<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 17, 1997
PACIFIC COAST APPAREL COMPANY, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 0-28760 95-4536683
------------------------ --------------------------- ------------------------
(STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1620 S. Los Angeles Street
Los Angeles, California 90015
--------------------------------- ----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(213) 748-9724
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 17, 1997, as previously reported, the registrant acquired the
business and assets of Cotton Stuff, Inc., a designer and manufacturer of casual
sportswear.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
Independent Auditor's Report F-1
Balance Sheet, December 31, 1996 F-2
Statement of Operations and Retained Earnings,
Years Ended December 31, 1996 and 1995 F-3
Statement of Cash Flows, Years Ended
December 31, 1996 and 1995 F-4
Notes to Financial Statements, December 31,
1996 and 1995 F-5
Unaudited Financial Statements:
Balance Sheet, June 30, 1997 F-6
Statement of Income and Retained Earnings,
Six Months Ended June 30, 1997 and 1996 F-7
Statement of Cash Flows, Six Months Ended June 30, 1997
and 1996 F-8
Notes to Unaudited Financial Statements F-9
(b) Unaudited Pro Forma Financial Statements
Preface to Unaudited Pro Forma Combined
Financial Statements P-1
Balance Sheet, June 30, 1997 P-2
Statement of Operations, Six Months
Ended June 30, 1997 and year Ended December 31, 1996 P-3
Notes to Pro Forma Financial Statements P-4
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned hereunto duly authorized.
PACIFIC COAST APPAREL COMPANY, INC.
Date: December 1, 1997 By: /s/ Terrence L. McGovern
------------------------------------
Terrence L. McGovern
Chief Executive Officer
3
<PAGE>
COTTON STUFF, INC.
DECEMBER 31, 1996
I N D E X
PAGE NO.
--------
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . F - 1
FINANCIAL STATEMENTS
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . F - 2
Statement of Operations and Retained Earnings. . . . . . . . . . F - 3
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . F - 4
Statement of Cash Flows - Supplemental Information . . . . . . . F - 4
Notes to Financial Statements. . . . . . . . . . . . . . . . . . F - 5
<PAGE>
[Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Cotton Stuff, Inc.
We have audited the accompanying balance sheet of Cotton Stuff, Inc. as of
December 31, 1996 and the related statements of operations and retained earnings
and cash flows for the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cotton Stuff, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
November 24, 1997
Los Angeles, California
F-1
<PAGE>
COTTON STUFF, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS
Cash $ 15,657
Due from factor, less unused customer
credits (Note 2) 388,080
Accounts receivable, less allowance for
doubtful accounts of $3,000 (Note 2) 5,075
Inventories (Notes 1 and 3) 425,677
Other receivables 24,592
Advances to stockholders (Note 5) 41,000
Prepaid and recoverable income taxes 800
Prepaid expenses and other current assets 61,513
-----------
Total Current Assets 962,394
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation (Notes 1, 4 and 9) 88,647
DEPOSITS 28,404
-----------
$ 1,079,445
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 9) $ 9,544
Accounts payable 143,903
Accrued expenses and sundry liabilities (Note 10) 121,514
Due to related party (Note 8) 53,055
-----------
Total Current Liabilities 328,016
LONG-TERM DEBT (Note 9) 19,253
NOTE PAYABLE, RELATED PARTY (Note 6) 384,778
NOTES PAYABLE, STOCKHOLDERS (Note 7) 200,000
COMMITMENTS AND CONTINGENCY (Note 11)
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized, 100,000 shares
Issued and outstanding, 66,000 shares 100,000
Retained earnings 47,398
-----------
147,398
-----------
$ 1,079,445
-----------
-----------
See accompanying independent auditor's report
and notes to financial statements
F-2
<PAGE>
COTTON STUFF, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
Year Ended December 31,
-------------------------
1996 1995
----------- -----------
NET SALES (Notes 1 and 12) $ 5,185,744 $ 7,612,131
COST OF GOODS SOLD 3,134,936 5,076,640
----------- -----------
GROSS PROFIT 2,050,808 2,535,491
OPERATING EXPENSES
Selling, shipping and general
and administrative 1,953,383 2,422,592
Interest (Notes 6 and 7) 135,136 189,113
----------- -----------
Total Operating Expenses 2,088,519 2,611,705
----------- -----------
LOSS FROM OPERATIONS (37,711) (76,214)
OTHER EXPENSE (Note 14) - (92,443)
----------- -----------
LOSS BEFORE INCOME TAXES (37,711) (168,657)
