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 October 3, 1998 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) 266-2175
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 October 3, 1998
----- ------------------------------
Common Stock 32,636,547 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
October 3, Dec. 31,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash & cash equivalents $ 18 $ 384
Receivables, less allowance for doubtful 5,502 3,203
accounts of $1,916 in 1998 and $2,665 in 1997
Note receivable 324 500
Inventories 12,603 10,390
Prepaid expenses and other 510 531
--------- ---------
18,957 15,008
Property, plant and equipment, net 4,919 6,045
Goodwill, less accumulated amortization
of $338 in 1998 and $56 in 1997 4,550 4,832
Debt issuance costs, net 7,206 3,716
Other assets 59 59
--------- ---------
Total assets $ 35,691 $ 29,660
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 4,853 $ 2,577
Bank overdraft 667 --
Accrued liabilities 6,255 6,617
Accrued interest 3,209 1,603
Current portion of long-term debt 5,828 7,110
Revolving advance account 42,348 40,457
--------- ---------
Total current liabilities 63,160 58,364
--------- ---------
Long-term debt, principally from
related parties 21,054 12,580
--------- ---------
Shareholders' Equity (Deficit):
Common stock 325 325
Preferred stock 48,746 44,316
Additional paid-in capital 165,079 160,399
Accumulated deficit (261,556) (245,207)
Treasury shares (at cost) (1,117) (1,117)
--------- ---------
Total shareholders' equity (deficit) (48,523) (41,284)
Total liabilities and --------- ---------
shareholders' equity (deficit) $ 35,691 $ 29,660
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 15,297 $ 10,451 $ 39,341 $ 32,708
Cost of sales 14,184 8,572 32,163 25,493
-------- -------- -------- --------
Gross profit 1,113 1,879 7,178 7,215
Royalty expense 1,434 1,102 3,290 3,614
Selling, general and administrative
expenses 4,728 3,005 13,831 8,817
Interest expense 3,343 3,993 6,961 11,192
Other (income)/expenses, net (18) 358 (555) 1,120
-------- -------- -------- --------
Loss before income taxes (8,374) (6,579) (16,349) (17,528)
Income taxes -- -- -- --
-------- -------- -------- --------
Net loss $ (8,374) $ (6,579) $(16,349) $(17,528)
======== ======== ======== ========
Basic/diluted net loss per share $ (.26) $ (.57) $ (.50) $ (1.51)
======== ======== ======== ========
Weighted average shares outstanding 32,662 11,578 32,641 11,578
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 3, September 27,
1998 1997
<S> <C> <C>
Operating Activities: ------------- -------------
Net loss $(16,349) $(17,528)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,548 930
(Gain) loss on disposal of equipment (402) 822
Changes in operating assets
and liabilities:
Receivables (2,299) (2,794)
Inventories (2,213) 461
Prepaid expenses and other assets 21 51
Accounts payable and accrued
liabilities 3,340 4,895
-------- --------
Net cash used in operating
activities (15,354) (13,163)
-------- --------
Investing Activities:
Purchases of property, plant and
equipment (238) (130)
Proceeds from notes receivable 176 --
Proceeds from the sale of property,
plant and equipment 877 467
-------- --------
Net cash provided by
investing activities 815 337
-------- --------
Financing Activities:
Increase in bank overdraft 667 --
Net increase in revolving
advance account 1,891 685
Net increase in borrowings from
related party 8,775 12,613
Principal payments on borrowings (1,784) (1,830)
Proceeds from sale of preferred stock 4,624 --
-------- --------
Net cash provided by
financing activities 14,173 11,468
-------- --------
Decrease in cash (366) (1,358)
Cash and Cash equivalents at beginning of period 384 1,713
-------- --------
Cash and Cash equivalents at end of period $ 18 $ 355
======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Part I Item 1. (cont'd)
SIGNAL APPAREL COMPANY, INC.
NOTES TO CONSOLIDATED 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, 1997. 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 October 3, 1998 and its
results of operations and cash flows for the three and nine months ended
October 3, 1998 and September 27, 1997. 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, 1997.
