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 OCTOBER 3, 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 NOVEMBER 17, 1998)
<PAGE>
BRAZOS SPORTSWEAR, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
OCTOBER 3, 1998
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets (unaudited) as of
October 3, 1998 and December 27, 1997...................... 1
Consolidated Condensed Statements of Operations (unaudited)
for the forty weeks ended October 3, 1998 and thirty-nine
weeks ended September 27, 1997 and the thirteen weeks ended
October 3, 1998 and September 27, 1997..................... 3
Consolidated Condensed Statements of Cash Flows (unaudited)
for the forty weeks ended October 3, 1998 and the thirty-nine
weeks ended September 27, 1997............................. 4
Notes to Financial Statements (unaudited).................. 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................... 11
PART II - OTHER INFORMATION.................................................. 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF OCTOBER 3, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash .............................................. $ 1,306 $ 2,679
Accounts receivable, net of allowance for doubtful
accounts of $7,463 and $7,930, respectively ..... 52,127 41,989
Inventory (Note 2(b)) ............................. 70,113 55,551
Prepaid expenses .................................. 6,883 8,861
Income tax receivable (Note 2(e)) ................. 3,425 2,841
Deferred tax assets (Note 2(e)) ................... -- 4,649
--------- ---------
Total current assets ..................... 133,854 116,570
--------- ---------
PROPERTY, PLANT AND EQUIPMENT-net, at cost ........... 13,574 13,336
--------- ---------
INTANGIBLE ASSETS:
Costs in excess of fair value of assets acquired .. 50,869 50,869
Less- accumulated amortization .................... (2,593) (1,655)
--------- ---------
48,276 49,214
--------- ---------
Other ............................................. 7,528 7,661
Less- accumulated amortization .................... (2,398) (1,740)
--------- ---------
5,130 5,921
--------- ---------
Total intangible assets .................. 53,406 55,135
--------- ---------
OTHER ASSETS ......................................... 227 269
--------- ---------
$ 201,061 $ 185,310
========= =========
The accompanying notes are an integral part of these
consolidated condensed balance sheets.
1
<PAGE>
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF OCTOBER 3, 1998 AND DECEMBER 27, 1997
(DOLLARS IN THOUSANDS)
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- - ---------------------------------------------------------
CURRENT LIABILITIES:
Borrowings pursuant to revolving
credit agreement (Note 2(c)) .................... $ 71,045 $ 31,504
Current portion of other debt ..................... 926 947
Accounts payable .................................. 19,991 13,902
Accrued liabilities ............................... 14,303 16,976
--------- ---------
Total current liabilities ................ 106,265 63,329
--------- ---------
LONG-TERM OBLIGATIONS - LESS SCHEDULED MATURITIES:
Senior notes payable .............................. 99,336 99,277
Subordinated debt due to related parties .......... 1,500 1,500
Capital lease liability ........................... 429 795
--------- ---------
101,265 101,572
--------- ---------
DEFERRED INCOME TAXES PAYABLE (Note 2(e)) ............ -- 1,141
OTHER LIABILITIES .................................... 682 2,036
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK ... 9,263 8,577
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 15,000,000 shares
authorized and 4,421,752 and 4,412,655 shares
issued and outstanding at October 3, 1998 and
December 27, 1997, respectively ................. 4 4
Additional paid-in capital ........................ 11,339 11,312
Retained deficit .................................. (27,757) (2,661)
--------- ---------
Total shareholders' equity (deficit) ..... (16,414) 8,655
--------- ---------
$ 201,061 $ 185,310
========= =========
The accompanying notes are an integral part of these
consolidated condensed balance sheets.
2
<PAGE>
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
----------------------------------- -----------------------------------
OCTOBER 3, 1998 SEPTEMBER 27, 1997 OCTOBER 3, 1998 SEPTEMBER 27, 1997
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES .................................... $ 81,689 $ 105,185 $ 188,943 $ 196,290
COST OF GOODS SOLD ........................... 63,346 76,092 152,441 144,742
Gross profit ..................... 18,343 29,093 36,502 51,548
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and
administrative expenses ................. 15,711 17,616 44,463 37,426
Restructuring charge (Note 2(f)) .......... -- -- 745 --
Amortization of intangible
assets and non-compete
payments ................................ 589 638 1,729 1,228
Total operating
expenses ......................... 16,300 18,254 46,937 38,654
Operating income (loss) .......... 2,043 10,839 (10,435) 12,894
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense .......................... 4,345 3,466 11,760 6,400
Other, net ................................ 195 72 177 126
Income (loss) before
provision for income ........... --
taxes .......................... (2,497) 7,301 (22,372) 6,368
PROVISION FOR INCOME TAXES (Note
2(e)) ...................................... 5,777 2,920 2,037 2,547
Net income (loss)
before extraordinary
item ........................... (8,274) 4,381 (24,409) 3,821
----------- ----------- ----------- -----------
EXTRAORDINARY ITEM:
Loss on extinguishment of
debt, net of tax ......................... -- (192) -- (192)
Net income (loss) ............... (8,274) 4,189 (24,409) 3,629
----------- ----------- ----------- -----------
DIVIDENDS AND ACCRETION ON
PREFERRED STOCK ............................