(PROVISION) CREDIT FOR INCOME TAXES
(Notes 1 and 13) (711) 14,600
----------- -----------
NET LOSS (38,422) (154,057)
RETAINED EARNINGS, beginning 181,970 336,027
DISTRIBUTIONS 96,150 -
----------- -----------
RETAINED EARNINGS, ending $ 47,398 $ 181,970
----------- -----------
----------- -----------
NET LOSS PER SHARE $ (.58) $ ( 2.33)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 66,000 66,000
See accompanying independent auditor's report
and notes to financial statements
F-3
<PAGE>
COTTON STUFF, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Year Ended December 31,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (38,422) $ (154,057)
----------- -----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 28,866 25,979
Changes in assets and liabilities
Increase in due from factor (355,538) (403,263)
Decrease in accounts receivable 24,135 4,980
Decrease in inventories 514,518 424,388
Decrease (increase) in other receivables 21,509 (18,633)
Decrease (increase) in prepaid expenses
and other current assets 33,550 (86,877)
Decrease (increase) in prepaid and
recoverable income taxes 6,400 (7,200)
Decrease in due from affiliate - 64,160
Decrease (increase) in deposits 6,366 (6,366)
(Decrease) increase in accounts payable (151,407) 295,310
Increase (decrease) in accrued expenses
and sundry liabilities 4,768 (47,842)
----------- -----------
Total Adjustments 133,167 244,636
----------- -----------
Net Cash Provided by Operating
Activities 94,745 90,579
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (6,499) (25,468)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in due to stockholders (28,244) 28,244
Payments on long-term debt (8,611) (41,449)
Increase in due to related party 53,055 -
Distributions to stockholders (96,150) -
Decrease in outstanding checks payable - (3,545)
Increase in advances to stockholders - (41,000)
----------- -----------
Net Cash Used by Financing
Activities (79,950) (57,750)
----------- -----------
NET INCREASE IN CASH 8,296 7,361
CASH, beginning 7,361 -
----------- -----------
CASH, ending $ 15,657 $ 7,361
----------- -----------
----------- -----------
See accompanying independent auditor's report
and notes to financial statements
F-4 (Page 1 of 2)
<PAGE>
COTTON STUFF, INC.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
Year Ended December 31,
-------------------------
1996 1995
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 105,136 $ 219,113
Income taxes - 114,115
See accompanying independent auditor's report
and notes to financial statements
F-4 (Page 2 of 2)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company operates exclusively as a manufacturer of casual sportswear and
sells to specialty retailers throughout the United States.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is being provided
on the straight-line method over the estimated useful life of the related
assets.
Leasehold improvements are depreciated on the straight-line method over the
term of the lease or estimated useful life, whichever is shorter.
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized.
INCOME TAXES
The Company has elected to be taxed under the provisions of Sub-Chapter S
of the Internal Revenue Code. Under those provisions, the Company does not
pay federal corporate income taxes on its taxable income and incurs a
liability for California income taxes at a rate of 1-1/2%. The
stockholders are liable for individual federal and California income taxes
on their respective share of the Company's taxable income.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
F-5 (Page 1 of 6)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
2 - DUE FROM FACTOR
The Company uses a factor for working capital and credit administration
purposes. Under the factoring agreement, the factor purchases
substantially all trade accounts receivable and assumes substantially all
credit risks with respect to such accounts. To the extent that the Company
draws on funds prior to the average maturity date of accounts receivable
sold to the factor, the Company pays interest on such funds. The Company
is contingently liable to the factor for merchandise disputes, customer
claims and the like on receivables sold to the factor. Receivables sold in
excess of maximums established for each account by the factor are subject
to recourse in the event of nonpayment by the customer. At December 31,
1996, items subject to such recourse were approximately $30,000.
Indebtedness to the factor is collateralized by accounts receivable, a
personal guarantee of the stockholders and a certificate of deposit in the
amount of $150,000 pledged by one of the stockholders of the Company.
