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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission File Number: 333-22895
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PIVOT RULES, INC.
(Name of small business issuer in its charter)
New York 13-3612110
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
42 West 39th Street, New York, NY 10018
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212)-944-8000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Check whether the issuer (1) 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 [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
The issuer's revenues for its most recent fiscal year were: $10,323,000
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 24, 1998 based upon the last sale price of such
equity reported on the National Associated of Securities Dealers Automated
Quotation National Market System was approximately $3,951,112.
As of March 27, 1998, the issuer had outstanding 2,700,000 of shares of Common
Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Documents incorporated by reference: Portions of the Registrant's definitive
proxy statement which the Registrant will file with the Securities and Exchange
Commission within 120 days of the close of its fiscal year ended December 31,
1997, pursuant to Regulation 14A of the Securities Exchange Act of 1934, shall
be deemed incorporated by reference in Part III of this Annual Report on Form
10-KSB from the date of filing of such document.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Pivot Rules, Inc. (the "Company") is a New York corporation organized in 1991.
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. Its
current products include knit and woven shirts, sweaters, sweatshirts, pants,
shorts, outerwear and hats, many of which carry the Company's distinctive
"Three Golfer" logo. The Company focuses its design efforts on creating
comfortable products with relaxed styling, innovative design, and superior fit,
utilizing natural fibers and easy to wear colors.
PRODUCT AND DESIGN
The Company offers a full collection of golf lifestyle sportswear for men,
including knit and woven shirts, sweaters, sweatshirts, pants, shorts,
outerwear and hats. The Company focuses its design efforts on creating products
with relaxed styling, innovative design and superior fit, utilizing natural
fibers and easy to wear colors. The Company aims to incorporate the newest
fabrics and styles into its products. The Company designs each seasonal product
offering from a single color palette to enhance retailers' presentations of the
product as a "collection" and encourage the consumer to purchase
well-coordinated outfits rather than a single item. The Company seeks to
distinguish its products from its competitors' products by incorporating many
unique details into its garments in order to create a "branded" look. For
example, a cotton tape of the Company's slogan is sewn into the neck and tail
of shirts, pants and shirts have a spare logoed button sewn into the seam and
hangtags are printed with one of several different messages designed to convey
the brand's image. In October 1997, the Company hired Bradley Erickson to head
its Design Department. Mr. Erickson is a former Creative Director of Nautica
International, Inc.
SOURCING
Substantially all of the Company's products are manufactured by third parties
in the Far East and India. The Company sources substantially all of its
products through a Hong Kong agency that oversees production and quality
control. This agency negotiates prices, identifies factories to manufacture the
products and conducts quality control on the Company's behalf. The Company
works closely with this agency to monitor each of these phases of the
production process. The Company makes substantially all final decisions
concerning pricing and the selection of factories. Additionally, the Company
approves samples of each garment before the commencement of production.
The Company is not obligated to source its products at any particular factory.
However, the Company maintains consistent orders with a number of different
factories in order to promote long-term relationships, reliable quality,
competitive pricing and timely delivery.
The Company has begun sourcing some of its products through manufacturers in
areas where labor and fabric costs are lower than those in areas where the
Company's products have historically been manufactured. The Company is also
seeking to reduce sourcing costs in some cases by sourcing materials for a
garment separately from the production of the garment. These strategies,
together with increased purchasing leverage from selling to high-volume
retailers, have enabled the Company to reduce the sourcing costs of its largest
volume product style by approximately 20% since the beginning of 1996.
PATENTS AND TRADEMARKS
The Company has trademarked many of its brand names and slogans in the United
States and in numerous countries worldwide. In the United States, the Company
owns a variety of trademarks, including "Pivot Rules," "The Rules Have Changed"
and "Clothes To Play A Round In," as well as its "Three Golfer" design mark and
"Three Golfer and Flag" design mark. The Company is also the owner of a design
patent for its Three Golfer and Flag design mark ("Design Patent"). The Design
Patent covers the interaction between an element on the chest of a garment, for
example, a golfer, and a separate related element on the sleeve of the garment,
for example, a putting green. In 1997, the Company registered its most recent
slogan "We Play Golf. When It Rains We Make Clothes." The Company launched this
new slogan simultaneously with its new advertising campaign in December 1997.
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WAREHOUSING/DISTRIBUTION
The Company leases 18,000 square feet of warehouse space in Tukwila,
Washington. The Company selected Tukwila as the site for the warehouse because
of its proximity to ports from which the Company receives shipments from its
manufacturers in the Far East. The warehouse is staffed by one full time
employee. Additional temporary personnel are hired during peak shipping
periods. The Company is linked by Electronic Data Interchange ("EDI") to
several of its largest customers and, therefore, can receive orders via
computer. During key holiday periods, the warehouse maintains a same day
shipping policy for orders received before 3:00 p.m., Eastern Standard Time.
MANAGEMENT INFORMATION SYSTEM
The Company uses a management information system designed for the apparel
industry that facilitates planning, production scheduling, product tracking and
standard cost control, and which provides a perpetual inventory record. The
management information system also permits the Company's customer service
personnel to have access to real-time inventory availability.
The Company has implemented a new computer system that is Year 2000 compliant.
In the opinion of management, there is no reason to believe that any computer
systems or software used internally by the Company will materially affect
transactions with any customer, supplier or business partner, now or in the
future. The cost of the new system totaled $124,000. The Company cannot predict
the impact that Year 2000 failure of any computer systems operated by the
Company's suppliers and business partners will have on the Company's
operations.
LICENSING
During 1997 and in the first quarter of 1998, the Company terminated its three
licensing agreements. The Company's licensing partners have incurred financial
difficulties due to the economic crisis in Asia and as a result the Company had
to assess the cost/benefit of maintaining such partnerships. The Company made
the decision to suspend its international licensing program until a more
beneficial environment exists. Management does not anticipate that such
decision will have a material effect on the Company's business, financial
condition and operating results.
COMPETITION
The men's sportswear segment of the golf apparel market is highly competitive.
The Company encounters substantial competition at a variety of price points
from a number of apparel brands including Polo, Tommy Hilfiger, Nautica, Chaps,
Izod, Gant, Dockers, Nike, Munsingwear, Grand Slam, Greg Norman, Ashworth,
Cross Creek and Jack Nicklaus. The Company competes primarily on the basis of
design, image, value and quality. Many of the companies selling such brands are
significantly larger than the Company, have substantially greater financial,
marketing and other resources and have achieved greater recognition for their
brand names. The Company believes that its competitive advantage depends upon
its ability to anticipate and respond effectively to changing consumer demands
and to offer well designed quality sportswear at competitive prices. Virtually
all of the Company's targeted retailers also offer their own private label
brands that compete at significantly lower prices. In addition, the current
success of golf-inspired lines leaves open the possibility of new entrants into
the market. Increased competition in the golf apparel and general sportswear
apparel markets could result in price reductions, reduced margins or loss of
market share, all of which could have a material adverse effect on the
Company's business, financial condition and operating results.
