FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 333-24507
WILLCOX & GIBBS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3308457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Milik Street, Carteret, New Jersey 07008
(Address of principal executive offices) (Zip Code)
(732) 541-6255
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
DATE CLASS SHARES OUTSTANDING
---- ----- ------------------
September 30, 1998 Common Stock 1,001,319
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
INDEX
-----
PART I - Financial Information PAGE
----
Consolidated Balance Sheets (Unaudited) at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations (Unaudited) for the Nine
Months and Three Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II - Other Information 20
Signature 21
<PAGE>
<TABLE>
<CAPTION>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS September 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,328 $ 1,325
Accounts receivable, less allowance for doubtful
accounts of $4,890 in 1998 and $4,315 in 1997 34,702 38,466
Inventories 45,737 48,735
Prepaid expenses and other current assets 3,596 3,496
Deferred income taxes 1,521 1,402
--------- ---------
Total current assets 86,884 93,424
Property and equipment, net 5,237 5,595
Deferred financing costs, less accumulated amortization of
$1,138 in 1998 and $650 in 1997 3,566 3,903
Intangible assets, less accumulated amortization of $1,687
in 1998 and $1,060 in 1997 31,759 32,386
Deferred income taxes 1,195 1,313
Other assets 5,886 3,193
--------- ---------
$ 134,527 $ 139,814
========= =========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31,
1998 1997
-------- ----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Revolving line of credit $ 15,643 $10,617
Book overdrafts 3,248 3,233
Current installments of long-term debt 607 594
Trade accounts payable 17,167 23,254
Accrued liabilities and other current liabilities 9,427 6,856
-------- ----------
Total current liabilities 46,092 44,554
Accrued retirement benefits 2,186 2,431
Long-term debt, excluding current installments 84,578 84,742
-------- ----------
Total liabilities 132,856 131,727
-------- ----------
Common stock subject to put option -- 3,000
Stockholders' Equity:
Common stock:
Class A, $10 stated value. Authorized 1,500,000
shares; issued and outstanding 1,187,396 in 1998
and 1,001,319 in 1997 11,874 9,013
Class B, no par value. Authorized 250,000 shares;
none issued -- --
Class C, no par value. Authorized 250,000 shares;
none issued -- --
Class A common stock subscriptions receivable (326) (379)
Accumulated deficit (9,942) (3,624)
Accumulated other comprehensive income - cumulative
translation adjustments 65 77
-------- ----------
Total stockholders' equity 1,671 5,087
-------- ----------
$134,527 $ 139,814
======== ==========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
Nine Months Ended Three Months Ended
------------------------- -------------------------
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 132,937 $ 135,671 $ 42,128 $ 46,429
Cost of goods sold 90,869 93,489 28,556 32,607
--------- --------- --------- ---------
Gross profit 42,068 42,182 13,572 13,822
Selling, general, and administrative expenses 37,894 35,004 12,250 11,915
Restructuring charge 1,850 -- -- --
--------- --------- --------- ---------
Operating income 2,324 7,178 1,322 1,907
Interest expense (9,445) (9,092) (3,212) (3,155)
Other income, net 327 192 19 102
--------- --------- --------- ---------
Loss before income taxes and extraordinary item (6,794) (1,722) (1,871) (1,146)
Income tax expense (benefit) (11) (631) 1,752 (413)
--------- --------- --------- ---------
Loss before extraordinary item (6,783) (1,091) (3,623) (733)
Extraordinary loss, net of income tax benefit -- (1,557) -- --
Net loss $ (6,783) $ (2,648) $ (3,623) $ (733)
========= ========= ========= =========
Basic and diluted loss per common share and
common share equivalent:
Loss before extraordinary item $ (6.81) $ (1.13) $ (3.62) $ (0.75)
Extraordinary item, net -- (1.60) -- --
--------- --------- --------- ---------
Net loss per share $ (6.81) $ (2.73) $ (3.62) $ (0.75)
========= ========= ========= =========
Weighted average number of common
shares and common share equivalents:
Basic 995 968 1,001 976
========= ========= ========= =========
Diluted 995 968 1,001 976
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
UNAUDITED
For the Nine Months Ended
September 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,783) $ (2,648)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,001 884
