SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to 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 July 3, 1999 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.)
34 Engelhard Avenue, Avenel, New Jersey 07001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 382-2882
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 August 20, 1999
----- ------------------------------
Common Stock 44,869,450 shares
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 3, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash & cash equivalents $ 301 $ 403
Receivables, less allowance for doubtful
accounts of $4,000 in 1999 and $2,443 in 1998, respectively 632 1,415
Note receivable 646 283
Inventories 6,495 12,641
Prepaid expenses and other 219 539
--------- ---------
Total current assets: 8,292 15,281
Property, plant and equipment, net 3,460 3,001
Goodwill 25,111 0
Other assets 824 182
--------- ---------
Total assets $ 37,687 $ 18,464
========= =========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable 9,158 8,133
Accrued liabilities 10,958 9,760
Accrued interest 4,76,8 3,810
Current portion of long-term debt and capital leases 1,638 6,435
Revolving advance account 15,340 44,049
Term Loan 47,732 0
--------- ---------
Total Current Liabilities: 89,595 72,187
Long-term Liabilities:
Convertible Debentures 2,998 0
Notes Payable Principally to Related Parties 23,437 13,968
--------- ---------
Total Long-term Liabilities: 26,435 13,968
Shareholders' Deficit:
Preferred Stock 49,754 52,789
Common Stock 491 326
Additional paid-in capital 185,520 165,242
Accumulated deficit (312,992) (284,931)
--------- ---------
Subtotal (77,227) (66,574)
Less: Cost of Treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total Shareholders' Deficit (78,343) (67,691)
--------- ---------
Total Liabilities and
Shareholders' Deficit $ 37,687 $ 18,464
========= =========
</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 Six Months Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $ 34,293 $ 12,483 $ 67,711 $ 24,044
Cost of Sales 35,184 9,472 59,949 17,979
-------- -------- -------- --------
Gross Profit (891) 3,011 7,762 6,065
Royalty Expense 1,408 1,059 3,393 1,856
Selling, General &
Administrative 13,744 4,494 20,753 9,502
Non-Recurring Expenses 3,240 -0- 3,240 -0-
Interest Expense 3,690 1,669 6,988 3,218
Other (Income) net (31) (90) -0- (536)
-------- -------- -------- --------
Loss Before Income Taxes (22,941) (4,121) (26,612) (7,975)
Income Taxes -0- -0- -0- -0-
-------- -------- -------- --------
Net Loss (22,941) $ (4,121) $(26,612) $ (7,975)
-------- -------- -------- --------
Less Preferred Stock Dividends 1,449 -0- 1,449 -0-
Net Loss Applicable to Common $(24,390) $ (4,121) $(28,061) $ (7,975)
Basic Diluted Net Loss Per Share $ (0.55) $ (0.13) $ (0.69) $ (0.24)
======== ======== ======== ========
Weighted average shares outstanding 44,498 32,662 40,544 32,641
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SIGNAL APPAREL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
July 3, July 4,
1999 1998
-------- --------
Operating Activities:
Net loss $(28,061) $ (7,975)
Adjustments to reconcile net loss to of the
effect of acquisitions and sales:
Depreciation and amortization 2,271 1,397
Non-cash interest charges 1,179 0
(Gain) on disposal of equipment (52) (609)
Changes in operating assets
and liabilities:
Receivables 965 (1,851)
Inventories 14,615 (2,167)
Prepaid expenses and other assets 243 (65)
Accounts payable and accrued
liabilities (687) 1,879
-------- --------
Net cash used in operating
activities (9,526) (9,391)
-------- --------
Investing Activities:
Purchases of property, plant and
equipment 153 (158)
Proceeds from notes receivable 0 116
Restricted Cash 476 0
Proceeds from the sale of Heritage Division 2,000 0
Proceeds from the sale of property,
plant and equipment 0 875
-------- --------
Net cash provided by
investing activities 2,629 833
-------- --------
Financing Activities:
Decrease in Cash in Bank 0 0
Net increase (decrease) in revolving
advance account (42,541) 2,007
Net increase in term loan borrowings 50,000 0
Net increase in borrowings from
related party 0 7,350
Principal payments on borrowings (635) (1,163)
Repurchase of preferred stock (2,398) 0
Proceeds from sale of convertible debt 2,350 0
New common stock issued 18 0
Net cash provided by
financing activities 6,794 8,194
-------- --------
(Decrease) in cash (102) (364)
Cash and Cash equivalents at beginning of period 403 384
-------- --------
Cash and Cash equivalents at end of period $ 301 $ 20
======== ========
See accompanying notes to financial statements.
<PAGE>
Part I Item 1. (continued)
SIGNAL APPAREL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Un-audited)
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, 1998. 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 July 3, 1999 and its
results of operations and cash flows for the three months ended July 3,
1999. 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, 1998.
