SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 April 3, 1999 or
[ ] 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.
(Exact name of registrant as specified in its charter)
Indiana 62-0641635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 Englehard Avenue, Avenel, New Jersey 07001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 382-2882
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 [_]
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 21, 1999
----- ----------------------------
Common Stock 44,498,214 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
April 3, Dec. 31,
1999 1998
--------- ---------
Assets
Current Assets:
Cash & cash equivalents $ 0 $ 403
Receivables, less allowance for doubtful
accounts of $428 in 1999 and $2,443 in 1998, respectively 599 1,415
Note receivable 683 283
Inventories 17,982 12,641
Prepaid expenses and other 1,534 539
--------- ---------
Total current assets: 20,797 15,281
Property, plant and equipment, net 4,368 3,001
Goodwill 25,517 0
Other assets 803 182
--------- ---------
Total assets $ 51,485 $18,464
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Bank Overdraft $ 1,439 $ 0
Accounts payable 5,447 8,133
Accrued liabilities 10,968 9,760
Accrued interest 4,049 3,810
Current portion of long-term debt and Capital leases 5,442 6,435
Revolving advance account 9,803 44,049
--------- ---------
Total current liabilities: 37,148 72,187
Long-term Liabilities:
Term Loan 50,000 0
Convertible Debentures 2,748 0
Notes Payable Related Parties 18,004 13,968
--------- ---------
Total Long-term Liabilities: 70,762 72,187
Shareholders' Equity (Deficit):
Preferred Stock 50,244 52,789
Common Stock 491 326
Additional paid-in capital 186,698 165,242
Accumulated deficit (292,741) (284,931)
--------- ---------
Subtotal (55,308) (66,574)
Less: Cost of Treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total shareholders' equity (deficit) (56,425) (67,691)
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 51,485 $18,464
========= =========
See accompanying notes to financial statements.
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
-------- --------
Net sales $33,418 $11,561
Cost of sales 24,766 8,507
-------- --------
Gross profit 8,653 3,054
Royalty expense 1,986 797
Net Gross margin 6,667 2,257
Selling, general and administrative
expenses 7,009 5,008
Interest expense 3,298 1,549
Other (income)/expenses, net (31) (446)
-------- --------
Loss before income taxes (3,609) (3,854)
-------- --------
Income taxes -- --
-------- --------
Net loss $(3,609) $(3,854)
======== ========
Basic/diluted net loss per share $(0.10) $(.12)
======== ========
Weighted average shares outstanding 36,591 32,621
======== ========
See accompanying notes to financial statements.
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
April 3, April 4,
1999 1998
-------- --------
Operating Activities
Net loss $(3,609) $(3,854)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,538 783
Non-cash interest charges 907 0
(Gain) loss on disposal of equipment (60) (439)
Changes in operating assets and liabilities:
Receivables 961 (1,427)
Inventories 3,129 (246)
Prepaid expenses and other assets (252) (203)
Accounts payable and accrued
liabilities (8,647) 40
-------- --------
Net cash used in operating
activities (6,033) (5,346)
-------- --------
Investing Activities:
Purchases of property, plant and
equipment (699) (88)
Proceeds from notes receivable 0 54
Proceeds from the sale of Heritage
Division 2,000 0
Proceeds from the sale of property,
plant and equipment 0 478
-------- --------
Net cash provided by
investing activities 1,301 444
-------- --------
Financing Activities:
Increase in bank overdraft 1,439 0
Net increase in revolving
advance account (45,986) 378
Net increase in term loan borrowings 50,000 0
Net increase in borrowings from
related party 0 4,950
Principal payments on borrowings (544) (800)
Repurchase of preferred stock (2,464) 0
Proceeds from sale of convertible debt 2,350 0
New common stock issued 18 0
-------- --------
Net cash provided by
financing activities 4,813 4,528
-------- --------
Increase (decrease) in cash 81 (374)
Cash and Cash equivalents at beginning of period 403 384
-------- --------
Cash and Cash equivalents at end of period $484 $10
======== ========
See accompanying notes to financial statements.
Part I Item 1. (cont'd)
SIGNAL APPAREL COMPANY, INC.
NOTES TO CONSOLIDATED 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, 1998. 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 April 3, 1999 and its
results of operations and cash flows for the three months ended April 3,
1999 . 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, 1998.
2. The results of operations for the three months ended April 3, 1999 are not
necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
April 3, December 31,
1999 1998
------- -------
(In thousands)
Raw materials and supplies $0 $788
Work in process 1,743 1,377
Finished goods 15,883 10,262
Supplies 355 214
------- -------
$17,981 $12,641
======= =======
4. Pursuant to the terms of various license agreements, the Company is
obligated to pay future minimum royalties of approximately $2.3 million in
1999.
