<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
X EXCHANGE ACT OF 1934
- ------
For the quarterly period ended June 30, 1997
_______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
--------------- ----------------
Commission File Number: 333-22895
---------
Pivot Rules, Inc.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 13-3612110
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
80 West 40th Street
New York, NY 10018
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(212)944-8000
- --------------------------------------------------------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 No X
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 13, 1997
---------- ---------------------------------
Common Stock, par value $.01 per share 2,700,000
Transitional Small Business Disclosure Format (check one): Yes No X
---- -----
<PAGE>
PIVOT RULES, INC.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996 .................................... 2
Condensed Statements of Operations for the six months ended
June 30, 1997 and 1996 (unaudited)........................ 3
Condensed Statements of Operations for the three months ended
June 30, 1997 and 1996 (unaudited)........................ 4
Condensed Statements of Cash Flows for the six months ended
June 30, 1997 and 1996 (unaudited)........................ 5
Notes to Condensed Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................... 13
SIGNATURES .............................................................. 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements
PIVOT RULES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996*
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ...................................................... $ 9,000 $ 33,000
Funds deposited with factor ............................... 4,036,000 --
Due from factor ........................................... 945,000 176,000
Non-factored receivables .................................. 33,000 45,000
Inventories ............................................... 819,000 835,000
Prepaid expenses and other current assets ................. 400,000 69,000
Income taxes receivable ................................... 84,000 --
Deferred income taxes ..................................... 97,000 97,000
----------- -----------
Total current assets ................................. 6,423,000 1,255,000
PROPERTY AND EQUIPMENT, NET ............................................ 189,000 89,000
DEFERRED COSTS AND OTHER ASSETS ........................................ 176,000 292,000
----------- -----------
Total ................................................ $ 6,788,000 $ 1,636,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable .......................... $ -- $ 230,000
Short-term loan payable ................................... -- 279,000
Due to factor ............................................. -- 123,000
Accounts payable, accrued expenses and other
current liabilities .................................... 834,000 336,000
Income taxes payable ...................................... -- 112,000
----------- -----------
Total current liabilities ............................ 834,000 1,080,000
NOTES PAYABLE, less current portion .................................... -- 135,000
DEFERRED INCOME TAXES .................................................. 12,000 12,000
----------- -----------
846,000 1,227,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - $.01 par value; 2,000,000 and no shares
authorized, respectively
Common stock - $.01 par value; 15,000,000 and 10,000,000
shares authorized, respectively; 2,700,000 and 1,200,000
shares issued and outstanding, respectively ............ 27,000 12,000
Additional paid-in capital ................................ 6,425,000 397,000
Accumulated deficit ....................................... (510,000) --
----------- -----------
Total shareholders' equity ........................... 5,942,000 409,000
----------- -----------
Total ................................................ $ 6,788,000 $ 1,636,000
=========== ===========
</TABLE>
*Derived from audited financial statements.
The accompanying notes are an integral part of these
condensed financial statements.
