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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 1-14078
BLUE FISH CLOTHING, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Pennsylvania 22-2781253
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
No. 3 Sixth Street, Frenchtown, New Jersey 08825
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(Address of Principal Executive Offices)
(908) 996-3844
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year if Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--------- ---------
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: As of August 18, 1998,
4,719,200 shares of Common Stock, $.001 par value per share, were issued and
outstanding.
Transitional Small Business Disclosure Format (check one): YES NO X
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BLUE FISH CLOTHING, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - December 31, 1997 and June 30, 1998 3
Statements of Operations - For the Three and Six Months Ended 4
June 30, 1997 and June 30, 1998
Statements of Cash Flows - For the Six Months Ended 5 June 30, 1997 and
June 30, 1998
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS ON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17
HOLDERS
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
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BLUE FISH CLOTHING, INC.
BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
ASSETS 1997 1998
------ ----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 350,477 $ 190,438
Restricted cash 116,065 65,007
Certificate of deposit 500,000 -
Receivables, net of allowance of 1,180,962 630,693
$40,000 and $46,453
Inventories, net 2,944,166 3,022,723
Other current assets 175,736 113,656
-------- -------
Total current assets 5,267,406 4,022,517
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated 1,898,489 1,658,012
depreciation of $819,575 and $1,079,618
OTHER ASSETS:
Restricted certificate of deposit 300,000 300,000
Security deposits 254,551 100,875
-------- -------
$ 7,720,446 $ 6,081,404
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES
Line of credit $ 500,000 $ 1,000,000
Current portion of long-term debt 222,786 215,490
Receivable purchase line of credit 1,160,648 650,074
Accounts payable 808,893 1,176,817
Accrued expenses 364,947 692,107
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Total current liabilities 3,057,274 3,734,488
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DEFERRED RENT AND OTHER NON-CURRENT LIABILITIES 267,553 75,466
-------- ------
LONG-TERM DEBT 1,055,195 975,623
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 11,000,000
shares authorized, 4,599,200
shares issued and outstanding 4,599 4,599
Additional paid-in capital 3,799,815 3,799,815
Retained (deficit) (463,990) (2,508,587)
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Total stockholders' equity 3,340,424 1,295,827
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$ 7,720,446 $ 6,081,404
================= =================
The accompanying notes are an integral part of these statements.
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BLUE FISH CLOTHING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
1997 1998 1997 1998
---- ---- ---- ----
SALES $3,900,007 $ 3,107,151 $ 7,342,862 $ 5,444,450
COST OF GOODS SOLD 1,815,114 1,824,572 3,416,040 3,008,509
---------- ---------- ---------- ---------
Gross margin 2,084,893 1,282,579 3,926,822 2,435,941
UNUSUAL ITEMS - 302,000 - 425,000
OPERATING EXPENSES 1,913,668 2,072,376 3,624,425 3,943,329
---------- ---------- ---------- ---------
Income (loss) from operations 171,225 (1,091,797) 302,397 (1,932,388)
INTEREST EXPENSE, NET 49,774 61,897 111,669 112,209
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES 121,451 (1,153,694) 190,728 (2,044,597)
INCOME TAX EXPENSE 56,597 - 88,880 -
------- -- ------- -
NET INCOME (LOSS) $ 64,854 $(1,153,694) $ 101,848 $ (2,044,597)
============= ============== =============== ==============
Net income (loss) per share:
============= ============== =============== ==============
Basic $ 0.01 $ (0.24) $ 0.02 $ (0.44)
============= ============== =============== ==============
============= ============== =============== ==============
Diluted $ 0.01 $ (0.24) $ 0.02 $ (0.44)
============= ============== =============== ==============
Weighted Average Shares Outstanding:
Basic 4,599,200 4,599,200 4,599,200 4,599,200
============= ============== =============== ==============
Diluted 4,777,466 4,599,200 4,775,681 4,599,200
============= ============== =============== ==============
The accompanying notes are an integral part of these statements.
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BLUE FISH CLOTHING, INC.
STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended June 30,
-------------------------------------------
1997 1998
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 101,848 $(2,044,597)
Adjustments to reconcile net income (loss) to net cash
used in operating activities -
Provision for deferred rent 45,855 7,913
Depreciation and amortization 190,888 260,043
Provision for losses on accounts receivable 25,002 6,453
(Increase) decrease in assets -
Accounts receivable (534,652) 543,816
Inventory (65,485) (78,557)
Other assets 19,707 15,756
Increase (decrease) in liabilities -
Accounts payable 82,633 367,924
Accrued expenses 88,066 327,160
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Net cash used in operating activities (46,138) (594,089)
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INVESTING ACTIVITIES:
Payments for purchases of property and equipment (804,558) (19,566)
Proceeds from certificate of deposit - 500,000
-- -------
Net cash (used in) provided by investing activities (804,558) 480,434
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FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit (500,000) 500,000
Receivable purchase line of credit, net 577,961 (510,574)
Repayments on long-term debt (82,325) (55,021)
Borrowing on long-term debt 800,000 -
Payments on capital lease obligations (30,528) (31,847)
S corporation distributions paid (44,041) -
-------- -
Net cash provided by (used in) financing activities 721,067 (97,442)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (129,629) (211,097)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,928,340 466,542
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CASH AND CASH EQUIVALENTS,
END OF PERIOD $1,798,711 $ 255,445
========== =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 111,849 $ 107,459
========= =========
Taxes $ 29,575 $ 4,087
========== =========
The accompanying notes are an integral part of these statements.
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BLUE FISH CLOTHING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDING JUNE 30, 1998
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION:
- ---------------------------------------------------
The accompanying unaudited financial statements are presented in accordance with
the requirements for Form 10-QSB and do not include all the disclosures required
by generally accepted accounting principles for complete financial statements.
Reference should be made to the Blue Fish Clothing, Inc.'s (the "Company")
annual report on Form 10-KSB, for additional disclosures including a summary of
the Company's accounting policies and a discussion of the Company's ability to
continue as a going concern.
In the opinion of management of the Company, the financial statements include
all adjustments, consisting of only normal recurring accruals, necessary for a
fair presentation of the financial position of Blue Fish Clothing, Inc. The
results of operations for the three months and six months ended June 30, 1998 or
any other interim period, are not necessarily indicative of the results to be
expected for the full year.
The Company incurred losses in 1996, 1997, and the first half of 1998. The net
sales in the first half of 1998 declined $1,898,412 as compared to the first
half of 1997. Wholesale sales are budgeted to be lower in the third and fourth
quarters of 1998 as compared to the same periods in 1997. The Company's existing
financing structure is not deemed adequate to support the projected 1998 cash
flow needs. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis to comply with the terms of its financing
agreements, to obtain equity investments, additional financing or increased
availability, as may be required and ultimately to attain successful operations.
Management is currently seeking equity investments, refining its operating
structure, reorganizing its marketing function and seeking additional financing
so that it can meet its obligations and sustain operations. There can be no
assurance, however, that Management's efforts will ultimately be successful.
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES:
- ---------------------------------------------------------
Inventories
The components of inventory as presented are as follows:
December 31, June 30,
1997 1998
------------ -------------
Raw materials $ 296,700 $ 512,536
Work-in-process 810,737 619,200
Finished goods, net 1,836,729 1,890,987
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$ 2,944,166 $ 3,022,723
============ =============
Major Customers and Concentration of Credit Risk
- ------------------------------------------------
The Company has one significant customer that accounted for 17.9% and 12.5% of
total sales for the six months ended June 30, 1997 and June 30, 1998,
respectively. This same customer accounted for 17.8% and 28.7% of net accounts
receivable at December 31, 1997 and June 30, 1998, respectively.
NOTE 3 - INCOME TAXES:
- ----------------------
Due to recurring losses, the Company has provided a full valuation for the tax
benefit associated with the 1998 loss.
NOTE 4 - FINANCING ARRANGEMENTS
- -------------------------------
On June 25, 1997, the Company entered into a Business Loan Agreement with a bank
and received a promissory note in the amount of $800,000. This note was
initially secured by an $842,000 certificate of deposit and guaranteed by
Jennifer Barclay, a principal shareholder. On September 30, 1997, this Agreement
was modified and the bank reduced its security interest in the certificate of
deposit to $300,000 and the Company agreed to maintain a minimum deposit account
with the bank in an amount not less than $500,000. This minimum deposit amount
was used for working capital needs during the first quarter of 1998.