5. The computation of basic net loss per share is based on the weighted
average number of common shares outstanding during the period. Diluted
earnings per share would also include common share equivalents outstanding.
Due to the Company's net loss for all periods presented, all common stock
equivalents would be anti-dilutive to diluted earnings per share.
6. On August 10, 1998, the Company's Board of Directors approved a new Credit
Agreement between the Company and WGI, LLC, to be effective as of May 8,
1998 (the "WGI Credit Agreement"), pursuant to which WGI will lend the
Company up to $25,000,000 on a revolving basis for a three-year term ending
May 8, 2001. Additional material terms of the WGI Credit Agreement are as
follows: (i) maximum funding of $25,000,000, available in increments of
$100,000 in excess of the minimum funding of $100,000; (ii) interest on
outstanding balances payable quarterly at a rate of 10% per annum; (iii)
secured by a security interest in all of the Company's assets (except for
the assets of its Heritage division and certain former plant locations
which are currently held for sale), subordinate to the security interests
of the Company's senior lender; (iv) funds borrowed may be used for any
purpose approved by the Company's directors and executive officers,
including repayment of any other existing indebtedness of the Company; (v)
WGI, LLC is entitled to have two designees nominated for election to the
Company's Board of Directors during the term of the agreement and (vi) WGI,
LLC will receive (subject to shareholder approval, which was obtained at
the Company's Annual Meeting on January 27, 1999) warrants to purchase up
to 5,000,000 shares of the Company's Common Stock at $1.75 per share.
The warrants issued in connection with the WGI Credit Agreement will vest
at the rate of 200,000 warrants for each $1,000,000 increase in the largest
balance owed at any one time over the life of the credit agreement (as of
April 3, 1999, the largest outstanding balance to date has been
$19,985,000, which means that warrants to acquire 3,997,000 shares of
Common Stock would have been vested as of such date). These warrants were
subject to shareholder approval which was obtained at a meeting held on
January 29, 1999.The warrants have registration rights no more favorable
than the equivalent provisions in the currently outstanding warrants issued
to principal shareholders of the Company, except that such rights include
three demand registrations. The warrants also contain antidilution
provisions which require that the number of shares subject to such warrants
shall be adjusted in connection with any future issuance of the Company's
Common Stock (or of other securities exercisable for or convertible into
Common Stock) such that the aggregate number of shares issued or issuable
subject to these warrants (assuming eventual vesting as to the full
5,000,000 shares) will always represent ten percent (10%) of the total
number of shares of the Company's Common Stock on a fully diluted basis.
The fair market value using the Black-Scholes option pricing model of the
above mentioned warrants of approximately $4,467,000 has been capitalized
and is included in the accompanying consolidated balance sheet as debt
issuance costs. These costs are being amortized over the term of the debt
agreement with WGI. As a result of the anti-dilution protection in the
warrants and the completion of the Tahiti acquisition (see Note 7), the
Company anticipates issuing approximately 3,382,344 additional warrants to
WGI, LLC.
7. On March 22, 1999, the Company completed the acquisition of substantially
all of the assets of Tahiti Apparel, Inc. ("Tahiti"), a New Jersey
corporation engaged in the design and marketing of swimwear, body wear and
active wear for ladies and girls. The financial statements reflect the
ownership of Tahiti as of January 1, 1999. The Company exercised dominion
and control over the operations of Tahiti prior to January 1, 1999.
Pursuant to the terms of an Asset Purchase Agreement dated December 18,
1998 between the Company, Tahiti and the majority stockholders of Tahiti,
as amended by agreement dated March 16, 1999 and as further amended
post-closing by agreement dated April 15, 1999 (as amended, the
"Acquisition Agreement"), the purchase price for the assets and business of
Tahiti is $15,872,500, payable in shares of the Company's Common Stock
having an agreed value (for purposes of such payment only) of $1.18750 per
share. Additionally, the Company assumed, generally, the liabilities of the
business set forth on Tahiti's audited balance sheet as of June 30, 1998
and all liabilities incurred in the ordinary course of business during the
period commencing July 1, 1998 and ending on the Closing Date (including
Tahiti's liabilities under a separate agreement (as described below)
between Tahiti and Ming-Yiu Chan, Tahiti's minority shareholder).