Provision for losses on accounts receivable 561 830
Amortization of intangible assets 627 628
Amortization of deferred financing costs 488 458
Amortization of debt discount 159 158
Deferred income taxes -- 205
Extraordinary loss on debt extinguishment, net -- 1,557
Changes in operating assets and liabilities, net of
effect of business acquisitions:
Trade accounts receivable 3,191 (7,090)
Inventories 2,987 4,117
Prepaid expenses and other current assets (100) 861
Other assets (2,071) (1,417)
Income taxes payable (21) (1,280)
Trade accounts payable and other liabilities (4,338) (6,184)
-------- --------
Net cash used in operating activities (4,299) (8,921)
-------- --------
Cash flows from investing activities:
Capital expenditures (675) (1,256)
Proceeds from sale of property and equipment 41 58
Payment for business acquisitions, net of cash acquired -- (37,690)
-------- --------
Net cash used in investing activities (634) (38,888)
-------- --------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
UNAUDITED
For the Nine Months Ended
September 30,
------------------------------
1998 1997
-------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from revolving line of credit $ 5,026 $ 12,488
Increase (decrease) in book overdrafts 15 (224)
Principal payments on long-term debt (342) (203)
Proceeds from debt issued in business acquisitions -- 83,980
Extinguishment of debt -- (41,137)
Payment of financing costs (151) (4,196)
Repurchase and retirement of warrants -- (3,026)
Proceeds from common stock issued to Company ESOP 379 425
-------- --------
Net cash provided by financing activities 4,927 48,107
-------- --------
Effect of exchange rate changes on cash 9 (25)
-------- --------
Net increase in cash 3 273
Cash at beginning of period 1,325 882
-------- --------
Cash at end of period $ 1,328 $ 1,155
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6,167 $ 5,792
======== =========
Income taxes $ 11 $ 275
======== =========
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Willcox &
Gibbs, Inc. and subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine and three months ending September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
2. ACQUISITION
Effective January 3, 1997, the Company acquired all the outstanding
capital stock of Macpherson Meistergram, Inc. ("Macpherson") for $24,000,000 in
cash and the assumption of approximately $6,100,000 of indebtedness and
$6,400,000 of trade payables. Macpherson is primarily engaged in the
distribution of embroidery equipment and supplies to the apparel industry.
3. REFINANCING
Effective January 3, 1997, the Company issued $85,000,000 principal amount
of 12.25% Series A senior notes which are due in December 2003. The Company used
the proceeds, in part, to repay approximately $40,952,000 of its indebtedness,
to redeem common stock warrants for a total of $3,026,000, and to finance the
Macpherson acquisition.
4. CLINTON RESTRUCTURING
During June 1998, the Company effected a restructuring with respect to its
Clinton Management Corp. and Clinton Machinery Corp. subsidiaries (together
"Clinton"), principally involving the departure from the Company of the former
shareholders of Clinton and certain other employees. The Company has taken a
charge of $2.8 million in the second quarter of 1998, principally with respect
to severance payments, as well as for the impairment of certain inventory and
accounts receivable. Of this amount, $1.9 million has been reflected as a
restructuring charge, $0.6 million has been charged to selling, general and
administrative expense and $0.3 million has been charged to cost of goods sold.
As part of the restructuring, the Company's obligations arising from its
original purchase of Clinton have been revised to reduce the contingent payments
for each of the years 1998, 1999 and 2000 from 35% of Clinton's operating
income, as defined, to 10% thereof and to eliminate the former Clinton
shareholders' option to put 100,000 shares of the Company's Class A common stock
to the Company at $30 per share. The Company is monitoring the effects of the
Clinton restructuring and may take further action intended to improve the
Company's results attributable to Clinton.
<PAGE>
5. PENSION PLAN
On May 21, 1998, the Board of Directors of the Company approved amendments
to the WG Apparel, Inc. Retirement Plan, effective July 31, 1998, providing that
no employees shall become a participant in the Plan after such date and that no
participant's accrued benefits under the Plan shall increase after such date.
