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, 1996 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 (423) 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 April 24, 1996
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Common Stock 11,578,046 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
March 31, Dec. 31
1996 1995
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Assets
Current Assets:
Cash $ 740 $ 1,495
Accounts receivable, net 5,257 4,358
Inventories 17,514 22,122
Prepaid expenses and other 1,306 1,346
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24,817 29,321
Property, plant and equipment, net 12,905 13,637
Other assets 111 271
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Total assets $37,833 $ 43,229
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued liabilities $15,879 $ 16,864
Accrued interest 2,944 2,076
Current portion of long-term debt 20,921 22,986
Discretionary overadvances from
senior lender 11,508 8,349
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Total current liabilities 51,252 50,275
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Long-term debt (less current portion):
Senior obligations 20,864 20,841
Senior subordinated note payable to
related party 3,000 3,000
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Total long-term debt 23,864 23,841
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Other non-current liabilities 2,650 2,067
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Shareholders' Equity (Deficit):
Common stock 115 115
Preferred stock at liquidation preference
plus cumulative undeclared dividends 76,202 76,202
Additional paid-in capital 73,086 73,012
Accumulated deficit (188,219) (181,166)
Treasury shares (at cost) (1,117) (1,117)
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Total shareholders'
equity (deficit) (39,933) (32,954)
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Total liabilities and
shareholders' equity (deficit) $37,833 $ 43,229
========= =========
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,
1996 1995
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Net sales $ 19,505 $ 26,217
Cost of sales 17,750 20,472
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Gross profit 1,755 5,745
Royalty expense 1,137 1,347
Selling, general and administrative
expenses 5,107 7,858
Interest expense 2,364 1,603
Other expenses, net 200 255
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Loss before income taxes (7,053) (5,318)
Income taxes -- --
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Net loss (7,053) (5,318)
Less preferred stock dividends -- --
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Net loss applicable to common stock $ (7,053) $ (5,318)
========= =========
Net loss per common share $ (0.61) $ (0.53)
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Weighted average common shares
outstanding 11,528 10,068
========= =========
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,
1996 1995
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Operating Activities:
Net loss $ (7,053) $ (5,318)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 760 1,112
Loss on disposal of equipment 26 38
Grant of Common Stock options below
market value 74 --
Changes in operating assets
and liabilities:
Increase in accounts receivable (899) (1,209)
Decrease in inventories 4,608 4,106
Increase (decrease) in prepaid
expenses and other assets 200 (389)
Increase (decrease) in accounts
payable and accrued liabilities 314 (2,549)
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Net cash used in operating
activities (1,970) (4,209)
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Investing Activities:
Purchases of property, plant and
equipment (51) (44)
Proceeds from the sale of property,
plant and equipment 80 6
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Net cash provided by (used
in) investing activities 29 (38)
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Financing Activities:
Borrowings from senior lender 13,718 16,613
Payments to senior lender (12,161) (21,548)
Proceeds from subordinated note payable
to related party -- 7,000
Proceeds from other borrowings -- 333
Principal payments on borrowings (371) (490)
Proceeds from sale of preferred stock -- 3,000
Proceeds from exercise of stock options -- 97
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Net cash provided by
financing activities 1,186 5,005
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Increase (decrease) in cash (755) 758
Cash at beginning of period 1,495 303
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Cash at end of period $ 740 $ 1,061
========= =========
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, 1995. 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, 1996 and December 31, 1995 and its
results of operations and cash flows for the three months
ended March 31, 1996 and March 31, 1995. 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, 1995.
2. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results
to be expected for the full year.
3. Inventories consisted of the following:
March 31, December 31,
1996 1995
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(Dollars in thousands)
Raw materials and supplies $ 2,022 $ 2,525
Work in process 3,004 2,855
Finished goods 12,488 16,742
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$17,514 $ 22,122
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4. Pursuant to the terms of various license agreements, the
Company is obligated to pay future minimum royalties of
approximately $4.6 million. The Company has outstanding
letters of credit totaling approximately $.2 million
relative to its obligations pursuant to these license
agreements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $19.5 million for the quarter ended March 31, 1996
represent a decrease of $6.7 million or 26% from the $26.2
million in net sales for the corresponding period of 1995. This
decrease is comprised of a $5.4 million reduction in
screenprinted products and a $2.1 million reduction in
undecorated activewear offset by a $.8 million increase in
women's fashion knitwear.
Sales of screenprinted products were $11.2 million for the
quarter ended March 31, 1996 versus $16.6 million for the
corresponding period of 1995. Reduced unit volume accounted for
a $6.2 million decrease in sales which was partially offset by an
increased average selling price ($.8 million). The increase in
average selling price was due to a combination of product mix and
unit selling price changes.