The acquisition will result in the issuance of 13,366,316 shares of the
Company's Common Stock to Tahiti in payment of the purchase price under the
Acquisition Agreement. The Acquisition Agreement also provides that
1,000,000 of such shares will be placed in escrow with Tahiti's counsel,
Wachtel & Masyr, LLP (acting as escrow agent under the terms of a separate
escrow agreement) for a period commencing on the Closing Date and ending on
the earlier of the second anniversary of the Closing Date or the completion
of Signal's annual audit for its 1999 fiscal year. This escrow will be used
exclusively to satisfy the obligations of Tahiti and its majority
stockholders to indemnify the Company against certain potential claims as
specified in the Acquisition Agreement. Any shares not used to satisfy such
indemnification obligations will be released to Tahiti at the conclusion of
the escrow period. As discussed below, the Company also issued 1,000,000
additional shares of Common Stock under the terms of the Chan Agreement.
During the course of negotiations leading to the execution of the
Acquisition Agreement, and in order to enable Tahiti to obtain working
capital financing needed to support its ongoing operations, the Company
guaranteed repayment by Tahiti of certain amounts owed by Tahiti under one
of its loans from Bank of New York Financial Corporation ("BNYFC"), which
also is the Company's senior lender.
At a meeting held January 29, 1999, the Company's shareholders approved the
issuance of up to 10,070,000 shares of the Company's Common Stock in
connection with the Acquisition Agreement and the Chan Agreement, which
shares were issued in connection with the closing. Under the rules of the
New York Stock Exchange, on which the Company's Common Stock is traded,
issuance of the additional 4,296,316 shares of Common Stock called for by
the March 16 amendment to the Acquisition Agreement will be subject to
approval by the Company's shareholders at the Company's 1999 annual
meeting, which the Company expects to hold not later than July 15, 1999.
The Company's principal shareholder, WGI, LLC, has executed a proxy in
favor of Zvi Ben-Haim to vote in favor of the issuance of such additional
4,296,316 shares of the Company's Common Stock at the Company's 1999 Annual
Meeting.
In connection with the acquisition, Tahiti and Tahiti's majority
stockholders reached an agreement with Tahiti's minority shareholder,
Ming-Yiu Chan (the "Chan Agreement"), pursuant to which Tahiti executed a
promissory note to Chan in the principal amount of $6,770,000 (the "Chan
Note"), bearing interest at the rate of 8% per
annum. Under the terms of the Acquisition Agreement, the Company assumed
the Chan Note following Closing. Effective March 22, 1999, the Company
exercised its right to pay the $3,270,000 portion of the Chan Note through
the issuance of 1,000,000 shares of Common Stock of the Company to Chan.
This resulted in the reduction of Goodwill in the amount of $2,082,500.
8. Effective March 22, 1999, the Company completed a new financing arrangement
with its senior lender, BNY Financial Corporation (in its own behalf and as
agent for other participating lenders), which provides the Company with
funding of up to $98,000,000 (the "Maximum Facility Amount") under a
combined facility that includes two Term Loans aggregating $50,000,000
(supported in part by $25,500,000 of collateral pledged by an affiliate of
WGI, LLC, the Company's principal shareholder) and a Revolving Credit Line
of up to $48,000,000 (the "Maximum Revolving Advance Amount"). Subject to
the lenders' approval and to continued compliance with the terms of the
original facility, the Company may elect to increase the Maximum Revolving
Advance Amount from $48,000,000 up to $65,000,000, in increments of not
less than $5,000,000.
The Term Loan portion of the new facility is divided into two segments with
differing payment schedules: (i) $27,500,000 ("Term Loan A") payable, with
respect to principal, in a single installment on March 12, 2004 and (ii)
$22,500,000 ("Term Loan B") payable, with respect to principal, in 47
consecutive monthly installments on the first business day of each month
commencing April 1, 2000, with the first 46 installments to equal
$267,857.14 and the final installment to equal the remaining unpaid balance
of Term Loan B. The Credit Agreement allows the Company to prepay either
term loan, in whole or in part, without premium or penalty. In connection
with the Revolving Credit Line, the Credit Agreement also provides (subject
to certain conditions) that the senior lender will issue Letters of Credit
on behalf of the Company, subject to a maximum L/C amount of $40,000,000
and further subject to the requirement that the sum of all advances under
the revolving credit line (including any outstanding L/Cs) may not exceed
the lesser of the Maximum Revolving Advance Amount or an amount (the
"Formula Amount") equal to the sum of: (1) up to 85% of Eligible
Receivables, as defined, plus (2) up to 50% of the value of Eligible
Inventory, as defined (excluding L/C inventory and subject to a cap of
$30,000,000 availability), plus (3) up to 60% of the first cost of Eligible
L/C Inventory, as defined, plus (4) 100% of the value of collateral and
letters of credit posted by the Company's principal shareholders, minus (5)
the aggregate undrawn amount of outstanding Letters of Credit, minus (6)
Reserves (as defined). In addition to the secured revolving advances
represented by the Formula Amount, and subject to the overall limitation of
the Maximum Revolving Advance Amount, the agreement provides the Company
with an additional, unsecured Overformula Facility of $17,000,000 (the
outstanding balance of which must be reduced to not more than $10,000,000
for at least one business day during a five business day cleanup period
each month) through December 31, 2000. In consideration for the unsecured
portion of the credit facility, the Company issued 1,791,667 shares of
Signal Apparel Common Stock and warrants to purchase 375,000 shares of
Common Stock priced at $1.50 per share. The fair market value using the
Black-Scholes option pricing model of the above mentioned warrants has not
yet been calculated. When such amount is calculated, it will be capitalized
and included in the consolidated balance sheet as debt issuance costs.
