<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
---------------------------
[ ] 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
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(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 April 14, 1998, 4,599,200 shares of Common Stock,
--------------------------------------------------------
$.001 par value per share, were issued and outstanding.
- - ---------------------------------------------------------------
Transitional Small Business Disclosure Format (check one):
YES NO X
----- -----
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BLUE FISH CLOTHING, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - December 31, 1996 and June 30, 1997 3
Statements of Operations - For the Three Months Ended
June 30, 1996 and June 30, 1997 4
Statements of Cash Flows - For the Three Months Ended
June 30, 1996 and June 30, 1997 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS ON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 17
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BLUE FISH CLOTHING, INC.
BALANCE SHEETS
--------------
(unaudited)
December 31, June 30,
ASSETS 1996 1997
- - ------ ------------ --------
CURRENT ASSETS
Cash and cash equivalents $1,887,994 $1,700,568
Restricted cash 40,346 98,143
Receivables, net of
allowance of $33,000
and $39,139 526,157 1,035,807
Inventories 3,005,717 3,071,202
Other current assets 63,013 188,208
Deferred income taxes 222,119 222,119
---------- ----------
Total current assets 5,745,346 6,316,047
PROPERTY AND EQUIPMENT
Property and equipment,
net of accumulated
depreciation of
$472,343 and $613,417 1,113,411 1,716,781
OTHER ASSETS:
Noncompete and consulting
agreement, net 56,667 32,111
Security deposits 197,884 52,982
Deferred income taxes 15,876 15,876
---------- ----------
$7,129,184 $8,133,797
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES
Line of credit $1,000,000 $ 500,000
Current portion of
long-term debt 193,698 167,683
Receivable purchase line
of credit 403,464 981,425
Accounts payable 849,667 932,300
Accrued expenses 432,099 485,309
---------- ----------
Total current
liabilities 2,878,928 3,066,717
---------- ----------
DEFERRED RENT -- 45,855
---------- ----------
LONG-TERM DEBT 482,982 1,196,144
COMMITMENTS AND CONTINGENCIES ========== ==========
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value
11,000,000 shares authorized,
6,647,896 and 4,599,200 shares
issued and 4,599,200 and
4,599,200 shares outstanding,
respectively 6,648 4,599
Additional paid-in capital 4,027,766 3,799,815
Retained earnings (37,140) 20,667
Less - Treasury stock,
2,048,696 common shares,
at cost (230,000) -
---------- ----------
Total stockholders' equity 3,767,274 3,825,081
---------- ----------
$7,129,184 $8,133,797
========== ==========
The accompanying notes are an integral part of these statements.
3
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BLUE FISH CLOTHING, INC.
STATEMENTS OF OPERATIONS
------------------------
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1997 1996 1997
---- ---- ---- ----
SALES $3,121,717 $3,900,007 $5,873,896 $7,342,862
COST OF GOODS SOLD 1,459,890 1,815,114 2,815,191 3,416,040
---------- ---------- ---------- ----------
Gross margin 1,661,827 2,084,893 3,058,705 3,926,822
OPERATING EXPENSES 1,472,275 1,913,668 2,942,993 3,624,425
---------- ---------- ---------- ----------
Income from operations 189,552 171,225 115,712 302,397
INTEREST EXPENSE, NET 31,259 49,774 94,239 111,669
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 158,293 121,451 21,473 190,728
INCOME TAX (BENEFIT)
PROVISION (149,427) 56,597 (163,109) 88,880
---------- ---------- ---------- ----------
NET INCOME $ 307,720 $ 64,854 $ 184,582 $ 101,848
========== ========== ========== ==========
NET INCOME PER SHARE $ 0.01 $ 0.02
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,777,466 4,775,681
PRO FORMA DATA unaudited:(Note 5)
Historical income before
income taxes $ 158,293 $ 21,473
Pro forma income tax
provision 77,089 10,457
---------- ----------
PRO FORMA NET INCOME $ 81,204 $ 11,016
========== ==========
PRO FORMA NET INCOME PER SHARE $ 0.02 $ 0.00
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING 4,250,519 4,064,172
The accompanying notes are an integral part of these statements.
4
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BLUE FISH CLOTHING, INC.
