SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 or
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-2782
SIGNAL APPAREL COMPANY, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Indiana 62-0641635
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200A Manufacturers Road, Chattanooga, Tennessee 37405
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (423) 756-8146
---------------
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.
Class Outstanding at November 6, 1996
-------- -------------------------------
Common Stock 11,578,046 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
Sept. 30, Dec. 31
1996 1995
--------- ---------
Assets
Current Assets:
Cash $ 1,742 $ 1,495
Accounts receivable, net 4,073 4,358
Inventories 17,235 22,122
Prepaid expenses and other 1,345 1,346
--------- ---------
24,395 29,321
Property, plant and equipment, net 11,104 13,637
Other assets 86 271
--------- ---------
Total assets $35,585 $ 43,229
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable and accrued liabilities $14,831 $ 16,864
Accrued interest 5,122 2,076
Current portion of long-term debt 13,298 22,986
Discretionary overadvances from
senior lender 13,024 8,349
Senior subordinated note payable to
related party 6,500 --
--------- ---------
Total current liabilities 52,775 50,275
--------- ---------
Long-term debt (less current portion):
Senior obligations to related party 23,837 20,841
Senior subordinated note payable to
related party 11,000 3,000
--------- ---------
Total long-term debt 34,837 23,841
--------- ---------
Other non-current liabilities 1,237 2,067
--------- ---------
Shareholders' Equity (Deficit):
Common stock 115 115
Preferred stock at liquidation preference
plus cumulative undeclared dividends 76,202 76,202
Additional paid-in capital 73,434 73,012
Accumulated deficit (201,898) (181,166)
Treasury shares (at cost) (1,117) (1,117)
--------- ---------
Total shareholders'
equity (deficit) (53,264) (32,954)
--------- ---------
Total liabilities and
shareholders' equity (deficit) $35,585 $ 43,229
========= =========
See accompanying notes to consolidated condensed financial statements.
<TABLE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 13,185 $ 21,059 $ 47,969 $ 72,478
Cost of sales 12,234 16,663 43,268 56,799
---------- ----------- ----------- -----------
Gross profit 951 4,396 4,701 15,679
Royalty expense 1,271 2,193 3,537 5,210
Selling, general and administrative
expenses 4,003 6,494 13,645 21,021
Interest expense 2,699 2,227 7,520 5,855
Other expenses, net 422 234 731 627
---------- ----------- ----------- -----------
Loss before income taxes (7,444) (6,752) (20,732) (17,034)
Income taxes -- -- -- --
---------- ----------- ----------- -----------
Net loss applicable to common
stock $ (7,444) $ (6,752) $ (20,732) $ (17,034)
========== =========== =========== ===========
Net loss per common share $ (0.64) $ (0.67) $ (1.79) $ (1.69)
========== =========== =========== ===========
Weighted average common shares
outstanding 11,578 10,078 11,562 10,074
========== =========== =========== ===========
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30, September 30,
1996 1995
------------- --------------
Operating Activities:
Net loss $ (20,732) $ (17,034)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,215 3,708
Loss on disposal of equipment 364 294
Grant of Common Stock options below
market value 222 --
Changes in operating assets
and liabilities:
Decrease in accounts receivable 285 395
Decrease in inventories 4,887 4,270
Increase (decrease) in prepaid
expenses and other assets 186 (74)
Increase (decrease) in accounts
payable and accrued liabilities 2,630 (4,108)
--------- ---------
Net cash used in operating
activities (9,943) (12,549)
--------- ---------
Investing Activities:
Purchases of property, plant and
equipment (197) (410)
Proceeds from the sale of property,
plant and equipment 233 118
--------- ---------
Net cash provided by (used
in) investing activities 36 (292)
--------- ---------
Financing Activities:
Borrowings from senior lender 40,714 55,479
Payments to senior lender (38,877) (63,182)
Proceeds from subordinated note payable
to related party 8,400 19,000
Proceeds from other borrowings 480 568
Principal payments on borrowings (763) (1,417)
Proceeds from sale of preferred stock -- 3,000
Proceeds from exercise of stock options 200 97
--------- ---------
Net cash provided by
financing activities 10,154 13,545
--------- ---------
Increase in cash 247 704
Cash at beginning of period 1,495 303
-------- ---------
Cash at end of period $ 1,742 $ 1,007
========= =========
See accompanying notes to consolidated condensed financial statements.