DEPENDENCE ON CUSTOMERS
In 1997, the Company focused its marketing efforts on the "moderate" price
segment of the golf apparel market. Accordingly, the Company reduced its prices
and redirected its sales efforts to focus on the higher-volume retailers and
other customers in the "moderate" price segment, such as department stores,
sporting goods stores, catalogs and corporations, as well as promotionally
oriented retailers, including discounters. This focus resulted in a 72.0%
concentration of gross sales among four customers. Individually, such customers
accounted for approximately 22.8%, 19.1%, 17.6%, and 12.5%, respectively, of
the Company's gross sales. Based upon the Company's refocus on the department
store channel (and specialty stores, catalogs, resorts, etc.) and away from the
more promotionally oriented retailers, there can be no assurance that the
Company will continue to sell product to such
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customers in the future. Any inability to reestablish the department store
channel may have a material adverse impact on the Company's business, financial
condition, and operating results.
EMPLOYEES
As of March 27, 1998, the Company had eleven full-time employees and one
part-time employee, of whom five are in management, three are in the sales
department, and the remaining four employees work in the finance, public
relations, warehouse, and production departments. None of the Company's
employees is represented by a labor union and the Company considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
In 1997, the Company moved its corporate headquarters in New York City. The
Company leases 9,000 square feet of office space in New York City and 18,000
square feet of warehouse space in Tukwila, Washington under noncancelable
operating leases. Both properties are in good operating condition. The New York
City lease expires in May 2008 and the Tukwila lease expires in August 1999.
The Company's total lease payments for 1998 will be approximately $150,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation arising in the
normal course of its business. The Company believes that none of these actions
will have a material adverse effect on the business, financial condition or
operating results of the Company.
The Company currently has several registered trademarks, has been awarded a
design patent, and may seek additional legal protection for its products and
trade names. The Company has invested substantial resources in registering the
trademarks and developing branded products and product lines. There can be no
assurance that the steps taken by the Company to protect these intellectual
property assets will be successful and the loss of these marks could have a
material adverse effect on the Company's business operations. Moreover,
although the Company is not aware of any lawsuit alleging the Company's
infringement of intellectual property rights that could have a material adverse
effect on the Company's business, there can be no assurance that any such
lawsuit will not be filed against the Company in the future or, if such a
lawsuit is filed, that the Company would ultimately prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share ("Common Stock") and
Redeemable Common Stock Purchase Warrants ("Warrants") are quoted on The Nasdaq
SmallCap Market. The Company's units ("Units"), each Unit consists of one share
of Common Stock and one Warrant, were quoted on The Nasdaq SmallCap Market from
May 15, 1997, the effective time of the IPO, until July 17, 1997, at which time
the Common Stock and Warrants commenced trading separately and the Units ceased
to be traded.
The following table sets forth the range of high and low bid price information
for the Common Stock for the periods indicated:
FISCAL 1997 HIGH LOW
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Third Quarter $3 1/8 $1 7/8
Fourth Quarter $2 1/4 $1 1/2
As of March 25, 1998, there were approximately 43 record holders of the Common
Stock. The Company believes there were substantially in excess of 300
beneficial holders of the Common Stock as of such date.
SALES OF UNREGISTERED SECURITIES
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured 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 ("Bridge
Warrants"), for gross proceeds of $1,500,000. The placement agent for the
private placement was GKN Securities Corp. The securities were issued in a
private placement exempt from registration under the Rules of Regulation D of
the Securities Act of 1933, as amended.
The net offering proceeds totaled $1,207,000 after deducting total expenses
listed below. The following amounts represent total expenses in connection with
this offering:
Agency discounts and commissions $150,000
Expenses paid to or for placement agent 60,000
Other expenses 83,000
In May 1997, the Bridge Warrant holders surrendered 237,000 out of the 600,000
Bridge Warrants issued in connection with the bridge financing. The remaining
Bridge Warrants were converted in May 1997 (on a one-for-one basis) into
Warrants. The Notes were repaid in May 1997 from the proceeds of the Company's
initial public offering ("IPO").
USE OF PROCEEDS FROM REGISTERED SECURITIES
Effective May 15,1997, the Company completed the IPO (Commission File No.
333-22895). The representative of the underwriters of the IPO was GKN
Securities Corp. The following table shows the title of each class of
securities registered and the title of any class of securities into which such
securities may be converted, if any:
(1) Units
(2) Common Stock
(3) Warrants
(4) Representative's Unit Purchase Option
(5) Bridge Warrants
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UNITS: Each Unit consists of one share of Common Stock and one Warrant.
WARRANTS: Each Warrant is exercisable into shares of Common Stock at
$5.00 per share, commencing May 15, 1998 and expiring at the close of
business on May 15, 2002.
REPRESENTATIVE'S UNIT PURCHASE OPTION: Representative's right to
purchase up to 150,000 Units for an aggregate price of $100.
BRIDGE WARRANTS: Warrants issued to certain persons in connection with
the Company's January 1997 bridge financing which were converted in
May 1997 (on a one-for-one basis) into the Warrants.
The following table represents the amount and aggregate offering price of
securities registered and sold:
<TABLE>
<CAPTION>
Aggregate offering
Price of Amount Aggregate Offering
Title of Security Amount Registered Registered Amount Sold Price of Amount Sold
- ------------------------- ------------------------ ------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C>
Unit 1,725,000 $8,625,000 1,500,000 $7,500,000
Representative's Unit 1 $100 1 $100
Purchase Option
</TABLE>
The net offering proceeds totaled $5,939,343 after deducting total expenses
listed below. The following amounts represent total expenses in connection with
issuance and distribution of the securities registered for each category listed
below:
Underwriting discounts and commissions $750,000
Expenses paid to or for underwriters 243,335
Other expenses 567,321
The amounts shown above represent direct or indirect payments to
others.