STATEMENTS OF CASH FLOW
(unaudited)
Six Months Ended June 30,
-------------------------
1996 1997
---- ----
OPERATING ACTIVITIES:
Net income $ 184,582 $ 101,848
Adjustments to reconcile
net income to net cash
used in operating activities -
Depreciation and amortization 101,222 190,888
Deferred tax benefit (173,566) -
Provision for deferred rent - 45,855
Provision for losses
(recoveries) on
accounts receivable (10,024) 25,002
(Increase) decrease in
assets -
Accounts receivable 14,522 (534,652)
Inventory (324,003) (65,485)
Other assets (9,877) 19,707
Increase (decrease) in
liabilities -
Accounts payable (225,198) 82,633
Accrued expenses (6,304) 88,066
Accrued bonus-stock grant (219,625) -
---------- ----------
Net cash used in
operating activities (668,271) (46,138)
---------- ----------
INVESTING ACTIVITIES:
Payments for purchases of
property and equipment (57,545) (804,558)
---------- ----------
Net cash used in investing
activities (57,545) (804,558)
---------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayments)
on line of credit 370,000 (500,000)
Receivable purchase
line of credit, net (114,171) 577,961
Borrowing on long-term debt 450,000 800,000
Repayments on long-term debt (109,464) (112,853)
Net cash proceeds received from
public offering 3,751,068 -
Stockholder cash distributions (463,926) (44,041)
---------- ----------
Net cash provided by financing
activities 3,883,507 721,067
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,157,691 (129,629)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 205,878 1,928,340
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $3,363,569 $1,798,711
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $ 91,543 $ 111,849
========== ==========
Taxes $ 2,426 $ 29,575
========== ==========
The accompanying notes are an integral part of these statements.
5
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BLUE FISH CLOTHING, INC.
Notes to Financial Statements
For the Period Ending March 31, 1997
------------------------------------
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, as amended,
for additional disclosures including a summary of the Company's accounting
policies.
In the opinion of management of the Company, the financial statements
include all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the financial position of Blue Fish
Clothing, Inc. The results of operations for the three months and six
months ended June 30, 1997 or any other interim period, are not necessarily
indicative of the results to be expected for the full year.
Note 2 - Initial Public Offering:
- - --------------------------------
On November 13, 1995, the Company commenced the sale of 800,000 shares of
common stock in a public offering at a price of $5.00 per share. The
offering was made directly by the Company on a "Minimum/Maximum" basis
subject to subscription and payment for not less than 500,000 shares (the
Minimum) and not more than 800,000 shares (the Maximum). The Minimum was
raised as of May 13, 1996, and the public offering was closed as of May 15,
1996, generating cash of approximately $3,215,000, net of transaction costs
of $721,000, of which approximately $247,000 was expended in 1995. Upon the
closing of the offering, offering costs deferred prior to the offering were
reclassified to stockholders' equity and the Company converted to C
Corporation status and recorded deferred income tax assets of $173,566 (see
Note 4). All S Corporation earnings were reclassified to additional paid
in capital.
Note 3 - Significant Accounting Policies and Disclosures:
- - --------------------------------------------------------
Inventories
- - -----------
The components of inventory as presented are as follows:
December 31, June 30,
1996 1997
------------ -----------
Raw materials $ 304,361 $ 549,907
Work-in-process 709,302 963,716
Finished goods 1,992,054 1,557,579
------------ -----------
$ 3,005,717 $ 3,071,202
============ ===========
6
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Earnings Per Share (EPS)
- - ------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the EPS
calculation by replacing primary EPS with basic EPS. Basic EPS is computed
by dividing reported earnings available to common stockholders by weighted
average shares outstanding. Fully diluted EPS, now called diluted EPS, is
still required. Early application is prohibited, although footnote
disclosure of proforma EPS amounts computed is required. Under SFAS 128,
proforma basic EPS and diluted EPS for the three months and six months
ended June 30, 1997 would not have changed from the amount reported. All
other EPS amounts for the periods presented remain the same.
Major Customers and Concentration of Credit Risk
- - ------------------------------------------------
The Company has one significant customer that accounted for 10.0% and 17.9%
of total sales for the six months ended June 30, 1996 and June 30, 1997,
respectively. This same customer accounted for 6.3% and 17.8% of net
accounts receivable at December 31, 1996 and June 30, 1997, respectively.
Note 4 - Income Taxes:
- - ---------------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
financial statements as measured by enacted tax laws.