At December 31, 1997, the Company had a line of credit of $500,000 subject to a
maximum outstanding amount not to exceed 50% of finished goods inventory plus
25% of work in process. This line of credit bears interest at the bank's prime
interest rate plus 0.75% payable on demand or monthly. In March 1998, the line
was increased to $1,000,000 subject to borrowing limits based on inventory and
extended to April 1999. These additional funds were borrowed on April 10, 1998.
The Company also has a receivable purchase line of credit agreement, which
provides for the assignment and processing of Company receivables with recourse
to a maximum outstanding assigned amount of $1,500,000 for a term of one year.
The Company assigns 100% of its wholesale credit sales. The Company can borrow
up to 90% of these assigned receivables, with the remaining 10% held in reserve
in the event of customer payment default. The receivable purchase line of credit
bears interest at 1.5% as a discount to all receivables assigned, and the
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Company is responsible for reimbursing the bank for all uncollectible accounts.
In March 1998, the receivable purchase line of credit was renewed and extended
through March 1999, however, this line can be terminated by either party upon
notice, as defined.
Both the line of credit and the receivable purchase line of credit are secured
by a stockholder guarantee and have a first lien on all accounts receivable,
inventory, equipment, fixtures and deposit accounts. Borrowings under the
receivable purchase line, the line of credit, and the note payable to a bank
contain cross-default and cross-collateralization provisions.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases and Real Estate
- ----------------------
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease was scheduled to commence in June 1998. In 1997, the lease was
amended, obligating the Company to purchase the Corporate facility and other
buildings in the complex for $3,800,000 during the sixth year after the Company
takes possession of the premises. In addition, the Company was obligated to make
payments of approximately $340,000 related primarily to building improvements at
this site of which $50,000 was paid as of June 30, 1998. In July 1998, this
lease was terminated, as were all commitments for rent and improvements, in
consideration of cash and stock valued in the aggregate at $252,000. The Company
is obligated to pay $102,000 in cash to the Lessor based on the following
payment schedule; $12,000 on each of July 6 and July 30, 1998 (both of which
were paid), $38,000 on or before June 30, 1999, and $40,000 on or before June
30, 2000. The Company must pay interest at the rate of 8.5% per annum on the
then unpaid principal balance of the amount due on the first of each month,
commencing August 1, 1998. In addition, the Company issued to the Lessor 120,000
shares of Common Stock valued at $1.25 per share, the last sale price for the
Company's Common Stock prior to issuance. The shares are restricted as they have
not been registered under the Securities Act of 1933. With the execution of the
agreement terminating the lease, the Company's principal stockholder executed
and delivered a personal guaranty for $180,000, which will be reduced to
$142,000 when the payment due June 30, 1999 is made, and shall terminate when
the payment due June 30, 2000 is made. Expenses of $302,000 are included in
unusual items in the 1998 periods presented.
In 1997, the Company received an economic development grant of $200,000, the
proceeds of which were paid to the Lessor of the proposed Corporate facility for
certain renovation costs at the site and for which the Company received a credit
against the purchase price. After the termination of the lease, the granting
authority commenced a review of the use of the grant proceeds and has indicated
that the Company will receive a report on its findings by September 30, 1998.
Management believes that the grant proceeds were expended in accordance with the
terms of the grant. No assurance can be given, however, that the granting
authority will accept Management's position on these expenditures. If the
granting authority requires a return of some or all of the grant proceeds, the
Company will record a corresponding charge.
In April 1998, the Company entered into an Agreement to purchase its production
facility in Frenchtown, New Jersey for $375,000 and paid a deposit of $37,500
upon execution of the Agreement. The scheduled closing date was June 30, 1998,
which coincided with the scheduled
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expiration date of the Company's lease for the premises. On June 25, 1998, the
Company entered into an Assignment and Assumption of Agreement of Sale with a
related party, pursuant to which the Company assigned its right to purchase its
production facility. Pursuant to the Assignment, the $37,500 deposit for the
Agreement of Sale was released to Seller and credited against the purchase
price, the Company was permitted to continue to occupy its production facility
in consideration of additional rent of $2,000 per month, to be withdrawn from a
security deposit held by the Seller, and the closing date was advanced by 30
days upon each payment to Seller of $10,000 on July 1, August 1, and September
1, 1998. The Company has made the July 1 and August 1 payments and, accordingly,
the closing date has been advanced to August 31, 1998.