2. The results of operations for the nine months ended October 3, 1998 are not
necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
October 3, December 31,
1998 1997
---------- ------------
(In thousands)
Raw materials and supplies $ 1,100 $ 1,238
Work in process 1,654 1,032
Finished goods 9,849 8,120
------- -------
$12,603 $10,390
======= =======
4. Pursuant to the terms of various license agreements, the Company is
obligated to pay future minimum royalties of approximately $0.4 million in
1998.
5. During the three months ended October 3, 1998, WGI, LLC and certain of its
affiliates (collectively, "WGI"), a principal shareholder, advanced to
Signal additional approximate loan proceeds of $1.4 million (bringing the
year to date total to $8.8 million). Accordingly, the Company's total
indebtedness to WGI for funds advanced under the WGI Credit Agreement
(described in Note 7) is
<PAGE>
approximately $20.0 million as of the end of the third quarter 1998. This
debt is classified as long term debt in the accompanying financial
statements.
6. The computation of basic net loss per share is based on the weighted
average number of common shares outstanding during the period. Diluted
earnings per share would also include common share equivalents outstanding.
Due to the Company's net loss for all periods presented, all common stock
equivalents would be anti-dilutive to diluted earnings per share.
7. At the 1997 Annual Meeting, the Company's Shareholders approved a plan for
restructuring the Company's then-outstanding preferred stock and the
majority of its subordinated debt (the "Restructuring Plan"). In connection
with the implementation of the Restructuring Plan (which was effective
December 30, 1997), the Company issued: (i) 8,000,000 shares of Common
Stock; (ii) warrants to acquire an additional 4,500,000 shares of Common
Stock with an exercise price of $1.75 per share; and (iii) 454.444 shares
of a new Series F Preferred Stock, stated value $100,000 per share, to WGI,
LLC. The new Series F Preferred Stock (which since has been exchanged for
Series H Preferred stock as discussed in Note 8 below) accrues cumulative
undeclared dividends at the rate of 9% per annum. These dividends are
payable in cash when declared. The Series F/Series H Preferred Stock is not
convertible into Common Stock or into any other security issued by the
Company, and does not have any mandatory redemption or call features.
The Company also agreed with WGI, LLC, that all funds advanced to the
Company by WGI, LLC after August 21, 1997 (which indebtedness was not part
of the Restructuring Plan) would be documented in the form of a new Credit
Agreement with interest payable quarterly at a rate of 10% per annum and
with other terms to be agreed upon between the Company and WGI. As of
November 13, 1998, the Company was indebted to WGI in an aggregate
principal amount of $19,985,000 pursuant to such advances.
On August 10, 1998, the Company's Board of Directors approved a new Credit
Agreement between the Company and WGI, LLC, to be effective as of May 8,
1998 (the "WGI Credit Agreement"), pursuant to which WGI will lend the
Company up to $25,000,000 on a revolving basis for a three-year term ending
May 8, 2001. Additional material terms of the WGI Credit Agreement are as
follows: (i) maximum funding of $25,000,000, available in increments of
$5,000 in excess of the minimum funding of $100,000; (ii) interest on
outstanding balances payable quarterly at a rate of 10% per annum; (iii)
secured by a security interest in all of the Company's assets (except for
the assets of its Heritage division and certain former plant locations
which are currently held for sale), subordinate to the security interests
of the Company's senior lender; (iv) funds borrowed may be used for any
purpose approved by the Company's directors and executive officers,
<PAGE>
including repayment of any other existing indebtedness of the Company; (v)
WGI, LLC is entitled to have two designees nominated for election to the
Company's Board of Directors during the term of the agreement and (vi) WGI,
LLC will receive (subject to shareholder approval at the Company's 1998
Annual Meeting) warrants to purchase up to 5,000,000 shares of the
Company's Common Stock at $1.75 per share.