Prior to the closing of the Offering, the Company had elected to be taxed
under Subchapter S of the Internal Revenue Code. As a result, the Company
was not subject to federal income taxes, and the taxable income of the
Company was included in the stockholders' tax returns. The Company had also
elected S Corporation status in certain states and, therefore, had recorded
a provision for state income taxes for those states that do not recognize
or partially recognize S Corporation treatment.
Shortly before the closing of the Offering, the Company terminated its
status as an S Corporation and is now subject to federal and additional
state income taxes. The Company recorded a tax benefit of $173,566 as a
result of establishing deferred income tax assets upon its conversion to a
C Corporation.
7
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Note 5 - Pro Forma Information:
- - ------------------------------
Pro Forma Statement of Operations Data
- - --------------------------------------
For informational purposes, the accompanying statements of operations for
the quarter and six months ended June 30, 1996 include an unaudited pro
forma adjustment for the income taxes which would have been recorded if the
Company had not been an S Corporation, based on the tax laws in effect
during the respective period.
The differences between the federal statutory income tax rate and the pro
forma income tax rate for all periods presented are as follows:
1996
----
Federal statutory tax rate 34.0%
State income taxes, net of federal benefit 7.9
Other 6.8
-----
48.7%
=====
Pro Forma Net Income Per Share
- - ------------------------------
Pro forma net income per share was calculated by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
for the respective periods, adjusted for the dilutive effect of common
stock equivalents which consist of stock options. Pursuant to the
requirements of the Securities and Exchange Commission, common stock issued
by the Company during the twelve months immediately preceding the initial
public offering, plus the number of common equivalent shares which were
authorized and will become issuable during the same period pursuant to the
grant of common stock options, have been included in the calculation of the
shares used in computing pro forma net income per share as if they were
outstanding for all periods presented using the treasury stock method and
the offering price of $5.00 per share.
Note 6 - Financing Arrangements:
- - -------------------------------
On June 25 and June 27, 1997, the Company refinanced its existing debt and
increased its borrowings. On June 25, 1997, the Company entered into a
Business Loan Agreement with a bank and received a promissory note in the
amount of $800,000. This note is subject to monthly interest payments
beginning July 25, 1997, with interest calculated on the unpaid principal
balances at an interest rate of two percentage points over the Index. The
Index represents the bank's one year certificate of deposit yield (5.9% at
June 30, 1997). Four principal payments of $50,000 are to be paid in annual
installments commencing June 25, 1998 through June 25, 2001, and one
principal payment of $600,000 is to be paid on June 25, 2002. This note is
secured by an $842,000 certificate of deposit and guaranteed by Jennifer
Barclay, a principal shareholder. This certificate of deposit is included
in cash and cash equivalents at June 30, 1997.
8
<PAGE> 9
As of June 27, 1997, the Company had an outstanding line of credit of
$1,000,000 subject to a maximum outstanding amount not to exceed 50% of
finished goods inventory plus 25% of work in process. On that date, the
Company modified this Note and Security Agreement and paid $500,000,
thereby reducing the outstanding principal balance due to $500,000 and
extended the term through April 1998. Interest shall be charged on the
outstanding principal balance of the loan from June 27, 1997, until the
full amount of principal due has been paid at a rate equal at all times to
the Prime Rate plus three quarters percent per annum. The Security
Agreement shall continue to be a first lien on the Collateral and shall
secure the Note as extended.
Note 7 - Commitments and Contingencies:
- - --------------------------------------
Operating Leases
- - ----------------
The Company has entered into a 10 year lease, commencing June 15, 1997, for
a 2,300 sq. ft. (approximately 2,000 selling sq. ft.) Westport, Connecticut
retail store at a monthly rent of $4,600 with an adjustment each year for
CPI.
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease is currently scheduled to commence in June 1998. Minimum lease
payments are due monthly and begin at $267,120 per year and increase 3% per year
throughout the term plus a common area maintenance charge of the greater of
$15,000 or 5% of base rent.
In 1997, the lease was amended and obligates 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. A deposit of
$200,000 was required which will be applied to the purchase price of the
property. This was funded through receipt of an economic development grant and
has been included in other non-current liabilities on the accompany balance
sheet until all obligations related to the grant have been achieved. In
addition, the Company is obligated to make payments of approximately $340,000
related primarily to building improvements at this site. The lease will be
accounted for as a capital lease upon commencement.