As of December 31,1997, the net offering proceeds of $5,939,343 were used for
the following cash expenditures:
<TABLE>
<CAPTION>
<S> <C> <C>
Repayment of indebtedness and other obligations (with interest) $2,031,580
Marketing and advertising 908,115
Installation of concept shops and/or concept areas 232,964
Construction of plant, building, and facilities 276,489
Working Capital and general corporate purposes
including fixed assets - computer hardware and software 633,958
</TABLE>
The balance of the proceeds have been deposited with the Company's factor and
invested at a rate of 1.75% below prime. The amounts shown above represent
direct or indirect payments to others.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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. Its
current products include knit and woven shirts, sweaters, sweatshirts, pants,
shorts, outerwear, and hats, many of which carry the Company's distinctive
"Three Golfer" logo. The Company focuses its design efforts on creating
comfortable products with relaxed styling, innovative design, and superior fit,
utilizing natural fibers and easy to wear 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 include promotionally oriented retailers.
By the end of 1997, the Company recognized that the Pivot Rules brand could not
co-exist across several customer categories. As a result, the Company has since
modified its strategy to refocus its sales efforts on the department store
channel (and specialty stores, catalogs, resorts, etc.) and away from the more
promotionally oriented retailers. Any inability to reestablish the department
store channel may have a material adverse impact on the Company's business,
financial condition, and operating results.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO YEAR ENDED DECEMBER 31, 1996
("1996")
The Company's net sales increased by $1,727,000, or 20.1%, to $10,323,000 in
1997 from $8,596,000 in 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 $2,687,000, or 35.9%, to $10,180,000 in
1997 from $7,493,000 in 1996. The remaining portion of net sales in 1997 and
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. In the fourth quarter of 1997,
the Company experienced a 16.8% decrease in net sales as compared to the fourth
quarter of 1996. This decrease resulted from inconsistent purchases from
promotionally oriented retailers. Based upon management's decision to refocus
its sales efforts away from these retailers, management anticipates that
decreases in net sales will continue unless the department store channel can be
reestablished. In the event such channel is reestablished, there is no
guarantee that such channel will generate comparable net sales volume as the
promotionally oriented retailers.
Returns and allowances decreased by $252,000, or 36.2%, to $444,000 in 1997
from $696,000 in 1996. Returns and allowances represented 4.1% of gross sales
in 1997 as compared to 7.5% in 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 $906,000, or 44.7%, to $2,931,000 in 1997 from
$2,025,000 in 1996. Gross profit as a percentage of net sales increased to
28.4% in 1997 from 23.6% in 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 $1,517,000,
or 101.0%, to $3,019,000 in 1997 from $1,502,000 in 1996. As a percentage of
net sales, selling, marketing, design and administrative expenses increased to
29.2% in 1997 from 17.5% in 1996. This increase primarily resulted from an
increase in advertising expense of $732,000. The increase in general and
administrative expenses was primarily a result of an increase in salaries,
commissions, and related costs of $313,000, due to the hiring of key management
personnel, as well as a result of the following factors: (i) an increase in
travel costs of $113,000 relating to the increase in sales related employees,
(ii) an increase in consulting fees of $82,000, (iii) an increase in insurance
expense of $48,000 resulting from the Company's Director's and Officers
liability policy and (iv) an increase in legal fees of $46,000.
In 1997, the Company had interest income of $126,000, which represents the
interest earned on the proceeds from the IPO.
Other income of $35,000 in 1996 represented the proceeds from lawsuit
settlements, net of related costs.
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Amortization of deferred costs for bridge financing of $293,000 represented the
expense of the debt issuance costs associated with the bridge financing.
Unamortized costs of $256,000 were fully written-off in May 1997 upon the
satisfaction of the bridge financing.
Interest expense and factoring charges decreased by $97,000 to $346,000 in 1997
from $443,000 in 1996. This decrease was attributable to the decrease in the
interest rate payable to factor, as well as the reduction of interest payable
due to the satisfaction of all outstanding notes payable from the proceeds of
the IPO. This decrease is offset by interest expense associated with the bridge
financing totaling $142,000, which was paid in full in May 1997. The interest
expense on the bridge financing included $138,000 of debt discount, of which
$46,000 of unamortized discount was fully written off in May 1997 upon the
satisfaction of the bridge financing. In addition, the debt discount on the
bridge financing was offset by a $55,000 reduction in interest expense
resulting from the surrendering of 237,000 bridge warrants in May 1997. The
Company does not anticipate additional interest expense from the bridge
financing or associated costs in the future.
Net loss increased by $516,000 from net income of $135,000 in 1996 to a net
loss of $381,000 in 1997. The increase in the loss 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. Requirements for growth of the business
include the purchase of inventory, launching an advertising campaign, and the
capital expenditures relating to the development and installation of concept
shops and/or concept areas.
During 1997, net cash used by operating activities was $278,000 compared to
cash provided by operating activities of $1,406,000 in 1996. The decrease in
cash provided by operations was primarily the result of increases in the
Company's net loss and prepaid insurance (relating to a 3-year Directors &
Officers insurance policy). Such decrease is partially offset by an increase in
accounts payable. In addition, inventory on hand increased by $578,000 due to a
greater quantity of core product on hand on December 31, 1997 as compared to
December 31, 1996.
During 1997, net cash used in investing activities was $2,619,000, compared to
$42,000 in 1996. The cash used in 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 1.75% below prime. Funds are
transferred into the Company's operating account as needed. In addition, the
Company invested approximately $233,000 in the development of concept shops
installed in retail stores in 1997. Furthermore, the Company invested
approximately $398,000 in construction costs and office equipment relating to
the Company's new office space and other improvements and $124,000 for the
implementation of a new computer system. In 1996, the cash was used to purchase
property and equipment.
During 1997, net cash provided by financing activities was $2,919,000, compared
to cash used in financing activities of $1,385,000 in 1996. This increase was
primarily due to the net proceeds received from the IPO of $5,939,000, (which
are net of underwriting costs and expenses). This increase was offset by
$2,144,000 in debt repayments, of which approximately $2,032,000 related to the
repayment of notes issued by the Company in connection with the bridge
financing. During 1996, net cash used in financing activities resulted from a
net decrease of $1,005,000 in the amount due to the factor and from payments of
$492,000 in notes payable.
Factoring Agreement: The Company is party to a Retail Collection Factoring
Agreement ("Factoring Agreement") pursuant to which the Company sells all of
its eligible accounts receivable to the factor ("Factor"). The Company
renegotiated such agreement in November 1997. The Company is eligible for
advances, at the Factor's discretion, for up to 90% of the net balance due on
eligible accounts receivable. At December 31, 1997, there was approximately
$1,857,000 funds invested with the Factor under the Factoring Agreement and
approximately $2,264,000 in factored receivables, net of returns and
allowances. Interest on the net amount due is payable monthly in arrears at the
rate of 1% above the Chase Manhattan Bank, NA prime rate ("Prime"). Interest on
the net receivable is received monthly in arrears at the rate of 1.75% 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
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payment of expenses in connection with the IPO. The Company received these
funds in January 1997 and paid this loan in full in May 1997 from the proceeds
of the IPO.