Part I Item 1. (cont'd)
SIGNAL APPAREL COMPANY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated condensed financial statements
have been prepared on a basis consistent with that of the
consolidated financial statements for the year ended
December 31, 1995. The accompanying financial statements
include all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of the Company,
necessary to present fairly the financial position of the
Company as of September 30, 1996 and December 31, 1995 and
its results of operations and cash flows for the nine months
ended September 30, 1996 and September 30, 1995. These
consolidated condensed financial statements should be read
in conjunction with the Company's audited financial
statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31,
1995.
2. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
3. Inventories consisted of the following:
September 30, December 31,
1996 1995
---- ----
(Dollars in thousands)
Raw materials and supplies $ 1,965 $ 2,525
Work in process 4,252 2,855
Finished goods 11,018 16,742
-------- --------
$17,235 $ 22,122
======== ========
4. Pursuant to the terms of various license agreements, the
Company is obligated to pay future minimum royalties of
approximately $2.2 million. The Company has outstanding
letters of credit totaling approximately $.2 million
relative to its obligations pursuant to these license
agreements.
5. During the third quarter Signal increased borrowings $8
million under a Walsh Greenwood Credit Agreement. Terms of
this agreement are currently being negotiated. It is
expected that the terms will be similar to the $20 million
Walsh Greenwood Credit Agreement entered into in 1995; thus,
the amounts are considered long term in the accompanying
financial statements.
6. The $6.5 million Tranch A and Tranch B notes previously held
by a bank were purchased by Walsh Greenwood during the third
quarter of 1996.
7. The discretionary overadvance which is guaranteed by certain
of the Company's principal shareholders has increased from
$8.3 million at year-end to $14 million as of the quarter
ended September 30, 1996.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $13.2 million for the quarter ended September 30,
1996 represent a decrease of $7.9 million or 37% from the $21.1
million in net sales for the corresponding period of 1995. This
decrease is comprised of a $2.1 million reduction in
screenprinted products, a $4.2 million reduction in undecorated
activewear and a $1.6 million reduction in women's fashion
knitwear.
Sales of screenprinted products were $8.1 million for the quarter
ended September 30, 1996 versus $10.1 million for the
corresponding period of 1995. Reduced unit volume accounted for
a $4.3 million decrease in sales which was partially offset by an
increased average selling price ($2.2 million). The increase in
average selling price was due to a combination of product mix and
unit selling price changes.
Sales of undecorated activewear products were $1.6 million for
the quarter ended September 30, 1996 versus $5.8 million for the
corresponding period of 1995. Reduced unit volume accounted for
a $3.9 million reduction in sales while a decrease in average
selling price accounted for a $.3 million sales reduction. Sales
through consignment distributors were down $2.7 million as a
result of the Company's decision in the last quarter of 1995 to
discontinue use of distributors.
Sales of women's fashion knitwear decreased 32% to $3.5 million
for the quarter ended September 30, 1996 as compared to $5.1
million for the corresponding period of 1995. Reduced unit
volume accounted for a $1.8 million reduction in sales which was
partially offset by an increased average selling price ($.2
million).
Net sales of $48.0 million for the nine months ended
September 30, 1996 represent a decrease of $24.5 million or 34%
from the $72.5 million in net sales for the corresponding period
of 1995. This decrease is comprised of an $11.8 million
reduction in screenprinted products, an $11.6 million reduction
in undecorated activewear and a $1.1 million reduction in women's
fashion knitwear.
Sales of screenprinted products were $27.8 million for the nine
months ended September 30, 1996 versus $39.6 million for the
corresponding period of 1995. Reduced unit volume accounted for
a $15.5 million decrease in sales which was partially offset by
an increased average selling price ($3.7 million). The increase
in average selling price was due to a combination of product mix
and unit selling price changes.
Sales of undecorated activewear products were $9.2 million for
the nine months ended September 30, 1996 versus $20.8 million for
the corresponding period of 1995. Reduced unit volume accounted
for a $9.4 million reduction in sales while a decrease in average
selling price accounted for a $2.2 million sales reduction.
Sales through consignment distributors were down $6.9 million as
a result of the Company's decision in the last quarter of 1995 to
discontinue using distributors. In addition, sales to a large
customer were down $2.1 million from $3.8 million to $1.7
million.