Note 8 - Treasury Stock:
- - -----------------------
The Company repurchased 2,048,696 shares of the Company's Common Stock.
These shares were held in Treasury by the Company (the "Treasury Stock").
Pursuant to a Security Agreement, the Treasury Stock, together with all
accounts receivable, inventories, work-in-progress, bank accounts,
trademarks, choses in action, leasehold interests, and fixed assets, served
as collateral to secure the Company's obligations under certain promissory
notes. The Company satisfied all of its obligations pursuant to the
Agreement and promissory notes on April 5, 1997. On April 20, 1997 the
Company retired the Treasury Stock and returned it to the status of
authorized but unissued shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- - ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS:
-----------------------------------
Six Months Ended June 30, 1997 ("1997 period") Compared to Six Months
Ended June 30, 1996 ("1996 period")
SALES. The Company's sales increased by $1,468,966 or 25.0% to
$7,342,862 in the 1997 period. The Company's wholesale sales increased by
20.9% from $4,100,940 in the 1996 period to $4,958,208 in the 1997 period,
its retail sales increased by 40.7% from $1,386,123 in the 1996 period to
$1,949,936 in the 1997 period and craft fair sales increased by 12.4% from
$386,833 in the 1996 period to $434,717 in the 1997 period. The Company
attributes the wholesale sales increase during the 1997 period primarily to
the enthusiastic customer response to the Spring and Summer lines, which
are particularly strong selling seasons for the Company, a 67.7% increase
in department store business, and to increased boutique account business
resulting from improved relations with existing wholesale accounts and new
business generated through the Messenger Program. The retail sales
increase was primarily due to a same store sales increase of $168,305 or
14.1%, and stores which opened in September 1996 and March 1997 generating
sales during the 1997 period. The Company attributes these results to
increased marketing efforts, personal shopping through its phone sales, and
repeat customer purchases. As a result of closing the Company's Taos, New
Mexico retail location in January 1997, sales at this location decreased
$165,132 to $27,563 in the 1997 period. The increase in craft fair sales
was due to the continued sale of past season and slightly damaged goods at
special showplaces.
9
<PAGE> 10
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 increased, as a percentage of sales,
by 1.4 percentage points from 52.1% in the 1996 period to 53.5% in the 1997
period. The Company attributes this increase to fewer discounted sales and
increased initial mark-ups at its retail stores.
OPERATING EXPENSES. The Company's operating expenses increased by
$681,432 or 23.2% from $2,942,993 in the 1996 period to $3,624,425 in the
1997 period and decreased as a percentage of sales by 0.7 percentage points
from 50.1% in the 1996 period to 49.4% in the 1997 period. The increase in
operating expenses in the 1997 period was primarily due to the addition of
management team members and staff support, expenses of two new retail
stores offset by a discontinued store accounting for 44.6% of the total
dollar increase which did not exist in the 1996 period, and accounting and
legal expenses. Operating expenses related to general and administrative
functions have increased throughout 1996 and 1997, providing capacity for
future sales growth. The decline as a percent of sales is primarily
attributable to sales increasing at a faster rate than expenses.
INTEREST EXPENSE, NET. The Company's interest expense, net, increased
by $17,430 or 18.5% from $94,239 in the 1996 period to $111,669 in the 1997
period. Interest expense increased by $26,973 due to increased borrowings
for the Company's working capital needs, an increase in assigned wholesale
credit receivables as a result of increased wholesale sales, and an
increase in interest on capitalized leases. Interest income increased by
$9,543 as a result of the Company investing cash raised from the initial
public offering in interest bearing instruments in May 1996.
PRE-TAX INCOME. As a result of the foregoing, income before income
tax provision increased $169,255 or 788.2% from $21,473 in the 1996 period
to an income before income tax provision of $190,728 in the 1997 period.
INCOME TAX (BENEFIT) PROVISION. During the 1997 period the effective
tax rate was 46.6% primarily due to Federal and state taxes and the impact
of certain non-deductible expenditures. The benefit of $163,109 in the 1996
period was primarily due to the recording of a tax benefit of $173,566 as a
result of establishing deferred income tax assets upon the conversion of
the Company to a C Corporation shortly before the closing of the Offering.
