<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 EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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 MARCH 31, 1999 3,064,000
Transactional Small Business Disclosure Format Yes / / No /X/
<PAGE>
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements, such as those pertaining to the Company's future
sales and revenues, return on investment, profitability, cash requirements and
possible merger transaction. Forward-looking statements involve numerous risks
and uncertainties. The following factors, among others discussed herein, could
cause actual results and future events to differ materially from those set forth
or contemplated in the forward-looking statement: economic conditions,
competitive products, and pricing, new product development, need for additional
capital, development of the Cotton Stuff business, changes in fashion trends,
dependence on key customers and personnel, consumer response to the Company's
products and advertising and the uncertainties associated with the Company's
ability to consummate the possible merger transaction discussed herein. 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 other
reports to be filed from time to time with the Securities and Exchange
Commission pursuant to the Securities and Exchange Act of 1934.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
INTRODUCTION
Pacific Coast Apparel Company, Inc. ("the Company") was incorporated in
California in April 1995 to design, source and market, under license, in the
United States a collection of men's active sportswear under the brand name "Aca
Joe" Registered Trademark through traditional department stores and men's
specialty stores. In August 1997, the Company acquired the assets and business
of Cotton Stuff, Inc. Because of the Company's inability to generate sufficient
revenues it decided not to renew it's exclusive Aca Joe license and ceased doing
business thereunder in June 1998.
Cotton Stuff apparel is a collection of both men's and women's better
sportswear which is sold across the United States through better catalogs
including Saks Folio, Coldwater Creek, Neiman Marcus and Nordstrom, better
specialty stores such as Fred Siegel, Bloomingdales and My Friends Place and
selected department stores including Macy's.
Over the past three years, the women's line represented the significant
portion of the Cotton Stuff business. In January 1998, the Company began to
execute a plan to further develop the men's business.
The Company hired Dorian Bolick a men's designer and merchandiser to
<PAGE>
head the product development of the men's line. Additionally, the Company
recruited a sales force comprised of seven independent regional salesmen and
began opening specialty store accounts across the country.
In December 1998, the Company signed an agreement to license the Cotton
Stuff men's brand to 34 Degrees West, a group headed by Dorian Bolick, designer
of the Cotton Stuff men's line. The agreement called for a term of one year with
a four-year option if certain milestones were achieved during the initial
license term. The agreement calls for the Company to receive a 3% royalty on all
revenues generated by the sale of the Cotton Stuff men's line. The Company
decided to license the men's line because it felt it needed to focus on the
growing women's Cotton Stuff business and considering its lack of capital the
Company felt would be difficult to successfully grow both the men's and women's
lines.
In November 1998, the Company announced the signing of a definitive
merger agreement which called for a merger with Jodi Kristopher, Inc. Jodi
Kristopher, Inc. ("JKI") is a well-established Los Angeles maker of junior
dresses with annual revenues of approximately $45M. The company is owned and
operated by Ira Rosenberg, a successful industry veteran.
JKI distributes its line through major department stores including the
Federated Group, Robinson's-May, Dayton Hudson, Kohl's, Sears Roebuck & Company
and J C Penney among others.
The terms of the agreement called for the Company to pay to the
existing shareholders of JKI at closing, $1,456,532 in cash, and to issue
2,506,900 shares of its common stock and 9,646 shares of Series A Preferred
Stock with a valuation of $100 per share in exchange for all of the outstanding
Class A and B common stock of JKI. Reference is made to the Reorganization
Agreement and exhibits thereto governing the merger, which were included in the
quarterly report for the period ended December 31, 1999 which will offer a more
complete description of such transaction.
Upon completion of the merger, Mr. Ira Rosenberg will become the
president and chief executive officer of the Company and Mr. McGovern will
remain chairman of the board of the Company.