Sales of women's fashion knitwear decreased 9% to $11.0 million
for the nine months ended September 30, 1996 as compared to $12.1
million for the corresponding period of 1995. Reduced unit
volume accounted for a $1.8 million reduction in sales while a
decrease in average selling price accounted for a $.7 million
sales reduction.
Gross profit was $1.0 million (7% of sales) for the quarter ended
September 30, 1996 compared to $4.4 million (20.9% of sales) for
the corresponding period in 1995. The primary components of the
$3.4 million reduction in margin are lower sales volume ($2.4
million) and decreased manufacturing efficiencies ($1.0 million).
Gross profit was $4.7 million (10% of sales) for the nine months
ended September 30, 1996 compared to $15.7 million (21.6% of
sales) for the corresponding period in 1995. The primary
components of the $11.0 million reduction in margin are lower
sales volume ($6.4 million), lower standard margins on the sales
($1.3 million) and decreased manufacturing efficiencies ($3.3
million).
Royalty expense related to licensed product sales was 10% of
sales for the quarters ended September 30, 1996 and 1995.
Selling, general and administrative (SG&A) expenses were 30% and
31% of sales for the quarters ended September 30, 1996 and 1995,
respectively. Actual SG&A expense decreased $2.5 million as a
result of ongoing efforts to minimize overhead costs.
Royalty expense related to licensed product sales was 7% of sales
for the nine months ended September 30, 1996 and 1995. Selling,
general and administrative (SG&A) expenses were 28% of sales for
the nine months ended September 30, 1996 compared to 29% for the
corresponding period of 1995. Actual SG&A expense decreased $7.4
million as a result of ongoing efforts to minimize overhead
costs.
FINANCIAL CONDITION
Working capital at September 30, 1996 decreased $7.4 million or
35% over year-end 1995. The decrease in working capital was
primarily due to a decrease in inventories ($4.9 million), an
increase in the discretionary overadvance from the senior lender
($4.7 million), an increase in accrued interest ($3.0 million),
an increase in senior subordinated note payable to related party
($6.5 million), and a decrease in accounts receivable ($.3
million), which were partially offset by a reduction in the
current portion of long-term debt ($9.7 million), an increase in
cash ($.2 million) and a decrease in accounts payable and accrued
liabilities ($2.0 million).
Accounts receivable decreased $.3 million or 7% over year-end
1995. The decrease in accounts receivable is a result of a
decrease in sales for the nine month period. A significant
portion of accounts receivable due from customers is carried at
the risk of the factor and is not reflected in the accompanying
balance sheets.
Inventories decreased $4.9 million or 22% compared to year-end
1995. Inventories decreased as a result of the sale of excess
and closeout inventory.
Total current liabilities increased $2.5 million or 5% over
year-end 1995 primarily due to an increase in the discretionary
overadvances with the senior lender of $4.7 million, an increase
in accrued interest of $3.0 million and an increase in senior
subordinated note payable to related party of $6.5 million,
partially offset by a decrease in the current portion of long-
term debt of $9.7 million and a decrease in accounts payable and
accrued liabilities of $2.0 million.
Cash used in operations was $9.9 million during the first nine
months of 1996 compared to $12.5 million used in operating
activities during the same period in 1995. The net loss of $20.7
million was the primary use of funds in the first nine months of
1996. Primary items partially offsetting the use of funds were
depreciation and amortization ($2.2 million), significantly lower
inventory levels ($4.9 million) a decrease in accounts receivable
of $.3 million and an increase in accounts payable, accrued
interest and other accrued liabilities ($2.6 million).
Commitments to purchase equipment totaled approximately $.1
million at September 30, 1996. During 1996, the Company
anticipates capital expenditures of approximately $.5 million.
Cash provided by financing activities was $10.1 million in 1996.
The revolving advance account increased $1.8 million from $19.6
million at year-end 1995 to $21.5 million at September 30, 1996.
Committed credit lines with the Company's senior lender
aggregated a maximum of $40.0 million at September 30, 1996. At
quarter-end, approximately $13.0 million was overadvanced under
its revolving advance account, which is classified as short-term
in the consolidated balance sheets at September 30, 1996.
