SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission File No. 1-2782
SIGNAL APPAREL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
Indiana 62-0641635
(State of Incorporation) (I.R.S. Employer Identification Number)
34 Englehard Avenue, Avenel, New Jersey 07001
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (732) 382-2882
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock: Par value $.01 a share New York Stock Exchange
Indicate by a 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 requirement for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant: $7,854,068, calculated by using the closing price on the New
York Stock Exchange on April 21, 2000 of the Company's Common stock, and
excluding common shares owned beneficially by directors and officers of the
Company, and by certain other entities, who may be deemed to be "affiliates",
certain of whom disclaim such status.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 24, 2000
----- --------------------------------
Common Stock, $.01 par value 53,326,821 shares
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The registrant hereby amends the following items, financial statements, exhibits
or other portions of its Annual Report on Form 10-K for the year ended December
31, 1999, which was filed with the Commission on March 30, 2000, as follows:
this amendment amends Part III of the Annual Report on Form 10-K by adding the
information required by Items 10, 11, 12 and 13 of Part III, since the
registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders will
not be filed by April 30, 2000.
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ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
Item
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
8. Financial Statements and Supplementary Data
9. Disagreements on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners
and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
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ITEM 1. BUSINESS
(a) Signal Apparel Company, Inc. ("Signal" or the "Company") is engaged in the
sales and marketing of apparel within the following product lines:
screenprinted and embroidered knit and woven activewear for men and boys,
and screenprinted and embroidered ladies' and girls' activewear, bodywear
and swimwear. The Company outsources all of its manufacturing and
embellishment processes to third parties located in the United States and
throughout the world.
On March 22, 1999, the Company purchased the business and assets of Tahiti
Apparel, Inc. ("Tahiti"), 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.
In November 1998, the Company acquired the license and certain assets for
the world recognized Umbro Soccer Brand in the United States for the
department store, sporting goods store, sports specialty store and mid-tier
retail channels and commenced sales of Umbro branded products with the
Spring 1999 selling season.
As of January 1, 1999, the Company sold the business and assets of its
Heritage Sportswear division which was engaged in the manufacture and
marketing of upscale knit apparel for the ladies' market.
As of July 31, 1999, the Company sold its wholly-owned subsidiary, GIDI
Holdings, Inc. doing business as Grand Illusion Sportswear, Inc. ("Grand
Illusion"), a supplier of embellished apparel and other activewear
primarily to large corporate accounts.
During 1999, the Company completed its transition to a sales and marketing
orientation from its historical manufacturing structure. In the first
quarter of 1999, the Company closed substantially all of its Chattanooga,
Tennessee offices and warehouses and its Tazewell, Tennessee cut and sew
facility. Previously, the Company had closed its Chattanooga, Tennessee
screenprinting and distribution operations. The Company also consolidated
its sales, merchandising and corporate administrative functions into
similar functions at Tahiti following completion of the Tahiti acquisition
on March 22, 1999.
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. Signal relocated the sales and merchandising
functions for its Big Ball Sports branded apparel line to New York, New
York.
(b) The Company is engaged in the single line of business of apparel sales and
marketing.
For financial information about the Company, see the information discussed
in Item 8 below.
(c) GENERAL
Founded in 1891 as Wayne Knitting Mills, a women's hosiery company, in Fort
Wayne, Indiana, the Company merged with the H. W. Gossard Co. of Chicago,
Illinois in 1967 and became Wayne-Gossard Corporation. The Company's name
was changed to Signal Apparel Company, Inc. in February 1987. As a result
of a merger in July 1991, The Shirt Shed, Inc. became a wholly-owned
subsidiary of the Company. In November 1994, the Company purchased all of
the outstanding capital stock of American Marketing Works Inc. (AMW) whose
principal business was the marketing of branded licensed apparel. The
outstanding capital stock of Grand Illusion and Big Ball was purchased in
October 1997 and
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November 1997, respectively. On March 22, 1999, the Company purchased the
business and assets of Tahiti.
The Company arranges for the manufacture and markets 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 lifestyle brands, licensed character brands,
licensed sports brands, and other licensed brands. The Company's principal
proprietary brands include G.I.R.L., Bermuda Beachwear, Tahiti Swimwear,
Big Ball and Signal Sport. Licensed brands include Hanes Sport, BUM
Equipment, Bikini.com, Jones New York and Umbro. Licensed character brands
include Mickey Unlimited, Winnie the Pooh, Looney Tunes and Scooby-Doo; and
licensed sports brands include the logos of Major League Baseball, the
National Hockey League and various colleges and universities. Currently, a
significant portion of the products marketed by the Company consists of
products generally similar in design and composition to those produced by
the Company's competition. The Company's business is, therefore, highly
subject to competitive pressures.
During 1999, the Company completed a strategic change from a manufacturing
orientation to a sales and marketing focus and as of December 31, 1999
operated under the following strategic business unit structure:
TAHITI APPAREL BUSINESS UNIT:
Tahiti Apparel designs and sells a range of women's and girls' activewear,
bodywear and swimwear primarily to mass market and mid-tier retailers. This
unit's products are sourced from various suppliers and embellished with
silkscreened and embroidered graphics developed by the Company. Finished
products are marketed under licenses from Warner Brothers, Disney
Enterprises, B.U.M. International and Hanes among others, as well as under
the Company's proprietary brands, Tahiti Swimwear and Bermuda Beachwear,
and proprietary brands of the Company's major retail customers.
SPORTS BUSINESS UNIT:
The Sports Business Unit is engaged in selling embellished activewear
ranging from children's to adult sizes to mid-tier and mass merchants as
well as to sporting goods, sport specialty, and department stores. This
unit markets tops and bottoms sourced from various suppliers and
embellished with a variety of silkscreened and embroidered graphics derived
under license from colleges and professional sports leagues (MLB and NHL)
or featuring original graphics created by the Company's internal creative
department. Finished products are generally sold under licensed brands such
as Hank Aaron Originals, proprietary brands of the Company such as Big Ball
Sports, Is Life, or Signal Sports, or the brands of the Company's major
retail customers.
UMBRO BUSINESS UNIT:
The Umbro Business Unit is engaged in selling to mid-tier, sporting goods,
sport specialty and department stores within the United States a line of
athletic-oriented activewear and footwear ranging from children's to adult
sizes and soccer hardgoods. This unit's apparel products, featuring the
world recognized Umbro Soccer Brand, are sourced from various suppliers and
embellished with screenprinted and embroidered graphics. Footwear and
hardgoods are sourced directly from the licensor, Umbro International. The
Company began selling Umbro products in 1999.
Page 5 of 80
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BRANDS AND CHARACTER BUSINESS UNIT:
The Brands and Character Business Unit is engaged in selling primarily to
mid-tier and mass merchants a line of popularly priced activewear ranging
from children's to adult sizes. This unit utilizes tops and bottoms sourced
from various suppliers and embellished with a variety of silkscreened and
embroidered graphics derived under license from popular cartoons, movies,
and television shows, as well as licensed brands and original concepts
produced by the Company's internal creative department.
PREMIER ACTIVE GROUP UNIT:
The Premier Active Group Unit is engaged in selling printed and embroidered
women's and girls swimwear, cover-ups, and activewear, sourced from various
suppliers, to department and specialty stores under licensed brands Jones
New York and Bikini.com., as well as under private label brands of major
retail customers and the Company's own G.I.R.L. brand, among others.
SALES BY PRODUCT LINE
The following table reflects the percentage of net sales contributed by the
Company's product lines to net sales during 1999, 1998, and 1997:
Product Line Percentage of Net Sales
1999 1998 1997
---- ---- ----
Screenprinted and embroidered men's and
boys' knit and woven activewear 35% 77% 73%
Screenprinted and embroidered ladies'
and girls activewear, bodywear and
swimwear 65% 0% 0%
Women's knit apparel (Heritage
Sportswear Division sold as of
January 1, 1999) 0% 23% 27%
For the years ended December 31, 1999, 1998 and 1997, one customer
accounted for 58%, 19% and 20%, respectively of the Company's net sales and
the next largest customer accounted for 9%, 10% and 10%, respectively of
the Company's net sales.
The numbers for 1999 include sales by the Company's Tahiti Apparel division
for all of 1999. (See Note 4 to the consolidated financial statements.) and
reflect the sale of Grand Illusion as of July 31, 1999.
DESCRIPTION OF OPERATIONS
During the course of 1998 and the first two quarters of 1999, the Company
substantially completed its transition from a manufacturer of garments to a
purchaser of blank and embellished finished garments from a variety of
domestic and international suppliers. Blank products are screenprinted or
embroidered by other suppliers prior to sale. The supply and price of
finished and blank products is dependent upon a variety of factors and is
primarily dependent upon the level of demand from competitive companies or
Page 6 of 80
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companies seeking similar products, although in the past, worldwide crop
conditions and in the case of synthetic products, global petroleum
availability have also had an impact. These factors generally have had a
greater impact on price than on availability. The Company also purchases
hangers, cartons, bags and ticketing for its products.
Although the Company does not have formal arrangements extending beyond one
year with its suppliers, the Company has not experienced any significant
difficulty obtaining necessary blank or finished products from its current
sources and believes that, in any event, adequate alternative sources are
available.
"Big Ball", "...Is Life" and "Signal Sport" are the principal registered
trademarks of the Company. In the first quarter of 1999, the Company
acquired its other principal trademarks, Tahiti Swimwear, G.I.R.L. and
Bermuda Beachwear, among others, in connection with its acquisition of
Tahiti. The Company is licensed directly or through affiliates of
well-known athletes to use the trademarks of Major League Baseball, the
National Hockey League and various colleges in connection with collections
of embellished activewear. The Company is also licensed by various
companies to print their respective corporate logos and corresponding
lifestyle graphics on garments. The Company is licensed by an affiliate of
well known athlete Hank Aaron (for MLB products) to sell products with
labels bearing his name. The Company is also licensed for the Umbro Brand
by Umbro International.
The Company also acquired various licensed rights in connection with its
acquisition of Tahiti. These licenses include Mickey Unlimited, Mickey
Stuff for Kids and Winnie the Pooh from Disney Enterprises, Looney Tunes
and Scooby-Doo from Warner Brothers, and licenses for the brands Hanes
Sport, B.U.M. Equipment and Jones New York. These licenses give the Company
the right to market various ladies and girls swimwear, activewear and/or
bodywear products.
The licenses held by the Company vary significantly in their terms and
duration. The Company's licenses generally are renewed for one to two-year
terms on an annual basis. The Company's MLB license, held through an
affiliate of Hank Aaron, has been extended through December 31, 2000. The
Company's license with the National Hockey League expires June 30, 2000 and
renewal discussions are expected to commence during the second quarter of
2000. The Company's license with the National Football League expired,
subject to certain sell-off rights, on March 31, 1999 and was not renewed.
