<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 0-28760
Pacific Coast Apparel Company, Inc.
-----------------------------------
(Exact name of registrant as specified in its charter)
California 95-4536683
-------------- ------------
(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1620 S. Los Angeles Street
Los Angeles, CA 90015
--------------- --------
(Address of principal office) (Zip Code)
Registrant's telephone number,
including area code (213) 748-9724
--------------
Inapplicable
------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes /X/ No / /
Number of shares of common stock
outstanding as of December 31, 1997 2,958,000
Transactional Small Business Disclosure Format Yes / / No /X/
<PAGE>
FORWARD-LOOKING INFORMATION
In addition to historical information, this Report contains forward-looking
statements, such as those pertaining to the Company's future sales and revenues,
profitability, and cash requirements. Forward-looking statements involve
numerous risks and uncertainties. The following factors, among others, could
cause actual results and future events to differ materially from those set forth
or contemplated in the forward-looking statements: economic conditions,
competitive products and pricing, new product development, the Company's lack of
operating history and the prolonged absence of ACA JOE products from the market
place, the need for additional capital, changes in fashion trends, dependence on
key customers and personnel, consumer response to the Company's products and
advertising, and the Company's ability to consummate its proposed acquisition.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
assumes no obligation to update forward-looking statements. See also the
Company's annual report on Form 10-KSB and other reports filed from time to time
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1997
----------------- ------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $251,118 $406,608
Due from factors $226,948 $173,577
Accounts receivable $34,922 $52,665
Inventories $910,501 $865,326
Prepaid expenses and other current assets $41,145 $17,637
Note receivable, stockholder $10,000 $10,000
Total current assets $1,474,634 $1,525,813
PROPERTY AND EQUIPMENT - at cost, net of $130,064 $138,011
accumulated depreciation
OTHER ASSETS $21,542 $19,739
$1,626,240 $1,683,563
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $325,482 $241,303
Accrued expenses $200,220 $180,992
Current maturities of long-term debt $108,000 $98,000
Total current liabilities $633,702 $520,295
LONG TERM DEBT, LESS CURRENT MATURITIES $192,804 $230,355
NEGATIVE GOODWILL $169,682 $172,566
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares
No shares outstanding
Common stock - no par value $5,452,718 $5,452,718
Authorized, 1,000,000 shares
Issued and outstanding 2,958,000 shares
Additional paid-in capital $479,860 $479,860
Deficit ($5,302,526) ($5,172,231)
Total stockholders' equity $630,052 $760,347
$1,626,240 $1,683,563
</TABLE>
See notes to condensed financial statements
1
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PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31
------------------------------
1997 1996
------------- -------------
NET SALES $1,134,521 $66,022
COST OF GOOD SOLD 553,793 27,000
GROSS (LOSS) PROFIT 580,728 39,022
OPERATING EXPENSES
Design and production 127,375 33,559
Selling 195,618 46,293
Shipping 55,926 2,601
General and administrative 392,652 296,972
Interest (income) expense 19,737 11,199
Total Operating Expenses 791,306 390,624
LOSS BEFORE INCOME TAXES (210,580) (351,602)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS ($211,380) ($352,402)
NET LOSS PER SHARE (0.07) (0.12)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,958,000 3,044,000
See notes to condensed financial statements
2
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Page 1 of 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Three Months Ended December 31
------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($211,380) ($352,402)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $9,247 $6,000
Amortization of negative goodwill ($2,884)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors ($53,371) ($31,194)
Decrease in accounts receivable $17,743 $0
Increase in inventories ($45,175) ($282,000)
Increase in prepaid expenses and other ($23,508) ($79,877)
current assets
Increase in other assets ($1,803)
Increase in accounts payable $84,179 $195,203
Increase (decrease) in accrued expense $19,566 ($2,599)
Total Adjustments $3,994 ($194,467)
Net Cash Used By Operating Activities ($207,386) ($546,869)
See notes to condensed financial statements
3
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Page 2 of 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Three Months Ended December 31
------------------------------
1997 1996
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($1,638) ($106,907)
Decrease in short term investments $677,547
Net Cash (used) Provided by
Investing Activities ($1,638) $570,640
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt ($27,551)
Reacquisition of common stock ($113,250)
Net Cash Used by Financing Activities ($27,551) ($113,250)
NET DECREASE IN CASH AND CASH EQUIVALENTS ($236,575) ($89,479)
CASH AND CASH EQUIVALENTS, beginning as
previously stated $406,606 $109,907
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS, beginning,
as restated $487,693 $109,907
CASH AND CASH EQUIVALENTS, ending $251,118 $20,428
See notes to condensed financial statements
4
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PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
THREE MONTHS ENDED DECEMBER 31
------------------------------
1997 1996
------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $20,179 $11,199
Income Taxes $800
See notes to condensed financial statements
5
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PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31,1997
1 - ACCOUNTING POLICIES
Although the interim condensed financial statements of the Company are
unaudited, it is the opinion of the Company's management that all normal
recurring adjustments necessary for a fair statement of the results have
been reflected therein. Operating revenues and net earnings for any
interim period are not necessarily indicative of results that may be
expected for the entire year.