2. The results of operations for the three months ended July 3, 1999 are not
necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
July 3, December 31,
1999 1998
------- -------
(In thousands)
Raw materials and supplies $ 0 $ 788
Work in process - 0 - 1,377
Finished goods 6,445 10,262
Supplies 50 214
------- -------
$ 6,495 $12,641
======= =======
4. Pursuant to the term of various license agreements, the Company is
obligated to pay future minimum royalties of approximately $1.4 million in
1999.
5. 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.
6. 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
$100,000 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,
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, which was obtained
at the Company's Annual Meeting on January 27, 1999) warrants to purchase
up to 5,000,000 shares of the Company's Common Stock at $1.75 per share.
The warrants issued 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
July 3, 1999, the largest outstanding balance to date has been $20,160,000,
which means that warrants to acquire 4,032,000 shares of Common Stock would
have been vested as of such date). These warrants were subject to
<PAGE>
shareholder approval which was obtained at the Company's 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 anti-dilution 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 a debt discount.
These costs are being amortized over the term of the debt agreement with
WGI. As a result of the anti-dilution protection in the warrants and the
completion of the Tahiti acquisition (including the issuance of the
additional 4.3 million common shares) (see Note 7), the Company anticipates
issuing approximately 3.4 million additional warrants to WGI, LLC. The fair
market value, using the Black-Scholes option pricing model, of the above
mentioned warrants of approximately $2.8 million will be capitalized and
included in the Company's balance sheet as a debt discount. These costs
will be amortized over the term of the debt agreement with WGI, LLC.
7. On March 22, 1999, the Company completed the acquisition of substantially
all of the assets of Tahiti Apparel, Inc. ("Tahiti"), a New Jersey
corporation engaged in the design and marketing of swimwear, body wear and
active wear for ladies and girls. The financial statements reflect the
ownership of Tahiti as of January 1, 1999. The Company exercised dominion
and control over the operations of Tahiti commencing January 1, 1999.
Pursuant to the terms of an Asset Purchase Agreement dated December 18,
1998 between the Company, Tahiti and the majority stockholders of Tahiti,
as amended by agreement dated March 16, 1999 and as further amended
post-closing by agreement dated April 15, 1999 (as amended, the
"Acquisition Agreement"), the purchase price for the assets and business of
Tahiti is $15,872,500, payable in shares of the Company's Common Stock
having an agreed value (for purposes of such payment only) of $1.18750 per
share. Additionally, the Company assumed, generally, the liabilities of the
business set forth on Tahiti's audited balance sheet as of June 30, 1998
and all liabilities incurred in the ordinary course of business during the
period commencing July 1, 1998 and ending on the Closing Date (including
Tahiti's liabilities under a separate agreement (as described below)
between Tahiti and Ming-Yiu Chan, Tahiti's minority shareholder).
The acquisition will result in the issuance of 13,366,316 shares of the
Company's Common Stock to Tahiti in payment of the purchase price under the
Acquisition Agreement. The Acquisition Agreement also provides that
1,000,000 of such shares will be placed in escrow with Tahiti's counsel,
Wachtel & Masyr, LLP (acting as escrow agent under the terms of a separate
escrow agreement) for a period commencing on the Closing Date and ending on
the earlier of the second anniversary of the Closing Date or the completion
of Signal's annual audit for its 1999 fiscal year. This escrow will be used
exclusively to satisfy the obligations of Tahiti and its majority
stockholders to indemnify the Company against certain potential claims as
specified in the Acquisition Agreement. Any shares not used to satisfy such
indemnification obligations will be released to Tahiti at the conclusion of
the escrow period. As discussed below, the Company also issued 1,000,000
additional shares of Common Stock under the terms of the Chan Agreement.
During the course of negotiations leading to the execution of the
Acquisition Agreement, and in order to enable Tahiti to obtain working
capital financing needed to support its ongoing operations, the Company
guaranteed repayment by Tahiti of certain amounts owed by Tahiti under one
of its loans from Bank of New York Financial Corporation ("BNYFC"), which
also is the Company's senior lender.
