SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to 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 June 24, 1999
----- ----------------------------
Common Stock 44,498,214 shares
The registrant hereby amends the following items, financial statements, exhibits
or other portions of its Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999, which was filed with the Commission on May 24, 1999:
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 17,981 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 8,259 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
Term Loan 49,796 0
--------- ---------
Total Current Liabilities: 84,235 72,187
Long-term Liabilities:
Convertible Debentures 2,748 0
Notes Payable Principally to Related Parties 18,014 13,968
--------- ---------
Total Long-term Liabilities: 20,762 72,187
Shareholders' Equity (Deficit):
Preferred Stock 48,752 52,789
Common Stock 491 326
Additional paid-in capital 185,410 165,242
Accumulated deficit (287,048) (284,931)
--------- ---------
Subtotal (52,395) (66,574)
Less: Cost of Treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total shareholders' equity (deficit) (53,512) (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 24,765 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) net (31) (446)
-------- --------
Loss before income taxes (3,609) (3,854)
-------- --------
Income taxes -- --
-------- --------
Net loss $ (3,609) $ (3,854)
-------- --------
Less: preferred stock dividends 0 0
Net loss applicable to common stock $ (3,609) $ (3,854)
Basic/diluted net loss per share $ (0.10) $ (0.12)
======== ========
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, net
of the effect of acquisitions and sales:
Depreciation and amortization 1,538 783
Non-cash interest charges 907 0
(Gain) on disposal of equipment (52) (439)
Changes in operating assets and liabilities:
Receivables 961 (1,427)
Inventories 3,129 (246)
Prepaid expenses and other assets (567) (203)
Accounts payable and accrued
liabilities (8,882) 40
-------- --------
Net cash used in operating
activities (6,575) (5,346)
-------- --------
Investing Activities:
Purchases of property, plant and
equipment (699) (88)
Proceeds from notes receivable 0 54
Restricted Cash (8) 0
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 1,293 444
-------- --------
Financing Activities:
Increase in bank overdraft 1,439 0
Net increase (decrease) 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 (2,398) 0
Proceeds from sale of convertible debt 2,350 0
New common stock issued 18 0
Net cash provided by
financing activities 4,879 4,528
-------- --------
(Decrease) in cash (403) (374)
Cash and Cash equivalents at beginning of period 403 384
-------- --------
Cash and Cash equivalents at end of period $ 0 $ 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 term 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 a debt
discount. 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 (including the
issuance of the additional 4.3 million common shares) (see Note 7), the
Company anticipates issuing approximately 3,382,344 additional warrants to
WGI, LLC. The fair market value, using the Black-Scholes option pricing
model, of the above mentioned warrants of approximately $2.8 million will
be capitalized and included in the Company's balance sheet as a debt
discount. These costs will be amortized over the term of the debt agreement
with 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 commencing 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. 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.
The results of operations of Tahiti are included in the accompanying
consolidated financial statements from the date of acquisition (i.e.
January 1, 1999). The pro forma financial information below is based on the
historical financial statements of Signal Apparel and Tahiti and adjusted
as if the acquisition had occurred on January 1, 1998, with certain
assumptions made that management believes to be reasonable. This
information is for comparative purposes only and does not purport to be
indicative of the results of operations that would have occurred had the
transactions been completed at the beginning of the respective periods or
indicative of the results that may occur in the future.
1998
(Unaudited
In Thousands)
Operating Revenue $43,892
Income from Operations $13,456
Net Loss $(1,570)
Basic/diluted net loss per share $ (.03)
Weighted average shares outstanding $45,987
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 of
approximately $204,215 has been capitalized and is included in the
accompanying
consolidated balance sheet as a debt discount. These costs are being
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 a debt discount. 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.
12. WGI has waived its right to receive $1.5 million in preferred dividends
which would have accrued in relation to the Series H Preferred Stock during
the first quarter of 1999.