These statements should be read in conjunction with the financial
statements and reflected notes which are incorporated by reference in the
Company's Annual Report on Form 10-KSB for the year ended September 30,
1997.
2 - PRIOR PERIOD ADJUSTMENT
Prior period adjustment reflects the correction of an error made in the
year ended September 30, 1997 relating to the understatement of cash
equivalents due to a clerical error. Had the error not been made, the
net loss and net loss per share would have been decreased by $81,085 and
$.03 per share, respectively.
See notes to condensed financial statements
6
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PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1997
AND THE THREE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common stock Preferred stock Additional Total
-------------------- ---------------- Paid-in Stockholders
Shares Amount Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1996 3,070,000 $5,920,118 $162,500 ($2,136,808) $3,945,810
Issuance of stock for services 9,000 $4,500 $4,500
Reacquisition of stock during
the year ended September 30, 1997 (121,000) ($471,900) $317,360 ($154,540)
Net loss for the year ended
September 30, 1997 ($3,035,423) ($3,035,423)
--------- ---------- ------ ------ ---------- ------------ ------------
--------- ---------- ------ ------ ---------- ------------ ------------
Balance, September 30, 1997, 2,958,000 $5,452,718 0 $0 $479,860 ($5,172,231) $760,347
as previously reported
Prior period adjustment,
(Note 2) $81,085 $81,085
--------- ---------- ------ ------ ---------- ------------ ------------
--------- ---------- ------ ------ ---------- ------------ ------------
Balance, September 30, 1997, 2,958,000 $5,452,718 0 $0 $479,860 ($5,091,146) $841,432
as restated
Net loss for the three months
ended December 31, 1997 ($211,380) ($211,380)
--------- ---------- ------ ------ ---------- ------------ ------------
--------- ---------- ------ ------ ---------- ------------ ------------
Balance, December 31, 1997 2,958,000 $5,452,718 0 $0 $479,860 ($5,302,526) $630,052
</TABLE>
See notes to condensed financial statements
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
The Company was formed in April 1995 with the business strategy of
reintroducing the ACA JOE apparel brand through major department stores in the
United States. The focus has been to capitalize on the strength of the ACA JOE
name and the perceived value of the apparel products.
To date, the Company has not been successful placing product in the target
market of the major department store chains. Lack of success has been due to a
number of factors, including the retailers' comments that the lines that have
been shown since the reintroduction lack specific direction. The Company feels
that these issues have been addressed and in October hired a previously
successful merchandiser/designer to give new direction to the ACA JOE line. The
first line developed by the new designer was shown in New York in mid-January
and received positive reaction from retailers. The true test of the trade's
acceptance will happen later in February when the Company shows the line at the
large men's show in Las Vegas. No significant shipments of ACA JOE products are
anticipated until June.
Another factor which has added to the lack of success of the reintroduction
is the continued growth of other men's collections which include Tommy Hilfiger,
Nautica and Polo. All three of these major collections continue to introduce
additional product lines. Jeans lines were introduced by these companies in
1997 and consequently floor space available to other brands with less
advertising and marketing dollars continues to shrink. The buyers are more
likely to give the brands that produce historically above average dollars per
square foot additional floor space for new lines when they are willing to
allocate space to new or less widely distributed resources. Additionally, many
of the larger department store chains have been focusing more and more in the
development of their own brands which produce higher gross profit dollars.
The Company acquired the Cotton Stuff product line in August 1997. The
Company intends to expand Cotton Stuff sales, while continuing to attempt to
launch the ACA JOE line.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1997
Revenues for the quarter ended December 31, 1997 were $1,134,621 compared
to $66,022 for the comparable prior year's quarter. The significant increase in
revenues reflects the Company's acquisition of the Cotton Stuff brand, in that
all but $92,492 of the current quarter's revenues related to Cotton Stuff.
Gross profit for the quarter was $580,726, compared with $39,022 in the quarter
ended December 31, 1996, reflecting the
8
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addition of the Cotton Stuff revenues. The Company's total expenses for the
quarter ended December 31, 1997 were $771,571, compared to $390,602 for the
quarter ended December 31, 1996. The increase over the prior year primarily
reflects an increase in selling, design and general and administrative
expenses attributable to the Cotton Stuff men's and women's line and the
continued development of the ACA JOE line. The increase in design and
production is attributable to the direction change in ACA JOE. The new ACA
JOE line introduced in January reflects a slightly lower price point, making
the retail price points more moderate. The Company believes that operating
expenses as a percentage of sales will continue to decrease as the Company
begins shipping the new ACA JOE line and the newly redesigned Cotton Stuff
men's line. There can be no assurance, however, the Company will operate
profitably in the future.