At a meeting held January 29, 1999, the Company's shareholders approved the
issuance of up to 10,070,000 shares of the Company's Common Stock in
connection with the Acquisition Agreement and the Chan Agreement, which
shares were issued in connection with the closing. Under the rules of the
New York Stock Exchange, on which the Company's Common Stock is traded,
issuance of the additional 4,296,316 shares of Common Stock called for by
the March 16 amendment to the Acquisition Agreement will be subject to
approval by the Company's shareholders at the Company's 1999 annual
meeting. The Company's principal shareholder, WGI, LLC, has executed a
proxy in favor of Zvi Ben-Haim to vote in favor of the issuance of such
additional 4,296,316 shares of the Company's Common Stock at the Company's
1999 Annual Meeting.
<PAGE>
In connection with the acquisition, Tahiti and Tahiti's majority
stockholders reached an agreement with Tahiti's minority shareholder,
Ming-Yiu Chan (the "Chan Agreement"), pursuant to which Tahiti executed a
promissory note to Chan in the principal amount of $6,770,000 (the "Chan
Note"), bearing interest at the rate of 8% per annum. Under the terms of
the Acquisition Agreement, the Company assumed the Chan Note following
Closing. Effective March 22, 1999, the Company exercised its right to pay
the $3,270,000 portion of the Chan Note through the issuance of 1,000,000
shares of Common Stock of the Company to Chan.
The results of operations of Tahiti are included in the accompanying
consolidated financial statements from the date of acquisition (i.e.
January 1, 1999). The pro forma financial information below is based on the
historical financial statements of Signal Apparel and Tahiti and adjusted
as if the acquisition had occurred on January 1, 1998, with certain
assumptions made that management believes to be reasonable. This
information is for comparative purposes only and does not purport to be
indicative of the results of operations that would have occurred had the
transactions been completed at the beginning of the respective periods or
indicative of the results that may occur in the future.
1998
(Un-audited
In Thousands)
-------------
Operating Revenue $ 43,892
Income from Operations $ 13,456
Net Loss $ (1,570)
Basic/diluted net loss per share $ (0.03)
Weighted average shares outstanding 45,987
8. Effective March 22, 1999, the Company completed a new financing arrangement
with its senior lender, BNY Financial Corporation (in its own behalf and as
agent for other participating lenders), which provides the Company with
funding of up to $98,000,000 (the "Maximum Facility Amount") under a
combined facility that includes two Term Loans aggregating $50,000,000
(supported in part by $25,500,000 of collateral pledged by an affiliate of
WGI, LLC, the Company's principal shareholder) and a Revolving Credit Line
of up to $48,000,000 (the "Maximum Revolving Advance Amount"). Subject to
the lenders' approval and to continued compliance with the terms of the
original facility, the Company may elect to increase the Maximum Revolving
Advance Amount from $48,000,000 up to $65,000,000, in increments of not
less than $5,000,000.
The Term Loan portion of the new facility is divided into two segments with
differing payment schedules: (i) $27,500,000 ("Term Loan A") payable, with
respect to principal, in a single installment on March 12, 2004 and (ii)
$22,500,000 ("Term Loan B") payable, with respect to principal, in 47
consecutive monthly installments on the first business day of each month
commencing April 1, 2000, with the first 46 installments to equal
$267,857.14 and the final installment to equal the remaining unpaid balance
of Term Loan B. The Credit Agreement allows the Company to prepay either
term loan, in whole or in part, without premium or penalty. In connection
with the Revolving Credit Line, the Credit Agreement also provides (subject
to certain conditions) that the senior lender will issue Letters of Credit
on behalf of the Company, subject to a maximum L/C amount of $40,000,000
and further subject to the requirement that the sum of all advances under
the revolving credit line (including any outstanding L/Cs) may not exceed
the lesser of the Maximum Revolving Advance Amount or an amount (the
"Formula Amount") equal to the sum of: (1) up to 85% of Eligible
Receivables, as defined, plus (2) up to 50% of the value of Eligible
Inventory, as defined (excluding L/C inventory and subject to a cap of
$30,000,000 availability), plus (3) up to 60% of the first cost of Eligible
L/C Inventory, as defined, plus (4) 100% of the value of collateral and
letters of credit posted by the Company's principal shareholders, minus (5)
the aggregate undrawn amount of outstanding Letters of Credit, minus (6)
Reserves (as defined). In addition to the secured revolving advances
represented by the Formula Amount, and subject to the overall limitation of
the Maximum Revolving Advance Amount, the agreement provides the Company
with an additional, unsecured Overformula Facility of $17,000,000 (the
outstanding balance of which must be reduced to not more than $10,000,000
for at least one business day during a five business day cleanup period
each month) through December 31, 2000. In consideration for the unsecured
portion of the credit facility, the Company issued 1,791,667 shares of
Signal Apparel Common Stock and warrants to purchase 375,000 shares of
Common Stock priced at $1.50 per share. The fair market value of the above
mentioned shares of common stock of approximately $2.1 million has been
capitalized and is included in the accompanying consolidated balance sheet
as a debt discount. The fair market value, using the Black-Scholes option
pricing model, of the above mentioned
<PAGE>
warrants of approximately $0.2 million has been capitalized and is included
in the accompanying consolidated balance sheet as a debt discount. These
costs are being amortized over the five year term of the debt agreement
with BNY.