10
<PAGE> 11
Three Months Ended June 30, 1997 ("1997 quarter") Compared to Three Months
Ended June 30, 1996 ("1996 quarter")
SALES. The Company's sales increased by $778,290 or 24.9% to
$3,900,007 in the 1997 quarter. The Company's wholesale sales increased by
23.9% from $1,900,254 in the 1996 quarter to $2,354,328 in the 1997
quarter, its retail sales increased by 43.5% from $842,611 in the 1996
quarter to $1,208,860 in the 1997 quarter and craft fair sales decreased by
10.6% from $378,852 in the 1996 quarter to $338,818 in the 1997 quarter.
The Company attributes the wholesale sales increase during the 1997 quarter
primarily to the enthusiastic response to the Summer line, which is a
particularly strong selling season for the Company, a 110.1% increase in
department store business, and to increased boutique account business
resulting from improved relations with existing wholesale accounts and new
business generated from through the Messenger Program. The retail sales
increase was primarily due to a same store sales increase of $58,000 or
8.0%, and stores which opened in September 1996 and March 1997 generating
sales during the 1997 quarter. The Company attributes these results to
increased marketing efforts, personal shopping through its phone sales, and
repeat customer purchases. As a result of closing the Company's Taos, New
Mexico retail location in January 1997, sales at this location decreased
$114,022 in the 1997 quarter. The decrease in craft fair sales was
primarily due to attending an event during the March 31, 1997 period which
previously occurred in the June 30, 1996 quarter.
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 increased, as a percentage of sales,
by 0.2 percentage points from 53.2% in the 1996 period to 53.4% in the 1997
period. The Company attributes this increase to fewer discounted sales and
increased initial mark-ups at its retail stores and overall production
efficiencies.
OPERATING EXPENSES. The Company's operating expenses increased by
$441,393 or 30.0% from $1,472,275 in the 1996 quarter to $1,913,668 in the
1997 quarter and increased as a percentage of sales by 1.9 percentage
points from 47.2% in the 1996 period to 49.1% in the 1997 period. The
increase in operating expenses in the 1997 quarter was primarily due to the
addition of management team members and staff support, expenses of two new
retail stores offset by a discontinued store accounting for 53.6% of the
total dollar increase which did not exist in the 1996 quarter, and
accounting and legal expenses. Operating expenses related to general and
administrative functions have increased throughout 1996 and 1997, providing
capacity for future sales growth.
INTEREST EXPENSE, NET. The Company's interest expense, net, increased
by $18,515 or 59.2% from $31,259 in the 1996 quarter to $49,774 in the 1997
quarter. Interest expense increased by $11,204 due to increased borrowings
for the Company's working capital needs, an increase in assigned wholesale
credit receivables as a result of increased wholesale sales, and an
increase in interest on capitalized leases. Interest income decreased by
$7,311 as a result of spending a portion of the Company's initial
investment of approximately $3.9 million of cash raised from the initial
public offering in interest bearing instruments in the 1996 quarter.
11
<PAGE> 12
PRE-TAX INCOME. As a result of the foregoing, income before income
tax provision decreased $36,842 or 23.3% from $158,293 in the 1996 period
to an income before income tax provision of $121,451 in the 1997 period.
INCOME TAX (BENEFIT) PROVISION. During the 1997 quarter the effective
tax rate was 46.6% primarily due to Federal and state taxes and the impact
of certain non-deductible expenditures. The benefit of $149,427 in the 1996
quarter was primarily due to the recording of a tax benefit of $173,566 as
a result of establishing deferred income tax assets upon the conversion of
the Company to a C Corporation shortly before the closing of the Offering.
Liquidity and Capital Resources:
- - -------------------------------
Since its inception, the Company has financed its operations through bank
lines of credit, factoring agreements, bank notes and capital lease financing.
In May 1996, the Company completed an initial public offering which generated
approximately $3.2 million in proceeds in 1996, net of expenses. At December 31,
1997, the Company had $467,000 in cash and cash equivalents (of which $116,000
was restricted), a $500,000 certificate of deposit, a receivable purchase line
of credit for up to $1,500,000 (with a $1,161,000 outstanding balance), a demand
bank line of credit for up to $500,000 (with a $500,000 outstanding balance)
with borrowing limits subject to 50% of finished goods and 25% of work in
progress inventory levels, an $800,000 note payable to a bank (with an $800,000
outstanding balance) which requires a $300,000 certificate of deposit as
security and a $345,000 loan from a shareholder. The Company had working capital
of $2.2 million on December 31, 1997, reflecting a decrease in working capital
of $700,000 from $2.9 million on December 31, 1996. Working capital is defined
as current assets less current liabilities.
