<PAGE> 1
================================================================================
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JULY 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.
4,421,752
------------------------------
(SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 17, 1998)
- --------------------------------------------------------------------------------
================================================================================
<PAGE> 2
BRAZOS SPORTSWEAR, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JULY 4, 1998
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of July 4, 1998
and December 27, 1997 (unaudited)....................................... 1
Consolidated Condensed Statements of Operations for the
twenty-seven weeks ended July 4, 1998 (unaudited) and the
twenty-six weeks ended June 28, 1997 (unaudited) and the
thirteen weeks ended July 4, 1998 (unaudited) and
June 28, 1997 (unaudited)............................................... 3
Consolidated Condensed Statements of Cash Flows for the
twenty-seven weeks ended July 4, 1998 (unaudited) and the
twenty-six weeks ended June 28, 1997 (unaudited)........................ 4
Notes to Financial Statements (unaudited)............................... 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 12
PART II - OTHER INFORMATION............................................................... 19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF JULY 4, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,310 $ 2,679
Accounts receivable, net of allowance for doubtful accounts
of $6,945 and $7,930, respectively 36,055 41,989
Inventory (Note 2(b)) 74,308 55,551
Prepaid expenses 9,696 8,861
Income tax receivable 5,621 2,841
Deferred tax assets 4,649 4,649
-------- --------
Total current assets 131,639 116,570
-------- --------
PROPERTY, PLANT AND EQUIPMENT-net, at cost 14,447 13,336
-------- --------
INTANGIBLE ASSETS:
Costs in excess of fair value of assets acquired 50,869 50,869
Less- accumulated amortization (2,268) (1,655)
-------- --------
48,601 49,214
-------- --------
Other 7,661 7,661
Less- accumulated amortization (2,267) (1,740)
-------- --------
5,394 5,921
-------- --------
Total intangible assets 53,995 55,135
-------- --------
OTHER ASSETS 249 269
-------- --------
$200,330 $185,310
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed balance sheets.
1
<PAGE> 4
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF JULY 4, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Borrowings pursuant to revolving $ 59,928 $ 31,504
credit agreement (Note 2(c))
Current portion of other debt 939 947
Accounts payable 25,590 13,902
Accrued liabilities 9,093 16,976
-------- --------
Total current liabilities 95,550 63,329
-------- --------
LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES:
Senior notes payable 99,317 99,277
Subordinated debt due to related parties 1,500 1,500
Capital lease liability 546 795
-------- --------
101,363 101,572
-------- --------
DEFERRED INCOME TAXES PAYABLE 1,141 1,141
OTHER LIABILITIES 1,162 2,036
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 9,027 8,577
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 15,000,000 shares
authorized and 4,419,479 and 4,412,655 shares issued and
outstanding at July 4, 1998 and December 27, 1997, respectively 4 4
Additional paid-in capital 11,330 11,312
Retained deficit (19,247) (2,661)
-------- --------
Total shareholders' equity (deficit) (7,913) 8,655
-------- --------
$200,330 $185,310
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed balance sheets.
2
<PAGE> 5
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED FOR THE PERIOD ENDED
------------------------------ -----------------------------
JULY 4, 1998 JUNE 28, 1997 JULY 4, 1998 JUNE 28, 1997
(13 WEEKS) (13 WEEKS) (27 WEEKS) (26 WEEKS)
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET SALES $ 54,272 $ 56,198 $ 107,254 $ 91,105
COST OF GOODS SOLD 46,009 41,967 89,095 68,650
---------- ---------- ---------- ----------
Gross profit 8,263 14,231 18,159 22,455
OPERATING EXPENSES:
Selling, general and administrative expenses 13,880 11,654 28,752 19,810
Restructuring charge (Note (2(e)) - - 745 -
Amortization of intangible assets and non-compete
payments 604 305 1,140 590
---------- ---------- ---------- ----------
Total operating expenses 14,484 11,959 30,637 20,400
Operating income (loss) (6,221) 2,272 (12,478) 2,055
---------- ---------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense 3,752 1,791 7,415 2,934
Other, net (5) (71) (18) 54
---------- ---------- ---------- ----------
Income (loss) before provision (credit)
for income taxes (9,968) 552 (19,875) (933)
PROVISION (CREDIT) FOR INCOME TAXES 222 236 (3,740) (373)
---------- ---------- ---------- ----------
Net income (loss) (10,190) 316 (16,135) (560)
DIVIDENDS AND ACCRETION ON PREFERRED STOCK 231 247 450 412
---------- ---------- ---------- ----------
Net income (loss) available for common shareholders $ (10,421) $ 69 $ (16,585) $ (972)
========== ========== ========== ==========
PER SHARE DATA (Note 2(d)):
BASIC EARNINGS PER SHARE
Earnings (loss) per share $ (2.36) $ .02 $ (3.75) $ (.24)
========== ========== ========== ==========
Weighted average shares outstanding 4,419,479 4,319,158 4,418,107 4,053,214
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Earnings (loss) per share $ (2.36) $ .01 $ (3.75) $ (.24)
========== ========== ========== ==========
Weighted average shares outstanding 4,419,479 5,001,648 4,418,107 4,053,214
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed financial statements.
3
<PAGE> 6
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SEVEN WEEKS ENDED JULY 4, 1998 AND
THE TWENTY-SIX WEEKS ENDED JUNE 28, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,135) $ (560)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation 1,181 758
Amortization of intangible assets 1,140 590
Decrease (increase) in accounts receivable 5,934 (4,312)
Increase in inventory (18,757) (20,439)
Increase in prepaid expenses (834) (121)
Increase in income tax receivable (2,779) (256)
Decrease (increase) in other noncurrent assets 21 (1,993)
Increase in accounts payable and accrued liabilities 3,075 14,540
-------- --------
Net cash used in operating activities (27,154) (11,793)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Sun Sportswear, Inc., net of cash acquired - (4,613)
Purchases of property, plant and equipment, net (2,292) (211)
-------- --------
Net cash used in investing activities (2,292) (4,824)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings pursuant to revolving credit agreement, net 28,424 18,239
Borrowings of long-term debt pursuant to credit agreement - 1,000
Repayments of long-term debt pursuant to credit agreement - (1,250)
Repayments of subordinated debt - (2,998)
Repayment of capital lease obligations and industrial revenue bonds (217) (290)
Payments made under non-compete agreements (150) (58)
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 28,077 16,603
-------- --------
NET DECREASE IN CASH (1,369) (14)
CASH AT BEGINNING OF PERIOD 2,679 561
-------- --------
CASH AT END OF PERIOD $ 1,310 $ 547
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 12,672 $ 2,763
Cash paid for income taxes (refunds received) (949) 1,479
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Payments of PIK dividends and accretion of preferred stock 450 412
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed financial statements.
4
<PAGE> 7
BRAZOS SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF JULY 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 the stockholders of Holdings acquired an 86% ownership
interest in Sun. The Merger has been accounted for as a reverse
acquisition with Sun being the surviving legal entity and Holdings being
the acquirer 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 twenty-seven week
period ended July 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.
The Company regularly evaluates whether events and circumstances
have occurred that indicate that the amounts of intangible assets
or deferred tax assets may not be realizable.