The warrants issuable in connection with the WGI Credit Agreement will vest
at the rate of 200,000 warrants for each $1,000,000 increase in the largest
balance owed at any one time over the life of the credit agreement (as of
October 3, 1998, the largest outstanding balance to date has been
$19,985,000, which means that warrants to acquire 3,997,000 shares of
Common Stock would have been vested as of such date). For accounting
purposes, these warrants have been treated as vested in the Company's
financial statements, due to the fact that WGI, LLC and its affiliates
currently hold approximately 50.9% of the Company's outstanding voting
securities and, accordingly, it is anticipated that the Company will obtain
the required shareholder approval of such warrants at its 1998 Annual
Meeting. The warrants have registration rights no more favorable than the
equivalent provisions in the currently outstanding warrants issued to
principal shareholders of the Company, except that such rights include
three demand registrations. The warrants also contain antidilution
provisions which require that the number of shares subject to such warrants
shall be adjusted in connection with any future issuance of the Company's
Common Stock (or of other securities exercisable for or convertible into
Common Stock) such that the aggregate number of shares issued or issuable
subject to these warrants (assuming eventual vesting as to the full
5,000,000 shares) will always represent ten percent (10%) of the total
number of shares of the Company's Common Stock on a fully diluted basis.
The fair market value using the Black-Scholes option pricing model of the
above mentioned warrants of approximately $4,467,000 has been capitalized
and is included in the accompanying consolidated balance sheet as debt
issuance costs. These costs are being amortized over the term of the debt
agreement with WGI.
8. The Company reached an agreement, effective September 17, 1998, with four
institutional investors concerning the private placement of up to $10
million in 5% senior convertible preferred stock. Under the terms of the
agreement, the Company has placed an initial installment of $5 million of
5% Convertible Preferred Stock, Series G1, as of the Closing Date. The
placement of an additional $5 million of 5% Convertible Preferred Stock,
Series G2, also will be available to the Company, subject to the
satisfaction of conditions concerning the absence of certain adverse
changes or events and the registration for resale of the shares of Common
Stock issuable upon conversion of (or as payment of dividends with respect
to) the Series G1 and Series G2 preferred stock. The Company has filed a
registration statement on Form S-3 with the Securities and Exchange
Commission in satisfaction of this condition.
<PAGE>
The 5% Series G1 Convertible Preferred Stock (the "Series G1 Stock") and
the 5% Series G2 Convertible Preferred Stock (when issued) will be equal to
each other and senior to all other classes of the Company's equity
securities. The Series G1 Stock carries a 5% dividend, payable
semiannually, and is convertible at the option of the purchasers (subject
to certain limitations) into shares of Common Stock at a maximum conversion
price of $2.50 per share of Common Stock. The maximum conversion price may
be reduced under certain circumstances. No dividends may be declared or
paid on the Company's Common Stock while Series G1 Stock is issued and
outstanding. The Series G1 Stock generally has no voting rights. After
September 17, 2001, any shares of Series G1 Stock that are still
outstanding and unconverted will be (at the option of the holder) converted
to Common Stock or redeemed by the Company in cash.
The Company's agreement with the investors required that the 5% Series G1
(and, when issued) 5% Series G2 Convertible Preferred Stock be senior to
all other classes of the Company's equity securities in priority as to
dividends and distributions. WGI, LLC, in order to facilitate the
completion of this private placement by the Company, agreed to exchange all
of the shares of Series F Preferred Stock which it received in the
Company's 1997 restructuring for a like number of shares of a new Series H
Preferred Stock. Series H Preferred Stock is identical to Series F
Preferred Stock in every respect except that Series H Preferred Stock is
junior in priority to the Company's 5% Series G1 and 5% Series G2
Convertible Preferred Stock. Under the terms of the Company's compensation
arrangements with Thomas A. McFall, its CEO, and John W. Prutch, its
President, each of Messrs. McFall and Prutch are paid an annual advance of
$150,000 which is offset against fees payable by the Company for certain
transactions consummated by the Company under the direction of Messrs.
McFall and Prutch. Each of Messrs. McFall and Prutch received a cash
payment of $50,000 in connection with the Company's private placement of
the Series G1 Stock.
