<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED APRIL 4, 1998
Commission File Number: 0-18054
BRAZOS SPORTSWEAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1770931
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4101 FOUNDERS BOULEVARD
BATAVIA, OHIO 45103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number including area code 513-753-3400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
4,419,479
----------------------
(SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 15, 1998)
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<PAGE> 2
BRAZOS SPORTSWEAR, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
APRIL 4, 1998
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of April 4,
1998 and December 27, 1997 (unaudited)......................... 1
Consolidated Condensed Statements of Operations for the
fourteen weeks ended April 4, 1998 (unaudited) and
the thirteen weeks ended March 29, 1997 (unaudited)............ 3
Consolidated Condensed Statements of Cash Flows for the
fourteen weeks ended April 4, 1998 (unaudited) and thirteen
weeks ended March 29, 1997 (unaudited)......................... 4
Notes to Financial Statements (unaudited)...................... 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................... 10
PART II - OTHER INFORMATION................................................. 13
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF APRIL 4, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,721 $ 2,679
Accounts receivable, net of allowance for doubtful accounts of $8,112
and $7,930, respectively 36,979 41,989
Inventory (Note 2(b)) 65,906 55,551
Prepaid expenses 9,201 8,861
Income tax receivable 6,933 2,841
Deferred tax assets 4,649 4,649
-------- --------
Total current assets 125,389 116,570
-------- --------
PROPERTY, PLANT AND EQUIPMENT-net, at cost 14,337 13,336
-------- --------
INTANGIBLE ASSETS:
Costs in excess of fair value of assets acquired 50,869 50,869
Less- accumulated amortization (1,928) (1,655)
-------- --------
48,941 49,214
-------- --------
Other 7,661 7,661
Less- accumulated amortization (2,003) (1,740)
-------- --------
5,658 5,921
-------- --------
Total intangible assets 54,599 55,135
-------- --------
OTHER ASSETS 267 269
-------- --------
$194,592 $185,310
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed balance sheets.
<PAGE> 4
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF APRIL 4, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings pursuant to revolving
credit agreement (Note 2(c)) $ 39,848 $ 31,504
Current portion of other debt 969 947
Accounts payable 24,155 13,902
Accrued liabilities 14,006 16,976
-------- --------
Total current liabilities 78,978 63,329
-------- --------
LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES:
Senior notes payable 99,298 99,277
Subordinated debt due to related parties 1,500 1,500
Capital lease liability 658 795
-------- --------
101,456 101,572
-------- --------
DEFERRED INCOME TAXES PAYABLE 1,141 1,141
OTHER LIABILITIES 1,711 2,036
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
8,796 8,577
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 15,000,000 shares authorized and 4,419,479
and 4,412,655 shares issued and outstanding at April 4, 1998 and December
27, 1997, respectively 4 4
Additional paid-in capital 11,331 11,312
Retained deficit (8,825) (2,661)
-------- --------
Total shareholders' equity 2,510 8,655
-------- --------
$194,592 $185,310
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed balance sheets.
<PAGE> 5
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOURTEEN WEEKS ENDED APRIL 4, 1998 AND
THIRTEEN WEEKS ENDED MARCH 29, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
NET SALES $ 52,981 $ 34,907
COST OF GOODS SOLD 43,085 26,720
---------- -----------
Gross profit 9,896 8,187
OPERATING EXPENSES:
Selling, general and administrative expenses 14,871 8,117
Restructuring charge (Note 2(e)) 745 -
Amortization of intangible assets 537 285
---------- -----------
Total operating expenses 16,153 8,402
Operating loss (6,257) (215)
---------- -----------
OTHER EXPENSE (INCOME):
Interest expense 3,663 1,145
Other, net (13) 125
---------- -----------
Loss before credit for income taxes (9,907) (1,485)
CREDIT FOR INCOME TAXES (3,962) (609)
---------- -----------
Net loss (5,945) (876)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK
219 165
---------- -----------
Net loss available for common shareholders $ (6,164) $ (1,041)
========== ===========
BASIC AND DILUTED PER SHARE DATA: (Note 2(d))
Loss per share $ (1.40) $ (.27)
========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,416,833 3,787,274
========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed financial statements.