Net income (loss) available for ........... 237 245 $ 687 $ 657
common shareholders ..................... (8,511) $ 3,944 25,096) $ 2,972
=========== =========== =========== ===========
PER SHARE DATA:
BASIC EARNINGS PER SHARE (Note
2(d))
Earnings (loss) per share ................. (1.93) $ .90 $ (5.68) $ .71
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........... 4,421,453 4,396,742 4,419,194 4,167,723
DILUTED EARNINGS PER SHARE
(Note2(d))
Earnings (loss) per share ................. (1.93) $ .70 $ (5.68) $ .62
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........... 4,421,453 5,945,462 4,419,194 4,814,233
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
3
<PAGE>
BRAZOS SPORTSWEAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FORTY WEEKS ENDED OCTOBER 3, 1998 AND THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $(24,409) $ 3,629
-------- --------
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation .......................................... 1,897 1,270
Amortization of intangible assets ..................... 1,729 1,228
Loss on sale of fixed assets .......................... 211 --
Increase in accounts receivable ....................... (10,138) (30,562)
Increase in inventory ................................. (14,562) (19,832)
Decrease (increase) in prepaid expenses ............... 1,978 (551)
Decrease in deferred income taxes ..................... 3,509 --
Decrease (increase) in income tax receivable .......... (584) 997
Decrease (increase) in other non-current assets ....... 43 (1,210)
Increase in accounts payable and accrued liabilities .. 2,233 22,449
-------- --------
Net cash used in operating activities ........... (38,093) (22,582)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Sun Sportswear, Inc., net of cash acquired ... -- (4,613)
Purchase of SolarCo., Inc., net of cash acquired ......... -- (29,198)
Purchase of Premier Sports Group, Inc., net of cash
acquired ............................................... -- (1,996)
Purchases of property, plant and equipment ............... (2,346) (856)
Net cash used in investing activities ........... (2,346) (36,663)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of senior notes ....................... -- 99,240
Net borrowings (repayments) pursuant to revolving credit
agreement .............................................. 39,541 (10,942)
Borrowings of long-term debt pursuant to credit agreement -- 1,000
Repayments of long-term debt pursuant to credit agreement -- (12,200)
Repayment of subordinated debt ........................... -- (15,093)
Repayment of capital lease obligations and industrial
revenue bonds .......................................... (327) (366)
Payments made under non-compete agreements ............... (175) (133)
Payments for deferred financing costs .................... -- (3,891)
Issuance of common stock ................................. 27 100
Issuance of preferred stock and related stock purchase
warrants ............................................... -- 2,000
-------- --------
Net cash provided by financing activities ....... 39,066 59,715
-------- --------
NET INCREASE (DECREASE) IN CASH ............................. (1,373) 470
CASH AT BEGINNING OF PERIOD ................................. 2,679 561
-------- --------
CASH AT END OF PERIOD ....................................... $ 1,306 $ 1,031
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 14,231 $ 4,455
Cash paid for income taxes (refunds received) ............ (870) 1,546
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Payments of PIK dividends and accretion on preferred stock 687 657
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
4
<PAGE>
BRAZOS SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF OCTOBER 3, 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 forty week period ended October
3, 1998 reflect the results of operations of the Company. The
accompanying historical consolidated condensed financial statements of
Brazos include the results of operations of acquisitions completed in
1997 from the effective date of each 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 or circumstances have occurred that
indicate that the amounts of intangible assets or deferred tax assets
may not be realizable. As discussed in Part 1 Item 2, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the Company has suffered significant operating losses in
the current fiscal year and has a net shareholder's deficiency. The
Company has been informed by its independent accountants that their
auditors report for the current fiscal year will likely include an
explanatory fourth paragraph that calls into question the Company's
ability to continue as a going concern.