These costs will be amortized over the term of the debt agreement with BNY.
9. On March 3, 1999, the Company completed the private placement of $5 million
of 5% Convertible Debentures due March 3, 2002 with two institutional
investors. The Company utilized the net proceeds from issuance of these
Debentures to redeem all of the remaining outstanding shares of the
Company's 5% Series G1 Convertible Preferred Stock (following the
conversion of $260,772.92 stated value (including accrued dividends) of
such stock into 248,355 shares of the Company's Common Stock effective
February 26, 1999, by two other institutional investors). This transaction
effectively replaced a security convertible into the Company's Common Stock
at a floating rate (the 5% Series G1 Preferred Stock) with a security (the
Debentures) convertible into Common Stock at a fixed conversion price of
$2.00 per share. The transaction also reflects the Company's decision to
forego the private placement of an additional $5 million of 5% Series G2
Preferred Stock under the original purchase agreement with the Series G1
Preferred investors. In connection with the sale of the $5 million of
Debentures, the Company issued 2,500,000 warrants to purchase the Company's
Common Stock at $1.00 per share with a term of five years. The fair market
value, using the Black Scholes option pricing model, of the above mentioned
warrants of approximately $2.25 million has been capitalized and included
in the consolidated balance sheet as debt issuance costs. These costs are
being amortized over the term of the Debentures.
10. In January 1999, the Company completed the sale of its Heritage division ,
a woman's fashion knit business, to Heritage Sportswear, LLC, a new company
formed by certain former members of management of the Heritage division.
Additional information regarding the terms of this sale are available in
Company's 10-K.
11. In the first quarter of 1999, Signal closed its offices and warehouses in
Chattanooga, Tennessee and its production facilities in Tazewell, Tennessee
and shut down substantially all of its operations located there. Signal
relocated its sales and merchandising offices to New York,
New York and relocated the corporate offices and all accounting and certain
related administrative functions to offices in Avenel, New Jersey.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
The Company has experienced losses for each of its past seven fiscal years. The
Company's net loss for the quarter ended April 3, 1999 is $3.6 million. However,
for the first time in over five years, the Company has demonstrated positive
earnings before depreciation and amortization ("EBITDA"). EBITDA is $0.44
million for the quarter ended April 3, 1999 compared to an EBITDA loss of ($2.4)
million for the corresponding period of 1998. The EBITDA improvement was
substantially the result of increased sales by Signal of 190% and increased
operating efficiencies, including a decrease in SG&A from 40% of total sales in
first quarter 1998 to 19% of sales in the corresponding period of 1999. The
EBITDA of $0.44 million in 1999 includes EBITDA loss of approximately ($1.0)
million from the Company's Big Ball subsidiary (which is being closed in the
second quarter of 1999, See Liquidity and Capital Resources) and EBITDA loss of
($0.76) million related to the start-up costs of the new Umbro license
initiative.
Net sales of $33.4 million for the quarter ended April 3, 1999 represents an
increase of $21.9 million (or 190%) from $11.6 million in net sales for the
corresponding period of 1998. This increase is mainly attributed to $26.0
million in combined new sales from the newly acquired Tahiti division and the
Umbro division. Conversely, the first quarter 1999 sales do not reflect any
sales from the Heritage division (sold at 1/1/99) which had provided $3.4
million in sales in the quarter ended April 4, 1998.
Total Gross Margin before royalties increased $5.6 million in the first quarter
of 1999 compared to the corresponding period in 1998. Gross Margin percentage
was constant at 26% for the quarter ended April 3, 1999 and for the
corresponding period in 1998. The $5.6 million increase in total gross margin is
attributable to the significant increase in sales of $21.9 million at an average
gross margin of 26%.
