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 April 4, 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 April 29, 1998
----- -----------------------------
Common Stock 32,636,547 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
April 4, Dec. 31,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash & cash equivalents $ 10 $ 384
Receivable, less allowance for doubtful 4,630 3,203
accounts of $2,786 in 1998 and $2,665 in 1997
Note receivable 446 500
Inventories 10,636 10,390
Prepaid expenses and other 734 531
--------- ---------
16,456 15,008
Property, plant and equipment, net 5,600 6,045
Goodwill, less accumulated amortization
of 147 in 1998 and 56 in 1997 4,741 4,832
Debt issuance cost, net 3,518 3,716
Other assets 59 59
--------- ---------
Total assets $ 30,374 $ 29,660
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 2,455 $ 2,577
Accrued liabilities 6,313 6,617
Accrued interest 2,069 1,603
Current portion of long-term debt 6,503 7,110
Revolving advance account 40,835 40,457
--------- ---------
Total current liabilities 58,175 58,364
--------- ---------
Long-term debt, principally from
related parties 17,337 12,580
--------- ---------
Shareholders' Equity (Deficit):
Common stock 325 325
Preferred stock 44,316 44,316
Additional paid-in capital 160,399 160,399
Accumulated deficit (249,061) (245,207)
Treasury shares (at cost) (1,117) (1,117)
--------- ---------
Total shareholders' equity (deficit) (45,138) (41,284)
--------- ---------
Total liabilities and
shareholders' equity (deficit) $ 30,374 $ 29,660
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended
April 4, March 31,
1998 1997
-------- --------
Net sales $ 11,561 $ 10,366
Cost of sales 8,507 8,546
-------- --------
Gross profit 3,054 1,820
Royalty expense 797 861
Selling, general and administrative
expenses 5,008 2,704
Interest expense 1,549 3,486
Other (Income)/expenses, net (446) 109
-------- --------
Loss before income taxes (3,854) (5,340)
Income taxes --
-------- --------
Net loss $ (3,854) (5,340)
======== ========
Basic/diluted net loss per share $ (.12) $ (.46)
======== ========
Weighted average shares outstanding 32,621 11,578
======== ========
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
April 4, March 31,
1998 1997
------- -------
Operating Activities:
Net loss $(3,854) $(5,340)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 783 329
(Gain) loss on disposal of equipment (439) (48)
Changes in operating assets
and liabilities:
Receivable (1,427) (1,196)
Inventories (246) 2,341
Prepaid expenses and other assets (203) (15)
Accounts payable and accrued
liabilities 40 488
------- -------
Net cash used in operating
activities (5,346) (3,441)
------- -------
Investing Activities:
Purchases of property, plant and
equipment (88) (27)
Proceeds from notes receivable 54
Proceeds from the sale of property,
plant and equipment 478 46
------- -------
Net cash provided by
investing activities 444 19
------- -------
Financing Activities:
Net increase/(decrease) in revolving
advance account 378 (1,198)
Borrowings from related party 4,950 5,385
Principal payments on borrowings (800) (503)
------- -------
Net cash provided by
financing activities 4,528 3,684
------- -------
(Decrease)/increase in cash (374) 262
Cash and cash equivalents at beginning of period 384 1,713
------- -------
Cash and cash equivalents at end of period $ 10 $ 1,975
======= =======
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
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, 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 April 4, 1998 and
December 31, 1997 and its results of operations and cash flows for the
three months ended April 4, 1998 and March 31, 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 three months ended April 4, 1998 are not
necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
April 4, December 31,
1998 1997
------- -------
(Dollars in thousands)
Raw materials and supplies $ 1,288 $ 1,238
Work in process 1,626 1,032
Finished goods 7,722 8,120
------- -------
$10,636 $10,390
======= =======
4. Pursuant to the terms of various license agreements, the Company is
obligated to pay future minimum royalties of approximately $.5 million in
1998.
5. During the three months ended April 4, 1998 Signal was advanced
approximately an additional $5.0 million by WGI, LLC and certain of its
affiliates (collectively, "WGI"), a principal shareholder, bringing the
Company's total indebtedness to WGI for funds advanced to approximately
5
<PAGE>
$16.2 as of the end of the quarter. Based on negotiations with WGI, the
Company is accruing interest on such indebtedness at a rate of 10% per
annum and expects that these advances will be documented as a loan with
interest payable on such basis and with payment of principal due more than
twelve months after April 4, 1998. Accordingly, this indebtedness 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 basic earnings per share.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales of $11.6 million for the quarter ended April 4, 1998 represent an
increase of $1.2 million or 12% from the $10.4 million in net sales for the
corresponding period of 1997. This increase is comprised of a $1.5 million
increase in screenprinted products, a $.6 million increase in women's fashion
knitwear, offset by a $.9 million reduction in undecorated activewear.