Certain of the Company's principal shareholders have agreed to
guarantee a discretionary overadvance of $14.0 million, $13
million of which was utilized at September 30, 1996. FS
Signal Associates II has guaranteed $2.0 million in the form of a
letter of credit and Walsh Greenwood has guaranteed $2.0 million
in the form of cash on deposit with the senior lender. The
remaining $10.0 million is guaranteed by WG Trading Company, L.P.
Interest expense for the nine months ended September 30, 1996 was
$7.5 million compared to $5.9 million for the same period in
1995. Total outstanding debt averaged $64.5 million and $54.2
million for the first nine months of 1996 and 1995, respectively,
with average interest rates of 15.5% and 14.0%. Average
outstanding debt increased primarily due to increased borrowings
under the Walsh Greenwood Credit Agreement which have also
increased the average interest rate on the Company's debt.
The Company also uses letters of credit to support foreign and
some domestic sourcing of inventory and certain other
obligations. Outstanding letters of credit were $2.7 million at
September 30, 1996 (excluding collateral of $2.0 million pledged
to the senior lender in the form of a standby letter of credit).
Total shareholders' deficit increased $20.3 million compared to
year-end 1995. The Company sustained losses of $20.7 million for
the first nine months of 1996. In connection with a shareholder
agreement, the holders of Series A and Series C Preferred Stock
agreed to a moratorium on the required dividends related to these
shares effective January 1, 1995. At September 30, 1996, the
Company has accrued cumulative, undeclared dividends of
$6,874,700 for Series A Preferred Stock and $4,850,400 for Series
C Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
As a result of continuing losses, the Company has been unable to
fund its cash needs through cash generated by operations during
1995 and the first nine months of 1996. The Company's liquidity
shortfalls from operations during these periods have been funded
through several transactions with its principal shareholders and
with the Company's senior lender.
The Company's senior lender waived all existing loan covenant
violations as of September 30, 1996. However, as the Company is
not currently in compliance with certain financial covenants of
its financing agreement with the senior lender, all long-term
debt due the senior lender is subject to accelerated maturity and
as such, has been classified as a current liability in the
consolidated balance sheets. If the senior lender were to
accelerate the maturity of the debt, the Company would not have
funds available to repay this debt.
The Company has taken a number of actions since year-end 1995 in
an effort to improve its operations and liquidity. These actions
have included: (i) the continuation of an extensive cost
reduction program that reduced general and administrative
expenses during 1995 and has further reduced such expenses during
1996; (ii) the continuation of efforts begun during 1995 to
closely monitor the status of the Company's finished goods
inventories and to improve the Company's working capital position
through the expeditious liquidation of all goods identified as
excess and close-out inventories; (iii) the continuation of an
inventory control program in order to eliminate the manufacture
of excess goods and to more effectively utilize working capital;
(iv) further guarantees by Walsh Greenwood to the senior lender
in order to support an increase in the Company's overadvance
position with the senior lender; and (v) increased borrowings of
$8 million under a Walsh Greenwood Credit Agreement. Terms of
this agreement are currently being negotiated. The Company has
also considered the sale of certain assets. The Company closed
its AMW facility in Gardena, California on October 18, 1995. The
Company closed its Rutledge, Tennessee sewing plant on November
29, 1995. The Company closed its Wabash, Indiana facility on May
30, 1996. The Company-owned buildings at Rutledge, Tennessee and
Wabash, Indiana have been put up for sale.
Despite the actions described above, the Company did not meet its
sales and profit projections for the first nine months of 1996.
If the Company's sales and profit margins for the remainder of
1996 do not meet projected levels, management will be required to
further reduce the Company's activities. In any event,
additional capital will be required to continue the Company's
operations. In order to obtain such additional capital, the
Company may be required to issue securities that would dilute the
interests of the stockholders of the Company. No assurance can
be given that any such additional financing will be available to
the Company on commercially reasonable terms or otherwise. If
sales and profit margins continue to fall below projected levels
or if additional funds cannot be raised, the Company will not be
able to continue as a going concern.
The Company will continue to explore financing alternatives. It
is essential that the Company be able to obtain additional
financing in order to continue as a going concern.
Part II. OTHER INFORMATION
Items 1-5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Letter Amendment dated October 31, 1996, amending
the Factoring Agreements dated as of May 23, 1991, by
and between BNY Financial Corp. and the Company, and
dated July 25, 1991, by and between BNY Financial Corp.
and Shirt Shed waiving compliance with certain
provisions thereof.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SIGNAL APPAREL COMPANY, INC.