<PAGE> 6
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOURTEEN WEEKS ENDED APRIL 4, 1998 AND
THE THIRTEEN WEEKS ENDED MARCH 29, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,945) $ (876)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation 514 381
Amortization of intangible assets 537 285
Decrease (increase) in accounts receivable 5,010 (328)
Increase in inventory (10,355) (9,244)
Increase in prepaid expenses (339) (344)
Increase in income tax receivable (4,092) (426)
Decrease (increase) in other noncurrent assets 3 (946)
Increase in accounts payable and accrued liabilities 7,028 7,663
-------- -------
Net cash used in operating activities (7,639) (3,835)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Sun Sportswear, Inc., net of cash acquired - (4,613)
Purchases of property, plant and equipment, net (1,515) 21
-------- -------
Net cash used in investing activities (1,515) (4,592)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings pursuant to revolving credit agreement, net 8,344 9,045
Borrowings of long-term debt pursuant to credit agreement - 1,000
Repayments of long-term debt pursuant to credit agreement - (600)
Repayments of subordinated debt - (3,000)
Repayment of capital lease obligations and industrial revenue bonds (93) (157)
Payments made under non-compete agreements (75) (25)
Payments for deferred financing costs - (140)
Issuance of common stock 20 100
Issuance of preferred stock and related stock purchase warrants - 2,000
-------- -------
Net cash provided by financing activities 8,196 8,223
-------- -------
NET DECREASE IN CASH (958) (204)
CASH AT BEGINNING OF PERIOD 2,679 561
-------- -------
CASH AT END OF PERIOD $ 1,721 $ 357
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 6,338 $ 1,687
Cash paid for income taxes 144 1,404
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Payments of PIK dividends and accretion of preferred stock 219 165
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed statements.
<PAGE> 7
BRAZOS SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF APRIL 4, 1998 AND DECEMBER 27, 1997
(1) Organization and Structure-
On March 14, 1997, BSI Holdings, Inc. (Holdings) consummated a merger
with Sun Sportswear, Inc. (Sun) (hereinafter referred to as the "Merger")
whereby Holdings acquired an 86% ownership interest in Sun. The Merger
has been accounted for as a reverse acquisition with Sun being the
surviving legal entity and Holdings being the aquiror for accounting
purposes. Concurrent with the Merger, Sun was reincorporated in the State
of Delaware under the name Brazos Sportswear, Inc. (Brazos or the
Company). See Note 3 for further information.
Effective April 6, 1998, the Company's principal operating subsidiary,
Brazos, Inc., a Texas corporation, was reincorporated in Delaware as a
limited liability company and was renamed Brazos Sportswear, LLC.
(2) Significant Accounting Policies-
(a) Interim Financial Statements--The accompanying consolidated
condensed financial statements of Brazos for the fourteen weeks
ended April 4, 1998 reflect the results of operations of the
Company. The accompanying historical consolidated condensed
financial statements of Brazos include the results of operations
of Sun from the date of acquisition and prior to March 14, 1997,
reflect Holdings' historical results.
The accompanying consolidated condensed financial statements of
Brazos are unaudited. These unaudited interim financial statements
and related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to such rules and regulations. However, in the opinion of
management, the accompanying consolidated condensed financial
statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the
results for the interim periods. These consolidated condensed
financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes
thereto included in Brazos' Annual Report on Form 10-K dated March
27, 1998.
The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the year.
<PAGE> 8
(b) Inventory--Inventories are comprised of:
INVENTORY CATEGORY METHOD APRIL 4, DECEMBER 27,
------------------ ------ 1998 1997
------- -------
Raw materials LIFO $ 3,791 $ 3,605
Finished goods LIFO 16,145 12,725
------- -------
19,936 16,330
Less -- LIFO reserve (182) (182)
------- -------
Total LIFO 19,754 16,148
------- -------
Raw materials FIFO 28,787 24,663
Work in process FIFO 4,876 5,926
Finished goods FIFO 12,489 8,814
------- -------
Total FIFO 46,152 39,403
------- -------
Total inventory $65,906 $55,551
======= =======
Finished goods on a LIFO basis include blank garments of $14.5
million and $11.3 million at April 4, 1998 and December 27, 1997,
respectively which are sold by Brazos' wholesale distribution
division.
(c) Debt--The Company maintains a loan and security agreement which
provides a revolving line of credit (the "Credit Facility") to the
Company's principal operating subsidiary, Brazos Sportswear, LLC (the
"Borrower") in an aggregate principal amount of up to $70.0 million,
subject to collateral limitations. The Credit Facility requires
compliance with certain financial covenants, as defined. At April 4,
1998, the Borrower was not in compliance with its minimum fixed
charge coverage ratio. The noncompliance has been waived by the
Company's senior secured lenders. Borrowings pertaining to the
Credit Facility are classified as current liabilities as of April 4,
1998 and December 27, 1997.