9. On March 3, 1999, the Company completed the private placement of $5 million
of 5% Convertible Debentures due March 3, 2002 with two institutional
investors. The Company utilized the net proceeds from issuance of these
Debentures to redeem all of the remaining outstanding shares of the
Company's 5% Series G1 Convertible Preferred Stock (following the
conversion of $260,772.92 stated value (including accrued dividends) of
such stock into 248,355 shares of the Company's Common Stock effective
February 26, 1999, by two other institutional investors). This transaction
effectively replaced a security convertible into the Company's Common Stock
at a floating rate (the 5% Series G1 Preferred Stock) with a security (the
Debentures) convertible into Common Stock at a fixed conversion price of
$2.00 per share. The transaction also reflects the Company's decision to
forego the private placement of an additional $5 million of 5% Series G2
Preferred Stock under the original purchase agreement with the Series G1
Preferred investors. In connection with the sale of the $5 million of
Debentures, the Company issued 2,500,000 warrants to purchase the Company's
Common Stock at $1.00 per share with a term of five years. The fair market
value, using the Black Scholes option pricing model, of the above mentioned
warrants of approximately $2.25 million has been capitalized and included
in the consolidated balance sheet as a debt discount. These costs are being
amortized over the term of the Debentures.
10. In January 1999, the Company completed the sale of its Heritage division ,
a woman's fashion knit business, to Heritage Sportswear, LLC, a new company
formed by certain former members of management of the Heritage division.
Additional information regarding the terms of this sale are available in
Company's 10-K.
11. In the first quarter of 1999, Signal closed its offices and warehouses in
Chattanooga, Tennessee and its production facilities in Tazewell, Tennessee
and shut down substantially all of its operations located there. Signal
relocated its sales and merchandising offices to New York, New York and
relocated the corporate offices and all accounting and certain related
administrative functions to offices in Avenel, New Jersey.
12. In the second quarter of 1999, Signal closed its warehouse and printing
facility in Houston, Texas and shut down substantially all of its
operations located there (except for certain artist functions). The Houston
facility was the location for the design, manufacture, and sale of the
Company's Big Ball Sports line of products. Signal relocated the sales and
merchandising functions to New York, New York and has outsourced all of the
manufacturing functions for the Big Ball Sports line to third parties.
Signal has recorded a one-time charge related to the termination of the
Houston facility of $3.2 million.
13. WGI waived its right to receive $1.5 million in preferred dividends which
would have accrued in relation to the Series H Preferred Stock during the
first quarter of 1999. WGI has not waived any other right to receive
preferred dividends which accrued after the end of the first quarter of
1999.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Three Months Ended July 3, 1999
Net sales of $34.3 million for the quarter ended July 3, 1999 represents an
increase of $21.8 million (or 174%) from $12.5 million in net sales for the
corresponding period of 1998. This increase is mainly attributed to $26.9 in
combined new sales from the newly acquired Tahiti division and the Umbro
division. Conversely, the second quarter 1999 sales do not reflect any sales
from the Heritage division (sold at 1/1/99) which had provided $2.7 million in
sales in the quarter ended July 4, 1998.
Total Gross Margin before royalties decreased $3.9 million in the second quarter
of 1999 compared to the corresponding period in 1998. Gross Margin percentage
was negative (2.6%) for the second quarter of 1999 compared to 24% for the
quarter ended July 4, 1998. The $3.9 million decrease in total gross margin is
attributable primarily to over $2.4 million in excessive costs to import goods
by air freight and then transport those same goods by overnight courier direct
to customer retail locations,
<PAGE>
all as a result of late manufacture of such goods. The late manufacture of goods
resulted from delays in opening letters of credit to foreign manufacturers as a
result of limited bank loan availability during the negotiation of the
acquisition of the assets of Tahiti Apparel, Inc. by the Company. In addition,
the gross margin for the second quarter of 1999 was negatively affected by
recognition of $1.1 million in loss on the mark down at the end of the swim
session of obsolete and slow moving inventory.
Royalty expense related to licensed product sales was 4% of sales for the
quarter ended July 3, 1999, compared to 8.5% for the corresponding period of
1998. This decrease resulted primarily from an increase by the Company in sales
of proprietary products.
Selling, general and administrative (SG&A) expenses as a percentage of total
sales were 40% of sales for the quarter ended July 3, 1999 compared to 36% of
sales for the corresponding period of 1998. The total amount of SG&A expenses
increased a total of $9.2 million from $4.5 million in the quarter ended July 4,
1998 to $13.7 million for the comparable quarter of 1999. The change in the
total amount of SG&A between 1998 and 1999 is primarily related to (a)
additional sales expenses resulting from the additional $21.8 million of sales
in the quarter ended July 3, 1999, (b) $2.1 million being paid to a licensor for
the transfer of an apparel license from Tahiti Apparel, Inc. to the Company, (c)
over $0.7 million in consulting fees being paid to third parties for services
related to accounting and systems consulting, (d) $1.0 million of professional
fees and (e) $1.5 million of temporary and recruiting costs associated with the
move to New Jersey.