On September 11, 1995 the Company's then sole stockholder Ms. Barclay
requested a distribution of $450,000 of the taxed but undistributed S
corporation earnings. Ms. Barclay received this distribution on January 2, 1996.
Ms. Barclay loaned these funds back to the Company on an unsecured basis. The
Company issued her a promissory note in the principal amount of $450,000 and
bearing interest of 7% per annum, payable monthly. At December 31, 1997,
$345,000 was outstanding. The principal amount of the note will be payable upon
demand by Ms. Barclay, subject to the following limitations upon repayment: (i)
the maximum amount of principal that the Company is required to pay in any
3-month period is $50,000 and in any 12-month period is $100,000; (ii) the
Company is not required to make any repayments of principal when its current
assets to current liabilities ratio as set forth in its latest quarterly balance
sheet is below 1.0, excluding liabilities related to amounts due pursuant to the
note; and (iii) no repayment of principal will be paid in the event that a
disinterested majority of the Company's Board of Directors determines that it is
not advisable to make a repayment of principal based upon the Company's then
current cash flow or liquidity needs. Although the restrictions imposed on
repayment were designed to protect the Company from experiencing liquidity
problems, no assurance can be given that a demand for repayment by Ms. Barclay
will not result in a shortage of cash available to the Company for operations.
See "Certain Relationships and Related Transactions."
Net cash used in operations was $284,000 during 1997, consisting primarily
of a net loss of $383,000 and an increase in accounts receivable of $701,000
partially offset by depreciation and amortization of $429,000 and deferred tax
expense of $238,000. Net cash used by operating activities during the same
period for 1996 was $1.2 million, consisting primarily of a net loss before
deferred tax benefit, an increase in inventories of $979,000 for store stock
levels and planned 1997 wholesale shipments, and a decrease in accrued
bonus-stock grant of $403,000 partially offset by a decrease in accounts
receivable of $293,000.
Net cash used in investing activities in 1996 and 1997 was $425,000 and
$2,192,000, respectively. Net cash used in investing activities in 1997
consisted primarily 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 Company's Westport, Connecticut retail store
which opened in October, 1997, the implementation of new software, ongoing
implementation of the Company's Management Information System, and the purchase
of $800,000 in certificates of deposits. A certificate of deposit of $300,000 is
restricted as collateral on the $800,000 note payable to the bank. The remaining
$500,000 was used to maintain a minimum deposit with the bank. The majority of
the 1996 expenditures consisted of the buildout of the wholesale showroom in New
York and Austin retail store.
Net cash provided by financing activities in the 1997 period was
$1,014,000, consisting primarily of an increase in the Company's receivable
purchase line of credit of $757,000, a $200,000 economic development grant and
additional net borrowings on debt of $101,000. Net cash provided by financing
activities in 1996 was $3.3 million, consisting primarily of net cash proceeds
received from the public offering of $3.5 million in 1996, an increase on
borrowings on the Company's line of credit of $500,000, and $450,000 of
borrowings from a majority shareholder. This funding was offset in part by
equity distributions of $556,000 to pay stockholder taxes and distribute S
corporation earnings.
On June 25 and June 27, 1997, the Company refinanced its existing debt and
increased its borrowings. On June 25, 1997, the Company entered into a Business
Loan Agreement with a bank and received a promissory note in the amount of
$800,000. This note is subject to monthly interest payments beginning July 25,
1997, with interest calculated on the unpaid principal balances at an interest
rate of two percentage points over the Index. The Index represents the bank's
one year certificate of deposit yield. Four principal payments of $50,000 are to
be paid in annual installments commencing June 25, 1998 through June 25, 2001,
and one principal payment of $600,000 is to be paid on June 25, 2002. This note
was initially secured by an $842,000 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. In addition, the Company agreed to maintain a minimum
deposit account with the bank in an amount not less than $500,000. At December
31, 1997, $800,000 was outstanding on this note and the interest rate was 7.9%.