The Company's license with the National Basketball Association, subject to
certain sell-off rights, expired on July 31, 1999 and was not renewed.
During the years ended December 31, 1998 and December 31, 1999,
respectively, licensed NFL and NBA product sales were approximately 21% and
3% of consolidated revenue. The expiration of these licenses has not
materially affected the Company's ability to sell other professional sports
apparel to its customers, however, there are no assurances it will not
affect future sales opportunities. The Company's license for the Jones New
York brand is scheduled to expire on June 30, 2000, and the Company is
currently in renewal discussions with the licensor. Except as set forth
above, no other material licenses of the Company are scheduled to expire
during 2000.
The Company obtained the U.S. license for Umbro, a world recognized soccer
brand, in November 1998 and began selling Umbro apparel, footwear and
hardgoods in 1999. The Company's license for Umbro has a five year term
(subject to certain repurchase rights by the licensor and certain renewal
rights by the Company).
The business of the Company tends to be seasonal with peak shipping months
varying from product line to product line. To meet the demands of peak
shipping months, it is necessary to build inventories of some products in
advance of expected shipping dates. The Company believes that its credit
practices and merchandise return policy are customary in the industry.
Borrowings are used to finance seasonal
Page 7 of 80
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inventories and receivables. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition".
During 1999, the Company sold its products to over 650 customers, including
department stores, sporting goods stores, specialty stores, mass
merchandisers, mid-tier chains and other retailers, wholesalers, and
distributors. Products are primarily shipped directly from the Company's
warehouse or from third party screenprint or embroidery locations. The
trend for the Company's sales to be concentrated on a few large customers
which possess significant negotiating power with regard to the terms of
sale and the possible return of certain merchandise continued in 1999.
On December 31, 1999, the Company had unfilled customer orders of
approximately $38 million, compared to approximately $5 million of such
orders at December 31, 1998. These amounts include both confirmed and
unconfirmed orders which the Company believes, based on industry practice
and past experience, will be confirmed. The amount of unfilled orders at a
particular time is affected by a number of factors, including the timing of
the receipt and processing of customer orders and scheduling of the
manufacture and shipping of the product, which is some instances is
dependent on the desires of the customer. Accordingly, a comparison of
unfilled orders from period to period is not necessarily meaningful and may
not be indicative of eventual actual shipments.
The apparel industry as a whole, including the part of the industry engaged
in by the Company, is highly competitive. The Company believes that the
principal methods of competition in the markets in which it competes are
design, styling, price, quality and service. The licensed and branded
markets are influenced by fashion, design, color, consistent quality and
consumer loyalty. Imports offer competition throughout the Company's
product lines. The industry is very fragmented, and the Company's relative
position in the industry is not known.
Compliance with federal, state and local provisions which have been enacted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, have not had, and are not
expected to have, any material effect upon the capital expenditures,
operating results, or the competitive position of the Company.
The Company had approximately 145 employees at March 1, 2000, compared to
146 employees at March 1, 1999.
(d) All of the Company's offices and facilities are located in the United
States. Substantially all of the Company's sales are domestic.
ITEM 2. PROPERTIES
As of December 31, 1999, the Company operated leased facilities aggregating
approximately 130,000 square feet of usable space and owned approximately 29,200
square feet in an idle facility which was sold on February 17, 2000. The
following table sets forth certain information concerning those of the above
facilities which constitute materially important physical properties of the
Company.
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Facility Square Owned/ Products/
Location Feet Leased Operations
- -------- ---- ------ ----------
New York, NY 11,700 Leased Offices
New York, NY 7,867 Leased Offices and
Showroom
Avenel, NJ 98,000 Leased Offices,
Warehouse and
Distribution
The leased premises set forth in the table above are well maintained and are
suitable for the Company's needs (see later paragraph for a discussion of the
idle facilities). Substantially all of the leased premises are protected by
sprinkler systems and automatic alarm systems, and all are insured in accordance
with the terms of the respective leases. The contents of all leased premises are
insured for amounts the Company considers adequate.
As part of its strategic plan, the Company in 1999 closed its remaining 92,500
square feet of warehousing, distribution and office space in Chattanooga,
Tennessee, except for approximately 3,700 square feet of office and permanent
file storage space, and shifted these functions into other Company facilities or
to outside contractors. The Company also closed its 91,300 square foot cut and
sew and warehouse facility in New Tazewell, Tennessee in March 1999, except for
a temporary warehousing function which was closed in July 1999. The Company also
closed approximately 12,100 square feet of office space in Chattanooga,
Tennessee during the first quarter of 1999 and consolidated these functions into
similar functions at Tahiti. In July 1999, the Company completed the closure of
its screenprinting, warehouse and distribution facilities (62,700 square feet)
in Houston, Texas, except for limited functions which were substantially
eliminated during the third and fourth quarters of 1999. The Company's former
facilities in Schaumburg, Illinois (28,200 square feet) were sold as part of the
Company's sale of Grand Illusion as of July 31, 1999. The Company sold 69,000
square feet of idle facilities in Wabash, Indiana in the fourth quarter of 1999
and 29,200 square feet of idle facilities in Marion, South Carolina in February
2000.
The Company uses independent contractors to supply and embellish all of its
products and the Company believes the contracted production will support the
expected level of business in 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is unaware of any material pending legal proceeding other than
ordinary, routine litigation incidental to its business, except as noted below.
The litigation commenced against the Company by former employees of the
Company's LaGrange, Georgia facility (which the Company closed in December 1996)
alleging that the Company violated the provisions of the WARN Act in connection
with the closing of the facility was settled in the fourth quarter of 1999 for
an amount not material to the financial condition of the Company.
On April 14, 1999, litigation was commenced against the Company and an affiliate
of the Company's principal shareholders ("Shareholder Affiliate") by a
consulting and investment advisory services company alleging the Company and/or
the Shareholder Affiliate owes the plaintiff fees in connection with the
Company's acquisition of the business and assets of Tahiti Apparel in March
1999. The Company and the Shareholder
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Affiliate have independently filed answers denying the allegations in the
litigation complaint. The Company has accrued $400,000 for legal fees of this
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Company's shareholders was held on December
31, 1999.
(b) The names of the directors elected at the meeting are as follows:
Henry L. Aaron, Zvi Ben-Haim, Barry F. Cohen, Paul R. Greenwood,
Michael Harary, Thomas A. McFall and Stephen Walsh.
(c) The meeting was held to consider and vote upon (i) a proposal to issue
up to 4,296,316 additional shares of the Company's Common Stock in
connection with the Company's acquisition of substantially all of the
assets of Tahiti Apparel, Inc.; (ii) a proposal to issue warrants to
purchase up to 4,000,000 shares of the Company's Common Stock to
Messrs. Zvi Ben-Haim and Michael Harary under the terms of Securities
Transfer Agreements executed in conjunction with such officers'
employment agreements; (iii) a proposal to issue additional shares of
the Company's Common Stock from time to time, in connection with
transactions approved by the Company's Board of Directors, pursuant to
the terms of the Company's compensation arrangements with Thomas A.
McFall, Vice Chairman of its Board of Directors; (iv) a proposal to
issue 4,217,956 additional shares of the Company's Common Stock to
WGI, LLC in connection with certain additional guarantees and
collateral pertaining to the Company's senior credit facility, plus an
indeterminate number of additional shares issuable, at the Company's
election, as payment of interest under the Company's Reimbursement
Agreement with WGI, LLC; and (v) a proposal to amend the Company's
Restated Articles of Incorporation increasing the number of authorized
shares of Common Stock from 80,000,000 to 150,000,000.
The results of the vote on the proposal to issue shares of the Company's Common
Stock in connection with the acquisition of Tahiti Apparel were as follows:
FOR 25,921,815
AGAINST 269,955
ABSTAIN 8,923
TOTAL 26,200,693
BROKER NON-VOTES 2,616,307
The results of the vote on the proposal to issue warrants to Messrs. Ben-Haim
and Harary were as follows:
FOR 25,885,152
AGAINST 305,048
ABSTAIN 10,493
TOTAL 26,200,693
BROKER NON-VOTES 2,616,307
The results of the vote on the proposal to issue shares of the Company's Common
Stock to Mr. McFall in connection with transactions approved by the Company's
Board of Directors were as follows:
FOR 23,367,091
AGAINST 312,879
ABSTAIN 2,520,723
TOTAL 26,200,693
BROKER NON-VOTES 2,616,307
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The results of the vote on the proposal to issue shares of the Company's Common
Stock to the Company's principal shareholder were as follows:
FOR 25,891,557
AGAINST 299,049
ABSTAIN 10,087
TOTAL 26,200,693
BROKER NON-VOTES 2,616,307
The results of the vote on the proposed to amend the Company's Restated Articles
of Incorporation were as follows:
FOR 25,921,522
AGAINST 265,754
ABSTAIN 13,417
TOTAL 26,200,693
BROKER NON-VOTES 2,616,307
There was no solicitation in opposition to management's nominees for directors.
Each director serves a one year term, or until his successor is elected and
qualified. The results of the election of directors were as follows:
WITHHOLD
DIRECTOR NAME FOR AUTHORITY TOTAL
- ------------- --- --------- -----
Henry L. Aaron 28,612,978 204,022 28,817,000
Zvi Ben-Haim 28,612,978 204,022 28,817,000
Barry F. Cohen 28,607,978 209,022 28,817,000
Paul R. Greenwood 28,615,978 201,022 28,817,000
Michael Harary 28,612,978 204,022 28,817,000
Thomas A. McFall 28,608,488 208,512 28,817,000
Stephen Walsh 28,615,978 201,022 28,817,000
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICES AND DIVIDENDS
Quarter Ended
-------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
1999 1998 1999 1998 1999 1998 1999 1998
------------- ------------- ------------- -------------
Common Stock:
High $1.63 $1.94 $1.13 $3.25 $0.75 $3.13 $1.06 $2.25
Low $1.50 $1.00 $1.13 $ .75 $0.75 $1.63 $0.88 $1.13
Cash dividends $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
The Company's loan agreements contain provisions which currently restrict the
Company's ability to pay dividends (see Note 4 of Notes to Consolidated
Financial Statements). No Common Stock dividends were declared during the
five-year period ended December 31, 1999 (See Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
Shareholders of record as of March 15, 2000: Common 933
The Company's Common Stock is listed on the New York Stock Exchange.
(Symbol "SIA")
RECENT SALES OF UNREGISTERED SECURITIES
On March 3, 1999, in connection with the redemption of all outstanding shares of
its Series G1 Preferred Stock, the Company issued $5 million of 5% Convertible
Debentures due March 3, 2002, together with warrants to purchase 2,500,000
shares of the Company's Common Stock at $1.00 per share, in a private placement
transaction which was exempt from the registration requirements of the
Securities Act of 1933 (the "Securities Act") pursuant to Rule 506 of Regulation
D thereunder. See Note 6 to the Consolidated Financial Statements for additional
information concerning these debentures.