(d) Loss Per Share--In 1997, the Company adopted SFAS No. 128, "Earnings
per Share". As a result, the Company's reported earnings per share
for 1997 have been restated. The effect of this accounting change on
previously reported earnings per share (EPS) data is as follows for
the thirteen weeks ended March 29, 1997:
1997
------
Per share amounts
Primary EPS as reported $ (.27)
Effect of SFAS No. 128 -
------
Basic EPS as restated $ (.27)
======
Basic earnings per share were computed by dividing net income
available to common shareholders by the weighted average number of
shares of common stock outstanding during the period. Diluted
earnings per share for 1998 and 1997 are equal to basic earnings per
share because of the loss periods. During loss periods, all options
and warrants are excluded from the dilutive calculation since they
are anti-dilutive.
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE FOURTEEN WEEKS ENDED APRIL 4, 1998
------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
------- --------- ---------
(000's Omitted)
<S> <C> <C> <C>
Net Loss $(5,945)
Less: dividends and accretion on preferred stock (219)
-------
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common shareholders $(6,164) 4,416,833 $(1.40)
======= ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 1997
PER-SHARE
INCOME SHARES AMOUNT
------- --------- ---------
(000's Omitted)
<S> <C> <C> <C>
Net Loss $ (876)
Less: dividends and accretion on preferred stock (165)
-------
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common shareholders $(1,041) 3,787,274 $ (.27)
======= ========= ======
</TABLE>
Loss per share amounts for all periods have also been computed in
accordance with Securities and Exchange Commission Staff
Accounting Bulletin No.98. There were no nominal shares issued as
defined by SAB No. 98.
(e) Restructuring of Operations--In the first quarter of 1998, the
Company continued with its plan initiated in the fourth quarter of
1997 to reduce costs and improve operating efficiencies and recorded
an additional restructuring charge of approximately $.7 million.
This charge principally relates to additional lease termination
costs and the physical movement of assets and personnel associated
with the closure and consolidation of two manufacturing facilities
into one existing facility. Total charges incurred from the
inception of this restructuring plan are $6.4 million.
The restructuring will be completed by the middle of 1998.
(f) New Accounting Pronouncement--In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS No. 130), effective for fiscal years
beginning after December 15, 1997. After reviewing the provisions of
SFAS No. 130, the Company concluded that the statement was not
applicable to the Company for any periods presented and does not
anticipate it being applicable in the future.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which requires disclosures for
each segment in which the chief operating decision maker organizes
these segments within a company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure and any
manner in which management disaggregates a company. The Company
intends to adopt SFAS No. 131 in the fourth quarter of fiscal 1998.
The Company anticipates that adoption of SFAS No. 131 will expand
disclosures but will not have an impact on reported consolidated
financial position, results of operations or cash flows.
<PAGE> 10
(g) Reclassification--Certain amounts in the 1997 condensed consolidated
financial statements have been reclassified to conform to the 1998
presentation.
(3) Mergers and Acquisitions-
During 1997, the Company made the following acquisitions, all of which
have been accounted for as purchases. The results of operations of each
acquisition are included in the Company's consolidated results of
operations from the effective date of each acquisition.
(a) Sun Sportswear, Inc. ("Sun")--Effective March 14, 1997, BSI Holdings,
Inc. (Holdings) consummated a merger with Sun whereby the
Shareholders of Holdings acquired an 86% ownership interest in Sun.
The purchase price of approximately $12.7 million consisted of cash
($4.7 million), the issuance of a subordinated debenture to the
former majority shareholder ($1.5 million) and the value of the
Company's equity interest subsequent to the Merger ($6.5 million).
(b) SolarCo, Inc.--Effective July 2, 1997, the Company acquired all of
the outstanding capital stock of SolarCo, Inc. the parent company to
Morning Sun, Inc. ("Morning Sun") for approximately $31.3 million,
consisting of approximately $30.5 million in cash and deferred
payments, and the issuance of 73,171 shares of common stock valued at
approximately $.8 million. Goodwill from this acquisition
(approximately $25.9 million) is being amortized over a period of 40
years.
(c) Premier Sports Group, Inc. ("Premier")--Effective July 2, 1997, the
Company also acquired certain assets and assumed certain liabilities
of Premier for approximately $3.5 million, consisting of
approximately $2.0 million in cash and $1.5 million in subordinated
debt to the selling shareholders. The purchase price for Premier
also includes a contingent earnout of up to $4.0 million to the
former owner of Premier. The payment of the earnout is contingent
upon financial performance measures being achieved for calendar
years 1997 through 2000. No earnout payments were achieved in 1997.
Goodwill from this acquisition (approximately $3.5 million, subject
to revision pending the outcome of the contingent earnout) is being
amortized over a period of 40 years.
(d) CS Crable Sportswear, Inc.--Effective September 29, 1997, the Company
acquired certain assets of CS Crable Sportswear, Inc. ("Crable"), a
wholly owned subsidiary of The Midland Company ("Midland"), for
approximately $13.3 million in cash. Concurrent with this
transaction, the Company entered into a long term lease commitment
with Midland for the former Crable facility.