5
<PAGE> 8
(b) Inventories--Inventories are comprised of:
<TABLE>
<CAPTION>
JULY 4, DECEMBER 27,
INVENTORY CATEGORY METHOD 1998 1997
------------------ ------ ------- ------------
<S> <C> <C> <C>
Raw Materials LIFO $ 2,476 $ 3,605
Finished Goods LIFO 17,008 12,725
------- -------
19,484 16,330
Less--LIFO reserve (182) (182)
------- -------
Total LIFO 19,302 16,148
------- -------
Raw Materials FIFO 34,695 24,663
Work-in-Process FIFO 4,811 5,926
Finished Goods FIFO 15,500 8,814
------- -------
Total FIFO 55,006 39,403
------- -------
Total inventory $74,308 $55,551
======= =======
</TABLE>
Finished goods on a LIFO basis include blank garments of $15.5
million and $11.3 million at July 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") . On June 30, 1998, the Company and its senior
lenders amended the Company's Credit Facility to include a
forbearance agreement and to increase the amount of the facility
from $70 million to $75 million, subject to collateral
limitations. Interest on the line of credit increased from prime
plus .25% or the Eurodollar base rate plus 1.75% to prime
plus 1.25% or the Eurodollar base rate plus 2.75%. Under the
forbearance agreement, the Company's lenders agreed to refrain
from exercising their rights and remedies under the Credit
Facility as a result of existing defaults through November 30,
1998. The forbearance agreement requires the Company to achieve
certain levels of earnings before interest, taxes, depreciation
and amortization ("EBITDA") on a monthly basis. As of July 4,
1998, the Company was in compliance with the EBITDA covenant.
Borrowings pertaining to the Credit Facility are classified as
current liabilities as of July 4, 1998 and December 27, 1997.
(d) Earnings (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 and twenty-six
weeks ended June 28, 1997:
6
<PAGE> 9
<TABLE>
<CAPTION>
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------- -----------
<S> <C> <C>
Per share amounts
Primary EPS as reported $ .01 $ (.23)
Effect of SFAS No. 128 .01 (.01)
--------- ----------
Basic EPS as restated $ .02 $ (.24)
========= ==========
Fully Diluted EPS as reported $ - $ (.23)
Effect of SFAS No. 128 .01 (.01)
--------- ----------
Diluted EPS as restated $ .01 $ (.24)
========= ==========
</TABLE>
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 the thirteen weeks and twenty-seven weeks
ended July 4, 1998 and the twenty-six weeks ended June 28, 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.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED JULY 4, 1998
--------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
--------------- ------ ---------
(000's Omitted)
<S> <C> <C> <C>
Net Loss $(10,190)
Less: dividends and accretion on preferred stock (231)
--------
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common shareholders $(10,421) 4,419,479 $(2.36)
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED JUNE 28, 1997
--------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
--------------- ------ ---------
(000's Omitted)
<S> <C> <C> <C>
Net Income $ 316
Less: dividends and accretion on preferred stock (247)
--------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 69 4,319,158 $ .02
Effect of Dilutive Securities
Options
300,435
Warrants
245,692
Convertible Debt
136,363
---------
DILUTED EARNINGS PER SHARE
Income available to common shareholders $ 69 5,001,648 $ .01
======== ========= ======
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE TWENTY-SEVEN WEEKS ENDED JULY 4, 1998
---------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
--------------- ------ ---------
(000's Omitted)
<S> <C> <C> <C>
Net Loss $ (16,135)
Less: dividends and accretion on preferred stock (450)
---------
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common shareholders $ (16,585) 4,418,107 $(3.75)
========= ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 1997
--------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
--------------- ------ ---------
(000's Omitted)
<S> <C> <C> <C>
Net Loss $ (560)
Less: dividends and accretion on preferred stock (412)
---------
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common shareholders $ (972) 4,053,214 $ (.24)
========= ========= ======
</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.
(f) New Accounting Pronouncements--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
8
<PAGE> 11
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.
(g) Reclassification--Certain amounts in the 1997 consolidated
condensed 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. consummated a merger with Sun whereby the
stockholders 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
9
<PAGE> 12
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's principal operating
subsidiary, Brazos Sportswear, LLC, 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 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.
<TABLE>
<CAPTION>
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------- ------------
JUNE 28, 1997 JUNE 28,1997
------------- ------------
(000's omitted except per share amounts)
<S> <C> <C>
Net sales $74,453 $131,731
Net loss (881) (5,063)
Loss available to common shareholders (1,099) (5,495)
Loss per share $ (.25) $ (1.26)
</TABLE>
(4) Significant Customers-
Brazos had net sales of $18.1 million to one customer for the
twenty-seven week period ended July 4, 1998 and $13.6 million to one
customer for the twenty-six week period ended June 28, 1997. These
amounts represented 17% and 15% of total net sales during the
twenty-seven week period ended July 4, 1998 and the twenty-six-week
period ended June 28, 1997, respectively. The accompanying consolidated
condensed balance sheets include accounts receivable of $11.7 million and
$7.8 million at July 4, 1998 and December 27, 1997, respectively, due
from such customer.
10
<PAGE> 13
(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.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Financial Statements and related Notes contained elsewhere herein.
GENERAL
During the fourth quarter of 1997, the Company initiated a
restructuring plan (the "Restructuring Plan") intended to improve operating
efficiencies principally by consolidating two facilities into the Cincinnati,
Ohio facility ( the "Cincinnati Facility") acquired upon the purchase of CS
Crable Sportswear, Inc. ("Crable") in September 1997. As a result of the
Restructuring Plan, the Company recorded pre-tax restructuring charges of $5.7
million in 1997 and $.7 million in the first quarter of 1998.
The key components of the Restructuring Plan are the following:
o In December, 1997, the Company closed a manufacturing facility in
Seattle, Washington, which was operated by Sun Sportswear, Inc.
prior to its acquisition by Brazos in March, 1997. By January,
1998, the Company had completed the move of substantially all of
the manufacturing equipment located at this facility, which
consisted primarily of advanced-technology screen printing
machines, to the Cincinnati Facility. In connection with the
Seattle plant closure, approximately 350 employees were
terminated.
o In February, 1998, the Company closed its "Velva Sheen" facility
located in Cincinnati, Ohio, and relocated certain manufacturing
equipment to the Cincinnati Facility. Of the 240 persons employed
at the Velva Sheen facility approximately 160 remained with the
Company after the facility consolidation. At July 4, 1998,
approximately 460 persons were employed at the Cincinnati
Facility, which includes approximately 150 persons hired
subsequent to the facility consolidation, 150 persons who were
formerly employed by Crable and 160 persons previously employed at
the Velva Sheen Facility.
o The Company is establishing a centralized product sourcing
operation to coordinate the procurement of garments for all
divisions.
o The Company intends to divest its "Red Fox" athletic uniform
business and expects that the sale of this business will be
completed in the third quarter of 1998, although no assurances can
be made that such a transaction will be consummated.
The consolidation of manufacturing facilities has caused operational
inefficiencies at the Cincinnati Facility, which together with lower than
expected
12
<PAGE> 15
revenues at the Company's Plymouth facility, have resulted in a net loss of
$16.1 million for the twenty-seven week period ended July 4, 1998. Operational
difficulties at the Cincinnati Facility were caused by (i) delays in the
commencement of production with relocated equipment, (ii) reductions in
productivity resulting from an insufficient number of available, experienced
manufacturing personnel, (iii) disruptions in the timely delivery of raw
materials meeting Company specifications and (iv) generally inefficient
manufacturing processes. As a result, the Company (a) incurred increased costs
associated with third-party contract manufacturing, (b) experienced increased
levels of product returns and allowances due to the failure to meet customer
performance expectations, (c) achieved lower than expected revenues due to
delays in product shipments and (d) received reduced future product orders from
its customers. Further, gross margins have been negatively impacted by
competitive pressures in the mass merchant segment of the Company's customer
base and soft demand for the Company's products by mid-tier customers. In
addition, the lower than expected sales at the Cincinnati Facility resulted in
excess inventory levels.
