SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1, TO
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 22, 1999
SIGNAL APPAREL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Indiana 1-2782 62-0641635
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Indentification No.)
of incorporation)
34 Englehard Avenue, Avenel, New Jersey 07001
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (732) 382-2882
200 Manufacturers Road, Chattanooga, Tennessee 37405
(Former name or former address, if changed since last report.)
<PAGE>
The registrant hereby amends the following items, financial statements, exhibits
or other portions of its Annual Report on Form 8-K dated March 22, 1999, which
was filed with the Commission on April 6, 1999:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
See Financial Statements Supplement to this Amended Report.
(b) Pro Forma Financial Information.
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited summary pro forma Income Statement and Other Financial
Data give effect to the acquisition as if it had been consummated on January 1,
1998. The Pro Forma Balance Sheet Data gives effect to the acquisition as if it
had consummated on December 31, 1998. The Pro Forma Financial Information does
not purport to represent what Signal's results of operations or financial
position actually would have been had the acquisition described herein in fact
been consummated on the dates indicated or to project the results of operations
or financial positions for any future period or date. The Pro Forma Financial
Information is based upon assumptions that Signal's management believes are
reasonable and should be read in conjunction with the section of this Report
entitled "Unaudited Pro Forma Financial Information Concerning the Acquisition"
and financial statements and the notes thereto included elsewhere in this Report
or incorporated herein by reference.
Pro Forma
Year Ended
December 31, 1998
Income Statement Data:
Net sales $ 112,142
Net loss $ (45,610)
Other Financial Data:
Basic/diluted net loss per common share $ (1.08)
Weighted average number of shares outstanding 46,010
Balance Sheet Data:
Total assets $ 59,839
Long-term debt, net of current maturities $ 13,968
Shareholders' deficit $ (51,818)
2
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
CONCERNING THE ACQUISITION
The following unaudited pro forma condensed balance sheet and statements of
operations have been prepared to reflect the Company's purchase from Tahiti of
substantially all of Tahiti's assets and the assumption of selected liabilities
of Tahiti under the terms of the Acquisition Agreement. The closing of the
acquisition took place on March 22, 1999. The purchase price for the assets is
approximately $15,873,000, subject to adjustment, to be paid in the Company's
common stock valued at $1.1875 per share or 13,366,000 common shares.
The unaudited pro forma condensed statements for operations of the year
ended December 31, 1998, and the unaudited pro forma condensed balance sheet as
of December 31, 1998, set forth below, have been prepared by combining the
Company's audited consolidated statement of operations for the year ended
December 31, 1998 with Tahiti's unaudited statement of operations for the twelve
months ended December 31, 1998; and combining the Company's audited consolidated
balance sheet as of December 31, 1998 with Tahiti's unaudited condensed balance
sheet as of December 31, 1998.
The unaudited pro forma condensed statement of operations for the year
ended December 31, 1998 was prepared as if the acquisition had occurred on
January 1, 1998. The unaudited pro forma condensed balance sheet as of December
31, 1998 was prepared giving effect to the acquisition on such date.
For purpose of presenting pro forma results, no changes in revenues and
expenses have been made to reflect the result of any modification to operations
that might have been made had the acquisition been consummated on the assumed
effective date for each statement as described above. The pro forma expenses
include the recurring costs which are directly attributable to the acquisition,
such as interest expense and amortization of goodwill, change in certain
expenses, and the related tax effects. The pro forma adjustments made to the pro
forma condensed balance sheets include (i) adjustments to remove selected Tahiti
assets not acquired and liabilities not assumed in the acquisition, (ii) the
issuance to Tahiti and its former stockholders (collectively) of 13,366,000
shares of the Company's common stock, and (iii) the recognition of goodwill
resulting from the acquisition. The pro forma financial information does not
purport to be indicative of the results which would have been attained had the
acquisition been completed as of the date and for the periods presented or which
may be attained in the future.
The unaudited pro forma condensed balance sheet reflects the preliminary
allocation of purchase price to the assets acquired and liabilities assumed in
the acquisition to the Company's tangible and intangible assets and liabilities.
The final allocation of such purchase price, and the resulting depreciation and
amortization expense in the accompanying unaudited pro forma statements of
operations, will differ from the preliminary estimates due to the final
allocation being based on actual closing date amounts of assets and liabilities,
and a final determination of the fair market values of property and other assets
as of the closing date.
3
<PAGE>
Signal Apparel Company, Inc.
Pro Forma Condensed Balance Sheet
31-Dec-98
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
ProForma Adjustments
-------------------------------
Signal Tahiti Debit Credit Combined
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Restricted cash $ -- $ -- $ $ --
Cash and cash equivalents 403 -- 403
Receivables 1,415 145 1,560
Note receivable 283 -- 283
Inventories 12,641 10,396 23,037
Due from Related Party -- 2,587 2,587(a) --
Prepaid expenses and other 539 546 40(a) 1,045
------------------------------------------------------------------------------
Total current assets 15,281 13,674 -- 2,627 26,328
------------------------------------------------------------------------------
Net PP&E 3,001 1,786 4,787
Goodwill -- 27,878(b) 27,878
Restricted cash -- 750 274(a) 476
Other Assets 182 188 370
------------------------------------------------------------------------------
Total Assets $ 18,464 $ 16,398 $ 27,878 $ 2,901 $ 59,839
==============================================================================
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable $ 8,133 $ 2,983 89(a) $ 11,027
Accrued liabilities 9,760 1,856 490(a) 11,126
Accrued interest 3,810 3,810
Royalty payable 590 590
Due to Shareholder 183 183(a) --
Due to Related Party 6,780 10(a) 6,770
Current portion of long-term 6,435 50 6,485
debt
Revolving advance account 44,049 13,832 57,881
------------------------------------------------------------------------------
72,187 26,274 772 -- 97,689
------------------------------------------------------------------------------
Long-term debt 13,968 -- 13,968
Other noncurrent liabilities -- -- --
Preferred stock 52,789 -- 52,789
Common stock 326 105 105(b) 134(b) 460
Additional paid in capital 165,242 15,739(b) 180,981
Accumulated deficit (284,931) (9,981) 9,981(b) (284,931)
------------------------------------------------------------------------------
Subtotal (66,574) (9,876) 105 25,854 (50,701)
Less treasury shares (1,117) (1,117)
------------------------------------------------------------------------------
(67,691) (9,876) 105 25,854 (51,818)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Total liabilities and shareholders'
deficit $ 18,464 $ 16,398 $ 877 $ 25,854 $ 59,839
==============================================================================
</TABLE>
4
<PAGE>
Signal Apparel Company, Inc.