In May 1998, the Company vacated the New York showroom. The Company is
negotiating with the landlord to determine a final lease termination settlement.
The original lease is scheduled to expire in December 2000.
In June 1998, the Company extended its existing lease for its second facility in
Frenchtown, NJ which expires on November 30, 1998. The term of the lease is for
three years beginning December 1, 1998 and ending November 30, 2001. The Company
will have the option for a two year lease extension.
Severance Obligations
- ---------------------
The Company recorded a charge in the first quarter of 1998 for severance to be
paid out to former employees of approximately $123,000, which is included in
unusual items in the accompanying financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1998 ("1998 QUARTER") COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997 ("1997 QUARTER")
SALES. The Company's sales decreased by $792,856 or 20.3% to $3,107,151 in the
1998 quarter as compared to the 1997 quarter. The Company's wholesale sales
decreased by 46.5% from $2,352,713 in the 1997 quarter to $1,257,994 in the 1998
quarter, its retail sales increased by 22.1% from $1,208,860 in the 1997 quarter
to $1,475,521 in the 1998 quarter and craft fair sales increased by 10.4% from
$338,434 in the 1997 quarter to $373,636 in the 1998 quarter. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
decreased sales of the Summer 1998 line as compared to the Summer 1997 line. The
Company required customers to buy in prepack assortments and modified its
garment sizing structure beginning with the Spring 1998 line. These changes were
not received well by the customers. The Summer line was not received well by
customers in design concept, and the changes made in the Spring line also
negatively affected Summer sales. Boutique sales declined by 46.5% and
department store sales declined by 63.6% in the quarter. The retail sales
increase was primarily due to a store which opened in October 1997 generating
sales during the 1998 quarter. Same store sales increased by 4.2% during the
quarter primarily due to increased markdowns of the
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Spring 1998 line and the sale of noncurrent inventory. Craft sales increased due
to additional craft shows being scheduled to sell prior season inventory as well
as increased revenues at existing venues.
GROSS MARGIN. The major components affecting gross margin are raw material and
production costs, wholesale and retail maintained margins and sales mix. The
Company's gross margin decreased, as a percentage of sales, by 12.2 percentage
points from 53.5% in the 1997 period to 41.3% in the 1998 period. This decrease
was primarily due to the increased markdowns taken on current season items and
the sale of non current inventory at reduced prices at the Company's retail
stores.
UNUSUAL ITEMS. The Company incurred expenses of $302,000 in connection with the
termination of the Corporate facility lease in Palmer Township, Pennsylvania.
These expenses related to lost deposits, cash and stock payments.
OPERATING EXPENSES. The Company's operating expenses increased by $158,708 or
8.3% from $1,913,668 in the 1997 period to $2,072,376 in the 1998 period. The
increase in operating expenses in the 1998 period was primarily due to expenses
of one new retail store which did not exist in the 1997 quarter, depreciation,
advertising and professional expenses. See Liquidity and Capital Resources for
management actions in response to the increased operating expenses.
INTEREST EXPENSE, NET. The Company's interest expense, net, increased by $12,123
or 24.4% from $49,774 in the 1997 period to $61,897 in the 1998 period. Interest
expense decreased by $1,916 primarily due to a decrease in assigned wholesale
credit receivables as a result of decreased wholesale sales partially offset by
increased borrowings for the Company's working capital needs. Interest income
decreased by $14,039 as a result of spending a portion of the Company's initial
public offering proceeds that were held in interest bearing instruments in 1996.
PRE-TAX INCOME (LOSS). As a result of the foregoing, income before income tax
provision decreased $1,275,145 from $121,451 of pre-tax income in the 1997
period to a pre-tax loss of $1,153,694 in the 1998 period.
INCOME TAX (BENEFIT) PROVISION. Due to recurring losses, no tax benefit has been
recorded in the 1998 period. During the 1997 period the effective tax rate was
46.6% primarily due to Federal and state taxes and the impact of certain
non-deductible expenditures.
