SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 0-28760
Pacific Coast Apparel Company, Inc.
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(Exact name of registrant as specified in its charter)
California 95-4536683
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(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1620 S. Los Angeles Street
Los Angeles, CA 90015
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(Address of principal office) (Zip Code)
Registrant's telephone number,
including area code (213) 748-9724
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Inapplicable
------------
(Former name, former address and former fiscal year, if changed since last
report)
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 / /
Number of shares of common stock
outstanding as of December 31, 1998 3,064,000
Transactional Small Business Disclosure Format Yes / / No /X/
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
December 31, 1998 September 30, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $3,985
Accounts receivable $78,040 $22,818
Inventories $487,014 $564,006
Prepaid expenses and other current assets $34,147 $82,068
Total current assets $603,186 $668,892
PROPERTY AND EQUIPMENT - at cost, net of $89,077 $92,206
accumulated depreciation
OTHER ASSETS $35,666 $36,730
$727,929 $797,828
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Outstanding checks payable $17,324
Accounts payable $208,719 $171,474
Accrued expenses $265,685 $279,049
Due to factor $72,399 $96,018
Current maturities of long-term debt $108,000 $108,000
Total current liabilities $654,803 $671,865
LONG TERM DEBT, LESS CURRENT $83,250 $110,713
MATURITY
NEGATIVE GOODWILL $158,178 $161,062
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares
No shares outstanding
Common stock - no par value $5,453,798 $5,453,798
Authorized, 1,000,000 shares
Issued and outstanding 3,064,000 shares
Additional paid-in capital $479,860 $479,860
Deficit ($6,101,960) ($6,079,470)
Total stockholders' equity ($168,302) ($145,812)
$727,929 $797,828
See notes to condensed financial statements
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
Three Months Ended December 31
----------------------------------
1998 1997
---- ----
NET SALES $1,229,287 $1,134,521
COST OF GOOD SOLD 673,602 553,793
GROSS (LOSS) PROFIT 555,685 580,728
OPERATING EXPENSES
Design and production 118,638 127,375
Selling 125,798 195,618
Shipping 70,445 55,926
General and administrative 242,301 392,652
Interest (income) expense 20,193 19,737
Total Operating Expenses 577,375 791,308
LOSS BEFORE INCOME TAXES (21,690) (210,580)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS ($22,490) ($211,380)
NET LOSS PER SHARE (0.01) (0.07)
WEIGHTED AVERAGE NUMBER OF 3,064,000 2,958,000
COMMON SHARES OUTSTANDING
See notes to condensed financial statements
Page 1 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Three Months Ended December 31
--------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($22,490) ($211,380)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $9,000 $9,247
Amortization of negative goodwill ($2,884) ($2,884)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors ($23,619) ($53,371)
Decrease in accounts receivable ($55,222) $17,743
Increase in inventories $76,992 ($45,175)
Increase in prepaid expenses and $47,921 ($23,508)
other current assets
Increase in other assets $1,064 ($1,803)
Increase (decrease) in accounts payable $37,245 $84,179
Increase (decrease) in accrued expenses ($13,364) $19,566
Total Adjustments $77,133 $3,994
Net Cash Used By Operating Activities $54,643 ($207,386)
See notes to condensed financial statements
Page 2 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Three Months Ended December 31
--------------------------------
1998 1997
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($5,871) ($1,638)
Decrease in short term investments
Net Cash (used) Provided by ($5,871) ($1,638)
Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt ($27,463) ($27,551)
Reacquistion of common stock
Net Cash Used by
Financing Activities ($27,463) ($27,551)
NET DECREASE IN CASH AND
CASH EQUIVALENTS $21,309 ($236,575)
CASH AND CASH EQUIVALENTS, beginning
as previously stated ($17,324) $460,606
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS,
beginning, as restated ($17,324) $487,693
CASH AND CASH EQUIVALENTS, ending $3,985 $251,118
See notes to condensed financial statements
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS -
SUPPLEMENTAL INFORMATION
Three Months Ended December 31
------------------------------
1998 1997
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $19,234 $20,178
Income Taxes
See notes to condensed financial statements
PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1 - ACCOUNTING POLICIES
Although the interim condensed financial statements of the Company are
unaudited, it is the opinion of the Company's management that all normal
recurring adjustments necessary for a fair statement of the results have
been reflected therein. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for
the entire year.