2
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales ................................................................ $ 4,589,000 $ 3,215,000
Less returns and allowances .......................................... 183,000 300,000
----------- -----------
Net sales ................................................... 4,406,000 2,915,000
Cost of sales ........................................................ 3,229,000 2,285,000
----------- -----------
Gross profit ................................................ 1,177,000 630,000
Selling, marketing, design and administrative expenses ............... 1,264,000 734,000
----------- -----------
Operating loss ....................................................... (87,000) (104,000)
----------- -----------
Other income (expense)
License fee income .......................................... 42,000 55,000
Interest income ............................................. 36,000 --
Other income ................................................ -- 50,000
Amortization of deferred costs for bridge financing ......... (286,000) --
Interest expense and factoring charges ...................... (285,000) (176,000)
----------- -----------
(493,000) (71,000)
----------- -----------
Loss before taxes .................................................... $ (580,000) $ (175,000)
Income tax benefit ................................................... 70,000 --
----------- -----------
Net loss ............................................................. $ (510,000) $ (175,000)
=========== ===========
Net loss per share ................................................... $(.32) $(.15)
===== =====
Weighted average shares outstanding .................................. 1,589,503 1,200,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
3
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales ..................................................................... $ 2,094,000 $ 1,686,000
Less returns and allowances ............................................... 84,000 164,000
----------- -----------
Net sales ........................................................ 2,010,000 1,522,000
Cost of sales ............................................................. 1,445,000 1,219,000
----------- -----------
Gross profit ..................................................... 565,000 303,000
Selling, marketing, design and administrative expenses .................... 855,000 354,000
----------- -----------
Operating loss ............................................................ (290,000) (51,000)
----------- -----------
Other income (expense)
License fee income ............................................... 18,000 28,000
Interest income .................................................. 36,000 --
Other income ..................................................... -- 31,000
Amortization of deferred costs for bridge financing .............. (250,000) --
Interest expense and factoring charges ........................... (123,000) (95,000)
----------- -----------
(319,000) (36,000)
----------- -----------
Loss before taxes ......................................................... $ (609,000) $ (87,000)
Income tax benefit ........................................................ 80,000 --
----------- -----------
Net loss .................................................................. $ (529,000) $ (87,000)
=========== ===========
Net loss per share ........................................................ $(.27) $(.07)
===== =====
Weighted average shares outstanding ....................................... 1,974,725 1,200,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
4
<PAGE>
PIVOT RULES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss .............................................................. $ (510,000) $ (175,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of discount and deferred costs on bridge financing .. 454,000 --
Depreciation and amortization .................................... 26,000 27,000
Changes in operating assets and liabilities (Increase) decrease in
Inventories ................................................ 16,000 811,000
Non factored receivables ................................... 12,000 (6,000)
Prepaid expenses and other current assets .................. (331,000) (19,000)
Other assets ............................................... (15,000) 5,000
Increase (decrease) in
Accounts payable and accrued expenses ...................... 498,000 (78,000)
Income taxes payable ....................................... (196,000) --
---------- ----------
Net cash provided by (used in) operating activities ................... (46,000) 565,000
---------- ----------
Cash flows from investing activities
Purchase of property and equipment .................................... (118,000) (5,000)
Trademark costs ....................................................... (6,000) (4,000)
Funds deposited with factor ........................................... (4,920,000) --
Funds transferred to operations from factor ........................... 884,000 --
---------- ----------
Net cash used in investing activities ..................................... (4,160,000) (9,000)
---------- ----------
Cash flows from financing activities
Deferred costs associated with bridge financing and
initial public offering ............................................. (485,000) --
Net proceeds from bridge financing .................................... 1,122,000 --
Warrants issued with bridge financing ................................. 102,000 --
Net proceeds from initial public offering ............................. 6,479,000 --
Payments of notes payable and short-term loan ......................... (644,000) (154,000)
Payment of bridge financing ........................................... (1,500,000) --
Net change in due to/from factor ...................................... (892,000) (433,000)
---------- ----------
Net cash provided by (used in) financing activities ....................... 4,182,000 (587,000)
---------- ----------
NET DECREASE IN CASH ...................................................... (24,000) (31,000)
Cash balance - December 31 ................................................ 33,000 54,000
---------- ----------
Cash balance - June 30 .................................................... $ 9,000 $ 23,000
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest ........................................................... $ 93,000 $ 96,000
========== ==========
Income taxes ....................................................... $ 99,000 $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
5
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Pivot Rules, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management of the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the condensed notes thereto. In the opinion of management
of the Company, the accompanying unaudited condensed financial statements
include all adjustments, consisting of only normal recurring adjustments,
necessary to fairly present the results for the interim periods to which these
financial statements relate.
These financial statements should be read in conjunction with the
Registration Statement filed with the Securities and Exchange Commission on
Form 8-A.
The results of operations of the Company for the three and six months
ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE B - THE COMPANY
The Company designs, sources and markets a full collection of golf
lifestyle sportswear with a fun attitude and style for men under the Pivot
Rules brand name and registered trademark.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
1. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower of
cost or market. Cost is determined by the first-in, first-out method.
2. EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding and after giving effect to
the stock split, on January 2, 1997.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share, which
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Early adoption of the new standard is not
permitted. The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and diluted earnings per share
together with disclosure of how the per share amounts were computed. Management
has not yet determined the impact that this pronouncement will have on the
Company's financial statements.
