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 September 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
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BLUE FISH CLOTHING, INC.
------------------------
(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
------------------------------------------------
(Address of Principal Executive Offices)
(908) 996-3844
--------------
(Issuer's Telephone Number, Including Area Code)
N/A
---
(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 November 20, 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
--- ---
<PAGE>
BLUE FISH CLOTHING, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - December 31, 1997 and September 30, 1998 3
Statements of Operations - For the Three and Nine Months Ended 4
September 30, 1997 and September 30, 1998
Statements of Cash Flows - For the Nine Months Ended 5
September 30, 1997 and September 30, 1998
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS ON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 19
HOLDERS
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
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<PAGE>
BLUE FISH CLOTHING, INC.
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
---------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 350,477 $ 121,237
Restricted cash 116,065 70,242
Certificate of deposit 500,000 -
Receivables, net of allowance of
$40,000 and $51,386 1,180,962 690,149
Inventories, net 2,944,166 2,492,671
Other current assets 175,736 95,234
---------- -----------
Total current assets 5,267,406 3,469,533
PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated
depreciation of $819,575 and $1,199,406 1,898,489 1,541,504
OTHER ASSETS:
Restricted certificate of deposit 300,000 300,000
Security deposits 254,551 128,374
---------- -----------
$7,720,446 $ 5,439,411
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITES
Line of credit $ 500,000 $ 1,000,000
Current portion of long-term debt 222,786 252,677
Receivable purchase line of credit 1,160,648 702,422
Accounts payable 808,893 1,635,140
Accrued expenses 364,947 444,574
---------- -----------
Total current liabilities 3,057,274 4,034,813
---------- -----------
DEFERRED RENT AND OTHER NON-CURRENT LIABILITIES 267,553 88,221
---------- -----------
LONG-TERM DEBT 1,055,195 999,732
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 11,000,000
shares authorized, 4,599,200 and 4,719,200
shares issued and outstanding, respectively 4,599 4,719
Additional paid-in capital 3,799,815 3,949,695
Retained (deficit) (463,990) (3,637,769)
---------- -----------
Total stockholders' equity 3,340,424 316,646
$7,720,446 $ 5,439,411
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
BLUE FISH CLOTHING, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
SALES $3,637,239 $ 3,199,876 $ 10,980,101 $ 8,644,326
COST OF GOODS SOLD 1,539,347 2,228,774 4,955,387 5,235,731
---------- ----------- ------------ -----------
Gross margin 2,097,892 971,102 6,024,714 3,408,595
UNUSUAL ITEMS - - - 425,000
OPERATING EXPENSES 1,894,081 2,038,697 5,518,506 5,981,924
---------- ----------- ------------ -----------
Income (loss) from operations 203,811 (1,067,595) 506,208 (2,998,329)
INTEREST EXPENSE, NET 61,088 63,240 172,757 175,450
---------- ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES 142,723 (1,130,835) 333,451 (3,173,779)
INCOME TAX EXPENSE 72,844 - 161,724 -
---------- ----------- ------------ -----------
NET INCOME (LOSS) $ 69,879 $ (1,130,835) $ 171,727 $(3,173,779)
=========== ============= ============= ============
Net income (loss) per share:
---------- ----------- ------------ -----------
Basic $ 0.01 $ (0.24) $ 0.04 $ (0.68)
=========== ============= ============= ============
Diluted $ 0.01 $ (0.24) $ 0.04 $ (0.68)
=========== ============= ============= ============
Weighted Average Shares Outstanding:
Basic 4,672,556 4,710,070 4,267,808 4,636,563
=========== ============= ============= ============
Diluted 4,791,023 4,710,070 4,780,791 4,636,563
=========== ============= ============= ============
</TABLE>
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The accompanying notes are an integral part of these statements.
<PAGE>
BLUE FISH CLOTHING, INC.
STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1997 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 171,727 $ (3,173,779)
Adjustments to reconcile net income (loss) to net cash
used in operating activities -
Deferred tax (benefit) expense -
Provision for deferred rent 59,699 (179,332)
Depreciation and amortization 299,711 379,831
Lease termination charge 150,000
Provision for losses on accounts receivable 38,107 11,386
(Increase) decrease in assets -
Accounts receivable (916,913) 479,427
Inventory (269,842) 451,495
Other assets 25,019 206,679
Increase in liabilities -
Accounts payable 168,609 826,247
Accrued expenses 37,309 79,627
------------ -------------
Net cash used in operating activities (386,574) (768,419)
------------ -------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment - -
Payments for purchases of property and equipment (1,043,795) (22,846)
(Purchase) redemption of certificate of deposit (300,000) 500,000
------------ -------------
Net cash (used in) provided by investing activities (1,343,795) 477,154
------------ -------------
FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit (500,000) 500,000
Receivable purchase line of credit, net 904,058 (458,226)
Borrowing on long-term debt - 78,000
Repayments on long-term debt (102,016) (60,874)
Borrowing on long-term debt 800,000 -
Payments on capital lease obligations (38,684) (42,698)
S corporation distributions paid (44,041) -
------------ -------------
Exercise of employee stock options - -
------------ -------------
Net cash provided by financing activities 1,019,317 16,202
------------ -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (711,052) (275,063)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,928,340 466,542
------------ -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,217,288 $ 191,479
============ =============
CASH PAID DURING THE PERIOD FOR:
Interest $ 164,514 $ 177,984
============ =============
Taxes $ 33,483 $ 4,087
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
BLUE FISH CLOTHING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDING SEPTEMBER 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 the Company. The results of
operations for the three months and nine months ended September 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 for the first 9 months of 1998.
The net sales as of September 30, 1998 declined $2,335,775 as compared to the
nine months ending September 30, 1997. Wholesale sales are budgeted to be lower
in the fourth quarter of 1998 as compared to the same period 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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<PAGE>
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND DISCLOSURES:
- - - ---------------------------------------------------------
Inventories
- - - -----------
The components of inventory as presented are as follows:
December 31, September 30,
1997 1998
----------- ------------
Raw materials $ 296,700 $ 590,974
Work-in-process 810,737 715,347
Finished goods, net 1,836,729 1,186,350
----------- ------------
$ 2,944,166 $ 2,492,671
=========== ============
Major Customers and Concentration of Credit Risk
- - - ------------------------------------------------
The Company has one significant customer that accounted for 17% and 9.1% of
total sales for the nine months ended September 30, 1997 and September 30, 1998,
respectively. This same customer accounted for 10.9% and 11.9% of net accounts
receivable at December 31, 1997 and September 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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<PAGE>
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. Subsequent to September 30, 1998 the Company initiated
discussions with the bank for borrowing under the receivable purchase line of
credit to include wholesale orders of up to $ 400,000 in the existing borrowing
base.