SIX MONTHS ENDED JUNE 30, 1998 ("1998 PERIOD") COMPARED TO SIX MONTHS ENDED JUNE
30, 1997 ("1997 PERIOD")
- --------------------------------------------------------------------------------
SALES. The Company's sales decreased by $1,898,412 or 25.9% to $5,444,450 in the
1998 period as compared to the 1997 period. The Company's wholesale sales
decreased by 48.4% from $4,958,208 in the 1997 period to $2,560,161 in the 1998
period, its retail sales increased by 16.7% from $1,949,936 in the 1997 period
to $2,274,762 in the 1998 period and craft fair sales increased by 40.2% from
$434,717 in the 1997 period to $609,527 in the 1998 period. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
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decreased sales of the Spring and Summer 1998 line. The Company began requiring
customers to buy the Spring line in prepack assortments and modified its garment
sizing structure. These changes were not received well by the customers. The
Summer line was not received well by customers in design concept, and the
changes made in the Spring line also negatively affected Summer sales. Boutique
sales declined by 48.4% and department store sales declined by 58.0%. The retail
sales increase was primarily due to stores which opened in March 1997 and
October 1997 generating sales during the entire 1998 period, partially offset by
a same store sales decrease of 8.4%. Same store sales decreased primarily due to
increased customer returns and a sizing problem for larger customers who did not
purchase goods in the period. Craft sales increased due to additional craft
shows being scheduled to sell prior season inventory as well as increased
revenues at existing venues.
GROSS MARGIN. The major components affecting gross margin are raw material and
production costs, wholesale and retail maintained margins and sales mix. The
Company's gross margin decreased, as a percentage of sales, by 8.8 percentage
points from 53.5% in the 1997 period to 44.7% in the 1998 period. This decrease
was primarily due to increased markdowns taken at the Company's retail stores,
and noncurrent inventory sold at a reduced price at the Company's retail stores
during the second quarter.
UNUSUAL ITEMS. Unusual items consist of lease termination and severance costs.
The Company incurred expenses of $302,000 in connection with the termination of
the Corporate facility lease in Palmer Township, Pennsylvania. These expenses
related to lost deposits, cash and stock payments. In connection with the
termination of certain employees, the Company incurred expenses of $123,000 for
severance during first quarter 1998.
OPERATING EXPENSES. The Company's operating expenses increased by $318,904 or
8.8% from $3,624,425 in the 1997 period to $3,943,329 in the 1998 period. The
increase in operating expenses in the 1998 period was primarily due to expenses
of two new retail stores which did not exist for the entire 1997 period,
depreciation, advertising and professional expenses. See Liquidity and Capital
Resources for management actions in response to the increased operating
expenses.
INTEREST EXPENSE, NET. The Company's interest expense, net, increased by $541 or
0.5% from $111,669 in the 1997 period to $112,210 in the 1998 period. Interest
expense decreased by $22,044 primarily due to a decrease in assigned wholesale
credit receivables resulting from decreased wholesale sales, partially offset by
increased borrowings for the Company's working capital needs. Interest income
decreased by $22,585 as a result of spending a portion of the Company's initial
public offering proceeds that were held in interest bearing instruments in 1996.
PRE-TAX INCOME (LOSS). As a result of the foregoing, income before income tax
provision decreased $2,235,325 from $190,728 of pre-tax income in the 1997
period to a pre-tax loss of $2,044,597 in the 1998 period.
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INCOME TAX (BENEFIT) PROVISION. Due to recurring losses, no tax benefit has been
recorded in the 1998 period. During the 1997 period the effective tax rate was
46.6% primarily due to Federal and state taxes and the impact of certain
non-deductible expenditures.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998, the Company had $255,445 in cash and cash equivalents (of
which $65,007 was restricted), a receivable purchase line of credit for up to
$1,500,000 (with $650,074 outstanding and in transit), a demand bank line of
credit for up to $1,000,000 (with a $1,000,000 outstanding balance), an $800,000
note payable to a bank (with a $750,000 outstanding balance) which requires a
$300,000 certificate of deposit as security, and a $345,000 loan from a
shareholder. At June 30, 1998, the Company had working capital of $288,029,
reflecting a decrease in working capital of $1,922,103 from $2,210,132 on
December 31, 1997. Working capital is defined as current assets less current
liabilities.