QUARTER ENDED DECEMBER 31, 1996
The results of the quarter ended December 31, 1996 reflect the continued
development of the ACA JOE brand. Revenues during the quarter reflect several
small initial shipments to target customers. Expenses during the period reflect
costs associated with the development of administrative and operations staff,
sales organization and marketing, along with design and production of the
initial line.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company realized net proceeds of approximately
$5,267,000 from an initial public offering of common stock and warrants to
purchase common stock. A portion of these proceeds was used to repay the
approximately $550,000 of indebtedness then outstanding. The Company has
experienced cumulative losses from operations of $5,302,526 for the period
from April 28, 1995 (inception) through December 31, 1997.
The August 1997 acquisition of Cotton Stuff was designed to provide a
revenue base for the Company from which to grow both the ACA JOE and Cotton
Stuff lines. Due to the continued lack of sales of the ACA JOE products,
however, the revenues from Cotton Stuff alone are not sufficient to sustain the
Company. At December 31, 1997, the Company's cash and equivalent balance was
approximately $251,000, and $227,000 was due from the Company's factor.
At its currently projected level of operations, the Company will require
additional capital sometime during the quarter ending March 31, 1998. In order
to sustain operations until such time as positive cash flow can be achieved, the
Company is considering available alternatives, including a strategic alliance.
In addition, the Company is implementing staff reductions and other cost cutting
measures. The Company also may seek to fund its operations through public or
private offerings of securities, with collaborative or other arrangements with
corporate partners or from other sources. Additional financing may not be
available when needed or on terms acceptable
9
<PAGE>
to the Company. The Company may be required to delay, scale back or
eliminate certain of its development programs, to relinquish rights to
certain of its products, or to license to third parties the right to
commercialize products the Company would otherwise seek to develop itself.
The Company incurred an adverse judgment totalling approximately $50,000 in
a recent arbitration. In addition, the Company has been threatened with
litigation relating to its June 1996 financing. The Company does not believe
these claims are meritorious, and the Company does not have the funds necessary
to pay any such claims.
In November 1996, following a decline in the market price of the Company's
common stock, the Board authorized the Company's purchase of up to 150,000
shares of its common stock. From December 1996 to March 1997, the Company
purchased 116,000 shares for a total of $145,790 ($1.258 per share). Management
believes these purchases were in the best interests of the Company and its
shareholders at the time, but at present there are no plans to purchase any
additional shares.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
The following table sets forth the approximate use through December
31, 1997 of the $5,267,000 net proceeds of the Company's August 1996 initial
public offering.
DESIGN AND PRODUCTION OF DISPLAY FEATURES $ 113,000
DEVELOPMENT AND FIXTURE OF CITADEL OUTLET STORE $ 24,000
NATIONAL MARKETING PROGRAM $ 186,000
RETIREMENT OF BRIDGE PROMISSORY NOTES $ 417,000
RETIREMENT OF OFFICER LOANS $ 32,000
REPAYMENT OF WORKING CAPITAL LOANS $ 101,000
EXPENSE INCURRED IN CONJUNCTION WITH
PURCHASE OF COTTON STUFF $ 604,000
REPURCHASES OF COMMON STOCK $ 145,790
WORKING CAPITAL AND GENERAL
CORPORATE PURPOSES $3,393,210
TOTAL $5,016,000
BALANCE $ 251,000
10
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended December 31, 1997, the Company filed
Form 8-K/A dated December 1, 1997, containing (in Item 7) financial information
regarding the acquired assets of Cotton Stuff, Inc.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Coast Apparel Company, Inc.
By /s/ Terrence L. McGovern
--------------------------------
Terrence L. McGovern
Chief Executive Officer and
Chief Financial Officer
February 5, 1998
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 251,118
<SECURITIES> 0
<RECEIVABLES> 261,870
<ALLOWANCES> 0
<INVENTORY> 910,501
<CURRENT-ASSETS> 1,474,634
<PP&E> 130,064
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,626,240
<CURRENT-LIABILITIES> 633,702
<BONDS> 0
0
0
<COMMON> 5,452,718
<OTHER-SE> (4,822,666)
<TOTAL-LIABILITY-AND-EQUITY> 1,626,240
<SALES> 1,134,521
<TOTAL-REVENUES> 1,134,521
<CGS> 553,793
<TOTAL-COSTS> 791,308
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (210,580)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (211,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (211,380)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
</TABLE>