9. On April 15, 1998, the Company signed a letter of intent to purchase Tahiti
Apparel, Inc. ("Tahiti"). The Company intends to close the acquisition
promptly after receiving approval from its shareholders for the issuance of
Common Stock in connection with the acquisition at its 1998 Annual Meeting.
10. In the fourth quarter of 1998, the Company reached a decision to close its
printing facility in Chattanooga, Tennessee. The Company is contemplating
taking a restructuring charge for this plant closure during the fourth
quarter of 1998, but it has not yet determined the appropriate amount (if
any) of such charge.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $15.3 million for the quarter ended October 3, 1998 represents an
increase of $4.8 million or 46% from the $10.5 million in net sales for the
corresponding period of 1997. This increase is comprised of a $5.2 million
increase in screenprinted products, partially offset by a $0.1 million decrease
in women's fashion knitwear and a $0.1 million reduction in undecorated
activewear.
Sales of screenprinted products were $11.8 million for the quarter ended October
3, 1998 versus $6.6 million for the corresponding period of 1997. The increase
of $5.2 million is comprised of $3.0 million derived from change in sales mix
toward higher price denim and embroidery and $2.2 from the inclusion of Big Ball
Sports, Inc., ("Big Ball") and G.I.D.I. Holdings, Inc. doing business as Grand
Illusion Sportswear, Inc. ("Grand Illusion").
Sales of women's fashion knitwear were constant at $3.5 million for the quarter
ended October 3, 1998 as compared to $3.6 million for the corresponding period
of 1997.
Net sales of $39.3 million for the nine months ended October 3, 1998 represents
an increase of $6.6 million or 20% from the $32.7 million in net sales for the
corresponding period of 1997. This increase is comprised of a $8.7 million
increase in screenprinted products primarily due to the inclusion of Big Ball
and Grand Illusion, a $0.2 million increase in women's fashion knitwear and was
offset by a $2.3 million reduction in undecorated activewear.
Sales of screenprinted products were $29.3 million for the nine months ended
October 3, 1998 versus $20.6 million for the corresponding period of 1997. The
increase was substantially the result of the inclusion of Big Ball and Grand
Illusion.
Sales of women's fashion knitwear were slightly ahead with $9.2 million for the
nine months ended October 3, 1998 as compared to $9.0 million for the
corresponding period of 1997. The $0.2 million sales increase was composed of a
$1.0 million increase in contract sales offset by a $0.8 million reduction in
women's fashion knitwear. The reduction in women's fashion knitwear was
primarily due to competition from competitor's garments.
Gross profit was $1.1 million (7% of sales) for the quarter ended October 3,
1998 compared to $1.9 million (18% of sales) for the corresponding
<PAGE>
period in 1997. Gross profit was $7.2 million (18% of sales) for the nine months
ended October 3, 1998 compared to $7.2 million (22% of sales) for the
corresponding period in 1997. The reduction in margin was primarily the result
of unfavorable purchase price variances (due to the Company having to purchase
certain materials in the spot market to counter a temporary disruption in its
sources of supply, unfavorable overhead absorption from the Company's existing
printing facilities (due to production at such facilities not having met
budgeted levels), and disposal of closeouts at negative gross margins.
Royalty expense related to licensed product sales was 9% of sales for the
quarter ended October 3, 1998 compared to 11% for the corresponding period of
1997. This decrease was primarily caused by a decrease in the percentage of
licensed versus non-licensed sales.
Royalty expense related to licensed product sales was 8.4% of sales for the nine
months ended October 3, 1998 compared to 11% for the corresponding period of
1997. This decrease was primarily caused by an decrease in the percentage of
licensed versus non-licensed sales.
Selling, general and administrative (SG&A) expenses were 31% of sales for the
quarter ended October 3, 1998 and 29% of sales for corresponding period of 1997.
Actual SG&A expense increased $1.7 million, with $1.3 million being attributable
to Big Ball and Grand Illusion (which subsidiaries were not part of the
Company's financial results in the comparable period in 1997) and $0.5 million
provision for relocation of offices.