3 - INVENTORIES
Inventories consist of the following:
Raw materials $ 87,719
Work in process 216,845
Finished goods 121,113
-----------
$ 425,677
-----------
-----------
4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Machinery and equipment $ 13,188
Furniture and fixtures 45,894
Computer 11,570
Computer software 11,380
Automobile 52,206
Leasehold improvements 26,143
-----------
160,381
Accumulated depreciation 71,734
-----------
$ 88,647
-----------
-----------
F-5 (Page 2 of 6)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
5 - ADVANCES TO STOCKHOLDERS
Advances to stockholders are unsecured, non-interest bearing and due on
demand.
6 - NOTE PAYABLE, RELATED PARTY
Note payable, related party is due to a corporation which is 100% owned by
two of the Company's stockholders. The note is unsecured, bears interest
at 10% per annum, is due 13 months after demand and is subordinated to all
trade creditors until revoked. Interest on the note for the years ended
December 31, 1996 and 1995 was approximately $40,000 in each year.
7 - NOTES PAYABLE, STOCKHOLDERS
Notes payable, stockholders, are unsecured with interest at 10% per annum,
are due 13 months after demand and are subordinated to the Company's
factor. A stockholder has subordinated $10,000 of his note payable to all
trade creditors until revoked. Interest expense on the notes for the years
ended December 31, 1996 and 1995 was approximately $20,000 in each year.
8 - DUE TO RELATED PARTY
Due to related party consists of advances from an entity which is 100%
owned by two of the Company's stockholders. The advances are unsecured,
non-interest bearing and are due on demand.
9 - LONG-TERM DEBT
Long-term debt consists of the following:
Contract payable in monthly installments
of $1,006, including interest at 10.3%
per annum, maturing in September 1999,
secured by automotive equipment with
an undepreciated cost of $52,206 $ 28,797
Current maturities 9,544
----------
$ 19,253
----------
----------
F-5 (Page 3 of 6)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
9 - LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows:
Year Ending
December 31,
------------
1997 $ 9,500
1998 10,500
1999 9,000
----------
$ 29,000
----------
----------
10 - ACCRUED EXPENSES AND SUNDRY LIABILITIES
Accrued expenses and sundry liabilities consist of the following:
Insurance $ 29,450
Salaries and payroll taxes 14,403
Contract labor 16,825
Supplies 7,888
Utilities 9,930
Other 43,018
----------
$ 121,514
----------
----------
11 - COMMITMENTS AND CONTINGENCY
COMMITMENTS
The Company is committed under noncancelable operating leases for the use
of its office, showroom and warehouse facilities through March 2000. The
terms of the lease agreements also require the payment of various expenses
incidental to the use of the properties. The Company subleases a portion
of its leased premises to unrelated parties on a month-to-month basis.
Total rent charged to operations for the years ended December 31, 1996 and
1995 was approximately $148,000 and $201,000, respectively, net of sublease
rental income of approximately $106,000 and $54,000, respectively.
F-5 (Page 4 of 6)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
11 - COMMITMENTS AND CONTINGENCY (Continued)
Minimum annual lease obligations are as follows:
Other
Entity's
Portion
(See
Year Ending 100% of contingency
December 31, Leases below) Net
------------ ---------- ----------- ----------
1997 $ 366,000 $ (186,000) $ 180,000
1998 333,000 (186,000) 147,000
1999 333,000 (186,000) 147,000
2000 84,000 (47,000) 37,000
---------- ----------- ----------
$1,116,000 $ (605,000) $ 511,000
---------- ----------- ----------
---------- ----------- ----------
CONTINGENCY
The Company shares leased office and warehouse space with an unrelated
entity. The Company is contingently liable to the lessor in the event of
non-payment by the unrelated party. The Company is contingently liable for
future rent payments of approximately $600,000 through March 2000.
12 - MAJOR CUSTOMERS
For the year ended December 31, 1996, two customers generated sales in
excess of 10% of the Company's total sales. Sales to these customers
approximated $2,070,000. For the year ended December 31, 1995, one
customer generated sales in excess of 10% of the Company's total sales.
Sales to this customer approximated $2,550,000.
