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, 1997 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 May 5, 1997
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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
1997 1996
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Assets
Current Assets:
Cash & cash equivalents $ 1,975 $ 1,713
Accounts receivable, net 1,951 755
Inventories 12,346 14,687
Prepaid expenses and other 797 769
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17,069 17,924
Property, plant and equipment, net 7,870 8,170
Other assets 60 73
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Total assets $ 24,999 $ 26,167
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Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 3,372 $ 5,055
Accrued liabilities 8,280 9,003
Accrued interest 9,227 7,044
Current portion of long-term debt 6,426 6,795
Revolving advance account 19,163 20,362
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Total current liabilities 46,468 48,259
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Long-term debt, principally from
related parties 44,612 39,266
Other non current liabilities 5,414 4,797
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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 73,507 73,507
Accumulated deficit (220,202) (214,862)
Treasury shares (at cost) (1,117) (1,117)
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Total shareholders'
equity (deficit) (71,495) (66,155)
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Total liabilities and
shareholders' equity (deficit) $ 24,999 $ 26,167
========= =========
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,
1997 1996
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Net sales $10,366 $ 19,505
Cost of sales 8,546 17,750
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Gross profit 1,820 1,755
Royalty expense 861 1,137
Selling, general and administrative
expenses 2,704 5,107
Interest expense 3,486 2,364
Other expenses, net 109 200
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Loss before income taxes (5,340) (7,053)
Income taxes -- --
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Net loss applicable to common stock $ (5,340) $ (7,053)
========= =========
Net loss per common share $ (.46) $ (0.61)
========= =========
Weighted average common shares
outstanding 11,578 11,528
========= =========
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,
1997 1996
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Operating Activities:
Net loss $ (5,340) $ (7,053)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 329 760
(Gain) Loss on disposal of equipment (48) 26
Grant of Common Stock options below
market value - 74
Changes in operating assets
and liabilities:
Increase in accounts receivable (1,196) (899)
Decrease in inventories 2,341 4,608
Increase(decrease) in prepaid
expenses and other assets (15) 200
Increase in accounts payable
and accrued liabilities 488 314
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Net cash used in operating
activities (3,441) (1,970)
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Investing Activities:
Purchases of property, plant and
equipment (27) (51)
Proceeds from the sale of property,
plant and equipment 46 80
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Net cash provided by
investing activities 19 29
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Financing Activities:
Borrowings from senior lender 6,576 13 718
Payments to senior lender (7,774) (12,161)
Proceeds from subordinated note payable
to related party --
Proceeds from other borrowings 5,385 --
Principal payments on borrowings (503) (371)
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Net cash provided by
financing activities 3,684 1,186
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Increase (decrease) in cash 262 (755)
Cash at beginning of period 1,713 1,495
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Cash at end of period $ 1,975 $ 740
========= =========
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, 1996. 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, 1997 and December 31, 1996 and its
results of operations and cash flows for the three months
ended March 31, 1997 and March 31, 1996. 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, 1996.
2. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of the results
to be expected for the full year.
3. Inventories consisted of the following:
March 31, December 31,
1997 1996
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(Dollars in thousands)
Raw materials and supplies $1,236 $ 1,244
Work in process 1,598 2,060
Finished goods 9,512 11,383
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$ 12,346 $14,687
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4. Pursuant to the terms of various license agreements, the
Company is obligated to pay future minimum royalties of
approximately $1.1 million in 1997.
5. During the three months ended March 31, 1997 Signal was
advanced an additional $5.4 million by Walsh Greenwood &
Company, a principal shareholder (Walsh Greenwood). This
advance to the Company is expected to be documented as a
loan on terms similar to the $20 million Walsh Greenwood
Credit Agreement and therefore is considered long term debt
in the accompanying financial statements.
6. In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128 "Earnings
Per Share" ("SFAS 128"). SFAS 128 changes the criteria for
reporting earnings per share ("EPS") by replacing primary
EPS with basic EPS and fully diluted EPS with diluted EPS.