5
<PAGE>
(b) INVENTORIES--Inventories are comprised of:
OCTOBER 3, DECEMBER 27,
INVENTORY CATEGORY METHOD 1998 1997
-------------------------- ------- ---------- ----------
Raw Materials LIFO $ 2,406 $ 3,605
Finished Goods LIFO 15,276 12,725
---------- ----------
17,682 16,330
Less--LIFO reserve (182) (182)
---------- ----------
Total LIFO 17,500 16,148
---------- ----------
Raw Materials FIFO 33,337 24,663
Work-in-Process FIFO 4,853 5,926
Finished Goods FIFO 14,423 8,814
---------- ----------
Total FIFO 52,613 39,403
---------- ----------
Total inventory $ 70,113 $ 55,551
========== ==========
Finished goods on a LIFO basis include blank garments of $12.7 million
and $11.3 million at October 3, 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 1.50%. 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 maintain minimum daily amounts of availability under the
line of credit and to achieve certain levels of adjusted earnings
before interest, taxes, depreciation and amortization ("EBITDA") on a
monthly basis. As of October 3, 1998, the Company was not in compliance
with the EBITDA or minimum daily availability covenants. On November
17, 1998, the senior lenders agreed to waive the default. Borrowings
pertaining to the Credit Facility are classified as current liabilities
as of October 3, 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 and thirty-nine weeks ended September 27, 1997:
6
<PAGE>
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
Per share amounts
-------------------------------
Primary EPS as reported $ .77 $ .62
-------------- ----------------
Effect of SFAS No. 128 .13 .09
-------------- ----------------
Basic EPS as restated $ .90 $ .71
============== ================
Fully Diluted EPS as $ .70 $ .62
reported
-------------- ----------------
Effect of SFAS No. 128 - -
-------------- ----------------
$ $
Diluted EPS as restated .70 .62
============== ================
Basic earnings per share was 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 forty weeks ended October 3, 1998 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.
FOR THE THIRTEEN WEEKS ENDED
OCTOBER 3, 1998
------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
------------------------------------
(000's Omitted)
Net loss $ (8,274)
Less: dividends and accretion on
preferred stock (237)
----------
BASIC AND DILUTED EARNINGS PER
SHARE
Loss available to common
shareholders $ (8,511) 4,421,453 $(1.93)
=========== ========== =========
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997
-----------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
------------------------------------
(000's Omitted)
Net income before extraordinary
item ........................ $ 4,381 -- --
Less: dividends and accretion on
preferred stock ............. (245) -- --
BASIC EARNINGS PER SHARE ...... --
Income available to common
shareholders before
extraordinary item .......... 4,136 4,396,742 $.94
Extraordinary loss ............ (192) -- (.04)
Income available to common .... -- --
shareholders ................ 3,944 4,396,742 .90
--------- --------- ----
ADJUSTMENTS TO RECONCILE TO
DILUTED EARNINGS PER SHARE:
Add: extraordinary loss ....... 192 -- --
Add: dividends and accretion on
preferred stock ............. 245 -- --
Effect of dilutive securities
Options ..................... -- 290,525 --
Warrants .................... -- 240,197 --
Conversion of preferred stock -- 881,634 --
Convertible debt ............ -- 136,364 --
----
DILUTED EARNINGS PER SHARE
Income available to common
shareholders before
extraordinary item .......... 4,381 5,945,462 .74
Extraordinary loss ............ (192) -- (.04)
Income available to common
shareholders ................ $ 4,189 5,945,462 $.70
========= ========= ====
<PAGE>
FOR THE FORTY WEEKS ENDED OCTOBER 3, 1998
-----------------------------------------
INCOME PER-SHARE
(000's Omitted) SHARES AMOUNT
--------------- ----------- -------
Net loss ............................... $ (24,409)
Less: dividends and accretion on
preferred stock ...................... (687)
BASIC AND DILUTED EARNINGS PER SHARE
Loss available to common
shareholders ......................... $ (25,096) 4,419,194 $ (5.68)
--------------- ----------- -------
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, 1997
------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
------------------------------------
(000's Omitted)
Net income before extraordinary
item ..................... $ 3,821 -- --
Less: dividends and accretion on
preferred stock .......... (657) -- --
BASIC EARNINGS PER SHARE
Income available to common
shareholders before
extraordinary item ....... 3,164 4,167,723 $ .76
Extraordinary loss ......... (192) -- (.05)
---------- -------
Income available to common
shareholders ............. 2,972 4,167,723 .71
---------- ----------- -------
ADJUSTMENTS TO RECONCILE TO
DILUTED EARNINGS PER SHARE:
Add: extraordinary loss .... 192 -- --
Effect of dilutive securities
Options .................. -- 301,650 --
Warrants ................. -- 245,959 --
Convertible debt ......... -- 98,901 --
DILUTED EARNINGS PER SHARE
Income available to common
shareholders before
extraordinary item ....... 3,164 4,814,233 .66
Extraordinary loss ......... (192) (.04)
---------- -------
Income available to common
shareholders ............. $ 2,972 4,814,233 $ .62
========== ========= =======
Earnings (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) INCOME TAXES--In the third quarter of 1998, a valuation allowance of
approximately $5.8 million was provided because of uncertainties
relating to the realizability of the Company's net deferred tax asset
through future operations. The net deferred tax asset consists
primarily of a net operating loss carryforward which can be carried
forward and used to reduce future taxable income through 2013. At
October 3, 1998, an income tax receivable of approximately $3.4 million
reflects federal and state refunds of approximately $1.4 million for
1997 overpayments of estimated income taxes as well as utilization of
approximately $5.6 million of current net operating losses to offset
taxable income from prior years as loss carryback claims.