Royalty expense related to licensed product sales was 6% of sales for the
quarter ended April 3, 1999 compared to 7% for the corresponding period of 1998.
This decrease resulted primarily from an increase by the Company in sales of
proprietary products.
Selling, general and administrative (SG&A) expenses as a percentage of total
sales improved 21% and were 19% of sales for the quarter ended April 3, 1999
compared to 40% of sales for the corresponding period of 1998. The total amount
of SG&A expenses increased from $4.65 million in the quarter ended April 4, 1998
to $6.19 million for the comparable quarter of 1999. The change in the total
amount of SG&A between 1998 and 1999 is primarily related to additional sales
expenses resulting from the additional $21.9 million of sales in the quarter
ended April 3, 1999.
Depreciation and Amortization increased from $360,000 in the quarter ended April
4, 1998 to $787,331 in the comparable 1999 period primarily as a result of
$459,742 of amortization of goodwill attributable to the new Tahiti acquisition.
Interest expense for the quarter ended April 3, 1999 was $3.3 million compared
to $1.6 million in the comparable quarter of 1998. In 1999, $1,038,652 of the
$3.3 million of interest expense is non-cash interest amortization related to
the reduction of debt discounts for the WGI, LLC warrants and the new Bank of
New York term loans.
FINANCIAL CONDITION
During 1998 and the first quarter of 1999, the Company has undergone a strategic
change from a manufacturing orientation to a sales and marketing focus.
Effective March 22, 1999, Signal Apparel Company, Inc. purchased the business
and assets of Tahiti Apparel Company, Inc., a leading supplier of ladies and
girls activewear, bodywear and swimwear primarily to the mass market as well as
to the mid-tier and upstairs retail channels. Tahiti's products are marketed
pursuant to various licensed properties and brands as well as proprietary brands
of Tahiti. During the fourth quarter of 1998, Signal also acquired the license
and certain assets for the world recognized Umbro soccer brand in the United
States for the department, sporting goods and sports specialty store retail
channels. The acquisition of Tahiti
Apparel and the Umbro license initiative both are part of the Company's ongoing
efforts to improve its operating results. The Company remains committed to
exiting all manufacturing activities and to focus exclusively on sales,
marketing and merchandising of its product lines. Following these developments,
Signal and its wholly owned subsidiaries, Big Ball Sports, Inc. and Grand
Illusion Sportswear, manufacture and market activewear, bodywear and swimwear in
juvenile, youth and adult size ranges. The Company's products are sold
principally to retail accounts under the Company's proprietary brands, licensed
character brands, licensed sports brands, and other licensed brands. The
Company's principal proprietary brands include G.I.R.L., Bermuda Beachwear, Big
Ball and Signal Sport. Licensed brands include Hanes Sport, BUM Equipment, Jones
New York and Umbro. Licensed character brands include Mickey Unlimited, Winnie
the Pooh, Looney Tunes, Scooby-Doo and Sesame Street; and licensed sports brands
include the logos of Major League Baseball, the National Basketball Association,
and the National Hockey League. The Company's license with the National Football
League expired, subject to certain sell-off rights, on March 31, 1999 and will
not be renewed. During the year ended December 31, 1998, licensed NFL product
sales were approximately 15% of consolidated revenue. The loss of this license
could also affect the Company's ability to sell other professional sports
apparel to its customers.
Additional working capital was required in the first three months of 1999 to
fund the continued losses and payments of interest on the Company's long-term
debt to its secured lenders. The Company's need was met through use of its new
credit facility with its senior lender. At April 3, 1999, the Company had
overadvance borrowings of approximately $9 million with its senior lender
compared to $35.9 million at April 4, 1998.
The Company's working capital deficit at April 3, 1999 decreased $40.6 million
or 71% compared to year end 1998. The decrease in working capital deficit was
primarily due to increases in inventory ($5.3 million), and decreases in the
revolving advance account ($34.2 million), accounts payable ($2.7 million),
current portion of long-term debt ($1.0 million) and prepaid expenses ($1.0
million) which were partially offset by a decrease in cash ($1.8 million) and an
increase in accrued interest ($0.2 million) and accrued liabilities ($1.2
million). The Company has a "zero base balance" arrangement with the bank where
it maintains its operating account that allows the Company to cover checks drawn
on such account on a daily basis with funds wired from its senior lender based
on the credit facility with the senior lender. The nominal bank overdraft at the
end of the fiscal quarter resulted from an inter-period timing difference
between the senior lender's wire transfers to the Company's operating account
and the checks clearing such account.
