<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 June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 0-28760
PACIFIC COAST APPAREL COMPANY, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4536683
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(State or other Jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1620 SO. LOS ANGELES ST.
LOS ANGELES, CA 90015
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(Address of principal office) (Zip Code)
Registrant's telephone number, including area code: (213) 748-9724
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INAPPLICABLE
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(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 June 30, 1998: 2,958,000
Transactional Small Business Disclosure Format Yes /X/ No / /
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1
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30 1998 June 30 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,555 $20,983
Short-term investments $1,450,830
Due from factors $286,518 $93,498
Accounts receivable $28,128
Inventories $625,737 $1,067,964
Prepaid expenses and other current assets $95,039 $132,899
Total current assets $1,036,977 $2,766,174
PROPERTY AND EQUIPMENT - at cost, net of
accumulated depreciation $116,169 $156,175
OTHER ASSETS $26,542 $78,312
$1,179,688 $3,000,661
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $240,382 $451,541
Accrued expenses $188,870 $178,421
Current maturities of long-term debt $108,000
Loan payable, officer/stockholder $6,899
Total current liabilities $537,252 $636,861
LONG TERM DEBT, LESS CURRENT $138,047 $2,049
MATURITY
NEGATIVE GOODWILL $163,914
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares
No shares outstanding
Common stock - no par value $5,452,718 $5,777,163
Authorized, 1,000,000 shares
Issued and outstanding 2,958,000 shares
Additional paid-in capital $479,860 $162,500
Deficit ($5,592,103) ($3,577,912)
Total stockholders' equity $340,475 $2,361,751
$1,179,688 $3,000,661
</TABLE>
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2
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended June 30
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1998 1997
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<S> <C> <C>
NET SALES $3,729,007 $630,054
COST OF GOOD SOLD 1,979,612 474,005
GROSS (LOSS) PROFIT 1,749,395 156,049
OPERATING EXPENSES
Design and production 462,245 160,268
Selling 610,356 376,311
Shipping 176,437 11,846
General and administrative 947,405 1,089,513
Interest (income) expense 53,109 (41,585)
Total Operating Expenses 2,249,552 1,596,353
LOSS BEFORE INCOME TAXES (500,157) (1,440,304)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS ($500,957) ($1,441,104)
NET LOSS PER SHARE (0.17) (0.48)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,958,000 3,012,000
</TABLE>
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3
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30
-----------------------------
1998 1997
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<S> <C> <C>
NET SALES $1,245,338 $222,448
COST OF GOOD SOLD 756,894 189,889
GROSS (LOSS) PROFIT 488,444 32,559
OPERATING EXPENSES
Design and production 145,535 72,443
Selling 182,287 112,695
Shipping 66,014 3,337
General and administrative 239,861 378,754
Interest (income) expense 19,234 (16,230)
Total Operating Expenses 652,931 550,999
LOSS BEFORE INCOME TAXES (164,487) (518,440)
PROVISION FOR INCOME TAXES 0 (800)
NET LOSS ($164,487) ($519,240)
NET LOSS PER SHARE (0.06) (0.18)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,958,000 2,954,000
</TABLE>
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4
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PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Ended June 30
-----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss ($500,957) ($1,441,104)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $27,741 $22,096
Amortization of negative goodwill ($8,652)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors ($112,941) ($93,498)
Decrease in accounts receivable $24,537
Increase in inventories $239,589 ($810,884)
Increase in prepaid expenses and ($77,402)
other current assets ($167,429)
Increase in other assets ($6,803)
Decrease in note receivable, stockholder $10,000
Increase (decrease) in accounts payable ($921) $402,780
Increase (decrease) in accrued expenses $7,878 $63,512
Total Adjustments $103,026 ($583,423)
Net Cash Used By Operating Activities ($397,931) ($2,024,527)
</TABLE>
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5
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PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Ended June 30
-----------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($5,899) ($170,233)
Decrease in short term investments $2,248,721
Net Cash (used) Provided by
Investing Activities ($5,899) $2,078,488
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt ($82,308)
Reacquistion of common stock ($142,955)
Net Cash Used by
Financing Activities ($82,308) ($142,955)
NET DECREASE IN CASH AND
CASH EQUIVALENTS ($486,138) ($88,994)
CASH AND CASH EQUIVALENTS, beginning
as previously stated $406,608 $109,977
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS,
beginning, as restated $487,693 $109,977
CASH AND CASH EQUIVALENTS, ending $1,555 $20,983
</TABLE>
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6
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS -
SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended June 30
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1998 1997
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for:
Interest $19,234 $13,686
Income Taxes $800
</TABLE>
<PAGE>
7
PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
1 - ACCOUNTING POLICIES
Although the interim condensed financial statements of the Company are
unaudited, it is the opinion of the Company's management that all normal
recurring adjustments necessary for a fair statement of the results have
been reflected therein. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for
the entire year.