On March 22, 1999, in connection with the acquisition of substantially all of
the assets of Tahiti Apparel, Inc., the Company issued 10,070,000 shares of its
Common Stock and warrants to acquire up to an additional 4,000,000 shares of
Common Stock in a private placement transaction which was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
as a transaction in securities by an issuer not involving any public offering.
See Note 2 to the Consolidated Financial Statements for additional information
concerning this acquisition.
Effective March 22, 1999, in connection with the execution of a new financing
arrangement with the Company's senior lender, the Company permitted the senior
lender to purchase 1,791,667 shares of the Company's Common Stock at the par
value of $.01 per share in a private placement transaction which was exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof as a transaction in securities by an issuer not involving any public
offering.
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On April 23, 1999, in connection with the conveyance of certain intellectual
property and other rights to the Company, the Company issued 20,000 shares of
its Common Stock in a private placement transaction which was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
as a transaction in securities by an issuer not involving any public offering.
On May 26, 1999, as consideration for the assignment of a license agreement to
the Company, the Company issued 20,000 shares of its Common Stock to an
affiliate of the licensor. This issuance constituted a private placement
transaction which was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction in securities
by an issuer not involving any public offering.
On February 1, 2000, following approval of the issuance of such shares at the
Company's Annual Meeting on December 31, 1999, the Company issued 4,217,956
shares of its Common Stock to its principal shareholder, WGI, LLC, in connection
with additional guarantees and collateral provided by WGI, LLC in support of the
Company's financing with its senior lender. This issuance constituted a private
placement transaction which was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction in securities
by an issuer not involving any public offering. See Note 4 to the Consolidated
Financial Statements for additional information concerning this transaction.
On March 1, 2000, following approval of the issuance of such shares at the
Company's Annual Meeting on December 31, 1999, the Company issued 4,296,316
additional shares of its Common Stock to the shareholders of Tahiti Apparel,
Inc. as additional consideration pursuant to an amended agreement for the
acquisition of substantially all of the assets of Tahiti. This issuance
constituted a private placement transaction which was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
as a transaction in securities by an issuer not involving any public offering.
See Note 2 to the Consolidated Financial Statements for additional information
concerning this acquisition.
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Financial Data
Dollars in Thousands (except Per Share data)
1999(a) 1998 1997(b) 1996 1995
-----------------------------------------------------
Net sales $ 98,725 $ 48,876 $ 44,616 $ 58,808 $ 89,883
Net loss (47,926) (35,607) (30,345) (33,696) (39,959)
Basic/diluted net loss
per common share (1.04) (1.22) (2.39) (2.91) (3.80)
Total assets 44,604 18,464 26,722 26,167 43,229
Long-term obligations 72,114 70,728 60,147 66,423 57,243
(a) The data includes amounts applicable to Tahiti Apparel from the effective
date of control of the Company, January 1, 1999.
(b) The data includes amounts applicable to Grand Illusion and Big Ball Sports
from the dates of acquisition, October 1, 1997 and November 5, 1997,
respectively.
Page 13 of 80
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1999 COMPARED TO 1998
Net sales of $98.7 million for 1999 represent an increase of 102% or $49.8
million when compared to the $48.9 million for 1998. This increase is primarily
attributed to $72.6 in sales from the Tahiti division and the Umbro division.
Conversely, 1999 does not include any sales from the Heritage division (sold at
1/1/99) which had provided $9.4 million in sales in 1998. In addition, the sale
of Grand Illusion and the closing of the Big Ball operations resulted in 1999
reflecting only $4.4 million in sales compared to $10.3 million in 1998 from
these entities.
Gross profit was $9.5 million (9.6% of sales) in 1999 compared to $4.9 million
(10% of sales) in 1998. The gross profit % in 1999 declined, in part, due to
$2.7 million of 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 availability during the
negotiation of the acquisition of the assets of Tahiti Apparel, Inc. by the
Company. In addition, the gross profit for 1999 was negatively affected by (a) a
$1.9 million net loss on closeout goods and $0.5 million in customer chargebacks
related to the Big Ball shutdown and (b) recognition of an additional $1.5
million loss on the markdown and sale of other obsolete and slow moving
inventory. The $1.9 million net loss on closeout goods related to the Big Ball
shutdown represents a 70% markdown from the total cost basis of $2.7 million for
such inventory. From December 31, 1998 through May 1999, the Company pursued a
vigorous effort to sell the Big Ball-related inventory through normal
distribution channels. From January 1999 through April 1999, the company sold a
meaningful portion of the inventory at prices above cost, giving management
confidence that the remaining units could be sold within a reasonable period of
time, at prices that at least would allow the Company to recover its cost plus
direct costs of disposition. During the second quarter of 1999, however,
management realized that the unsold inventory would not be liquidated at normal
selling prices. The remaining inventory was not of a quality or quantity that
easily could be sold in the closeout market, particularly taking into
consideration a rapid deterioration in the closeout market for sports apparel
that occurred in the second quarter of 1999 due to an excess of goods created by
the bankruptcies of two major sports apparel manufacturers. In order to minimize
costs, management determined that the Company should sell the remaining
inventory as fast as possible at an estimated liquidation value (after costs of
loading and shipping) of approximately $0.8 million, and booked the net loss in
June 1999 based on this estimate. The final liquidated value of such goods
approximated the Company's estimate.
Royalty expense related to licensed product sales was 5.6% of sales in 1999,
compared to 8.6% 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 38.1% of sales for 1999 compared to 44.3% for the corresponding
period of 1998, an 6.2% improvement. The SG&A expenses increased a total of $16
million to $37.6 million from $21.6 million for 1998. The change in the total
amount of SG&A expenses between 1998 and 1999 is primarily related to (a)
additional sales expenses resulting from the additional $49.8 million of sales
in 1999, (b) over $0.7 million in consulting fees being paid to third parties
for services related to accounting and systems consulting, (c) $1.0 in
professional fees, (d) $1.5 million of temporary and recruiting costs associated
with the move of the Company's administrative and warehousing functions to New
Jersey, which were partially offset by $0.7 million in reduced SG&A expenses at
the Houston facility, compared to 1998, (e) $0.5 million of employee termination
costs and other administrative
Page 14 of 80
<PAGE>
exit costs related to the Big Ball shutdown, and (f) $0.8 million of start-up
expenses incurred for the expansion of two divisions.
During 1999, the Company continued to implement the revised business strategy
initiated in the last quarter of 1998, which has resulted in a change from the
Company being primarily a manufacturer of products to primarily a sales,
marketing, merchandising and distribution company for activewear, swimwear and
other clothing. As a result, the Company closed its last operating facility for
the Big Ball division in Houston, Texas. The Company's Gross Profit in 1999
includes a $1.9 million net loss on closeout goods and $0.5 million in customer
chargebacks related to this shutdown.
Depreciation and Amortization decreased from $3.9 million in 1998 to $3.7
million in 1999, primarily as a result of $1.8 million of amortization of
goodwill attributable to the new Tahiti acquisition, net of disposals of idle
property and equipment.
Interest expense for 1999 was $14.3 million compared to $8.6 million in 1998. In
1999, $5.1 million of the $14.3 million of interest expense is non-cash interest
and amortization of debt issuance costs for the WGI, LLC warrants and the
warrants issued to the senior lender. (See Note 4.)
1998 COMPARED TO 1997
Net sales of $48.9 million for 1998 represent an increase of 10% or $4.3 million
when compared to the $44.6 million in net sales for 1997. This increase is
comprised of an $8.0 million increase for screenprinted and embellished products
offset by a $2.2 million decrease in undecorated activewear, a $0.3 million
decrease for women's fashion knitwear and a $1.2 million sales allowance related
to a single large chargeback from a primary customer due to failure to meet
certain garment specifications. Sales in the fourth quarter of 1998 decreased to
$9.6 million from an average of $13.1 million for the first three quarters of
1998.
Gross profit was $4.9 million (10% of sales) in 1998 compared to $5.3 million
(12% of sales) in 1997. Despite increased first quality sales and other
efficiencies during 1998, as well as improved margins on first quality sales due
to improved sales mix and an overall decrease in closeout sales, the Company
recorded a $0.4 million decrease in gross profit in 1998 due to excessive Cost
of sales of $13.0 million for the fourth quarter. The Company had sales and
negative gross profit for the fourth quarter of 1998 of $9.6 million and ($2.3)
million, respectively. The excessive Cost of sales for the fourth quarter
primarily resulted from substantial closeout sales completed in the fourth
quarter of 1998 which had costs of sales in excess of sales price and a $1.0
million charge included in Cost of sales related to a dispute with a vendor.
This dispute arose after the vendor had delivered a portion of the garments
pursuant to the Company's purchase agreement and before the Company took
delivery of additional goods for which it originally was obligated under the
agreement. The Company did not take delivery of the additional goods. The
Company is asserting breach of contract against the vendor for failures in both
quality and timely delivery. The vendor is asserting breach of contract against
the Company. No lawsuit has been filed. The Company has reserved $1.0 million to
cover anticipated costs relating to the resolution of its dispute with this
vendor, including legal fees. The Company believes this accrual is sufficient
based upon the Company's claims against this vendor for breach of contract.
Royalty expense related to licensed product sales was 9% and 12% of total sales
for 1998 and 1997, respectively. The decrease in royalty expense percentage from
1997 is the result of increased sales of licensed products relative to total
sales. The additional licensed sales achieved more revenues, thereby covering
the minimum royalty obligations and resulting in a lower percentage of cost of
sales.
Page 15 of 80
<PAGE>
Selling, general and administrative ("SG&A") expenses were 44% and 31% of sales
for the years ended December 31, 1998 and 1997, respectively. Actual SG&A
expenses increased in 1998 by $7.7 million to $21.6 million principally due to
additional costs associated with Big Ball and Grand Illusion.
The Company's SG&A expenses in the fourth quarter of 1998 were $7.8 million
compared to the SG&A expenses for the first nine months of 1998 of $13.8
million. The average SG&A expenses for the first nine months of 1998 were $4.6
million per quarter. Thus, the fourth quarter reflected approximately $3.2
million of SG&A expenses above the average level for the balance of the year.
The material items which substantially contributed to this $3.2 million variance
are as follows: (a) $0.5 million of bad debt, (b) $0.5 million of legal and
professional fees due to potential liability related to the closure of the La
Grange facility, (c) $0.4 million of start-up expenses for the new Umbro
Division which commenced in October, 1998, (d) $0.2 million of additional
insurance expenses related to change in policies, (e) $0.3 million of excessive
administrative expenses at the Grand Illusion division related to the
extraordinary activity resulting from the shutdown of the Chattanooga printing
facility, (f) $0.1 million of excessive factor interest related to slow payments
by customers, and (g) $0.1 million of temporary accounting labor and moving
costs related to the consolidation of administrative functions in New Jersey.
The primary element making up the 1998 other income (expense) amount of $1.3
million is a gain on the disposal of certain fixed assets.