During the second quarter, the Company began aggressively addressing
the operational problems resulting from the Restructuring Plan. At the
Cincinnati Facility, (i) production rates and quality have improved, (ii)
product shipment performance has improved, (iii) charge backs/returns have
decreased from an average of $390,000 per week in May and June 1998 to an
average of $193,000 per week in July 1998 and (iv) the use of third-party
contract manufacturers has decreased, resulting in improved product quality and
a greater percentage of on-time customer deliveries. Additionally, management
has begun addressing raw material procurement issues by reorganizing its
sourcing operation.
Although the Company has made progress in correcting the operational
problems at the Cincinnati Facility, increased revenue levels at that facility
and the Company's Plymouth facility will be required (i) in order for the
Company's overall margins to return to expected levels and (ii) for the Company
to return to profitability. Management has focused the Company's sales and
marketing efforts on reassuring customers, particularly its significant mass
merchant and mid-tier customers, that the Company's production and delivery
performance is returning to normal levels. In order to return to profitability,
the Company also must (a) reduce inventory levels, (b) continue to reduce charge
back and return rates, (c) reduce reliance on third-party contract
manufacturers, (d) address royalty rates and minimum royalties in light of the
Company's expected levels of licensed product sales and (e) continue to improve
operational efficiencies at the Cincinnati Facility.
The Company believes that it will achieve positive EBITDA (earnings
before interest, taxes, depreciation and amortization) for the second half of
fiscal 1998. This expected improvement is due to the seasonal increase in
product demand and the impact of the operational improvements described above.
13
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of Brazos' statements of operations expressed as a percentage of net
sales on a historical basis.
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTEEN WEEKS TWENTY-SEVEN WEEKS TWENTY-SIX WEEKS
ENDED JULY 4, 1998 ENDED JUNE 28, 1997 ENDED JULY 4, 1998 ENDED JUNE 28, 1997
------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 84.8% 74.7% 83.1% 75.4%
------ ------ ------ ------
Gross profit 15.2% 25.3% 16.9% 24.6%
Operating expenses, excluding
restructuring charge 26.7% 21.3% 27.9% 22.4%
Restructuring charge - - .7% -
------ ------ ------ ------
Operating income (loss) (11.5%) 4.0% (11.6%) 2.3%
Other expense (income)
Interest expense 6.9% 3.2% 6.9% 3.2%
Other, net - (.1%) - .1%
------ ------ ------ ------
Income (loss) before provision
(credit) for income taxes (18.4%) 1.0% (18.5%) (1.0%)
Provision (credit) for income taxes .4% .4% (3.5%) (.4%)
------ ------ ------ ------
Net income (loss) (18.8%) .6% (15.0%) (.6%)
====== ====== ====== ======
</TABLE>
Thirteen Weeks Ended July 4, 1998 compared with the Thirteen Weeks
Ended June 28, 1997
The Company's net sales decreased approximately $1.9 million, or 3.4%,
from $56.2 million in 1997 to $54.3 million in 1998. This decrease was
attributable to (i) the disruption in operations resulting from implementation
of the Restructuring Plan, (ii) late deliveries of specialized products from
suppliers which hindered the Company's ability to fulfill sales commitments to
retailers and (iii) overall weakness in the decorated apparel industry. The
decrease was partially offset by sales from the acquisitions completed by the
Company in the second half of 1997. See Note 3 of the Notes to Financial
Statements for further information related to the acquisitions made in 1997.
Brazos' gross profit decreased $6.0 million, or 41.9%, from $14.2
million in 1997 to $8.3 million in 1998. Overall gross profit margin decreased
to 15.2% in 1998 from 25.3% 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 $2.5 million, or 21.1%, from $12.0 million
in 1997 to $14.5 million in 1998. The increase in operating expenses was
directly attributable to the acquisitions completed in 1997. As a percentage of
sales, operating expenses
14
<PAGE> 17
increased from 21.3% in 1997 to 26.7% in 1998. This increase principally relates
to reduced sales volume resulting from 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 $2.0 million, or 109.5%, from $1.8 million
in 1997 to $3.8 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 fiscal 1998 operating losses and the acquisitions made
by the Company in 1997.
Income tax benefit was not recorded in 1998 due to management's
uncertainty concerning the realizability of any further net operating loss
carryforwards. In 1997, income tax expense of $.2 million was recorded at an
effective tax rate of 40%.
Twenty-Seven Weeks Ended July 4, 1998 compared with the Twenty-Six
Weeks Ended June 28, 1997
The Company's net sales increased approximately $16.1 million, or
17.7%, from $91.1 million in 1997 to $107.3 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 twenty-seven week accounting
period in 1998. See Note 3 of the Notes to Financial Statements for 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, (ii) late deliveries of
specialized products from suppliers which hindered the Company's ability to
fulfill sales commitments to retailers and (iii) overall weakness in the
decorated apparel industry.
Brazos' gross profit decreased $4.3 million, or 19.1%, from $22.5
million in 1997 to $18.2 million in 1998. Overall gross profit margin decreased
to 16.9% in 1998 from 24.6% 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 $10.2 million, or 50.2%, from $20.4
million in 1997 to $30.6 million in 1998. The increase in operating expenses was
directly attributable to the acquisitions completed in 1997. As a percentage of
sales, operating expenses increased from 22.4% in 1997 to 28.6% in 1998. This
increase principally relates to reduced sales volume resulting from 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.
15
<PAGE> 18
Interest expense increased $4.5 million, or 152.7%, from $2.9 million
in 1997 to $7.4 million in 1998. The increase was a result of the issuance of
the Notes in July, 1997 and increased borrowings under Brazos' credit facility
to fund its greater working capital needs in connection with fiscal 1998
operating losses and the acquisitions made by the Company in 1997.
An income tax benefit of $4.0 million has been recorded in 1998 based
on management's estimate of future taxable income and net operating loss
carryback ability. In 1997, an income tax benefit of $.4 million was recorded
based on management's estimate of future taxable income and net operating loss
carryback potential.
LIQUIDITY AND CAPITAL RESOURCES
Brazos has financed its acquisitions and operations through borrowings
under its bank lines of credit, private placements of debt and equity
securities, seller financing and operating cash flow. The Company's cash
requirements consist of its general working capital needs, 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"). 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 1.25% or the Eurodollar base rate plus 2.75%. 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.
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 the Credit Facility. On June 30, 1998, the Company
and its senior lenders amended the Credit Facility to include a forbearance
agreement which provides for a waiver of the covenant noncompliance. The amended
Credit Facility increased aggregate available borrowings from $70 million to $75
million, subject to collateral limitations. Under the forbearance agreement, the
Company's lenders agreed to refrain from exercising their rights and remedies
under the Credit Facility as a result of existing defaults through November 30,
1998. The forbearance agreement requires the Company to achieve certain levels
of earnings before interest, taxes, depreciation and amortization ("EBITDA") on
a monthly basis. As of July 4, 1998, the Company was in compliance with the
EBITDA covenant of the forbearance agreement, and Brazos had an aggregate
borrowing base of $63.5 million, based on existing collateral, under its Credit
Facility. Of its borrowing base, $3.9 million remained unused at July 4, 1998.