As of June 27, 1997, the Company had an outstanding line of credit of
$1,000,000 subject to a maximum outstanding amount not to exceed 50% of finished
goods inventory plus 25% of work in process. On that date, the Company modified
this Note and Security Agreement and paid $500,000, thereby reducing the
outstanding principal balance due to $500,000 and extended the term through
April 1998. The Security Agreement shall continue to be a first lien on the
Collateral and shall secure the Note as extended. This line of credit bears
interest at the bank's prime interest rate plus 0.75% payable on demand or
monthly. At December 31, 1997, outstanding borrowings under the line of credit
were $500,000, and the interest rate was 9.25%. The line of credit is subject to
a maximum outstanding balance not to exceed 50% of finished goods inventory plus
25% of work in process. In March 1998, the line was increased to $1,000,000
subject to borrowing limits based on inventory and extended the line to April
1999. As of April 14, 1998, the Company had borrowed $950,000 under the line.
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,
12
<PAGE> 13
and the Company is responsible for reimbursing the bank for all uncollectible
accounts. Interest expense under this agreement was $117,000 and $131,000 during
1996 and 1997, respectively. 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. 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.
Borrowings under this agreement, the line of credit, and the note payable
to a bank contain cross-default and cross-collateralization provisions.
The Company has three other notes payable to banks with outstanding
balances of $34,000 on December 31, 1997 and mature October 1998 through
November 2000. As of December 31, 1997, the Company has $99,000 outstanding in
capital lease obligations for various pieces of equipment. Four leases expire in
1998, and two leases expire in 1999.
The Company repurchased 2,048,696 shares of the Company's Common Stock in
1993. These shares were held in Treasury by the Company (the "Treasury Stock").
Pursuant to a Security Agreement, the Treasury Stock, together with all accounts
receivable, inventories, work-in-progress, bank accounts, trademarks, choses in
action, leasehold interests, and fixed assets now or hereafter acquired, served
as collateral to secure the Company's obligations under certain promissory
notes. The Company satisfied all of its obligations pursuant to the Agreement
and promissory notes on April 5, 1997. On April 20, 1997 the Company retired the
Treasury Stock and returned it to the status of authorized but unissued shares.
In December 1996, the Company entered into a lease agreement for a new
corporate headquarters and production facility in Palmer Township, Pennsylvania,
commencing in June 1998 at an annual rent of approximately $267,000 during the
first year, $275,000 during the second year, with a three percent (3%) escalator
per year thereafter, plus taxes and operating expenses. This rent, plus
anticipated moving expenses, constitutes a significant increase over the
Company's current occupancy cost. In addition, the Company has committed to pay
approximately $340,000 related to building improvements at this site during
1998. If the Company is unable to generate sufficient funds from operations to
finance these additional costs, the Company will require additional debt or
equity financing. In addition, the lease agreement, as amended, provides that
the Company must purchase the leased premises plus adjoining space and a
building comprising a total of approximately 96,000 square feet and 7.5 acres of
land during the sixth year after the Company takes possession of the leased
premises for $3,800,000. The Company plans to pursue mortgage financing for this
purchase.
During the first quarter 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 quarter of 1998 as compared to
the first quarter of 1997 and expects to report a loss in the first quarter of
1998. In response, the Company has undertaken cost reductions, including
personnel, and is negotiating with its existing lender and new lender(s) for an
increased debt facility. No assurance can be given that the Company will be
successful in securing this increased debt facility. 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 it
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. No assurance can be given that
such management actions or attempts to raise additional financing or increase
sales will be successful.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.26 Agreement by and between Blue Fish Clothing, Inc.
(Sub-Tenant), Michael J. Herbst (Tenant) and
Charles F. Schaefer and Shirley Kaplan Mellor
(Landlords) effective June 25, 1997.
10.27 Business Loan Agreement by and between Blue Fish
Clothing, Inc. and Carnegie Bank, N.A. dated June
25, 1997.
10.28 Promissory Note in the principal amount of
$800,000 by and between Blue Fish Clothing, Inc.
and Carnegie Bank, N.A. dated June 25, 1997.
10.29 Assignment of Deposit Account by and between Blue
Fish Clothing, Inc. and Carnegie Bank, N.A. dated
June 25, 1997.
10.30 Note and Loan and Security Agreement Modification
Agreement by and between Blue Fish Clothing, Inc.
and Carnegie Bank, N.A. dated June 27, 1997.