Pro forma results of the Company, Sun, Morning Sun, Premier, and Crable
combined, assuming the acquisitions were consummated at the beginning of
fiscal 1997, follow. Such pro forma information reflects adjustments to
reflect the elimination of Sun's historical depreciation expense for the
write-off of net equipment and leasehold improvements resulting from the
application of purchase accounting, elimination of pre-merger acquisition
expenses incurred by Sun, elimination of compensation expense to reflect
compensation levels on a post-acquisition basis pursuant to
post-acquisition employment and advisory agreements for Morning Sun and
Premier, elimination of
<PAGE> 11
severance costs for Crable employees terminated as a result of the
acquisition, increased rent expense for the lease of the Crable facility,
increased amortization expense for Morning Sun and Premier as a result of
purchased goodwill, additional interest expense related to increased net
indebtedness and dividends on additional preferred stock issued.
PERIOD ENDED
------------
MARCH 29,
1997
------------
(000's omitted except per share amounts)
Net sales $57,278
Net loss (4,182)
Loss available to common shareholders (4,397)
Loss per share $ (1.01)
(4) Significant Customers-
Brazos had net sales of $12.0 million to two customers for the fourteen
weeks ended April 4, 1998 and $7.1 million to two customers for the
thirteen weeks ended March 29, 1997. These amounts represented 23% and
20% of total net sales during the fourteen weeks ended April 4, 1998 and
the thirteen weeks ended March 29, 1997, respectively. The accompanying
consolidated condensed balance sheets include accounts receivable of
$12.9 million and $11.7 million at April 4, 1998 and December 27, 1997,
respectively, due from such customers.
(5) Commitments and Contingencies-
The Company is involved in litigation arising in the ordinary course of
business, which in the opinion of management, will not have a material
effect on the Company's consolidated financial position, results of
operations or cash flows.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Financial Statements and related Notes contained elsewhere herein.
RESULTS OF OPERATIONS
Restructuring Plan
During the fourth quarter of 1997, the Company initiated a
restructuring plan (the "Restructuring Plan") that included, as a key
component, the consolidation of three facilities into one facility located in
Cincinnati, Ohio. The Restructuring Plan is intended to improve operating
efficiencies by combining manufacturing operations. The Company's results of
operations have been negatively impacted during implementation of the
Restructuring Plan, as the Company has experienced unexpected operational
inefficiencies resulting in (i) increased personnel training and outsourcing
costs, (ii) lower sales due to shipment delays, and (iii) higher levels of
returns and markdowns due to difficulties in meeting certain customer
performance expectations on product shipments from the Cincinnati facility.
The Company is evaluating the impact of the increased costs and
production inefficiencies that have resulted from the implementation of the
Restructuring Plan and is aggressively addressing these issues to bring the
Cincinnati facility to full capacity and meet customer deliveries in an
efficient and profitable manner. As a result of ongoing and further
improvements, the Company anticipates a decline in its reliance upon contract
services and expects that the facility will be fully operational in the third
quarter of fiscal 1998 resulting in lower production costs and improved
operating margins.
The following table sets forth, for the periods indicated, the
components of Brazos' statements of operations expressed as a percentage of net
sales on a historical basis.
<TABLE>
<CAPTION>
FOURTEEN WEEKS THIRTEEN WEEKS
ENDED APRIL 4, 1998 ENDED MARCH 29, 1997
-------------------- --------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 81.3% 76.5%
------- ------
Gross profit 18.7% 23.5%
Operating expenses, excluding restructuring charge 29.1% 24.1%
Restructuring charge 1.4% -
------- ------
Operating loss (11.8%) (.6%)
Other expense
Interest expense 6.9% 3.3%
Other, net - .4%
------- ------
Loss before credit for income taxes (18.7%) (4.3%)
Credit for income taxes (7.5%) (1.7%)
------- ------
Net loss (11.2%) (2.5%)
======= ======
</TABLE>
Fourteen Weeks Ended April 4, 1998 compared with the Thirteen Weeks
Ended March 29, 1997
The Company's net sales increased approximately $18.1 million, or
51.8%, from $34.9 million in 1997 to $53.0 million in 1998. This increase was
attributable to the four acquisitions completed by the Company in 1997 as well
as the additional week of operations provided by a fourteen week accounting
period in 1998. See Note 3 of the Notes to Financial Statements for
<PAGE> 13
further information related to the acquisitions made in 1997. Net sales were
significantly less than expected due to (i) the disruption in operations
resulting from implementation of the Restructuring Plan and (ii) overall
weakness in the decorated apparel industry.