6. LOSS PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share, before extraordinary item, for the nine and three months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss
per share $ (6,783,325) $ (2,647,92) $ (3,622,963) $ (732,443)
============ =========== ============ ==========
Denominator for basic and diluted loss
per share-weighted-average shares
outstanding 995,705 968,577 1,001,319 976,055
============ =========== ============ ==========
Loss per share - basic $ (6.81) $ (2.73) $ (3.62) $ (0.75)
============ =========== ============ ==========
Loss per share - diluted $ (6.81) $ (2.73) $ (3.62) $ (0.75)
============ =========== ============ ==========
</TABLE>
Employee stock options and warrants which were outstanding were excluded
from the computation since the effect would be antidilutive.
7. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement
130"). Statement 130 establishes items that are required to be recognized under
accounting standards as components of comprehensive income. Statement 130
requires, among other things, that an enterprise report a total for
comprehensive income in financial statements of interim periods issued to
shareholders. For the three and nine month periods ended September 30, 1998 and
1997, the Company's consolidated comprehensive income does not differ materially
from the consolidated net loss set forth in the accompanying consolidated
statements of operations.
8. GUARANTOR SUBSIDIARIES
Set forth below are condensed consolidating financial statements of the
subsidiaries of the Company that have fully and unconditionally, jointly and
severally guaranteed the Company's 12 1/4% Senior Notes (the "Guarantor
<PAGE>
Subsidiaries") and the non-guarantor subsidiaries of the Company (the
"Non-Guarantor Subsidiaries"). As of September 30, 1998, the Guarantor
Subsidiaries were WG Apparel, Inc., Leadtec Systems, Inc., J&E Sewing Supplies,
Inc., W&G Daon, Inc. W&G Tennessee Imports, Inc., Clinton Management Corp.,
Clinton Machinery Corporation, Clinton Leasing Corp., Clinton Equipment Corp.,
Macpherson Meistergram, Inc. and Paradise Color Incorporated, and the
Non-Guarantor Subsidiaries were Willcox & Gibbs, Ltd., Sunbrand S.A. de C.V.,
Sunbrand Caribe S.A., Allied Machine Parts Ltd., M.E.C. (Sewing Machine
Limited), Unity Sewing Supply Company (UK) Limited, Allide Machine Parts
Limited, Natyork Limited, Forest Needle Company Limited, Morris & Ingram
(Textiles) Limited, Eildon Electronics Limited, Geoffrey E. Macpherson Canada,
Inc., Embroidery Leasing Corporation, Sunbrand de Colombia, Unity de Colombia
and Clinton de Mexico. The Guarantor Subsidiaries are wholly owned by the
Company, and there are no restrictions on the ability of the Guarantor
Subsidiaries to make distributions to the Company, except those generally
applicable under relevant corporation laws. Separate financial statements of
each Guarantor Subsidiary and eliminating entries have not been included because
management has determined that they are not material to investors.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 1998
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
ASSETS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Cash $ 1,313 $ 15 $ 1,328
Accounts receivable, net 27,484 7,218 34,702
Inventories 32,503 13,234 45,737
Other current assets 4,805 312 5,117
--------- --------- ---------
Total current assets 66,105 20,779 86,884
Property and equipment, net 3,716 1,521 5,237
Intangible assets, net 35,325 -- 35,325
Other assets 3,783 3,298 7,081
--------- --------- ---------
$ 108,929 $ 25,598 $ 134,527
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current borrowings $ 15,825 $ 425 $ 16,250
Book overdrafts 3,103 145 3,248
Trade accounts payable 12,023 5,144 17,167
Accrued liabilities and other current liabilities
8,217 1,210 9,427
--------- --------- ---------
Total current liabilities 39,168 6,924 46,092
Long-term debt, excluding current installments
83,940 638 84,578
Accrued retirement benefits 2,000 186 2,186
--------- --------- ---------
Total liabilities 125,108 7,748 132,856
Intercompany, net (9,549) 9,549 --
Common stock 11,874 -- 11,874
Other equity (deficit) (18,504) 8,301 (10,203)
--------- --------- ---------
Total stockholders' equity (6,630) 8,301 1,671
--------- --------- ---------
$ 108,929 $ 25,598 $ 134,527
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1997
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
ASSETS SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Cash $ 1,254 $ 71 $ 1,325
Accounts receivable, net 32,067 6,399 38,466
Inventories 42,370 6,365 48,735
Other current assets 4,730 168 4,898
--------- --------- ---------