The nonrecurring charge of $3.2 million in the second quarter of 1999 was the
result of the Company continuing to implement the revised business strategy
first implemented in the last quarter of 1998. The reevaluation resulted in a
change from the company being primarily a manufacturer of products to primarily
a sales marketing, merchandising and distibution company for activewear and
other clothing. As a result, the Company has closed its last operating facility
in Houston, Texas. The Company has accrued $2.2 million for costs associated
with the plant closing, including disposition of inventory or the write down of
inventory. In additional $1.0 million for the relocation of the Houston
activities to New York and New Jersey and the costs of the start-up of new
divisions and other administrative reorganization costs.
Depreciation and Amortization increased from $0.4 million in the quarter ended
July 4, 1998 to $0.7 million in the comparable 1999 period, primarily as a
result of $0.5 million of amortization of goodwill attributable to the new
Tahiti acquisition, partially offset by the sale by the Company of a substantial
portion of its fixed assets in connection with the various plant closings that
have occurred.
Interest expense for the quarter ended July 3, 1999 was $3.7 million compared to
$1.7 million in the comparable quarter of 1998. In the second quarter of 1999,
$1.9 million of the $3.7 million of interest expense is non-cash interest
amortization related to the reduction of debt discounts for the WGI, LLC
warrants and the warrants and common stock issued to BNY (See Notes 6 and 8) .
In addition, as of July 3, 1999, non-cash interest in the amount of $62,500 had
accrued on the 5% Convertible Debenture. Pursuant to the terms of the 5%
Convertible Debenture, the Company intends to pay this accrued interest by the
issuance of shares of common stock.
Six Months Ended July 3, 1999
Net sales of $67.7 million for the six months ended July 3, 1999 represents an
increase of $43.7 million (or 182%) from $24.0 million in net sales for the
corresponding period of 1998. This increase is mainly attributed to $52.3
million in combined new sales from the newly acquired Tahiti division and the
Umbro division. Conversely, the first six months of 1999 sales do not reflect
any sales from the Heritage division (sold at 1/1/99) which had provided $5.8
million in sales in the quarter ended July 4, 1998.
Total Gross Margin before royalties increased $1.7 million in the first six
months of 1999 compared to the corresponding period in 1998. Gross Margin
percentage was 11.5% for the first six months of 1999 compared to 25.2% for the
six months ended July 4, 1998. The $1.7 million increase in total gross margin
is attributable to a smaller percentage (11.5%) applied to a much larger sales
base ($67.7 million). The reduced gross margin percentage is attributable to
excessive costs to import goods by air freight and then transport those same
goods by overnight courier direct to customer retail locations, all as a result
of late manufacture of such goods. The late manufacture of goods resulted from
delays in opening letters of credit to foreign manufacturers as a result of
limited bank loan availability during the negotiation of the acquisition of the
assets of Tahiti Apparel, Inc. by the Company. In addition, the gross margin for
the first six months of 1999 was negatively effected by recognition of $1.5
million in loss on the markdown and sale of obsolete and slow moving inventory.
Royalty expense related to licensed product sales was 5% of sales for the six
months ended July 3, 1999, compared to 7.7% for the corresponding period of
1998. This decrease resulted primarily from an increase by the Company in sales
of proprietary products.
Selling, general and administrative (SG&A) expenses as a percentage of total
sales were 31% of sales for the six months ended July 3, 1999 compared to 40% of
sales for the corresponding period of 1998, a 23% improvement. The SG&A expenses
increased a total of $11.3 million from $9.5 million in the six months ended
July 4, 1998 to $20.8 million for the comparable period of 1999. The change in
the total amount of SG&A between 1998 and 1999 is
<PAGE>
primarily related to (a) additional sales expenses resulting from the additional
$43.7 million of sales in the first six months of 1999, (b) $2.1 million being
paid to a licensor for the transfer of an apparel license from Tahiti Apparel,
Inc. to the Company, (c) over $0.7 million in consulting fees being paid to
third parties for services related to accounting, systems consulting (d) $1.0
million of preofessional fees and (e) $1.5 million of temporary and recruiting
costs associated with the move to New Jersey, which were partially offset by
$0.7 million in reduced SG&A expenses at the Houston facility, compared to the
same period for 1998.