(f) 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
8
<PAGE>
into one existing facility. Total charges incurred from the inception
of this restructuring plan are $6.4 million.
(g) 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 for making operating decisions and assessing
performance. Reportable segments can be 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.
(h) 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
9
<PAGE>
$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'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 WEEKS THIRTY-NINE
ENDED WEEKS ENDED
------------------------------------
SEPTEMBER 27, 1997 SEPTEMBER 27,1997
------------------------------------
<S> <C> <C>
(000's omitted except per share amounts)
Net sales ..................................... $ 117,758 $ 249,489
Net income (loss) ............................. 2,460 (2,603)
Income (loss) available to common
shareholders ................................ 2,237 (3,258)
Basic earnings (loss) per share ............... $ .51 $ (.74)
Diluted earnings (loss) per share ............. $ .41 $ (.74)
</TABLE>
(4) SIGNIFICANT CUSTOMERS-
Brazos had net sales of $51.5 million to two customers for the forty week
period ended October 3, 1998 and $28.5 million to one customer for the
thirty-nine week period ended September 27, 1997. These amounts represented
27% and 15% of total net sales during the forty week period ended October
3, 1998 and the thirty-nine week period ended September 27, 1997,
respectively. The accompanying consolidated condensed balance sheets
include accounts receivable of $19.9 million and $11.7 million at October
3, 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.
10
<PAGE>
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 October 3, 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 sold its "Red Fox" athletic uniform business for cash
consideration of $1.2 million in the third quarter of 1998.
The consolidation of manufacturing facilities has caused operational
inefficiencies at the Cincinnati Facility, which together with lower than
expected revenues at the Company's other facilities, have resulted in a net loss
of $24.4 million for the forty week period ended October 3, 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
11
<PAGE>
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.
Beginning in the second quarter of fiscal 1998, the Company began
aggressively addressing the operational problems resulting from the
Restructuring Plan. As a result, at the Cincinnati Facility, (i) production
rates and quality have improved, (ii) product shipment performance has improved,
(iii) charge backs/returns have decreased 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, improved market conditions and
increased operating efficiencies will be required to return the facility to
profitable operations.
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>
OCTOBER 3, 1998 SEPTEMBER 27, 1997 OCTOBER 3, 1998 SEPTEMBER 27, 1997
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................. 77.5% 72.3% 80.7% 73.7%
----- ----- ----- -----
Gross profit ............... 22.4% 27.7% 19.3% 26.3%
Operating expenses,
excluding restructuring
charge ............................. 20.0% 17.4% 24.4% 19.7%
Restructuring charge ............... -- -- .4% --
----- ----- ----- -----
Operating income (loss) .... 2.5% 10.3% (5.5%) 6.6%
Other expense (income)
Interest expense ........... 5.3% 3.3% 6.2% 3.3%
Other, net ................. .2% .1% .1% .1%
-----
Income (loss) before
provision for income taxes ......... (3.1%) 6.9% (11.8%) 3.2%
Provision for income taxes ......... 7.1% 2.8% 1.1% 1.3%
-----
Net income (loss) before
extraordinary item ................. (10.1%) 4.2% (12.9%) 1.9%
Extraordinary loss on
extinguishment of debt, net
of tax ............................. -- (.2%) -- (.1%)
----- ----- ----- -----
Net income (loss) .................. (10.1%) 4.0% (12.9%) 1.8%
===== ===== ===== =====
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 3, 1998 COMPARED WITH THE THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1997
The Company's net sales decreased approximately $23.5 million, or 22.3%,
from $105.2 million in 1997 to $81.7 million in 1998. Sales at all facilities
were adversely impacted by the overall weakness in the retail decorated apparel
industry. In addition, sales from the Cincinnati Facility's business decreased
from $33.3 million in the prior period to $21.6 million in the current period as
a result of (i) the disruption in operations resulting from implementation of
the Restructuring Plan including reductions in productivity resulting from an
insufficient number of available, experienced manufacturing personnel, (ii) late
deliveries of specialized products from suppliers which hindered the Company's
ability to fulfill sales commitments to retailers, (iii) reduced product orders
from its customers due to previous delays in product shipments and adverse
market conditions and (iv) lower than normal sales prices due to efforts to
dispose of excess inventory.