Brazos' gross profit increased $1.7 million, or 20.9%, from $8.2
million in 1997 to $9.9 million in 1998, as a result of the increase in sales
volume. Overall gross profit margin decreased to 18.7% in 1998 from 23.5% in
1997, primarily as a result of increased costs associated with the
Restructuring Plan. In addition, the seasonality of the acquired businesses
contributed a lower gross profit margin than Brazos' historical gross profit
margin.
Operating expenses increased $7.8 million, or 92.3%, from $8.4 million
in 1997 to $16.2 million in 1998. The increase in operating expenses was
directly attributable to the acquisitions completed in 1997 as well as an
additional non-recurring restructuring charge of $.7 million. Excluding the
restructuring charge, as a percentage of sales, operating expenses increased
from 24.1% in 1997 to 29.1% in 1998. This increase principally relates to
difficulties associated with the implementation of the Restructuring Plan.
Also, the seasonality of the acquired businesses contributed higher operating
expenses as a percentage of sales than Brazos' historical operating expenses
as a percentage of sales.
Interest expense increased $2.5 million, or 219.9%, from $1.1 million
in 1997 to $3.7 million in 1998. The increase was a result of the issuance of
$100 million of 10.5% Senior Notes (the "Notes") in July, 1997 and increased
borrowings under Brazos' credit facility to fund its greater working capital
needs in connection with the acquisitions made by the Company in 1997.
An income tax benefit of $4.0 million has been recorded in 1998 at an
effective tax rate of 40%, as management believes that future taxable income
will be sufficient to realize this benefit. In 1997, an income tax benefit of
$.6 million was recorded at an effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
Brazos has financed its acquisitions and operations through borrowings
under its bank lines of credit, public and private placements of debt and
equity securities, seller financing and operating cash flow. The Company's cash
requirements consist of its general working capital needs, required interest
payments, including those on the Notes, capital expenditures and obligations
under its leases.
The Company has entered into a loan and security agreement with its
senior secured lenders, which provides a revolving line of credit (the "Credit
Facility") to the Company's principal operating subsidiary, Brazos Sportswear
LLC (the "Borrower"), in the amount of up to $70.0 million, subject to
collateral limitations. Advances under this line are based on a percentage of
the Borrower's inventory and receivables and various other reserves established
from time to time by the lenders. Interest on the line of credit is payable at
prime plus .25% or the Eurodollar base rate plus 1.75%. The Credit Facility
requires the Borrower to maintain certain levels of working capital and
stockholders' equity and contains certain other restrictive covenants. The
Credit Facility has an initial expiration of July 1, 2000, subject to
extension, and borrowings under the Credit Facility are guaranteed by the
Company. Under the Company's Credit
<PAGE> 14
Facility, as of April 4, 1998, Brazos had an aggregate borrowing base of $54.4
million, based on existing collateral. Of its borrowing base, $13.6 million
remained unused at April 4, 1998.
During the first quarter, the Company incurred a net loss of $5.9
million. As a result, the Company was not in compliance with its minimum fixed
charge coverage ratio under its Credit Facility. The noncompliance has been
waived by the Company's senior secured lenders. The Company is in discussions
with its senior secured lenders to amend its Credit Facility to bring the
financial covenants in line with expected operating results for the year. If
such an amendment is not obtained, management believes that the Company will be
in violation of certain financial covenants as of the end of the Company's
second quarter and throughout the remainder of the fiscal year.
Management is evaluating its working capital needs in light of its
current level of operations and cost structure. If the Company's cash
requirements cannot be met by its currently available financing sources, the
Company may seek to increase available borrowings under its Credit Facility.
There can be no assurance that such additional borrowings, if necessary, will be
available. Other sources of financing may include additional bank debt or the
public or private sale of equity or debt securities. In connection with any such
financing, the Company may be required to issue securities that would dilute the
interests of the shareholders of the Company. There can be no assurance that the
Company will be successful in arranging such financing at all or on terms
commercially acceptable to the Company.
If the Company is unable to amend its Credit Facility or obtain future
waivers of any noncompliance, or if necessary, obtain additional financing, the
Company's operations and financial condition could be adversely impacted.
Brazos used $7.6 million of cash for operating activities in 1998
versus cash used for operating activities in 1997 of $3.8 million. Contributing
to the use of cash in 1998 were: (i) a net loss of approximately $5.9 million
and (ii) working capital investments of $2.7 million, offset by depreciation and
amortization of $1.0 million. Working capital investments consisted primarily
of an increase in inventory financed by accounts payable as the Company began
building stock to support the seasonable nature of higher sales levels in the
second and third quarters of fiscal 1998.
The Company incurred capital expenditures net of disposals of $1.5
million in 1998. Capital expenditures consisted primarily of computer hardware
and software, embroidery equipment and leasehold improvements related to the
consolidation of facilities into the new Batavia facility.