NOTE D - BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured
6
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
promissory note in the principal amount of $100,000 per unit ("Note") and
warrants to purchase 40,000 shares of common stock of the Company, no par
value, at an exercise price of $2.50 ("Warrants"), for gross proceeds of
$1,500,000. Net proceeds amounted to $1,290,000 after underwriter expenses and
brokerage fees, but before additional debt issuance costs. A portion of the
gross proceeds has been allocated to the Warrants based on their estimate of
fair market value, resulting in approximately $168,000 of original issue
discount and a $168,000 increase in paid-in capital.
Interest on the Notes accrued at a rate of 10% per annum from January 2,
1997 through April 30, 1997, and at the rate of 12% per annum thereafter until
such notes were repaid from the proceeds of the Company's initial public
offering ("IPO") in May 1997.
In May 1997, 237,000 out of the 600,000 Warrants issued pursuant to the
bridge financing were surrendered by the Warrant holders. The cancellation of
such Warrants resulted in a reduction of interest expense and additional
paid-in capital of $66,000. The remaining Warrants were converted in May 1997
(on a one-for-one basis) into warrants with the same terms sold in the IPO
("IPO Warrants"). The IPO Warrants are exercisable at $5.00 per share,
commencing in May 15, 1998 and expiring at the close of business on May 15,
2002.
NOTE E - COMMITMENTS AND CONTINGENCIES
1. EMPLOYMENT CONTRACTS
In March 1997, the Company entered into an employment agreement with its
Executive Vice President of Sales ("VP of Sales"). The employment agreement
expires on March 16, 2002. Pursuant to the employment agreement, the VP of
Sales is entitled to a base salary and is eligible for a discretionary annual
bonus in 1997 and in subsequent years a bonus contingent on achieving certain
performance objectives. Pursuant to the employment agreement, the VP of Sales
is also entitled to annual raises to be determined by the Board of Directors in
its discretion, but subject to certain specified minimum amounts, as well as an
annual option grant.
In March 1997, the Company entered into an employment agreement with its
Vice President of Operations, which expires on February 28, 2001. The
employment agreement provides for a base salary and discretionary annual
bonuses. In addition, the employment agreement provides for annual raises to be
determined by the Board of Directors in its discretion but subject to certain
specified minimums, and an annual option grant contingent on achieving certain
specified performance objectives.
2. OPERATING LEASE
In May 1997, the Company signed a lease for a new office and showroom
space. The term of the lease is from June 1, 1997 through May 31, 2008. Annual
minimum rentals, excluding utilities, are $81,000 through May 31, 2003 and
$90,000 for the remaining periods.
3. NEW OFFICE CONSTRUCTION
As of July 31, 1997, the Company has entered into various contracts
totalling $320,000 for the construction of its new office space.
NOTE E - AUTHORIZED SHARES
In May 1997, the Company's Board of Directors authorized a new class of
2,000,000 shares of preferred stock, $.01 par value per share, and increased
the aggregate number of shares of Common Stock authorized for issuance from
7
<PAGE>
PIVOT RULES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
10,000,000 shares to 15,000,000 shares.
NOTE F - STOCK OPTION PLAN
In May 1997, the Company's Board of Directors adopted a stock option
plan (the "Plan") for the purpose of encouraging key employees, consultants and
directors who are not employees to acquire a proprietary interest in the growth
and performance of the Company. In May 1997, 83,000 shares were granted under
the Plan, all of which have an exercise price of $5.00. The maximum number of
shares which may be granted under the Plan is 200,000.
NOTE G - INITIAL PUBLIC OFFERING
The Company completed the IPO in May 1997. The Company received net
proceeds of $6,479,000, of which approximately $2,030,000 was used to repay
Company indebtedness, including the repayment of notes issued by the Company in
connection with the bridge financing. The funds from the IPO were deposited
with the Company's factor and invested at a rate of 2% below prime. As a result
of the satisfaction of the bridge loan, the Company has written-off $80,000 of
unamortized debt discount and $233,000 of unamortized debt issuance costs.