Selling, general and administrative (SG&A) expenses were 35% of sales for the
nine months ended October 3, 1998 and 27% of sales for the corresponding period
of 1997. Actual SG&A expense increased $5.0 million, with $4.1 million being
attributable to Big Ball and Grand Illusion, $.2 million for legal and
professional and $0.5 for relocation of offices.
FINANCIAL CONDITION
Additional working capital was required in the first nine months of 1998 to fund
the continued losses and payments of principal on the Company's long-term debt
to its secured lenders. The Company's need was met through several transactions
with the Company's principal shareholders and the senior lender. During the
first nine months of fiscal 1998, the Company received an additional $8.8
million (approximately) in advances from WGI, LLC a principal shareholder,
bringing the Company's total indebtedness to WGI for funds advanced to
approximately $20.0 million as of October 3, 1998. During the third quarter, the
Company and WGI, LLC reached an agreement, to be effective as of May 8, 1998,
documenting such indebtedness as a new Credit
<PAGE>
Agreement pursuant to which WGI, LLC will lend the Company up to $25,000,000 on
a revolving basis for a three-year term ending May 8, 2001, with interest on
outstanding balances payable quarterly at a rate of 10% per annum. Accordingly,
this indebtedness is classified as long term debt in the accompanying financial
statements. At October 3, 1998, the Company had overadvance borrowings of
approximately $34.7 million with its senior lender compared to $34.0 million at
December 31, 1997.
The Company's working capital deficit at October 3, 1998 increased $0.8 million
or 2.0% compared to year end 1997. The increase in working capital deficit was
primarily due to increases in accounts receivable ($2.3 million), inventory
($2.2 million), and decreases in the current portion of long-term debt ($1.3
million) and accrued liabilities ($0.4 million) which were partially offset by a
decrease in cash ($0.4 million), and notes receivable ($0.2 million) and an
increase in accrued interest ($1.6 million), accounts payable ($2.3 million),
and in borrowings under the revolving advance account ($1.9 million) and in bank
overdraft ($0.7 million). The Company has a "zero base balance" arrangement with
the bank where it maintains its operating account that allows the Company to
cover checks drawn on such account on a daily basis with funds wired from its
senior lender based on the credit facility with the senior lender. The nominal
bank overdraft at the end of the fiscal quarter resulted from an inter-period
timing difference between the senior lender's wire transfers to the Company's
operating account and the checks clearing such account.
Accounts receivable increased $2.3 million or 71.8% over year-end 1997. The
increase was primarily a result of the additional receivables from increased
sales for Big Ball and Grand Illusion and the timing of payments from the senior
lender on factored receivables.
Inventories increased $2.2 million or 21% compared to year-end 1997. Inventories
increased as a result of increased purchases to have the proper product mix for
the fleece season together with increased inventories at the Big Ball subsidiary
resulting from slower than anticipated sales of such subsidiary.
Total current liabilities increased $4.8 million or 8.2% over year-end 1997,
primarily due to increases in accounts payable ($2.3 million), bank overdraft
($0.7 million), the revolving advance account ($1.9 million), and accrued
interest ($1.6 million), partially offset by decreases in the current portion of
long term-debt ($1.3 million) and accrued liabilities ($0.4 million).
Cash used in operations was $15.4 million during the first nine months of 1998
compared to $13.2 million used in operating activities during the same period in
1997. In addition to the net loss of $16.3 million, during the first nine months
of 1998, the increased use of cash during such period was
<PAGE>
primarily due to increases in accounts receivable($2.3 million) and inventory
($2.2 million). Primary items partially offsetting the uses of funds were
depreciation and amortization ($2.5 million)and an increase in accounts payable
and accrued liabilities ($3.3 million).
Commitments to purchase equipment totaled less than $1.0 million at October 3,
1998. During 1998, the Company anticipates capital expenditures of approximately
$0.9 million.
Cash provided from investing activities was $0.8 million for the nine months
ended October 3, 1998 compared to $0.3 in the comparable period for 1997.