Net cash used in operations was ($594,089) during the six months ended June 30,
1998, consisting primarily of the net loss before depreciation and amortization
of $1,784,554 partially offset by a decrease in accounts receivable of $543,816,
an increase in accounts payable of $367,924 and an increase in accrued expenses
of $327,160. The decrease in accounts receivable and increase in inventory are
primarily due to lower wholesale sales. Net cash used in operating activities
during the same period for 1997 was ($46,138), which consisted primarily of
increases in accounts receivable of $534,652 partially offset by net income
before depreciation and amortization of $292,736 and increases in accounts
payable and accrued expenses of $82,633 and $88,066 respectively.
Net cash provided by investing activities in the 1998 period was $480,434
consisting of proceeds from a certificate of deposit of $500,000, partially
offset by capital expenditures. Net cash used in investing activities in the
1997 period was ($804,558) which consisted of capital expenditures to purchase
property and equipment, including construction and buildout of the Company's New
York retail store which opened in March, 1997, and the ongoing implementation of
the Company's Management Information System.
Net cash used in financing activities in the 1998 period was ($97,442),
consisting primarily of a decrease in the Company's receivable purchase line of
credit of $510,574 offset by additional net borrowings on long term debt of
$413,132. Net cash provided by financing activities in the 1997 period was
$721,067, which consisted primarily of an increase in the Company's receivable
purchase line of credit of $577,961 and additional net borrowings of $187,147.
On June 25, 1997, the Company entered into a Business Loan Agreement with a bank
and received a promissory note in the amount of $800,000. This note is subject
to monthly interest payments beginning July 25, 1997, with interest calculated
on the unpaid principal balances at an interest rate of two percentage points
over the Index. The Index represents the bank's one year certificate of deposit
yield. Four principal payments of $50,000 are to be paid in annual installments
commencing June 25, 1998 through June 25, 2001, and one principal payment of
$600,000 is to be paid on June 25, 2002. This note was initially secured by an
$842,000
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certificate of deposit and guaranteed by Jennifer Barclay, the principal
stockholder. On September 30, 1997, this Agreement was modified and the bank
reduced its security interest in the certificate of deposit to $300,000. In
addition, the Company agreed to maintain a minimum deposit account with the bank
in an amount not less than $500,000. This minimum deposit amount was spent for
working capital needs during the first quarter of 1998.
At December 31, 1997, the Company had a line of credit of $500,000 subject to a
maximum outstanding amount not to exceed 50% of finished goods inventory plus
25% of work in process. This line of credit bears interest at the bank's prime
interest rate plus 0.75% payable on demand or monthly. In March 1998, the line
was increased to $1,000,000 subject to borrowing limits based on inventory and
extended to April 1999. These additional funds were borrowed on April 10, 1998.
The Company also has a receivable purchase line of credit agreement, which
provides for the assignment and processing of Company receivables with recourse
to a maximum outstanding assigned amount of $1,500,000 for a term of one year.
The Company assigns 100% of its wholesale credit sales. The Company can borrow
up to 90% of these assigned receivables, with the remaining 10% held in reserve
in the event of customer payment default. The receivable purchase line of credit
bears interest at 1.5% as a discount to all receivables assigned, and the
Company is responsible for reimbursing the bank for all uncollectible accounts.
In March 1998, the receivable purchase line of credit was renewed and extended
through March 1999, however, this line can be terminated by either party upon
notice, as defined.
Both the line of credit and the receivable purchase line of credit are secured
by a stockholder guarantee and have a first lien on all accounts receivable,
inventory, equipment, fixtures and deposit accounts. Borrowings under the
receivable purchase line, the line of credit, and the note payable to a bank
contain cross-default and cross-collateralization provisions.
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease was scheduled to commence in June 1998. Minimum lease payments were
due monthly and began at $267,120 per year and increased 3% per year throughout
the term plus a common area maintenance charge at the greater of $15,000 or 5%
of base rent. In 1997, the lease was amended, obligating the Company to purchase
the Corporate facility and other buildings in the complex for $3,800,000 during
the sixth year after the Company takes possession of the premises. In addition,
the Company was obligated to make payments of approximately $340,000 related
primarily to building improvements at this site of which $50,000 was paid as of
June 30, 1998. In July 1998, this lease was terminated, as were all commitments
for rent and improvements, in consideration of cash and stock valued in the
aggregate at $252,000. The Company is obligated to pay $102,000 in cash to the
Lessor based on the following payment schedule; $12,000 on each of July 6 and
July 30, 1998 (both of which were paid), $38,000 on or before June 30, 1999, and
$40,000 on or before June 30, 2000. The Company must pay interest at the rate of
8.5% per annum on the then unpaid principal balance of the amount due on the
first of each month, commencing August 1, 1998. In addition, the Company issued
to the Lessor 120,000 shares of Common Stock valued at $1.25 per share, the last
sale price for the Company's Common Stock prior to issuance. The shares are
restricted as they have not been registered under the Securities Act of 1933.