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1998
(Unaudited)
(In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
ProForma ProForma
Signal Tahiti Adjustments Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 50,076 $ 62,066 $ 112,142
Cost of Sales 42,999 49,434 92,433
----------------------------------------------------------------------
Gross Profit 7,077 12,632 -- 19,709
Royalty expense 4,211 4,965 9,176
SG&A expenses 22,843 12,652 1,859(c) 37,122
18(f)
(250)(g)
Interest expense 8,645 3,383 -- 12,028
Other (income) expense, net (1,315) (1,315)
Write-off of goodwill 4,542 4,542
Nonrecurring charges 3,758 -- 3,758
----------------------------------------------------------------------
Loss before income taxes (35,607) (8,368) (1,627) (45,602)
Income Taxes -- (8) 8(d) --
Net loss $ (35,607) $ (8,376) $ (1,619) $ (45,602)
Less: preferred stock dividends (4,062) -- (4,062)
Net loss applicable to common stock $ (39,669) (8,376) $ (1,619) (49,664)
======================================================================
Weighted average shares outstanding 32,644 0.15 N/A 46,010(e)
Basic/diluted net loss per common share $ (1.22) $ (55,840) N/A $ (1.08)(e)
</TABLE>
EXPLANATION OF ADJUSTMENTS REFLECTED ON
PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
(a) To remove selected Tahiti assets not acquired and the liabilities not
assumed in the acquisition.
(b) To recognize the issuance of 13,366,000 shares of the Company's common
stock and the excess of the cost of the assets acquired over their fair
value at the date of acquisition as goodwill and to eliminate the
historical equity balances of Tahiti.
(c) To reflect amortization of goodwill recorded in connection with (b) above.
The Company will amortize goodwill on a straight-line basis over a period
of 15 years.
(d) To consider the federal and state tax effects of the pro forma adjustments
and the impact of the Tahiti results on the consolidated income taxes.
(e) Net earning per common share are computed assuming that the 13,366,000
shares of the Company's common stock issued in connection with the
acquisition are outstanding for the entire periods presented.
5
<PAGE>
(f) To reflect increased compensation to be paid to the former stockholders of
Tahiti, offset in part by the reduction of charitable contributions made by
Tahiti.
(g) To reflect nonrecurring costs associated with the merger.
[THIS SPACE INTENTIONALLY LEFT BLANK]
6
<PAGE>
(c) Exhibits.
(10.1) Asset Purchase Agreement dated as of December 17, 1998, by
and among the Company, Tahiti Apparel, Inc. and the
stockholders of Tahiti Apparel, Inc.*
(10.2) Amendment, dated March 16, 1999, to Asset Purchase Agreement
dated as of December 17, 1998, by and among the Company,
Tahiti Apparel, Inc. and the stockholders of Tahiti Apparel,
Inc. *
(10.3) Escrow Agreement, dated March 16, 1999, by and among the
Company, Tahiti Apparel, Inc. and Wachtel & Masyr, LLP*
(10.4) Agreement, dated March 16, 1999, between Tahiti Apparel,
Inc. and Ming Yiu Chan, together with related Form of
Promissory Note (assumed by the Company at closing)*
(10.5) Stock Resale Agreement, dated March 16, 1999, between the
Company, Tahiti Apparel, Inc., Zvi Ben-Haim, Michael Harary
and Ming Yiu Chan*
(10.6) Registration Rights Agreement, dated March 16, 1999, between
the Company, Tahiti Apparel, Inc., Zvi Ben-Haim, Michael
Harary and Ming Yiu Chan*
(10.7) Employment Agreement, dated March 16, 1999, between the
Company and Zvi Ben-Haim*
(10.8) Employment Agreement, dated March 16, 1999, between the
Company and Michael Harary*
(10.9) Securities Transfer Agreement, dated March 16, 1999, between
the Company and Zvi Ben-Haim*
(10.10) Securities Transfer Agreement, dated March 16, 1999, between
the Company and Michael Harary*
(10.11) Form of Warrants to be issued to each of Zvi Ben-Haim and
Michael Harary under Securities Transfer Agreements dated
March 16, 1999*
(10.12) Revolving Credit, Term Loan and Security Agreement, dated
March 12, 1999, between the Company and BNY Financial
Corporation (individually and as Agent)*
(10.13) Second Amended and Restated Factoring Agreement, dated March
12, 1999, between the Company and BNY Financial Corporation*
(10.14) Subscription and Stock Purchase Agreement, dated March 12,
1999, between the Company and BNY Financial Corporation*
(10.15) Form of Warrants to purchase the Company's Common Stock
issued to BNY Financial Corporation, dated March 12, 1999*
(10.16) Second Amendment to Asset Purchase Agreement concerning
Tahiti Apparel, Inc., dated April 15, 1999.**
* Previously filed with this Report.
** Incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for
the quarter ended April 3, 1999.
7
<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 hereunto duly authorized.
Date: June 4, 1999 SIGNAL APPAREL COMPANY, INC.
By: /s/ Robert J. Powell
--------------------------------
Robert J. Powell
Vice President,
General Counsel & Secretary
8
<PAGE>
FINANCIAL STATEMENTS SUPPLEMENT
INDEX TO FINANCIAL STATEMENTS
TAHITI APPAREL, INC.
<TABLE>
<CAPTION>
PAGE
----
AS OF JUNE 30, 1998 AND 1997
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
Balance Sheets as of June 30, 1998 and 1997 F-3
Statements of Operations For The Years Ended June 30, 1998, 1997 and 1996 F-4
Statements of Stockholders' Equity (Deficit) For The Years Ended June 30, 1998,
1997 and 1996 F-5
Statements of Cash Flows For The Years Ended June 30, 1998, 1997 and 1996 F-6
NOTES TO FINANCIAL STATEMENTS F-7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF F-14
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL QUARTER ENDED AS OF
DECEMBER 31, 1998 AND 1997(unaudited)
Balance Sheets as of December 31, 1998 and June 30, 1998 F-18
Statements of Operations For The Three Months Ended December 31, 1998 and 1997 F-19
Statements of Cash Flows For The Three Months Ended December 31, 1998 and 1997 F-20
NOTES TO FINANCIAL STATEMENTS F-21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF F-21
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Tahiti Apparel, Inc.:
We have audited the accompanying balance sheets of Tahiti Apparel, Inc. as of
June 30, 1998 and 1997, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tahiti Apparel, Inc. as of June
30, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
August 31, 1998
F-2
<PAGE>
TAHITI APPAREL, INC.