Brazos' gross profit decreased $10.8 million, or 37.0%, from $29.1 million
in 1997 to $18.3
12
<PAGE>
million in 1998. Overall gross profit margin decreased to 22.4% in 1998 from
27.7% in 1997, primarily as a result of competitive pressures in the mass
merchant segment of the Company's customer base and overall soft demand from the
Company's mid-tier customer base. As a result of lower than expected sales, the
Company has excess inventory levels in its Cincinnati facility. To address this
issue, the Company identified excess inventory items and has initiated a plan to
dispose of these items by the end of 1998. To date, these sales resulted in
lower gross profit margins compared to sales made in the ordinary course.
Operating expenses decreased $2.0 million, or 10.7%, from $18.3 million in
1997 to $16.3 million in 1998. The decrease in operating expenses was directly
attributable to the decrease in sales volume, which resulted in a $1.7 million
decrease in royalty and commission expense. In addition, the Company implemented
a cost savings plan in July, which resulted in the elimination of non-essential
selling and administrative positions at several facilities as well as salary
reductions for certain management personnel at those facilities. The plan is
expected to save approximately $2.0 million annually. As a percentage of sales,
operating expenses increased from 17.4% in 1997 to 20.0% in 1998. This increase
principally relates to reduced sales volume resulting from the factors described
above.
Interest expense increased $.9 million, or 25.4%, from $3.5 million in
1997 to $4.3 million in 1998. The increase was a result of increased borrowings
under the Company's credit facility to fund the Company's greater working
capital needs in connection with fiscal 1998 operating losses.
Income tax expense of $5.8 million reflects the provision for a valuation
allowance for all deferred tax assets including current net operating losses,
which can only be realized through future earnings of the Company. Due to the
Company's significant losses in 1998 and anticipated losses in the near future,
management concluded that there was considerable uncertainty as to the
realizability of any deferred tax assets, which could only be realized through
future taxable income. Therefore, as of October 3, 1998, only tax assets which
can be realized either through refunds of overpayments or loss carryback claims
are reflected on the balance sheet. The Company expects to utilize approximately
$5.6 million of current net operating losses as state and federal carryback
claims to offset taxable income from prior years. The Company expects to receive
refunds from its loss carryback claims of approximately $2.0 million. In
addition, the Company has filed for approximately $1.4 million of federal and
state income tax refunds for 1997 estimated tax overpayments, which it expects
to receive in the fourth quarter of 1998.
FORTY WEEKS ENDED OCTOBER 3, 1998 COMPARED WITH THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 27, 1997
The Company's net sales decreased approximately $7.3 million, or 3.7%,
from $196.3 million in 1997 to $188.9 million in 1998. Sales at all facilities
were adversely impacted by the overall weakness in the retail decorated apparel
industry. In addition, sales were significantly less than expected in the
Cincinnati Facility due to (i) the disruption in operations resulting from
implementation of the Restructuring Plan including reductions in productivity
resulting from an insufficient number of available, experienced manufacturing
personnel, (ii) late deliveries of specialized products from suppliers which
hindered the Company's ability to fulfill sales commitments to retailers, (iii)
increased levels of product returns and allowances due to the failure to meet
customer performance expectations, (iv) reduced product orders from its
customers due to previous delays in product shipments and adverse market
conditions and (v) lower than normal sales prices due to efforts to dispose of
excess inventory.