Total current assets 80,421 13,003 93,424
Property and equipment, net 4,037 1,558 5,595
Intangible assets, net 36,289 -- 36,289
Other assets 2,361 2,145 4,506
--------- --------- ---------
$ 123,108 $ 16,706 $ 139,814
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current borrowings $ 10,798 $ 413 $ 11,211
Book overdrafts 3,233 -- 3,233
Trade accounts payable 22,563 691 23,254
Accrued liabilities and other current liabilities
5,319 1,537 6,856
--------- --------- ---------
Total current liabilities 41,913 2,641 44,554
Long-term debt, excluding current installments
83,917 825 84,742
Accrued retirement benefits 2,245 186 2,431
--------- --------- ---------
Total liabilities 128,075 3,652 131,727
--------- --------- ---------
Common stock subject to put option 3,000 -- 3,000
Intercompany, net (5,627) 5,627 --
Common stock 9,013 -- 9,013
Other equity (deficit) (11,353) 7,427 (3,926)
--------- --------- ---------
Total stockholders' equity (2,340) 7,427 5,087
--------- --------- ---------
$ 123,108 $ 16,706 $ 139,814
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 115,534 $ 17,403 $ 132,937
------------ ------------ ------------
Cost of goods sold 79,279 11,590 90,869
Gross profit 36,255 5,813 42,068
Selling, general, and administrative expenses 34,958 4,786 39,744
------------ ------------ ------------
Operating income 1,297 1,027 2,324
Interest expense (9,337) (108) (9,445)
Other income (expense), net 475 (148) 327
------------ ------------ ------------
Income (loss) before income taxes (7,565) 771 (6,794)
Income tax expense (benefit) 1 (12) (11)
------------ ------------ ------------
Net income (loss) $ (7,566) $ 783 $ (6,783)
============ ============ ============
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
Net sales $ 118,830 $ 16,841 $ 135,671
Cost of goods sold 81,873 11,616 93,489
------------ ------------ ------------
Gross profit 36,957 5,225 42,182
Selling, general, and administrative expenses 31,053 3,951 35,004
------------ ------------ ------------
Operating income 5,904 1,274 7,178
Interest expense (8,955) (137) (9,092)
Other income, net 113 79 192
------------ ------------ ------------
Income (loss) before income taxes and (2,938) 1,216 (1,722)
extraordinary item
Income tax expense (benefit) (635) 4 (631)
------------ ------------ ------------
Income (loss) before extraordinary item (2,303) 1,212 (1,091)
Extraordinary loss, net of income tax benefit (1,557) -- (1,557)
------------ ------------ ------------
Net income (loss) $ (3,860) $ 1,212 $ (2,648)
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities $ (4,488) $ 189 $ (4,299)
------------ ------------ ------------
Cash flows from investing activities (589) (45) (634)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 5,041 -- 5,041
Principal payment on debt (133) (209) (342)
Payment for financing costs (151) -- (151)
Other changes 379 -- 379
------------ ------------ ------------
5,136 (209) 4,927
Effect of exchange rates on cash balances -- 9 9
------------ ------------ ------------
Net change in cash 59 (56) 3
Cash at beginning of period 1,254 71 1,325
------------ ------------ ------------
Cash at end of period $ 1,313 $ 15 $ 1,328
============ ============ ============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
GUARANTOR NON-GUARANTOR
SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------------ ------------ ------------
Cash flows from operating activities $ (9,398) $ 477 $ (8,921)
------------ ------------ ------------
Cash flows from investing activities:
Payment for business acquisitions (37,690) -- (37,690)
Other changes (978) (220) (1,198)
------------ ------------ ------------
(38,668) (220) (38,888)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 96,244 -- 96,244
Extinguishment of debt (41,135) (205) (41,340)
Payment of financing costs (4,196) -- (4,196)
Repurchase and retirement of warrants (3,026) -- (3,026)
Other changes 425 -- 425
------------ ------------ ------------
48,312 (205) 48,107
Effect of exchange rates on cash balances -- (25) (25)
------------ ------------ ------------
Net change in cash 246 27 273
Cash at beginning of period 343 539 882
------------ ------------ ------------
Cash at end of period $ 589 $ 566 $ 1,155
============= ============ ============
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Willcox & Gibbs, Inc. (the "Company") was organized in 1994 by members of
the Company's current management and certain other investors (the "Management
Buyout") to acquire the sewn products replacement parts, supply and specialized
equipment distribution businesses of the Company's predecessor (the
"Distribution Business"), which occurred on July 13, 1994.