BALANCE SHEETS AS OF JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 0 $ 27,188
Restricted cash - current (Note 2) 100,000 126,557
Accounts receivable - nonfactored, net of allowance
for doubtful accounts (Note 2) 318,677 220,951
Inventories (Notes 2 and 4) 10,376,422 4,850,355
Prepaid expenses and other current assets 982,061 172,383
Deferred income taxes (Notes 2 and 5) 0 363,217
Due from affiliate (Note 7) 924,375 0
Due from officers (Note 7) 1,464,131 491,515
------------ ------------
Total current assets 14,165,666 6,252,166
------------ ------------
FURNITURE, FIXTURES AND EQUIPMENT (NOTE 2):
Furniture and fixtures 342,368 214,020
Machinery and equipment 44,924 44,326
Computer equipment 402,998 282,922
Leasehold improvements 990,474 185,229
------------ ------------
Total furniture, fixtures and equipment 1,780,764 726,497
Less- Accumulated depreciation and amortization 271,184 107,376
------------ ------------
Furniture, fixtures and equipment, net 1,509,580 619,121
------------ ------------
RESTRICTED CASH (Note 2) 644,242 461,540
------------ ------------
DEFERRED INCOME TAXES (Notes 2 and 5) 0 124,000
------------ ------------
OTHER ASSETS 187,849 171,205
------------ ------------
Total assets $ 16,507,337 $ 7,628,032
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
---------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Cash overdraft $ 89,766 $ 0
Current portion of note payable (Note 6) 49,000 30,000
Due to factor (Note 3) 6,166,405 92,986
Accounts payable 2,685,937 1,760,949
Due to related party (Note 7) 6,772,207 1,644,394
Royalties payable (Note 8) 1,361,562 775,033
Accrued expenses and other current liabilities 874,225 2,387,094
(Notes 7 and 8)
Due to stockholder (Note 7) 178,412 169,407
------------ ------------
Total current liabilities 18,177,514 6,859,863
------------ ------------
NOTE PAYABLE (Note 6) 0 46,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value; authorized 300 shares; issued and
outstanding 150 shares 104,990 104,990
Retained earnings (deficit) (1,775,167) 617,179
------------ ------------
Total stockholders' equity (deficit) (1,670,177) 722,169
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 16,507,337 $ 7,628,032
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 2) $ 64,574,007 $ 46,781,696 $ 34,431,340
COST OF SALES (Note 7) 47,672,730 32,189,436 25,796,690
------------ ------------ ------------
Gross profit 16,901,277 14,592,260 8,634,650
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 2, 7 and 8) 16,900,310 10,990,237 7,906,219
------------ ------------ ------------
Income from operations 967 3,602,023 728,431
INTEREST EXPENSE 3,150,686 1,576,980 1,145,224
------------ ------------ ------------
(Loss) income before provision for
income taxes (3,149,719) 2,025,043 (416,793)
(BENEFIT) PROVISION FOR INCOME TAXES
(Note 5) (757,373) 825,816 193,967
------------ ------------ ------------
Net income (loss) ($ 2,392,346) $ 1,199,227 ($ 610,760)
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Common Stock
-------------------------
Shares Retained
Issued Amount Earnings Total
----------- ----------- ----------- -----------
BALANCE, June 30, 1995 150 $ 104,990 $ 28,712 $ 133,702
Net loss 0 0 (610,760) (610,760)
----------- ----------- ----------- -----------
BALANCE, June 30, 1996 150 104,990 (582,048) (477,058)
Net income 0 0 1,199,227 1,199,227
----------- ----------- ----------- -----------
BALANCE, June 30, 1997 150 104,990 617,179 722,169
Net loss 0 0 (2,392,346) (2,392,346)
----------- ----------- ----------- -----------
BALANCE, June 30, 1998 150 $ 104,990 ($1,775,167) ($1,670,177)
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements
F-5
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,392,346) $ 1,199,227 ($ 610,760)
Adjustments to reconcile net income to net cash
provided by operating activities-
Provision for doubtful accounts 144,000 190,000 267,447
Depreciation and amortization 246,543 105,983 21,983
Deferred tax provision (benefit) 487,217 (357,217) (23,000)
Changes in assets and liabilities-
Due from factor, net 0 2,376,464 228,215
Accounts receivable - nonfactured (241,726) 127,963 134,999
Inventories (5,526,067) (2,700,525) 426,985
Prepaid expenses and other current assets (809,678) (69,915) 80,848
Due from affiliate (924,375) 0 0
Due from officers (972,616) (291,344) (218,450)
Other assets (16,644) 32,626 215,824
Accounts payable 924,988 (2,003,829) (1,050,365)
Due to related party 5,127,813 0 0
Royalties payable 586,529 395,074 (75,627)
Accrued expenses and other current liabilities (1,512,869) 1,596,110 577,255
Due from stockholder 9,005 0 159,235
----------- ----------- -----------
Net cash (used in) provided by operating
activities (4,870,226) 600,617 134,589
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash, net (156,145) (271,550) (316,547)
Purchases of furniture, fixtures and equipment (1,137,002) (635,981) (51,508)
----------- ----------- -----------
Net cash (used in) provided by investing
activities (1,293,147) (907,531) (368,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on note payable (27,000) (55,210) (40,038)
Due to factor, net 6,073,419 0 0
Cash overdraft 89,766 0 0
----------- ----------- -----------
Net cash provided by (used in) financing
activities 6,136,185 (55,210) (40,038)
----------- ----------- -----------
Net decrease in cash and cash equivalents (27,188) (362,124) (273,504)
CASH AND CASH EQUIVALENTS, beginning of year 27,188 389,312 $ 662,816
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 0 $ 27,188 $ 389,312
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for-
Interest $ 3,150,686 $ 1,576,980 $ 1,145,224
=========== =========== ===========
Income taxes $ 17,903 $ 69,200 $ 76,571
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements
F-6
<PAGE>
TAHITI APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND BACKGROUND:
Tahiti Apparel, Inc. (the Company) is an importer and distributor of
women's clothing, specifically swimwear, swimwear cover-ups and bodywear.