Brazos' gross profit decreased $15.0 million, or 29.2%, from $51.5 million
in 1997 to $36.5
13
<PAGE>
million in 1998. Overall gross profit margin decreased to 19.3% in 1998 from
26.3% in 1997, primarily as a result of increased costs associated with the
Restructuring Plan such as third-party contract manufacturing and high levels of
product returns and allowances due to the failure to meet customer performance
expectations. Gross margins were also unfavorably impacted as a result of
competitive pressures in the mass merchant segment of the Company's customer
base and overall soft demand from the Company's mid-tier customer base. As a
result of lower than expected sales, the Company has excess inventory levels in
its Cincinnati facility. To address this issue, the Company identified excess
inventory items and has initiated a plan to dispose of these items by the end of
1998. To date, these sales resulted in lower gross profit margins compared to
sales made in the ordinary course.
Operating expenses increased $8.3 million, or 21.4%, from $38.7 million in
1997 to $46.9 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 19.7% in 1997 to 24.8% in 1998. This increase
principally relates to reduced sales volume resulting from the factors described
above.
Interest expense increased $5.4 million, or 83.8%, from $6.4 million in
1997 to $11.8 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 the Company's credit facility to fund the Company's greater
working capital needs in connection with fiscal 1998 operating losses and the
acquisitions made by the Company in 1997.
Income tax expense of $2.0 million reflects the provision for a valuation
allowance for all deferred tax assets including current net operating losses,
which can only be realized through future earnings of the Company. Due to the
Company's significant losses in 1998 and anticipated losses in the near future,
management concluded that there was considerable uncertainty as to the
realizability of any deferred tax assets, which could only be realized through
future taxable income. Therefore, as of October 3, 1998, only tax assets which
can be realized either through refunds of overpayments or loss carryback claims
are reflected on the balance sheet. The Company expects to utilize approximately
$5.6 million of current net operating losses as state and federal loss carryback
claims to offset taxable income from prior years. The Company expects to receive
refunds from its loss carryback claims of approximately $2.0 million. In
addition, the Company has filed for approximately $1.4 million of federal and
state income tax refunds for 1997 estimated tax overpayments, which it expects
to receive in the fourth quarter of 1998.
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 principal
and/or interest payments, including those under the Credit Facility (defined
below) and 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 (the "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, subject to various other
reserves established from time to time by the lenders. Interest on the line of
credit is payable at prime plus 1.50%. 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.
14
<PAGE>
During the first quarter of fiscal 1998, 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 the Secured Lenders amended the Credit Facility to include a
forbearance agreement (the "Forbearance Agreement") which provides for a waiver
of the covenant non-compliance. The amended Credit Facility increased aggregate
available borrowings from $70 million to $75 million, subject to collateral
limitations. Under the Forbearance Agreement, the Secured Lenders agreed to
refrain from exercising their rights and remedies under the Credit Facility as a
result of certain existing defaults through November 30, 1998. The Forbearance
Agreement requires the Company to maintain minimum daily amounts of availability
under the line of credit and to achieve certain levels of adjusted earnings
before interest, taxes, depreciation and amortization ("EBITDA") for monthly
periods ending in July through November 1998. The Company's required minimum
EBITDA and actual adjusted EBITDA for the relevant time periods are set forth
below:
REQUIRED EBITDA ACTUAL
TIME PERIOD UNDER FORBEARANCE AGREEMENT* EBITDA*
----------- ---------------------------- -------
One month period ending
July 4, 1998 ($1.0) $0.53
Two month period ending
August 8, 1998 $0.0 $0.78
Three month period ending
September 5, 1998 $2.5 $1.91
Four month period ending
October 3, 1998 $7.5 $3.41
*Dollars in millions
The Company is in violation of both the EBITDA covenant for the periods ending
September 5, 1998, and October 3, 1998 and the minimum daily availability
covenant as of October 3, 1998. On November 17, 1998, the Secured Lenders agreed
to waive such defaults. Unless the Company is able to extend the Forbearance
Agreement beyond November 30, 1998 (and the Company gives no assurances that
such extension will be obtained), the Secured Lenders may exercise all of their
rights and remedies under the Credit Facility, which include ceasing additional
advances under the revolving line of credit and foreclosing on collateral
securing the loans, which consists of all of the Company's inventory and
accounts receivable. If the Secured Lenders take any of these actions, the
Company's business will be materially and adversely impacted, and it likely
would be unable to continue normal operations unless it seeks protection from
its creditors under federal bankruptcy laws.
In light of the Company's losses through the period ended October 3, 1998,
and the existing defaults under the Credit Facility, the Company does not expect
to have funds available to make the next interest payment on the Notes in the
aggregate amount of $5.25 million, which is due January 1, 1999. If such a
payment default is not cured within 30 days, subject to the provisions of the
Indenture, the trustee or the note holders will have the right to declare the
entire principal amount of the Notes, $100 million, together with accrued and
unpaid interest, immediately due and payable. If the obligations under the Notes
are accelerated, the Company's business will be materially and adversely
impacted, and
15
<PAGE>
as a result, the Company may seek protection under federal bankruptcy laws or be
subject to an involuntary bankruptcy or other insolvency proceeding.