Due to the losses sustained by the Company (which make
common stock equivalents anti-dilutive), SFAS 128 will not
have any impact on current year to date EPS or prior period
EPS amounts disclosed in the current Financial Statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $10.4 million for the quarter ended March 31, 1997
represent a decrease of $9.1 million or 47% from the $19.5
million in net sales for the corresponding period of 1996. This
decrease is comprised of a $5.0 million reduction in
screenprinted products, a $2.7 million reduction in undecorated
activewear and a $1.4 million reduction in women's fashion
knitwear.
Sales of screenprinted products were $6.2 million for the quarter
ended March 31, 1997 versus $11.2 million for the corresponding
period of 1996. Reduced unit volume accounted for a $4.9 million
decrease in sales while a decrease in average selling price neted
a $.1 million reduction. The decrease in average selling price
was due to a combination of product mix and unit selling price
changes. The Company is focusing, its efforts on the recovery of
lost volume in this core area of the business.
Sales of undecorated activewear products were $1.3 million for
the quarter ended March 31, 1997 versus $4.1 million for the
corresponding period of 1996. As reported in the Annual Report on
Form 10-K for the year ended December 31, 1996, the Company has
made the decision to concentrate its marketing efforts on
screenprinted products in an effort to produce higher margin
sales than can be made with undecorated activewear. As a result
of this decision, the Company's sales of undecorated activewear
will continue to decline during 1997 and will no longer represent
a significant share of the Company's total sales.
Sales of women's fashion knitwear decreased 33% to $2.8 million
for the quarter ended March 31, 1997 as compared to $4.3 million
for the corresponding period of 1996. Closeout sales increased
to $.6 million for the quarter ended March 31, 1997 compared to
$.3 million for the corresponding period of 1996. Total sales
excluding closeouts for the quarter ended March 31, 1997 were
$2.2 million compared to $4.0 million for the corresponding
period in 1996. Of the $1.8 million sales reduction $1.4 million
was the result of reduced unit volume and $.4 million was the
results of reduced average selling price. The reduction in
average selling price was due to a combination of product mix and
unit selling price changes. The $1.8 million sales reduction was
primarily due to competition from garments selling at lower
retail prices.
Gross profit was $1.8 million (18% of sales) for the quarter
ended March 31, 1997 compared to $1.8 million (9% of sales) for
the corresponding period in 1996. Of the 9% margin improvement
7% is due to lower manufacturing costs with the balance being the
results of an improved sales mix. Manufacturing cost was
improved as a result of having only one printing operation this
year versus two last year, the closing of the LaGrange plant, and
reduced overhead costs.
Royalty expense related to licensed product sales was 8% of sales
for the quarter ended March 31, 1997 compared to 6% for the
corresponding period of 1996. 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% of sales for the quarters ended March 31, 1997 and 1996,
respectively. Actual SG&A expense decreased $2.4 million as a
result of ongoing efforts to minimize overhead costs.
FINANCIAL CONDITION
Additional working capital was required in the first quarter of
1997 to fund the continued losses incurred by the Company. The
Company's need was met through several transactions with the
Company's principal shareholders and the senior lender. In the
first quarter of 1997, the Company received $5.4 million from
Walsh Greenwood. The Company is in the process of negotiating to
amend the Walsh Greenwood Credit Agreement dated March 31, 1995
to include these additional funds as well as funds received in
1996 ($12.0 million). Therefore, the Company is currently
accruing interest on these additional funds at an annual rate of
25%, based on the terms of the Walsh Greenwood Credit Agreement.
At March 31, 1997, the Company had overadvance borrowings of
approximately $13.3 million with its senior lender compared to
$14.1 million at December 31, 1996.