The products are imported primarily from the Far East and sold to specialty
stores, department stores and mass merchant chains.
On June 30, 1996, the stockholders executed an agreement to merge Tahiti
Apparel, Inc., a previously inactive corporation, into Key Item Speed
Sourcing, Inc. and to change the name of the Company to Tahiti Apparel,
Inc. As a result, this transaction was accounted for as a reorganization of
companies under common control which is similar to a pooling of interests.
The accompanying financial statements include the financial results of both
Key Item Speed Sourcing, Inc. and Tahiti Apparel, Inc. The merger and name
change was filed with the state of New Jersey on August 6, 1996.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
Cash and cash equivalents represent all highly liquid investments with
maturities of one year or less when acquired.
Restricted Cash-
Restricted cash represents certificates of deposit of $744,242 and
$588,097 at June 30, 1998 and 1997, respectively, which have been
assigned to a bank as security for letters of credit (see Note 7)
issued by banks on behalf of the Company.
Allowance for Doubtful Accounts-
The Company provides an allowance for doubtful accounts arising from
operations of the business, which allowance is based upon a specific
review of certain outstanding and historical collection performance.
In determining the amount of the allowance, the Company is required to
make certain estimates and assumptions and actual results may differ
from these estimates and assumptions. The allowance for doubtful
nonfactored accounts receivable was $205,254 and $52,680 as of June
30, 1998 and 1997, respectively.
F-7
<PAGE>
Inventories-
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. Inventories, which consist primarily of
finished goods, have been pledged in accordance with the terms of the
Company's factoring agreement (see Note 4).
Furniture, Fixtures and Equipment-
Furniture, fixtures and equipment are stated at cost. Depreciation is
provided using the straight-line method based on the estimated useful
lives of the assets.
Furniture and fixtures 4 -10 years
Machinery and Equipment 10 years
Computer equipment 7 years
Leasehold improvements Lease term
Long-Lived Assets-
The provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets" ("SFAS 121")
requires, among other things that an entity review its long-lived
assets and certain related intangibles for impairment whenever changes
in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. The Company does not believe that any such
changes have occurred.
Income Taxes-
The Company accounts for taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
This statement requires the Company to recognize deferred tax assets
and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statements
carrying amounts and the tax basis of assets and liabilities.
Revenue Recognition-
Revenue is recognized when the Company's products are shipped to its
customers.
Concentrations of Credit Risk-
In 1998, 1997 and 1996, Wal-Mart accounted for 55%, 50% and 50% of
sales, respectively. In 1998, 1997 and 1996, Kmart accounted for 26%,
26% and 23% of sales, respectively.
Advertising Costs-
The Company expenses nonreimbursable advertising costs as costs are
incurred. The amounts charged to advertising expense during the years
ended June 30, 1998, 1997 and 1996 were approximately $264,000,
$41,000 and $182,000, respectively.
F-8
<PAGE>
Financial Instruments-
The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable and amounts due to factor. The carrying
amounts of these financial instruments approximate fair value due to
their short-term nature.
Reclassifications-
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
(3) DUE TO FACTOR:
Due to factor consists of the following-
June 30
----------------------------
1998 1997
------------ ------------
Factor receivables $ 15,233,891 $ 14,858,900
Due to factor (21,056,296) (14,456,555)
Allowance for returns and discounts (344,000) (495,331)
------------ ------------
Net due to factor ($ 6,166,405) ($ 92,986)
============ ============
The Company has an accounts receivable financing arrangement (the "Factor
Agreement") with a financial institution (the "Factor") covering
substantially all of its accounts receivable. The Factor Agreement provides
for the payment of a commission ranging from .70% to .80% of the face
amount for all accounts sold to the Factor. In addition, the Factor
Agreement also provides for advances to be made against eligible accounts
receivable, factored without recourse, and eligible inventory as determined
by the Factor. The outstanding advances bear interest at the prime rate
(8.50% at June 30, 1998) plus 1.5%. Under the Factor Agreement, the Company
can obtain letter of credit financing to fund the Company's foreign orders
up to a defined borrowing base at a monthly rate of .25%. All transactions
under the Factor Agreement are personally guaranteed by two stockholders of
the Company and secured by the factored receivables and inventory of the
Company. Additionally, during 1997, stockholders of the Company provided
the Factor side collateral of approximately $200,000 which was returned to
the stockholders prior to June 30, 1997.
Either party to the Factor Agreement may terminate with 60 days notice. The
Factor Agreement provides that a minimum amount of receivables
($30,000,000) must be sold to the factor per each Factor Agreement year.
(4) INVENTORIES:
Inventories are summarized as follows:
1998 1997
----------- -----------
Raw materials $ 326,680 $ 37,014
Work-in-process 376,751 0
Finished goods 9,672,991 4,813,341
----------- -----------
$10,376,422 $ 4,850,355
=========== ===========
F-9
<PAGE>
(5) INCOME TAXES:
The provision for income taxes consists of the following for the years
ended June 30, 1998, 1997 and 1996-
1998 1997 1996
----------- ----------- -----------
Federal-
Current ($1,001,640) $ 922,179 $ 182,279
Deferred 390,000 (282,451) (18,000)
----------- ----------- -----------
(611,640) 639,728 164,279
----------- ----------- -----------
State-
Current (242,950) 260,854 34,688
Deferred 97,217 (74,766) (5,000)
----------- ----------- -----------
(145,733) 186,088 29,688
----------- ----------- -----------
Total ($ 757,373) $ 825,816 $ 193,967
=========== =========== ===========
A reconciliation of the differences between the effective tax rate and the
statutory U. S. income tax rate (34%) is as follows for the years ended
June 30, 1998, 1997 and 1996-
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at statutory rate ($1,047,614) $ 688,515 $ 164,279
State income tax provision, net of Federal benefit (184,873) 137,301 29,688
Valuation allowance 1,719,704 0 0
Reversal of previously recorded tax liability (1,244,590) 0 0
----------- ----------- -----------
Total ($ 757,373) 825,816 193,967
----------- ----------- -----------
Effective tax rate (21.3%) 40.8% 46.5%
=========== =========== ===========
</TABLE>
The deferred income tax benefit for the year ended June 30, 1997 amounted
to $357,217. Significant components of deferred tax assets as of June 30,
1998 and 1997 are as follows-
1998 1997
--------- ---------
Allowance for doubtful accounts $ 111,000 $ 197,000
Inventory 270,000 166,217
Contributions 403,000 124,000
Depreciation 25,000 0
Valuation allowance (809,000) 0
--------- ---------
Total $ 0 $ 487,217
========= =========
The Company incurred a net operating loss of approximately $100,000 for
Federal income tax purposes during 1998. The deferred tax benefit for the
loss was not recorded in the accompanying financial statements as
management was unable to determine that the realization of such asset was
more likely than not, and thus provided a valuation allowance for the
deferred tax asset generated. In addition, due to the loss recorded during
1998, management was unable to conclude that the realization of deferred
tax assets totaling $809,000 at June 30, 1998 were more likely than not.