Initial Public Offering: In May 1997, the Company completed the IPO. The IPO
consisted of 1,500,000 units, each of which consisted of one share of the
Company's Common Stock and one Warrant. Each unit was priced at $5.00 per share
resulting in net proceeds of $5,939,000, after deducting underwriting
discounts, commissions, and underwriting related expenses. A portion of the net
proceeds from the IPO was used to repay the bridge financing, the notes
payable, and the short-term loan payable that totaled approximately $2,032,000.
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.
SEASONALITY
The apparel industry is seasonal in nature and, as a result, the Company
experiences significant variability in its quarterly results and working
capital requirements. Significant portions of the Company's sales occur during
the quarter in which the Holiday line is shipped. In addition, quarterly
results may vary from year to year due to the timing of new product
introductions, orders and sales, advertising expenditures, promotional periods
and shipments.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain written and oral statements made or incorporated by reference from time
to time by The Company or its representatives in this report, other reports,
filings with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Act").
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and my contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Forward-looking statements involve risks
and uncertainties which may cause actual results to differ materially from the
forward-looking statements. The risks and uncertainties are detailed from time
to time in reports filed by The Company with the S.E.C., including Forms 8-A,
8-K, 10-QSB, and 10-KSB, and include, among others, the following: uncertainty
in apparel retailing; unexpected changes in fashion trends; acceptance of
repositioning, including the ability to reestablish the brand in the department
store channel; risk of loss of existing and targeted retailers; potential
failure of advertising and marketing initiatives; limited working capital
(possible need for additional financing); retailer's refusal to place concept
shops; competition; dependence on foreign sourcing; future status of Hong Kong
and China; markdown expenses could exceed historical levels; dependence on
limited number of customers; lack of long-term sales agreements; management of
growth; recent loss; uncertainty and expenses of intellectual property
litigation; seasonality and quarterly fluctuations; dependence on key
personnel. The risks included here are not exhaustive. Other sections of this
report may include additional factors which could adversely impact The
Company's business and financial performance. Moreover, The Company operates in
a very competitive and rapidly changing environment. New risk factors emerge
from time to time and it is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors in the
Company's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results.
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ITEM 7. FINANCIAL STATEMENTS
(a) The following Financial Statements are attached hereto in response to
Item 7:
Independent Auditor's Report - M.R.Weiser&Co.LLP F-1
Independent Auditor's Report - Grant Thornton LLP F-2
Balance Sheet - As of December 31, 1997 F-3
Statement of Operations - Years ended December 31, 1997 and 1996 F-4
Statement of Changes in Shareholders' Equity -
Years ended December 31, 1997 and 1996 F-5
Statement of Cash Flows - Years ended December 31, 1997 and 1996 F-6
Notes to Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective January 1998, M.R. Weiser & Co.LLP was engaged as the Company's
independent auditors, replacing Grant Thornton LLP, the Company's former
auditors. The Company's Audit Committee of the Board of Directors approved the
appointment of M.R. Weiser & Co.LLP. The former auditor's report on the
Company's financial statements for the year ended December 31, 1996 is included
in the financial statements of the Company. There were no disagreements with
the former auditors on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure with respect to
the Company's financial statements for the fiscal year ended December 31, 1996
or up through the time of replacement, which, if not resolved to the former
auditor's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its report. The report of Grant
Thornton LLP in connection with such audit did not contain any adverse opinion
or disclaimer of opinion, and was not modified as to uncertainty, audit scope
or accounting principles. Before retaining M.R. Weiser & Co.LLP, the Company
had not consulted with M.R. Weiser & Co.LLP regarding accounting principles.
9
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
The information required for this item is hereby incorporated by reference to
the section entitled "Election of Directors" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission with respect
to the 1998 annual meeting of shareholders ("Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required for this item is hereby incorporated by reference to
the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is hereby incorporated by reference to
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is hereby incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB:
EXHIBIT NO. DESCRIPTION
3.1 (a) Restated Certificate of Incorporation of the Company.
3.2 (a) Amended and Restated By-Laws of the Company.
3.3 (a) Amendment to Amended and Restated By-Laws of the Company.
4.1 (a) Specimen Common Stock certificate.
4.2 (a) Form of Unit Purchase Option.
4.5 (a) Specimen Redeemable Common Stock Purchase Warrant.
4.6 (a) Form of Warrant Agreement.
10.2 (a) Letter Agreement by and between the Company and Joseph J.
Boughton, Jr., dated November 7, 1996.
10.4 (a) Agreement, dated as of September 24, 1996, by and between the
Company, Leisure Wear Inc., David M. Goldblatt
Inc. Profit Sharing Plan, David Goldblatt, Anita Goldblatt
and Jeffrey Goldstein.
10.5 (a) Factoring Agreement by and between the Company and Heller
Financial, Inc. ("Heller"), dated April 1992.
10.6 (a) Letter of Credit Financing Agreement by and between the
Company and Heller, dated as of April 28, 1992.
10.8 (a) Letter Agreement by and between the Company and Heller, dated
December 18, 1996.
10
<PAGE>
10.9 (a) Promissory Note dated September 30, 1996, executed by the
Company in favor of Edward H. Mank ("Mank").
10.10 (a) Letter Agreement by and between the Company and Mank, dated
December 23, 1996.
10.11 (a) Amended and Restated Employment Agreement by and between the
Company and E. Kenneth Seiff.
10.12 (a) Representation Agreement by and between the Company and
International Merchandising Corporation, dated May 10, 1994.
10.14 (a) Lease Agreement by and between the Company and Sound Floor
Coverings, Inc., dated November 18, 1994.
10.15 (a) Agreement by and between the Company and Textiles Network,
Ltd., dated August 1996.
10.16 (a) 1997 Stock Option Plan.
10.17 (a) Agreement by and between the Company and IDL International,
LLC, dated May 1996.
10.18 (a) Addendum to Agreement by and between the Company and IDL
International, LLC, dated July 1996.
10.19 (a) Employment Agreement by and between the Company and David
Lewis, dated as of March 1, 1997.
10.20 (a) Employment Agreement by and between the Company and William
McLoone, dated as of March 17, 1997.
10.21 (b) Lease Agreement by and between the Company and John R.
Perlman, et al., dated as of May 5, 1997.