Sales of undecorated activewear products were $4.1 million for
the quarter ended March 31, 1996 versus $6.2 million for the
corresponding period of 1995. Reduced unit volume accounted for
a $1.1 million reduction in sales while a decrease in average
selling price accounted for a $1.0 million sales reduction.
Sales to consignment distributors were down $2.1 million.
Sales of women's fashion knitwear increased 24% to $4.3 million
for the quarter ended March 31, 1996 as compared to $3.4 million
for the corresponding period of 1995.
Gross profit was $1.8 million (9% of sales) for the quarter ended
March 31, 1995 compared to $5.7 million (21.9% of sales) for the
corresponding period in 1995. The primary components of the $3.9
million reduction in margin are lower sales volume ($1.7
million), lower standard margins on the sales ($1.4 million) and
decreased manufacturing efficiencies ($.8 million).
Royalty expense related to licensed product sales was 6% of sales
for the quarter ended March 31, 1996 compared to 5% for the
corresponding period of 1995. This increase was primarily caused
by an increase in the percentage of licensed versus non-licensed
sales. Selling, general and administrative (SG&A) expenses were
26% and 30% of sales for the quarters ended March 31, 1996 and
1995, respectively. Actual SG&A expense decreased $2.8 million
as a result of ongoing efforts to minimize overhead costs.
FINANCIAL CONDITION
Working capital at March 31, 1996 decreased $5.5 million or 26%
over year-end 1995. The decrease in working capital was
primarily due to a decrease in inventories ($4.6 million), an
increase in the discretionary overadvance from the senior lender
($3.2 million), an increase in accrued interest ($.9 million) and
a decrease in cash ($.8 million), which were partially offset by
a reduction in the current portion of long-term debt ($2.1
million), a reduction in accounts payable and accrued liabilities
($1.0 million) and an increase in accounts receivable ($.9
million).
Accounts receivable increased $.9 million or 21% over year-end
1995. 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 $4.6 million or 21% compared to year-end
1995. Inventories decreased as a result of the sale of excess
and closeout inventory.
Total current liabilities increased $1.0 million or 2% over year-
end 1995 primarily due to an increase in the discretionary
overadvances with the senior lender of $3.2 million and an
increase in accrued interest of $.9 million partially offset by a
decrease in the current portion of long-term debt of $2.1 million
and a decrease in accounts payable and accrued liabilities of
$1.0 million.
Cash used in operations was $2.0 million during the first three
months of 1996 compared to $4.2 million used in operating
activities during the same period in 1995. The net loss of $7.1
million and increases in accounts receivable of $.9 million were
the primary uses of funds in the first three months of 1996.
Primary items partially offsetting the uses of funds were
depreciation and amortization ($.8 million) and significantly
lower inventory levels ($4.6 million).
Commitments to purchase equipment totaled approximately $.1
million at March 31, 1996. During 1996, the Company anticipates
capital expenditures of approximately $.5 million.
Cash provided by financing activities was $1.2 million in 1996.
The revolving advance account increased $1.6 million from $19.6
million at year-end 1995 to $21.2 million at March 31, 1996.
Committed credit lines with the Company's senior lender
aggregated a maximum of $40.0 million at March 31, 1996. At
quarter-end, approximately $11.5 million was overadvanced under
its revolving advance account, which is classified as short-term
in the consolidated balance sheets at March 31, 1996.
Certain of the Company's principal shareholders have agreed to
guarantee a discretionary overadvance of $13.0 million. FS
Signal Associates II has guaranteed $2.0 million in the form of a
letter of credit and Walsh Greenwood has guaranteed $2.0 million
in the form of cash on deposit with the senior lender. The
remaining $9.0 million is guaranteed by WG Trading Company, L.P.
Interest expense for the quarter ended March 31, 1996 was $2.4
million compared to $1.6 million for the same period in 1995.
Total outstanding debt averaged $57.4 million and $59.1 million
for the first three months of 1996 and 1995, respectively, with
average interest rates of 16.5% and 10.9%.
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 $1.8 million at
March 31, 1996 (excluding collateral of $2.0 million pledged to
the senior lender in the form of a standby letter of credit).
Total shareholders' deficit increased $7.0 million compared to
year-end 1995. The Company sustained losses of $7.1 million for
the first three months of 1996. 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, 1996, 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 continuing losses, the Company has been unable to
fund its cash needs through cash generated by operations during
1995 and into 1996. The Company's liquidity shortfalls from
operations during these periods have been funded through several
transactions with its principal shareholders and with the
Company's senior lender.