The nonrecurring charge of $3.2 million in the first six months of 1999 was the
result of the Company continuing to implemaent the revised business strategy
first implemented in the last quarter of 1998. The reevaluation resulted in a
change from the Company being primarily a manufacturer of products to primarily
a sales, marketing, merchandising and distribution company for activewear and
other clothing. As a result, the Company has closed its last operating facility
in Houston, Texas. The Company has accrued $2.2 million for costs associated
with the plant closing, including disposition of inventory or the write down of
inventory, an additional $1.0 million for the relocation of the Houston
activities to New York and New Jersey and the costs of the start-up of new
divisions and other administrative reorganization costs.
Depreciation and Amortization increased from $1.4 million in the six months
ended July 4, 1998 to $1.2 million in the comparable 1999 period, primarily as a
result of $0.9 million of amortization of goodwill attributable to the new
Tahiti acquisition.
Interest expense for the six months ended July 3, 1999 was $6.9 million compared
to $3.2 million in the comparable period of 1998. In 1999, $1.9 million of the
$6.9 million of interest expense is non-cash interest amortization related to
the reduction of debt discounts for the WGI, LLC warrants and the warrants and
common stock issued to BNY (See Notes 6 and 8).
FINANCIAL CONDITION
During 1998 and the first six months of 1999, the Company has undergone a
strategic change from a manufacturing orientation to a sales and marketing
focus. Effective March 22, 1999, Signal Apparel Company, Inc. purchased the
business and assets of Tahiti Apparel Company, Inc., a leading supplier of
ladies and girls activewear, bodywear and swimwear primarily to the mass market
as well as to the mid-tier and upstairs retail channels. Tahiti's products are
marketed pursuant to various licensed properties and brands as well as
proprietary brands of Tahiti. During the fourth quarter of 1998, Signal also
acquired the license and certain assets for the world recognized Umbro soccer
brand in the United States for the department, sporting goods and sports
specialty store retail channels. The acquisition of Tahiti Apparel and the Umbro
license initiative both are part of the Company's ongoing efforts to improve its
operating results. The Company remains committed to exiting all manufacturing
activities and to focus exclusively on sales, marketing and merchandising of its
product lines. Following these developments, Signal and its wholly owned
subsidiaries, Big Ball Sports, Inc. and Grand Illusion Sportswear, manufacture
and market activewear, bodywear and swimwear in juvenile, youth and adult size
ranges. The Company's products are sold principally to retail accounts under the
Company's proprietary brands, licensed character brands, licensed sports brands,
and other licensed brands. The Company's principal proprietary brands include
G.I.R.L., Bermuda Beachwear, Big Ball and Signal Sport. Licensed brands include
Hanes Sport, BUM Equipment, Jones New York and Umbro. Licensed character brands
include Mickey Unlimited, Winnie the Pooh, Looney Tunes, Scooby-Doo and Sesame
Street; and licensed sports brands include the logos of Major League Baseball,
the National Basketball Association, and the National Hockey League. The
Company's license with the National Football League expired, subject to certain
sell-off rights, on March 31, 1999 and will not be renewed. During the year
ended December 31, 1998, licensed NFL product sales were approximately 15% of
consolidated revenue. The loss of this license could also affect the Company's
ability to sell other professional sports apparel to its customers.
Additional working capital was required in the first six months of 1999 to fund
the continued losses and payments of interest on the Company's long-term debt to
its secured lenders. The Company's need was met through use of its new credit
facility with its senior lender. At July 3, 1999, the Company had overadvance
borrowings (secured in part by the guarantee of two principal shareholders) of
$7.9 million with its senior lender compared to $36.7 million at July 4, 1998.
The Company's working capital deficit at July 3, 1999 increased $24.4 million or
43% compared to year end 1998. Excluding the effect of all sales and
acquisitions of divisions, the increase in the working capital deficit was
primarily due to the new term loan being classified as a current liability
($50.0 million), which was partially offset by a decrease in inventories ($14.6
million), a decrease in accounts receivable ($1.0 million), a decrease in
accounts payable and accrued liabilities ($0.7 million), a decrease in the
revolving advance account ($42.5 million), and debt discount associated with the
term loan ($2.3 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.
Excluding the effect of all sales and acquisitions of divisions, accounts
receivable decreased $1.0 million or 68% over year-end 1998. The decrease was
primarily a result of the improved collection of non-collectible receivables,
the application of appropriate reserves related to the new Tahiti accounts
receivable, and the timing of payments from the senior lender on factored
receivables.
<PAGE>
Excluding the effect of all sales and acquisitions of divisions, inventories
decreased $14.6 million or over 100% compared to year-end 1998. Inventories
decreased as a result of management's focus on selling all slow moving and
obsolete inventory during the first six months of 1999, the sale of
substantially all of the remaining Big Ball Sports inventory in connection with
the closure of the Houston facility, and the general reduction of inventory
related to the Tahiti division as of the end of the swimwear season at July 3,
1999.