The Company recorded a restructuring charge of $2.8 million as a result of the
Company reevaluating its business strategy during the latter portion of 1998.
The reevaluation resulted in a shift from a capital-intensive manufacturing
company to a sales and marketing company with lower fixed costs. In connection
with the reevaluation of the Company's business strategy, the Company analyzed
the performance of its operations and divisions. This analysis indicated that
significant strategic and operational changes would be necessary, including the
closure of the Big Ball operations and the Chattanooga and Tazewell locations,
as well as the sale of the Heritage division and Grand Illusion.
This analysis led, among other things, to the sale of the Company's Heritage
division, which was completed on January 20, 1999 (for additional details, see
Note 7 to the consolidated financial statements). Additionally, the Company
reached a decision during the fourth quarter of 1998 to close the Big Ball
operations, as well as the Chattanooga and Tazewell facilities, by no later than
the end of the second quarter of fiscal 1999 with an anticipated completion of
this exit plan by the end of the third quarter. The Chattanooga and Tazewell
locations substantially ceased operations effective December 14, 1998 and March
9, 1999, respectively. As of December 1998, the Company was in negotiations
regarding the sale of Grand Illusion and anticipated the completion of this sale
by mid-1999. The sale of Grand Illusion was completed as of July 31, 1999.
In connection with the decisions discussed above, the Company recorded a $2.8
million restructuring charge in the fourth quarter of 1998. The exit plan for
Chattanooga and Tazewell estimated the termination of 375 employees (275 at
Chattanooga and 100 at Tazewell) representing substantially all of the
management, office staff, plant supervisors, artists, and factory workers at
each of these locations. As of December 31, 1998, approximately 200 employees
consisting of management, supervisors, and plant workers of the Chattanooga
Printwear location had been terminated, but no termination benefits had been
paid as of year end. Subsequent to the balance sheet date, all accrued benefits
have been paid out. Other than the lease buyouts associated with the planned
closure of Big Ball, no other exit costs for Big Ball or Grand Illusion were
reasonably estimable by management as of the end of fiscal 1998. Accordingly, no
other costs were accrued as of the end of fiscal 1998 with respect to the
planned closure of Big Ball and sale of Grand Illusion. In addition to the
restructuring charge, the Company recorded a $4.5 million charge to write-off
the remaining goodwill resulting from the Big Ball and Grand Illusion
acquisitions.
Page 16 of 80
<PAGE>
The restructuring charge is composed of the writedown of fixed assets of the
aforementioned divisions and locations, employee termination benefits, and other
exit costs such as lease buyouts, contract buyouts, legal and professional costs
associated with plant closures, and cost of employees incurred after operations
cease that are associated with the closing of the Chattanooga location, as
summarized in the following table:
<TABLE>
<CAPTION>
Initial Charge to Remaining
Charge Related Assets Balance
------ -------------- -------
<S> <C> <C> <C>
Writedown of property, plant, and equipment $1,352 $1,352 $ 0
(Big Ball division, Chattanooga and Tazewell facilities)
Severance costs of terminated employees 276 0 276
(Chattanooga and Tazewell facilities)
Lease buyouts 401 0 401
(Big Ball division)
Employee payroll incurred after plant closure 495 0 495
(Chattanooga facility)
Legal and professional costs associated with closure 167 0 167
(Chattanooga and Tazewell facilities)
Other, including travel 67 0 67
------ ------ ------
$2,758 $1,352 $1,406
------ ------ ------
Write off of goodwill (Big Ball and Grand Illusion) $4,542 $4,542 $ 0
====== ====== ======
</TABLE>
The remaining restructuring charges incurred in 1999 approximated the remaining
reserve balance at December 31, 1998.
[For additional information concerning the restructuring, see Note 7 to the
accompanying consolidated financial statements.]
FINANCIAL CONDITION
Additional working capital was required in 1999 to fund the continuing losses
and payment of interest on the Company's long term debt to its secured lenders.
Such working capital was provided through several transactions with WGI, LLC and
affiliates (the Company's principal shareholders) and its senior lender. See
Note 4 for information related to the Revolving Credit Agreement, Term Loan and
Security Agreement and funding from WGI, LLC and affiliates. At December 31,
1999, the Company had overadvance borrowings (secured in part by collateral and
guarantees of WGI, LLC and affiliates) of $18.8 million with its senior lender
compared to $8.2 million at December 31, 1998.
The Company's working capital deficit at December 31, 1999 increased $50.2
million or 88.2% compared to 1998. The increase in the working capital deficit
was primarily due to the new term loan being classified as a current liability
($49.6 million), which was partially offset by a decrease in accounts payable,
accrued liabilities, and accrued interest ($4.1 million), a decrease in the
revolving advance account ($4.1 million), and debt discount associated with the
term loan ($4.8 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.
Accounts and notes receivable decreased $1.3 million over 1998.
Page 17 of 80
<PAGE>
Inventories decreased $5.3 million compared to 1998. Inventories decreased as a
result of management's focus on selling slow moving and obsolete inventory
during 1999, the sale of substantially all of the remaining Big Ball Sports
inventory in connection with the closure of the Houston facility.
Total current liabilities increased $43.8 million or 60.7% over 1998, primarily
due to increased borrowings under the Company's credit facility, the long-term
portion of such borrowing ($48 million) had to be included in current
liabilities (See Note 4 to the Consolidated Financial Statements).
Cash used in operations was $38.0 million during 1999 compared to $16.2 million
used in operating activities during 1998. The increased use of cash during that
period was primarily due to the net loss of $47.9 million during 1999, which was
partially offset by depreciation and amortization ($3.7 million) and non-cash
interest ($5.1 million), and a decrease in inventories ($5.3 million) (excluding
the effect of all the sales and acquisitions of divisions).
Commitments to purchase equipment totaled less than $1 million as of December
31, 1999.
Cash provided by investing activities was $2.2 million for 1999, compared to
cash provided of $1.6 million in 1998. This primarily resulted from $2.5 million
provided through the sale of the Heritage division, $0.4 million from the sale
of Grand Illusion, and $0.5 million of restricted cash being released.
Cash provided by financing activities was $35.3 million in 1999 compared to
$14.7 million in 1998. At December 31, 1999, the Company had a net increase in
borrowings amounting to approximately $32.1 million from its senior lender,
after taking into account borrowings under the new Revolving Credit, Term Loan
and Security Agreement and repayment of the prior credit facilities maintained
by the Company. WGI, LLC has pledged $25.5 million of collateral in support of
the Company's $50 million term loan with its senior lender and has pledged
collateral totaling $31.1 million and provided guarantees of up to $17.5 million
in support of the Company's indebtedness of $40 million at December 31, 1999
under the Revolving Advance Account with its senior lender. Effective June 30,
1999, the Company entered into a Reimbursement Agreement with WGI, LLC pursuant
to which the Company will automatically become indebted to WGI, LLC under a
related Promissory Note to the extent that the senior lender proceeds against
any of these WGI, LLC guarantees or offsets any of such collateral against the
Company's indebtedness to the senior lender. In addition, the Company sold $5.0
million of 5% convertible debentures, which was partially offset by repurchase
of $2.4 million Series G1 Preferred Stock, and other principal payments of $3.4
million on borrowings (including debt discounts). See Note 4 to the Consolidated
Financial Statements.
Interest expense for 1999 was $14.3 million compared to $8.6 million for 1998.
Excluding the effect of all sales and acquisitions of divisions, the $14.3
million of interest in this period included non-cash interest charges of $5.1
million. Total outstanding debt averaged $93 million and $65 million for 1999
and 1998, respectively, with average interest rates of 9.1% and 10%,
respectively. The increased interest expense during 1999 reflects non-cash
interest charges of $5.1 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
$12 million as of December 31, 1999.
Total Shareholders' Deficit increased $26.2 million to $93.9 million compared to
1998, primarily due to a loss of $47.9 million for the year.
Page 18 of 80
<PAGE>
YEAR 2000 READINESS
The Company has completed an extensive program to ensure that its computer
systems are Year 2000 compliant and has experienced no significant problems to
date associated with the Year 2000 issue. Additionally, there are no claims
pending or, to its knowledge, threatened against the Company arising out of the
Year 2000 issue. The costs incurred with respect to ensuring compliance with the
Year 2000 issue were not material.
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 December 31, 1999, the Company's senior lender waived certain covenant
violations (tangible net worth, current ratio, working capital and net loss)
under the Company's factoring agreement. Accordingly, Generally Accepted
Accounting Principles requires that the $49,639 term loans be classified as a
current liability even though the term of the loan is longer than one year.
Throughout 1999 and during the first quarter of 2000, the Company experienced
liquidity shortfalls from operations that were resolved through additional
advances against the Company's available borrowing capacity. These shortfalls
bring into questions whether the Company will be in compliance with the
financial covenants of its new Resolving Credit Agreement and Term Loan at the
end of the first quarter for fiscal 2000 or have sufficient capacity under its
available borrowings to fund its operating needs. If the senior lender were to
accelerate the maturity of the Company's indebtedness under its factoring
agreement, the Company would not have funds available to repay the debt.
If the Company's sales and profit margins do not substantially improve in the
near term, the Company will be required to seek additional capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate additional acquisitions. To obtain such
additional capital and such financing, the Company may be required to issue
additional securities that may dilute the interest of its stockholders.
In a prior year, 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 4 to the financial
statements, during 1999, the Company sold $5 million of Convertible Debentures
to institutional investors, whose funds were used to repurchase the Company's
Series G1 Convertible Preferred Stock (following the conversion of $348) stated
value (included accrued dividends) of such stock into 331,140 shares of the
Company's Common Stock effective February 26, 1999, by two other institutional
investors). In order for the Company to have sufficient liquidity for it to
continue as a going concern in its present form, the Company will need to raise
additional funds and execute planned improvements (See Note 1 to the
consolidated financial statements).
INFLATION AND CHANGING PRICES
Inflation and changing prices have not had a material effect on the Company's
results of operations or financial condition during the past three years.
Page 19 of 80
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998
Consolidated Statements of Operations for the years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Deficit for the Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Page 20 of 80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Signal Apparel Company, Inc.
