SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995 or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-2782
SIGNAL APPAREL COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Indiana 62-0641635
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200A Manufacturers Road, Chattanooga, Tennessee 37405
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 756-8146
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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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 3, 1995
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Common Stock 10,077,826 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, Dec. 31,
1995 1994
--------- ---------
(Unaudited)
Assets
Current Assets:
Cash $ 1,061 $ 303
Accounts receivable, net 7,921 6,713
Inventories 29,245 33,350
Prepaid expenses and other 1,578 1,135
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Total current assets 39,805 41,501
Property, plant and equipment, net 15,883 16,810
Goodwill, net 10,680 10,786
Other assets 298 351
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Total assets $ 66,666 $ 69,448
========= =========
Liabilities and Shareholders'
Equity (Deficit)
Current Liabilities:
Accounts payable and accrued liabilities $ 17,470 $ 20,019
Current portion of long-term debt 1,155 1,144
Discretionary overadvances from
senior lender 7,677 10,849
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Total current liabilities 26,302 32,012
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Long-term debt (less current portion):
Senior obligations 28,252 30,217
Senior subordinated note payable to
related party 7,198 --
Subordinated note payable to related
party 5,434 5,434
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Total long-term debt 40,884 35,651
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Multiemployer pension plan withdrawal
liability 1,001 1,084
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Shareholders' Equity (Deficit):
Common stock 102 102
Preferred stock at liquidation preference
plus cumulative undeclared dividends 76,202 73,202
Additional paid-in capital 69,817 69,721
Accumulated deficit (146,525) (141,207)
Treasury shares (at cost) (1,117) (1,117)
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Total shareholders' equity (deficit) (1,521) 701
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Total liabilities and
shareholders' equity (deficit) $ 66,666 $ 69,448
========= =========
See accompanying notes to consolidated condensed financial
statements.
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
March 31, March 31,
1995 1994
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Net sales $ 26,217 $ 27,477
Cost of sales 20,472 22,169
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Gross profit 5,745 5,308
Royalty expense 1,347 899
Selling, general and administrative
expenses 7,858 6,166
Interest expense 1,603 593
Other expenses, net 255 439
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Loss before income taxes (5,318) (2,789)
Income taxes -- --
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Net loss (5,318) (2,789)
Less preferred stock dividends -- 2,121
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Net loss applicable to common stock $ (5,318) $ (4,910)
======== ========
Net loss per common share $ (0.53) $ (0.55)
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Weighted average common shares
outstanding 10,068 8,964
======== ========
See accompanying notes to consolidated condensed financial
statements.
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
1995 1994
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Operating Activities:
Net loss $ (5,318) $ (2,789)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,112 1,272
(Gain) loss on disposal of equipment 38 (2)
Changes in operating assets
and liabilities:
Increase in accounts receivable (1,209) (5,442)
Decrease in inventories 4,106 378
Increase in prepaid expenses
and other assets (389) (155)
Increase (decrease) in accounts
payable and accrued liabilities (2,549) 1,609
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Net cash used in operating
activities (4,209) (5,129)
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Investing Activities:
Purchases of property, plant and (44) (618)
equipment
Proceeds from the sale of property,
plant and equipment 6 1
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Net cash used in
investing activities (38) (617)
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Financing Activities:
Borrowings from senior lender 16,613 25,409
Payments to senior lender (21,548) (28,799)
Proceeds from subordinated note
payable to related party 7,000 3,000
Proceeds from other borrowings 333 --
Principal payments on borrowings (490) (270)
Proceeds from sale of preferred stock 3,000 7,000
Proceeds from exercise of stock options 97 --
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Net cash provided by
financing activities 5,005 6,340
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Increase in cash 758 594
Cash at beginning of period 303 444
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Cash at end of period $ 1,061 $ 1,038
========= =========
See accompanying notes to consolidated condensed financial
statements.
Part I Item 1. (cont'd)
SIGNAL APPAREL COMPANY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated condensed financial statements
have been prepared on a basis consistent with that of the
consolidated financial statements for the year ended December
31, 1994. The accompanying financial statements include all
adjustments (consisting only of normal recurring accruals)
which are, in the opinion of the Company, necessary to present
fairly the financial position of the Company as of March 31,
1995 and December 31, 1994 and its results of operations and
cash flows for the three months ended March 31, 1995 and March
31, 1994. These consolidated condensed financial statements
should be read in conjunction with the Company's audited
financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended
December 31, 1994.