As a result of the Company's financial performance, on November 3, 1998,
the Company engaged BT Alex. Brown, Incorporated (the "Financial Advisor") to
provide advice to the board of directors on a possible reorganization,
restructuring, or recapitalization of the Company. The Financial Advisor will
review and analyze the Company's business, operations and financial condition,
in the context of various transactions including, among other things,
negotiations with the Secured Lenders, a modification or restructuring of the
Notes, the structure of potential investments from strategic or financial
partners, possible sales of assets or business units of the Company, and
negotiations with other stakeholders.
With the assistance of the Financial Advisor, the Company is continuing to
review all aspects of its business and capital structure with the objective of
restructuring the Company such that it can operate profitably given current
sales levels and industry conditions. A restructuring of the Company likely will
require additional equity or debt financing, which 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
substantially dilute the interests of the Company's stockholders. In addition,
management will continue to address operating difficulties at the Cincinnati
Facility, while specifically focusing on the profit potential of the licensed
sportswear business generally and the viability of certain product licenses. Of
the Company's operating loss of $10.4 million for the forty weeks ended October
3, 1998, approximately $8.3 million is attributable to operations at the
Cincinnati Facility, which produces substantially all of the Company's licensed
sportswear.
If the Company is unable to timely refinance or restructure the
outstanding indebtedness under the Credit Facility and the Notes, and no
assurance is given that any refinancing or restructuring will occur, the Company
will have insufficient liquidity to satisfy those obligations if they are
accelerated. Under these circumstances, the Company's operations and financial
condition will be materially and adversely affected, and it may seek protection
from its creditors under federal bankruptcy laws.
The Company has been informed by its independent accountants that their
auditors report for the current fiscal year will likely include an explanatory
fourth paragraph that calls into question the Company's ability to continue as a
going concern.
As of October 3, 1998, Brazos had an aggregate borrowing base of $74.2
million, based on existing collateral, under its Credit Facility. Of its
borrowing base, $2.5 million remained unused at October 3, 1998.
Brazos used $38.1 million of cash from operating activities in 1998 versus
cash used for operating activities in 1997 of $22.6 million. Contributing to the
use of cash were; (i) a net loss of $24.4 million and (ii) working capital
investments of $17.6 million, offset by depreciation and amortization of $3.6
million. Working capital investments consisted primarily of increases in
inventory and accounts receivable. Due to the seasonable nature of the decorated
apparel business, the Company purchased inventory to support higher sales levels
in the third and fourth quarters. As a result of higher sales levels in the
third quarter, accounts receivables increased.
The Company incurred capital expenditures net of disposals of $2.3 million
in 1998 and $0.9 million in 1997. Capital expenditures consisted primarily of
computer hardware and software, embroidery equipment and leasehold improvements
related to the consolidation of facilities into the Cincinnati Facility.
16
<PAGE>
Financing activities provided $39.1 million of cash in 1998 principally
through net borrowings under existing credit facilities. In 1997, financing
activities provided $59.7 million of cash principally through the issuance of
$99.2 million of Notes. Proceeds from the Notes were used to repay a portion of
the Company's existing credit facility as well as existing subordinated debt and
deferred financing costs associated with the Notes.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and machinery with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
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. Operating software refers to systems that are commonly
thought of as Information Technology ("IT") systems, including accounting, data
processing, invoicing, purchasing and manufacturing resource planning. The
software package being implemented is Year 2000 compliant. The Company is
implementing the new software in phases according to location and expects the
process to be complete by the end of the third quarter of fiscal 1999. In
addition, the Company has developed a multi-phase plan to resolve other
potential Year 2000 problems associated with IT systems not covered by the new
operating software as well as non-IT systems such as alarm systems, fax machines
or other miscellaneous systems. The plan consists of the following phases:
Phase I: Initial IT system identification and assessment
Phase II: Remediation and testing regarding hardware infrastructure
Phase III Remediation and testing regarding desktop software
Phase IV Identification and assessment of other imbedded technology systems
Phase V Upgrades and remediation for other imbedded technology systems
Phase VI Upgrade to telephone and voicemail systems
Phase VII Electronic data interchange conversions
Phase VIII Development of business continuation plan
With the exception of Phase I, which is complete, the Company is in process of
completing all remaining phases of the plan. Completion of the plan is expected
by the end of the second quarter of fiscal 1999. Costs associated with this plan
are expected to be less than $.5 million. The Company has not incurred
significant costs to date related to this plan.