The Company currently operates through six principal business units: (i)
its Sunbrand division ("Sunbrand"), which is a distributor of replacement parts,
supplies and specialized equipment to manufacturers of apparel and other sewn
products; (ii) its Unity Sewing Supply Co. division ("Unity"), which is a
wholesale distributor to dealers of replacement parts and supplies for use by
the apparel and other sewn products industry; (iii) its Willcox & Gibbs, Ltd.
("W&G, Ltd.") subsidiary, which is a distributor to manufacturers and dealers in
the United Kingdom and Europe of replacement parts and supplies for use by the
apparel and other sewn products industry; (iv) its Clinton subsidiaries
("Clinton"), which distribute screen printing equipment and supplies for the
apparel industry; (v) its Leadtec Systems, Inc. ("Leadtec") subsidiary, which
develops and supplies computer-based production planning and control systems for
the apparel industry; and (vi) its Macpherson Meistergram, Inc. ("Macpherson")
subsidiary which distributes embroidery equipment and supplies used in the
apparel industry.
RESULTS OF OPERATIONS
The following table sets forth the percentages that certain income and
expense items bear to net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30
------------------- ------------------
1998 1997 1998 1997
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 31.6 31.1 32.2 29.8
Selling, general and administrative expenses 28.5 25.8 29.1 25.7
Restructuring charge 1.4 0.0 0.0 0.0
Operating income 1.7 5.3 3.1 4.1
Interest expense 7.1 6.7 7.6 6.8
Income tax expense (benefit) (0.0) (0.5) 4.2 (0.9)
Net loss (5.1) (2.0) (8.6) (1.6)
==== ==== ==== ====
</TABLE>
<PAGE>
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE AND THREE
MONTHS ENDED SEPTEMBER 30, 1997
Net sales were $132.9 million in the nine months ending September 30,
1998, a decrease of $2.7 million, or 2.0%, as compared to the nine months ending
September 30, 1997. Net sales were $42.1 million in the three months ending
September 30, 1998, a decrease of $4.3 million, or 9.3%, as compared to the 1997
period. Macpherson's sales increased 16.1% and decreased 13.8% for the nine and
three months ended September 30, 1998 over the same periods in 1997. The decline
in Macpherson's third quarter sales was attributable to a delay in deliveries of
a new line of embroidery equipment introduced in early September. Clinton's
sales declined by 35.6% and 34.4% for the nine and three months ended September
30, 1998. Clinton's net sales were negatively affected by a declining screen
printing market and the replacement of an existing equipment product line, which
impacted market share. Sales for the Company's other operations experienced a
decline of 2.1% and an increase of 1.3% for the nine and three months ended
September 30, 1998 over the same period in 1997. The decreases for the nine
month period is due to the continued decline in apparel manufacturing in the
United States.
Gross profit in the nine months ending September 30, 1998 was $42.1
million, a decrease of $0.1 million, or 0.3%, as compared to the same period of
1997. Gross profit for the three months ending September 30, 1998 was $13.6
million, a decrease of $0.2 million or 1.8% as compared to the same period in
1997. As a percentage of net sales, gross profit in the nine and three months
ending September 30, 1998 was 31.6% and 32.2%, as compared with 31.1% and 29.8%
in the same periods in 1997. The increase in gross profit percentage for the
nine and three month period was primarily attributable to the decline in
Clinton's sales which historically have had lower gross profit margins than the
rest of the Company.