The Company's working capital deficit at March 31, 1997 decreased
$1.0 million or 3.3% compared to year end 1996. The decrease in
working capital deficit was primarily due to a decrease in
inventories ($2.3 million), which were partially offset by a
reduction in the current portion of long-term debt ($.4 million),
a decrease in accounts payable, accrued liabilities and accrued
interest ($.2 million), an increase in cash ($.3 million),an
increase in accounts receivable ($1.2 million) and a reduction in
the revolving advance account ($1.1 million).
Accounts receivable increased $1.2 million or 158% over year-end
1996. The increase was a result of an increase in first quarter
sales over fourth quarter sales in 1996 and the timing of
payments from the senior lender.
Inventories decreased $2.3 million or 15.9% compared to year-end
1996. Inventories decreased as a result of ongoing efforts to
minimize inventory levels.
Total current liabilities decreased $1.8 million or 3.7% over
year-end 1996 primarily due to a decrease in the revolving
advance account of $1.1 million, a decrease in the current
portion of long-term debt of $.4 million and a decrease in
accounts payable, accrued liabilities and accrued interest of $.2
million.
Cash used in operations was $3.4 million during the first three
months of 1997 compared to $2.0 million used in operating
activities during the same period in 1996. The net loss of $5.3
million and increases in accounts receivable of $1.2 million were
the primary uses of funds in the first three months of 1997.
Primary items partially offsetting the uses of funds were
depreciation and amortization ($.3 million) and significantly
lower inventory levels ($2.3 million).
Commitments to purchase equipment totaled approximately $.1
million at March 31, 1997. During 1997, the Company anticipates
capital expenditures of approximately $.7 million.
Cash provided by financing activities was $3.7 million for the
first three months of 1997. The Company borrowed $5.4 million
from Walsh Greenwood. This was partially offset by principle
payments on borrowing of $1.7 million.
The revolving advance account decreased $1.1 million from $20.4
million at year-end 1996 to $19.2 million at March 31, 1997.
Under the current financing arrangement with its senior lender
the Company's total outstanding obligations cannot exceed the
lower of $40 million or the borrowing base as defined. At March
31, 1997, the borrowing base was $5.9 million. Therefore,
approximately $13.3 million was overadvanced under the revolving
advance account.
The Company and the senior lender have agreed in principle to
adjust and to extend through March 31, 2000 the current credit
facility. The new agreement will provide a $67,000,000 credit
facility consisting of (i) a $33,000,000 revolving advance
account which is similar in terms to the Company's current
revolving advance account, (ii) a $34,000,000 additional facility
replacing the existing $14,000,000 overadvance facility and which
will provide an additional $5,000,000 of debt availability for
the Company for which no additional collateral will be required,
(iii) a significant reduction in the fees charged for services as
a result of lowered volume guarantees and the elimination and
reduction of certain other fees, and (iv) issuance to the senior
lender of warrants for 250,000 shares of Common Stock at $2.50
per share.
The Company believes that this credit agreement, which is subject
to final documentation, will be adequate to provide for the
Company's financing through at least 1997 assuming that
projections for the balance of the year are met.
Certain of the Company's principal shareholders have agreed to
guarantee a discretionary overadvance of $14.0 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 $10.0 million is guaranteed by WG Trading Company, L.P.
Interest expense for the quarter ended March 31, 1997 was $3.5
million compared to $2.4 million for the same period in 1996.
Total outstanding debt averaged $71.0 million and $57.4 million
for the first three months of 1997 and 1996, respectively, with
average interest rates of 19.6% and 16.5%.
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 $.7 million at
March 31, 1997 (excluding collateral of $2.0 million pledged to
the senior lender in the form of a standby letter of credit).
Average outstanding debt and the average interest rate increased
due to additional borrowings from Walsh Greenwood. As of March
31, 1997 total indebtedness to Walsh Greenwood (including
borrowing under the Walsh Greenwood Credit Agreement) totaled
$37.3 million with an interest rate of 25% and an interest rate
of $27% on accrued but unpaid interest. As a result of continued
losses, the Company has been unable to fund its cash needs from
operating activities. The Company's liquidity shortfalls were
primarily funded through the additional $5.3 million advance from
Walsh Greenwood.