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 September 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 September 30, 1999, and $40,000 on or before
September 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 September 30, 1999 is made, and
shall terminate when the payment due September 30, 2000 is made. Expenses of
$302,000 are included in unusual items for the nine months ending September 30,
1998.
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. 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.
-8-
<PAGE>
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 September 30,
1998, which coincided with the scheduled expiration date of the Company's lease
for the premises. On September 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. In September, 1998 the Company entered
into an agreement to lease its production factory in Frenchtown, NJ, from a
related party. An additional $7,500 was paid to the related party to establish a
$75,000 security fund to be refunded to Blue Fish Clothing upon completion of
the lease. All payments made to the Seller were credited to the Company by the
related party purchaser. The term of the lease is for seven years at a rate of
$75,600 per annum, subject to changes in the prime rate, beginning October 1,
1998 ending September 30, 2005.
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.
Employment
- - - ----------
During the third quarter, the Company entered into employment agreements with
certain key employees providing for salary, stock options, performance bonuses
and severance in certain circumstances.
NOTE 6 - STOCK OPTION PLANS
- - - ---------------------------
During the quarter, the Company granted employees options, under the 1995 Stock
Option Plan, to purchase 370,500 shares of Common stock at the exercise prices
ranging from $ 1.00 to $2.00 per share,
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<PAGE>
which approximated fair value at the date of the grant.
Effective September 1, 1998, the Company instituted the 1998 Stock Option Plan,
subject to shareholder approval. The Plan provides for the issuance of up to
1,200,000 shares of Common stock to employees and consultants under stock
options for a term not to exceed nine yeas from the date of grant. Qualified and
nonqualified stock options will be granted to employees at the discretion of the
Compensation Committee (subject to certain plan limitations) at exercise prices
at least equal to the fair market value of the Common stock for qualified
incentive stock options. Consultants shall only be eligible to receive grants of
nonqualified stock options. Stock options granted under the Plan shall vest in
accordance with the terms and conditions determined by the Compensation
Committee. During the third quarter of 1998, the Company granted options, under
the Plan, to purchase 70,710 shares of Common stock at exercise prices ranging
from $ 1.50 to $ 2.00 per share, which approximated the fair market value as of
the grant date.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - - --------------------------------------------------------------------------------
OF OPERATIONS
-------------
THREE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 QUARTER") COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997 ("1997 QUARTER")
SALES. The Company's sales decreased by $437,363 or 12.1% to $3,199,876 in the
1998 quarter as compared to the 1997 quarter. The Company's wholesale sales
decreased by 46.1% from $2,250,609 in the 1997 quarter to $1,213,612 in the 1998
quarter, its retail sales increased by 27.5% from $1,104,670 in the 1997 quarter
to $1,408,217 in the 1998 quarter and craft fair sales increased by 105% from
$281,960 in the 1997 quarter to $578,047 in the 1998 quarter. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
decreased sales of the Fall 1998 line as compared to the Fall 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 and Fall sales. Boutique sales declined by 46.1% and
department store sales declined by 77% in the quarter as compared to the same
period in 1997. The retail sales increase was primarily due to a store which
opened in October 1997 generating sales during the entire 1998 quarter. Same
store sales decreased by 1.4% during the quarter primarily due to increased
markdowns of the Spring 1998 line and Summer 1998 line. Craft sales increased
due to the opening of three temporary outlet stores located in Reading, PA, St.
Michaels, MD, and Syracuse, NY. The three locations sold non-current inventory
from 1997 and prior. Sales from the stores during the quarter were $397,609. All
temporary outlet stores were closed as of September 7, 1998.
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 27.4 percentage
points from 57.7% in the 1997 period to
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<PAGE>
30.3% 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 outlet stores. See Liquidity and Capital
Resources for management actions in response to the decrease in gross margin.
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, and cash and stock payments.
OPERATING EXPENSES. The Company's operating expenses increased by $144,616 or
7.6% from $1,894,081 in the 1997 period to $2,038,697 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 $2,152
or 3.5% from $61,088 in the 1997 period to $63,240 in the 1998 period. Interest
expense increased by $2,693 primarily due to an increased borrowings for the
Company's working capital needs offset by a decrease in assigned wholesale
credit receivables as a result of decreased wholesale sales.
PRE-TAX INCOME (LOSS). As a result of the foregoing, income before income tax
provision decreased $1,273,558 from $142,723 of pre-tax income in the 1997
period to a pre-tax loss of $1,130,835 in the 1998 period.
INCOME TAX PROVISION. Due to recurring losses, no tax benefit has been recorded
in the 1998 period. During the 1997 period the effective tax rate was 51%
primarily due to Federal and state taxes and the impact of certain
non-deductible expenditures.
NINE MONTHS ENDED SEPTEMBER 30, 1998 ("1998 PERIOD") COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997 ("1997 PERIOD")
SALES. The Company's sales decreased by $2,335,775 or 21.3% to $8,644,326 in the
1998 period as compared to the 1997 period. The Company's wholesale sales
decreased by 47.7% from $7,208,817 in the 1997 period to $3,773,773 in the 1998
period, its retail sales increased by 20.6% from $3,054,607 in the 1997 period
to $3,682,980 in the 1998 period and craft fair sales increased by 65.7% from
$716,678 in the 1997 period to $1,187,573 in the 1998 period. The Company
attributes the wholesale sales decrease during the 1998 period primarily to the
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 and Fall sales.
Boutique sales declined by 47.7% and department store sales declined by 63.9%.
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 5.1%. Same store sales decreased
primarily due to increased customer returns and a
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<PAGE>
sizing problem for larger customers who did not purchase goods during the 9
month period. Craft sales increased due to the opening of three temporary outlet
stores located in Reading, PA, St. Michaels, MD, and Syracuse, NY. The three
locations sold non-current inventory from 1997 and prior. Sales from the stores
during 1998 were $430,506. All temporary Outlet stores were closed as of
September 7, 1998.