Sales of screenprinted products were $7.7 million for the quarter ended April 4,
1998 versus $6.2 million for the corresponding period of 1997. The increase was
the result of the inclusion of Big Ball Sports, Inc., Print The Planet, Inc.
(collectively "Big Ball") and G.I.D.I. Holdings, Inc. doing business as Grand
Illusion Sportswear, Inc. ("Grand Illusion"). As of March 31, 1998, Big Ball
Sports, Inc. and Print the Planet, Inc. were merged as Big Ball Sports, Inc.
Sales of women's fashion knitwear increased 22% to $3.4 million for the quarter
ended April 4, 1998 as compared to $2.8 million for the corresponding period of
1997. The $.6 million sales increase was composed of a $2.8 million increase in
unit volume offset by a $2.2 million reduction due to reduced average selling
price. The reduction in average selling price was due to a combination of
product mix and unit selling price changes. The sales price reduction was the
primary factor increasing the sales unit volume.
6
<PAGE>
Gross profit was $3.1 million (26% of sales) for the quarter ended April 4, 1998
compared to $1.8 million (18% of sales) for the corresponding period in 1997.
The margin improvement was primarily the result of the inclusion of Big Ball and
Grand Illusion in 1998.
Royalty expense related to licensed product sales was 7% of sales for the
quarter ended April 4, 1998 compared to 8% 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 43% of sales for the quarter ended April 4, 1998 and 26% of sales for
corresponding period of 1997. Actual SG&A expense increased $2.3 million, with
$1.5 million being attributable to Big Ball and Grand Illusion, .3 million for
legal and professional and .2 million for amortization of debt issuance cost.
FINANCIAL CONDITION
Additional working capital was required in the first quarter of 1998 to fund the
continued losses, payment of a portion of the purchase price for Big Ball, 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 quarter of fiscal
1998, the Company received an additional $5.0 million (approximately) in
advances from WGI, a principal shareholder, bringing the Company's total
indebtedness to WGI for funds advanced to approximately $16.2 million as of the
end of the quarter. Based on negotiations with WGI, the Company is accruing
interest on such indebtedness at a rate of 10% per annum and expects that these
advances will be documented as a loan with interest payable on such basis and
with payment of principal due more than twelve months after April 4, 1998.
Accordingly, this indebtedness is classified as long term debt in the
accompanying financial statements. At April 4, 1998, the Company had overadvance
borrowings of approximately $35.9 million with its senior lender compared to
$34.0 million at December 31, 1997.
The Company's working capital deficit at April 4, 1998 decreased $1.6 million or
3.8% compared to year end 1997. The decrease in working capital deficit was
primarily due to increases in inventory ($.2 million), accounts receivable ($1.4
million), and prepaid expenses ($.2 million), and decreases in accounts payable
($.1 million), accrued liabilities ($.3 million), and current portion of
long-term debt ($.6 million) which were partially offset by a decrease in cash
($.3 million), an increase in
7
<PAGE>
accrued interest ($.5 million) and an increase in borrowings under the revolving
advance account ($.4 million).
Accounts receivable increased $1.4 million or 44.6% 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 million or 2.4% compared to year-end 1997. Inventories
increased as a result of increased purchases to have the proper product mix for
seasonally stronger, second quarter tee shirt sales.
Total current liabilities decreased $.2 million or .3% over year-end 1997,
primarily due to decreases in the current portion of long-term debt ($.6
million), accounts payable ($.1 million), and accrued liabilities ($.3 million)
offset by an increase in accrued interest ($.5 million) and the revolver balance
($.4 million).
Cash used in operations was $5.3 million during the first three months of 1998
compared to $3.4 million used in operating activities during the same period in
1997. The net loss of $3.9 million, increases in accounts receivable ($1.4
million) and a gain on disposal of equipment ($.4 million) were the primary uses
of funds in the first three months of 1998. Primary items partially offsetting
the uses of funds were depreciation and amortization ($.8 million).