For the twenty-seven week period ended July 4, 1998, the Company
incurred a
16
<PAGE> 19
net loss of $16.1 million. The Company anticipates that it will require
additional liquidity from equity or debt financing in fiscal 1999 to meet its
seasonal working capital requirements. The sources of financing may include
additional bank debt or the public or private sale of equity or debt securities.
In connection with any financing, the Company may be required to issue
securities that dilute the interests of the Company's stockholders. There can be
no assurance that the Company will be successful in arranging such financing,
and the failure to obtain such financing, if required, will adversely impact the
Company's operations and financial condition.
The Company also expects that it will require additional waivers of
covenant noncompliance under the Credit Facility or further amendments
reflecting the Company's current level of operations and cost structure. There
can be no assurance that the Company will be able to obtain future waivers of
noncompliance or amendments to the Credit Facility, and if the Company is unable
to do so or obtain a new credit facility, its operations and financial condition
will be adversely impacted.
Brazos used $27.2 million of cash for operating activities in 1998
versus cash used for operating activities in 1997 of $11.8 million. Contributing
to the use of cash in 1998 were: (i) a net loss of approximately $16.1 million
and (ii) working capital investments of $13.3 million, offset by depreciation
and amortization of $2.3 million. Working capital investments consisted
primarily of an increase in inventory as the Company began building stock to
support the seasonal nature of higher sales levels in the third quarter of
fiscal 1998.
The Company incurred capital expenditures net of disposals of $2.3
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 Cincinnati Facility.
Financing activities provided $28.1 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 $16.6 million.
YEAR 2000
The Company expects its financial systems to become Year 2000 compliant
during the fourth 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 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.
17
<PAGE> 20
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.
18
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
In the second 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. Additionally, in the second quarter,
Alan B. Elenson resigned as a director of the Company. The vacancy created by
his resignation has not yet been filled.
In the third quarter, Mr. Taylor's employment with the Company was
terminated and all benefits relating to the remainder of his employment
agreement were expensed.
Because the Company's common stock does not meet the listing
requirements of the Nasdaq National Market, the Company is seeking to list its
stock on the Nasdaq SmallCap Market, although no assurances can be made
regarding whether the listing will be approved. Pending review of the Company's
application, Brazos' stock will continue to trade on the Nasdaq National Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Forbearance Agreement and Second Amendment to Third
Amended and Restated Loan and Security Agreement
dated June 30, 1998 between Brazos Sportswear, LLC,
and The First National Bank of Boston and Fleet
Capital (the "Senior Lenders")
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
19
<PAGE> 22
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: August 17, 1998
20
<PAGE> 1
EXHIBIT 10.1
FORBEARANCE AGREEMENT AND SECOND
AMENDMENT TO THIRD AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
THIS FORBEARANCE AGREEMENT AND SECOND AMENDMENT TO THIRD AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT (hereinafter, "this Agreement") is executed
on this 30th day of June, 1998 (to be effective as of the relevant date
hereinafter specified), by FLEET CAPITAL CORPORATION ("Fleet"), a Rhode Island
corporation ("Fleet"), BANKBOSTON, N.A., a national banking association
("Boston") (Fleet and Boston are collectively referred to as "Lenders" or each
individually as "Lender"), Fleet, as agent for Lenders (Fleet, in such capacity,
the "Agent"), BRAZOS SPORTSWEAR, L.L.C., a Delaware limited liability
corporation ("Brazos"), successor-in-interest by operation of law to Brazos,
Inc., a Texas corporation ("Brazos Inc."), and MORNING SUN, INC., a Washington
corporation ("Morning Sun") (Brazos and Morning Sun being hereinafter
individually and collectively referred to as "Borrowers", as governed by the
provisions of Section 1.5 and Section 1.6 of the Loan Agreement [as hereinafter
defined]).
RECITALS
A. Morning Sun, Brazos Inc., Lenders and Agent have entered into that
certain Third Amended and Restated Loan and Security Agreement, dated July 2,
1997 (the Third Amended and Restated Loan and Security Agreement, as amended
from time to time, being hereinafter referred to as the "Loan Agreement").
Brazos has by operation of law succeeded to all right, title and interest of
Brazos Inc. in the Loan Agreement and the other Loan Documents (as defined in
the Loan Agreement).
B. On the date this document is executed, Borrower is in default of
certain obligations to Lenders and Agent under the Loan Agreement and the other
Loan Documents.
C. Borrower has requested that Lenders and Agent forbear from
exercising their rights and remedies with respect to such existing defaults up
to and including November 30, 1998.
D. Borrower hereby agrees and acknowledges that Lenders and Agent have
no obligation to extend such forbearance past November 30, 1998.
E. Lenders and Agent have agreed to forbear from exercising their
rights and remedies with respect to such existing defaults up to and including
November 30, 1998, such forbearance to be upon the terms and conditions set
forth in this Agreement.
F. Borrower has also requested that the Lenders and Agent amend the
Loan Agreement in the manner set forth in this Agreement and Lenders and Agent
are willing to do so upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
1
<PAGE> 2
ARTICLE I
DEFINITIONS
1.01 Capitalized terms used in this Agreement, to the extent not
otherwise defined herein, shall have the same meaning as in the Loan Agreement,
as amended hereby.
ARTICLE II
EFFECTIVE DATE
2.01 Except as otherwise provided herein, the Forbearance (as defined in
Section 4.01 hereof) and the agreements, consents and amendments contained in
this Agreement shall each be effective on the date that all conditions precedent
in Section 6.01 hereof are satisfied, and once effective shall be deemed to have
been effective as of June 30, 1998.
ARTICLE III
EXISTING DEFAULTS
3.01 As of the date of execution of this Agreement, Borrower hereby
acknowledges, confirms and agrees that the following event has occurred (the
"Existing Default"), which presently constitutes an Event of Default and
entitles Lenders and Agent to exercise their rights and remedies under the Loan
Documents: based on financial information supplied to Lenders and Agent by
Borrower, Borrower will fail to maintain for the twelve-month period ending on
July 4, 1998, a Fixed Charge Ratio of not less than the ratio set forth in
Section 9.3(B) of the Loan Agreement.
ARTICLE IV
FORBEARANCE
4.01 In reliance upon the representations, warranties and covenants of
Borrower contained in this Agreement and subject to the terms and conditions of
this Agreement and any documents or instruments executed in connection herewith,
each of the Lenders and Agent hereby agrees to forbear up to and including
November 30, 1998, from exercising its rights and remedies under the Loan
Documents as a result of the Existing Default (the "Forbearance"). If not sooner
terminated pursuant to the terms of this Agreement, the Forbearance shall
automatically terminate on December 1, 1998, and on and after such date each of
the Lenders and Agent shall be entitled to exercise its available rights and
remedies without further notice. Except as limited and/or modified by this
Agreement and by the documents executed in connection herewith, the Loan
Documents shall be deemed to be in full force and effect during the period of
this Agreement, and all provisions of the Loan Documents relating to the rights
and remedies of Lender shall continue to be in effect until such time as all
Obligations have been finally paid in full.
4.02 Borrower hereby agrees and acknowledges that Lenders and Agent
have no obligation to extend the Forbearance past November 30, 1998.