Selling, general and administrative expenses in the nine months ending
September 30, 1998 were $37.9 million, an increase of $2.9 million, or 8.3%, as
compared to the same period of 1997. Such expenses were $12.3 million in the
three months ended September 30, 1998, an increase of $0.3 million, or 2.8%, as
compared to the same period in 1997. As a percentage of the net sales, such
expenses increased to 28.5% and 29.1% for the nine and three months ending
September 30, 1998 from 25.8% and 25.7% in the same periods of 1997. The
increase in expenses as a percentage of sales was principally a result of
increased costs as the Company continues to expand in Latin America, fixed
overhead costs that did not decline in proportion to lower sales and, for the
nine month period, certain charges relating to the restructuring of Clinton
described below.
In the nine months and three months ending September 30, 1998 the Company
had operating income of $2.3 million and $1.3 million, respectively, a decrease
of $4.9 million, or 67.6%, and $0.6 million, or 30.7%, as compared to the same
periods of 1997. As a percentage of net sales, operating income was 1.7% for the
nine months ended September 30, 1998, as compared to 5.3% in the same period of
1997. The decreases were attributable to the factors discussed above.
<PAGE>
During June 1998, the Company effected a restructuring with respect to
Clinton, principally involving the departure from the Company of the former
shareholders of Clinton and certain other employees. The Company has taken a
charge of $2.8 million in the second quarter, principally with respect to
severance payments, as well as for the impairment of certain inventory and
accounts receivable. Of this amount, $1.9 million has been reflected as a
restructuring charge, $0.6 million has been charged to selling, general and
administrative expense and $0.3 million has been charged to cost of goods sold.
As part of the restructuring, the Company's obligations arising from its
original purchase of Clinton have been revised to reduce the contingent payments
for each of the years 1998, 1999 and 2000 from 35% of Clinton's operating
income, as defined, to 10% thereof and to eliminate the former Clinton
shareholders' option to put 100,000 shares of the Company's Class A common stock
to the Company at $30 per share. The Company is monitoring the effects of the
Clinton restructuring and may take further action intended to improve the
Company's results attributable to Clinton.
Interest expense was $9.4 million and $3.2 million in the nine and three
months ending September 30, 1998, respectively, an increase of $0.3 million, or
3.8%, and unchanged, as compared to the respective periods in 1997. The increase
in interest expense was a result of higher borrowings in 1998 over the same
period in 1997.
The Company recorded an income tax benefit of $1.8 million during the six
months ended June 30, 1998. The Company's net deferred tax assets include
substantial amounts of net operating loss carryforwards. Since operating profits
continue to be lower than forecasts and as a result of operational difficulties
and higher than expected expenses at Clinton, management believes that a
valuation allowance is required, since sufficient uncertainty exists regarding
the realizability of net deferred tax assets. As a result, the Company has
recorded income tax expense of $1.8 million during the three months ended
September 30, 1998, which will result in a nominal tax benefit for the nine
months ended September 30, 1998. If the Company is unable to generate sufficient
taxable income in the future through operations, further increases in the
valuation allowance will be required through a charge to income.
The Company's results for the first nine months of 1997 reflect an
extraordinary loss from the extinguishment of debt (net of income tax benefit)
of $1.6 million owing to the refinancing of the Company's indebtedness in
connection with the Macpherson acquisition and the issuance by the Company of
$85.0 million aggregate principal amount of its 12 1/4% Series A Senior Notes
due 2003 (the "Senior Notes") relating thereto.
Net loss for the nine and three months ended September 30, 1998 was $6.8
million and $3.6 million compared to a net loss of $2.6 million and $0.7 million
in the same periods of 1997. The decrease was attributable to the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements, capital
expenditures and acquisitions from cash provided by operations, borrowings under
its credit facilities and proceeds from the issuance of debt and equity
securities.