These statements should be read in conjunction wth the financial statements
and reflected notes which are incorporated by reference in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1998
See notes to condensed financial statements
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1998
Common stock Additional Total
---------------------- Paid-in Stockholders'
Shares Amount Capital Deficit Equity
Balance, October 1, 1996 3,070,000 5,920,118 $162,500 ($2,136,808) $3,945,810
Issuance of stock for services 9,000 $4,500 $4,500
Reacquistion of stock during the
year ended September 30, 1997 (116,000) ($452,400) $306,610 ($145,790)
Other (5,000) ($19,500) $10,750 ($8,750)
Net loss for the year ended
. September 30, 1997 ($2,954,339) ($2,954,339)
--------- ---------- -------- ------------ ----------
Balance, September 30, 1997 2,958,000 5,452,718 $479,860 ($5,091,147) $841,431
Issuance of stock 108,000 $1,080 $1,080
Cancellation of stock (2,000)
Net loss for the year ended
. September 30, 1998 ($988,323) ($988,323)
--------- ---------- -------- ------------ ----------
Balance, September 30, 1998 3,064,000 5,453,798 $479,860 ($6,079,470) ($145,812)
Net loss for the three months ended
. December 31, 1998 ($22,490) ($22,490)
--------- ---------- -------- ------------ ----------
Balance, December 31, 1998 3,064,000 5,453,798 479,860 (6,101,960) (168,302)
See notes to condensed financial statements
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
Forward-looking statements, such as those pertaining to the Company's future
sales and revenues, return on investment, profitability, cash requirements
and possible merger transaction. Forward-looking statements involve numerous
risks and uncertainties. The following factors, among others discussed
herein, could cause actual results and future events to differ materially
from those set forth or contemplated in the forward-looking statement:
economic conditions, competitive products, and pricing, new product
development, need for additional capital, development of the Cotton Stuff
business, changes in fashion trends, dependence on key customers and
personnel, consumer response to the Company's products and advertising and
the uncertainties associated with the Company's ability to consummate the
possible merger transaction discussed herein. Readers are cautioned not to
place undue reliance on forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company assumes no
obligation to update forward-looking statements. See also the Company's other
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
INTRODUCTION
Pacific Coast Apparel Company, Inc. ("the Company") was incorporated
in California in April 1995 to design, source and market, under license, in
the United States a collection of men's active sportswear under the brand
name "Aca Joe" Registered Trademark through traditional department stores and
men's specialty stores. In August 1997, the Company acquired the assets and
business of Cotton Stuff, Inc. Because of the Company's inability to generate
sufficient revenues it decided not to renew its exclusive Aca Joe license
and ceased doing business thereunder in June 1998.
Cotton Stuff apparel is a collection of both men's and women's
better sportswear which is sold across the United States through better
catalogs including Saks Folio, Coldwater Creek, Neiman Marcus and Nordstrom,
better specialty stores such as Fred Siegel, Bloomingdales and My Friends
Place and selected department stores including Macy's.
Over the past three years, the women's line represented the
significant portion of the Cotton Stuff business. In January 1998, the
Company began to execute a plan to further develop the men's business.
1
The Company hired Dorian Bolick a men's designer and merchandiser to
head the product development of the men's line. Additionally, the Company
recruited a sales force comprised of seven independent regional salesmen and
began opening specialty store accounts across the country.
In November 1998, the Company announced the signing of definitive
merger agreement which called for the merger of Jodi Kristopher, Inc. into
the Company which would be the surviving corporation.
Jodi Kristopher, Inc. ("JKI") is a well-established Los Angeles
maker of junior dresses with annual revenues of approximately $45M. The
company is owned and operated by Ira Rosenberg, a successful industry veteran.
JKI distributes its line through major department stores including
the Federated Group, Robinson's-May, Dayton Hudson, Kohl's, Sears Roebuck &
Company and J C Penney among others.
The terms of the agreement called for the Company to pay to the
existing shareholders of JKI at closing, $1,456,532 in cash, and to issue
2,506,900 shares of its common stock and 9,646 shares of Series A Preferred
Stock with a valuation of $100 per share in exchange for all of the
outstanding Class A and B common stock of JKI. Reference is made to the
Reorganization Agreement and exhibits thereto governing the merger, which are
included in this quarterly report as exhibits, for a more complete
description of such transaction.
Upon completion of the merger, Mr. Ira Rosenberg will become the
president and chief executive officer of the Company and Mr. McGovern will
remain chairman of the board of the Company.
If all conditions of the reorganization Agreement are met, the
merger is anticipated to close in the Company's second or third fiscal
quarter 1999. The Company plans to consolidate the operations of the two
companies following the merger.
The Company's ability to consummate the described transaction or any
future acquisition or merger is subject to numerous uncertainties and
conditions, including the ability to obtain financing on terms satisfactory
to the company and JKI receipt of third-party consents, adverse changes to
the business of the Company or its target markets, and the uncertainties with
the Company's operations.
2
In anticipation of the pending merger with JKI, the Company decided
to re-focus all of it's energies and resources on the development of the
Cotton Stuff women's line and has licensed the men's Cotton Stuff sportswear
category to 34 Degrees West Apparel Company, Inc., a California Corporation
formed by Dorian Bolick. The initial term of the license agreement is
thirteen months. The licensee has the option to renew the agreement for one
additional four-year term.