Accordingly, during 1998 a $809,000 valuation allowance was recorded
against the net deferred tax assets.
F-10
<PAGE>
(6) NOTE PAYABLE:
On October 25, 1993, the Company entered into a stock buy-out agreement
(the "Stock Agreement") with a stockholder. The Stock Agreement called for
the Company to repurchase the 50 shares of the Company's stock owned by the
stockholder for total consideration of $400,000. In accordance with the
terms of the Stock Agreement the Company paid $150,000 to the stockholder
in 1993. In addition, the Stock Agreement required five annual installments
of $50,000 (inclusive of interest at a rate of 7.00%) to be paid to the
stockholder commencing on October 15, 1994. The final installment of
$49,000 is due and payable on October 15, 1998.
(7) RELATED PARTY TRANSACTIONS:
The Company has outstanding advances of $1,464,131 and $491,515 at June 30,
1998 and 1997, respectively, to certain officers including two
stockholders. Accrued interest, included within due from officers in the
accompanying balance sheet, totaled approximately $108,000 and $31,000 as
of June 30, 1998 and 1997, respectively. The advances which bear interest
at the prime rate (8.50% at June 30, 1998) are payable on demand.
On November 1, 1997, the Company and the Affiliate entered into a Products
Warehousing Agreement (the "Warehousing Agreement"). Under the Warehousing
agreement the Company has contracted the Affiliate to warehouse and service
orders of the Company's products under policies and procedures provided by
the Company within the Warehousing Agreement for a period of five years.
Following expiration, the Warehousing Agreement shall be automatically
renewed as written in one year increments unless either party provides at
least sixty days notice prior to expiration. The Warehousing Agreement
provides payment terms for the Affiliate for performing services. The fee
structure is delineated in an exhibit to the Warehousing Agreement where
prices are set based upon per piece and per dozen of pieces handled.
As of June 30, 1998 and 1997, the Company has outstanding advances/payables
of approximately $924,000 and ($2,000), respectively due from/(to) an
affiliated company (the "Affiliate"). The Affiliate, incorporated in
December 1996, has four stockholders, two of which are 33 1/3% stockholders
of the Company and two who are officers of the Company. The Affiliate acts
as a contractor for the Company for the receipt, warehousing, and shipment
of the Company's inventory. The Company made payments to the Affiliate in
the amount of $3,041,000 and $440,000 in fiscal 1998 and 1997,
respectively. It is the Company's intent to deduct the $924,375 in
outstanding advances against future invoices for services rendered by the
Affiliate.
A stockholder loaned $150,000 to the Company to fund a certificate of
deposit which provides security to a bank for letters of credit issued by
that bank on behalf of the Company in relation to certain licensing
agreements. As of June 30, 1998 and 1997, the certificate of deposit had
earned interest of $28,412 and $19,407, respectively, which is reflected as
an additional stockholder loan payable in the accompanying balance sheet.
A related party owned by a stockholder providing financing for the Company
by opening bank letters of credit to suppliers and provides acceptance
financing for merchandise shipped under those letters of credit. The
related party provided continuous financing which reached a maximum of
approximately $8 million in open letters of credit and acceptances,
combined. The related party is compensated for the letters of credit at 3%
of their face amount, and interest on acceptances is accrued at an annual
rate of 11%. The Company made payments to the related party in the
approximate amount of $10,450,000, $10,085,000, and $14,061,000 in fiscal
1998, 1997 and 1996, respectively, related to the inventory purchases and
the letter of credit fees discussed above. Included within current
liabilities in the accompanying balance sheet are amounts due to the
related party of approximately $6,772,000 and $1,644,000 as of June 30,
1998 and 1997, respectively. During fiscal 1998, the Company extended its
payment terms with the related party. As a result,
F-11
<PAGE>
beginning in March 1998, interest was accrued on past due invoices at an
annual rate of 12.75%. As of June 30, 1998, approximately $76,500 of
accrued interest is included within accrued expenses and other current
liabilities related to the past due accounts payable outstanding.
(8) COMMITMENTS AND CONTINGENCIES:
Leases-
The future minimum lease payments for all noncancellable leases at June 30,
1998, are as follows-
1999 $609,000
2000 486,000
2001 432,000
2002 424,000
2003 433,000
Thereafter 1,280,000
---------------
$3,664,000
===============
Rent expense under the Company's various lease agreements totaled
approximately $479,000, $104,000, and $116,000 in 1998, 1997 and 1996,
respectively.
Employment and Consulting Contracts-
During 1997, the Company entered into a two year employment contract
with an officer which provides for guaranteed annual base and bonus
compensation of $240,000, plus an additional incentive bonus based on
the sales performance of specific product lines. Either party may
terminate the contract with thirty days written notice.
In April 1998, the Company entered into a three year consulting
agreement with an officer providing for an annual fee of $600,000 (the
"Fee") during the term. The Fee is payable in monthly installments of
$50,000, which commenced in April 1998. The consulting agreement also
provides for additional fees ("Additional Fees"), as defined,
calculated as a percentage of net sales of certain products sold by
the officer and payable on a quarterly basis. The Fee is considered an
advance and is not earned by the officer until the calculation of the
Additional Fee based upon net sales equals or exceeds $600,000 (the
"Sales Threshold"). In the event the Sales Threshold is not met in any
given year, the difference between the Sales Threshold and the portion
of the Fee and Additional Fee advanced to the officer (the
"Shortfall") shall be added to the Sales Threshold in any subsequent
year of the consulting agreement. Included in prepaid expenses and
other current assets in the accompanying June 30, 1998 balance sheet
is $150,000 of the Fee advanced to the officer. The consulting
agreement also provides for early termination under certain
conditions, including not achieving a minimum sales level, as defined.