We have audited the accompanying consolidated balance sheet of Signal Apparel
Company, Inc. and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, shareholders' deficit, and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Signal Apparel Company, Inc. as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plan in regard to
these matters is also described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 22, 2000
Page 21 of 80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Signal Apparel Company, Inc.:
We have audited the accompanying consolidated balance sheet of SIGNAL APPAREL
COMPANY, INC. (an Indiana corporation) AND SUBSIDIARIES as of December 31, 1998
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for each of the two years in the period ended December 31, 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 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 Signal Apparel Company, Inc.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has as of
December 31, 1998 a working capital deficit of $56.9 million, an accumulated
deficit of $284.9 million, and the liquidity of the Company has been adversely
affected by recurring losses from operations. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
March 26, 1999
Page 22 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands of dollars, except per share data)
Assets: 1999 1998
--------- ---------
Current assets:
Cash and cash equivalents $ 0 $ 403
Receivables, less allowance for
doubtful accounts of $251 in 1999
and $2,443 in 1998, respectively 304 1,415
Notes receivable 100 283
Inventories 7,346 12,641
Prepaid expenses and other current assets 1,139 539
--------- ---------
Total current assets 8,889 15,281
Property, plant and equipment, at cost:
Land 12 390
Buildings and leasehold improvements 2,057 4,918
Machinery and equipment 1,486 20,023
--------- ---------
Total property, plant and equipment 3,555 25,331
Less: Accumulated depreciation and amortization (707) (22,330)
--------- ---------
Net property, plant and equipment 2,848 3,001
Goodwill, less accumulated amortization
of $1,827 in 1999 26,249 0
Debt issuance costs 5,528
Other assets 1,090 182
--------- ---------
Total Assets $ 44,604 $ 18,464
========= =========
Liabilities and Shareholders' Deficit:
Current liabilities:
Accounts payable $ 4,922 $ 8,133
Accrued liabilities 6,358 9,760
Accrued interest 6,365 3,810
Current portion of long-term debt 8,722 6,435
Revolving advance account 39,994 44,049
Term loans 49,639 0
--------- ---------
Total current liabilities 116,000 72,187
Long Term debt, principally to related parties,
less current portion, net of unamortized
discount of $4,768 and $6,276, respectively 22,475 13,968
--------- ---------
Total liabilities 138,475 86,155
Page 23 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
December 31, 1999 and 1998
(in thousands of dollars, except per share data)
Commitments and contingencies
Shareholders' Deficit:
Preferred stock
Series G1, $1,000 stated value per share, 5,000
shares authorized, issued and outstanding in
1998, (cumulative unpaid dividends of $73 in 1998) 4,484
Series H, $100,000 stated value per share, 1,000
shares authorized, 443.16 issued and outstanding
in 1999 and 1998 (including unpaid dividends of
$6,980 in 1999 and $3,989 in 1998) 51,296 48,305
Common Stock, 150,000,000 shares authorized,
$.01 Par value per share, 53,492,406 and 32,661,955
shares issued and outstanding in 1999 and 1998,
respectively 535 326
Additional Paid-in Capital 191,263 165,242
Accumulated Deficit (335,848) (284,931)
--------- ---------
Subtotal (92,754) (66,574)
Less: cost of treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total shareholders' deficit (93,871) (67,691)
--------- ---------
Total liabilities and shareholders' deficit $ 44,604 $ 18,464
========= =========
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
Page 24 of 80
<PAGE>
Signal Apparel Company, Inc. And Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 98,725 $ 48,876 $ 44,616
Cost of sales 89,268 43,999 39,287
-------- -------- --------
Gross profit 9,457 4,877 5,329
Royalty Expense 5,484 4,211 5,467
Selling, general and administrative
Expenses 37,645 21,643 13,916
Interest expense 14,254 8,645 14,726
Other (income) expense, net 0 (1,315) 1,565
Write off of goodwill 0 4,542 0
Nonrecurring charges 0 2,758 0
-------- -------- --------
Loss before income taxes (47,926) (35,607) (30,345)
Income taxes 0 0 0
-------- -------- --------
Net loss (47,926) (35,607) (30,345)
Less: preferred stock dividends (2,991) (4,062) 0
-------- -------- --------
Net loss applicable to common stock ($50,917) ($39,669) ($30,345)
======== ======== ========
Weighted average shares outstanding,
basic and diluted 48,782 32,644 12,693
======== ======== ========
Basic/diluted net loss per share ($ 1.04) ($ 1.22) ($ 2.39)
======== ======== ========
</TABLE>
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
Page 25 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Deficit
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
Preferred Stock Series
A C F G1 H Common Capital in Accumulated Treasury Total
Stock Excess of Deficit Stock
Par Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, $39,584 $36,618 $0 $0 $0 $115 $73,507 ($214,862) ($1,117) ($66,155)
1996
------------------------------------------------------------------------------------------------------
Net loss 0 0 0 0 0 0 0 (30,345) 0 (30,345)
Exercise of warrants to 0 (3,375) 0 0 0 46 13,911 0 0 10,582
acquire 4,630,000 shares
of common stock through
conversion of $10,582 in
debt and Series C
Preferred Stock
Conversion of $23,802 in 0 (20,514) 44,316 0 0 0 0 0 0 23,802
debt and Series C
Preferred Stock into
Series F Preferred Stock
Conversion of $15,833 in (39,584) (12,729) 0 0 0 155 67,991 0 0 15,833
debt and Series A and C
Preferred Stock into
15,473,220 shares of
Common Stock
Issuance of 855, 194 0 0 0 0 0 9 1,274 0 0 1,283
Shares of Common Stock
for Big Ball acquisition
Issuance of 4,750,000 0 0 0 0 0 0 3,716 0 0 3,716
warrants in connection
with extension of debt
------------------------------------------------------------------------------------------------------
Balance, December 31, 0 0 44,316 0 0 325 160,399 (245,207) (1,117) (41,284)
1997
------------------------------------------------------------------------------------------------------
Net loss 0 0 0 0 0 0 0 (35,607) 0 (35,607)
Issuance of 125,000 0 0 0 0 0 1 180 0 0 181
shares of Common Stock
Conversion of Series F 0 0 (44,316) 0 44,316 0 0 0 0 0
Preferred Stock into
Series H Preferred Stock
Issuance of 5,000 shares 0 0 0 4,429 0 0 196 0 0 4,625
of Series G1 Preferred
Stock and 162,500
warrants to purchase
common stock
</TABLE>
Page 26 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Deficit (Continued)
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands of dollars except per share data)
<TABLE>
<CAPTION>
Preferred Stock Series
A C F G1 H Common Capital in Accumulated Treasury Total
Stock Excess of Deficit Stock
Par Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 3,997,000 warrants 0 0 0 0 0 0 4,467 0 0 4,467
to purchase common stock
to a lender
Accretion of Series G1 0 0 0 55 0 0 0 (55) 0 0
Preferred Stock
Cumulative accrued dividends on 0 0 0 0 0 0 0 (73) 0 (73)
Series G1 Preferred Stock
Cumulative accrued dividends on 0 0 0 0 3,989 0 0 (3,989) 0 0
Series H Preferred Stock
------------------------------------------------------------------------------------------------------
Balance, December 31, 0 0 0 4,484 48,305 326 165,242 (284,931) (1,117) (67,691)
1998
------------------------------------------------------------------------------------------------------
Net loss 0 0 0 0 0 0 0 (47,926) 0 (47,926)
Issuance of 14,366,316 shares of 0 0 0 0 0 144 16,917 0 0 17,061
common stock for the acquisition
of Tahiti Apparel and payment
of Chan note
Issuance of 4,217,956 shares of 0 0 0 0 0 42 4,228 0 0 4,270
common stock to a lender
Conversion of preferred stock 0 0 0 (347) 0 3 344 0 0 -0-
for common stock
Issuance of 1,791,667 shares of 0 0 0 0 0 18 2,314 0 0 2,332
common stock and 375,000
warrants to senior lender
Issuance of 83,333 shares of 0 0 0 0 0 1 100 0 0 101
common stock to former officer
Issuance of 40,057 shares of 0 0 0 0 0 1 0 0 0 1
common stock for business
transactions
Issuance of 15,000 warrants to 0 0 0 0 0 0 16 0 0 16
purchase common stock
Repurchase of Series G1 0 0 0 (4,137) 0 0 0 0 0 (4,137)
Preferred Stock
Issuance of warrants to 0 0 0 0 0 0 2,102 0 0 2,102
purchase common stock to a
lender
Dividends on Series H preferred 0 0 0 0 2,991 0 0 (2,991) 0 -0-
stock
------------------------------------------------------------------------------------------------------
Balance, December 31, $0 $0 $0 $0 $51,296 $535 $191,263 ($335,848) ($1,117) ($93,871)
1999
======================================================================================================
</TABLE>
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
Page 27 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended
December 31, 1999, 1998 and 1997
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss $ (47,926) $ (35,607) $ (30,345)
Adjustments to reconcile net loss to net cash used
in operating activities:
Nonrecurring charges 2,758
Depreciation and amortization 3,712 3,933 1,467
Increase in debt issuance costs (2,332)
Non-cash interest charges 5,051
Non-cash compensation 100
(Gain) loss on disposal and write-down
Of property, plant and equipment 472 (1,199) 977
Loss on sale of GIDI Holdings 85
Write-off of goodwill 4,542
Changes in operating assets and liabilities,
net of effects of business acquired:
Receivables 1,349 2,566 (2,147)
Inventories 13,060 (2,251) 5,146
Prepaid expenses and other current assets (245) (131) 349
Other assets (465)
Accounts payable and accrued liabilities (10,837) 9,142 3,709
----------- ----------- -----------
Net cash used in operating activities (37,976) (16,247) (20,844)
----------- ----------- -----------
Investing activities:
Purchases of property, plant and equipment (730) (215) (233)
Proceeds from sale of property, plant and equipment 1,575 2,295
Cash received in acquisition of Tahiti 476 (200)
Proceeds from note receivable 217
Proceeds from sale of Heritage Division 2,500
----------- ----------- -----------
Net cash provided by investing activities 2,246 1,577 1,862
----------- ----------- -----------
Financing activities:
Net (decrease)increase in revolving advance account (17,887) 3,592 (26)
Net increase in term loan borrowings 50,000
Proceeds from borrowings 6,922 9,754 22,472
Principal payments on borrowings (3,810) (2,970) (3,998)
Principal payments on multi-employer withdrawal liability (312) (795)
Repurchase of Series G1 Preferred Stock (2,398)
Proceeds from issuance of Series G1 Preferred Stock 4,625 0
Proceeds from sale of convertible debt 2,500
----------- ----------- -----------
Net cash provided by financing activities 35,327 14,689 17,653
----------- ----------- -----------
</TABLE>
Page 28 of 80
<PAGE>
Signal Apparel Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Years Ended
December 31, 1999, 1998 and 1997
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net (decrease)increase in cash and cash equivalents $ (403) $ 19 $ (1,329)
Cash and cash equivalents, beginning of year 403 384 1,713
----------- ----------- -----------
Cash and cash equivalents, end of year $ 0 $ 403 $ 384
----------- ----------- -----------
</TABLE>
Supplemental schedule of non-cash investing and financing activities - See notes
2,4 and 5
The accompanying notes and independent auditors' reports should be read in
conjunction with the consolidated financial statements.
Page 29 of 80
<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except per share data)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Signal Apparel Company, Inc. (the
"Company") have been presented on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company reported a net loss applicable to Common Stock of
$50,917 for the year ended December 31, 1999 and cumulative losses applicable to
common stock for the past three years of $120,931. As a result of these
continuing losses, the Company's accumulated deficit now totals $335,848 as of
December 31, 1999.