These statements should be read in conjunction wth the financial statements
and reflected notes which are incorporated by reference in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1997
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 and
specialty store chains in the United States.
Because of it's inability to place goods in its target accounts and
continued losses in the development of this plan, the Company decided not to
renew its license for the Aca Joe brand which came up for renewal on June 30,
1998. The Company was not confident it would achieve profitability in the
near future, and decided it would not be prudent to continue funding the Aca
Joe operations with its significant historical losses. The Company has no
further capital commitments or obligations to the Aca Joe brand.
The Company is continuing to develop both the men's and women's Cotton
Stuff lines. Revenues for the Cotton Stuff brand have increased
approximately 16.5% since the brand was acquired in September 1997. The
Cotton Stuff line is sold through better men's and women's specialty stores
and better catalogs throughout the United States. Catalog customers include
the Neiman Marcus and Saks Folio. Specialty stores include the Jacobson's
stores and Fred Siegel.
The Company continues to increase its marketing efforts for the Cotton
Stuff brand. The Company now has a complete men's and women's sales force
made up of independent sales representatives in major territories across the
United States. Additionally the number of trade shows in which the Company
participates has more than doubled in the last nine months.
In addition to the branded Cotton Stuff business the Company is in the
very early stages of developing a private label, product development
program targeted at department stores and specialty store chains. The
Company would use either its Cotton Gear label or a label chosen by the
particular account. The Company believes it has an opportunity to increase
its revenues by producing quality products at slightly lower costs and lower
mark ups than its current Cotton Stuff line. To date the Company has no
commitment from customers for these services and there is no assurance that
this marketing effort will be successful.
NINE MONTHS ENDED JUNE 30, 1998
Revenues for the nine months ended June 30, 1998 were $3,729,007
compared with $630,054 for the comparable period ended June 30, 1997. The
<PAGE>
significant increase during the nine months ended, reflects the revenues
realized by the purchase of Cotton Stuff brand in September 1997. All of the
revenues for the period ended June 30, 1997 were generated from the Aca Joe
brand, while only $113,235 in revenues were generated from the Aca Joe brand
in the nine months ended June 30, 1998. When comparing revenues generated by
the Cotton Stuff brand, the revenues have increased approximately 16.5 % in
the period ended June 30, 1998 compared to June 30, 1997.
The Company's operating expenses for the nine months ended June 30, 1998
were $2,239,552 compared with $1,596,353. The increase in operating expenses
is in relation to the significant increase in revenues. Operating costs as a
percentage of sales has decreased from 253.3% of sales in the period ended
June 30, 1997 to 59.7% in the period ended June 30, 1998. General and
administrative expenses have decreased from $1,089,513 to $937,405, a
decrease of approximately 15%. Selling costs have increased over the
comparable period from $376,311 to $462,245. Selling cost as a percentage of
sales has decreased from 59.7% in the period ended June 30, 1997 to 12.3% in
the period ended June 30, 1998. Design and production expenses have
increased during the comparable period from $160,268 to $462,245 in the
period ended June 30, 1998 due to the development of both the men's and the
women's line. Design costs as a percentage of sales has decreased from
26.6% in the period ended June 30, 1997 to 12.2% in the period ended June 30,
1998. All costs as a percentage of sales decreased over the comparable period
ended June 30, 1997 because of the significant increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996 the Company realized net proceeds of approximately
$5,267,000 from the initial public offering of common stock and warrants to
purchase common stock. A portion of these proceeds were used to repay
appxomimately $550,000 of indebtedness then outstanding. The Company has
experienced cumulative losses from operation of [$5,592,103] for the period
from April 28,1995 (inception) through June 30, 1998.