Brazos believes that its internal computer software and systems will not
experience significant disruption in connection with the Year 2000 issue.
However, there can be no assurance that a third-party vendor's failure to
resolve the Year 2000 issue would not have an adverse effect on the Company. In
particular, if Brazos' internal computer software and systems or those of a
third-party vendor experience any significant disruption in connection with the
Year 2000 issue, such disruption could affect the Company's ability to conduct
business and may have a material adverse effect on operations. Presently, the
Company has not developed an alternative business continuation plan.
17
<PAGE>
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
seasonal nature of apparel sales will continue in future periods.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form10-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>
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the first quarter of fiscal 1998, 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 the Secured Lenders amended the Credit Facility to include a
forbearance agreement (the "Forbearance Agreement") which provides for a waiver
of the covenant non-compliance. The amended Credit Facility increased aggregate
available borrowings from $70 million to $75 million, subject to collateral
limitations. Under the Forbearance Agreement, the Secured Lenders agreed to
refrain from exercising their rights and remedies under the Credit Facility as a
result of certain existing defaults through November 30, 1998. The Forbearance
Agreement requires the Company to maintain minimum daily amounts of availability
under the line of credit and to achieve certain levels of adjusted earnings
before interest, taxes, depreciation and amortization ("EBITDA") for monthly
periods ending in July through November 1998. The Company is in violation of
both the EBITDA covenant for the periods ending September 5, 1998, and October
3, 1998 and the minimum daily availability covenant as of October 3, 1998. On
November 17, 1998, the Secured Lenders agreed to waive such defaults. Unless the
Company is able to extend the Forbearance Agreement beyond November 30, 1998
(and the Company gives no assurances that such extension will be obtained), the
Secured Lenders may exercise all of their rights and remedies under the Credit
Facility, which include ceasing additional advances under the revolving line of
credit and foreclosing on collateral securing the loans, which consists of all
of the Company's inventory and accounts receivable. If the Secured Lenders were
to take any of these actions, the Company's business will be materially and
adversely impacted, and it likely would be unable to continue normal operations
unless it seeks protection from its creditors under federal bankruptcy laws.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 9, 1998, the Company held its annual meeting of stockholders,
the purpose of which was to approve (i) the election of the nominees as Class
III directors of the Company and (ii) an amendment to the Company's 1997
Incentive Plan. The results of the votes were as follows:
ELECTION OF DIRECTORS
NUMBER OF
NUMBER OF SHARES NUMBER OF
SHARES VOTED SHARES
NAME OF NOMINEE VOTED FOR AGAINST ABSTAINED
--------------- --------- ------- ---------
Class III Directors:
Robert C. Klein...... 4,624,172 20 5,920
------------- ------------- -------------
Michael S. Chadwick.. 4,624,172 170 5,920
------------- ------------- -------------
NUMBER OF
NUMBER OF SHARES NUMBER OF
SHARES VOTED SHARES
VOTED FOR AGAINST ABSTAINED
--------- ------- ---------
APPROVAL OF AMENDMENT TO
THE COMPANY'S 1997
INCENTIVE PLAN.... 4,659,281 8,720 540
------------- ------------- -------------
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K. None.
20
<PAGE>
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
Corporate Controller and Chief Accounting Officer
DATE: November 17, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM OCTOBER 3, 1998 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 1,306
<SECURITIES> 0
<RECEIVABLES> 59,590
<ALLOWANCES> 7,463
<INVENTORY> 70,113
<CURRENT-ASSETS> 133,854
<PP&E> 20,175
<DEPRECIATION> 6,601
<TOTAL-ASSETS> 201,061
<CURRENT-LIABILITIES> 106,265
<BONDS> 101,265
9,263
0
<COMMON> 4
<OTHER-SE> (16,418)
<TOTAL-LIABILITY-AND-EQUITY> 201,061
<SALES> 188,943
<TOTAL-REVENUES> 188,943
<CGS> 152,441
<TOTAL-COSTS> 152,441
<OTHER-EXPENSES> 46,937
<LOSS-PROVISION> 624
<INTEREST-EXPENSE> 11,760
<INCOME-PRETAX> (22,372)
<INCOME-TAX> 2,037
<INCOME-CONTINUING> (24,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,409)
<EPS-PRIMARY> (5.68)
<EPS-DILUTED> (5.68)
</TABLE>