F-12
<PAGE>
Litigation-
The Company is involved in legal proceedings incurred in the normal
course of business. In the opinion of management and its counsel, if
adversely decided, none of these proceedings would have a material
effect on the financial position or results from operations of the
Company.
License Agreements-
The Company has licenses for the right to use certain trademarks in
connection with the sale of its products. The license agreements
require the Company to pay a percentage of sales of the licensed
products, as defined. In addition, minimum royalty payments and
advertising expenditures is also generally required, as well as
providing for maintenance of quality control. Royalty expense under
these agreements was approximately $4,547,000, $2,804,000 and
$1,842,000 for the years ended June 30, 1998, 1997, and 1996,
respectively. As of June 30, 1998, future minimum guaranteed royalty
payments under existing license agreements aggregate to approximately
$5,645,000 through the year 2002.
Letters of Credit-
At June 30, 1998, and 1997, the Company was contingently liable for
irrevocable standby letters of credit totaling $3,158,000 and
$1,113,000, respectively.
Litigation Settlement-
In June 1998, the Company settled a copyright infringement lawsuit.
Under the terms of the Settlement Agreement, the Company is required
to pay $40,000 to the plaintiff in two $20,000 installments in
addition to certain legal fees incurred. The first installment was due
on or before July 6, 1998 and the second installment was due on or
before August 1, 1998. The Company has accrued $44,000 for the
settlement and related legal expenses which is included within accrued
expenses and other liabilities in the accompanying June 30, 1998
balance sheet.
Under the terms of the Settlement Agreement, the Company committed to
purchase from the plaintiff a minimum of $2,000,000 of fabric from the
date of the settlement through March 1, 2000, (the "Settlement
Period"). If the Company fails to meet the fabric purchase
requirements an additional payment will be required on April 1, 2000.
If the Company purchases more than $1,000,000 of fabric but less than
$2,000,000 of fabric during the Settlement Period, $50,000 will be
due. If the purchased fabric amount is less than $1,000,000 during the
Settlement Period, $75,000 will be due.
Any late payments under the Settlement Agreement are subject to
interest changes at an annual rate of 18%. If the Company sells its
assets during the Settlement Period, the buyer of the assets will
assume the contingent minimum fabric purchase liability or the Company
will make the additional $50,000 or $75,000 payment, based on fabric
purchases through the asset sale date.
Buying Agency Agreement-
In February 1998, the Company entered into a Buying Agency Agreement
with an agent based in Taiwan (the "Agent"). Under the terms of the
Buying Agency Agreement, the Agent will act as a nonexclusive buying
agent for the company in connection with the Company's purchases of
wearing apparel in Taiwan, Hong Kong, Philippines, Indonesia, Korea,
and the United States.
The Agent will charge a commission of 6% of the invoice price for
purchases in the United States and Taiwan and a commission of 7% for
purchases in the other countries. The Company will also reimburse the
Agent for freight and insurance expenses incurred on the shipment of
goods. Letter
F-13
<PAGE>
of credit financing is required under the Buying Agency Agreement upon
which the Agent may draw from on the Company's behalf.
There is no term or purchase requirement in the Buying Agency
Agreement. The Company can terminate the Buying Agency Agreement if
the Agent fails to perform with any terms of the agreement or if the
Agent discontinues performance for any thirty day period, changes
ownership or enters bankruptcy proceedings.
Collateral Agreement-
In July 1998, the Company, Signal Apparel Company, Inc. ("Signal"),
and the Factor (see Note 3) entered into an agreement (the
"Agreement") whereby Signal would provide letter of credit financing
for the Company. Under the Company's Factor Agreement (see Note 3)
letter of credit financing is available, however, the Company had
reached its borrowing base limit. The Factor Agreement also provided
the Factor with first lien on the Company's inventory and receivables
from factored sales. Under the Agreement, Signal is provided with the
first lien on the Company's inventory purchased under letters of
credit opened by Signal on behalf of the Company. Signal will also
guarantee to the Factor payment of all invoices attributable to the
letters of credit opened by Signal. The Company will pay Signal a fee
of 2% of the total invoice cost of the goods plus the costs to import
the goods and the costs to prepare the goods for shipment.
(8) SUBSEQUENT EVENT:
The Company is currently negotiating the sale of its assets to Signal
Apparel Company, Inc. ("Signal") in exchange for stock in Signal.
MANAGEMENT'S DISSCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Year Ended June 30, 1998 Compared With The Prior Fiscal Year
Net sales totaled $64.6 million and $46.8 million for the fiscal years ended
June 30, 1998 and 1997 respectively, or an increase of $17.8 million (38%). The
increase in net sales in fiscal 1998 compared with fiscal 1997, was principally
due to an increase in bodywear and activewear sales in the first six months of
fiscal 1998. Those non-seasonal sales totaled $16.6 million in the first six
months of the fiscal year ended June 30, 1998 compared with $2.9 million for the
first six months of fiscal 1997, or an increase of $13.7 million (472%). Prior
to fiscal 1998, the company was very seasonal with virtually all sales occurring
in the January to June period which is the swimwear sales season. The balance of
the increase was due to growth in seasonal sales to the existing customer base
($2.7 million or approximately 6%) and the entry into a new channel of
distribution ($1.2 million or approximately 2%). Sales in the new channel of
distribution were made to specialty retailers and the higher-priced, better
stores with swimwear and related garments made under the Jones of New York label
under a licensing agreement.
Cost of sales totaled $47.6 million and $32.2 million representing percentages
of net sales of 74% and 69% in the fiscal years ended June 30, 1998 and 1997,
respectively. The increase in the cost of sales is principally the result of
higher sales volume. The increase in cost of sales as a percentage of net sales
in fiscal 1998 as compared with fiscal 1997 is due to the inclusion of higher
product costs in connection with the entry into the new channel of distribution
described above and the product costs in connection with a new product which was
launched in fiscal 1998 and subsequently abandoned. Additionally, cost of
F-14
<PAGE>
sales includes higher manufacturing costs and a premium to expedite imported
merchandise which was delayed due to the company's inability to open letters of
credit in favor of the manufacturers in a timely manner due to a shortage of
working capital (see LIQUIDITY AND CAPITAL RESOURCES below).