Accounts receivable decreased $0.8 million or 58% over year-end 1998. The
decrease was primarily a result of the improved collection of non-functional
receivables, the recalculation of appropriate reserves, and the timing of
payments from the senior lender on factored receivables.
Inventories increased $5.3 million or 42% compared to year-end 1998. Inventories
increased as a result of the new Tahiti acquisition and the significant
additional inventory required to service the increased sales volume.
Total current liabilities decreased $35 million or 49% over year-end 1998,
primarily due to decreases in accounts payable ($2.7 million) and the revolving
advance account ($34.2 million), partially offset by increases in the current
portion of long-term debt ($1.0 million) and accrued liabilities ($1.2 million),
and increases in the bank overdraft ($1.4 million).
Cash used in operations was $40.2 million during the first three months of 1999
compared to $5.3 million used in operating activities during the same period in
1998. In addition to the net loss of $3.6 million, during the first three months
of 1999, the increased use of cash during such period was primarily due to
increases in Goodwill and other adjustments ($30.5 million), accounts payable
and accrued liabilities ($1.2 million) and inventory ($5.3 million). Primary
items partially offsetting the uses of funds were depreciation and amortization
($0.8 million) and decrease in accounts receivable ($0.8 million).
Commitments to purchase equipment totaled less than $0.1 million at April 3,
1999. During the remainder of 1999, the Company anticipates capital expenditures
not to exceed $1.0 million.
Cash used in investing activities was $1.8 million for the three months ended
April 3, 1999 compared to $0.4 million in the comparable period for 1998.
Cash provided by financing activities was $42 million for the first three months
of 1999 compared to $4.5 million in the comparable period for 1998. The Company
borrowed approximately $50 million from the senior lender under a new term loan,
and a bank
overdraft of $1.4 million borrowed approximately $4 million from related parties
(primarily Chan for $3.5 million). This was partially offset by a significant
reduction in the revolving advance account ($34.2 million), repurchase of Series
G1 Preferred Stock ($2.5 million), and other principal payments on borrowings of
$1.0 million.
The revolving advance account decreased $34.2 million from $44 million at
year-end 1998 to $9.8 million at April 3, 1999. Approximately $9.0 million was
overadvanced under the revolving advance account. The overadvance is secured in
part, by the guarantee of two principal shareholders.
Interest expense for the three months ended April 3, 1999 was $3.3 million
compared to $1.5 million for the same period in 1998. The $3.3 million of
interest in this quarter included non-cash interest charges of $0.9 million.
Total outstanding debt averaged $78 million and $62.5 million for the first
three months of 1999 and 1998, respectively, with average interest rates of
9.7%, and 9.9%, respectively. The increased interest expense was partially
offset by amortization of debt issuance cost of $1.0 million.
The Company uses letters of credit to support foreign and some domestic sourcing
of inventory and certain other obligations. Outstanding letters of credit were
$7.8 million at April 3, 1999 (excluding collateral of $2.0 million pledged to
the senior lender in the form of a standby letter of credit).
Total Shareholders' Deficit increased $7.8 million compared to year-end 1998.
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.
As of April 3, 1999, the company's senior lender waived certain covenant
violations (pertaining to quarterly profits and working capital) under the
Company's factoring agreement.
If the Company's sales and profit margins do not substantially improve in the
near term, the Company will be required to seek additional capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate additional acquisitions. To obtain such
additional capital and such financing, the Company may be required to issue
additional securities that may dilute the interests of its stockholders.
At the end of fiscal 1997, the Company implemented a restructuring plan for its
preferred equity and the majority of its subordinated indebtedness (following
approval by shareholders of the issuance of Common Stock in connection
therewith), which resulted in a significant increase in the Company's overall
equity as well as a significant reduction in the Company's level of indebtedness
and ongoing interest expense. In addition, as discussed in Note 8 to the
financial statements, during the first quarter of 1999, the Company sold $5
million of Convertible Debentures to institutional investors, which funds were
used to repurchase the Company's Convertible Preferred Stock. The Company
anticipates that funds provided by the WGI Credit Agreement and the Bank of New
York credit facility will enable the Company to meet its liquidity needs at
least through June 30, 1999.
During the fourth quarter of 1998, the Company reached a decision to close its
printing facility in Chattanooga, Tennessee and it anticipated closing its Big
Ball and Grand Illusion subsidiaries. The Company recorded a restructuring
charge in the amount of $8.3 million as a result of these matters. The Company
took this action in an effort to further improve its cost structure. The Company
is considering the sale of certain other non-essential assets. The Company also
has an ongoing cost reduction program intended to control its general and
administrative expenses, and has implemented an inventory control program to
eliminate any obsolete, slow moving or excess inventory.