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 15.5 percentage
points from 54.9% in the 1997 period to 39.4% in the 1998 period. This decrease
was primarily due to increased markdowns taken at the Company's retail stores,
non-current inventory sold at a reduced price at the Company's retail stores
during the second quarter and outlet stores during the third 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, and 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 $463,418 or
8.4% from $5,518,506 in the 1997 period to $5,981,924 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 $2,693
or 1.6% from $172,757 in the 1997 period to $175,450 in the 1998 period.
Interest expense decreased by $28,469 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 $31,162 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 $3,507,230 from $333,451 of pre-tax income in the 1997
period to a pre-tax loss of $3,173,779 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
48.5% primarily due to Federal and state taxes and the impact of certain
non-deductible expenditures.
LIQUIDITY AND CAPITAL RESOURCES
- - - -------------------------------
At September 30, 1998, the Company had $191,479 in cash and cash equivalents (of
which $70,242 was restricted), a receivable purchase line of credit for up to
$1,500,000 (with $702,422
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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 September 30,
1998, the Company had negative working capital of $565,280, reflecting a
decrease in working capital of $2,775,412 from $2,210,132 on December 31, 1997.
Working capital is defined as current assets less current liabilities. During
1998, the Company has funded its working capital requirements through the sale
of prior season inventory at reduced margins as well as extending its payments
to vendors.
Net cash used in operations was $768,419 during the nine months ended September
30, 1998, consisting primarily of the net loss before depreciation and
amortization of $2,793,948 partially offset by a decrease in accounts receivable
and inventory of $479,427 and $ 451,495 respectively and an increase in accounts
payable of $826,247. The decrease in accounts receivable and increase in
accounts payables are primarily due to lower wholesale sales. Net cash used in
operating activities during the same period for 1997 was $386,574, which
consisted primarily of increases in accounts receivable of $916,913 and
inventory of $269,842 offset by net income before depreciation and amortization
of $471,438 and increases in accounts payable and accrued expenses of $168,609
and $ 37,309 respectively.
Net cash provided by investing activities in the 1998 period was $477,154
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 $1,343,795 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 $16,202, consisting
primarily of a increase in the Company's net borrowings of $474,428 offset by a
decrease in the receivable purchase line of credit of $458,226. Net cash
provided by financing activities in the 1997 period was $1,019,317, which
consisted primarily of an increase in the Company's receivable purchase line of
credit of $904,058 and additional net borrowings of $159,300.
On September 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 September 25, 1998 through September 25, 2001,
and one principal payment of $600,000 is to be paid on September 25, 2002. This
note was initially secured by an $842,000 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.
-13-
<PAGE>
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. Subsequent to September 30, 1998 the company initiated
discussions with the bank for borrowing under the receivable purchase line of
credit to include wholesale order of up to $ 400,000 in the existing borrowing
base. As of November 16, 1998, the bank funded $ 400,000 based on existing
orders.
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
September 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 September 30,
1999, and $40,000 on or before September 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 September 30,
1999 is
-14-
<PAGE>
made, and shall terminate when the payment due September 30, 2000 is made.
Expenses of $302,000 are included in unusual items in the first 9 months ending
September 30, 1998.
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. 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 September 30,
1998, which coincided with the scheduled expiration date of the Company's lease
for the premises. On September 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. In September, 1998 the company entered
into an agreement to lease its production factory in Frenchtown, NJ, from a
related party. An additional $7,500 was paid to the related party to establish a
$75,000 security fund to be refunded to Blue Fish Clothing upon completion of
the lease. The term of the lease if for seven years at a rate of $75,600 per
annum, subject to changes in the prime rate, beginning October 1, 1998 ending
September 30, 2005.
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 September 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.
THE YEAR 2000
- - - -------------
The Year 2000 issue is a result of computer programs being written using two
digits rather than four to define the applicable year. In other words, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of similar normal business activities.
-15-
<PAGE>
Unlike many businesses in the apparel industry, the Company is not highly
directly reliant on computer technology in its day-to-day operations. The
Company does not believe that it has a material exposure to the Year 2000 issue
with respect to its own information systems. The Company is currently in the
process, which it expects to complete in the first quarter of 1999, of ensuring
that its own information systems are Year 2000 compliant. The Company has
projected total remediation expense related to this effort to be immaterial. In
the event that the Company's efforts at remediation of the Year 2000 issue fail,
the Company will rely on non-computerized production and point of sale methods
to complete transactions and to carry on the Company's business.
Many of the purchases from the Company's stores are made with credit cards, and
the Company's operations may be materially adversely affected to the extent that
its customers are unable to use their credit cards due to Year 2000 issues that
are not rectified by their credit card vendor. The Company intends to conclude
an analysis in the first half of 1999 to determine the extent to which its major
customer's systems (insofar as they relate to the Company's business) are
subject to the Year 2000 issue. The Company is currently unable to predict the
extent to which the Year 2000 issue will affect its major customer, or the
extent to which it would be vulnerable to the customer's failure to remediate
any Year 2000 issues on a timely basis. If the major customer is subject to the
Year 2000 issue and fails to convert its systems on a timely basis, the Company
could be materially adversely affected.
The Company does not believe that it has a material exposure to the Year 2000
issue with respect to its suppliers' systems. Because the Company does not have
a single major supplier, but instead has a large number of small suppliers, the
Company believes that it will be able to make purchases from other replacement
suppliers if any of its current suppliers are unable to remediate any Year 2000
issues on a timely basis.
GOING CONCERN
- - - -------------
During the first three 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 three quarters of 1998, as
compared to the first three 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 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.
-16-
<PAGE>
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.
-17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable
ITEM 2. CHANGES IN SECURITIES
---------------------
a-c. Not applicable
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 September 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
-18-
<PAGE>
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. Then Acting Chief Executive
Officer Jeffrey L. Haims assumed the CFO function. On August 21, 1998, Mr. Haims
was appointed President and Chief Executive Officer and continues as Acting
Chief Financial Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS
10.45. 1998 Stock Option Plan
10.46. Employment Agreement between Peter Meade and the
Registrant dated October 16, 1998
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Not applicable
-19-
<PAGE>
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 November 23, 1998.