With the execution of the agreement terminating the lease, the Company's
principal stockholder executed and delivered a personal guaranty for $180,000,
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which will be reduced to $142,000 when the payment due June 30, 1999 is made,
and shall terminate when the payment due June 30, 2000 is made. Expenses of
$302,000 are included in unusual items in the 1998 periods presented.
In 1997, the Company received an economic development grant of $200,000, the
proceeds of which were paid to the Lessor of the proposed Corporate facility for
certain renovation costs at the site and for which the Company received a credit
against the purchase price. After the termination of the lease, the granting
authority commenced a review of the use of the grant proceeds and has indicated
that the Company will receive a report on its findings by September 30, 1998.
Management believes that the grant proceeds were expended in accordance with the
terms of the grant. No assurance can be given, however, that the granting
authority will accept Management's position on these expenditures. If the
granting authority requires a return of some or all of the grant proceeds, the
Company will record a corresponding charge.
In April 1998, the Company entered into an Agreement to purchase its production
facility in Frenchtown, New Jersey for $375,000 and paid a deposit of $37,500
upon execution of the Agreement. The scheduled closing date was June 30, 1998,
which coincided with the scheduled expiration date of the Company's lease for
the premises. On June 25, 1998, the Company entered into an Assignment and
Assumption of Agreement of Sale with a related party, pursuant to which the
Company assigned its right to purchase its production facility. Pursuant to the
Assignment, the $37,500 deposit for the Agreement of Sale was released to Seller
and credited against the purchase price, the Company was permitted to continue
to occupy its production facility in consideration of additional rent of $2,000
per month, to be withdrawn from a security deposit held by the Seller, and the
closing date was advanced by 30 days upon each payment to Seller of $10,000 on
July 1, August 1, and September 1, 1998. The Company has made the July 1 and
August 1 payments and, accordingly, the closing date has been advanced to August
31, 1998.
In May 1998, the Company vacated the New York showroom. The Company is
negotiating with the landlord to determine a final lease termination settlement.
The original lease is scheduled to expire in December 2000.
In June 1998, the Company extended its existing lease for its second facility in
Frenchtown, NJ which expires on November 30, 1998. The term of the lease is for
three years beginning December 1, 1998 and ending November 30, 2001. The Company
will have the option for a two year lease extension.
GOING CONCERN
- -------------
During the first and second quarters of 1998, the Company experienced
diminishing cash flow, due primarily to a significant drop in wholesale sales.
The Company experienced a reduction in net sales in the first and second
quarters of 1998, as compared to the first and second quarters of 1997, and
expects to report a loss in 1998. In response to lower sales and revised
budgets, the Company has undertaken significant personnel and other cost
reductions to realign the Company's production and management functions to
improve operational efficiencies. The effects of these changes are expected to
be realized in subsequent quarters. In their report on the
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Company's financial statements for the year ended December 31, 1997, the
Company's independent public accountants have included an explanatory paragraph
raising substantial doubt about the Company's ability to continue as a going
concern, unless the Company is able to secure additional financing to meet its
obligations on a timely basis and to increase sales. Management intends to
continue to make cost reductions where possible and to initiate various
management actions to address the sales shortfall, as well as to pursue
aggressively additional sources of financing and evaluate ways to sell excess
inventory. No assurance can be given that these management actions will be
successful.