F-5 (Page 5 of 6)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
13 - INCOME TAXES
Income tax (provision) credit consists of the following:
Year Ended December 31,
-------------------------
1996 1995
---------- ----------
Currently payable state income taxes $ (800) $ (800)
Overaccrual of prior year's
state income tax provision
when the Company was taxed
as a C-Corporation - 15,400
Other 89 -
---------- ----------
$ (711) $ 14,600
---------- ----------
---------- ----------
14 - OTHER EXPENSE
During the year ended December 31, 1995, the Company settled a legal
dispute with two former employees. The agreed upon settlement amount,
including legal fees incurred for the year ended December 31, 1995 was
$92,443.
F-5 (Page 6 of 6)
<PAGE>
COTTON STUFF, INC.
JUNE 30, 1997
I N D E X
Page No.
--------
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . F - 6
Statement of Income and Retained Earnings . . . . . . . . . . . F - 7
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . F - 8
Statement of Cash Flows - Supplemental Information. . . . . . . F - 8
Notes to Financial Statements . . . . . . . . . . . . . . . . . F - 9
<PAGE>
COTTON STUFF, INC.
BALANCE SHEET
JUNE 30, 1997
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 17,675
Due from factor, net of unused customer
credits (Note 2) 481,961
Accounts receivable, less allowance for
doubtful accounts of $3,000 (Note 2) 16,911
Inventories (Note 1) 356,319
Advances to stockholders (Note 4) 41,000
Other receivables 13,746
Prepaid expenses and other current assets 64,637
-----------
Total Current Assets 992,249
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation (Notes 1, 3 and 8) 79,270
DEPOSITS 17,404
-----------
$ 1,088,923
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt (Note 8) $ 9,000
Accounts payable 191,918
Accrued expenses and sundry liabilities 107,537
Due to related party (Note 7) 25,079
-----------
Total Current Liabilities 333,534
LONG-TERM DEBT (Note 8) 18,163
NOTE PAYABLE, RELATED PARTY (Note 5) 384,778
NOTES PAYABLE, STOCKHOLDERS (Note 6) 200,000
COMMITMENTS AND CONTINGENCY (Note 9)
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized, 100,000 shares
Issued and outstanding, 66,000 shares 100,000
Retained earnings 52,448
-----------
152,448
-----------
$ 1,088,923
-----------
-----------
F-6
<PAGE>
COTTON STUFF, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
Six Months Ended June 30,
--------------------------
1997 1996
------------ -----------
(Unaudited)
--------------------------
NET SALES (Notes 1 and 10) $ 2,121,107 $ 3,030,581
COST OF GOODS SOLD 1,272,664 1,843,119
----------- -----------
GROSS PROFIT 848,443 1,187,462
OPERATING EXPENSES
Selling, shipping and general
and administrative 814,899 1,014,280
Interest (Notes 5 and 6) 27,694 59,562
----------- -----------
Total Operating Expenses 842,593 1,073,842
----------- -----------
INCOME BEFORE INCOME TAXES 5,850 113,620
PROVISION FOR INCOME TAXES (Note 1) 800 1,550
----------- -----------
NET INCOME 5,050 112,070
RETAINED EARNINGS, beginning 47,398 181,970
DISTRIBUTIONS - 66,000
----------- -----------
RETAINED EARNINGS, ending $ 52,448 $ 228,040
----------- -----------
----------- -----------
NET INCOME PER SHARE $ .08 $ 1.70
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 66,000 66,000
F-7
<PAGE>
COTTON STUFF, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1997 1996
----------- ------------
(Unaudited)
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,050 $ 112,070
----------- -----------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 9,377 9,969
Changes in assets and liabilities
Increase in due from factor (93,881) (515,902)
Increase in accounts receivable (11,836) (3,091)
Decrease in inventories 69,358 378,311
Decrease in other receivables 10,846 20,946
(Increase) decrease in prepaid expenses
and other current assets (3,124) 16,707
Decrease in prepaid and recoverable
income taxes 800 7,200
Decrease in other assets 11,000 5,366
Increase (decrease) in accounts payable 48,015 (176,134)
(Decrease) increase in accrued expenses
and sundry liabilities (13,977) 22,300
----------- -----------
Total Adjustments 26,578 (234,328)
----------- -----------
Net Cash Provided (Used) by
Operating Activities 31,628 (122,258)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (1,634) (4,768)
(Decrease) increase in due to related party (27,976) 202,117
Distributions to stockholders - (66,000)
----------- -----------
Net Cash (Used) Provided by
Financing Activities (29,610) 131,349
----------- -----------
NET INCREASE IN CASH 2,018 9,091
CASH, beginning 15,657 7,361
----------- -----------
CASH, ending $ 17,675 $ 16,452
----------- -----------
----------- -----------
</TABLE>
F-8 (Page 1 of 2)
<PAGE>
COTTON STUFF, INC.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
Six Months Ended June 30,
---------------------------
1997 1996
------------- -----------
(Unaudited)
---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 27,694 $ 59,562
Income taxes 800 -
F-8 (Page 2 of 2)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED FINANCIAL STATEMENTS
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash
flows for the interim periods.
