<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 JUNE 30, 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 JUNE 30, 1999 3,064,000
Transactional Small Business Disclosure Format Yes / / No /X/
<PAGE>
FORWARD LOOKING STATEMENTS
In addition to historical information, this Report contains
forward-looking statements, such as those pertaining to the Company's future
sales and revenues, return on investment, profitability and cash requirements.
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, and consumer response to the Company's products and
advertising. 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 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
agreement and ceased doing business under it's license with Action Down
Under, Ltd. in June 1998.
As previously stated the Company acquired the assets of Cotton
Stuff, Inc. in August 1997. Cotton Stuff apparel is a collection of both
men's and women's garment-dyed, 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.
<PAGE>
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 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 November 1998 the Company announced the signing of definitive merger
agreement which called for the merger of Jodi Kristopher, Inc. and Pacific Coast
Apparel Company, Inc. Should the merger be consummated, Pacific Coast Apparel
Company, Inc. would be the surviving corporation.
Jodi Kristopher, Inc. 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.
Jodi Kristopher distributes their 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 transaction is being structured as a merger and is intended to be
treated as a tax-free reorganization pursuant to the provisions of Section 368
of the Internal Revenue Code of 1986, as amended. The terms of the agreement
called for the Company to pay to the existing shareholders of Jodi Kristopher,
Inc. 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 Jodi
Kristopher, Inc.
Upon completion of the merger, Mr. Ira Rosenberg, president of Jodi
Kristopher, Inc. will become the president and chief executive officer of
Pacific Coast Apparel Company, Inc. Mr. McGovern will remain chairman of the
board of the Company. 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 Jodi Kristopher, Inc. 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.
<PAGE>
In anticipation of the pending merger with Jodi Krisopher, Inc., the
Company decided to re-focus all of it's energies and resources on the
development of the Cotton Stuff women's line and has licensed the men's
Cotton Stuff sportswear category to 34 Degrees West Apparel Company, Inc. a
California Corporation formed by Dorian Bolick; the Company's former men's
designer and associates specifically for the licensing of the Cotton Stuff
men's line. The initial term of the license agreement is thirteen months. The
licensee has the option to renew the agreement for one additional four year
term.
NINE MONTHS ENDED JUNE 30, 1999
Revenues for the nine months ended June 30, 1999 were $3,385,398
compared with $3,729,007 for the comparable period ended June 30, 1998. The
decrease in revenues during the nine months ended, reflects the licensing of
the Cotton Stuff Men's brand. Sales of the men's product for the period ended
June 30, 1998 were approximately $607,000. There are no revenues for the
men's line in the during the nine months ended June 30, 1999.
The Company's operating expenses for the nine months ended June 30,
1999 were $1,650,570 compared with $2,249,552. The decrease in operating
expenses are primarily due to the licensing of the men's line and savings
from ongoing cost cutting measures . Operating expenses as percentage of
sales has decreased from 59.7% in the period ended June 30, 1998 to 48.7% in
the period ended June 30, 1999. General and administrative expenses have
decreased from $947,405 to $587,396 primarily due to the elimination of
overhead relative to the licensing of the men's line. Selling expense have
decreased from $610,356 to $443,166 a decrease of approximately 27.3%. Design
and production expenses decrease from $462,245 to $357,460.
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
approximately $550,000 of indebtedness then outstanding. The Company has
experienced cumulative losses from operations of $($6,259,576) for the period
from April 28, 1995 (inception) through June 30, 1999. The company continues
to experience loss from operations but expects the losses to continue
narrowing as cost cutting measures continue. The revenues of the Cotton Stuff
women's line are not sufficient to sustain the Company. At June 30, 1999 the
Company's cash and cash equivalent balance was zero.
<PAGE>
At its current projected level of operations, the Company will
require additional capital before the year ending September 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 June 30, 1999
approximately $5,254,348 in net operating loss carryforwards to offset future
federal taxable income expiring through the year ending September 30, 2019.
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
an employment agreement. The Company filed a cross complaint 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.
<PAGE>
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 September 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 maintainance 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 Year 2000 issues, which
could have a material adverse effect on the Company's business, operating
results or financial conditions.