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
("EBITDA") which is defined as net income before interest, taxes, depreciation
and amortization. EBITDA is used by the Company to supplement operating income
as an indicator of operating performance and cash flows from operating
activities as a measure of liquidity, and not as an alternative to measures
defined and required by generally accepted accounting principles. EBITDA is $0.5
million for the quarter ended April 3, 1999 compared to an EBITDA loss of ($1.9)
million for the corresponding period of 1998. The EBITDA improvement was
substantially the result of increased sales by the Company of 190% and increased
operating efficiencies, including a decrease in SG&A from 43% of total sales in
first quarter 1998 to 21% of sales in the corresponding period of 1999. The
EBITDA of $0.5 million in 1999 includes an 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 an EBITDA loss
of ($0.8) 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 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 22% and were 21% of sales for the quarter ended April 3, 1999
compared to 43% of sales for the corresponding period of 1998. The total amount
of SG&A expenses increased from $5.1 million in the quarter ended April 4, 1998
to $7.0 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 $0.4 million in the quarter ended
April 4, 1998 to $0.8 million in the comparable 1999 period primarily as a
result of $0.5 million 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, $0.9 million 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 increased $6.5 million or
11.5% compared to year end 1998. Excluding the effect of all sales and
acquisitions of divisions, the increase in the working capital deficit was
primarily due to the new term loan being classified as a current liability
($49.8 million), a decrease in cash ($0.4 million) and an increase in bank
overdraft ($1.4 million), which were partially offset by increases in inventory
($3.1 million) and accounts receivable ($1.0 million), and decreases in the
revolving advance account ($46.0 million), accounts payable and accrued
liabilities ($8.9 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.
Excluding the effect of all sales and acquisitions of divisions, accounts
receivable decreased $1.0 million or 68% over year-end 1998. The decrease was
primarily a result of the improved collection of non-collectible receivables,
the recalcuation of appropriate reserves related to the new Tahiti accounts
receivable, and the timing of payments from the senior lender on factored
receivables.
Excluding the effect of all sales and acquisitions of divisions, inventories
increased $3.1 million or 25% 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.
Excluding the effect of all sales and acquisitions of divisions, total current
liabilities increased $12.0 million or 16.7% over year-end 1998, primarily due
to the term loan being classified as a current liability ($49.8) million,
increases in the current portion of long term-debt ($1.0 million) and increases
in the bank overdraft ($1.4 million), partially offset by decreases in accounts
payable and accrued liabilities ($8.9 million) and the revolving advance account
($46 million).
Excluding the effect of all sales and acquisitions of divisions, cash used in
operations was $6.6 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 an increase in
accounts receivable ($1.0 million) and inventories ($3.1 million) and a decrease
in accounts payable and accrued liabilities ($8.9 million). The primary items
partially offsetting the use of cash were depreciation and amortization ($1.5
million) and non-cash interest ($0.9 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 provided by investing activities was $1.3 million for the three months
ended April 3, 1999 compared to cash provided of $0.4 in the comparable period
for 1998.
Cash provided by financing activities was $4.9 million for the first three
months of 1999 compared to $4.5 million in the comparable period for 1998.
Excluding the effect of all sales and acquisitions of divisions, the Company had
net borrowings of approximately $4.0 million from its senior lender, after
taking into account borrowings under the new $50 million term loan and the
borrowings under the new revolving credit facility and repayment of the existing
credit facilities maintained by the Company (including those assumed in
connection with the Tahiti acquisition), and a bank overdraft of $1.4 million.
In addition, the Company borrowed approximately $4 million from related parties
and sold new 5% convertible debentures ($2.4 million). This was partially offset
by a significant reduction in the revolving advance account ($46.0 million),
repurchase of Series G1 Preferred Stock ($2.4 million), and other principal
payments on borrowings of $0.5 million.
Excluding the effect of all sales and acquisitions of divisions, the revolving
advance account decreased $46.0 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 discount 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 decreased $14.2 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. Even though these covenant violations have been
waived, the Company has not yet compiled its results for the second quarter of
1999 and no determination can yet be made whether one or more covenant
violations exist for the second quarter. Accordingly, GAAP requires that the $50
million term loan be classified as a current liability even though the term of
the loan is longer than one year.
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 9 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 Series G1 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
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) Letter Agreement dated May 26, 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.
(10.3) Letter Agreement dated May 14, 1999 containing waiver of dividends
on the Company's Series H Preferred Stock for the First Quarter of
1999 by WGI, LLC, the sole holder of such stock.
(27) Financial Data Schedule
* Incorporated by reference to original Form 10-Q Quarterly Report for the
quarterly period ended April 3, 1999 filed by Signal Apparel Company, Inc. (SEC
File No. 1-2782)
(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 Disposition Historical and Pro Forma
of Assets: The acquisition Financial Statements
of substantially all of the concerning this
assets and business of acquisition, to be
Tahiti Apparel, Inc. filed by amendment.
Item 5 - Other Events: The completion None.
of 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: June 29, 1999 /s/ Thomas A. McFall
------------------------------
Thomas A. McFall
Chief Executive Officer
Date: June 29, 1999 /s/ Howard Weinberg
------------------------------
Howard Weinberg
Chief Financial Officer