Excluding the effect of all sales and acquisitions of divisions, total current
liabilities increased $18.0 million or 25% over year-end 1998, primarily due to
the term loan being classified as a current liability ($50.0) million, which was
partially offset by and a decrease in accounts payable and accrued liabilities
($0.7 million), a decrease in the revolving advance account ($42.5 million) ,
and debt discount associated with the term loan ($2.3 million).
Excluding the effect of all sales and acquisitions of divisions, cash used in
operations was $9.5 million during the first six months of 1999 compared to $9.4
million used in operating activities during the same period in 1998. The
increased use of cash during such period was primarily due to the net loss of
$28.1 million during the first six months of 1999, which was partially offset by
depreciation and amortization ($2.3 million) and non-cash interest ($1.2
million), a decrease in inventories ($14.6 million), a decrease in accounts
receivable ($1.0 million), and a decrease in accounts payable and accrued
liabilities ($0.7 million).
Commitments to purchase equipment totaled less than $0.1 million at July 3,
1999. During the remainder of 1999, the Company anticipates capital expenditures
not to exceed $0.5 million.
Cash provided by investing activities was $2.6 million for the six months ended
July 3, 1999 compared to cash provided of $0.8 in the comparable period for
1998. This primarily resulted from $2.0 million provided through the sale of the
Heritage division.
Cash provided by financing activities was $6.8 million for the first six months
of 1999 compared to $8.2 million in the comparable period for 1998. Excluding
the effect of all sales and acquisitions of divisions, the Company had net
borrowings of approximately $7.5 million from its senior lender, after taking
into account borrowings under the new $50 million term loan and the borrowings
under the new revolving credit facility and repayment of the existing credit
facilities maintained by the Company (including those assumed in connection with
the Tahiti acquisition). In addition, the Company sold new 5% convertible
debentures ($2.4 million), which was partially offset by repurchase of Series G1
Preferred Stock ($2.4 million), and other principal payments on borrowings ($0.6
million).
Excluding the effect of all sales and acquisitions of divisions, the revolving
advance account decreased $29.0 million from $44 million at year-end 1998 to
$15.3 million at July 3, 1999. Approximately $10.0 million was overadvanced
under the revolving advance account. The overadvance is secured in part, by the
guarantee of two principal shareholders.
Interest expense for the six months ended July 3, 1999 was $6.9 million compared
to $3.2 million for the same period in 1998. The $6.9 million of interest in
this quarter included non-cash interest charges of $1.9 million. Total
outstanding debt averaged $85.2 million and $64.2 million for the first six
months of 1999 and 1998, respectively, with average interest rates of 11.8%, and
10.0%, respectively. The increased interest expense during 1999 reflects
non-cash interest resulting from amortization of debt discount of $0.5 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
$6.2 million at July 3, 1999.
Total Shareholders' Deficit increased $10.6 million to $78.3 million compared to
year-end 1998.
<PAGE>
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 July 3, 1999, the company's senior lender waived certain covenant
violations (pertaining to quarterly profits and working capital) under the
Company's factoring agreement. Even though these covenant violations have been
waived, the Company has not yet completed the third quarter of 1999 and no
determination can yet be made whether one or more covenant violations exist for
the third quarter. Accordingly, GAAP requires that the $50 million term loan be
classified as a current liability even though the term of the loan is longer
than one year.
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 9 to the
financial statements, during the first quarter of 1999, the Company sold $5
million of Convertible Debentures to institutional investors, which funds were
used to repurchase the Company's Series G1 Convertible Preferred Stock. The
Company anticipates that funds provided by the WGI Credit Agreement, other
support by WGI LLC and the Bank of New York credit facility will enable the
Company to meet its liquidity needs at least through September 30, 1999.
During the fourth quarter of 1998, the Company reached a decision to close its
printing facility in Chattanooga, Tennessee and it anticipated closing its Big
Ball and Grand Illusion subsidiaries. The Company recorded a restructuring
charge in the amount of $8.3 million as a result of these matters. The Company
took this action in an effort to further improve its cost structure. 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 any obsolete, slow moving or excess inventory.
On May 12, 1999 the Company issued a WARN notice that the Company would close
its Houston printing facility. The facility was, in fact, shut down on July 11,
1999. The Company has taken a restructuring charge for this plant closure in the
second quarter of 1999 in the amount of $ 3.2 million.