ARTICLE V
AMENDMENTS TO LOAN AGREEMENT AND OTHER AGREEMENTS
5.01 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT; AMENDMENT AND
RESTATEMENT OF CERTAIN DEFINITIONS. Effective as of the effective date of this
Agreement, the definitions of "Borrowing Base," "Existing Boston Revolving
Credit Note," "Existing Fleet Revolving Credit Note," "Revolving
2
<PAGE> 3
Credit Commitment," "Revolving Credit Notes" and "Seasonal Inventory Overadvance
Agreement" set forth in Section 1.1 of the Loan Agreement are hereby amended and
restated in their entirety to read as follows:
"Borrowing Base - as at any date of determination thereof, an amount
equal to the lesser of:
(a) (i) the Revolving Credit Commitment; minus (ii) 100% of
the face amount of all standby Letters of Credit issued by Agent or
covered by the provisions of an LC Risk Participation Agreement which
are outstanding at such date; minus (iii) 45% of the face amount of all
documentary Letters of Credit issued by Agent or covered by the
provisions of an LC Risk Participation Agreement which are outstanding
at such date; minus (iv) any reserves for accrued and unpaid royalty
payments established by Agent and/or Lenders from time to time pursuant
to Section 2.1(A) hereof (based on the amount of such accrued and
unpaid royalty payments which are shown on Borrower's financial
statements, as adjusted by Lenders in the exercise of their credit
judgment); minus (v) all other reserves established by Agent and/or
Lender from time to time pursuant to Section 2.1(A) hereof; minus (vi)
the FX Amount; or
(b) an amount equal to:
(i) (A) 85% (or such lesser percentage as Lenders may
in their discretion determine from time to time after the
occurrence of a Default) of the net amount of Eligible
Accounts outstanding as of the applicable Calculation Date
plus (B) the lesser of $1,000,000 or 85% (or such lesser
percentage as Lenders may in their discretion determine from
time to time after the occurrence of a Default) of the net
amount of Eligible Dated Accounts outstanding as of the
applicable Calculation Date; plus (C) 85% (or such lesser
percentage as Lenders may in their discretion determine from
time to time after the occurrence of a Default) of the lesser
of (a) $1,500,000 or (b) the net amount of Japanese Accounts
outstanding as of the applicable Calculation Date;
PLUS
(ii) the lesser of (A) during the time period
beginning June 30, 1998 and continuing through October 30,
1998, $45,000,000, and thereafter $35,000,000 or (B) the sum
of: (1) (x) the lesser of (I) $5,000,000 or (II) 55% (or such
lesser percentage as Lenders may in their discretion determine
from time to time after the occurrence of a Default) of the
value of Eligible Finished Goods Inventory consisting of
"printed" finished goods as of the applicable Calculation Date
plus (y) 55% (or such lesser percentage as Lenders may in
their discretion determine from time to time after the
occurrence of a Default) of the value of Eligible Inventory
(other than Eligible Finished Goods Inventory consisting of
"printed" finished goods), as of the applicable Calculation
Date plus (2) the Seasonal Inventory Overadvance Amount as of
the applicable Calculation Date.
MINUS
(subtract from the sum of clauses (i) and (ii) above)
(iii) the sum of: (a) 100% of the face amount of all
standby Letters of Credit issued by Agent or covered by the
provisions of an LC Risk Participation Agreement
3
<PAGE> 4
which are outstanding at such date, (b) 45% of the face amount
of all documentary Letters of Credit issued by Agent or
covered by the provisions of an LC Risk Participation
Agreement which are outstanding at such date, (c) any reserves
for accrued and unpaid royalty payments established by Agent
and/or Lenders from time to time pursuant to Section 2.1(A)
hereof and based on the amount of such accrued and unpaid
royalty payments which are shown on Borrower's financial
statements, (d) all other reserves established by Agent and/or
Lenders from time to time pursuant to Section 2.1(A) hereof,
and (e) the FX Amount.
For purposes of clause (b)(i) above, the net amount of Eligible
Accounts or Eligible Dated Accounts, as the case may be, at any time shall be
the face amount of such Eligible Accounts or such Eligible Dated Accounts, as
the case may be, less any and all returns, rebates, discounts (which may, at
Agent's option, be calculated on shortest terms), credits, allowances or excise
taxes of any nature at any time issued, owing, claimed by Account Debtors,
granted, outstanding or payable in connection with such Account at such time.
For purposes of clause (b)(ii) above and the definition of `Seasonal
Inventory Overadvance Amount,' the value of Eligible Inventory on a date shall
be calculated on the basis of the lower of cost or market. Cost shall be
calculated on a first-in, first-out basis.
Without limiting Lenders' discretion to adjust advance rates from time
to time after the occurrence of a Default as provided above, Borrower
acknowledges that Lenders may from time to time before or after the occurrence
of a Default reduce the Inventory advance rate if Lenders determine that the
size mix of Borrower's finished goods has materially changed from size mix as of
the Closing Date."
"Existing Boston Revolving Credit Note - that certain Third Amended and
Restated Revolving Credit Note, dated September 29, 1997, in the original
principal amount of $28,840,000.00 executed by Borrower and payable to the order
of Boston."
"Existing Fleet Revolving Credit Note - that certain Third Amended and
Restated Revolving Credit Note, dated September 29, 1997, in the original
principal amount of $41,160,000.00 executed by Borrower and payable to the order
of Fleet."
"Revolving Credit Commitment - During the time period beginning June
30, 1998 and continuing through October 30, 1998, $75,000,000.00, and thereafter
$70,000,000.00. Fleet's maximum portion of the Revolving Credit Commitment
during the time period beginning June 30, 1998 and continuing through October
30, 1998 is $44,100,000.00, i.e., Fleet's Revolving Credit Commitment during the
time period beginning June 30, 1998 and continuing through October 30, 1998 is
$44,100,000.00. Beginning October 31, 1998 and continuing thereafter, Fleet's
maximum portion of the Revolving Credit Commitment is $41,160,000.00, i.e.,
Fleet's Revolving Credit Commitment during that time period is $41,160,000.00.
Boston's maximum portion of the Revolving Credit Commitment during the time
period beginning June 30, 1998, and continuing through October 30, 1998 is
$30,900,000.00, i.e. Boston's Revolving Credit Commitment during the time period
beginning on June 30, 1998 and continuing through October 30, 1998, is
$30,900,000.00. Beginning October 31, 1998, and continuing thereafter, Boston's
maximum portion of the Revolving Credit Commitment is $28,840,000.00 i.e.,
Boston's Revolving Credit Commitment during that time period is $28,840,000.00.
"Revolving Credit Notes - those certain Fourth Amended and Restated
Revolving Credit Notes, to be executed by Borrower on or about the date of the
Second Amendment, in favor of each Lender, to
4
<PAGE> 5
evidence Borrower's indebtedness to such Lender for its Revolving Credit
Percentage, the Fourth Amended and Restated Revolving Credit Note in favor of
Fleet to be in the form of Annex I attached to the Second Amendment, as the same
may be amended, renewed, extended, modified or restated from time to time, the
provisions of which are in amendment and restatement of, and in replacement for,
the provisions of the Existing Fleet Revolving Credit Note, and the Fourth
Amended and Restated Revolving Credit Note in favor of Boston to be in the form
of Annex II attached to the Second Amendment, as the same may be amended,
renewed, modified, extended or restated from time to time, the provisions of
which are in amendment and restatement of, and in replacement for, the
provisions of the Existing Boston Revolving Credit Note."