NATURE OF OPERATIONS
The Company operates exclusively as a manufacturer of casual sportswear and
sells to specialty retailers throughout the United States.
INVENTORIES
Inventories at June 30, 1997 are calculated based upon a gross profit
percentage estimated by management.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is being provided
on the straight-line method over the estimated useful life of the related
assets.
Leasehold improvements are depreciated on the straight-line method over the
term of the lease or estimated useful life, whichever is shorter.
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized.
INCOME TAXES
The Company has elected to be taxed under the provisions of Sub-Chapter S
of the Internal Revenue Code. Under those provisions, the Company does not
pay federal corporate income taxes on its taxable income and incurs a
liability for California income taxes at a rate of 1-1/2%. The
stockholders are liable for individual federal and California income taxes
on their respective share of the Company's taxable income.
The provision for income taxes represents primarily currently payable state
taxes.
F-9 (Page 1 of 5)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
2 - DUE FROM FACTOR
The Company uses a factor for working capital and credit administration
purposes. Under the factoring agreement, the factor purchases
substantially all trade accounts receivable and assumes substantially all
credit risks with respect to such accounts. To the extent that the Company
draws on funds prior to the average maturity date of accounts receivable
sold to the factor, the Company pays interest on such funds. The Company
is contingently liable to the factor for merchandise disputes, customer
claims and the like on receivables sold to the factor. Receivables sold in
excess of maximums established for each account by the factor are subject
to recourse in the event of nonpayment by the customer. At June 30, 1997,
items subject to such recourse were not significant. Indebtedness to the
factor is collateralized by accounts receivable and a personal guarantee of
the stockholders.
3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Machinery and equipment $ 13,188
Furniture and fixtures 45,894
Computer 11,570
Computer software 11,380
Automobile 52,206
Leasehold improvements 26,143
-----------
160,381
Accumulated depreciation 81,111
-----------
$ 79,270
-----------
-----------
F-9 (Page 2 of 5)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
4 - ADVANCES TO STOCKHOLDERS
Advances to stockholders are unsecured, non-interest bearing and due on
demand.
5 - NOTE PAYABLE, RELATED PARTY
Note payable, related party is due to a corporation which is 100% owned by
two of the Company's stockholders. The note is unsecured, bears interest
at 10% per annum, is due 13 months after demand and is subordinated to all
trade creditors until revoked. Interest on the note for the six months
ended June 30, 1997 and 1996 approximates $20,000 in each period.
6 - NOTES PAYABLE, STOCKHOLDERS
Notes payable, stockholders, are unsecured, with interest at 10% per annum,
are due 13 months after demand and are subordinated to the Company's
factor. A stockholder has subordinated $10,000 of his note payable to all
trade creditors until revoked. Interest expense on the notes for the six
months ended June 30, 1997 and 1996 approximates $10,000 in each period.
7 - DUE TO RELATED PARTY
Due to related party consists of advances from an entity which is 100%
owned by two of the Company's stockholders. The advances are unsecured,
non-interest bearing and are due on demand.
8 - LONG-TERM DEBT
Long-term debt consists of the following:
Contract payable in monthly installments
of $1,006, including interest at 10.3%
per annum, maturing in September 1999,
secured by automotive equipment with
an undepreciated cost of $52,206 $ 27,163
Current maturities 9,000
----------
$ 18,163
----------
----------
F-9 (Page 3 of 5)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
8 - LONG-TERM DEBT (Continued)
Future maturities of long-term debt are as follows:
Year Ending
December 31,
------------
1997 (Six months) $ 7,500
1998 10,500
1999 9,000
----------
$ 27,000
----------
----------
9 - COMMITMENTS AND CONTINGENCY
COMMITMENTS
The Company is committed under noncancelable operating leases for the use
of its office, showroom and warehouse facilities through March 2000. The
terms of the lease agreements also require the payment of various expenses
incidental to the use of the properties. The Company subleases a portion
of its leased premises to unrelated parties on a month-to-month basis.