As of December 31, 1999, the Company was not in compliance with certain
financial covenants of its Revolving Credit, Term Loan and Security Agreement
with its senior lender. The Company has received from its senior lender a waiver
of compliance with the aforementioned financial covenants at December 31, 1999.
Throughout 1999 and during the first quarter of 2000, the Company experienced
liquidity shortfalls from operations that were resolved through additional
advances against the Company's available borrowing capacity. These shortfalls
bring into question whether the Company will be in compliance with the financial
covenants of its Revolving Credit, Term Loan and Security Agreement at the end
of the first quarter of fiscal 2000 or have sufficient capacity under its
available borrowings to fund its operating needs. Accordingly, all debt due the
senior lender has been classified as a current liability in the consolidated
balance sheets. The Company's working capital deficit as of December 31, 1999
totals $107,111.
If the debt due the senior lender does become subject to accelerated maturity,
there can be no assurance the Company would be able to find other financing
sources to continue operations or repay the senior lender.
The Company's continued existence is dependent upon its ability to raise
additional debt or equity financing and to substantially improve its operating
results in 2000. Plans to improve operations include: 1) reducing general and
administrative costs; 2) focusing the Company's efforts on Tahiti's markets,
which include swimwear, bodywear, and activewear; 3) expanding market
penetration of the Company's Umbro license; 4) continuing to improve margins
through effective offshore sourcing and other measures; 5) seeking appropriate
additional acquisitions to enhance the Company's revenues and profitability.
In order for the Company to have sufficient liquidity for it to continue as a
going concern in its present form, the Company will need to raise additional
funds and execute planned improvements. The Company has no assurances it will be
able to raise additional funds. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or any
other adjustments that might become necessary should the Company be unable to
continue as a going concern in its present form. There can be no assurances that
the Company's operations can be returned to profitability.
Page 30 of 80
<PAGE>
Nature of Operations
The Company is engaged in the manufacture and marketing of apparel to retailers
throughout the United States within the following product lines: screenprinted
and embroidered knit and woven activewear for men and boys, and screenprinted
and embroidered ladies' and girls' activewear, bodywear and swimwear.
Principles of Consolidation
The consolidated financial statements include the accounts of Signal Apparel
Company, Inc. ("Signal") and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated.
Revenue Recognition
Revenue is recognized when the Company's products are shipped to its customers.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market for all inventories. For discontinued and closeout inventories, the
Company evaluates the need for write-downs on an item by item basis. Market
value for finished goods and blank (unprinted) goods is estimated net realizable
value.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided over the estimated
useful lives of the assets principally using accelerated methods. Assets under
capital leases are included in property, plant and equipment, and amortization
of such assets is included with depreciation expense. The estimated useful lives
of the assets range from 4 to 32 years for buildings and improvements and from 3
to 10 years for machinery and equipment. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation and amortization of
property, plant and equipment amounted to $810 in 1999, $1,736 in 1998 and
$1,411 in 1997.
The Company identifies and records impairment on long-lived assets when events
and circumstances indicate that such assets have been impaired. The Company
periodically evaluates the recoverability of its long-lived assets based on
expected nondiscounted cash flows, and recognizes impairment, if any, based on
expected discounted cash flows.
Net Loss per Share
As the Company is in a loss position for all periods presented, the Company's
potential common stock would have an anti-dilutive effect on earnings per share
("EPS") and are excluded from the diluted EPS calculation for all periods
presented.
Page 31 of 80
<PAGE>
Stock-Based Compensation
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). Effective in 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 requires companies that do not choose to
account for stock-based compensation as prescribed by the statement to disclose
the pro forma effects on net income and earnings per share as if SFAS No. 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock-based compensation and the assumptions used to determine the
pro forma effects of SFAS No. 123.
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 and 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 reporting period.
Actual results could differ from those estimates.
Credit and Market Risk
The Company sells products to a wide variety of customers servicing the ultimate
consumer. Pursuant to the terms of a factoring agreement with its senior lender,
the Company sells substantially all accounts receivable, except cash-in-advance
or cash-on-delivery sales, to the senior lender on a pre-approved basis. The
Company pays a factoring commission as consideration for the credit risk and
other services provided by the senior lender.
With regard to credit-approved sales, the senior lender accepts the credit risk
for nonpayment due to financial inability to pay. With regard to
non-credit-approved sales, the Company bears all credit risk of nonpayment for
any reason. As of December 31, 1999, the senior lender had outstanding
receivables from the Company's customers totaling $14,282, of which $2,611 was
not credit-approved by the senior lender. The Company performs ongoing credit
evaluations of those customers carried at its own risk and generally does not
require collateral for such receivables. The Company maintains an allowance for
doubtful accounts at a level which management believes is sufficient to cover
potential credit losses.
For the years ended December 31, 1999, 1998 and 1997, one customer accounted for
58%, 19% and 20%, respectively, of the Company's net sales and the next largest
customer accounted for 9%, 10% and 10%, respectively, of the Company's net
sales.
The Company's NFL and NBA licenses expired on March 31, 1999 and July 31, 1999,
respectively. The Company no longer has the right to manufacture NFL and NBA
licensed products. During 1999 and 1998, respectively, licensed NFL and NBA
product sales were approximately 3% and 21% of consolidated revenue. The loss of
these licenses could also affect the Company's ability to sell other
professional sports apparel to its customers, although the Company is not aware
of any material impact to date.
Page 32 of 80
<PAGE>
Goodwill
In 1997, the Company acquired GIDI Holdings, Inc., doing business as Grand
Illusion Sportswear and Big Ball Sports, Inc. (including Print The Planet, Inc.)
(collectively "Big Ball"). These acquisitions resulted in goodwill of $751 and
$4,137, respectively. As a result of the Company changing its business strategy
and outsourcing more of its manufacturing process in 1998, the Company wrote off
the remaining goodwill for both Grand Illusion and Big Ball [See Note 7].
Amortization and write-off of goodwill associated with the aforementioned
acquisitions aggregated $4,832 in 1998. The acquisition of Tahiti [see Note 2]
resulted in goodwill of $28,076. Amortization of goodwill for Tahiti was $1,827.
At each balance sheet date, the Company evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include (i) current operating results, (ii) projected future operating results,
and (iii) any other material factor that effect the continuity of the business.
Segment Information
Effective in 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect the results of operations, financial position or
segment-related disclosure information. Management has determined that the
Company is a single reportable segment.
New Pronouncements
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
2. Acquisition of Tahiti Apparel Co., Inc.
On March 22, 1999, effective January 1, 1999, the Company completed the
acquisition of substantially all of the assets of Tahiti Apparel Co., Inc.
("Tahiti"), a New Jersey corporation engaged in the marketing of swimwear,
bodywear and activewear for ladies and girls. The purchase price for the assets
and business of Tahiti was $15,872, payable in shares of the Company's common
stock having an agreed value (for purposes of such payment only) of $1.1875 per
share. The Company acquired certain assets aggregating $12,875 and assumed
certain liabilities aggregating $25,079.
The acquisition resulted in the issuance of 14,366,316 shares of the Company's
Common Stock to Tahiti in payment of the purchase price under the Acquisition
Agreement (including 1,000,000 shares issued in payment of the "Chan Note"
discussed below). One million of such shares have been placed in escrow 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 the Company's annual audit
for its 1999 fiscal year to satisfy the obligations of Tahiti and its majority
stockholders and to indemnify the Company against certain potential claims as
specified in the Acquisition 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 its 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
Page 33 of 80
<PAGE>
the Chan Agreement discussed below, for which shares were issued in connection
with the closing. Issuance of the additional 4,296,316 shares of Common Stock
called for by the amendment to the Acquisition Agreement was approved by the
Company's shareholders at the Company's annual meeting held on December 31,
1999, and the Company has issued such shares.
All of the shares of Common Stock issued pursuant to the Acquisition Agreement
are unregistered, restricted shares pursuant to the rules of the Securities and
Exchange Commission. Under the terms of a separate Registration Rights Agreement
executed in connection with the Acquisition Agreement, Tahiti and/or its
shareholders (and certain permitted assignees) have the right for a period of
ten years following the Closing Date, under certain circumstances, to have the
Company register the shares of Common Stock issued to them pursuant to the
Acquisition Agreement. Tahiti shareholders have also agreed with the Company
(subject to certain limited exceptions) to limit their transfers of Company
Common Stock during each of the first five years following the closing date (two
years in the case of the shares issued under the Chan Agreement) to no more than
five percent of the number of shares held by each of them during each such year.
Pursuant to the terms of the Acquisition Agreement, the Company also entered
into employment agreements with Tahiti's two former majority shareholders. These
agreements call for minimum annual salaries of $500 each for five years. Each of
them must be appointed to the Company's Executive Management Committee and one
must be appointed as a director of the Company. The employment agreements also
provide for the issuance in the aggregate of up to 4,000,000 warrants to
purchase the Company's Common Stock with an average exercise price of $1.75 per
share. One million of such warrants vested upon the signing of the Agreement and
the remaining three million warrants are subject to certain vesting
restrictions.
In connection with the acquisition, Tahiti and Tahiti's former majority
shareholders reached an agreement with Tahiti's former 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 (the "Chan Note"),
bearing interest at the rate of 8% per annum, and payable as follows:
(a) $3,500 payable in cash (with accrued interest thereon) in the
following installments:
$1,000 payable in equal installments of $250 (90 days, 180 days, 270
days, and 360 days following the closing)
$2,500 payable in equal quarterly installments of $312 commencing June
1, 2000 with a final payment due on March 1, 2002.
(b) The balance of $3,270 plus accrued interest payable, at the option of
Tahiti, through either the delivery of 1,000,000 shares of Common
Stock of the Company within five business days of the closing, or
payment of such amount in cash in eight quarterly installments,
beginning on the first anniversary of the closing under the Asset
Purchase Agreement.
Under the terms of the Acquisition Agreement, the Company assumed the Chan note
following closing and effective March 22, 1999 repaid $3,270 of the Chan note
through the issuance of 1,000,000 shares of Common Stock.
The Acquisition Agreement gives Tahiti's former majority shareholders the right
(jointly) to repurchase Tahiti's assets from the Company, if at any time prior
to the fifth anniversary of the Closing, the Company is unable to provide
sufficient financing to Tahiti to support a level of sales at least equal to the
sales of such business for the preceding season plus a reasonable rate of growth
(a "Financing Default"). If the rights were exercised, the repurchase price
would consist of repayment to the Company of the
Page 34 of 80
<PAGE>
original $15,872 purchase price (payable in shares of Common Stock which would
be valued at $1.1875 per share), plus the assumption of liabilities incurred in
the ordinary course of business.
The following pro forma information presents the results of operations of the
Company for the year ended December 31, 1998 as though the acquisition occurred
on January 1, 1998.