Commitments to purchase equipment totaled approximately $.4 million at April 4,
1998. During 1998, the Company anticipates capital expenditures of approximately
$.9 million.
Cash provided by financing activities was $4.5 million for the first three
months of 1998. The Company borrowed approximately $5.0 million from WGI, LLC.
This was partially offset by principal payments on borrowings of $.8 million.
The revolving advance account increased $.4 million from $40.4 million at
year-end 1997 to $40.8 million at April 4, 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
April 4, 1998, the borrowing base was $4.9 million. Therefore, approximately
$35.9 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
8
<PAGE>
of two principal shareholders.
Interest expense for the quarter ended April 4, 1998 was $1.5 million compared
to $3.5 million for the same period in 1997. Total outstanding debt averaged
$62.5 million and $71.0 million for the first three months of 1998 and
1997,respectively, with average interest rates of 9.9% and 19.6%.
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 $1.2 million at April 4, 1998 (excluding collateral of $2.0 million
pledged to the senior lender in the form of a standby letter of credit).
Total Shareholders' Deficit increased $3.9 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 March 31, 1998, the Company's senior lender waived certain covenant
violations (pertaining to cumulative pre-tax operating earnings) 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 April 4, 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
9
<PAGE>
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.
Although management believes that the restructuring has enhanced the Company's
opportunities for obtaining the needed funding, no assurance can be given that
any such additional financing will be available to the Company on commercially
reasonable terms or otherwise. If the Company's sales and profit margins do not
significantly improve and additional funds cannot be raised as needed, the
Company will not be able 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
(10.1) Waiver Letter, dated as of May 13, 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
10
<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: May , 1998 /s/ David E. Houseman
---------------- ------------------------------
David E. Houseman
Chief Executive Officer and
Chief Financial Officer
Date: May , 1998 /s/ John W. Prutch
---------------- ------------------------------
John W. Prutch
President
11
<PAGE>
SIGNAL APPAREL COMPANY, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
EXHIBIT INDEX
Exhibit No.
per Item 601 Sequential
of Reg. S-K Description of Exhibit Page No.
- ------------ ---------------------- ----------
(10.1) Waiver Letter, dated as of
May 13, 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
12
May 13, 1998
Signal Apparel Company, Inc.
P. O. Box 4296
200A Manufacturers Road
Chattanooga, Tennessee 37405
Attention: Mr. Jim Elkins, Controller
Re: Your letter of 5/4/98; Request for a 3/31/98 Covenant Waiver
Gentlemen:
By your recent letter, you have requested us to waive your compliance with one
of the financial covenants set forth in the Amended and Restated Factoring
Agreement between us, bearing the effective date of 5/23/91, as restated as of
October 31, 1997 (as amended and supplemented, herein, the "Agreement"), to the
extent herein described - namely, Paragraph 11(a)(iv) thereof, pertaining to
minimum Cumulative Pre-Tax Operating Earnings for you and the Other Client
(herein, the "Minimum Cumulative Pre-Tax Operating Earnings Covenant"). You have
requested that we waive compliance with the Minimum Cumulative Pre-Tax Operating
Earnings Covenant for your fiscal quarter ended on March 31, 1998 (the "Waiver
Date"), to the extent and as more fully specifically described in this letter.
Subject to the matters set forth in the paragraph which immediately follows, we
hereby waive compliance with the minimum Cumulative Pre-Tax Operating Earnings
Covenant, to the extent such non-compliance arose solely as a result of your
failure to have for your fiscal quarter ended on such Waiver Date, losses for
you and the Other Client of not in excess of a negative $3,000,000.00, provided
however, that such losses for such fiscal quarter did not exceed a negative
$3,854,000.00.
<PAGE>
The limited waiver herein set forth shall not, however, become effective until
we shall have received back an copy of this Amendment duly executed by you, and
you have signed below also confirming our entitlement to charge and receive a
fee in connection with the matters herein set forth in the amount of $5,000, for
which fee we shall be entitled to immediately charge your account(s).
Except to the limited extent set forth herein: (a) no waiver of any other term,
condition, covenant, agreement or any other aspect of the Agreement is intended
or implied; and (b) and except for the specific period of time and circumstances
covered by this letter, no other aspect of the Minimum Cumulative Pre-Tax
Operating Earnings Covenant is or shall be deemed waived, including without
limitation for any other period or circumstance, and no such additional waiver
is intended or implied. This 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: VP
Agreed:
SIGNAL APPAREL COMPANY, INC.
By __________________________________
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