In February, the Company was notified that it was out of compliance with
the net tangible asset requirement (which became effective February 23, 1998)
for maintaining it's lisiting on NASDAQ SmallCap Market. Company
representatives made an oral presentation to the NASDAQ Listings and
Qualifications Panel in Washington DC on March 28, 1998 to discuss the
violation and it's plan for compliance. The Company was subsequently granted
an exemption through May 15, 1998 at which time the Company was to have met
the net tangible requirement.
<PAGE>
On May 13, 1998 the Company requested an extension to the exemption. On
May 19, 1998 the Company was notified that its securities were being delisted
effective the close of business May 19, 1998 for failure to comply with the
net tangible asset requirement.
The securities of the Company began trading on the OTC Bulletin Board,
symbol (ACAJ and ACAJW) on May 21, 1998. The Company plans to reapply for
listing on the NASDAQ SmallCap Market as soon as it is in compliance with
all requirements. There can be no assurance however that the Company will
be able to meet all of the requirements necessary to re-list on the NASDAQ
SmallCap Market.
In order to meet its cash flow needs, an officer of the Company has
placed, with the Company's factor, sufficient collateral to guarantee a cash
over advance of up to $108,000 above the Company's factor line. The Company
may decide to continue to fund its current cash flow needs in this fashion,
by securing additional collateral to cover over advances above the existing
factor line, or the Company may attempt to fund its operations through public
or private offerings of securities or debt, with collaborative or other
arrangement with corporate partners or from other sources. Additional
financing may not be available when needed or on terms acceptable to the
Company. The Company may be required to delay, scale back or eliminate
certain of its development programs, to relinquish rights to certain of its
products or to license to third parties the right to commercialize products
the Company would otherwise seek to develop internally.
In March the Company signed a non-binding Letter of Intent to purchase
the assets of CMG, Inc., a Los Angeles based manufacturer of men's and
women's apparel. The Company recently ceased discussions with CMG, Inc.,
deciding it was no longer an acquisition candidate.
The Company continues to review and meet with companies that meet the
acquisition criteria developed by the Company. Recently the Company entered
into substantive discussions with a Los Angeles based women's apparel
manufacturer. Various strategic combinations including a merger or an
acquisition have been discussed, but to date no agreements have been signed.
Consummation of this or any acquisition or merger is subject to the
execution of a definitive purchase agreement and other conditions. There is
no assurance that this or any other such strategic combination will be
consummated.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Coast Apparel Company, Inc.
By /s/ Terrence L. McGovern
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Terrence L. McGovern
Chief Executive Officer and
Chief Financial Officer
August 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,555
<SECURITIES> 0
<RECEIVABLES> 314,646
<ALLOWANCES> 0
<INVENTORY> 625,737
<CURRENT-ASSETS> 1,036,977
<PP&E> 116,169
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,179,688
<CURRENT-LIABILITIES> 537,252
<BONDS> 0
0
0
<COMMON> 5,452,718
<OTHER-SE> 4,771,768
<TOTAL-LIABILITY-AND-EQUITY> 1,179,688
<SALES> 1,245,338
<TOTAL-REVENUES> 1,245,338
<CGS> 756,694
<TOTAL-COSTS> 652,931
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (164,487)
<INCOME-TAX> 0
<INCOME-CONTINUING> (164,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (164,487)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> 0
</TABLE>