(unaudited)
Net Sales $112,142
Net Loss ($45,602)
Net Loss per share ($1.08)
3. Inventories
Inventories consisted of the following at December 31:
1999 1998
-------- --------
Raw materials $ 1,079 $ 788
Work-in-process 583 1,377
Finished goods 5,634 10,262
Supplies 50 214
-------- --------
Total inventories $ 7,346 $ 12,641
======== ========
4. Debt
Debt consisted of the following at December 31:
1999 1998
-------- --------
Senior Obligations:
Term Loan A $ 27,500 $ -0-
Term Loan B 22,139 -0-
Revolving advance account 39,994 44,049
under senior credit facility -
interest payable monthly at the
alternate base rate (8.5% at
at December 31, 1999); plus 1.25%,
guaranteed by principal
shareholder.
Senior secured subordinated 15,042 13,184
promissory note to related
party - interest at 10% (payable
quarterly); secured by a second
lien on accounts receivable,
inventory, machinery and equip-
ment, and certain real estate (net
of unamortized debt discount of
$4,768 and $6,276, respectively).
Page 35 of 80
<PAGE>
Promissory unsecured subordinated 2,100
note to related party pursuant to
Reimbursement Agreement - interest
payable annually at 8% per annum
Notes payable to related parties 6,731 1,981
interest accrued monthly at 5.5%
to 8% per annum based on the
average outstanding debt.(a)
5% Convertible Debentures net 3,373
of unamortized debt discount
of 1,627
Subordinated debt to related party 3,000 3,000
Obligations under capital leases 792 1,029
Other 159 1,209
-------- --------
Total 120,830 64,452
Less: current portion of long-term 8,722 6,435
debt
Term loans 49,639
Revolving advance account 39,994 44,049
-------- --------
Long-term debt, excluding current
portion and Revolving advance account $ 22,475 $ 13,968
======== ========
(a) In a prior year, the Company entered into a Reimbursement Agreement of
a Promissory Note with FS Signal, a related party, whereby the Company
agreed to repay amounts that FS Signal pays in support of letters of
credit. As of December 31, 1999 and 1998 the Company had a debt of $3,981
and $1,981, respectively, relating to this agreement. Accrued interest
relating to this debt as of December 31, 1999 and 1998 was approximately
$316 and $207, respectively. (See Note 2 for information relating to the
"Chan Note" in the amount of $2,750.)
Substantially all of the assets of the Company are secured under the terms of
the aforementioned debt and capital lease agreements.
Revolving Credit Agreement and Term Loan with Senior Lender
Effective March 22, 1999, pursuant to a Revolving Credit, Term Loan and Security
Agreement (the "Credit Agreement"), the Company completed a new financing
arrangement with its senior lender, (GMAC Financial Corporation (successor in
interest to BNY Financial Corporation) on its own behalf and as agent for other
participating lenders). This arrangement provides the Company with funding of up
to $98,000 (the "Maximum Facility Amount") under a combined facility that
includes a $50,000 Term Loan (supported in part by $25,500 of collateral pledged
by an affiliate of WGI, LLC, the Company's principal shareholder) and a
Revolving Credit Line of up to $48,000 (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 up to $65,000, in increments of not less than
$5,000.
Page 36 of 80
<PAGE>
The Term Loan portion of the new facility is divided into two segments with
differing payment schedules: (i) $27,500 ("Term Loan A") payable, with respect
to principal, in a single installment on March 12, 2004, and (ii) $22,500 ("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 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 ("L/C")on behalf of the Company, subject to a maximum amount of $40,000
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 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) Reserves (as defined).
As detailed below under "WGI, LLC Agreements," the Company's principal
shareholder currently has in place guarantees totaling up to $7.5 million and
has posted collateral totaling $31.3 million in support of the Company's
borrowings under this formula.
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 (the outstanding balance of which must be reduced to not
more than $10,000 for at least one business day during a five business day
cleanup period each month) through December 31, 2000. Between December 31, 2000
and June 1, 2001, both the maximum overall balance and the maximum cleanup
period balance under this Overformula Facility are gradually reduced to zero in
six equal monthly increments. Subject to the limitations of the Maximum
Revolving Advance Amount and the Formula Amount, as well as the Maximum Facility
Amount, the agreement also provides that the senior lender (in its individual
capacity) may make Swingline Loans of up to $5,000 to the Company for periods
not to exceed seven (7) days for any one such loan.
Interest on all amounts advanced under the Credit Agreement pursuant to the
either Term Loan or Revolving Advances (including any outstanding Letters of
Credit) is payable in arrears on the last day of each month. The facility allows
the Company to select (separately) interest rates for both the Term Loan and
Revolving Advances based on either a Domestic Rate or a Eurodollar Rate.
Interest on Domestic Rate Loans is payable at a fluctuating Alternate Base Rate
equal to the higher of the prime rate (as defined) (8.5% as of December 31,
1999) or the federal funds rate plus 0.5%, plus the Applicable Margin (as
defined). Interest on Eurodollar Rate Loans is payable at a fluctuating
Eurodollar Rate equal to the daily average of the 30-day London Interbank
Offered Rate as published in The Wall Street Journal (5.8225% as of December 31,
1999) (calculated as prescribed in the agreement), plus the Applicable Margin
(as defined). The Applicable Margin for both Domestic Rate Loans and Eurodollar
Rate Loans is tied to the Company's ratio of Funded Debt to Free Cash Flow (each
as defined in the agreement), and ranges (A) in the case of Domestic Rate Loans,
from zero for a ratio less than or equal to 1.0:1 to 1.25%
Page 37 of 80
<PAGE>
for a ratio greater than 5.0:0, and (B) in the case of Eurodollar Rate Loans,
from 1.5% for a ratio less than or equal to 1.0:1 to 3.5% for a ratio greater
than 5.0:1.
Notwithstanding the foregoing, the Credit Agreement provides that (x) from and
after the Closing Date through and including the earlier of (i) the first
anniversary of the Closing Date and (ii) the date on which the senior lender
receives the Company's 1999 annual audited financial statement as required, the
Applicable Margin shall be 1.25% for Domestic Rate Loans and 3.5% for Eurodollar
Rate Loans, and (y) from and after the date that the Company repays in full Term
Loan B, and (ii) the date at which advances are no longer permitted under the
Overformula Facility, the Applicable Margin in effect from time to time for both
Domestic Rate Loans and Eurodollar Rate Loans shall be increased by .50%.
In addition to the amounts due for interest, the Company is obligated to pay:
(i) a monthly unused facility fee, computed at the rate of 0.25% per annum, on
the difference between the Maximum Revolving Advance Amount and the average
daily balance of outstanding Revolving Advances (plus the aggregate undrawn
amount of outstanding Letters of Credit) during that month; (ii) a monthly fee
computed at the rate of 0.25% per annum on the outstanding face amount of any
Letters of Credit (plus certain customary fees charged by the senior lender in
connection with issuing letters of credit); and (iii) certain administrative
fees payable to the senior lender under a fee letter executed in connection with
the agreement.
The Credit Agreement requires, among other things, maintenance by the Company of
prescribed minimum amounts of tangible net worth, ratios of current assets to
current liabilities, and working capital and net operating results (excluding
extraordinary items). The Credit Agreement also limits the Company's ability to
pay dividends, the Company's future capital expenditures, and the amount of
indebtedness the Company may incur, and it effectively prohibits future
acquisition or business combination transactions by the Company without the
lenders' consent. Substantial doubt exists regarding the Company's ability to
maintain compliance with its financial covenants under the new Credit Agreement.
As of December 31, 1999, the Company's senior lender waived certain covenant
violations (tangible net worth, current ratio, working capital and net loss)
under the Company's Revolving Credit, Term Loan and Security Agreement. During
the first quarter of 2000, the Company does not expect to be in compliance with
these covenants. Accordingly, Generally Accepted Accounting Principles ("GAAP")
requires that the $49,639 of term loans be classified as a current liability
even though the term of the loan is longer than one year.
In consideration of the provision of the additional, unsecured Overadvance
Facility prescribed in the agreement, the Company permitted the senior lender to
purchase a total of 1,791,667 shares of the Company's Common Stock at the par
value of $.01 per share (the "Issued Shares") under the terms of a separate
Subscription and Stock Purchase Agreement executed in conjunction with the
Credit Agreement. The Company also issued to the senior lender warrants to
purchase up to 375,000 additional shares of its Common Stock (the "Warrant
Shares") at an exercise price of $1.50 per share. The fair market value of these
warrants using the Black-Scholes Option Pricing Model was $204 and will be
treated as a debt discount and amortized over the term of the agreement. Subject
to certain requirements for advance notice to the Company by the holder
regarding the number of Warrant Shares which the holder intends to purchase, the
warrant becomes exercisable over a three-year period beginning December 31, 1999
with respect to a maximum of 125,000 shares per year. The agreement also gives
the senior lender the right to have both the Issued Shares and the Warrant
Shares registered for resale under the Securities Act of 1933 in prescribed
installments over a staggered period of time, and provides certain customary
antidilution protection with respect to the Warrant Shares and 625,000 of the
Issued Shares for which resale registration is delayed.
The Subscription and Stock Purchase Agreement also provides for certain put and
call options with respect to the Issued Shares. Under the put option, the senior
lender will have the right (upon specified advance written notice) once each
calendar year for three years, beginning December 31, 1999, to require
Page 38 of 80
<PAGE>
the Company to purchase up to 388,889 of the Issued Shares at a price of $1.50
per share. This right will only be exercisable, however, if the average closing
bid price of the Company's Common Stock for the five trading days prior to the
date of the exercise of the put option is less than $1.50. Under the call
option, the Company has the right (but not the obligation), exercisable at any
time, while the senior lender holds the 1,166,667 issued shares (for which
registration is not delayed under the agreement), to purchase all or any of the
portion of such shares at $3.00 per share. The senior lender did not exercise
its right at December 31, 1999 to have the Company purchase up to 388,889
shares.
WGI, LLC Agreements
On August 10, 1998, the Company's Board of Directors approved (subsequently
approved by the shareholders) 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 on a revolving basis
for a three-year term ending May 8, 2001. Additional terms of the WGI Credit
Agreement are as follows:
o Maximum funding of $25,000, available in increments of $100 in excess
of the minimum funding of $100.
o Secured by a security interest in all of the Company's assets,
subordinate to the security interests of the Company's senior lender.
o 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.
o During the term of the WGI Credit Agreement, WGI, LLC is entitled to
have two designees nominated by the Company for election to its Board
of Directors at the Company's Annual Meeting of Shareholders; Messrs.
Walsh and Greenwood are the Board nominees designated by WGI, LLC
pursuant to this provision.