"Seasonal Inventory Overadvance Amount - during the period (but only
during the period) beginning June 30, 1998 and continuing through October 31,
1998, the lesser of (a) $7,000,000.00 or (b) 10% (or such lesser percentage as
Lenders may in their discretion determine from time to time after the occurrence
of a Default) of the value of the Eligible Inventory consisting of "blank"
finished goods inventory of Borrower at such date. Beginning November 1, 1998,
and continuing through March 31, 1999, the Seasonal Inventory Overadvance Amount
shall be $0.00. Beginning with calendar year 1999, and continuing through each
succeeding calendar year during the term of this Agreement, the Seasonal
Inventory Overadvance Amount shall be during the period (but only during the
period) beginning April 1 and continuing through September 30 of each such
calendar year the lesser of (a) $4,500,000 or (b) 10% (or such lesser percentage
as Lenders may in their discretion determine from time to time after the
occurrence of a Default) of the value of Eligible Inventory consisting of
"blank" finished goods inventory of Borrower at such date. Beginning October 1
of each such calendar year and continuing through March 31 of the following
year, the Seasonal Inventory Overadvance Amount shall be $0.00."
5.02 AMENDMENT TO SECTION 1.1 OF THE LOAN AGREEMENT; ADDITION OF
DEFINITION. Effective as of the effective date of this Agreement, Section 1.1 of
the Loan Agreement is hereby amended by adding thereto in alphabetical order the
following definition:
"Second Amendment - that certain Forbearance Agreement and
Second Amendment to Third Amended and Restated Loan and Security
Agreement, dated as of June 30, 1998, executed by Borrower, Lenders and
Agent."
5.03 AMENDMENT TO SUBSECTION 2.1(A) OF THE LOAN AGREEMENT. Effective as
of June 30, 1998, Subsection 2.1(A) of the Loan Agreement is amended by amending
and restating the fifth sentence of Subsection 2.1(A) to read in its entirety as
follows:
"Notwithstanding the foregoing provisions of this Section
2.1(A), Borrower and Lenders agree Agent shall have the right to
establish and/or eliminate reserves in such amounts, with respect to
such matters, as Agent shall in its sole discretion deem necessary or
appropriate, against the amount of Revolving Credit Loans which
Borrower may otherwise request under this Section 2.1(A), including,
without limitation, with respect to (i) price adjustments, damages,
unearned discounts, returned products or other matters for which credit
memoranda are issued in the ordinary course of Borrower's business;
(ii) shrinkage, spoilage and obsolescence of Inventory; (iii) slow
moving Inventory; (iv) other sums chargeable against Borrower's Loan
Account as Revolving Credit Loans under any section of this Agreement;
(v) tax liabilities and (vi) such other matters, events, conditions or
contingencies as to which Agent, in its sole discretion, determines
reserves should be established from time to time hereunder."
5
<PAGE> 6
5.04 ADDITION OF A NEW SECTION 2.11 TO THE LOAN AGREEMENT. Effective as
of June 30, 1998, a new Section 2.11 Structure of Credit Facility is hereby
added to the Loan Agreement, to read in its entirety as follows:
"2.11 Structure of Credit Facility. Each Borrower agrees and
acknowledges that the present structure of the credit facility detailed
in this Agreement is based in part upon the financial and other
information presently known to Agent and Lenders regarding each
Borrower, the organizational structure of Borrowers, and the present
financial condition of each Borrower. Each Borrower hereby agrees that
upon the occurrence of a Default, Agent shall have the right, in its
sole credit judgment, to require that any or all of the following
changes be made to this credit facility: (i) establish a separate
"borrowing base" for each Borrower, (ii) advance a Revolving Credit
Loan specifically to a specific Borrower, based on such Borrower's
availability under its own "borrowing base", (iii) restrict loans and
advances between Borrowers, (iv) establish separate lockbox and
dominion accounts for each Borrower, and (v) establish such other
procedures as shall be reasonably deemed by Agent to be useful in
tracking where Loans are made under this Agreement and the source of
payments received by Agent on such Loans."
5.05 AMENDMENT TO SUBSECTION 3.1(A) OF THE LOAN AGREEMENT. Effective as
of June 30, 1998, Subsection 3.1(A) of the Loan Agreement is hereby amended as
follows:
(a) The reference to the phrase "one and three-fourths percent
(1.75%)" is hereby deleted and substituted therefore is the phrase "two
and three fourths percent (2.75%)."
(b) The reference to the phrase "one-quarter percent (0.25%)"
is hereby deleted and substituted therefore is the phrase "one and
one-quarter percent (1.25%)."
5.06 AMENDMENT AND RESTATEMENT OF SUBSECTION 3.3(B) OF THE LOAN
AGREEMENT. Effective as of June 30, 1998, Subsection 3.3(B) of the Loan
Agreement is amended and restated to read in its entirety as follows:
"(B) At the effective date of any such termination by
Borrower, Borrower shall pay to Agent, for the benefit of Lenders, in
accordance with their respective Revolving Credit Percentage (in
addition to the then outstanding principal, accrued interest and other
charges owing under the terms of this Agreement and any of the other
Loan Documents), as liquidated damages for the loss of the bargain and
not as a penalty, an amount equal to (i) one and one-half percent
(1.5%) of the Average Daily Loan Balance for the one year period
preceding the date of termination if the termination occurs during the
period from June 30, 1998 to and including June 30, 1999, and (ii)
one-half of one percent (0.5%) of the Average Daily Loan Balance for
the one year period preceding the date of termination if the
termination occurs after June 30, 1999. No prepayment fee shall be
payable if the termination occurs on the last day of the Original Term
or any Renewal Term."
5.07 ACCOUNTS RECEIVABLE AND INVENTORY REPORTING. In addition to and
not in limitation of any other reporting requirements of Borrower under the Loan
Agreement, Borrower hereby agrees and acknowledges that Borrower is now required
(i) to report accounts receivable on a daily basis, (ii) to report inventory on
weekly basis, and (iii) to report ineligible accounts receivable and ineligible
inventory on a weekly basis, and that beginning on September 15, 1998, Borrower
will be required to report inventory on a daily basis.
6
<PAGE> 7
5.08 AMENDMENT TO SUBSECTION 9.1(J) (ii) OF THE LOAN AGREEMENT.
Effective as of June 30, 1998, Subsection 9.1(J)(ii) of the Loan Agreement is
hereby amended by deleting therefrom the phrase "forty-five (45)" and
substituting therefore the phrase "thirty (30)".
5.09 SUSPENSION OF COMPLIANCE WITH FINANCIAL COVENANT SET FORTH IN
SECTION 9.3 OF THE LOAN AGREEMENT. During the Forbearance, compliance with each
of the financial covenants set forth in Section 9.3 of the Loan Agreement is
hereby suspended. At the expiration of the Forbearance, the financial covenants
set forth in Section 9.3 of the Loan Agreement shall be reinstated.