BLUE FISH CLOTHING, INC.
(Registrant)
DATE: November 23, 1998 /s/ Jeffrey L. Haims
-----------------------------
Jeffrey L. Haims
President and Chief Executive Officer
and Acting Chief Financial Officer
-20-
<PAGE>
EXHIBIT INDEX
10.45. 1998 Stock Option Plan
10.46. Employment Agreement between Peter Meade and the
Registrant dated October 16, 1998
27. Financial Data Schedule
-21-
EXHIBIT 10.45
BLUE FISH CLOTHING, INC.
1998 STOCK OPTION PLAN
----------------------
The purpose of the Blue Fish Clothing, Inc. 1998 Stock Option Plan (the
"Plan") is to provide designated employees (including employees who are also
officers and directors) and consultants of Blue Fish Clothing, Inc. and its
subsidiaries and affiliates (hereinafter collectively referred to as the
"Company") with the opportunity to receive grants of stock options. The Company
desires to reward its employees and consultants equitably for their service,
value and commitment to the continuing prosperity of the Company. The Company
recognizes that these individuals form the arcs of a revolving circle that
produces the magic of Blue Fish quality and creativity and believes that the
Plan will cause the participants to contribute materially to the growth of the
Company, thereby benefitting the Company's shareholders and will align the
economic interests of the participants with those of the shareholders.
1. ADMINISTRATION
--------------
The Plan shall be administered and interpreted by the Compensation
Committee (the "Committee") consisting of not less than two persons appointed by
the Board of Directors of the Company (the "Board"). Each member of the
Committee shall be a "disinterested person" as defined under Rule 16b-3 under
the Securities Exchange Act of 1934 (the "Exchange Act") and an "outside
director" as defined under Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code") and related Treasury regulations.
Subject to the provisions of Section 5, the Committee shall have the
sole authority to (i) determine the employees and consultants to whom options
shall be granted under the Plan, (ii) determine the type, size and terms of the
options to be granted to each such individual, (iii) determine the time when the
options will be granted and the duration of the exercise period, including the
criteria for vesting and the acceleration of vesting and (iv) deal with any
other matters arising under the Plan.
The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interests in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in the
best interest of the Company and in keeping with the objectives of the Plan.
2. GRANTS
------
Incentives under the Plan shall consist of incentive stock options and
nonqualified stock options (hereinafter collectively referred to as "Stock
Options"). All Stock Options shall be subject to the terms and conditions set
forth herein and to those other terms and
<PAGE>
conditions consistent with this Plan as the Committee deems appropriate and as
are specified in writing by the Committee to the employee or consultant (the
"Grant Letter"). The Committee shall approve the form and provisions of each
Grant Letter to an employee or consultant. Grants under a particular Section of
the Plan need not be uniform as among the employees or consultants.
3. SHARES SUBJECT TO THE PLAN
--------------------------
(a) Subject to the adjustment specified below, the aggregate number of
shares of common stock of the Company (the "Company Stock") that have been or
may be issued or transferred under the Plan is 1,200,000 shares. Notwithstanding
anything in the Plan to the contrary, during the term of the Plan, the maximum
aggregate number of shares of Company Stock that shall be subject to options
granted under the Plan to any single employee during any calendar year shall be
750,000 shares. The shares may be authorized but unissued shares of Company
Stock or reacquired shares of Company Stock, including shares purchased by the
Company for purposes of the Plan. If and to the extent options granted under the
Plan terminate, expire, cancel, are forfeited, or are exchanged or surrendered
without having been exercised, the shares subject to such options shall again be
available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of Company
Stock issuable under the Plan through the declaration of stock dividends or
through a recapitalization, stock splits, or combinations or exchanges of such
shares, or merger, reorganization or consolidation of the Company,
reclassification or change in par value or by reason of any other extraordinary
or unusual events affecting the outstanding Company Stock as a class without the
Company's receipt of consideration, the maximum number of shares of Company
Stock available for Stock Options the maximum number of shares of Company Stock
for which any one employee participating in the Plan may be granted over the
term of the Plan, the number of shares covered by outstanding Stock Options, and
the price per share or the applicable market value of such Stock Options, and
the other terms and conditions of the Stock Options, as the Committee may deem
necessary or desirable, shall be proportionately adjusted by the Committee to
reflect any increase or decrease in the number or kind of issued shares of
Company Stock to preclude the enlargement or dilution of rights and benefits
under such Stock Options; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated. The adjustments determined
by the Committee shall be final, binding and conclusive. Notwithstanding the
foregoing, no adjustment shall be authorized or made pursuant to this Section to
the extent that such authority or adjustment would cause the Plan or any
Incentive Stock Option to fail to comply with Section 422 of the Code.
4. ELIGIBILITY FOR PARTICIPATION
-----------------------------
All employees and consultants of the Company or a subsidiary (including
employees who are officers or members of the Board) shall be eligible to
participate in the Plan. The Committee shall select the employees and
consultants to receive Stock
-2-
<PAGE>
Options (the "Optionees") and determine the number of shares of Company Stock
subject to a particular Stock Option in such manner as the Committee determines.
Nothing contained in this Plan shall be construed to limit the right of
the Company to grant options otherwise in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including options granted to employees
thereof who become employees of the Company, or for other proper corporate
purpose.
5. GRANTING OF OPTIONS
-------------------
(a) Number of Shares. The Committee, in its sole discretion, shall
determine the number of shares of Company Stock that will be subject to each
Stock Option grant.
(b) Type of Option and Price. The Committee may grant options intended
to qualify as incentive stock options ("Incentive Stock Options") within the
meaning of Section 422 of the Code or options which are not intended to so
qualify ("Nonqualified Stock Options") or any combination of Incentive Stock
Options and Nonqualified Stock Options, all in accordance with the terms and
conditions set forth herein; provided, however, that consultants shall only be
eligible to receive grants of Nonqualified Stock Options.