2. The results of operations for the three months ended March 31,
1995 are not necessarily indicative of the results to be
expected for the full year.
3. Inventories consisted of the following:
March 31, December 31,
1995 1994
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(Dollars in thousands)
Raw materials and supplies $ 4,710 $ 2,319
Work in process 5,353 5,639
Finished goods 19,182 25,392
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$29,245 $ 33,350
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4. A principal shareholder, Walsh Greenwood, made an equity
investment in the Company of $3.0 million in January 1995 for
which they received 30 shares of Series C Preferred Stock.
The holders of Series A and Series C Preferred Stock agreed to
a moratorium on the required dividends related to the shares
effective January 1, 1995. At March 31, 1995, the Company has
accrued cumulative, undeclared dividends of $6,874,700 for
Series A Preferred Stock and $4,850,400 for Series C Preferred
Stock.
5. Pursuant to the terms of various license agreements, the
Company is obligated to pay future minimum royalties of
approximately $9.7 million. The Company has outstanding
letters of credit totaling approximately $2.6 million relative
to its obligations pursuant to these license agreements.
6. On November 22, 1994, the Company acquired all of the
outstanding stock of American Marketing Works, Inc., (AMW).
The following unaudited pro forma summary presents the
consolidated results of operations for the three months ended
March 31, 1994 as if the acquisition of AMW had occurred on
January 1, 1994.
Dollars in Thousands
(except per share data) 1994
----
Net Sales $ 36,369
Net Loss (6,885)
Net Loss Per Common Share ($ .68)
The pro forma financial information presented has been
prepared for comparative purposes only and is not necessarily
indicative of the results of operations that would have
resulted had the acquisition of AMW occurred at the beginning
of the period indicated or the future results of operations of
the combined companies.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $26.2 million for the quarter ended March 31, 1995
represent a decrease of $1.3 million from the $27.5 million in net
sales for the corresponding period of 1994. This decrease is
comprised of a $2.7 million reduction in active sportswear, a $2.2
million reduction in women's fashion knitwear and a $2.7 million
reduction in Signal Artwear screenprinted products offset by a $6.3
million increase due to the inclusion of American Marketing Works,
Inc. (AMW) sales in 1995.
Sales of active sportswear products were $8.1 million for the
quarter ended March 31, 1995 versus $10.8 million for the
corresponding period of 1994. Of the $2.7 million reduction,
$1.6 million is a result of reduced sales to a large customer. The
reduced sales of active sportswear is primarily due to a reduction
in unit volume. Sales of closeout active sportswear products
increased $1.5 million while first quality sales decreased $4.3
million.
Sales of women's fashion knitwear decreased 40% to $3.1 million for
the quarter ended March 31, 1995 as compared to $5.2 million for
the corresponding period of 1994. The sales reduction was
primarily due to competition from garments selling at lower retail
prices. Decreases in unit volume accounted for 60% of the sales
reduction while decreases in the average selling price accounted
for 40% of the decrease. The decrease in average selling price was
due to a combination of product mix and unit selling price changes.
Signal Artwear's sales were $8.4 million for the quarter ended
March 31, 1995 versus $11.1 million for the corresponding period in
1994. Of the $2.7 million reduction, $2.6 million is a result of
reduced sales to two large customers. Sales of licensed products
under two cartoon themes accounted for a $2.1 million reduction.
The reduced sales of Signal Artwear screenprinted products is
primarily due to a reduction in unit volume slightly offset by an
increased average selling price due to product mix changes.
Closeout sales increased $.4 million while first quality sales
decreased $3.1 million.
Gross profit was $5.7 million (21.9% of sales) for the quarter
ended March 31, 1995 compared to $5.3 million (19.3% of sales) for
the corresponding period in 1994. The $.4 million improvement is
the result of improved margin on first quality sales ($.2 million)
and capitalization of variances ($.2 million).