10.22 (c) Employment Agreement, dated as of September 23, 1997 by and
between the Company and Bradley Erickson.
10.23 Letter Agreement by and between the Company and Heller, dated
November 14, 1997.
16 (a) Letter of Richard A. Eisner & Company, LLP, Independent
Auditors.
27 Financial Data Schedule.
(a) - Incorporated by reference to the Company's Form SB-2 registration
statement and amendments thereto (File No. 333-22895).
(b) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended March 31, 1997.
(c) - Incorporated by reference to the Company's Quarterly report filed on
Form 10-QSB for the quarterly period ended September 30, 1997.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the period
covered by this report.
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
-------------------------
E. Kenneth Seiff
President
March 30, 1998
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ E. Kenneth Seiff
- ------------------------
E. Kenneth Seiff Chairman of the Board of Directors, Chief March 30, 1998
Executive Officer, President,
and Treasurer (Principal Executive Officer)
/s/ Meena N. Bhatia
- ------------------------
Meena N. Bhatia Chief Financial Officer March 30, 1998
(Principal Accounting Officer)
/s/ Martin Miller
- ------------------------
Martin Miller Director March 30, 1998
/s/ Fred Rosenfeld
- ------------------------
Fred Rosenfeld Director March 30, 1998
/s/ Robert G. Stevens
- ------------------------
Robert G. Stevens Director March 30, 1998
</TABLE>
12
<PAGE>
PIVOT RULES, INC.
TABLE OF CONTENTS
PAGE
-----
Independent Auditors' Reports
M.R.Weiser&Co.LLP F-1
Grant Thornton LLP F-2
Balance Sheet as of December 31, 1997 F-3
Statements of Operations for the years ended December 31, 1997 and 1996 F-4
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997 and 1996 F-5
Statements of Cash Flows for the years ended December 31, 1997 and 1996 F-6
Notes to Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Pivot Rules, Inc.
We have audited the accompanying balance sheet of Pivot Rules, Inc. as of
December 31, 1997 and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pivot Rules, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ M.R.Weiser&Co.LLP
Certified Public Accountants
New York, N.Y.
February 25, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Shareholders
Pivot Rules, Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity, and cash flows of Pivot Rules, Inc. for the year then
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Pivot Rules,
Inc. for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ GRANT THORNTON LLP
New York, New York
February 18, 1997
F-2
<PAGE>
PIVOT RULES, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Current assets
Cash $ 55,000
Funds deposited with factor 1,857,000
Due from factor 2,264,000
Non-factored receivables 51,000
Inventories 1,413,000
Prepaid expenses and other current assets 285,000
Income taxes receivable 203,000
Deferred income taxes 94,000
------------
Total current assets 6,222,000
Property and equipment, net 774,000
Deferred costs and other assets 155,000
------------
$7,151,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other current $ 1,092,000
liabilities
Deferred income taxes 9,000
------------
1,101,000
------------
Commitments and contingencies
Shareholders' equity
Preferred stock -$.01 par value; 2,000,000 authorized
and no shares issued
Common stock -$.01 par value; 15,000,000 authorized
and 2,700,000 issued and outstanding 27,000
Additional paid-in capital 6,404,000
Accumulated deficit (381,000)
-----------
6,050,000
-----------
$ 7,151,000
===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Sales $ 10,767,000 $ 9,292,000
Less returns and allowances 444,000 696,000
------------ ------------
Net sales 10,323,000 8,596,000
Cost of sales 7,392,000 6,571,000
------------ ------------
Gross profit 2,931,000 2,025,000
Selling, marketing, design and administrative expenses 3,019,000 1,502,000
------------ ------------
Operating (loss) profit (88,000) 523,000
------------ ------------
Other income (expense)
License fee income 38,000 90,000
Interest income 126,000 --
Other income -- 35,000
Amortization and write-off of deferred costs for bridge (293,000) --
financing
Interest expense and factoring charges (346,000) (443,000)
------------ ------------
(475,000) (318,000)
------------ ------------
(Loss) income before provision for income taxes (563,000) 205,000
Benefit (provision) for income taxes 182,000 (70,000)
------------ ------------
Net (loss) income $ (381,000) $ 135,000
============ ============
Basic and diluted (loss) income per share $ (.18) $ .11
============ ============
Weighted average shares outstanding 2,149,315 1,200,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock, Common Stock,
no par value $.01 par value Retained
--------------------------- --------------------- earnings/
Number of Number of Paid-in (Accumulated)
shares Amount shares Amount capital deficit)
----------- ------------ ----------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 200 $ 955,000 -- $ -- $ -- $ 191,000
Stock-split recapitalization (200) (955,000) 1,200,000 12,000 397,000 (326,000)
Net income -- -- -- -- -- 135,000
----------- ----------- ------------ -------- ---------- -----------
Balance at December 31, 1996 -- -- 1,200,000 12,000 397,000 --
Issuance of warrants - bridge financing -- -- -- -- 138,000 --
Cancellation of warrants - bridge
financing -- -- -- -- (55,000) --
Sale of units - ($5.00 per share) -- -- 1,500,000 15,000 5,924,000 --
Net loss -- -- -- -- -- (381,000)
---------- ----------- ----------- -------- ---------- ----------
Balance at December 31, 1997 -- $ -- 2,700,000 $ 27,000 $6,404,000 $ (381,000)
========== =========== =========== ======== ========== ==========
</TABLE>
[RESTUBBED TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Treasury Stock
-----------------------------
Number of
shares Amount Total
----------- ---------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995 (64) $ (872,000) $ 274,000
Stock-split recapitalization 64 872,000 --
Net income -- -- 135,000
----------- ----------- ----------
Balance at December 31, 1996 -- -- 409,000
Issuance of warrants - bridge financing -- -- 138,000
Cancellation of warrants - bridge
financing -- -- (55,000)
Sale of units - ($5.00 per share) -- -- 5,939,000
Net loss -- (381,000)
----------- ----------- ----------
Balance at December 31, 1997 -- $ -- $6,050,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net (loss) income $ (381,000) $ 135,000
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Loss on equipment disposition 10,000 8,000
Amortization of deferred costs for bridge financing 293,000 --
Amortization of debt discount 83,000
Depreciation and amortization 76,000 55,000
Deferred income taxes -- (40,000)
Changes in operating assets and liabilities
(Increase) decrease in
Inventories (578,000) 792,000
Non-factored receivables (10,000) 37,000
Prepaid expenses and other current assets (212,000) 52,000
Increase (decrease) in
Accounts payable and accrued expenses 756,000 183,000
Income taxes receivable/payable (315,000) 184,000
----------- -----------
Net cash (used in) provided by operating activities (278,000) 1,406,000
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (755,000) (42,000)
Trademark costs (7,000) --
Funds deposited with factor from initial public offering (4,920,000) --
Withdrawal of funds deposited with factor 3,063,000 --
----------- -----------
Net cash used in investing activities (2,619,000) (42,000)
----------- -----------
Cash flows from financing activities
Deferred costs associated with bridge financing and initial public offering 128,000 (128,000)
Proceeds from notes payable -- 240,000
Net proceeds from bridge financing 1,207,000 --
Net proceeds from initial public offering 5,939,000 --
Repayments of notes payable and short-term loan (644,000) (492,000)
Repayment of bridge financing (1,500,000) --
Net change in due to/from factor (2,211,000) (1,005,000)
----------- -----------
Net cash provided by (used in) financing activities 2,919,000 (1,385,000)
----------- -----------
Net increase (decrease) in cash 22,000 (21,000)
Cash balance - January 1 33,000 54,000
----------- -----------
Cash balance - December 31 $ 55,000 $ 33,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 75,000 $ 209,000
=========== ===========
Income taxes $ 125,000 $ --
=========== ===========
Non-cash financing activities:
Issuance of warrants in connection with bridge financing $ 138,000 $ --
=========== ===========
Cancellation of warrants in connection with bridge financing $ 55,000 $ --
=========== ===========
Reclassification of former shareholder notes payable $ -- $ 279,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A - THE COMPANY
Pivot Rules, Inc. (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. The Company sells its products to department stores,
sporting goods stores, catalogs, corporations and promotionally oriented
retailers, including discounters, throughout the United States.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. 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 ("FIFO") method.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment is depreciated on a
straight-line basis over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the
lease. Maintenance and repairs are expensed as incurred.