Cash provided by financing activities was $14.2 million for the first nine
months of 1998 compared to $11.5 million in the comparable period for 1997. The
Company borrowed approximately $8.8 million from WGI, LLC, an additional $1.9
million from the senior lender, and a bank overdraft of $0.7 million and
received proceeds of $4.6 million from the sale of Convertible Preferred Stock.
This was partially offset by principal payments on borrowings of $1.8 million.
The revolving advance account increased $1.9 million from $40.5 million at
year-end 1997 to $42.4 million at October 3, 1998. Under the current financing
arrangement with its senior lender the Company's total outstanding obligations
cannot exceed the lower of $55.0 million or the borrowing base as defined. At
October 3, 1998, the borrowing base was $7.7 million. Therefore, approximately
$34.7 million was overadvanced under the revolving advance account. The
overadvance is secured by treasury bills pledged by a principal shareholder, and
in part, by the guarantee of two principal shareholders.
Interest expense for the nine months ended October 3, 1998 was $7.0 million
compared to $11.2 million for the same period in 1997. Total outstanding debt
averaged $65.9 million and $74.8 million for the first nine months of 1998 and
1997, respectively, with average interest rates of 12.1%, and 20%, respectively.
The reduction in interest expense was primarily the result of the implementation
of the Restructuring Plan for the Company's preferred equity and the majority of
its subordinated indebtedness at the end of fiscal 1997 and partially offset by
amortization of debt issuance cost of $1.0 million.
The Company uses letters of credit to support foreign and some domestic sourcing
of inventory and certain other obligations. Outstanding letters of credit were
$0.3 million at October 3, 1998 (excluding collateral of $2.0 million pledged to
the senior lender in the form of a standby letter of credit).
<PAGE>
Total Shareholders' Deficit increased $7.2 million compared to year-end 1997.
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. 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. These transactions are detailed above in the Financial Condition
section.
As of October 3, 1998, the Company's senior lender waived certain covenant
violations (pertaining to cumulative pre-tax operating earnings, tangible net
worth, and working capital) under the Company's amended and restated factoring
agreement. Nevertheless, on the basis of such violations (which could also serve
as a basis for the senior lender enforcing its remedies under defaults preserved
from the Company's prior factoring agreement), all of the Company's long-term
debt owed to the senior lender at October 3, 1998 was 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 such debt, the Company would not have funds available to repay the
debt.
If the Company's sales and profit margins do not substantially improve in the
near term, the Company will be required to seek additional capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate additional acquisitions. To obtain such
additional capital and such financing, the Company may be required to issue
additional securities that may dilute the interests of its stockholders.
At the end of fiscal 1997, the Company implemented a restructuring plan for its
preferred equity and the majority of its subordinated indebtedness (following
approval by shareholders of the issuance of Common Stock in connection
therewith), which resulted in a significant increase in the Company's overall
equity as well as a significant reduction in the Company's level of indebtedness
and ongoing interest expense. In addition, as discussed in Note 8 to the
financial statements, during the third quarter of 1998, the Company sold
Convertible Preferred Stock to new institutional investors in the principal
amount of $5.0 million (with the placement of an additional $5 million of such
securities available to the Company upon satisfaction of certain conditions).
The funds provided by the WGI Credit Agreement and the private placement of
convertible preferred stock are expected to enable the Company to meet its
liquidity needs for the balance of 1998. During the fourth quarter of 1998, the
Company reached a decision to close its printing facility in Chattanooga,
Tennessee. The Company is taking this action in an effort to further improve its
cost structure. The Company is contemplating taking a restructuring charge for
these plant closures during the fourth quarter of 1998, but it has not yet
determined the appropriate amoutn (if any) of such charge. The Company is
considering the sale of certain other non-essential assets. The Company also has
an ongoing cost reduction program intended to control its general and
administrative expenses, and has implemented an inventory control program to
eliminate the manufacture of excess goods.
Although management believes that the effects of the restructuring, the private
placement of preferred stock and the cost reduction measures described above
have enhanced the Company's opportunities for obtaining the additional funding
required to meet its liquidity
<PAGE>
requirements beyond January 1, 1999, no assurance can be given that any such
additional financing will be available to the Company on commercially reasonable
terms or otherwise. The Company will need to significantly improve sales and
profit margins or raise additional funds in order to continue as a going
concern.