In January 1997, in connection with the issuance of certain
substitute or replacement letters of credit (aggregating $4.5
million) with respect to which two of the Company's principal
shareholders (FS Signal Associates Limited Partnership and FS
Signal Associates II Limited Partnership, collectively "FS Signal
Associates") have agreed to reimburse the issuer for any draws
related to amounts owed by the Company, the Company entered into
a Reimbursement Agreement with FS Signal Associates and a related
Promissory Note for $4.5 million, each dated January 30, 1997.
Under the reimbursement Agreement and Promissory Note, the
Company has agreed to repay any amounts that FS Signal Associates
may be required to pay to the issuer of these letters of credit,
with interest at an annual rate of 5.5% until fully repaid. The
Company's obligations under the Reimbursement Agreement and
Promissory Note are subordinate to its obligations to its senior
lender and under the Tranche A and Tranche B Notes, and are parri
passu with the Company's obligations under the Walsh Greenwood
Credit Agreement.
The Rutledge, Tennessee plant was sold on May 5, 1997 for
$400,000. Approximately $352,000 was used to retire the debt to
CDBG, City of Rutledge and Grainger County. Approximately
$48,000 of these funds were applied against the BNY Term debt.
In accordance with the Company's strategic plan to focus on its
core business activities and reduce non-core operating expenses,
the Company has decided to seek purchasers for its Heritage
Sportswear unit and LaGrange, Georgia fabric manufacturing
facility.
Potential purchasers for both the LaGrange and Heritage
operations have been identified and negotiations are currently
underway. The vacant Wabash, Indiana plant is also for sale.
Total shareholders' deficit increased $5.3 million compared to
year-end 1996. The Company sustained losses of $5.3 million for
the first three months of 1997.
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. 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.
These transactions are detailed above in the Financial Condition
section.
The Company's senior lender waived all existing loan covenant
violations as of March 31, 1997. However, as the Company is not
currently in compliance with certain financial covenants, 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.
Actions taken by the Company to improve its operations and
liquidity have included: (i) the institution of an extensive cost
reduction program that has reduced general and administrative
expenses; (ii) the sale of excess and close-out inventories;
(iii) the implementation of an inventory control program in order
to eliminate the manufacture of excess goods and to more
effectively utilize working capital; (iv) obtaining $20.0 million
in financing under the Walsh Greenwood Credit Agreement and
further financial support by Walsh Greenwood in the amount of
$17.4 million in cash through March 1997; and (v) 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 believes it can improve its
operating margins as a result of certain of the actions being
taken. The Company has also considered the sale of certain non-
strategic assets as discussed above..
If the Company's sales and profit margins for 1997 do not meet
projected levels, management will be required to reduce the
Company's activities or seek additional capital to complete its
plan for improving the Company's performance. 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 be
unable 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) Waiver Letter, dated as of April 14, 1997,
pertaining to factoring Agreements dated as of (i) May
23, 1991 between the Company and BNY Financial
Corporation and (ii) July 25, 1991 between The Shirt
Shed, Inc. and BNY Financial Corporation.
(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 13, 1997 /s/ Barton J. Bresky
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Barton J. Bresky
President and
Chief Executive Officer
Date: May 13, 1997 /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, 1997
EXHIBIT INDEX
Exhibit No.
per Item 601 Sequential
of Reg. S-K Description of Exhibit Page No.
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(10.1) Waiver Letter, dated as of April 14,
1997, pertaining to factoring
Agreements dated as of (i) May 23,
1991 between the Company and BNY
Financial Corporation and (ii) July
25, 1991 between The Shirt Shed, Inc.
and BNY Financial Corporation.
(27) Financial Data Schedule