Total rent charged to operations for the six months ended June 30, 1997 and
1996 was approximately $83,000 and $80,000, respectively, net of sublease
rental income of approximately $23,000 and $35,000, respectively.
Minimum annual lease obligations are as follows:
Other
Entity's
Portion
(See
Year Ending 100% contingency
December 31, of Leases below) Net
------------ ---------- ----------- ----------
1997 (Six months) $ 176,000 $ (93,000) $ 83,000
1998 333,000 (186,000) 147,000
1999 333,000 (186,000) 147,000
2000 84,000 (47,000) 37,000
---------- ---------- ----------
$ 926,000 $ 512,000 $ 414,000
---------- ---------- ----------
---------- ---------- ----------
F-9 (Page 4 of 5)
<PAGE>
COTTON STUFF, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
9 - COMMITMENTS AND CONTINGENCY (Continued)
CONTINGENCY
The Company shares leased office and warehouse space with an unrelated
entity. The Company is contingently liable to the lessor in the event of
non-payment by the unrelated party. The Company is contingently liable for
future rent payments of approximately $500,000 through March 2000.
10 - MAJOR CUSTOMERS
For the six months ended June 30, 1997, approximately 20% of the Company's
sales were to two customers. For the six months ended June 30, 1996,
approximately 45% of the Company's sales were to three customers.
F-9 (Page 5 of 5)
<PAGE>
PACIFIC COAST APPAREL COMPANY, INC.
PREFACE TO UNAUDITED PRO-FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro-forma combined financial statements as of June 30, 1997 and
for the six months then ended and for the year ended December 31, 1996 give
effect to the acquisition by Pacific Coast Apparel Company, Inc. of certain
assets of Cotton Stuff, Inc. as if such acquisition had occurred as of and for
the periods indicated above.
The source of the historical financial statements is as follows:
June 30, 1997 and the six months then ended - Unaudited historical
financial statements for each Company as of and for the dates indicated.
Note: Due to the different fiscal year-ends of the two Companies, in the
opinion of management, pro-forma financial information for the six months
ended June 30, 1997 is the most meaningful presentation.
Year ended December 31, 1996: Pacific Coast Apparel Company, Inc. - Audited
historical financial statements for the year ended September 30, 1996 (in
the opinion of management, the difference in fiscal year-ends of the
Companies does not cause any significant distortion).
Cotton Stuff, Inc. - Audited historical financial statements for the year
ended December 31, 1996.
These unaudited pro-forma combined financial statements should be read in
conjunction with the related historical financial statements used in the
preparation of such pro-forma statements. The pro-forma information is not
necessarily indicative of the results that would have been attained had the
above transaction occurred at an earlier date, nor is it indicative of future
results.
P-1
<PAGE>
PACIFIC COAST APPAREL COMPANY, INC.
PRO-FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Pacific
Coast
Apparel Cotton
Company, Stuff, Pro-forma Pro-forma
Inc. Inc. Adjustments Adjusted
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 20,983 $ 17,675 $ - $ 38,658
Short-term investments 1,450,830 - (475,000) 975,830
Due from factors 93,498 481,961 - 575,459
Inventories 1,067,964 356,319 - 1,424,283
Prepaid expenses and other current assets 132,899 95,294 - 228,193
Advances to stockholders - 41,000 (41,000) -
----------- ----------- ----------- -----------
Total Current Assets 2,766,174 992,249 (516,000) 3,242,423
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation 156,175 79,270 (34,170) 201,275
OTHER ASSETS 78,312 17,404 (5,554) 90,162
----------- ----------- ----------- -----------
$ 3,000,661 $ 1,088,923 $ (555,724) $ 3,533,860
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 451,541 $ 191,918 $ - $ 643,459
Other current liabilities 178,421 107,537 - 285,958
Loan payable, stockholder 6,899 25,079 (25,079) 6,899
----------- ----------- ----------- -----------
Total Current Liabilities 636,861 324,534 (25,079) 936,316
LONG-TERM DEBT 2,049 611,941 (611,941) 2,049
NEGATIVE GOODWILL - - 233,744 233,744
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares (A) - - - -
No shares outstanding (A)
Common stock, no par value
Authorized, 10,000,000 shares (A)
Issued and outstanding 2,954,000 shares (A) 5,777,163 100,000 (100,000) 5,777,163
Additional paid-in capital 162,500 - - 162,500
Deficit (3,577,912) 52,448 (52,448) (3,577,912)
----------- ----------- ----------- -----------
2,361,751 152,448 (152,448) 2,361,751
----------- ----------- ----------- -----------
$ 3,000,661 $ 1,088,923 $ (555,724) $ 3,533,860
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(A) Information for preferred and common shares relates to Pacific Coast Apparel
Company, Inc.