8
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PIVOT RULES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company designs, sources and markets a full collection of golf
sportswear with a fun attitude and style for men under the Pivot Rules brand
name and registered trademark. Its current products include knit and woven
shirts, sweaters, sweatshirts, pants, shorts, outerwear, hats and socks, many
of which carry the Company's distinctive "Three Golfer" logo. The Company
focuses its design efforts on creating products with updated styling,
innovative design, and superior comfort and fit, utilizing natural fibers and
bright colors.
In September 1996, as a result of increasing competition in the "upper
moderate" price segment of the golf lifestyle apparel market, the Company
initiated a strategy of repositioning its products into the "moderate" price
segment and expanding distribution to focus on higher-volume retailers.
Historically, the Company sold its products in the "upper moderate"
price segment, primarily to better department stores, specialty stores, and
catalogs. Because such retailers typically purchased small quantities of a
given product style, the Company utilized small production runs and its
profitability was dependent upon high margins. By refocusing its marketing
efforts on the "moderate" price segment of the golf lifestyle apparel market,
the Company is taking advantage of the greater distribution opportunities
available and the resulting larger order sizes in an effort to increase gross
profit through sales growth and improved sourcing.
RESULTS OF 0PERATIONS
Six months ended June 30, 1997 ("First Half of 1997") compared to Six months
ended June 30, 1996 ("First Half of 1996")
The Company's net sales increased by $1,491,000, or 51.1%, to $4,406,000
in the First Half of 1997 from $2,915,000 in the First Half of 1996. This
increase was attributable to an increase in unit volume of the Company's new
customers, which was partially offset by average lower selling prices of its
men's sportswear collection both resulting from the Company's shift to the
"moderate" price segment. Revenues derived from the sale of the men's
sportswear grew $2,197,000, or 106%, to $4,262,000 in the First Half of 1997
from $2,065,000 for the First Half of 1996. The remaining portion of net sales
in the First Half of 1997 and the First Half of 1996 was attributable to the
women's sportswear collection which the Company chose to discontinue during
1996. The Company continues to sell a limited amount of women's apparel on a
contract basis.
Returns and allowances decreased by $117,000, or 39.0%, to $183,000 in
the First Half of 1997 from $300,000 in the First Half of 1996. Returns and
allowances represented 4.0% of gross sales in the First Half of 1997 as
compared to 9.3% in the First Half of 1996. This improvement resulted
principally from improved selling at retail which resulted in lower markdowns
as well as from a shift in sales to larger volume retailers who had lower
return rates.
Gross profit increased by $547,000, or 86.8%, to $1,177,000 in the First
Half of 1997 from $630,000 in the First Half of 1996. Gross margin as a
percentage of net sales increased to 26.7% in the First Half of 1997 from 21.6%
in the First Half of 1996. This increase was related to reduced sourcing costs
relating to larger order sizes. This increase was partially offset by an
average lower selling price.
Selling, marketing, design and administrative expenses increased by
$530,000, or 72.2%, to $1,264,000 in the First Half of 1997 from $734,000 in
the First Half of 1996. As a percentage of net sales, selling, marketing,
design and administrative expenses increased to 28.7% in the First Half of 1997
from 25.2% in the First Half of 1996. This
9
<PAGE>
increase primarily resulted from an increase in advertising expense of
$284,000, as well as an increase in salaries of $142,000, due to the hiring of
key management personnel.
In the First Half of 1997, the Company had interest income of $36,000
which represents the interest earned on the proceeds from the IPO.
Other income of $50,000 in the First Half of 1996 represented the
proceeds from lawsuit settlements, net of related costs.
Amortization of deferred costs for bridge financing of $286,000
represented the expense of the debt issuance costs associated with the bridge
financing. Unamortized costs of $233,000 were fully written-off in May 1997
upon the satisfaction of the bridge loan.
Interest expense and factoring charges increased by $109,000 to $285,000
in the First Half of 1997 from $176,000 in the First Half of 1996. This
increase was attributable to the interest expense associated with the bridge
financing totalling $161,000 which was paid in full in May 1997. The interest
on the bridge financing included the $80,000 write-off of unamortized debt
discount from the satisfaction of the bridge financing which was partially
offset by a $66,000 reduction in interest expense resulting from the
surrendering of 237,000 bridge warrants in May 1997.