The purchase price of Company Stock subject to a Stock Options shall be
determined by the Committee but shall be no less than 85% of the fair market
value of a share of such Stock on the date such Stock Option is granted;
provided, however, that (I) the purchase price of Company Stock subject to an
Incentive Stock Option shall be equal to, or greater than, the fair market value
of a share of such Stock on the date such Stock Option is granted, (ii) a Stock
Option shall not be granted to any individual who, at the time of grant, owns
stock possessing more than 10% of the total combined voting power or value of
all classes of stock of the Company or parent of the Company, unless the option
price per share is not less than 110% of the fair market value of Company Stock
on the date of grant, and (iii) in no event, based upon the facts known at the
time of the grant, may a purchase price be established hereunder that would
result in the disallowance of the Company's expense deduction pursuant to
Section 162(m) of the Code.
During such time that the Company Stock is listed upon an established
stock exchange or other market source, as determined by the committee, "fair
market value" on any date of reference shall be the closing price of a share of
Company Stock (on a consolidated basis) on the principal exchange or other
recognized market source, as determined by the Committee on such date, or if
there is no sale on such date, then the closing price of a share of Company
Stock on the last previous day on which a sale is reported. If the Company Stock
is not listed on an established stock exchange or traded in the
over-the-counter-market, the "fair market value" of Company Stock shall be
determined by an independent firm, i.e., a firm not otherwise engaged in
consulting work for the Company, unless determined otherwise by the Committee,
with expertise in the valuation of business entities and the securities thereof,
selected by the Committee (the
-3-
<PAGE>
"Valuation Expert"). Such determination of "fair market value" by the Valuation
Expert shall be made after taking into account such factors as it shall deem
appropriate.
(c) Exercise Period. The Committee shall determine the option exercise
period of each Stock Option. The exercise period shall not exceed nine years
from the date of grant.
(d) Exercisability of Options. Stock Options shall become exercisable
in accordance with the terms and conditions determined by the Committee, in its
sole discretion, and specified in the Grant Letter. Notwithstanding any
determinations by the Committee, all outstanding Stock Options shall become
immediately exercisable upon a Change in Control (as defined herein).
(e) Manner of Exercise. An Optionee may exercise a Stock Option which
has become exercisable by delivering a notice of exercise to the Committee with
accompanying payment of the option price in accordance with (g) below. Such
notice may instruct the Company to deliver shares of Company Stock due upon the
exercise of the Stock Option to any registered broker or dealer designated by
the Company ("Designated Broker") in lieu of delivery to the Optionee. Such
instructions must designate the account into which the shares are to be
deposited. The Optionee may tender this notice of exercise, which has been
properly executed by the Optionee, and the aforementioned delivery instructions
to any Designated Broker.
(f) Termination of Employment, Disability or Death.
(1) In the event the Optionee during the Optionee's lifetime ceases
to be an employee of or consultant to the Company for any reason other than
death, disability, approved retirement or termination for cause, as defined
below, by the Company, any Stock Option which is otherwise exercisable by the
Optionee shall terminate unless exercised within 90 days of the date on which
the Optionee ceases to be an employee (or within such other period of time as
may be specified in the Grant Letter), but in any event no later than the date
of expiration of the Option Exercise Period (except as the Committee may
otherwise provide in the Grant Letter).
(2) In the event the Optionee ceases to be an employee of or
consultant to the Company on account of a termination for cause by the Company,
as determined in accordance with the personnel policies of the Company in effect
before any Change of Control of the Company, any Stock Option held by the
Optionee shall terminate as of the date the Optionee ceases to be an employee or
consultant (except as the committee may otherwise provide).
(3) In the event the Optionee ceases to be an employee of or
consultant to the Company on account of becoming disabled (as defined under
section 22(e)(3) of the Code), all of the Optionee's outstanding Stock Options
shall become immediately exercisable upon the date on which the Optionee ceases
to be an employee or consultant and shall remain exercisable until the date of
expiration of the option exercise period (except as the Committee may otherwise
provide in the Grant Letter); provided, however,
-4-
<PAGE>
that any Incentive Stock Option that is exercised more than one year after the
date the Optionee terminates employment shall be treated as a Nonqualified Stock
Option pursuant to Section 422(c)(6) of the Code.
(4) In the event of the death of the Optionee while he or she is an
employee of or consultant to the Company or within not more than 30 days of the
date on which he or she ceases to be an employee or consultant for any reason
other than a termination for cause by the Company (or within such other period
of time as may be specified in the Grant Letter), all of the Optionee's
outstanding Stock Options shall become immediately exercisable upon the date of
death and may be exercised by the Optionee's personal representative at any time
prior to the date of expiration of the option exercise period.
(5) In the event the Optionee ceases to be an employee of the
Company on account of retirement approved by the Company, all of the Optionee's
outstanding Stock Options shall become immediately exercisable upon the date on
which the Optionee ceases to be an employee and shall remain exercisable until
the date of expiration of the option exercise period (except as the Committee
may otherwise provide in the Grant Letter); provided, however, that any
Incentive Stock Option that is exercised more than 90 days after the date the
Optionee terminates employment shall be treated as a Nonqualified Stock Option
pursuant to Section 422(a)(2) of the Code.
(g) Satisfaction of Option Price. The Optionee shall pay the option
price specified in the Grant Letter in (i) cash, (ii) with the approval of the
Committee, by delivering shares of Company Stock owned by the Optionee including
Company Stock acquired in connection with the exercise of a particular Stock
Option and having a fair market value on the date of exercise equal to the
option price and the amount of withholding tax due, if any, at the time of
exercise. Shares of Company Stock shall not be issued or transferred upon
exercise of a Stock Option until the option price is fully paid.
(h) Rule 16b-3 Restrictions. Unless an Optionee could otherwise
transfer Company Stock issued pursuant to a Stock Option granted hereunder
without incurring liability under Section 16(b) of the Exchange Act, at least
six months must elapse from the date of acquisition of a Stock Option to the
date of disposition of the Company Stock issued upon exercise of such option.
(i) Limits on Incentive Stock Options. Each Incentive Stock Option
shall provide that to extent that the aggregate fair market value of the Company
Stock on the date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year under the
Plan or any other stock option plan of the Company exceeds $100,000, then such
option as to the excess shall be treated as a Nonqualified Stock Option. An
Incentive Stock Option shall not be granted to any employee who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or parent of the Company, unless
the option price per share is not less than 110% of the fair market value
-5-
<PAGE>
of Company Stock on the date of grant and the option exercise period is not more
than five years from the date of grant.