P-2
<PAGE>
PACIFIC COAST APPAREL COMPANY, INC.
PRO-FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Pacific
Coast
Apparel Cotton
Company, Stuff, Pro-forma Pro-forma
Inc. Inc. Adjustments Adjusted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 574,419 $ 2,121,107 $ - $ 2,695,526
COST OF GOODS SOLD 453,545 1,272,664 - 1,726,209
----------- ----------- ----------- -----------
GROSS PROFIT 120,874 848,443 - 969,317
OPERATING EXPENSES
Selling, shipping and general
and administrative 1,239,471 814,899 (95,000) 1,959,370
Interest (income) expense (31,197) 27,694 (30,000) (33,503)
----------- ----------- ----------- -----------
1,208,274 842,593 (125,000) 1,925,867
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (1,087,400) 5,850 125,000 (956,550)
PROVISION FOR INCOME TAXES (1,600) (800) - (2,400)
----------- ----------- ----------- -----------
NET (LOSS) INCOME $(1,089,000) $ 5,050 $ 125,000 $ (958,950)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET (LOSS) INCOME PER SHARE $ (0.37) $ 0.08 $ (0.32)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,961,000 66,000 2,961,000
</TABLE>
P-3 (Page 1 of 2)
<PAGE>
PACIFIC COAST APPAREL COMPANY, INC.
PRO-FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Pacific
Coast
Apparel Cotton
Company, Stuff, Pro-forma Pro-forma
Inc. Inc. Adjustments Adjusted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 221,181 $ 5,185,744 $ - $ 5,406,925
COST OF GOODS SOLD 182,709 3,134,936 - 3,317,645
----------- ----------- ----------- -----------
GROSS PROFIT 38,472 2,050,808 - 2,089,280
OPERATING EXPENSES
Selling, shipping and general
and administrative 1,677,036 1,953,383 (165,000) 3,465,419
Interest expense 186,028 135,136 (60,000) 261,164
----------- ----------- ----------- -----------
1,863,064 2,088,519 (225,000) 3,726,583
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,824,592) (37,711) 225,000 (1,637,303)
PROVISION FOR INCOME TAXES (2,336) (711) - (3,047)
----------- ----------- ----------- -----------
NET LOSS $(1,826,928) $ (38,422) $ - $(1,640,350)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET LOSS PER SHARE $ (0.99) $ (0.58) $ (0.89)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,850,000 66,000 1,850,000
</TABLE>
P-3 (Page 2 of 2)
<PAGE>
PACIFIC COAST APPAREL COMPANY, INC.
NOTES TO UNAUDITED PRO-FORMA COMBINED FINANCIAL STATEMENTS
1 - On August 22, 1997, the Company agreed to purchase certain assets of Cotton
Stuff, Inc. for $475,000. The Company agreed to purchase trade and
factored accounts receivable, inventories, certain property and equipment
and certain intangible assets. In addition, the Company assumed certain
trade payables. The Company did not assume Cotton Stuff, Inc.'s loan
payable, stockholder nor other related party debt which has been reflected
as part of the pro-forma adjustments. The excess of the net assets
acquired, less the assumed liabilities and the purchase price has been
reflected on the pro-forma balance sheet as negative goodwill.
2 - The pro-forma adjustments in the pro-forma combined statement of operations
for the six months ended June 30, 1997 and for the year ended December 31,
1996 represent estimated operating expense reductions for interest, rent,
salaries and other expenses that would not have been incurred if the
acquisition had occurred at an earlier date for the periods indicated
above.
P-4