5.10 FINANCIAL COVENANTS DURING FORBEARANCE PERIOD. During the
Forbearance, Borrower covenants that, unless otherwise consented to by Lenders
in writing, it shall:
(a) EBITDA. As of the end of each fiscal month of Borrower
ending closest to the dated indicated below, maintain EBITDA of not
less than the amount indicated below for the time period indicated
below:
<TABLE>
<CAPTION>
Relevant Time Period Amount
-------------------- ------
<S> <C>
(i) One month period ending July 4, 1998 (i) ($1,000,000)
(ii) Two month period ending August 8, 1998 (ii) $0.00 (zero dollars)
(iii) Three month period ending September 5, 1998 (iii) $2,500,000
(iv) Four month period ending October 3, 1998 (iv) $7,527,000
(v) Five month period ending November 7, 1998 (v) $10,580,000
</TABLE>
For the purposes of this Agreement, "EBITDA" shall mean for any fiscal
period of Borrower the sum of (A) Consolidated Adjusted Net Earnings from
Operations for such period, plus (B) Consolidated amortization expense and
Consolidated depreciation expense for such period (to the extent deducted in
calculating Consolidated Adjusted Net Earnings from Operations), plus (C)
Consolidated Interest Expense for such period (to the extent deducted in
calculating Consolidated Adjusted Net Earnings from Operations), plus (D)
Consolidated Tax Expense of Borrower for such period (to the extent deducted in
calculating Consolidated Adjusted Net Earnings from Operations).
(b) Minimum Daily Availability. At the end of each day during
the time period set forth below, maintain Availability of not less than
the amount indicated below during the time period indicated below:
<TABLE>
<CAPTION>
Relevant Time Period Amount
-------------------- ------
<S> <C>
(i) June 30, 1998 through September 29, 1998 (i) $0.00
(ii) September 30, 1998 through October 31, 1998 (ii) $5,000,000
(iii) November 1, 1998 through November 15, 1998 (iii) $7,500,000
(iv) November 16, 1998 through November 30, 1998 (iv) $10,000,000
</TABLE>
7
<PAGE> 8
For the purpose of this Agreement, "Availability" shall mean the amount
that Borrower is entitled to borrow from time to time as Revolving Credit Loans,
such amount being the difference derived when the sum of the principal amount of
the Revolving Credit Loans then outstanding (including any amounts which Agent
or any Lender may have paid for the account of Borrower pursuant to any of the
Loan Documents and which have not been reimbursed by Borrower) is subtracted
from the Borrowing Base.
ARTICLE VI
CONDITIONS PRECEDENT
6.01 CONDITIONS TO EFFECTIVENESS. Notwithstanding anything herein to
the contrary, the effectiveness of this Agreement is subject to the satisfaction
of the following conditions precedent, unless specifically waived in writing by
Lenders and Agent:
(a) Lenders shall have received each of the following, each of
which shall be in form and substance satisfactory to Lenders, in their
sole discretion:
(i) this Agreement, duly executed by Borrower,
together with the Consent, Ratification and Release duly
executed by Brazos Sportswear, Inc.;
(ii) (a) the Fourth Amended and Restated Revolving
Credit Note, in the form of Annex I attached hereto, duly
executed by Borrower, in favor of Fleet, and (b) the Fourth
Amended and Restated Revolving Credit Note, in the form of
Annex II attached hereto, duly executed by Borrower, in favor
of Boston;
(iii) the written opinion of Porter & Hedges, L.L.P.,
counsel to Borrower, regarding Borrower, the execution of this
Agreement, the other Loan Documents executed in connection
herewith, and the other transactions contemplated hereby, to
be in form and substance satisfactory to Lenders, in their
sole discretion;
(iv) a closing certificate signed by the chief
executive officer of Borrower, dated as of the date of this
Agreement, stating that (A) the representations and warranties
set forth in Section 8 of the Loan Agreement, as amended by
this Agreement, are true and correct as of such date, other
than for such representations and warranties which relate to a
specific date, (B) other than for the Existing Default,
Borrower is on such date in compliance with all the terms and
provisions set forth in the Loan Agreement, as amended by this
Agreement, and (C) on such date, other than for the Existing
Default, no Default or Event of Default has occurred or is
continuing, except for such Defaults or Events of Default as
have been specifically disclosed in writing by Borrower to
Agent;
(v) a company general certificate, certified by the
Secretary or Assistant Secretary of the Borrower,
acknowledging (A) that as to Brazos, the managers of Brazos
have met and have adopted, approved, consented to and ratified
resolutions which authorize the execution, delivery and
performance by Brazos of this Agreement and all other Loan
Documents to which Brazos is or is to be a party, and that as
to Morning Sun, the Board of Directors of Morning Sun has met
and adopted, approved, consented to and ratified resolutions
which authorize the execution, delivery and performance by
Morning Sun of this Agreement and all other Loan Documents to
which Morning Sun is or is to
8
<PAGE> 9
be a party and (B) the names of the officers of the Borrower
authorized to sign this Agreement and each of the other Loan
Documents to which the Borrower is or is to be a party
hereunder (including the certificates contemplated herein)
together with specimen signatures of such officers; and
(vi) such additional documents, instruments and
information as Lenders or their legal counsel may request.
(b) Other than for the Existing Default, No Default or Event
of Default shall have occurred and be continuing, unless such Default
or Event of Default has been specifically disclosed in writing by
Borrower to Agents.
(c) The representations and warranties contained herein and in
the Loan Agreement and the other Loan Documents, as each is amended
hereby, shall be true and correct as of the date hereof, as if made on
the date hereof, other than for such representations and warranties
which relate to a specific date.
(d) All limited liability company and corporate proceedings
taken in connection with the transactions contemplated by this
Agreement and all documents, instruments and other legal matters
incident thereto shall be satisfactory to Lenders and Agent and their
legal counsel.
In addition, the effectiveness of the Forbearance shall be subject to the
satisfaction of the conditions set forth in Section 6.02(a) through 6.02(c),
inclusive.
6.02 CONDITIONS TO CONTINUATION OF FORBEARANCE. In addition to and not
in limitation of any other provision of this Agreement, unless each of the
following conditions are and continue to be fully satisfied in a manner
satisfactory to Agent, at Agent's option, the Forbearance shall terminate (each
condition being separate and independent of each other condition, such that the
satisfaction of any one or more, or the waiver of satisfaction by Agent or
Lenders of any one or more, or the waiver of satisfaction by Agent or Lenders of
any one or more, shall not affect the absolute obligation of Borrower to satisfy
each separate condition):
(a) No Event of Default or Default (other than the Existing
Default) shall have occurred and be continuing.
(b) The representations and warranties contained in this
Agreement shall be true and correct.
(c) Borrower shall not be in default under any of the
provisions of this Agreement.
6.03 FAILURE OF CONDITION. The failure of any condition in this
Agreement to be satisfied shall constitute an Event of Default under the Loan
Agreement and a default under this Agreement, and upon such occurrence Agent
shall be entitled to terminate the Forbearance and each of Agent and Lenders
shall be entitled to exercise any and all of its rights and remedies available
under any of the Loan Documents.
9
<PAGE> 10
ARTICLE VII
NO WAIVER
7.01 Nothing contained herein shall be construed as a waiver by Agent
or any Lender of any covenant or provision of the Loan Agreement, the other Loan
Documents, this Agreement, or of any other contract or instrument between
Borrower and Agent and/or Lenders, and Agent's and/or any Lender's failure at
any time or times hereafter to require strict performance by Borrower of any
provision thereof shall not waive, affect or diminish any right of Agent and
Lenders to thereafter demand strict compliance therewith. Each of Agent and
Lenders hereby reserves all rights granted under the Loan Agreement, the other
Loan Documents, this Agreement and any other contract or instrument between
Borrower and Agent and/or Lenders. This Agreement is not to be construed as a
cure or forgiveness of the Existing Default.