Net loss increased by $335,000 to a net loss of $510,000 in the First
Half of 1997 from a loss of $175,000 in the First Half of 1996. The loss was
primarily attributable to the write-off and amortization of $286,000 of debt
issuance costs and $102,000 of debt discount associated with the bridge
financing as well as to the factors noted above.
Three months ended June 30, 1997 ("Second Quarter of 1997") compared to Three
months ended June 30, 1996 ("Second Quarter of 1996")
The Company's net sales increased by $488,000, or 32.1%, to $2,010,000
in the Second Quarter of 1997 from $1,521,000 in the Second Quarter of 1996,
this increase was attributable to an increase in unit volume which was
partially offset by average lower selling prices of its men's sportswear
collection both resulting from the Company's shift to the "moderate" price
segment. Revenues derived from the sale of the men's sportswear grew $756,000,
or 63.4%, to $1,948,000 in the Second Quarter of 1997 from $1,192,000 for the
Second Quarter of 1996. The remaining portion of net sales in the Second
Quarter of 1997 and the Second Quarter of 1996 was attributable to the women's
sportswear collection which the Company chose to discontinue during 1996. The
Company continues to sell a limited amount of women's apparel on a contract
basis.
Returns and allowances decreased by $80,000, or 48.8%, to $84,000 in the
Second Quarter of 1997 from $164,000 in the Second Quarter of 1996. Returns and
allowances represented 4.0% of gross sales in the Second Quarter of 1997 as
compared to 9.7% in the Second Quarter of 1996. This improvement resulted
principally from improved selling at retail which resulted in lower markdowns
as well as from a shift in sales to larger volume retailers who had lower
return rates.
Gross profit increased by $262,000, or 86.4%, to $565,000 in the Second
Quarter of 1997 from $303,000 in the Second Quarter of 1996. Gross margin as a
percentage of net sales increased to 28.1% in the Second Quarter of 1997 from
19.9% in the Second Quarter of 1996. This increase was related to reduced
sourcing costs relating to larger order sizes. This increase was partially
offset by an average lower selling price.
Selling, marketing, design and administrative expenses increased by
$501,000 to $855,000 in the Second Quarter of 1997 from $354,000 in the Second
Quarter of 1996. As a percentage of net sales, selling, marketing, design and
administrative expenses, increased to 42.5% in the Second Quarter of 1997 from
23.3% in the Second Quarter of 1996. This increase primarily resulted from an
increase in salaries of $103,000, due to the hiring of key management
personnel, as well as an increase in advertising expense of $305,000.
10
<PAGE>
Interest expense and factoring charges increased by $28,000 to $123,000
in the Second Quarter of 1997 from $95,000 in the Second Quarter of 1996. This
increase was primarily attributable to the interest expense associated with the
bridge financing totalling $67,000 which was paid in full in May 1997. The
interest on the bridge financing includes the $80,000 write-off of debt
discount from the satisfaction of the bridge financing which was partially
offset by a $66,000 reduction in interest expense resulting from the
surrendering of 237,000 bridge warrants in May 1997.
In the Second Quarter of 1997, the Company had interest income of
$36,000 which represented the interest earned on the proceeds from the IPO.
Other income of $31,000 in the Second Quarter of 1996 represented the
proceeds from lawsuit settlements, net of related costs.
Amortization of deferred costs for bridge financing of $250,000
represents the expense of the debt issuance costs associated with the bridge
financing. Unamortized costs of $233,000 were fully written-off in May 1997
upon the satisfaction of the bridge loan.
Net loss increased by $442,000 to a net loss of $529,000 in the Second
Quarter of 1997 from a loss of $87,000 in the Second Quarter of 1996. This
increase was attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary funding requirements are to finance working
capital and the continued growth of its business. Primarily, this includes the
purchase of inventory, launching advertising campaigns, and the capital
expenditures relating to the development and installation of concept shops
and/or concept areas the Company is beginning to install within retail stores.
During the First Half of 1997, net cash used by operating activities was
$46,000, compared to cash provided by operating activities of $565,000 in the
First Half of 1996. The decrease in cash provided by operations was primarily
the result of increases in the Company's net loss, prepaid insurance (relating
to a 3-year Directors & Officers insurance policy) and prepaid samples relating
to the Holiday '97 and Spring '98 men's sportswear collection, which increases
are partially offset by an increase in accounts payable.