On May 12, 1999 the Company issued a WARN notice that the Company will close its
Houston printing facility. The Company is contemplating taking a restructuring
charge for this plant closure in the second quarter of 1999, but it has not yet
determined the appropriate amount (if any) of such charge.
Although management believes that the effects of the restructuring, the private
placement of preferred stock and the cost reduction measures described above
have enhanced the Company's opportunities for obtaining the additional funding
required to meet its liquidity requirements beyond June 30, 1999, no assurance
can be given that any such additional financing will be available to the Company
on commercially reasonable terms or otherwise. The Company will need to
significantly improve sales and profit margins or raise additional funds in
order to continue as a going concern.
YEAR 2000
The Company is in the process of updating its current software, developed for
the apparel industry, which will make the information technology ("IT") systems
year 2000 compliant. This software modification, purchased from a third party
vendor, is expected to be installed, tested and completed on or before September
30, 1999, giving the Company additional time to test the integrity of the
system. Although the Company believes that the modification to the software
which runs its core operations is year 2000 compliant, the Company does utilize
other third party equipment and software that may not be year 2000 compliant. If
any of this software or equipment does not operate properly in the year 2000 and
thereafter, the Company could be forced to make unanticipated expenditures to
cure these problems, which could adversely affect the Company's business. The
total cost of the new software and implementation necessary to upgrade the
Company's current IT system and address the year 2000 issues is estimated to be
approximately $100,000. Planned costs have been budgeted in the Company's
operating budget. The projected costs are based on management's best estimates
and actual results could differ as the new system is implemented. Approximately
$30,000 has been expended as of April 3, 1999. While the Company was aware of
and was in the process of addressing all known and anticipated year 2000 issues,
no formal plan had been adopted. Accordingly, the Company is in the process of
completing a formal year 2000 compliance plan and expects to achieve
implementation on or before September 30, 1999. This effort will be headed by
the Company's new MIS manager and includes members of various operational and
functional units of the Company. The Company is cognizant of the risk associated
with the year 2000 and has begun a series of activities to reduce the inherent
risk associated with non-compliance. The Company hired a new MIS manager whose
primary responsibility will be to insure that all Company systems are Year 2000
compliant. Among the activities which the Company has not performed to date
include: software (operating systems, business application systems and EDI
system) must be upgraded and tested (although these systems are integrated and
are included in the Company's core accounting system); PC's must be assessed and
upgraded for compliance, letters/inquiries have not been sent to suppliers,
vendors, and others to determine their compliance status (although the Company'
principal customers, Wal-Mart, Target and K-Mart, have indicated that they are
Year 2000 compliant). In the event that the Company or any of its significant
customers or suppliers does not successfully and timely achieve year 2000
compliance, the Company's business or operations could be adversely affected.
Thus, the Company is in the process of adopting a contingency plan. The Company
is currently developing a "Worst Case Contingency Plan" which will include
generally an environment of utilizing spreadsheets and other "workaround"
programming and procedures. This contingency system will be activated if the
current plans are not successfully implemented and tested by October 31, 1999.
The cost of these alternative measures are estimated to be less than $25,000.
The Company believes that its current operating systems are fully capable
(except for year 2000 data handling) of processing all present and future
transactions of the business. Accordingly, no major efforts have been delayed or
avoided which affect normal business operations as a result of the incomplete
implementation of the year 2000 IT systems. These current systems will become
the foundation of the Company's contingency system.
Part II. OTHER INFORMATION
Items 1-3
Not Required
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1998 Annual Meeting of the Company's shareholders was held on
January 27, 1999.
(b) The following directors were elected at the Annual Meeting: Henry L.
Aaron; Barry F. Cohen; Jacob I. Feigenbaum; Paul R. Greenwood; Thomas
A. McFall; John W. Prutch; Stephen Walsh; and Howard N. Weinberg.
(c) The meeting was held to consider and vote upon (i) a proposal to
approve the issuance of up to 10,070,000 shares of the Company's
Common Stock in connection with the Company's acquisition of
substantially all of the assets of Tahiti Apparel, Inc.; (ii) a
proposal to approve the issuance of additional shares of the Company's
Common Stock upon the conversion of (or, at the election of the
Company, in payment of accrued dividends with respect to) shares of
the Company's 5% Series G1 Convertible Preferred Stock and 5% Series
G2 Convertible Preferred Stock; (iii) a proposal to approve the
Company's 1998 Stock Incentive Plan and the issuance of up to
5,000,000 shares of the Company's Common Stock in connection with
awards under such plan; (iv) approve the issuance of warrants to
purchase up to 5,000,000 shares of the Company's Common Stock to WGI,
LLC in connection with certain additional funding and waivers under
the Credit Agreement between the Company and WGI, LLC; (v) a proposal
to approve the issuance of warrants to purchase up to 3,804,546 shares
of the Company's Common Stock to the Company's Chief Executive Officer
and the Company's President under the terms of certain agreements
between the Company and such officers; and (vi) the election of eight
directors.
