1
Exhibit 99.1
CS CRABLE SPORTSWEAR
FINANCIAL STATEMENTS
AS OF
SEPTEMBER 27, 1997
TOGETHER WITH
AUDITORS' REPORT
2
Report of Independent Public Accountants
----------------------------------------
To the Board of Directors of
Brazos Sportswear, Inc.:
We have audited the accompanying balance sheet of CS Crable Sportswear
(a business acquired by Brazos Sportswear, Inc. effective September 29, 1997,
formerly a business of CS Crable Sportswear, Inc., a wholly-owned subsidiary of
The Midland Company) as of September 27, 1997, and the related statements of
operations, changes in intercompany to parent and cash flows for the period from
January 1, 1997 to September 27, 1997. These financial statements are the
responsibility of the management of Brazos Sportswear, Inc. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CS Crable Sportswear
as of September 27, 1997, and the results of its operations and its cash flows
for the period from January 1, 1997 to September 27, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 26, 1997
3
CS CRABLE SPORTSWEAR
BALANCE SHEET
AS OF SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash $ 285
Accounts receivable, net of allowances of $868 (Note 1(c)) 4,974
Inventory (Note 2(c)) 6,911
Prepaid expenses 51
--------
Total current assets 12,221
--------
PROPERTY AND EQUIPMENT, at cost (Note 2(d)):
Office equipment 2,386
Production equipment 3,352
Automobiles 40
--------
5,778
Less- accumulated depreciation (4,064)
--------
1,714
--------
Total assets $ 13,935
========
LIABILITIES AND INTERCOMPANY TO PARENT
ACCOUNTS PAYABLE $ 463
ACCRUED ROYALTIES AND LICENSE COMMITMENTS (Note 4) 283
ACCRUED ADVERTISING 277
OTHER ACCRUED LIABILITIES 1,173
--------
Total current liabilities 2,196
--------
COMMITMENTS
INTERCOMPANY TO PARENT (Note 3):
Intercompany 32,041
Retained deficit (20,302)
--------
11,739
--------
Total liabilities and intercompany to parent $ 13,935
========
The accompanying notes are an integral part
of these financial statements.
4
CS CRABLE SPORTSWEAR
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
NET SALES (Note 1(c)) $ 22,774
COST OF GOODS SOLD 20,515
WRITEDOWN OF INVENTORY TO LOWER
OF COST OR MARKET (Note 2(c)) 2,154
--------
Gross profit 105
--------
OPERATING EXPENSES:
Selling expenses 4,214
General and administrative expenses 1,650
Severance and other employee benefits (Note 1(b)) 1,292
Management Fee to Parent (Note 3) 170
--------
Total operating expenses 7,326
--------
Operating loss (7,221)
--------
OTHER EXPENSE (INCOME):
Interest expense to Parent (Note 3) 808
Other (23)
--------
Total other expense 785
--------
Loss before income taxes (8,006)
INCOME TAXES (Note 5) --
--------
Net loss $ (8,006)
--------
The accompanying notes are an integral part
of these financial statements.
5
CS CRABLE SPORTSWEAR
STATEMENT OF CHANGES IN INTERCOMPANY TO PARENT
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
RETAINED
INTERCOMPANY DEFICIT TOTAL
------------- ---------------- -------------
Balance at January 1, 1997 $ 28,656 $(12,296) $ 16,360
Net loss -- (8,006) (8,006)
Intercompany charges and borrowings
from Parent
15,630 -- 15,630
Intercompany payments to Parent (12,245) -- (12,245)
------------- ---------------- -------------
Balance at September 27, 1997 $ 32,041 $(20,302) $ 11,739
============= ================ =============
The accompanying notes are an integral part of
these financial statements.
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CS CRABLE SPORTSWEAR
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO SEPTEMBER 27, 1997
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,006)
Adjustments to reconcile net loss to net cash used in operating
activities-
Depreciation 603
Increase in accounts receivable (919)
Decrease in inventory 6,418
Increase in prepaid expenses (4)
Decrease in accounts payable and accrued expenses (1,362)
Net cash used in operating activities (3,270)
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (104)
Net cash used in investing activities (104)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in intercompany to Parent 3,385
Net cash provided by financing activities 3,385
-------
NET INCREASE IN CASH 11
CASH, beginning of year 274
-------
CASH, end of year $ 285
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 808
=======
The accompanying notes are an integral part
of these financial statements.
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CS CRABLE SPORTSWEAR
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
(1) Nature of Operations-
---------------------
(a) BASIS OF PRESENTATION--The accompanying financial statements
represent the financial position, results of operations and cash
flows of CS Crable Sportswear ("Crable"), which is comprised of
substantially all of the net assets and operations of CS Crable
Sportswear, Inc., a wholly-owned subsidiary of The Midland Company
("Midland" or the "Parent"). This presentation is provided to show
the continuing "business" of Crable, which was acquired by Brazos
Sportswear, Inc. ("Brazos"), effective on September 29, 1997 (see
(b) below).
References to Crable or CS Crable Sportswear included herein
denote the continuing business acquired by Brazos and do not
denote the legal entity, CS Crable Sportswear, Inc.
(b) ACQUISITION OF CRABLE BY BRAZOS--Effective on September 29, 1997,
Brazos acquired substantially all the assets and assumed certain
liabilities of Crable for total consideration of approximately
$13.236 million. Brazos also agreed to lease Crable's facility
from Midland for a ten-year period. Under the facility lease,
Brazos will make monthly installment payments totaling $1.1
million annually beginning one year from the effective date of the
acquisition.