Financing activities provided $8.2 million of cash in 1998 principally
through net borrowings under existing credit facilities. In 1997, net borrowings
of debt and the issuance of preferred stock with detachable common stock
purchase warrants provided $8.2 million.
YEAR 2000
The Company expects its financial systems to become Year 2000 compliant
during the second quarter of 1998. The Company has not completed an assessment
of its current operating systems. However, in 1997, the Company began the
implementation of a new operating software package as part of a reorganization
and consolidation of the Company's numerous operating systems. The software
package being implemented is Year 2000 compliant. The Company is implementing
the new software in phases and expects the process to be complete
<PAGE> 15
by the end of the third quarter of fiscal 1999. In addition, the Company has not
completed an assessment of the effects on the Company of Year 2000 issues at
third party suppliers, vendors and customers.
SEASONALITY
The Company's sales levels are generally higher in the second and third
quarters of each year. During these periods, spring, summer, back-to-school and
pre-holiday season products are produced and sold. The Company expects that the
seasonable nature of apparel sales will continue in future periods.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Although the Company believes that its
expectations are based on reasonable assumptions, it can give no assurance that
such expectations will be achieved. Other factors could cause actual results to
differ materially from those in the forward-looking statements herein.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Subsequent to the end of the first quarter, Brazos' Board of Directors
accepted the resignation of the Company's president and CEO, J. Ford Taylor, and
appointed his successor, Robert C. Klein, as the new president and CEO of the
Company. Mr. Klein was also appointed to fill the vacancy on the board of
directors created by Mr. Taylor's resignation as a director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Brazos, Inc. 1998 Annual Incentive Compensation Plan
27 Financial Data Schedule
(b) Reports on Form 8-K. The Company filed a report on Form 8-K
dated March 27, 1998, with respect to the Company's change in
fiscal year.
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRAZOS SPORTSWEAR, INC.
/S/ F. CLAYTON CHAMBERS
-----------------------
F. Clayton Chambers,
Vice President and Chief Financial Officer
/S/ STEVEN P. RATTERMAN
-----------------------
Steven P. Ratterman
Controller and Principal Accounting Officer
DATE: May 19, 1998
<PAGE> 1
Exhibit 10.1
BRAZOS, INC.
ANNUAL INCENTIVE COMPENSATION PLAN
JANUARY 1998
<PAGE> 2
BRAZOS, INC.
ANNUAL INCENTIVE COMPENSATION PLAN
TABLE OF CONTENTS
PAGE
----
PURPOSE.......................................................................1
DEFINITIONS...................................................................1
ADMINISTRATION................................................................2
PARTICIPATION/ELIGIBILITY.....................................................2
TIMING OF AWARD PAYMENTS......................................................3
AWARD DETERMINATION...........................................................3
DURATION OF PLAN..............................................................4
TERMINATION OF PLAN...........................................................4
MISCELLANEOUS PLAN PROVISIONS.................................................5
EFFECTIVE DATE................................................................5
<PAGE> 3
PURPOSE
Brazos, Inc. (the "Company") has adopted an Annual Incentive Compensation Plan
(the "Plan") to reward employees for enhancing the value of the Company. The
purpose of this Plan is to motivate employees to think and act like owners. The
Plan is intended to reward the Participants in the Plan for the Company's
financial performance.
The Plan is an annual plan that coincides with the fiscal year of the Company.
Awards made under the Plan are in addition to base salary and base salary
adjustments to maintain market competitiveness.
The Plan is a bonus program and is, therefore, not subject to ERISA and Internal
Revenue Service reporting requirements for certain qualified deferred
compensation plans.
The Board of Directors (the "Board") of the Company reserves the right to amend,
modify or revoke the Plan at any time at its discretion, without prior notice to
participants, provided however, any amendments, modifications or revocation
shall not cause a participant to forfeit an Award that has been awarded to him
prior to any such amendment, modification or revocation. No contractual right to
any benefit described herein is intended to be created by this document or any
related action of the Company or Compensation Committee and none should be
inferred from the descriptions of this Plan. No Participant shall have a vested
right to an Award until actually paid to or on behalf of such Participant.
DEFINITIONS
Annual Incentive Pool - Represents the Funding Percentages for the
level of EBITDA achieved multiplied by each Plan Participant Groups'
total Base Pay.
Award - Total cash awarded to a Participant due to the Company's
performance and results achieved under the Plan.
Base Pay - Regular W-2 earnings (box 1) excluding incentive
compensation, bonuses, benefits, moving allowances, pension and
profit-sharing contributions, determined as of the end of the
immediately preceding Plan Year.
Compensation Committee - The Compensation Committee of the Board as
comprised from time to time.