------------------------------
(Registrant)
Date: November 12, 1996 /s/ Bruce E. Krebs
----------------- ------------------------------
Bruce E. Krebs
President
Date: November 12, 1996 /s/ William H. Watts
----------------- ------------------------------
William H. Watts
Chief Financial Officer
SIGNAL APPAREL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
Exhibit No.
per Item 601 Sequential
of Reg. S-K Description of Exhibit Page No.
- ------------ ---------------------- ----------
(10) Letter Amendment dated October 31,
1996, amending the Factoring
Agreements dated as of May 23, 1991,
by and between BNY Financial Corp.
and the Company, and dated July 25,
1991, by and between BNY Financial
Corp. and Shirt Shed waiving
compliance with certain provisions
thereof.
(27) Financial Data Schedule
BNY FINANCIAL CORPORATION
A WHOLLY OWNED SUBSIDIARY OF THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED 1784 BY ALEXANDER HAMILTON
1290 AVENUE OF THE AMERICAS, NEW YORK, N.Y. 10104
212-408-7000
Signal Apparel Company, Inc. ("Signal")
P. O. Box 4296
200 Manufacturers Road
Chattanooga, TN 37405
The Shirt Shed, Inc. ("Shirt Shed")
570 South Miami Street
Wabash, IN 46992
October 31, 1996
Re: Our Factoring Agreement with Signal bearing the effective
date of May 23, 1991 as amended and supplemented (the "Signal
Agreement") and our Factoring Agreement with Shirt Shed bearing
the effective date of July 25, 1991 as amended and supplemented
(the "Shirt Shed Agreement") (the Signal Agreement and the Shirt
Shed Agreement herein collectively, the "Agreements")
Gentlemen:
We refer to each and both of the above mentioned Agreements
between ourselves on the one hand and Signal and Shirt Shed on
the other hand, and in particular to the covenants appearing
therein in subparagraphs 11 (a) (iii) thereof (herein the
"Tangible Net Worth Covenant"), 11 (a) (iv) thereof (herein the
"Working Capital Covenant") and 11 (a) (v) thereof (herein the
"Pre-Tax Operating Earnings covenant"; together with the Working
Capital Covenant and the Tangible Net Worth covenant, herein
collectively the "Covenants").
We hereby waive any default under the above Agreements to the
extent arising out of the failure of Signal and/or Shirt Shed to
be in compliance with the above specified Covenants as of
September 30, 1996.
Except to the limited extent set forth herein: (a) no waiver of
any other term, condition, covenant, agreement or any other
aspect of any of the Agreements is intended or implied; and (b)
except for the specific period of time and circumstances covered
by this letter, no other aspect of the Covenants referred to in
this letter is waived, including without limitation for any other
period or circumstance, and no such additional waiver is intended
or implied. This limited waiver is therefore limited exclusively
to the specific purposes and time period(s) for which it is
given.
If the foregoing is in accordance with your understanding, would
you kindly sign below to so indicate.
Very truly yours,
BNY FINANCIAL CORPORATION
By:/s/Wayne Miller
----------------------
Title: V.P.
AGREED:
Signal Apparel Company, Inc.
By:/s/William H. Watts
-------------------------
Title: CFO
Shirt Shed, Inc.
By:/s/William H. Watts
-------------------------
Title: CFO
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1742
<SECURITIES> 0
<RECEIVABLES> 8059
<ALLOWANCES> 3986
<INVENTORY> 17235
<CURRENT-ASSETS> 24395
<PP&E> 47669
<DEPRECIATION> 36565
<TOTAL-ASSETS> 35585
<CURRENT-LIABILITIES> 52775
<BONDS> 1048
0
76202
<COMMON> 115
<OTHER-SE> (200781)
<TOTAL-LIABILITY-AND-EQUITY> 35585
<SALES> 47969
<TOTAL-REVENUES> 47969
<CGS> 43268
<TOTAL-COSTS> 43268
<OTHER-EXPENSES> 17913
<LOSS-PROVISION> 101
<INTEREST-EXPENSE> 7520
<INCOME-PRETAX> (20732)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20732)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