4. DEFERRED COSTS
Deferred costs consist of trademark and organization costs. The trademark and
organization costs are amortized on a straight-line basis over their estimated
useful lives of 10 years.
5. LONG-LIVED ASSETS
The Company's policy is to evaluate long-lived assets and certain identifiable
intangibles for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. This
evaluation is based on a number of factors, including expectations for
operating income and undiscounted cash flows that will result from the use of
such assets. The Company has not identified any such impairment of losses.
6. INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
7. PREPAID EXPENSES
Sample costs for upcoming seasons are deferred and charged to expenses in the
season to which they pertain. Costs are deferred for a period of approximately
six to nine months.
F-7
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 1997 and 1996 amounted to approximately $908,000 and
$176,000 respectively.
9. CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
10. REVENUE RECOGNITION
Revenue is recognized when merchandise is shipped to a customer.
11. EARNINGS (LOSS) PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards No. ("SFAS") 128, "Earnings Per Share". Basic earnings (loss) per
share excludes dilution and is computed by dividing earnings (loss) available
to common shareholders by the weighted average number of common shares
outstanding for the period.
Diluted earnings (loss) per share is computed by dividing earnings (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, adjusted to reflect potentially dilutive
securities. Options and warrants were not included in the computation of
diluted earnings per share because the exercise price was greater than the
market price of the stock.
12. STOCK BASED COMPENSATION
The Company applies SFAS 123 "Accounting for Stock Based Compensation" in
accounting for its stock based compensation plan. In accordance with SFAS 123,
the Company applies Accounting Principles Board opinion No. 25 and related
Interpretations for expense recognition. No compensation expense has been
recorded in 1997, because the exercise price of employee stock options equals
or exceeds the market price of the underlying stock on the date of grant.
13. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information" were issued. These
standards which will become effective in 1998 expand or modify disclosures and
accordingly will have no effect on the Company's financial position, results of
operations or cash flows.
14. RECLASSIFICATION
The 1996 financial statements have been reclassified in order to conform with
the 1997 presentation.
NOTE C - BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured 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 ("Bridge
Warrants"), for gross proceeds of $1,500,000. Net proceeds amounted to
$1,207,000 after agency expenses and brokerage fees, but before additional debt
issuance costs. A portion of the gross proceeds has been allocated to the
Bridge Warrants based on an estimate of their fair market value, resulting in
approximately $138,000 of original issue discount and a $138,000 increase in
paid-in capital.
F-8
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
The Notes bore interest at the rate of 10% per annum from January 2, 1997
through April 30, 1997, and thereafter at the rate of 12% per annum until such
notes were repaid from the proceeds of the Company's initial public offering
("IPO") in May 1997.
In May 1997, the Bridge Warrant holders surrendered 237,000 out of the 600,000
Bridge Warrants issued in connection with the bridge financing. The
cancellation of such Bridge Warrants resulted in a reduction of interest
expense and additional paid-in capital of $55,000. The remaining Bridge
Warrants were converted in May 1997 (on a one-for-one basis) into warrants with
the same terms as the warrants sold in the IPO.
NOTE D - FACTORING AGREEMENT
In April 1992, the Company entered into a factoring and financing agreement
whereby the Company sells substantially all of its trade receivables without
recourse to a commercial factor ("Factor"). In November 1997, the agreement was
amended whereby advances will bear interest at 1% above the Chase Manhattan
Bank, N.A. prime rate ("Prime"). In addition, the Company receives interest at
1.75% below Prime on funds deposited with the Factor. Any amounts due to the
Factor are collateralized by accounts receivable, inventories, and other
assets. As of the balance sheet date, funds deposited with the Factor represent
the net proceeds from the IPO, net of amounts transferred to operations.
The Company incurred $188,000 and $363,000 of factoring commissions and
interest charges for receivables sold and for advances for the years ended
December 31, 1997 and 1996, respectively.
NOTE E - PROPERTY AND EQUIPMENT
As of December 31, 1997, property and equipment consist of the following:
Leasehold improvements $309,000
Concept area fixtures 233,000
Office equipment 196,000
Computer equipment and software 178,000
------------
916,000
Less accumulated depreciation 142,000
------------
$774,000
============
NOTE F - DEFERRED COSTS AND OTHER ASSETS
As of December 31, 1997, deferred costs and other assets consist of the
following:
Trademarks $166,000
Deposits 29,000
Organization costs 7,000
------------
202,000
Less accumulated depreciation 47,000
------------
$155,000
===========
F-9
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE G - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, 1997, accounts payable, accrued expenses and other current
liabilities consist of the following:
Accounts payable $ 828,000
Accrued advertising costs 147,000
Other accounts payable 117,000
------------
$ 1,092,000
============
NOTE H - INCOME TAXES
Income taxes receivable represents the anticipated refund from the carry back
of the current net operating loss.