On April 29, 1999 Mr. McGovern and Mr. Rosenberg began discussing
<PAGE>
the basis upon which the agreement could be extended past the original
termination date of April 30, 1999. Pacific Coast Apparel Company, Inc.
continues to have discussion with several potential financing sources but as
of this date no financing source has agreed to provide all the financing
needed to close this transaction. There can be no assurance that the Company
will secure financing that is acceptable to both the Company and Jodi
Kristopher, Inc.
If all conditions of the reorganization Agreement are met, the merger
is anticipated to close in the Company's third or fourth fiscal quarter 1999.
The Company plans to consolidate the operations of the two companies following
the merger.
The Company's ability to consummate the described transaction or any
future acquisition or merger is subject to numerous uncertainties and
conditions, including the ability to obtain financing on terms satisfactory to
the Company and JKI receipt of third-party consents, adverse changes to the
business of the Company or its target markets, and the uncertainties with the
Company's operations.
THREE MONTHS ENDED DECEMBER 31, 1998
Revenues for the quarter ended March 31, 1999 were $1,131,595 compared
to $1, 349,148 for the comparable prior year's quarter. The Company reports that
a significant portion of customer orders due to ship March 31, 1999 were shipped
in the next reporting period because one of the Company's sewing contractors
failed to deliver orders when promised. The Company was forced to get
authorization from customers to ship these orders after the March 31, 1999
cancellation date. The Company was successful in all but a few cases.
Gross profit for the quarter was $ 470,454 compared to $680,223 in the
quarter ended March 31, 1998. The lower gross profit reflects the shipping of
significant catalog orders which traditionally have a lower gross profit margin.
Catalog sales during the quarter were significantly greater than those for the
comparable prior quarter. Total expenses for the quarter ended March 31, 1999
were $542,726 compared to $805,313. The significant drop in operating expenses
reflects the effects of the cost cutting program put in place during the first
fiscal quarter 1998. Net losses for the period ended March 31, 1999 were
narrowed to < $69,409 > compared to < $125,090 > for the comperable period ended
March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
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
approximately $550,000 of indebtedness then outstanding. The Company has
experienced cumulative losses from operations of $ < $6,171,369 > for the period
from April 28, 1995 (inception) through March 31, 1999.
The company continues to experience loss from operations but expects
the losses to continue to decline during the balance of fiscal 1999, due to the
discontinuation of the Aca Joe lines and the licensing of the Cotton Stuff men's
line.
The revenues of the Cotton Stuff women's line are not sufficient to
sustain the Company. At March 31, 1999, the Company's cash and cash equivalent
balance was zero. The Company is currently in default of a promissory note to
IRA Capital which became due April 30, 1999. The Company is currently in
discussions with IRA Capital about the possibility of restructuring the note.
There is no assurance that the Company and IRA Capital can come to an agreement
to restructure the note under terms satisfactory to both parties.
In January 1999, a non-affiliate loaned the Company $50,000 which the
Company used to purchase inventory and for working capital purposes.
The loan calls for repayment on or before February 28, 1999 and bears interest
at the rate of 1% per month. The Company repaid the note in full plus all
accrued interest on the due date.
At its current projected level of operations, the Company will require
additional capital during the quarter ending June 30, 1999. In order to sustain
operations until such time as positive cash flow can be achieved, the Company is
considering available alternatives, including additional cost cutting. In
addition, the Company may seek to fund its operations through 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 to the Company. The Company may be required to delay, scale
back or eliminate certain of its development programs, to relinquish rights to
certain products or to license to third parties the right to commercialize
products the Company would otherwise seek to develop itself.
FEDERAL TAXES
Since its inception, the Company has been taxed as a "C" corporation.
Accordingly the Company has available as of March 31, 1999 approximately
$4,000,000 in net operating loss carryforwards to offset future federal taxable
income until expiring through the year ending September 30, 2108.
<PAGE>
LEGAL PROCEEDINGS
The Company is currently involved in a law suit, which was filed by Ms.
Jill Grossman, the Company's former sales manager. Ms. Grossman terminated her
employment with the Company on September 22, 1997. Ms. Grossman claims she is
owed approximately $440,000 of compensation due under and employment agreement.