A reconciliation of the net assets included in the accompanying
balance sheet to the purchase price paid by Brazos is as follows
(dollars in thousands):
Total Crable assets included in the accompanying balance
sheet $13,935
Less:
Assets not acquired by Brazos-
Cash (285)
Employee receivables (59)
Liabilities assumed by Brazos-
Vacation (55)
Commitments under license agreements (100)
Other (315)
Add: Transaction costs 115
-------
Total purchase price paid by Brazos $13.236
=======
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Certain former and continuing employees of Crable were provided
benefits by Midland related to the acquisition of Crable by
Brazos. Such benefits included severance, retention bonuses,
health and dental insurance, and out-placement services. In
addition, all Crable employees became fully vested in Midland's
qualified pension plan and 401(k) contribution plan. The
accompanying statement of operations includes costs of
approximately $1.3 million related to this matter. The
corresponding liability is included in the accompanying balance
sheet under the caption "Intercompany" because it is an obligation
of Midland.
Brazos and Midland have also agreed on a sharing and pro-ration of
certain costs such as certain salaries, utilities, rent and other
miscellaneous costs for an approximate 60-day period subsequent to
September 29, 1997.
(c) OPERATIONS--Crable designs, sources, embellishes and markets
officially licensed sports apparel for colleges, universities and
professional sports teams. Distribution channels for Crable's
products are major department store chains and specialty shops.
Crable had net sales of approximately $10 million to 1 customer in
the period ended September 27, 1997, representing 44% of total net
sales for that period. The accompanying balance sheet at September
27, 1997 includes $2.5 million due from such customer.
(2) Significant Accounting Policies-
-------------------------------
(a) MANAGEMENT'S USE OF ESTIMATES--The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(b) REVENUE RECOGNITION--Sales are recognized when finished garments
are shipped to customers from Crable's facility.
(c) INVENTORY--Crable's inventory is stated at cost utilizing the
first-in, first-out method. Cost includes the purchase price of
blank garments and embellishment costs. Crable's major classes of
inventory are as follows at September 27, 1997 (dollars in
thousands):
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Raw materials $7,327
Work-in-process 91
Finished goods 1,385
Supplies 262
Lower of cost or market reserves (2,154)
-----------
$6,911
===========
Lower of cost or market reserves reflect the difference between
estimated fair value, based on the purchase price paid by Brazos,
and Crable's historical cost.
(d) PROPERTY AND EQUIPMENT-- Property and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of
the respective assets using the straight-line method. The
estimated useful life for each major asset category is as follows:
Office equipment 5 years
Production equipment 7 years
Automobiles 5 years
(e) ADVERTISING--Advertising costs are expensed as incurred.
Advertising expense was approximately $920,000 in the period ended
September 27, 1997.
(3) Related Party Transactions-
--------------------------
(a) FACILITY LEASE--Crable historically leased office, warehouse and
manufacturing space from Midland. This lease required monthly
payments of approximately $33,000, exclusive of operation and
maintenance expenses, during 1997. The monthly lease payment
amount was determined by Midland based on Crable's operating
capacity within the facility. During the period ended September
27, 1997, Crable operated substantially below capacity. As a
result, the monthly lease payment amount is below estimated fair
value. Fair value is estimated to be $1.0 million annually based
on the lease negotiated between Brazos and Midland (see Note
1(b)). Total rent expense for this lease included in the
accompanying statement of operations is approximately $300,000.
(b) WORKING CAPITAL ADVANCES--Midland historically provided working
capital advances to Crable on an as-needed basis. The amount of
such advances outstanding at September 27, 1997 was approximately
$7,093,000. Such
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advances are included in the accompanying balance sheet under the
caption "Intercompany". Crable was required to pay interest to
Midland on the average outstanding balance of such advances at a
rate equal to Midland's short-term cost of funds, approximately
5.5% during 1997.
(c) ADMINISTRATIVE SERVICES--Midland historically provided certain
administrative services to Crable related to human resources and
corporate matters and charged Crable a management fee. The amount
of this management fee was approximately $170,000 for the period
ended September 27, 1997.
(d) EMPLOYEE BENEFITS--Crable employees have historically participated
in the employee benefit plans of Midland, including a qualified
pension plan and 401(k) contribution plan.
The qualified pension plan provides for payment of annual benefits
to substantially all employees upon retirement. Annual benefit
amounts are based on years of service and the employee's highest
compensation during five consecutive years of employment. Total
pension cost included in the accompanying statement of operations
is approximately $326,000, including approximately $180,000
related to all Crable employees becoming fully vested as a result
of the acquisition of Crable by Brazos.
The 401(k) contribution plan is for employees who meet certain age
and length of service requirements. Total cost for this plan
included in the accompanying statement of operations is
approximately $88,000.
(4) Royalty and License Commitments-
-------------------------------
Crable acquires rights to use trademarks, characters and logos on
specified types of garments under license agreements with third parties.
Pursuant to these license agreements, Crable pays royalties which
generally range between 9% and 10% of the sales price of the garments
sold. Royalty expense for Crable's license agreements was approximately
$994,000 in the period ended September 27, 1997.
Certain license agreements require that Crable guarantee a minimum
royalty payment. Guaranteed minimum royalty commitments under all
licensing agreements in place at September 27, 1997 are as follows:
1998 $595,000
1999 295,000
--------------
$890,000
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The accompanying balance sheet includes an allowance of approximately
$250,000 to cover 1998 and 1999 minimum royalty commitments which are not
anticipated to be recovered through licensed product sales.
(5) Income Taxes-
------------
Crable, through CS Crable Sportswear, Inc., has historically been
included in the consolidated tax return of Midland. Pursuant to a
tax-sharing agreement between CS Crable Sportswear, Inc. and Midland,
income taxes are allocated to Crable on the basis of a separate return
calculation. There is no current or deferred tax expense or benefit
recognized in the accompanying statement of operations because the
Company is in a loss position.