(j) Optional Purchase by the Company. In the sole discretion of the
Committee, in lieu of the exercise of a Stock Option, the Optionee may be
permitted to transfer the Stock Option to the Company in exchange for a cash
payment equal to the excess over the purchase price of the then fair market
value of the shares of Company Stock subject to the Optionee's outstanding Stock
Options.
6. TRANSFERABILITY OF OPTIONS
--------------------------
Only an Optionee or his or her authorized legal representative may
exercise rights under a Stock Option. Such persons may not transfer those rights
except by will or by the laws of descent and distribution or, if permitted under
Rule 16b-3 of the Exchange Act and if permitted in any specific case by the
Committee in its sole discretion, pursuant to a qualified domestic relations
order as defined under the Code or Title 1 of ERISA or the regulations
thereunder. When an Optionee dies, the personal representative or other person
entitled to succeed to the rights of the Optionee ("Successor Optionee") may
exercise such rights. A Successor Optionee must furnish proof satisfactory to
the Company of his or her right to receive the Stock Option under the Optionee's
will or under the applicable laws of descent and distribution.
Notwithstanding the foregoing, the Committee may permit an employee to
transfer rights under a Nonqualified Stock Option to the employee's spouse or a
lineal descendant or to one or more trusts for the benefit of such family
members or to partnerships in which said family members are the only partners (a
"Family Transfer") provided that the employee receives no consideration for a
Family Transfer and the Grant Letter relating to the Stock Options transferred
in a Family Transfer continue to be subject to the same terms and conditions
that were applicable to such Stock Options immediately prior to the Family
Transfer.
7. CHANGE IN CONTROL OF THE COMPANY
--------------------------------
As used herein, a "Change in Control" shall be deemed to have occurred
if:
(a) As a result of a tender offer, stock purchase, other stock
acquisition, merger, consolidation, recapitalization, reverse split, or sale or
transfer of assets, any person or group (as such terms are used in and under
Section 13(d) of the Exchange Act) other than an existing shareholder, becomes
the beneficial owner (as defined in Rule 13-d) under the Exchange Act), directly
or indirectly, of securities of the Company representing more than 30% of the
combined voting power of the Company's then outstanding securities; or
(b) During any period of two consecutive years, individuals who at the
beginning of such period constitute the board of directors cease for any reason
to constitute at least a majority thereof unless the election, or the nomination
for election by
-6-
<PAGE>
shareholders, of each new director was approved by a vote of at least 2/3 of the
directors then still in office who were directors at the beginning of the
period.
8. CERTAIN CORPORATE CHANGES
-------------------------
(a) Sale or Exchange of Assets, Dissolution or Liquidation, or Merger
or Consolidation Where the Company Does Not Survive. If all or substantially all
of the assets of the Company are to be sold or exchanged, the Company is to be
dissolved or liquidated, or the Company is a party to a merger or consolidation
with another corporation in which the Company will not be the surviving
corporation, then, at least 10 days prior to the effective date of such event,
the Company shall give each Optionee with any outstanding Stock Options written
notice of such event. Each such Optionee shall thereupon have the right to
exercise in full any installments of such Stock Options not previously exercised
(whether or not the right to exercise such installments has accrued pursuant to
such Stock Options),within 10 days after such written notice is sent by the
Company or to require that the Company purchase such Stock Options for a cash
payment equal to the excess over the purchase price of the then fair market
value of the shares of Company Stock subject to the Optionee's outstanding Stock
Options.
(b) Merger or Consolidation Where the Company Survives. If the Company
is a party to a merger or consolidation in which the Company will be the
surviving corporation, then the Committee may, in its sole discretion, elect to
give each Optionee with any outstanding Stock Options written notice of such
event. If such notice is given, each such Optionee shall thereupon have the
right to exercise some or all of any installments of such Stock Options not
previously exercised (whether or not the right to exercise such installments has
accrued pursuant to such Stock Options), within ten days after such written
notice is sent by the Company or to require that the Company purchase such Stock
Options for a cash payment equal to the excess over the purchase price of the
then fair market value of the shares of Company Stock subject to the Optionee's
outstanding Stock Options.
9. AMENDMENT AND TERMINATION OF THE PLAN
-------------------------------------
(a) Amendment. The Board, by written resolution, may amend or terminate
the Plan at any time; provided, however, that any amendment that increases the
aggregate number (or individual limit for any single Optionee) of shares of
Company Stock that may be issued or transferred under the Plan (other than by
operation of Section 3(b)), or modifies the requirements as to eligibility for
participation in the Plan, shall be subject to approval by the shareholders of
the Company, and provided, further, that the Board shall not amend the Plan
without shareholder approval if such amendment would cause the Plan or any Stock
Option, or the exercise of any right under the Plan to fail to comply with the
requirement of Rule 16b-3 under the Exchange Act.
(b) Termination of Plan. The Plan shall terminate on the tenth
anniversary of its effective date unless terminated earlier by the Board or
unless extended by the Board with the approval of the shareholders.
-7-
<PAGE>
(c) Termination and Amendment of Outstanding Stock Options. A
termination or amendment of the Plan that occurs after a Stock Option is made
shall not materially impair the rights of an Optionee unless the Optionee
consents or unless the Committee acts under Section 17(b) hereof. The
termination of the Plan shall not impair the power and authority of the
Committee with respect to an outstanding Stock Option. Whether or not the Plan
has terminated, an outstanding Stock Option may be terminated or amended under
Section 17(b) hereof or may be amended by agreement of the Company and the
Optionee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling document. No
other statements, representations, explanatory materials, or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company, its successors and assigns.
10. FUNDING OF THE PLAN
-------------------
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Stock Option under this Plan. In no event
shall interest be paid or accrued on any Stock Option, including unpaid
installments of Stock Options.
11. RIGHTS OF OPTIONEES
-------------------
Nothing in this Plan shall entitle any employee, consultant or other
person to any claim or right to be granted a Stock Option under this Plan.
Neither this Plan nor any action taken hereunder shall be construed as giving
any individual any rights to be retained by or in the employ of the Company or
any other governmental rights.