The Company filed a cross complaint against Ms. Grossman based on the belief
that, among other things, Ms. Grossman breached the employment agreement.
Although the outcome of the litigation cannot be predicted with
certainty, management believes that the Company has meritorious defenses to the
claims alleged, and intends to defend this action with vigor.
YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates.
This inability to recognize or properly treat the Year 2000 may cause the
Company's systems and applications to process critical financial and operational
information incorrectly. The Company continues to assess the impact of the Year
2000 issue on its reporting systems and operations.
The Company is currently in the process of investigating whether its
internal accounting systems and other operations systems are Year 2000
compliant. The Company has been informed by the vendors of its internal
accounting software that upgrades are currently available and will provide them
to the Company under its existing software maintenance agreement. The Company
expects to effect the conversion of its internal accounting system to such
upgraded software by June 1999. The Company believes that necessary conversions
of other operational systems can also be accomplished through vendor upgrades
and enhancements as provided under its system maintenance agreements currently
in effect. The Company does not anticipate significant costs associated with any
necessary conversions. However, there can be no assurances that certain of the
Company's internal computer systems or networks or those of its key vendors and
distributors will not be adversely effected by such Year 2000 issues, which
could have a material adverse effect on the Company's business, operating
results or financial condition.
<PAGE>
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31 1999 September 30 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS
Accounts receivable $46,036 $22,818
Inventories $414,234 $564,006
Prepaid expenses and other current assets $40,037 $82,068
Note receivable, stockholder
Total current assets $500,307 $668,892
PROPERTY AND EQUIPMENT - at cost, net of $83,148 $92,206
accumulated depreciation
OTHER ASSETS $35,666 $36,730
$619,121 $797,828
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks payable $9,171 $17,324
Accounts payable $207,448 $171,474
Accrued expenses $290,176 $279,049
Due from factors $29,240 $96,018
Current maturities of long-term debt $108,000 $108,000
Total current liabilities $644,035 $671,865
LONG TERM DEBT, LESS CURRENT $57,501 $110,713
MATURITY
NEGATIVE GOODWILL $155,294 $161,062
STOCKHOLDERS' EQUITY
Preferred stock
Authorized, 600,000 shares
No shares outstanding
Common stock - no par value $5,453,798 $5,453,798
Authorized, 1,000,000 shares
Issued and outstanding 3,064,000 shares
Additional paid-in capital $479,860 $479,860
Deficit ($6,171,367) ($6,079,470)
Total stockholders' equity ($237,709) ($145,812)
$619,121 $797,828
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended March 31
--------------------------------
1999 1998
---- ----
<S> <C> <C>
NET SALES $2,360,882 $2,483,669
COST OF GOOD SOLD 1,334,743 1,222,718
GROSS (LOSS) PROFIT 1,026,139 1,260,951
OPERATING EXPENSES
Design and production 231,120 316,710
Selling 275,569 428,069
Shipping 132,979 110,423
General and administrative 436,989 707,544
Interest (income) expense 43,444 33,875
Total Operating Expenses 1,120,101 1,596,621
LOSS FROM OPERATIONS (93,962) (335,670)
OTHER INCOME
Royalty income $2,863
LOSS BEFORE INCOME TAXES ($91,099) ($335,670)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS ($91,899) ($336,470)
NET LOSS PER SHARE (0.03) (0.11)
WEIGHTED AVERAGE NUMBER OF 3,064,000 2,958,000
COMMON SHARES OUTSTANDING
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31
--------------------------------
1999 1998
---- ----
<S> <C> <C>
NET SALES $1,131,595 $1,349,148
COST OF GOOD SOLD 661,141 668,925
GROSS (LOSS) PROFIT 470,454 680,223
OPERATING EXPENSES
Design and production 112,482 189,335
Selling 149,771 232,451
Shipping 62,534 54,497
General and administrative 194,688 314,892