The components of deferred tax assets and liabilities as of December 31, 1997
are as follows:
Deferred tax asset
Accounts receivable reserves $94,000
Deferred tax liability
Tax over book depreciation (9,000)
------------
Net deferred tax asset $85,000
============
Differences between book and tax are primarily due to temporary differences
resulting from use of accelerated depreciation for income tax purposes and
using the direct write-off method for receivables for tax purposes.
The provision (benefit) for income taxes is comprised of the following:
1997 1996
---- ----
Current
Federal $ (189,000) $ 92,000
State 7,000 5,000
Foreign -- 13,000
---------- ----------
(182,000) 110,000
----------- ----------
Deferred
Federal (1,000) (45,000)
State 1,000 5,000
---------- ----------
-- (40,000)
---------- --------
$(182,000) $ 70,000
========== ========
The statutory Federal income tax rate and the effective rate of the provision
for income taxes for the years ended December 31, 1997 and December 31, 1996 is
reconciled as follows:
1997 1996
---- ----
Statutory Federal income tax rate (34.0)% 34.0%
State taxes, net of Federal tax benefit 1.7 3.2
Other -- (3.1)
-------- ----
Effective tax rate (32.3)% 34.1%
===== ====
F-10
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE I - COMMITMENTS AND CONTINGENCIES
1. LETTERS OF CREDIT
The Company had outstanding letters of credit in the aggregate amount of
$859,000 as of December 31, 1997, of which $490,000 has been provided as a
liability in the year-end balance sheet. The Company's letter of credit
facility with the Factor provides that the Factor has sole discretion with
regard to the extension of such credit.
2. EMPLOYMENT CONTRACTS
The Company has an employment contract, which was amended on May 21, 1997, with
the Chief Executive Officer and shareholder ("CEO"). The amended employment
agreement, which expires on January 1, 2000, provides for a base salary plus
annual bonuses at the discretion of the Board of Directors based upon operating
profits before taxes and financing costs. In addition, the Company maintains a
$1.2 million key person life insurance policy on the life of the CEO.
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 September 1997, the Company entered into an employment agreement with its
Chief Creative Officer, which expires on December 31, 2000. The employment
agreement provides for a base salary, discretionary annual bonuses, and a
one-time bonus. Such bonuses are contingent on achieving certain targeted sales
requirements. 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 option grant upon commencement of
employment.
In October 1997, the Company entered into an employment agreement with its Vice
President of Corporate Sales, which expires on December 31, 2000. The
employment agreement provides for a base salary and annual bonuses contingent
on achieving certain specified performance objectives. In addition, the
employment agreement provides for annual raises and option grants, each
contingent upon meeting certain targeted sales requirements.
As of December 31, 1997, the Company's aggregate commitment for future base
salary is:
1998 $ 549,000
1999 575,000
2000 438,000
2001 178,000
2002 53,000
------
Total $1,793,000
===========
3. OPERATING LEASES
In May 1997, the Company signed a lease for a new office and showroom. The term
of the lease is from September 1, 1997 through May 31, 2008. The Company also
leases a warehouse under an operating lease, which expires in August 1999. Rent
expense aggregated approximately $159,000 and $126,000 for the years ended
December 31, 1997 and 1996.
F-11
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
As of December 31, 1997, future minimum rentals, excluding utilities, are as
follows:
1998 $ 150,000
1999 127,000
2000 81,000
2001 81,000
2002 81,000
Thereafter 484,000
-----------
Total $1,004,000
===========
NOTE J - SHAREHOLDERS' EQUITY
1. RECAPITALIZATION AND TREASURY STOCK
In December 1996, the Board of Directors approved a plan of recapitalization
through the use of a stock split. The recapitalization, which was effected on
January 2, 1997, resulted in the authorization of 10,000,000 shares of $.01 par
value common stock. Shareholders received 8,862.6292 shares for each share of
the previous no par value common stock.
In connection with the recapitalization, the Company's Board of Directors
approved the retirement of the 64.6 shares of treasury stock (572,526 after
giving effect to the stock split). Of the $872,000 in treasury stock, $546,000
was first offset against the common stock account with the remainder, totaling
$326,000, reducing retained earnings.
2. 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, $.01 par value per share
("Common Stock"), authorized for issuance from 10,000,000 shares to 15,000,000
shares.
3. INITIAL PUBLIC OFFERING
In May 1997, the Company completed an initial public offering of 1,500,000
units ("Units"), each Unit consisting of one share of the Company's Common
Stock and one redeemable common stock purchase warrant ("Warrants"). The
Company received net proceeds of $5,939,000, (which are net of underwriting
costs and expenses) of which approximately $2,032,000 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 1.75% below prime. As a
result of the satisfaction of the bridge financing, the Company has written-off
$83,000 of unamortized debt discount and $256,000 of unamortized debt issuance
costs.
4. WARRANTS
The Company has 1,863,000 Warrants outstanding as of December 31, 1997
consisting of 1,500,000 Warrants offered in the IPO and 363,000 converted from
the bridge financing (see Note C). These Warrants entitle the holders to
purchase one share of Common Stock at $5.00 per share during the four-year
period commencing May 15, 1998; all Warrants become exercisable on such date.
The Company may redeem the Warrants at any time after they become exercisable,
at a price of $.01 per Warrant, provided that the market price of the stock
exceeds 165% of the exercise price of the Warrants for a specific period of
time, and upon specific notice provisions.
F-12
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. UNIT PURCHASE OPTION
In May 1997, the Company sold to the underwriter of the IPO, for an aggregate
purchase price of $100, a Unit Purchase Option ("UPO") consisting of the right
to purchase up to an aggregate of 150,000 Units. The UPO is exercisable
initially at a per-Unit price equal to 160% of $5.00 per share during the
four-year period commencing May 15, 1998.
6. RESERVED SHARES
The Company has reserved an aggregate of 2,250,000 shares of Common Stock for
the exercise of the Warrants and the UPO.
7. 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. The maximum number of shares that may be granted
under the Plan is 200,000.
Activity in the stock option plan is summarized as follows:
SHARES UNDER WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
Options granted 117,000 $5.00
Options canceled (24,500) $5.00
----------
Balance at December 31, 1997 92,500 $5.00
==========
Eligible for exercise at December 31, 1997 -- N/A
==========
The stock options are exercisable in different periods commencing in 1998
through 2007.