12. NO FRACTIONAL SHARES
--------------------
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Stock Option. The Committee shall determine whether
cash, other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
13. WITHHOLDING OF TAXES
--------------------
The Optionee or other person receiving shares of Company Stock upon the
exercise of a Stock Option shall be required to pay to the Company the amount of
any federal, state or local taxes which the Company is required to withhold with
respect to the exercise of such Stock Options or the Company shall have the
right to deduct from other wages paid to the employee by the Company (including
through the withholding of Company Stock purchased upon the exercise of a Stock
Option, if then authorized by the Committee and applicable law) the amount of
any withholding due with respect to such Stock Options.
-8-
<PAGE>
14. REQUIREMENTS FOR ISSUANCE OF SHARES
-----------------------------------
No Company Stock shall be issued or transferred upon the exercise of
any Stock Option hereunder unless and until all legal requirements applicable to
the issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Stock Option made to any employee hereunder on such employee's undertaking
in writing to comply with such restrictions on his or her subsequent disposition
of such shares of Company Stock as the Committee shall deem necessary or
advisable as a result of any applicable law, regulation or official
interpretation thereof, and certificates representing such shares shall be
legended to reflect any such restrictions. Certificates representing shares of
Company Stock issued under the Plan will be subject to such stop-transfer orders
and other restrictions as may be applicable under such laws, regulations and
other obligations of the Company, including any requirement that a legend or
legends be placed thereon.
15. HEADINGS
--------
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
16. EFFECTIVE DATE
--------------
Subject to the approval of the Company's shareholders, this Plan shall
be effective as of September 1, 1998.
17. MISCELLANEOUS
-------------
(a) Substitute Grants. The Committee may make a Grant to an employee of
another corporation who becomes an employee by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or liquidation
involving the Company or any of its subsidiaries in substitution for a stock
option or restricted stock option granted by such corporation ("Substituted
Stock Incentives"). The terms and conditions of the substitute Grant may vary
from the terms and conditions required by the Plan and from those of the
Substituted Stock Incentives. The Committee shall prescribe the provisions of
the substitute Grants.
(b) Compliance with Law. The Plan, the exercise of Stock Options and
the obligations of the Company to issue or transfer shares of Company Stock
under Stock Options shall be subject to all applicable laws and to approvals by
any governmental or regulatory agency as may be required. With respect to
persons subject to Section 16 of the Exchange Act, it is the intent of the
Company that the Plan and all transactions under the Plan comply with all
applicable provisions of Rule 16b-3 or its successors under the Exchange Act.
The Committee may revoke any Stock Option if it is contrary to law or modify a
Stock Option to bring it into compliance with any valid and mandatory government
regulation. The Committee may also adopt rules regarding the withholding of
taxes on payments to Optionees. The Committee may, in its sole discretion, agree
to limit its authority under this Section.
-9-
<PAGE>
(c) Ownership of Stock. An Optionee or Successor Optionee shall have no
rights as a shareholder with respect to any shares of Company Stock covered by a
Stock Option until the shares are issued or transferred to the Optionee or
Successor Optionee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation and
effect of the Plan and Grant Letters issued under the Plan shall exclusively be
governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
(e) Indemnification of Committee. In addition to such other rights of
indemnification as they may have as directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any Grant thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding except in relation to matters as to which
it shall be adjudged in such action, suit or proceeding that such Committee
member is liable for negligence or misconduct in the performance of his or her
duties; provided that within 60 days after institution of any such action, suit
or proceeding the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
-10-
[LOGO]
BLUE FISH CLOTHING, INC.
3 Sixth Street TEL 908-996-3225, Ext. 236
Frenchtown, NJ 08825 FAX 908-996-7062
Date: Wednesday, Oct 16th, 1998
Dear Peter,
It has been a pleasure discussing your ideas and career interests regarding the
Company, relative to the opportunities available here at Blue Fish. I hope that
we have been able to provide a clear understanding of the type of position that
we are presenting to you, and how you might participate in the future growth of
the company.
In this regard, it gives me great pleasure to offer you the position of Chief
Operating Officer. This position reports to the CEO, at an annual base salary of
$90,000, and has the following additional compensation features:
In the first year of employment we would like to offer you a nine-year incentive
stock option (ISO) for 1% of the outstanding shares of the Company's common
stock ( the "Shares). The exercise price of these shares shall be at the fair
market value on the date of the grant. Such options shall be unvested at grant
and shall vest in full at least thirty (30) days prior the merger of the
Corporation with and into another corporation or the sale of all or
substantially all of its stock or assets, or on the eighth anniversary of the
grant date (or on the immediately preceding anniversary date(s) if necessary to
comply with Internal Revenue Code Section 422(d), as determined by the CEO);
provided, however, vesting of each ISO may be accelerated by the CEO to the most
rapid vesting schedule permissible under Code Section 422 upon achievement of
certain financial and non-financial goals for the employee established by the
CEO.
The performance goals for the first year of employment shall be described in
Schedule A. For each succeeding year you shall submit by November 15 of the
preceding year a list of proposed goals and objectives for the following year.
The CEO shall review and approve these recommendations by December 31st of the
preceding year.
Each year for the following two years (years two and three respectively, of your
employment), you shall have a nine year ISO to purchase an additional 1% of the
outstanding shares of the Company's common stock (the "Shares) with an exercise
price of the current fair market value on the grant date for a potential total
of 3% of the outstanding shares. The options to be granted for year two of your
employment shall be granted on the first anniversary of the date of this
agreement, and the options be granted in the year three of your employment shall
be granted on the second anniversary of the date of this agreement respectively.
The vesting schedule for the ISO's granted in years two and three of your
employment, shall carry the same terms, conditions and vesting schedule as the
ISO's granted in the first year.
1. You will be eligible for the Company's 401k plan.
2. You will be entitled to an annual clothing allowance of $2,000 at
approximately wholesale prices. All purchases must be made at a Blue Fish
retail store; the sale will be rung at full retail value and given a 50%
discount. This discounted amount will then be applied to your allowance.
This allowance is to be distributed in two equal parts - $1,000 each 6
months. The allowance is applicable toward Blue Fish clothing only (no
gifts or accessories).
<PAGE>
3. In addition to your clothing allowance you are entitled to a 75% discount
on the retail value of all Blue Fish Clothing, with a cap of $5,000.00 and
a 50% discount on the retail value of other vendor purchases, with a cap of
$2,000.00, at the stores.