FORWARD LOOKING INFORMATION
- ---------------------------
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY,
INCLUDING STATEMENTS UNDER THE CAPTIONS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "LIQUIDITY AND CAPITAL
RESOURCES." THESE FORWARD LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. NO ASSURANCE CAN BE GIVEN THAT ANY OF SUCH MATTERS WILL BE
REALIZED. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY SUCH FORWARD LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE
FOLLOWING POSSIBILITIES: (1) UNCERTAIN FUTURE SALES GROWTH AND OPERATING
RESULTS; (2) COMPETITION; (3) SEASONALITY; (4) DEPENDENCE ON FOUNDER AND
EXECUTIVE OFFICERS; (5) RELIANCE ON AND POSSIBLE LIMITED APPEAL OF THE "BLUE
FISH CONCEPT"; (6) SENSITIVITY OF APPAREL DESIGN; (7) SIGNIFICANT WHOLESALE
CUSTOMERS; AND (8) FUTURE CAPITAL NEEDS. THE COMPANY HAS NO DUTY UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 TO UPDATE THE FORWARD LOOKING
STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB AND THE COMPANY DOES NOT
INTEND TO PROVIDE SUCH UPDATES.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable
ITEM 2. CHANGES IN SECURITIES
---------------------
a-b. Not applicable
c. On July 8, 1998, the Registrant issued 120,000 shares of its
restricted Common Stock, $.001 par value per share, to William I. Roberts, as
nominee of Upper Mill, L.P. pursuant to a letter agreement by and between the
Registrant and Upper Mill, L.P. dated July 6, 1998 in consideration of the
termination of a certain lease agreement for premises located in Palmer
Township, Pennsylvania. The Registrant claimed the exemption provided by Section
4(2) of the Securities Act of 1933 as this issuance was not in connection with a
public offering of the Registrant's securities.
d. On November 13, 1995, the Registrant commenced a direct public
offering of 800,000 shares of Common Stock, $.001 par value per share,
registered under the Securities Act of 1993 on Form SB-2, Commission File No.
33-974218-NY, which was declared effective on that date. The offering was
conducted directly by the Registrant (with no underwriter) on a minimum/maximum
basis. On May 15, 1996, the Registrant sold 787,200 shares of its Common Stock
and the offering was terminated. After the deduction of offering expenses of
approximately $500,000, all of which were paid to non-affiliates of the
Registrant, the net proceeds of the offering were approximately $3,436,000.
There were no underwriting discounts and commissions, finders' fees, or expenses
paid to or for underwriters. As of June 30, 1998, approximately $921,000 of the
net proceeds was used for construction of plant, building and facilities;
approximately $700,000 was used for purchase and installation of machinery and
equipment, including management information systems hardware and software;
approximately $1,515,000 was used for working capital; and approximately
$300,000 was in temporary investments consisting of a certificate of deposit.
All payments of proceeds were to non-affiliates of the Registrant. The only
material changes from the use of proceeds listed in the Registrant's Prospectus
are that the Registrant used approximately $950,000 less for retail store
expansion, due to a change in the Registrant's plan for new store openings, and
approximately $640,000 more in working capital and general corporate purposes.
Previously, the Registrant reported the application of proceeds on Form
SR--"Report of Sales of Securities and Use of Proceeds Therefrom."
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION
-----------------
On August 7, 1998, the Registrant announced that Richard E. Swarttz,
Vice President of Finance and Chief Financial Officer, resigned effective
immediately to pursue other career opportunities. Acting Chief Executive Officer
Jeffrey L. Haims assumed the CFO function.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.41. Letter Agreement by and between Upper Mill, L.P. and the
Registrant dated July 6, 1998
10.42. Guaranty of Jennifer Barclay in favor of Upper Mill, L.P.
dated July 6, 1998
10.43. Assignment and Assumption of Agreement of Sale by and
between the Registrant and David Barclay dated June 25,
1998
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not applicable
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant certifies that it has caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Frenchtown in the
State of New Jersey on August 19, 1998.
BLUE FISH CLOTHING, INC.
---------------------------------
(Registrant)
DATE: August 19, 1998 /s/ Jeffrey L. Haims
---------------------------------
Jeffrey L. Haims
Acting Chief Executive Officer and
Chief Financial Officer
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EXHIBIT INDEX
10.41. Letter Agreement by and between Upper Mill, L.P. and the
Registrant dated July 6, 1998
10.42. Guaranty of Jennifer Barclay in favor of Upper Mill, L.P.
dated July 6, 1998
10.43. Assignment and Assumption of Agreement of Sale by and
between the Registrant and David Barclay dated June 25,
1998
27. Financial Data Schedule
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