Gross profit of $17 million and $14.6 million for the fiscal years ended June
30, 1998 and 1997 represented 26% and 31%, respectively, of net sales of those
years. The increases in gross profit are the result of the sales increase in
each of the years and the changes as a percentage of net sales result from the
changes in cost of sales as described above.
Selling, general and administrative expenses increased $5.9 million to $16.9
million (26% of net sales) in the fiscal year ended June 30, 1998 compared with
$11 million (24% of net sales) in fiscal 1997. Much of the increase is
attributable to the increase in sales volume including higher royalties for
licensed products of $1.8 million, increased payroll and related taxes for
increased staff of $.9 million, higher legal and professional fees of $.5
million, increased rent $.4 million for additional showroom and office space,
increased office administrative expenses of $.4 million, increased advertising
of $.2 million and depreciation of $.2 million related to capital expenditures
for additional space and computer systems. The 2% of net sales, or approximately
$1.3 million increase in selling, general and administrative expenses in fiscal
1998 as compared with fiscal 1997 that is not directly related to the volume
increase is the result of costs in connection with sales in the new channel of
distribution and the new product launch described above.
Interest expense increased $1.6 million to $3.2 million (5% of net sales) in the
fiscal year ended June 30, 1998 from $1.6 million (3% of net sales) in fiscal
1997. The increase resulted from higher loan balances outstanding due to
increased volume and a shortage of working capital (see discussion of LIQUIDITY
AND CAPITAL RESOURCES below).
Year Ended June 30, 1997 Compared With The Prior Fiscal Year
Net sales increased $12.4 million or 36% from $34.4 million in the year ended
June 30, 1996 to $46.8 million in the year ended June 30, 1997. The increase
resulted from higher seasonal sales to existing customers. Non-seasonal bodywear
and activewear sales decreased $1.1 million from $4.0 million in the first six
months of the fiscal year ended June 30, 1996 to $2.9 million in the first six
months of the fiscal year ended June 30, 1997.
Cost of sales totaled $32.2 million, or 69% of net sales for the year ended June
30, 1997. This represents an increase of $6.4 million from $25.8 million, or 75%
of net sales for the previous fiscal year. The increase in cost of sales is the
direct result of the increased sales, however, the decrease expressed as a
percentage of net sales from 75% to 69% was the effect of a selling price
increase made at the end of fiscal 1996 and in effect for the full fiscal year
ended June 30, 1997.
Gross profit increased from $8.6 million, or 25% of net sales for the fiscal
year ended June 30, 1996 to $14.6 million, or 31% of net sales for the fiscal
year ended June 30, 1997. The improvement in gross profit expressed as a
percentage of net sales resulted from the selling price increase described
above.
The total of selling, general and administrative expenses increased $3.9 million
in the fiscal year ended June 30, 1997 to $11.8 million, or 25% of net sales,
from $7.9 million, or 23% of net sales, in fiscal 1996. Included in
volume-related increases are higher royalties for licensed products of $1
million, increased payroll and related taxes for increased staff of $1.4
million, increased warehousing and shipping costs of $.5 million and increased
sales-related travel and selling expenses of $.7 million
Interest expense increased from $1.2 million, or 4% of net sales for the fiscal
year ended June 30, 1996 to $1.6 million, or 3% of net sales for the fiscal year
ended June 30, 1997. The increase resulted from greater borrowings in fiscal
1997 to support the increased sales recorded in that year.
F-15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit was $.6 million at June 30, 1997 and worsened to
$3.9 at June 30, 1998. The trend throughout fiscal 1998 was the consumption of
working capital with the result of a severe shortage at June 30, 1998. At June
30, 1998, the company had ceased payment to a shareholder who provided letter of
credit and acceptance financing to the company and was in arrears in payment of
trade accounts payable, royalties payable to licensors and other liabilities.
The severe shortage in working capital was caused by the net loss recorded for
fiscal 1998 ($2.3 million), an increase in inventory ($5.5 million), an increase
in prepaid expenses ($.8 million) and increases in due from officers ($1
million) and due from related parties ($.9 million).
In the fiscal year ended June 30, 1998, the working capital demands caused by
the net cash used by operating activities of $4.9 million and capital spending
of $1.1 million were met by borrowings under an accounts receivable factoring
and inventory loan agreement. Borrowings under that agreement are near the
maximum available. Sale of the company's inventory to provide liquidity is
possible, however, sale of seasonal inventory in the off season will result in
deep discounts from normal selling prices. The company intends to complete the
intended acquisition by Signal Apparel Company, Inc. and benefit from the
greater financial resources of that company. While both parties to the
acquisition believe it will be accomplished, no assurances can be given that it
will close. Should the acquisition not close, the company will pursue a
financing alternative that had been discussed with a new source. The financing
package is intended to be a combination of purchase order financing to provide
letters of credit for imported products and asset-based financing to meet the
company's working capital needs. In addition, the company explored an
equity/debt placement which will be re-evaluated in the event that the intended
acquisition does not occur.
At June 30, 1998, the company had capital expenditure commitments totaling
approximately $1 million, the bulk of which is related to completion of
leasehold improvements in leased space for offices and showrooms.
YEAR 2000 COMPLIANCE PLAN
The company purchased hardware and software and installed the new systems during
fiscal 1997 to support operational and customer demands resulting from the
increased sales levels. The company's year 2000 initiative involves internal and
external professionals and is ongoing. Preliminary findings indicate that the
systems require slight modification to be year 2000 compliant with a total
estimated cost of less than $100 thousand.
F-16
<PAGE>
TAHITI APPAREL, INC.