Royalty expense related to licensed product sales was 5% of sales
for the quarter ended March 31, 1995 compared to 3% for the
corresponding period of 1994. This increase was primarily caused
by the inclusion of AMW, which has higher royalty rates, in the
1995 financial statements. Selling, general and administrative
(SG&A) expenses were 30% and 22% of sales for the quarters ended
March 31, 1995 and 1994, respectively. Actual SG&A expense
increased $1.7 million which was the result of AMW SG&A expenses of
$2.6 million being included in 1995 offset by SG&A expense
reductions at other divisions and corporate.
FINANCIAL CONDITION
Working capital at March 31, 1995 increased $4.0 million or 42%
over year-end 1994. The increase in working capital was primarily
due to an increase in accounts receivable ($1.2 million), a
decrease in accounts payable and accrued liabilities ($2.5 million)
and a decrease in the discretionary overadvances with the senior
lender ($3.2 million), which were partially offset by lower
inventories ($4.1 million).
Accounts receivable increased $1.2 million or 18% over year-end
1994. Due to the seasonality of the business, trade accounts
receivable normally peak from February to May and August to October
and are lower in the other months as cash is collected and as
shipments decrease. A significant portion of accounts receivable
due from customers is carried at the risk of the factor and is not
reflected in the accompanying balance sheets.
Inventories decreased $4.1 million or 12% compared to year-end
1994. Inventories decreased as a result of the sale of excess and
closeout inventory. The Company expects inventory to continue at
present levels except for seasonal fluctuations.
Total current liabilities decreased $5.7 million or 18% over year-
end 1994 primarily due to the decrease in accounts payable and
accrued liabilities of $2.5 million and the discretionary
overadvances with the senior lender of $3.2 million. Accounts
payable and accrued liabilities decreased as a result of more
timely payments to vendors.
Cash used in operations was $4.2 million during the first three
months of 1995 compared to $5.1 million used in operating
activities during the same period in 1994. The net loss of $5.3
million, increases in accounts receivable of $1.2 million and
decreases in accounts payable and accrued liabilities of $2.5
million were the primary uses of funds in the first three months of
1995. These items were partially offset by depreciation and
amortization ($1.1 million), and significantly lower inventory
levels ($4.1 million).
Cash used in investing activities was for purchases of property and
equipment. Commitments to purchase equipment totaled approximately
$.1 million at March 31, 1995. During 1995, the Company
anticipates capital expenditures of approximately $.8 million.
Cash provided by financing activities was $5.0 million in 1995. In
January 1995, Walsh Greenwood, a principal shareholder, made an
equity investment in the Company of $3.0 million for which they
received 30 shares of Series C Preferred Stock. On March 31, 1995,
the Company executed a credit agreement with Walsh Greenwood and
affiliates. The related promissory note has a face amount of the
lesser of $15.0 million or the unpaid draws and an effective rate
of 25%. The Company may draw funds as needed in increments of $1.0
million. As of March 31, 1995, the Company had drawn $7.0 million
under this credit agreement. Subsequent to quarter-end, the
Company drew an additional $5.0 million. Hence, the currently
available funds against this credit agreement total $3.0 million.
The credit agreement prohibits the payment of cash dividends to any
class of stock, except required dividends on the Company's
Preferred Stock.
In conjunction with the credit agreement described above, Walsh
Greenwood received warrants to purchase 1,500,000 shares of Common
Stock at an exercise price of $2.25 per share, expiring in three
years. Such warrants will vest as funds are drawn. Additionally,
Walsh Greenwood received a second warrant to purchase 1,500,000
shares with an exercise price at a 25% discount to the 20 day
average trading price in December 1996. These warrants vest upon
issuance of warrants and are exercisable for a period of three
years commencing on January 1, 1997. The warrants will be adjusted
for dilution caused by certain dilutive transactions. The issuance
of the warrants is subject to shareholder approval.
The Company has the right after repayment of this credit agreement
and other senior notes of $6.5 million to redeem the outstanding
Preferred Stock with the Company's Common Stock, such shares being
valued at $7.00 per share for the purpose of such redemption. Such
redemption must take place before June 30, 1998.