4. 3 weeks paid vacation in accordance with Company policies and a
participation in the employee benefits program including health care, which
will be further explained on your first day of employment.
5. Blue Fish will reimburse all approved travel and related entertainment
expenses in accordance with Company policies and procedures.
6. In the event that the Company terminates your employment without cause
within the first year of employment, then the Company shall continue to pay
you three months salary in accordance with the Company's normal payroll
periods. In the event that the Company terminates your employment without
cause after completion of your first year of employment, the Company agrees
to continue to pay you one month's salary for each full year of employment
or portion thereof in accordance with the Company's normal payroll periods.
"Cause" shall be defined as: The Employee is convicted of a felony;
Employee engages in theft, fraud or embezzlement from the Employer, its
customers or suppliers; Employee willfully or habitually refuses or
neglects to comply with explicit directives of the CEO or Employee's
obligations under this agreement or as an employee; habitual use of drugs
or alcohol; or Employee competes with Employer, unless such competition is
consented to by Employer.
Should you decide to accept this offer please sign the acknowledgment below and
return it to the Company.
We look forward to having you join Blue Fish.
Best regards,
Accepted and
/s/ Jeff Haims Acknowledged: /s/ Peter Meade Date 10/23/98
- - - --------------------- --------------- --------
Jeff Haims, CEO Peter Meade
<PAGE>
SCHEDULE A
ANNUAL CASH BONUS
Your goals for remainder of 1998 are as follows:
1. WHOLESALE DIVISION
A) Liquidate $400k of Non Current inventory
B) Liquidate balance of unsold inventory for Fall 1997 & Fall 1998($300,000)
C) Liquidate balance of unsold inventory for Winter 1998($320,000)
2. RETAIL DIVISION
A) Develop operating and sales plans with accompanying budgets for retail
division for 1999
B) Develop a plan with the Retail Division to have retail under its on 4wall
P&L and on a standard retail 4-5-4 operating calendar for January 1,
1999.
C) Develop store sales and management training programs that will benchmark
customer satisfaction and sales increases.
D) Create Retail promotion and event calendars that tie into and insure
the support of the corresponding PR & Marketing, Design and Production
department's calendars and resources
Your goals for 1999 are as follows:
- - - ----------------------------------------
** (A) Total sales $5.2 MM
- - - ----------------------------------------
** (A1)Gross Margin 51%
- - - ----------------------------------------
NEW BUSINESSES (KID'S, MEN'S, CUSTOM BASICS)
- - - ----------------------------------------------------------------------------
Kids Mens Custom Basics Sweaters
- - - ----------------------------------------------------------------------------
** (B) Total sales $ 150,000 $ 100,000 $ 1,250,000 $ 750,000
- - - ----------------------------------------------------------------------------
** (B1)Gross Margin 50% 50% 50% 50%
- - - ----------------------------------------------------------------------------
CORE BUSINESS
- - - --------------------------------------
** (C) Total sales $8.0 MM
- - - --------------------------------------
** (C1)Gross Margin 54%
- - - --------------------------------------
- - - ---------------------------------------------------------------
** (D) Net Income $500,000 (after interest) year end
- - - ---------------------------------------------------------------
YOUR TARGET BONUS GOAL IS 30% OF YOUR ANNUAL SALARY
** Goals Achieved Percent of Target Bonus Payable
- - - ---------------------------------------------------------------------------
with less than 85% of Goal 70%
- - - ---------------------------------------------------------------------------
with greater than or equal to 85% but less than 88% of Goal 75%
- - - ---------------------------------------------------------------------------
with greater than or equal to 88% but less than 91% of Goal 80%
- - - ---------------------------------------------------------------------------
with greater than or equal to 91% but less than 94% of Goal 85%
- - - ---------------------------------------------------------------------------
with greater than or equal to 94% but less than 97% of Goal 90%
- - - ---------------------------------------------------------------------------
with greater than or equal to 97% but less than 100% of Goal 95%
- - - ---------------------------------------------------------------------------
with 100% of Goal 100%
- - - ---------------------------------------------------------------------------
<PAGE>
SCHEDULE A
CONTINUED...
ANNUAL CASH BONUS
Your goals for 1999 are as follows:
CALCULATION TABLE
Total percentage of targeted Goal will be defined as follows:
- - - ------------------------------------- --------------------
Add the percent total of target (A) + (A1)
- - - ------------------------------------- --------------------
+ The percent total of target (B) + (B1)
- - - ------------------------------------- --------------------
+ The percent total of target (C) + (C1)
- - - ------------------------------------- --------------------
+ The percent total of target (D)
- - - ------------------------------------- --------------------
Total percentage of goal ( Sum x Target )
EXAMPLE
Total percentage of targeted Goal will be defined as follows:
% of Goal % of Goal
- - - ------------------------------------------------------------------------------
Retail sales A = 100% A1 = 90% (100%+90%)/2 95%
- - - ------------------------------------------------------------------------------
+ The percent total of target B = 90% B1 = 98% (90%+98%)/2 94%
- - - ------------------------------------------------------------------------------
+ The percent total of target C = 98% C1 = 108% (98%+108%)/2 103%
- - - ------------------------------------------------------------------------------
+ The percent total of target D = 95% (95%) 95%
- - - ------------------------------------------------------------------------------
Total percentage= 97%
Total percentage of goal= (Sum x Target)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 191,479
<SECURITIES> 0
<RECEIVABLES> 741,535
<ALLOWANCES> 51,386
<INVENTORY> 2,492,671
<CURRENT-ASSETS> 3,469,533
<PP&E> 2,740,910
<DEPRECIATION> 1,199,406
<TOTAL-ASSETS> 5,439,411
<CURRENT-LIABILITIES> 4,034,813
<BONDS> 999,732
0
0
<COMMON> 4,719
<OTHER-SE> 311,926
<TOTAL-LIABILITY-AND-EQUITY> 5,439,411
<SALES> 3,199,876
<TOTAL-REVENUES> 3,199,876
<CGS> 2,228,774
<TOTAL-COSTS> 2,228,774
<OTHER-EXPENSES> 2,038,697
<LOSS-PROVISION> 1,067,595
<INTEREST-EXPENSE> 63,240
<INCOME-PRETAX> (1,130,835)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,130,835)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,130,835)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