YEAR 2000
In 1997, the Company upgraded its main computer to an IBM AS/400 model 500. The
Company plans to move all mainframe processing to this hardware and to Year 2000
compliant software by mid-1999. The Company's main manufacturing and accounting
software package was upgraded in 1997 to the Year 2000 compliant Apparel
Business System (ABS) software. The Company plans to move all mainframe
processing to this software. By mid-1999, the Company plans to have completed
the testing of all of this hardware and software by in-house staff. The cost of
these hardware and software upgrades totaled $270,000 in 1997. The Company has
budgeted an additional $50,000 for software modifications during 1998 and early
1999.
EDI with customers was addressed in 1997 by acquiring Premenos software for the
AS/400. All customer EDI will be moved from a PC system to the mainframe by
mid-1999. Fixed asset accounting was moved to a Year 2000 compliant software
package in early 1998.
<PAGE>
Part II. OTHER INFORMATION
Items 1-5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Waiver Letter, dated as of October 3, 1998, pertaining to the
Amended and Restated Factoring Agreement dated as of October 31, 1997
between the Company and BNY Financial Corporation.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNAL APPAREL COMPANY, INC.
(Registrant)
Date: November 17, 1998 /s/ Thomas A. McFall
----------------------------
Thomas A. McFall
Chief Executive Officer
Date: November 17, 1998 /s/ Howard Weinberg
----------------------------
Howard Weinberg
Chief Financial Officer
<PAGE>
SIGNAL APPAREL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED October 3, 1998
EXHIBIT INDEX
Exhibit No.
per Item 601 Sequential
of Reg. S-K Description of Exhibit Page No.
- - ------------ ---------------------- ----------
(10.1) Waiver Letter, dated as of
October 3, 1998, pertaining to
the Amended and Restated
Factoring Agreement dated as of
October 31, 1997 between the Company and BNY
Financial Corporation.
(27) Financial Data Schedule
BNY FINANCIAL CORPORATION
1290 Avenue of the Americas
New York, NY 10104
November 16, 1998
SIGNAL APPAREL COMPANY, INC.
THE SHIRT SHED, INC.
P.O. Box 4296
200-A Manufacturers Road
Chattanooga, TN 37405
BIG BALL SPORTS, INC.
5708 North Shepherd, #B6
Houston, TX 77091
Re: Waiver
Gentlemen:
Reference is made to the (i) Amended and Restated Factoring Agreement dated
as of October 31, 1997 (the "Signal Factoring Agreement") by and between Signal
Apparel Company, Inc. ("Signal") and BNY Financial Corporation ("BNYFC"),
Amended and Restated Factoring Agreement dated as of October 31, 1997 (the
"Shirt Factoring Agreement") by and between The Shirt Shed, Inc. ("Shirt") and
BNYFC, and the Factoring Agreement dated January 30, 1998 by and between Big
Ball Sports, Inc. ("Big Ball") and BNYFC (the "Big Ball Factoring Agreement";
and together with the Signal Factoring Agreement and the Shirt Factoring
Agreement, as heretofore amended and as amended from time to time hereafter, the
"Factoring Agreements") and ("Big Ball"; together with Signal and Shirt, shall
hereinafter be collectively referred to as the "Clients"); and (ii) the Guaranty
dated February 27, 1996 (as heretofore amended and as amended from time to time
hereafter, the "Guaranty") by an affiliate of the Client's in favor of BNYFC.
All initially capitalized terms used and not otherwise defined herein shall have
the respective meanings ascribed to them in the Factoring Agreements.