Effective April 1, 1995, Marvin and Sherri Winkler and MW Holdings
agreed to convert their outstanding promissory notes totaling
approximately $2.4 million into 1,000,000 shares of the Company's
Common Stock.
The revolving advance account decreased $5.0 million from $28.9
million at year-end 1994 to $23.9 million at March 31, 1995.
Committed credit lines with the Company's senior lender aggregated
a maximum of $40.0 million at March 31, 1995. At quarter-end,
approximately $7.7 million was overadvanced under its revolving
advance account, which is classified as short-term in the
consolidated balance sheets at March 31, 1995 (see later paragraphs
for a discussion of overadvance arrangements totalling $9.0
million).
In August 1994, in response to the Company's liquidity needs, two
principal shareholders, FS Signal Associates II and Walsh
Greenwood, pledged collateral of $4.0 million to the senior lender
in connection with such lender's agreement to lend, on a
discretionary basis, funds up to $4.0 million in excess of the
borrowing base. The Company may reduce the outstanding debt under
this special overadvance only after repayment of its mid-month
overadvance facility and any other overadvance facilities. In
November 1994, the senior lender agreed to provide a discretionary
over-formula accommodation not to exceed $5.0 million and a mid-
month overadvance of $2.0 million. During the first quarter of
1995, the senior lender reduced the $11.0 million in overadvances
described above to $9.0 million.
Interest expense for the quarter ended March 31, 1995 was $1.6
million compared to $.6 million for the same period in 1994. Total
outstanding debt averaged $59.1 million and $28.5 million for the
first three months of 1995 and 1994, respectively, with average
interest rates of 10.9% and 7.9%. Average outstanding debt
increased primarily due to the senior notes of $6.5 million related
to the acquisition of AMW and the draw of $7.0 million against the
credit agreement with Walsh Greenwood.
The Company also uses letters of credit to support foreign and some
domestic sourcing of inventory and certain other obligations.
Outstanding letters of credit were $2.6 million at March 31, 1995
(excluding collateral of $2.0 million pledged to the senior lender
in the form of a standby letter of credit).
Total shareholders' deficit increased $2.2 million compared to
year-end 1994. The Company sustained losses of $5.3 million for
the first three months of 1995 which were partially offset by a
$3.0 million investment in Preferred Stock by a principal
shareholder in January 1995. In connection with a shareholder
agreement, the holders of Series A and Series C Preferred Stock
agreed to a moratorium on the required dividends related to these
shares effective January 1, 1995. At March 31, 1995, the Company
has accrued cumulative, undeclared dividends of $6,874,700 for
Series A Preferred Stock and $4,850,400 for Series C Preferred
Stock.
LIQUIDITY AND CAPITAL RESOURCES
As a result of continued losses, the Company has been unable to
fund its cash needs through cash generated by operations over the
last year and during the first quarter of 1995. The Company's
liquidity shortfalls from operations were resolved through several
transactions with related parties and the Company's senior lender.
In January 1994, the Company issued a subordinated promissory note
of $3.0 million to a principal shareholder, FS Signal Associates I.
The senior lender provided discretionary overadvances of $11.0
million during 1994 and reduced the overadvances to $9.0 million
during the first quarter of 1995. In addition, the senior lender
waived all loan covenant violations at December 31, 1994 and
amended the covenants for 1995. As long as sales continue at
present levels, as projected, the Company expects to comply with
the senior lender's amended covenants. In January 1995, the
Company sold $3.0 million in Series C Preferred Stock to a
principal shareholder, Walsh Greenwood and affiliated entities.
During the first quarter of 1995, the Company was advanced $7.0
million under the terms of a $15.0 million credit agreement with a
related party, Walsh Greenwood. Subsequent to quarter-end, the
Company was advanced $5.0 million under this credit agreement.