FINANCIAL STATEMENTS
FISCAL QUARTER ENDED AS OF
DECEMBER 31, 1998 AND 1997(unaudited)
F-17
<PAGE>
TAHITI APPAREL, INC.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1998 1998
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ -- $ --
Restricted Cash-Current -- 100
Accounts Receivable-Net of Allowance
for Doubtful Accounts 145 319
Inventories 10,396 10,376
Prepaid Expenses and Other Current Assets 546 983
Due From Affiliate 961 924
Due From Officers 1,626 1,464
-------- --------
Total Current Assets 13,674 14,166
FURNITURE, FIXTURES AND EQUIPMENT-NET 1,786 1,510
RESTRICTED CASH 750 644
OTHER ASSETS 188 188
-------- --------
Total Assets $ 16,398 $ 16,507
======== ========
Liabilities and Stockholders' Deficit
CURRENT LIABILITIES:
Cash Overdraft $ 298 $ 90
Current Portion of Note Payable 50 49
Due to Factor 13,832 6,166
Accounts Payable 2,685 2,686
Due to Related Party 6,780 6,772
Royalties Payable 590 1,362
Accrued Expenses and Other Current Liabilities 1,856 874
Due to Stockholder 183 178
-------- --------
Total Current Liabilities 26,274 18,177
STOCKHOLDER'S DEFICIT:
Common Stock, No Par Value; Authorized 300
Shares; Issued and Outstanding 150 Shares 105 105
Accumulated Deficit (9,981) (1,775)
-------- --------
Total Stockholder's Deficit (9,876) (1,670)
Total Liabilities and Stockholder's
Deficit $ 16,398 $ 16,507
======== ========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE>
TAHITI APPAREL, INC.
STATEMENTS OF OPERATIONS
For the Six Months Ended
December 31, 1998 and 1997
(In Thousands)
(Unaudited)
1998 1997
-------- --------
Net Sales $ 14,141 $ 16,648
Cost of Sales 13,828 12,066
-------- --------
Gross Profit 313 4,582
Selling, General and Administrative
Expenses 7,156 6,439
-------- --------
Loss From Operations
(6,843) (1,857)
Interest Expense 1,362 1,130
-------- --------
Loss Before Benefit for Income Taxes (8,205) (2,987)
Income Taxes -- 765
-------- --------
Net Loss $ (8,205) $ (2,222)
======== ========
See Accompanying Notes to Financial Statements
F-19
<PAGE>
TAHITI APPAREL, INC
STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
December 31,1998 December 31,1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(8,206) $(2,222)
Adjustments to Reconcile Net Loss
to Net Cash Used by Operating
Activities-
Depreciation 118 66
Changes in Assets and Liabilities-
Accounts Receivable 174 (8)
Inventories (20) (8,688)
Prepaid Expenses 436 (1,592)
Due From Related Party (37) --
Due From Officers (162) 35
Other Assets (1) 146
Accounts Payable (1) (3)
Due to Related Party 8 5,126
Royalties Payable (771) 277
Accrued Expenses 982 (1,936)
Due to Stockholder 5 --
------- -------
Net Cash Used by
Operating Activities (7,475) (8,799)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted Cash (6) 42
Purchases of Furniture, Fixtures and Equipment (394) (320)
------- -------
Net Cash Used in
Investing Activities (400) (278)
CASH FLOWS FROM FINANCING ACTIVITIES:
Note Payable 1 --
Due to Factor 7,666 9,193
Cash Overdraft 208 0
------- -------
Net Cash Provided by
Financing Activities 7,875 9,193
Net Increase in Cash and
Cash Equivalents -- 116
CASH AND CASH EQUIVALENTS-beginning of period -- 27
------- -------
CASH AND CASH EQUIVALENTS-end of period $ -- $ 143
======= =======
</TABLE>
See Accompanying Notes to Financial Statements
F-20
<PAGE>
TAHITI APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial statements have been prepared on a basis
consistent with the financial statements for the year ended June 30, 1998. The
accompanying financial statements include all adjustments which are, in the
opinion of the company, necessary to present fairly the financial position of
the company as of December 31, 1998 and its results of operations and cash flows
for the six months ended December 31, 1998. These financial statements should be
read in conjunction with the company's audited financial statements and notes
thereto as of June 30, 1998 and 1997.
2. The results of operations for the six months ended December 31, 1998 are
not necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
(In Thousands)
December 31, June 30,
1998 1998
------- -------
Raw Materials $ 493 $ 326
Work in Process 1,450 377
Finished Goods 8,453 9,673
------- -------
$10,396 $10,376
======= =======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales of $14.1 million for the six months ended December 31, 1998 decreased
$2.6 million or 16% from $16.7 million for the six months ended December 31,
1997. This decrease resulted primarily from a delay in the shipment of goods
during the beginning of the 1998/1999 spring season. Several million in orders
were delayed until January and February, 1999 due to the failure of Tahiti's
suppliers to timely complete and deliver goods, partially as a result of
Tahiti's delay in opening letters of credit. These delays occurred during the
negotiation and consummation of the sale of Tahiti's assets to Signal Apparel.
Cost of sales increased $1.8 million from $12.1 million (72.5%) for the six
months ended December 31, 1997 to $13.9 million (97.8%) for the six months ended
December 31, 1998. This increase is primarily the result of the delay in sales
of higher margin goods until January and February, 1999 and the extra cost of
air freight associated with the delivery of goods produced late in November and
December, 1998.
Gross profit decreased from $4.6 million for the six months ended December 31,
1997 to $0.3 million for the same period in 1998. This decrease is the result of
the increased cost of sales as discussed above.
F-21
<PAGE>
Selling general and administrative expenses increased $0.8 million from $6.4
million for the six months ended December 31, 1997 to $7.2 million for the same
period in 1998. Selling expenses increased $0.2 as a result of extra promotional
and marketing expenses, including trade shows and travel expenses.
Administrative expenses increased $0.5 million largely as a result of costs
associated with the negotiation and preparation for the sale of the Tahiti
assets to Signal Apparel and higher payroll costs associated with staff
increases.
Interest expense increased $0.3 million from $1.1 million for the six months
ended December 31, 1997 to $1.4 million for the six months ended December 31,
1998. The increase resulted from larger borrowings from Tahiti's factor due to a
shortage of working capital.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit was <$3.9> at June 30, 1998 and declined to a
deficit of <$12.6> at December 31, 1998. The worsening deficit was principally
the result of the net loss of $8.2 million and increased borrowings related to
the significant letters of credit required to be opened for goods to be
delivered in January and February, 1999. The borrowings of Tahiti were repaid in
full when the acquisition by Signal Apparel was completed.
At December 30, 1998, Tahiti had capital expenditure commitments totaling
approximately $0.7 million, largely related to the completion of leasehold
improvements in space leased for showrooms and offices.
YEAR 2000 COMPLIANCE PLAN
The company purchased hardware and software and installed the new systems during
fiscal 1997 to support operational and customer demands resulting from the
increased sales levels. The company's year 2000 initiative involves internal and
external professionals and is ongoing. Preliminary findings indicate that the
systems require slight modification to be year 2000 compliant with a total
estimated cost of less than $100 thousand.
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