<PAGE>
PACIFIC COAST APPAREL CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts receivable $65,658 $22,818
Inventories $350,940 $564,006
Prepaid expenses and other current assets $24,751 $82,068
Total current assets $441,349 $668,892
PROPERTY AND EQUIPMENT - at cost, net of $74,148 $92,206
accumulated depreciation
OTHER ASSETS $36,666 $36,730
$552,163 $797,828
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks payable $14,113 $17,324
Accounts payable $221,456 $171,474
Accrued expenses $301,742 $279,049
Due from factors $49,969 $96,018
Current maturities of long-term debt $108,000 $108,000
Total current liabilities $695,280 $671,865
LONG TERM DEBT, LESS CURRENT $30,391 $110,713
MATURITY
NEGATIVE GOODWILL $152,410 $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 $(6,259,576) $(6,079,470)
Total stockholders' equity $(325,918) $(145,812)
$552,163 $797,828
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended June 30
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
NET SALES $3,385,399 $3,729,007
COST OF GOOD SOLD 1,925,971 1,979,612
GROSS (LOSS) PROFIT 1,459,428 1,749,395
OPERATING EXPENSES
Design and production 357,460 462,245
Selling 443,166 610,356
Shipping 197,822 176,437
General and administrative 587,396 947,405
Interest (income) expense 64,726 53,109
Total Operating Expenses 1,650,570 2,249,552
LOSS FROM OPERATIONS (191,142) (500,157)
OTHER INCOME
Royalty income 11,836
LOSS BEFORE INCOME TAXES (179,306) (500,157)
PROVISION FOR INCOME TAXES (800) (800)
NET LOSS (180,106) $ (500,957)
NET LOSS PER SHARE (0.06) (0.17)
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 June 30
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
NET SALES $1,024,516 $1,245,338
COST OF GOOD SOLD 596,228 756,894
GROSS (LOSS) PROFIT 428,288 488,444
OPERATING EXPENSES
Design and production 127,698 145,535
Selling 166,240 182,287
Shipping 64,843 66,014
General and administrative 150,200 239,861
Interest (income) expense 21,283 19,234
Total Operating Expenses 530,264 652,931
LOSS FROM OPERATIONS (101,976) (164,487)
OTHER INCOME
Royalty income 8,766
LOSS BEFORE INCOME TAXES (93,210) (164,487)
PROVISION FOR INCOME TAXES
NET LOSS (93,210) (164,487)
NET LOSS PER SHARE (0.03) (0.06)
WEIGHTED AVERAGE NUMBER OF 3,064,000 2,958,000
COMMON SHARES OUTSTANDING
</TABLE>
<PAGE>
Page 1 of 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Ended June 30
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES
Net loss $(180,106) $(500,957)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation $27,000 $27,741
Amortization of negative goodwill $(8,652) $(8,652)
Changes in assets and liabilities, net
of effect of assets and liabilities
acquired:
Increase in due from factors $(46,049) $(112,941)
Decrease in accounts receivable $(42,840) $24,537
Increase in inventories $213,066 $239,589
Increase in prepaid expenses and $57,317 $(77,402)
other current assets
Increase in other assets $64 $(6,803)
Decrease in note receivable, stockholder $10,000
Increase (decrease) in accounts payable $49,982 $(921)
Increase (decrease) in accrued expenses $22,693 $7,878
Total Adjustments $272,581 $103,026
Net Cash Used By Operating Activities $92,475 $(397,931)
</TABLE>
<PAGE>
Page 2 of 2
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Nine Months Ended June 30
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $(8,942) $(5,899)
Decrease in short term investments
Net Cash (used) Provided by $(8,942) $(5,899)
Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long term debt $(80,322) $(82,308)
Reacquistion of common stock
Net Cash Used by
Financing Activities $(80,322) $(82,308)
NET DECREASE IN CASH AND
CASH EQUIVALENTS $3,211 $(486,138)
CASH AND CASH EQUIVALENTS, beginning
as previously stated $(17,324) $406,608
PRIOR PERIOD ADJUSTMENT $81,085
CASH AND CASH EQUIVALENTS,
beginning, as restated $(17,324) $487,693
CASH AND CASH EQUIVALENTS, ending $(14,113) $1,555
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
CONDENSED STATEMENT OF CASH FLOWS -
SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended June 30
-------------------------------
1999 1998
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during period for:
Interest $21,283 $19,234
Income Taxes
</TABLE>
<PAGE>
PACIFIC COAST APPAREL CO., INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 NINE MONTHS ENDED JUNE 30, 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 nine months ended
June 30, 1999 $(180,106) $(180,106)
--------- --------- -------- ------------ ----------
Balance, June 30, 1999 3,064,000 5,453,798 479,860 (6,259,576) (325,918)
</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
August 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
PACIFIC COAST APPAREL COMPANY, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> (14,113)
<SECURITIES> 0
<RECEIVABLES> 65,658
<ALLOWANCES> 0
<INVENTORY> 350,940
<CURRENT-ASSETS> 441,349
<PP&E> 74,148
<DEPRECIATION> 0
<TOTAL-ASSETS> 552,163
<CURRENT-LIABILITIES> 695,280
<BONDS> 0
0
0
<COMMON> 5,453,798
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 552,163
<SALES> 3,385,399
<TOTAL-REVENUES> 0
<CGS> 1,925,971
<TOTAL-COSTS> 1,650,570
<OTHER-EXPENSES> (11,836)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,726
<INCOME-PRETAX> (179,306)
<INCOME-TAX> 800
<INCOME-CONTINUING> (180,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,106)
<EPS-BASIC> 0.06
<EPS-DILUTED> 0
</TABLE>