The Company's continued existence is dependent upon its ability to
substantially improve its operating results during 1995. The
Company's estimates of its cash needs are based upon, among other
things, projections of its sales and profit margins. There can be
no assurance that sales and profit margins for the Company will
meet projected levels, and if sales and profit margins fall
significantly short of projected levels, the Company's ability to
continue as a going concern may be jeopardized. The board of
directors elected a new president and chief financial officer
during February 1995 to effect an improvement in operations and
liquidity. Since year-end, the Company has taken actions to
improve its operations and liquidity. On March 31, 1995, the
Company closed on the $15.0 million (net of discount) credit
agreement. Such funds will be utilized for working capital
purposes. The Company instituted an extensive cost reduction
program that is expected to substantially reduce general and
administrative expenses and the Company is considering the sale of
certain assets. In addition, the Company sold excess and closeout
inventory of approximately $4.0 million (net of reserves) since
year-end and implemented an inventory control program in order to
eliminate the manufacture of excess goods.
The Company believes the execution of the above steps will provide
sufficient liquidity for it to continue as a going concern in its
present form. Accordingly, the consolidated financial statements
do not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amount and
classification of liabilities or any other adjustments that might
become necessary should the Company be unable to continue as a
going concern in its present form. However, there can be no
assurances that all of these steps, if successfully completed, can
return the Company's operations to profitability.
Part II. OTHER INFORMATION
Items 1-5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Employment Agreement with Marvin Winkler dated
as of April 1, 1995.
(10.2) Warrant Certificate dated April 1, 1995 to
purchase 1,000,000 shares of the Company's Common Stock
issued to Marvin Winkler in connection with his
employment contract.
(10.3) Registration Rights Agreement dated May 10, 1995
by and between the Company and Marvin Winkler, Sherri
Winkler and MW Holdings, Inc.
(10.4) Agreement dated May 10, 1995 by and between the
Company and Sherri Winkler and MW Holdings, Inc.
(10.5) Employment Agreement with Leon Ruchlamer dated
as of March 27, 1995.
(10.6) Employment Agreement with William Watts dated as
of March 15, 1995.
(10.7) Agreement dated April 24, 1995 between the
Company and MC Properties I, L.P.
(10.8) Agreement dated as of March 31, 1995 among AMW,
Shirt Shed, the Company, certain lenders and Greyrock
Capital Group, Inc. amending the Amended and Restated
Credit Agreement dated as of February 16, 1993 between
AMW, certain lenders and Greyrock.
(10.9) Settlement Agreement dated as of March 1, 1995
with Glenn Grandin.
(10.10) Settlement Agreement dated as of April 13, 1995
with Daniel Cox.
(27.1) Financial Data Schedule.
(b) Reports on Form 8-K:
None
SIGNATURES
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.
SIGNAL APPAREL COMPANY, INC.
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(Registrant)
Date: May 15, 1995 /s/ Leon Ruchlamer
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Leon Ruchlamer
President
Date: May 15, 1995 /s/ William H. Watts
---------------- ------------------------------
William H. Watts
Chief Financial Officer
SIGNAL APPAREL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1995
EXHIBIT INDEX
Exhibit No.
per Item 601 Sequential
of Reg. S-K Description of Exhibit Page No.
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(10.1) Employment Agreement with Marvin
Winkler dated as of April 1, 1995.
(10.2) Warrant Certificate dated April 1,
1995 to purchase 1,000,000 shares of
the Company's Common Stock issued to
Marvin Winkler in connection with his
employment contract.
(10.3) Registration Rights Agreement dated
May 10, 1995 by and between the
Company and Marvin Winkler, Sherri
Winkler and MW Holdings, Inc.
(10.4) Agreement dated May 10, 1995 by and
between the Company and Sherri Winkler
and MW Holdings, Inc.
(10.5) Employment Agreement with Leon
Ruchlamer dated as of March 27, 1995.
(10.6) Employment Agreement with William
Watts dated as of March 15, 1995.
(10.7) Agreement dated April 24, 1995 between
the Company and MC Properties I, L.P.
(10.8) Agreement dated as of March 31, 1995
among AMW, Shirt Shed, the Company,
certain lenders and Greyrock Capital
Group, Inc. amending the Amended and
Restated Credit Agreement dated as of
February 16, 1993 between AMW, certain
lenders and Greyrock.
(10.9) Settlement Agreement dated as of March
1, 1995 with Glenn Grandin.
(10.10) Settlement Agreement dated as of April
13, 1995 with Daniel Cox.
(27.1) Financial Data Schedule.