1. The Clients have advised BNYFC that, for the fiscal period commencing
January 1, 1998 and ending October 3, 1998 that: (a) their Cumulative Pre-Tax
Operating Earnings is less than ($7,000,000), the minimum Cumulative Pre-Tax
Operating Earnings permitted for the fiscal period commencing January 1, 1998
and ending on October 3, 1998 under Paragraph 11(a)(iv) of the Factoring
Agreements, (b) their Tangible Net Worth on a combined basis is less than (i)
($58,600,000) plus (ii) 65% of additional equity as required by Paragraph
11(a)(ii) of the Factoring Agreement, and (c) the Working Capital is less than
(i) ($45,000,000) plus (ii) 80% of the aggregate of any capital contributions as
required by Paragraph 11(a)(iii) of the Factoring Agreement (collectively, the
foregoing Events of Termination shall be referred to as the "Subject Termination
Event"). As a result of such Subject Termination Event, BNYFC is entitled, as of
the date hereof, to terminate the Factoring Agreements and to exercise its
rights and remedies under the Factoring Agreements, applicable law or otherwise
to realize upon its collateral and to collect the Obligations. The Clients have
<PAGE>
requested BNYFC to waive the Subject Termination Event only for the specific
periods stated above, and BNYFC hereby agrees to do so.
2. The Clients hereby acknowledges, confirm and agree that the waiver by
BNYFC of the Subject Termination Event is solely for the benefit of the Clients
under the Factoring Agreements, that for the purposes of the Guaranty, BNYFC
shall be deemed not to have waived the Subject Event of Termination, and that
conditions precedent to the "First Reduction Date" and/or the "Second Reduction
Date", under and as said quoted terms are defined in the Guaranty, have not been
satisfied and such First Reduction Date and/or Second Reduction Date have not
occurred.
3. Except as specifically set forth herein, no other changes, modifications
or waivers to the Factoring Agreements are intended or implied, and, in all
other respects, the Factoring Agreements shall continue to remain in full force
and effect in accordance with its terms as of the date hereof. Except as
specifically set forth herein, nothing contained herein shall evidence a waiver
or amendment by BNYFC of any other provision of the Factoring Agreements nor
shall anything contained herein be construed as a consent by BNYFC to any
transaction other than those specifically consented to herein. The waivers made
hereinabove are only made for the specific periods stated in paragraph 1 hereof
and for no other period.
4. The terms and provisions of this agreement shall be for the benefit of
the parties hereto and their respective successors and assigns; no other person,
firm, entity or corporation shall have any right, benefit or interest under this
agreement.
5. The waivers provided above shall be effective retroactively as of
October 3, 1998.
6. This agreement may be signed in counterparts, each of which shall be an
original and all of which taken together constitute one amendment. In making
proof of this agreement, it shall not be necessary to produce or account for
more than one counterpart signed by the party to be charged.
7. This agreement sets forth the entire agreement and understanding of the
parties with respect to the matters set forth herein. This agreement cannot be
changed, modified, amended or terminated except in writing executed by the party
to be charged.
Very truly yours,
BNY FINANCIAL CORPORATION
By: /s/ Wayne Miller
----------------------
Vice President
<PAGE>
ACKNOWLEDGED AND AGREED:
SIGNAL APPAREL COMPANY, INC.
/s/ Howard Weinberg
- - -------------------------------
By: Howard Weinberg
Title: Chief Financial Officer
THE SHIRT SHED, INC.
/s/ Howard Weinberg
- - -------------------------------
By: Howard Weinberg
Title: Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SIGNAL APPAREL COMPANY, INC. FOR THE QUARTERLY PERIOD
ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-3-1998
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 7,418
<ALLOWANCES> (1,916)
<INVENTORY> 12,603
<CURRENT-ASSETS> 18,957
<PP&E> 27,204
<DEPRECIATION> 22,285
<TOTAL-ASSETS> 35,691
<CURRENT-LIABILITIES> 63,160
<BONDS> 21,054
0
48,746
<COMMON> 325
<OTHER-SE> (97,594)
<TOTAL-LIABILITY-AND-EQUITY> 35,691
<SALES> 39,341
<TOTAL-REVENUES> 39,341
<CGS> 32,163
<TOTAL-COSTS> 49,284
<OTHER-EXPENSES> (555)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,961
<INCOME-PRETAX> (16,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,349)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