EBITDA - The earnings before interest, taxes, depreciation and
amortization of the Company for a given Plan Year, determined in
accordance with generally accepted accounting principles.
Funding Percentages - Percentages determined annually by the Board for
Plan Participant Groups for various target levels of EBITDA.
<PAGE> 4
Plan - The Company Annual Incentive Compensation Plan as set forth in
this document and as it may be amended by the Compensation Committee
from time to time.
Participant - Any full-time employee of the Company if approved for
participation in the Plan by the Compensation Committee or its
delegate.
Plan Participant Group - Classes created by the Compensation Committee
of Participants designated "Executives", "Class A", "Class B", "Class
C", Class "D" Classes A, B, C and D may further be divided by location.
Plan Year - The fiscal year of the Company.
Unusual/Nonrecurring Items - Income or expense items which may be
excluded from EBITDA. Such items may include, but are not limited to,
the effect of changes in accounting principles and gains on disposition
of assets. It is intended that these items represent items outside the
influence of management and employees of the Company. The Compensation
Committee shall have the discretion to determine which items shall be
defined as Unusual/Nonrecurring Items.
ADMINISTRATION
The Board shall establish the following for each Plan Year:
o Target levels of EBITDA.
o Funding Percentages for the Plan Participant Groups for the various target
levels of EBITDA.
The Compensation Committee shall establish the following for each Plan Year:
o Participants
o Plan Participant Groups
The Compensation Committee will be responsible for Plan administration.
The Compensation Committee will follow the following guidelines and procedures
with respect to Plan operation.
PARTICIPATION/ELIGIBILITY
All full-time employees of the Company, if approved by the Compensation
Committee or its delegate, will be eligible to participate in the Plan. The
Compensation Committee may delegate the authority to select Participants to any
officer or officers of the Company subject to final approval by the Compensation
Committee. Participants whose employment is terminated due to death, disability,
or retirement on or after attaining age 65, shall be eligible for an Award for
the Plan Year in which such
2
<PAGE> 5
termination occurred. Participants whose employment is terminated for any other
reason during a Plan Year shall not be entitled to an Award for such Plan Year,
unless otherwise determined by the Compensation Committee in its discretion as
exercised on a case-by-case basis taking into account such factors that the
Compensation Committee deems to be relevant. The Compensation Committee shall
determine whether a termination of employment was voluntary, for cause or for
any other reason, in its complete discretion. All determinations of the
Compensation Committee shall be final, non-appealable and need not be uniform
with respect to similarly situated employees or classes of employees.
TIMING OF AWARD PAYMENTS
After the Company's annual financial results have been finalized for a Plan
Year, the Annual Incentive Pool, if any, will be determined and Awards will be
allocated to Participants. Awards for the Plan Year will be paid to Participants
as soon as administratively practicable after the end of the Plan Year for which
the Award was made.
AWARD DETERMINATION
The Compensation Committee shall calculate the Annual Incentive Pool for each
Plan Year as follows:
Financial statement EBITDA will be increased or decreased for any
Unusual/Nonrecurring Items resulting in EBITDA for purposes of the Plan.
Funding Percentages corresponding to a target level of EBITDA will be
determined for each Plan Participant Group. Those Funding Percentages will be
multiplied by the Base Pay for each corresponding Plan Participant Group. The
sum of all Plan Participant Group calculations will be the Annual Incentive
Pool.
For example, if the Board targets Plan EBITDA at $28,000,000 for a Plan Year and
such target is achieved, the Annual Incentive Pool for that Plan Year would be
calculated as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
FUNDING PLAN PARTICIPANT GROUP
PLAN PARTICIPANT GROUP BASE PAY PERCENTAGE ANNUAL INCENTIVE POOL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Executives $850,000 29.17% $247,917
- -------------------------------------------------------------------------------------------------------------
Class A - Tacoma, Batavia, $1,581,413 20.83% $329,461
Embroidery, Corp., Boulder
- -------------------------------------------------------------------------------------------------------------
Class A - Other $834,160 14.583% $121,648
- -------------------------------------------------------------------------------------------------------------
Class B - Tacoma, Batavia, $1,859,748 12.5% $232,468
Embroidery, Corp., Boulder
- -------------------------------------------------------------------------------------------------------------
Class B - Other $1,033,464 8.75% $90,428
- -------------------------------------------------------------------------------------------------------------
Class C - Tacoma, Batavia, $2,806,640 6.25% $175,415
Embroidery, Corp., Boulder
- -------------------------------------------------------------------------------------------------------------
Class C - Other $2,443,396 4.375% $106,899
- -------------------------------------------------------------------------------------------------------------
Class D Not available Discretionary $537,800
- -------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Annual Incentive Pool $1,839,036
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Funding Percentages for target levels of EBITDA shall be determined by the
Board in its discretion based on expected earnings per share performance. The
Funding Percentages for target levels of EBITDA will be set annually and
communicated to Participants as soon as administratively practicable for the
Plan Year.