ARTICLE VIII
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
8.01 RATIFICATIONS. The terms and provisions set forth in this
Agreement shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement and the other Loan Documents, and except as
expressly modified and superseded by this Agreement, the terms and provisions of
the Loan Agreement and the other Loan Documents are ratified and confirmed and
shall continue in full force and effect. Borrower and Agent and Lenders agree
that the Loan Agreement and the other Loan Documents, as amended hereby, shall
continue to be legal, valid, binding and enforceable in accordance with their
respective terms.
8.02 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Agent and Lenders (a) the execution, delivery and performance of
this Agreement and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite limited liability
company or corporate action on the part of Borrower and will not violate the
Articles of Incorporation or Bylaws of Morning Sun or the Certificate of
Formation or regulations of Brazos; (b) the representations and warranties
contained in the Loan Agreement, as amended hereby, and any other Loan Document
are true and correct on and as of the date hereof and on and as of the date of
execution hereof as though made on and as of each such date; (c) other than the
Existing Default, no Event of Default or Default under the Loan Agreement has
occurred and is continuing, unless such Event of Default or Default has been
specifically waived in writing by Lenders; and (d) other than the Existing
Defaults Borrower is in full compliance with all covenants and agreements
contained in the Loan Agreement and the other Loan Documents, as amended hereby.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in the Loan Agreement or any other Loan Document, including,
without limitation, any document furnished in connection with this Agreement,
shall survive the execution and delivery of this Agreement and the other Loan
Documents, and no investigation by Agent or Lenders or any closing shall affect
the representations and warranties or the right of Agent and Lenders to rely
upon them.
9.02 REFERENCE TO LOAN AGREEMENT. Each of the Loan Documents, including
the Loan Agreement and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Loan Agreement, as amended
10
<PAGE> 11
hereby, are hereby amended so that any reference in such Loan Documents to the
Loan Agreement shall mean a reference to the Loan Agreement, as amended hereby.
9.03 EXPENSES OF AGENT AND LENDERS. As provided in the Loan Agreement,
Borrower agrees to pay on demand all costs and expenses incurred by Agent and
Lenders in connection with the preparation, negotiation and execution of this
Agreement and the other Loan Documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including, without
limitation, the costs and fees of Agent's and each Lender's legal counsel, and
all costs and expenses incurred by Agent and Lenders in connection with the
enforcement or preservation of any rights under the Loan Agreement, as amended
hereby, or any other Loan Documents, including, without limitation, the costs
and fees of Agent's legal counsel and each Lender's legal counsel.
9.04 SEVERABILITY. Any provision of this Agreement held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
9.05 SUCCESSORS AND ASSIGNS. This Agreement is binding upon and shall
inure to the benefit of Agent, Lenders and Borrower and their respective
successors and assigns, except Borrower may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of Agent and
Lenders.
9.06 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
9.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by
Agent or Lenders to or for any breach of or deviation from any covenant or
condition by Borrower shall be deemed a consent to or waiver of any other breach
of the same or any other covenant, condition or duty.
9.08 HEADINGS. The headings, captions, and arrangements used in this
Agreement are for convenience only and shall not affect the interpretation of
this Agreement.
9.09 APPLICABLE LAW. THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF TEXAS.
9.10 FINAL AGREEMENT. THE LOAN DOCUMENTS, AS AMENDED HEREBY, REPRESENT
THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF
IN THE DATE THIS AGREEMENT IS EXECUTED. THE LOAN DOCUMENTS, AS AMENDED HEREBY,
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES, THERE ARE NOT UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY
PROVISION OF THIS AGREEMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED
BY BORROWER AND LENDER.
9.11 RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR
11
<PAGE> 12
NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF
ITS LIABILITY TO REPAY THE "OBLIGATIONS" OR TO SEEK AFFIRMATIVE RELIEF OR
DAMAGES OF ANY KIND OR NATURE FROM AGENT OR ANY LENDER. BORROWER HEREBY
VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES AGENT AND EACH LENDER,
ITS RESPECTIVE PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL
POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES,
AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY
ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AGREEMENT IS
EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST AGENT, ANY
LENDER, ITS RESPECTIVE PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS,
IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT,
VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY "LOANS",
INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING,
COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE
APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT OR
OTHER AGREEMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AGREEMENT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE> 13
Executed this 30th day of June, 1998, but effective for all purposes as
provided in Section 2.01 hereof.
BRAZOS SPORTSWEAR, L.L.C.
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
MORNING SUN, INC.
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
FLEET CAPITAL CORPORATION,
as Agent
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
FLEET CAPITAL CORPORATION,
in its individual capacity
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
BANKBOSTON, NA
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
13
<PAGE> 14
CONSENT, RATIFICATION AND RELEASE
The undersigned hereby consents to the terms of the within and
foregoing Forbearance Agreement and Second Amendment to Third Amended and
Restated Loan and Security Agreement ("Amendment"), confirms and ratifies the
terms of its guaranty agreement, and acknowledges that its guaranty agreement is
in full force and effect on the date executed, that it has no defense,
counterclaim, set-off or any other claim to diminish its liability under such
document, that its consent is not required to the effectiveness of the within
and foregoing document, and that no consent by it is required for the
effectiveness of any future amendment, modification, forbearance or other action
with respect to the Loans, the Collateral, or any Loan Documents. THE
UNDERSIGNED HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES
AGENT AND EACH LENDER, AND EACH OF ITS RESPECTIVE PREDECESSORS, AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS,
CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR
UNKNOWN, ANTICIPATED OR UNANTICIPATED, SUSPECTED OR UNSUSPECTED, FIXED,
CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART
ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE UNDERSIGNED MAY NOW
OR HEREAFTER HAVE AGAINST AGENT AND EACH LENDER, AND EACH OF ITS RESPECTIVE
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND
IRRESPECTIVE OR WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE AND ARISING FROM ANY "LOANS," INCLUDING,
WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING
OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE
EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE LOAN AGREEMENT, AS AMENDED HEREBY,
OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
BRAZOS SPORTSWEAR, INC.,
a Delaware corporation
By: ______________________________________
Name: ______________________________________
Title: ______________________________________
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> JUL-04-1998
<CASH> 1,310
<SECURITIES> 0
<RECEIVABLES> 43,000
<ALLOWANCES> 6,945
<INVENTORY> 74,305
<CURRENT-ASSETS> 131,639
<PP&E> 20,776
<DEPRECIATION> 6,321
<TOTAL-ASSETS> 200,330
<CURRENT-LIABILITIES> 95,550
<BONDS> 101,363
9,027
0
<COMMON> 4
<OTHER-SE> 7,917
<TOTAL-LIABILITY-AND-EQUITY> 200,330
<SALES> 107,254
<TOTAL-REVENUES> 107,254
<CGS> 89,095
<TOTAL-COSTS> 89,095
<OTHER-EXPENSES> 30,637
<LOSS-PROVISION> 549
<INTEREST-EXPENSE> 7,415
<INCOME-PRETAX> (19,875)
<INCOME-TAX> (3,740)
<INCOME-CONTINUING> (16,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,135
<EPS-PRIMARY> (3.75)
<EPS-DILUTED> (3.75)
</TABLE>
