whose telephone number is (818) 502-1404.
EXHIBIT 99.4
CONSENT
The undersigned consent to being named in this Registration Statement on
Form S-4 as persons who are about to become directors of the Registrant.
January 23, 1997
/s/ RANDALL B. HALE
RANDALL B. HALE
/s/ NOLAN LEHMANN
NOLAN LEHMANN
/s/ MICHAEL S. CHADWICK
MICHAEL S. CHADWICK
/s/ J. FORD TAYLOR
J. FORD TAYLOR
/s/ ALAN ELENSON
ALAN ELENSON
/s/ F. CLAYTON CHAMBERS
F. CLAYTON CHAMBERS