If no Annual Incentive Pool is generated in any Plan Year, then any incentive
that may be awarded for that Plan Year is completely discretionary based on
achievement of individual performance criteria and other factors as determined
by the Compensation Committee in its sole discretion.
If an Annual Incentive Pool is generated for a Plan Year, the pool will be
allocated to the Plan Participant Group classes and then allocated to
Participants within each group based on the relative Base Pay of such
Participants and the discretion of the Compensation Committee. Participant
Awards may also be based on achievement of individual performance criteria in
the discretion of the Compensation Committee.
The Compensation Committee will assign Participants to a Plan Participant Group
at the beginning of the Plan Year or for the portion of the Plan Year for which
the Participant was an employee if not an employee at the beginning of the Plan
Year. Participants cannot change Plan Participant Groups during the year except
as permitted in the discretion of the Compensation Committee.
PLAN PROGRESS REPORTS
Plan progress reports summarizing performance to date may be posted on a
periodic basis in the discretion of the Compensation Committee.
DURATION OF PLAN
The Plan is part of the Company's compensation program. The Board reserves the
right, in its discretion, at any time, and from time to time, to modify amend or
terminate (in whole or in part) for any reason, any or all of the provisions of
the Plan without notice; provided, however, that no such modification, amendment
or termination shall be retroactive to reduce or affect any Awards that are
earned, due and payable under the Plan at the time of such action.
TERMINATION OF PLAN
The incentive computation for the Plan Year in which termination of the Plan
occurs will be based on the period ending on the last business day immediately
prior to the effective date of the Plan termination. All performance
calculations (e.g., threshold, financial performance, etc.) will be adjusted to
coincide with such period as determined by the Compensation Committee in its
discretion, provided, however, the Board in its discretion may terminate the
Plan during a Plan Year without providing for any Awards in the year of
termination.
4
<PAGE> 7
MISCELLANEOUS PLAN PROVISIONS
A Participant shall have no right or interest in any Award before it is actually
awarded to him. A Participant's right and interest in any Award that is earned
any payable may not be assigned or transferred except in the event of the
Participant's death. Upon the death of a Participant who was entitled to and had
earned an Award that was payable at the date of his death, such Award (and only
such Award) shall become payable, pursuant to the Plan, to the Participant's
lawful spouse if then living and not legally separated from the Participant at
the time of death ("Qualifying Spouse"). If there is no Qualifying Spouse, the
Participant's beneficiary will be the same as the beneficiary designated under
the Company's group term life insurance program. If the Participant does not
have a Qualifying Spouse, nor participate in such group life insurance program,
the Award will be payable to the Participant's estate. After payment of such
Award to the Participant's Qualifying Spouse, beneficiary or estate, as
applicable, the Company shall be relieved of any liability therefor to the
extent of such payment and, in addition, the Company and any other entity shall
not be required to oversee the application of any such payment.
The Company shall deduct all minimum required federal tax and any required state
or local tax withholding from the Awards.
The administrative expense of the Plan will be borne by the Company.
Neither the establishment of the Plan nor the making of Awards hereunder shall
be deemed to create a trust or a fund of any type, nor create any fiduciary
relationship between the Participant and the Company, Board or Compensation
Committee. The Plan shall constitute an unfunded, unsecured liability of the
Company to make payments in accordance with the provisions of the Plan, and no
Participant shall have any security or other interest in any assets of the
Company resulting from his participation in the Plan.
EFFECTIVE DATE
This Plan is effective January 1, 1998 and shall continue until terminated.
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> APR-04-1998
<CASH> 1,721
<SECURITIES> 0
<RECEIVABLES> 45,091
<ALLOWANCES> 8,112
<INVENTORY> 65,906
<CURRENT-ASSETS> 125,389
<PP&E> 20,057
<DEPRECIATION> 5,719
<TOTAL-ASSETS> 194,592
<CURRENT-LIABILITIES> 78,978
<BONDS> 101,456
8,796
0
<COMMON> 4
<OTHER-SE> 2,506
<TOTAL-LIABILITY-AND-EQUITY> 194,592
<SALES> 52,981
<TOTAL-REVENUES> 52,981
<CGS> 43,085
<TOTAL-COSTS> 43,085
<OTHER-EXPENSES> 16,153
<LOSS-PROVISION> 346
<INTEREST-EXPENSE> 3,663
<INCOME-PRETAX> (9,907)
<INCOME-TAX> (3,962)
<INCOME-CONTINUING> (5,945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,945)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