The results of the proposal to approve the issuance of the Company's
Common Stock in connection with the Company's acquisition of
substantially all of the assets of Tahiti Apparel, Inc. were as
follows:
FOR 16,722,899
AGAINST 8,135
ABSTAIN 6,613
BROKER NON-VOTES 5,725,525
TOTAL 22,463,172
The results of the proposal to approve the issuance of shares of the
Company's Common Stock upon the conversion of (or, at the election of
the Company, in payment of accrued dividends with respect to) shares
of the Company's 5% Series G1 Convertible Preferred Stock and 5%
Series G2 Convertible Preferred Stock were as follows:
FOR 16,687,064
AGAINST 43,124
ABSTAIN 7,459
BROKER NON-VOTES 5,725,525
TOTAL 22,463,172
The results of the proposal to approve the Company's 1998 Stock
Incentive Plan and related issuances of Common Stock were as follows:
FOR 16,500,104
AGAINST 229,517
ABSTAIN 8,026
BROKER NON-VOTES 5,725,525
TOTAL 22,463,172
The results of the proposal to approve the issuance of warrants to
purchase up to 5,000,000 shares of the Company's Common Stock to WGI,
LLC were as follows:
FOR 16,685,214
AGAINST 45,169
ABSTAIN 7,264
BROKER NON-VOTES 5,725,525
TOTAL 22,463,172
The results of the proposal to approve the issuance of warrants to
purchase up to 3,804,546 shares of the Company's Common Stock to the
Company's Chief Executive Officer and the Company's President were as
follows:
FOR 16,495,281
AGAINST 231,796
ABSTAIN 10,590
BROKER NON-VOTES 5,725,525
TOTAL 22,463,172
There was no solicitation in opposition to management's nominees for directors.
Each director serves a one year term, or until his successor is elected and
qualified. The results of the election of directors were as follows:
WITHHOLD BROKER
DIRECTOR NAME FOR AUTHORITY NON-VOTES TOTAL
- - - - ------------- --- --------- --------- -----
Henry L. Aaron 22,455,794 7,378 0 22,463,172
Barry F. Cohen 22,455,458 7,714 0 22,463,172
Jacob I. Feigenbaum 22,455,774 7,398 0 22,463,172
Paul R. Greenwood 22,455,388 7,784 0 22,463,172
Thomas A. McFall 22,362,461 100,711 0 22,463,172
John W. Prutch 22,362,461 100,711 0 22,463,172
Stephen Walsh 22,455,478 7,694 0 22,463,172
Howard N. Weinberg 22,455,388 7,784 0 22,463,172
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Second Amendment to Asset Purchase Agreement concerning Tahiti
Apparel, Inc., dated April 15, 1999.
(10.2) Form of Letter Agreement dated May __, 1999 amending the Revolving
Credit, Term Loan and Security Agreement dated March 12, 1999
between the Company and its senior lender, BNY Financial
Corporation (in its own behalf and as agent for other
participating lenders), and waiving compliance with certain
provisions thereof.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following Current Reports on Form 8-K during
the quarter:
FINANCIAL
DATE OF REPORT ITEMS REPORTED STATEMENTS FILED
- - - - -------------- -------------- ----------------
March 3, 1999 Item 5 - Other Events: The private None.
placement of $5 million of 5% Convertible
Debentures due March 3, 2002.
FINANCIAL
DATE OF REPORT ITEMS REPORTED STATEMENTS FILED
- - - - -------------- -------------- ----------------
March 22, 1999 Item 2 - Acquisition or Historical and Pro Forma
Disposition of Assets: Financial Statements concerning this
The acquisition of substantially all of acquisition, to be filed by amendment.
the assets and business of Tahiti
Apparel, Inc.
Item 5 - Other Events: The completion of None.
the Company's new financing arrangement
with its senior lender, BNY Financial
Corporation.
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.
(Registrant)
Date: May 24, 1999 /s/ Thomas A. McFall
--------------------
Thomas A. McFall
Chief Executive Officer
Date: May 24, 1999 /s/ Howard Weinberg
-------------------
Howard Weinberg
Chief Financial Officer