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 requirements beyond September 30, 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
The Company is in the process of updating its current software, developed for
the apparel industry, which will make the information technology ("IT") systems
year 2000 compliant. This software modification, purchased from a third party
vendor, is expected to be installed, tested and completed on or before September
30, 1999, giving the Company additional time to test the integrity of the
system. Although the Company believes that the modification to the software
which runs its core operations is year 2000 compliant, the Company does utilize
other third party equipment and software that may not be year 2000 compliant. If
any of this software or equipment does not operate properly in the year 2000 and
thereafter, the Company could be forced to make unanticipated expenditures to
cure these problems, which could adversely affect the Company's business. The
total cost of the new software and implementation necessary to upgrade the
Company's current IT system and address the year 2000 issues is estimated to be
approximately $100,000. Planned costs have been budgeted in the Company's
operating budget. The projected costs are based on management's best estimates
and actual results could differ as the new system is implemented. Approximately
$40,000 has been expended as of July 3, 1999. The Company has adopted a formal
year 2000 compliance plan and expects to achieve implementation on or
<PAGE>
before September 30, 1999. This effort is being headed by the Company's new MIS
manager and includes members of various operational and functional units of the
Company. To date, letters/inquiries have been sent to suppliers, vendors, and
others to determine their compliance status. A significant number of responses
have been received. The Company's principal customers, Wal-Mart, Target and
K-Mart, have indicated that they are Year 2000 compliant. The Company is
cognizant of the risk associated with the year 2000 and has begun a series of
activities to reduce the inherent risk associated with non-compliance. The
Company's MIS manager is primarily responsible to insure that all Company
systems are Year 2000 compliant. Among the activities which the Company has not
performed to date include: software (operating systems, business application
systems and EDI system) must be upgraded and tested (although these systems are
integrated and are included in the Company's core accounting system); a few PC's
must be assessed and upgraded for compliance. In the event that the Company or
any of its significant customers or suppliers does not successfully and timely
achieve year 2000 compliance, the Company's business or operations could be
adversely affected. Thus, the Company is in the process of adopting a
contingency plan. The Company is currently developing a "Worst Case Contingency
Plan" which will include generally an environment of utilizing spreadsheets and
other "workaround" programming and procedures. This contingency system will be
activated if the current plans are not successfully implemented and tested by
October 31, 1999. The cost of these alternative measures is estimated to be less
than $25,000. The Company believes that its current operating systems are fully
capable (except for year 2000 data handling) of processing all present and
future transactions of the business. Accordingly, no major efforts have been
delayed or avoided which affect normal business operations as a result of the
incomplete implementation of the year 2000 IT systems. These current systems
will become the foundation of the Company's contingency system.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10.1) Restructuring Agreement dated as of November 21, 1997 between the
Company and WGI, LLC.*
(10.2) Warrant to Purchase 4,500,000 shares of Common Stock issued to
WGI, LLC, dated December 30, 1997.*
(10.3) Credit Agreement dated as of May 8, 1998 among the Company, three
subsidiaries of the Company (The Shirt Shed, Inc., GIDI Holdings,
Inc. and Big Ball Sports, Inc.) and WGI, LLC.*
(10.4) Warrant to Purchase 5,000,000 shares of Common Stock issued to
WGI, LLC, dated December 30, 1997.*
(10.5) Letter Agreement dated August 10, 1998 among the Company, Thomas
A. McFall and John W. Prutch.*
(10.6) Letter Agreement dated August 23, 1999 amending the Revolving
Credit, Term Loan and Security Agreement dated March 12, 1999
between the Company and its senior lender, BNY Financial
Corporation (in its own behalf and as agent for other
participating lenders), and waiving compliance with certain
provisions thereof.*
(27) Financial Data Schedule
* Previously filed with original Quarterly Report on Form 10-Q for period
ended July 3, 1999.
(b) Reports on Form 8-K:
The Company filed the following Current Reports on Form 8-K during the
quarter:
<TABLE>
<CAPTION>
FINANCIAL
DATE OF REPORT ITEMS REPORTED STATEMENTS FILED
-------------- -------------- ----------------
<S> <C> <C>
March 22, 1999 Item 2 - Acquisition or Disposition of Assets: Historical and Pro Forma
(Amendment No. 1) The acquisition of substantially all of the Financial Statements concerning
assets and business of Tahiti Apparel, Inc. this acquisition.
Item 5 - Other Events: The completion of None.
the Company's new financing arrangement
with its senior lender, BNY Financial
Corporation.
</TABLE>
<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: August 26, 1999 /s/ Thomas A. McFall
--------------------
Thomas A. McFall
Chief Executive Officer
Date: August 26, 1999 /s/ Howard Weinberg
-------------------
Howard Weinberg
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
FISCAL QUARTER ENDED JULY 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-3-1999
<CASH> 301
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<ALLOWANCES> 4,000
<INVENTORY> 6,495
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<PP&E> 6,797
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<TOTAL-ASSETS> 37,687
<CURRENT-LIABILITIES> 89,595
<BONDS> 26,435
<COMMON> 491
0
49,754
<OTHER-SE> (127,472)
<TOTAL-LIABILITY-AND-EQUITY> 37,687
<SALES> 67,711
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<CGS> 59,949
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</TABLE>