Interest (income) expense 23,251 14,138
Total Operating Expenses 542,726 805,313
LOSS FROM OPERATIONS (72,272) (125,090)
OTHER INCOME
Royalty income $2,863
LOSS BEFORE INCOME TAXES ($69,409) ($125,090)
PROVISION FOR INCOME TAXES 0 0
NET LOSS ($69,409) ($125,090)
NET LOSS PER SHARE (0.02) (0.04)
WEIGHTED AVERAGE NUMBER OF 3,064,000 2,958,000
COMMON SHARES OUTSTANDING
</TABLE>
<PAGE>
Page 1 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Six Months Ended March 31
--------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss ($91,899) ($336,470)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $18,000 $18,494
Amortization of negative goodwill ($5,768) ($5,768)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors ($66,778) ($156,285)
Decrease in accounts receivable ($23,218) ($6,387)
Increase in inventories $149,772 $71,546
Increase in prepaid expenses and $42,031 ($37,509)
other current assets
Increase in other assets $1,064 ($6,803)
Increase in accounts payable $35,974 $31,357
Increase (decrease) in accrued expenses $11,127 $38,917
Total Adjustments $162,204 ($52,438)
Net Cash Used By Operating Activities $70,305 ($388,908)
</TABLE>
<PAGE>
Page 2 0f 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Six Months Ended March 31
-------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ($8,940) ($5,039)
Decrease in short term investments
Net Cash (used) Provided by ($8,940) ($5,039)
Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt ($53,212) ($54,893)
Reacquistion of common stock
Net Cash Used by
Financing Activities ($53,212) ($54,893)
NET DECREASE IN CASH AND
CASH EQUIVALENTS $8,153 ($448,840)
CASH AND CASH EQUIVALENTS, beginning
as previously stated ($17,324) $406,606
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS,
beginning, as restated ($17,324) $487,691
CASH AND CASH EQUIVALENTS, ending ($9,171) $38,851
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $23,251 $14,138
Income Taxes
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
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, 1998
<PAGE>
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1998
AND THE SIX MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Common stock Additional Total
--------------------- Paid-in Stockholders'
Shares Amount Capital Deficit Equity
<S> <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
Reacquistion of stock during the
year ended September 30, 1997 (116,000) ($452,400) $306,610 ($145,790)
Other (5,000) ($19,500) $10,750 ($8,750)
Net loss for the year ended
. September 30, 1997 ($2,954,339) ($2,954,339)
---------- ------------ ---------- ------------- ------------
Balance, September 30, 1997, 2,958,000 $5,452,718 $479,860 ($5,091,147) $841,431
Issuance of stock 108,000 $1,080 $1,080
Cancellation of stock (2,000)
Net loss for the year ended
. September 30, 1998 ($988,323) ($988,323)
---------- ------------ ---------- ------------- ------------
Balance, September 30, 1998 3,064,000 $5,453,798 $479,860 ($6,079,470) ($145,812)
Net loss for the three months ended
. March 31, 1999 ($91,899) ($91,899)
---------- ------------ ---------- ------------- ------------
Balance, March 31, 1999 3,064,000 5,453,798 479,860 (6,171,369) (237,711)
</TABLE>
<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
-------------------------------
Terrence L. McGovern
Chief Executive Officer and
Chief Financial Officer
May 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
COAST APPAREL CO., INC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> (9171)
<SECURITIES> 0
<RECEIVABLES> 46,036
<ALLOWANCES> 0
<INVENTORY> 414,234
<CURRENT-ASSETS> 500,307
<PP&E> 83,148
<DEPRECIATION> 0
<TOTAL-ASSETS> 619,121
<CURRENT-LIABILITIES> 644,035
<BONDS> 0
0
0
<COMMON> 5,453,798
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 619,121
<SALES> 2,360,882
<TOTAL-REVENUES> 0
<CGS> 1,334,743
<TOTAL-COSTS> 1,120,101
<OTHER-EXPENSES> (2863)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,444
<INCOME-PRETAX> (91,099)
<INCOME-TAX> 800
<INCOME-CONTINUING> (91,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (91,899)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