During the First Half of 1997, net cash used in investing activities was
$4,160,000, compared to $9,000 in the First Half of 1996. The cash used in the
First Half of 1997 was primarily the investment of the proceeds received from
the IPO. The funds from the IPO were deposited with the Company's factor and
invested at a rate of 2% below prime. Funds are transferred into the Company's
operating account as needed. In addition, the Company invested $94,000 in the
development of concept shops installed in retail stores in May 1997 and $24,000
for the construction costs relating to the Company's new office space. In the
First Half of 1996, the cash was used to purchase property and equipment and
was also attributable to the costs associated with the registration of several
trademarks in the United States and foreign countries.
During the First Half of 1997, net cash provided by financing activities
was $4,182,000, compared to cash used in financing activities of $587,000 in
the First Half of 1996. The increase was primarily attributable to the net
proceeds from the IPO of $6,479,000 which was partially offset by debt
repayments totalling $2,144,000 (which $2,030,000 was paid from the net IPO
proceeds) and deferred costs relating to the IPO and the bridge financing of
$485,000. During the First Half of 1996, net cash used in financing activities
resulted from a net decrease of $433,000 in the amount due to the factor and
from payments of $154,000 in notes payable.
Factoring Agreement: The Company is party to a Retail Collection
Factoring Agreement ("Factoring Agreement") with Heller Financial ("Heller")
pursuant to which the Company sells all of its eligible accounts receivable to
Heller. The Company is eligible for advances from Heller, at Heller's
discretion, for up to 80% of the net balance due on eligible accounts
receivable. At June 30, 1997, there was approximately $4,036,000 funds
deposited with Heller under
11
<PAGE>
the Factoring Agreement and approximately $945,000 in factored receivables. net
of returns and allowances. Interest on the net amount due to Heller is payable
monthly in arrears at the rate of 2% above the Chase Manhattan Bank, N.A. prime
rate ("Prime"). Interest on the net receivable with Heller is received monthly
in arrears at the rate of 2% below Prime.
Bridge Financing: In the first quarter of 1997, the Company used the
proceeds from the bridge financing for the hiring of key personnel, the initial
stages of the development of concept shops and/or concept areas to be installed
within retail stores, and the payment of expenses in connection with the IPO.
The Company received these funds in January 1997 and paid this loan in full May
1997 from the proceeds of its IPO.
Initial Public Offering: In May 1997, the Company completed its IPO. The
IPO consisted of 1,500,000 units, each of which consisted of one share of the
Company's common stock and one IPO Warrant. Each unit was priced at $5.00 per
share resulting in net proceeds of $6,479,000, after deducting underwriting
discounts, commissions, and underwriting related expenses. A portion of the net
proceeds from the IPO were used to repay the bridge financing, the notes
payable, and the short-term loan payable which totaled approximately
$2,030,000. The remaining proceeds are intended to be used for marketing and
advertising purposes, the installation of concept shops and/or concept areas,
and for working capital and general corporate purposes.
12
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item no. Description
-------- -----------
27 Financial Data Schedule.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 1997
PIVOT RULES, INC.
/s/ E. Kenneth Seiff
-------------------------------------
E. Kenneth Seiff
President and Chief Executive Officer
/s/ Meena N. Bhatia
-------------------------------------
Meena N. Bhatia
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,000
<SECURITIES> 0
<RECEIVABLES> 978,000
<ALLOWANCES> 0
<INVENTORY> 819,000
<CURRENT-ASSETS> 6,423,000
<PP&E> 318,000
<DEPRECIATION> (129,000)
<TOTAL-ASSETS> 6,788,000
<CURRENT-LIABILITIES> 834,000
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 5,915,000
<TOTAL-LIABILITY-AND-EQUITY> 6,788,000
<SALES> 4,589,000
<TOTAL-REVENUES> 4,589,000
<CGS> (3,229,000)
<TOTAL-COSTS> (1,266,000)
<OTHER-EXPENSES> (376,000)
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> (195,000)
<INCOME-PRETAX> (580,000)
<INCOME-TAX> 70,000
<INCOME-CONTINUING> (510,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (510,000)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