<PAGE>
As a result of the decline in the Company's results of operations in 1998,
the Company may not generate sufficient cash from operations to pay the interest
payment on the Senior Notes due December 15, 1998. The Company has been actively
exploring new sources of debt financing, including financing sufficient to make
such interest payment, and the possible restructuring of its existing debt. The
Company has engaged a financial advisory firm to assist in implementing such new
financing and restructuring. However, no assurance can be given that the Company
will be able to consummate any such new financing or restructuring. If the
Company fails to make such interest payment by January 15, 1999, the holders of
Senior Notes may seek to exercise remedies against the Company. In addition, at
September 30, 1998, the Company was not in compliance with various covenants in
its Credit Agreement. The lender under the Credit Agreement has waived such
noncompliance, but has required in connection with such waiver that borrowings
thereunder not be used to make payments on the Senior Notes. The Company expects
that it will not be in compliance as of December 31, 1998 with covenants under
the Credit Agreement. If the Company is unable to conclude successfully its
plans for new financing and restructuring and defaults in its obligations with
respect to the Senior Notes or the Credit Agreement, its existing lenders may
seek to exercise remedies against the Company. In such circumstances, the
Company may be required to seek reorganization under the Bankruptcy Code.
At September 30, 1998, the Company had outstanding indebtedness of $104.1
million and cash of $1.3 million. In addition, approximately $1.9 million was
available for borrowings under the Company's Credit Agreement. The Company has
agreed to reduce the maximum permitted borrowings under the Credit Agreement
from 85% to 84%, 83% and 82% of eligible accounts receivable, effective October
1, November 1 and December 1, 1998, respectively. In addition, loans under the
Credit Agreement bear interest at a rate per annum of 2.75% above the lender's
prime rate, effective November 1, 1998.
The Company's capital expenditures during the first nine months of 1998
aggregated approximately $0.7 million. Such expenditures were primarily for
computer, office and warehouse equipment and improvements.
Net cash used in the Company's operating activities was $4.3 million
during the first nine months of 1998 principally due to working capital changes.
Net cash provided by financing activities during the first nine months of 1998
aggregated $4.9 million.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the disclosures it currently provides. This Statement is
effective for fiscal years beginning after December 15, 1997.
<PAGE>
YEAR 2000 ISSUE
Many existing computer programs use only the last two digits to define a
year and do not take account of the change in century that will occur in the
year 2000. If this problem is not corrected, computer applications could fail or
create mistakes. As a result, the Company established a Year 2000 project team
in 1998 to assess its Year 2000 risks and to recommend necessary remedial
action. The project scope includes both information technology and computer
based embedded technology. The project team has focused its efforts on
information systems software and hardware, and third-party relationships. The
Company does not expect remediation costs to have a material impact on its
results of operations or liquidity.
The Company believes that its internal systems and equipment will be Year
2000 compliant in a timely manner, although there can be no assurance that the
Company's systems or equipment will not encounter problems. In addition, the
Company cannot predict whether systems of third parties will be Year 2000
compliant in a timely manner. The implementation of the Company's new business
systems and completion of the Year 2000 project as scheduled will reduce the
possibility of significant interruptions of normal operations. The Company
believes its most reasonably likely worst case scenario is that disruption of
its distribution system would occur, through product delays from suppliers or
delayed orders from customers, which could result in the reduction of the
Company's operations. The Company has not developed a specific Year 2000
contingency plan. Contingency plans will be addressed as additional information
is available regarding the Company's remediation and testing steps and the
status of third-party Year 2000 readiness.
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q for the nine and three months ended
September 30, 1998 that state the Company's or management's intentions, hopes,
beliefs, expectations or predictions of the future are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. It is important to note that the Company's actual results could differ
materially from those contained in such forward-looking statements. Additional
information concerning factors that could cause actual results to differ
materially from those in forward-looking statements is contained from time to
time in the Company's SEC filings, including under the caption "Certain Factors
that May Affect Results of Operations" in the Company's Form 10-K filed for the
year ended December 31, 1997.
<PAGE>
WILLCOX & GIBBS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
27.1 Financial Data Schedule (filed with
EDGAR only)
(b) Reports on Form 8-K
During the nine months ended September 30, 1998, the Company did not
file any reports on Form 8-K.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLCOX & GIBBS, INC.
(Registrant)
Date November 16, 1998 By /S/ JOHN K. ZIEGLER, JR.
----------------------------
John K. Ziegler, Jr.
Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WILLCOX &
GIBBS, INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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