The Company does not recognize compensation expense for stock options granted
at or above fair market value, as permitted by the accounting standards. The
fair value of options granted during 1997 was $112,000. Fair value is estimated
based on the Black-Scholes option-pricing model with the following assumptions
for grants in 1997: expected volatility of 40%; risk-free interest rates
ranging from 5.98% through 6.67% and expected lives of 6 years. Had
compensation expense been determined based on the fair value of the options on
the grant dates, the Company's net loss would have been increased by $112,000
($.05 per share) in 1997.
On January 16, 1998 and February 26, 1998, additional options for an aggregate
of 69,500 shares of Common Stock were granted, of which options for 44,000
shares were granted at an exercise price of $2.16, options for 500 shares were
granted at an exercise price of $5.00, and the remaining options for 25,000
shares were granted at an exercise price of $2.17. The exercise price of these
options were equal to or greater than the market price of the Common Stock as
of the date of grant.
NOTE K - CONCENTRATIONS
The Company sells its products to department stores, sporting goods stores,
catalogs, corporations and promotionally oriented retailers, including
discounters. The Company uses a Factor to evaluate the creditworthiness of most
of its customers. The Company sells substantially all of its receivables to the
Factor. For approved accounts, the Factor assumes all credit risk. For approved
accounts, the Factor has recourse in cases of disputes, chargebacks and
reserves. For nonapproved accounts, the Factor has full recourse. For
non-factored sales, credit losses have been within management's expectations.
As of December 31, 1997, all accounts were approved by the Factor. For the year
ended December 31, 1997, four customers accounted for an aggregate of
F13
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
72.0% of the Company's sales, of which individually such customers accounted
for approximately 22.8%, 19.1%, 17.6%, and 12.5%, respectively, of the
Company's sales. For the year ended December 31, 1996, four customers accounted
for 45% of the Company's sales, including one customer accounting for
approximately 24.7% of the Company's sales. Based upon the Company's refocus on
the department store channel (and specialty stores, catalogs, resorts, etc.)
and away from the more promotionally oriented retailers, there can be no
assurance that the Company will continue to sell product to these customers in
the future. Any inability to reestablish the department store channel may have
a material adverse impact on the Company's business, financial condition, and
operating results.
Substantially all of the Company's products are manufactured by third parties
in the Far East and India. The use of contractors and the resulting lack of
direct control could make it difficult for the Company to obtain timely
delivery of products of acceptable quality. Delays in shipments to the Company,
inconsistent or inferior garment quality and other factors beyond the Company's
control could adversely affect the Company's relationship with its customers,
its reputation in the industry and its sales and operating results. Moreover,
foreign manufacturing is subject to numerous risks, including work stoppages,
transportation delays, political instability, foreign currency fluctuations,
the imposition of tariffs and import and export controls, customs laws, changes
in governmental policies and other factors that could have a material adverse
effect on the Company's business, financial condition and operating results.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Funds deposited with factor - the carrying amount approximates
fair value due to the short-term maturities of these instruments.
Letters of Credit - letters of credit collateralize the Company's
obligations to the Factor and have terms ranging from 30 days to 120 days; the
face amount of the letters of credit approximate fair value since the value for
each is fixed over a relatively short period of time.
The carrying amount approximates the fair value of the Company's financial
instruments as of December 31, 1997.
NOTE M - LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation arising in the
normal course of its business. The Company believes that none of these actions
will have a material adverse effect on the business, financial condition or
operating results of the Company.
F-14
<PAGE>
EXHIBIT 10.23
-------------
November 14, 1997
Pivot Rules, Inc.
42 West 39th Street
New York, NY 10018
Gentlemen:
We have reference to that certain Retail Collection Factoring
Agreement (the "Factoring Agreement") and Letter of Credit Agreement (the L/C
Agreement") between Pivot Rules, Inc. and Heller Financial, Inc. both having
the Effective date of April 28, 1992, as from time to time amended or modified
(collectively, the "Agreements").
We hereby propose that, effective as of May 1, 1997, the Factoring
Agreement be amended as follows:
1. The advance rate set forth in Section 2.2 shall be increased to ninety
percent (90%).
2. The factoring commission set forth in Section 2.3 shall be reduced to
three-quarters of one percent (.75%).
3. The Interest Rate set forth in Section 3.1 shall be reduced to one percent
(1%) plus the Base Rate.
4. The matured funds rate set forth in Section 3.2 shall be increased to the
Base Rate minus one and three-quarters of one percent (1.75%).
We also hereby propose that, effective as of the date hereof, the
second sentence of paragraph numbered 10 of the L/C Agreement be deleted and
replaced with the following sentence:
"10....In addition to such bank charges, we shall pay to you
one-quarter of one percent (.25%) of the face amount of each
Letter of Credit or Guaranty upon the opening of same and
one-eighth of one percent (.125%) of their face amount thereof
upon the closing of each Letter of Credit or Guaranty."
<PAGE>
PIVOT RULES, INC.
NOVEMBER 14, 1997
PAGE 2
Except as herein or heretofore amended or supplemented, the Agreements
remain in full force and effect in accordance with their original terms and
conditions.
If the foregoing correctly sets forth your and our understanding,
please sign the enclosed copy of this letter agreement in the space provided
and return such fully executed copy to the undersigned as soon as possible.
Very truly yours,
HELLER FINANCIAL, INC.
By: /s/ John D. Calabro SVP
--------------------------------
Name: John D. Calabro
---------------------------------
Title: Sr. V.P.
---------------------------------
CONSENTED AND AGREED TO
This 18 day of November, 1997
PIVOT RULES, INC.
By:/s/ E. Kenneth Seiff
-------------------------------
Name: Kenneth Seiff
---------------------------
Title: CEO
-----------------------------
By: Not Applicable
----------------------------------
E. KENNETH SEIFF, INDIVIDUALLY
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 55,000
<SECURITIES> 0
<RECEIVABLES> 2,566,000
<ALLOWANCES> 251,000
<INVENTORY> 1,413,000
<CURRENT-ASSETS> 6,222,000
<PP&E> 916,000
<DEPRECIATION> 142,000
<TOTAL-ASSETS> 7,151,000
<CURRENT-LIABILITIES> 1,092,000
<BONDS> 0
0
0
<COMMON> 27,000
<OTHER-SE> 6,023,000
<TOTAL-LIABILITY-AND-EQUITY> 7,151,000
<SALES> 10,323,000
<TOTAL-REVENUES> 10,323,000
<CGS> (7,329,000)
<TOTAL-COSTS> (3,019,000)
<OTHER-EXPENSES> (293,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (346,000)
<INCOME-PRETAX> (563,000)
<INCOME-TAX> (182,000)
<INCOME-CONTINUING> (381,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,000)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
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