10.33 First Addendum dated May 19 1997 to Lease Agreement
dated December 16, 1996 between William I. Roberts and
the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Not applicable
14
<PAGE> 15
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 April 15, 1998.
BLUE FISH CLOTHING, INC.
------------------------
(Registrant)
DATE: April 15, 1998 /s/ Jennifer Barclay
-----------------------------------
Jennifer Barclay
Chairman
DATE: April 15, 1998 /s/ Richard E. Swarttz
-----------------------------------
Richard E. Swarttz
Chief Financial Officer and
Treasurer
15
<PAGE> 16
INDEX TO EXHIBITS
10.33 First Addendum dated May 19, 1997 to the Lease
Agreement dated December 16, 1996 between
William I. Roberts and the Registrant.
<PAGE> 1
EXHIBIT 10.33
FIRST ADDENDUM TO LEASE AGREEMENT
THE FIRST ADDENDUM to Lease Agreement dated December 16, 1996, between
WILLIAM I. ROBERTS, as Lessor, and BLUE FISH CLOTHING, INC., as Lessee (the
"Lease Agreement") is made this 19th day of May, 1997.
The Lease Agreement is hereby amended in the following respects:
1. Section 2.1 is hereby amended by changing the commencement date of
September 1, 1997, referred to at the end thereof, to January 1, 1998.
2. Article 24 - Lessee's Option to Purchase Property, is hereby changed
to read as follows:
ARTICLE 24 - LESSEE'S PURCHASE OF PROPERTY
24.1 Sale of Property. Lessor agrees to sell and Lessee agrees to
purchase the Property after January 1, 2003, and before January 1, 2004,
for the purchase price of $3,800,000.00. Real estate taxes, insurance, and
any other prepaid or accrued charges customarily prorated shall be prorated
as of the date of transfer according to the applicable fiscal year.
24.2 Right to Purchase. At the time of the closing of the loan by
Lessor for the improvements for the Property, Lessee shall pay Lessor
$200,000.00 to obtain the right to purchase the Property. This payment
shall be credited against the purchase price in Section 24.1.
24.3 Notice period. Lessee shall give Lessor at least thirty (30)
days' notice of the Settlement.
24.4 Settlement: title. Settlement shall occur no later than January
1, 2004, at which time Lessor, as against receipt of said purchase price,
shall give Lessee a good, clear, and marketable title to the Property, free
and clear of all liens, encumbrances, encroachments, restrictions,
reservations, conditions of record, and easements, except then existing
leases, usual and customary easements such as utility services, taxes due
but not yet payable, and zoning ordinances, if any. Transfer of the
Property shall be made by special warranty deed conveying title therein to
Lessee, in fee simple. If there is any lien or encumbrance of record
against the Property, Lessee may elect to take the Property subject to any
such lien or encumbrance.
24.5 Change in Commencement Date. If for any reason Lessor cannot
deliver possession of the Demised Premises to Lessee on or before the
Commencement Date, the dates set forth in this Article shall be reset so
that each date is moved forward in time by the number of days which passed
between the
<PAGE> 2
Commencement Date and the date upon which Lessor delivered possession to
Lessee.
3. Preliminary Costing Proposal, Exhibit B.
(a) If Lessee requests revisions to the preliminary costing proposal from
Bowser Construction Company dated September 18, 1986, and attached to the
Lease Agreement as Exhibit "B", then in that event Lessee shall be
responsible for the cost of said revisions.
(b) If an elevator is required as a result of any revisions requested by
Lessee, then Lessee shall be responsible for $150,000.00 toward the cost
of that elevator, but not more than the actual cost of the elevator or
lift and its installation.
(c) If Lessee chooses to build out its own office space, then the build out
must be within the specifications pursuant to Exhibit B and any
contractor retained by Lessee will be subject to all requirements of the
prime contractor, Bowser Construction Company.
IN WITNESS WHEREOF, this Addendum is signed this 19th day of May, 1997.
WITNESS: LESSOR:
/s/ Robbin Tolan /s/ William I. Roberts
- ---------------------------------- -------------------------------
William I. Roberts
LESSEE:
ATTEST: BLUE FISH CLOTHING, INC.
/s/ Frances G. Housten By: /s/ Jennifer Barclay
- ---------------------------------- -------------------------------
FRANCES G. HOUSTEN
NOTARY PUBLIC OF NEW JERSEY
My Commission Expires July 8, 2000