The Company's senior lender waived all existing loan covenant
violations as of March 31, 1996. However, as the Company is not
currently in compliance with certain financial covenants of its
financing agreement with the senior lender, all long-term debt
due the senior lender is subject to accelerated maturity and as
such, has been classified as a current liability in the
consolidated balance sheets. If the senior lender were to
accelerate the maturity of the debt, the Company would not have
funds available to repay this debt.
The Company's secondary bank lender has notified the Company that
it is in default of their loan agreement as the Company is
delinquent on interest since January 1, 1996. If this lender
accelerates the maturity as the default allows it to do, the
Company would not have funds available to pay this debt.
Actions taken by the Company since year-end 1995 to improve its
operations and liquidity have included: (i) the continuation of
an extensive cost reduction program that has reduced general and
administrative expenses during 1995 and is expected to further
reduce such expenses during 1996; (ii) the sale of excess and
close-out inventories during 1995 and into 1996; (iii) the
continuation of an inventory control program in order to
eliminate the manufacture of excess goods and to more effectively
utilize working capital; and (iv) further guarantees by Walsh
Greenwood to the senior lender in order to support an increase in
the Company's overadvance position with the senior lender. The
Company has also considered the sale of certain assets. The
Company closed its AMW facility in Gardena, California on October
18, 1995. The Company closed its Rutledge, Tennessee sewing
plant on November 29, 1995. On February 26, 1996, the Company
announced the closing of its Wabash, Indiana facility. This
closing will take effect on May 30, 1996. The Company-owned
buildings at Rutledge, Tennessee and Wabash, Indiana have been
put up for sale.
The Company did not meet its sales and profit projections for the
first four months of 1996. If the Company's sales and profit
margins for the remainder of 1996 do not meet projected levels,
management will be required to reduce the Company's activities.
In any event, additional capital will be required to continue the
Company's operations. In order to obtain such additional
capital, the Company may be required to issue securities that
would dilute the interests of the stockholders of the Company.
No assurance can be given that any such additional financing will
be available to the Company on commercially reasonable terms or
otherwise. If sales and profit margins continue to fall below
projected levels or if additional funds cannot be raised, the
Company will not be able to continue as a going concern.
In December 1995, the Company began actively pursuing the
possibility of issuing a significant amount of its Common Stock
in a private placement transaction exempt from registration under
the Securities Act of 1933, which could include an offshore
private placement pursuant to Regulation S under such Act.
Securities sold in such a transaction may not be offered or sold
in the United States (or, in the case of offshore sales under
Regulation S, to or for the benefit of any "U. S. person" as
defined in Regulation S) absent registration or an applicable
exemption under such Act. The Company believes that any such
offering may require that the shares of Common Stock issued
therein be offered at a price below the then current quoted
market price for such shares. To date, the Company has entered
into agreements with two different third party investors
concerning the completion of such a financing transaction. Each
of these transactions has failed to close, due to the inability
of the intended investor in each case to secure its own financing
for the purchase of the Company's securities. The Company will
continue to explore financing alternatives. It is essential that
the Company be able to obtain additional financing, through such
a transaction or otherwise, in order to continue as a going
concern.
Part II. OTHER INFORMATION
Items 1-5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Letter Amendment dated March 29, 1996, amending
the Factoring Agreements dated as of May 23, 1991, by and
between BNY Financial Corp. and the Company, and dated July
25, 1991, by and between BNY Financial Corp. and Shirt Shed
waiving compliance with certain provisions thereof
(10.2) Letter Amendment dated April 24, 1996, amending
the Factoring Agreements dated as of May 23, 1991, by and
between BNY Financial Corp. and the Company and dated July
25, 1991 by and between BNY Financial Corp. and Shirt Shed
amending certain provisions thereof
(27) 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 7, 1996 /s/ Bruce E. Krebs
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Bruce E. Krebs
President
Date: May 7, 1996 /s/ William H. Watts
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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) Letter Amendment dated March 29,
1996, amending the Factoring
Agreements dated as of May 23, 1991,
by and between BNY Financial Corp.
and the Company, and dated July 25,
1991, by and between BNY Financial
Corp. and Shirt Shed waiving
compliance with certain provisions
thereof
(10.2) Letter Amendment dated April 24,
1996, amending the Factoring
Agreements dated as of May 23, 1991,
by and between BNY Financial Corp.
and the Company and dated July 25,
1991 by and between BNY Financial
Corp. and Shirt Shed amending certain
provisions thereof
(27) Financial Data Schedule