THREE MONTHS ENDED DECEMBER 31, 1998
Revenues for the quarter ended December 31, 1998 were $1,229,287
compared to $1,134,621 for the comparable prior year's quarter. Gross profit
for the quarter was $555,375 compared to $580,726 in the quarter ended
December 31, 1997. The lower gross profit reflects the markdown of certain
Cotton Stuff men's inventory. Total expenses for the quarter ended December
31, 1998 were $577,375 compared to $791,308. The significant drop in
operating expenses reflects the effects of the cost cutting program put in
place during the first fiscal quarter 1998. In addition to the reduction in
operating expenses for the period ended December 31, 1998, it should be noted
that expenses of approximately $43,289 were incurred in conjunction with the
merger involving Jodi Kristopher, Inc. The expenses were primarily
professional fees and related expenses. Additionally, the Company continued
to incured expenses from the design and development of the Cotton Stuff men's
line during the period. Since the Company licensed its Cottons Stuff men's
line in December 1998, it does not believe it will incur material expenses
relative to the Cotton Stuff men's line in future periods. Net losses for the
period ended December 31, 1998 were narrowed to ($22,490) compared to
($211,380) for the comperable period ended December 31, 1997. The results of
the quarter ended December 31, 1997 reflects the continued development of the
Aca Joe lines and the further development of the Cotton Stuff men's line. As
previously stated, neither the Aca Joe lines or the Cotton Stuff men's lines
are currently being developed by the Company.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company realized net proceeds of
approximately $5,267,000 from the initial public offering of common stock and
warrants to purchase common stock. A portion of these proceeds were used to
repay approximately $550,000 of indebtedness then outstanding. The Company
has experienced cumulative losses from operations of ($6,101,980) for the
period from April 28, 1995 (inception) through December 31, 1998.
The company continues to experience loss from operations but
expects the losses to continue to decline during the first half of fiscal
1999 due to the discontinuation of the Aca Joe lines and the licensing of the
Cotton Stuff men's line.
3
The revenues of the Cotton Stuff women's line are not sufficient to
sustain the Company. At December 31, 1998, the Company's cash and cash
equivalent balance was zero.
In January 1999, a non-affiliate loaned the Company $50,000 which
the Company used to purchase inventory and for working capital purposes. The
loan calls for repayment on or before February 28, 1999 and bears interest at
the rate of 1% per month. If the Company fails to repay the total amount due
as agreed, the lender has the right to exercise a warrant, which was issued
as collateral by the Company, to purchase 100,000 shares of the Company's
common stock for the aggregate sum of $1. The Company believes it will have
the cash to repay the loan in full on time.
At its current projected level of operations, the Company will
require additional capital during the quarter ending March 31, 1999. In order
to sustain operations until such time as positive cash flow can be achieved,
the Company is considering available alternatives, including additional cost
cutting. In addition, the Company may seek to fund its operations through
private offerings of securities, with collaborative or other arrangements
with corporate partners or from other sources. Additional financing may not
be available when needed or on terms acceptable to the Company. The Company
may be required to delay, scale back or eliminate certain of its development
programs, to relinquish rights to certain products or to license to third
parties the right to commercialize products the Company would otherwise seek
to develop itself.
FEDERAL TAXES
Since its inception, the Company has been taxed as a "C"
corporation. Accordingly the Company has available as of December 31, 1998
approximately $4,000,000 in net operating loss carryforwards to offset future
federal taxable income until expiring through the year ending September 30,
2018.
LEGAL PROCEEDINGS
The Company is currently involved in a law suit, which was filed by
Ms. Jill Grossman, the Company's former sales manager. Ms. Grossman
terminated her employment with the Company on September 22, 1997. Ms.
Grossman claims she is owed approximately $440,000 of compensation due under
and employment agreement. The Company filed a cross complaint against Ms.
Grossman based on the belief that, among other things, Ms. Grossman breached
the employment agreement.
Although the outcome of the litigation cannot be predicted with
certainty, management believes that the Company has meritorious defenses to
the claims alleged, and intends to defend this action with vigor.
4
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date
code fields will need to accept four digit entries to distinguish 21st
century dates. This inability to recognize or properly treat the Year 2000
may cause the Company's systems and applications to process critical
financial and operational information incorrectly. The Company continues to
assess the impact of the Year 2000 issue on its reporting systems and
operations.
The Company is currently in the process of investigating whether its
internal accounting systems and other operations systems are Year 2000
compliant. The Company has been informed by the vendors of its internal
accounting software that upgrades are currently available and will provide
them to the Company under its existing software maintenance agreement. The
Company expects to effect the conversion of its internal accounting system to
such upgraded software by June 1999. The Company believes that necessary
conversions of other operational systems can also be accomplished through
vendor upgrades and enhancements as provided under its system maintenance
agreements currently in effect. The Company does not anticipate significant
costs associated with any necessary conversions. However, there can be no
assurances that certain of the Company's internal computer systems or
networks or those of its key vendors and distributors will not be adversely
effected by such Year 2000 issues, which could have a material adverse effect
on the Company's business, operating results or financial condition.
5
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.
Pacific Coast Apparel Company, Inc.
By /s/ Terrence L. McGovern
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Terrence L. McGovern
Chief Executive Officer and
Chief Financial Officer
February 15, 1999