Pursuant to the WGI Credit Agreement, WGI received warrants to purchase up to
5,000,000 shares of the Company's Common Stock at $1.75 per share, with the
following additional terms:
1) The warrants vest at the rate of 200,000 warrants for each $1,000
increase in the largest balance owed at any one time over the term of the
Credit Agreement (as of December 31, 1999, the largest outstanding balance
to date has been $19,810, which means that warrants to acquire 4,217,956
shares of Common Stock were vested, approved, issued and exercised as of
such date);
2) 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; and
3) The warrants contain antidilution provisions which require that the
number of shares subject to such warrants shall be adjusted in connection
with any future issuance of the Company's Common Stock (or of other
securities exercisable for or convertible into Common Stock) such that the
aggregate number of shares issued or issuable subject to these Warrants
(assuming eventual vesting as to the full 5,000,000 shares) will always
represents ten percent 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 for the
warrants was $4,467 and has been shown as a debt discount in the accompanying
balance sheets. These warrants expire August 17, 2003.
Page 39 of 80
<PAGE>
As of December 31, 1999, the Company had not made any antidilution adjustments
to the above warrants based on the formula described above, although the Company
intends to calculate an appropriate initial antidilution adjustment in the
current year, which will take into account all additional issuances of shares,
options and warrants from December 1998 through the transactions approved by
shareholders at the 1999 Annual Meeting which was held on December 31, 1999.
In order to further assist the Company in meeting its ongoing liquidity needs,
WGI, LLC entered into a Reimbursement Agreement as of June 30, 1999 whereby it
made certain direct payments to a third party licensor on the Company's behalf
and provided additional collateral and guarantees in connection with the
Company's Credit Agreement with its senior lender. Specifically, WGI, LLC:
(1) Posted additional T-bills as collateral for the term loan portion in
the amount of $8,500, bringing the total amount of such collateral
posted by WGI to $25,500;
(2) Posted additional T-bills as collateral for additional advances under
the revolving term loan portion in the amount of $5,626.
(3) Provided additional firm guarantees of the Company's obligations in
the amount of $5,000, plus additional contingent guarantees of up to
$2,500 (the amount of which will be fixed based on the results of an
appraisal of the Company's Umbro License and fixed assets), bringing
the maximum amount of the Company's indebtedness guaranteed by WGI,
LLC to $20,000.
(4) Made certain cash payments on behalf of the Company directly to a
third-party licensor in the amount of $2,100.
As a mechanism for reimbursing WGI, LLC for payments made on the Company's
behalf outside of the terms of the WGI Credit Agreement, as well as for any loss
that it might suffer as a result of a decision by the senior lender to proceed
against the guarantees and/or collateral posted by WGI with respect to the
Company's obligations under its senior loan, the Company has entered into a
Reimbursement Agreement and related Promissory Note with WGI, LLC, effective as
of June 30, 1999, having the following key terms:
Indebtedness under the Reimbursement Agreement will be unsecured and will
be subordinated to the Company's obligations to its senior lender.
The Reimbursement Agreement will remain outstanding for as long as WGI, LLC
is obligated under any guarantees, or has any collateral posted, with
respect to the Company's obligations under agreements with its senior
lender or until all obligations under the Reimbursement Agreement are
repaid, whichever is later.
The Promissory Note created in connection with the Reimbursement Agreement
will have a nominal principal amount of up to $53,226, with $2,100 of
principal indebtedness initially outstanding (due to the licensor payment
described above). The Company's principal indebtedness under the note will
automatically increase from time to time in an amount equal to any payments
made by WGI, LLC pursuant to any of the senior lender guarantees, plus the
value of any WGI collateral which is offset by the senior lender against
the Company's obligations. The Promissory Note will be amended in 2000 to
increase the nominal principal amount to $56,776 in order to reflect
additional collateral and guarantees posted by WGI, LLC in 1999.
Page 40 of 80
<PAGE>
Indebtedness under the Reimbursement Agreement will bear interest at the
rate of eight percent per annum, payable in annual installments either in
cash or (at the Company's option) with shares of Common Stock valued at the
then-current market price.
The principal amount of the Company's indebtedness under the Reimbursement
Agreement will be payable at any time upon demand of WGI, LLC.
As compensation to WGI, LLC for the opportunity cost and additional risk
involved in issuing the guarantees and posting the collateral in support of the
Company's financing arrangements as described above, and in consideration of
WGI's agreement to leave these arrangements in place at least through March 12,
2004 (the initial term of the Credit Agreement), the shareholders approved the
issuance of additional shares of Common Stock to WGI, LLC based on the following
formula: the Company will issue shares of Common Stock having a fair market
value of $200 with respect to each $1,000 (or fraction thereof) which WGI either
has paid on the Company's behalf to third parties or has placed at risk in the
form of new guarantees and/or collateral in support of the Company's Revolving
Credit and Term Loan Agreement with the senior lender and its participating
banks (a total of $23,726). Based on a fair market value of $1.125 per share for
the Common Stock (the closing price on June 30,1999), this resulted in the
issuance of 4,217,956 additional shares of Common Stock to WGI, LLC.
In a prior year, the Company signed a promissory note for $3,000 with a related
party, FS Signal Associates I. The promissory note was due on April 30, 1997,
subject to the terms of the subordination agreement with the Company's senior
lender. Interest was payable at maturity at the prime rate, as defined, plus 3%.
In connection with this promissory note, accrued interest payable to FS Signal
Associates I was approximately $2,005 and $1,670 as of December 31, 1999 and
1998, respectively.
Interest expense in the consolidated statements of operations includes interest
to related parties of $2,325, $2,211 and $11,081 during 1999, 1998, and 1997,
respectively.
The Company made cash payments for interest of $9,757, $4,366 and $2,349 during
1999, 1998, and 1997, respectively. The aggregate future scheduled maturities of
debt for the five years subsequent to December 31, 1999, are as follows:
2000 $ 98,355(a)
2001 16,549
2002 3,807
2003 19
2004 2,100
--------
$120,830
(a) Includes $48,032 which by its terms is non-current. However, since the
Company is in default of its Revolving Credit, Term Loan and Security
Agreement, and is expected to continue to be in default in the first
quarter of 2000, GAAP requires that the term loans be classified as a
current liability through the term of the loan is longer than one year.
The fair value of the Company's debt approximates the carrying amount due to the
short-term nature of the instruments.
5. Capital Stock
In January 1999, the Company's shareholders approved the 1999 Stock Incentive
Plan (the "1999 Plan") which superseded the Company's 1985 Stock Option Plan
(the "1985 Plan"). No additional stock option grants are anticipated under the
1985 Plan. The stock options under the 1985 Plan outstanding as of
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<PAGE>
December 31, 1999 typically have terms ranging from three to ten years and vest
over periods from one to four years from date of grant.
The 1999 Plan provides for the grant of up to five million shares of the
Company's Common Stock in the form of options, stock compensation awards and
other stock-based awards. Options granted under the 1999 Plan as of December 31,
1999 have five year terms and vest either as of the grant date or over a period
of two years from the date of grant. Stock compensation awards under the 1999
Plan constitute shares of the Company's Common Stock issued to the recipient as
of the date of grant.
The Company accounts for its stock-based compensation under APB No. 25, under
which no compensation expense has been recognized for stock options granted with
exercise prices equal to or greater than the fair value of the Company's Common
Stock on the date of grant. The Company adopted SFAS No. 123 for disclosure
purposes. For SFAS No. 123 purposes, the fair value of each option and warrant
grant has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 1999, 1998,
and 1997, respectively: risk-free interest rate of 5.25%, 5.63%, and 6.11%,
expected life of 8.0, 7.0 and 3.0 years, expected dividend yield of 0% and
expected volatility of 89% for 1999 and 71% 1998 and 1997. Using these
assumptions, the fair value of the employee stock options and warrants
(excluding warrants issued to lenders) granted in 1999, 1998 and 1997 is $5,358,
$7,537, and $2,743, respectively, which would be amortized as compensation
expense over the vesting period of the options. Compensation expense recognized
under APB No. 25 in 1999, 1998 and 1997 is $0. Had compensation cost for the
plan been determined in accordance with SFAS No. 123, utilizing the assumptions
detailed above, the Company's pro forma net loss would have been $52,479,
$43,303 and $31,049 for the years ending December 31, 1999, 1998 and 1997,
respectively. Pro forma net loss per share would have been $1.08, $1.33 and
$2.45 for the years ending December 31, 1999, 1998 and 1997, respectively.
The pro forma effect on net loss in this disclosure may not be representative of
the pro forma effect on net loss in future years because it does not take into
consideration expense related to grants made prior to 1995.
A summary of the Company's stock option activity for 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ----------------------------- -----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 2,404,850 $2.33 2,648,350 $2.69 493,600 $5.29
Granted, at market price 0 $0.00 430,000 $1.76 1,700,000 $2.12
Granted, at below market price 0 $0.00 0 $0.00 65,000 $2.38
Granted, at above market price 200,000 $1.00 350,000 $1.75 682,000 $2.38
Exercised 0 $0.00 0 $0.00 0 $0.00
Canceled or expired (431,400) $2.89 (1,023,500) $2.82 (292,250) $3.38
Outstanding, end of year 2,173,450 $2.05 2,404,850 $2.33 2,648,350 $2.69
Exercisable, at end of year 1,705,116 $2.22 623,684 $3.17 380,600 $5.38
Weighted average fair value of
At market price N/A $0.96 $1.31
At below market price N/A N/A $1.26
At above market price $1.00 $1.05 $ .46
</TABLE>
There are 2,173,450 options outstanding as of December 31, 1999, having exercise
prices between $1.00 and $7.06 with a weighted average price of $2.05 and a
weighted average remaining contractual life of 2.96 years. Of these options
1,705,116 were exercisable at year's end with a weighted average price of $2.22.
The remaining 468,334 options have exercise prices between $1.00 and $2.38 with
a weighted average price of $2.25.
Page 42 of 80
<PAGE>
In connection with the 1998 issuance of the Series G1 Convertible Stock, the
Series F Preferred Stock was exchanged in full for the Series H preferred Stock.
In the first quarter of 1999, WGI waived its right to receive $997 in preferred
dividends that 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 that accrued after the end of the first quarter of 1999.
The Company also issued 62,500 warrants to the placement agent and another
100,000 warrants to the purchasers of the Series G1 Preferred Stock. These
warrants, using the Black-Scholes Option Pricing Model, were valued at
approximately $196. The statement of shareholders' deficit reflects the face
amount of the 5% Series G1, less the value of the warrants issued and other
costs of issuance. Accretion and accrued dividends for 1998 were $55 and $73,
respectively. The new Series H Preferred Stock is identical to the Series F
Preferred Stock in every respect except that the Series H Preferred Stock will
be junior in priority to the Company's 5% Series G1 Convertible Preferred Stock.
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 received $102 in cash net of debt issuance costs and exchanged
Series G1 Preferred Stock for the balance. The Company utilized the net cash
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 $348 stated value (including accrued dividends) of
such stock into 331,140 shares of the Company's Common Stock effective February
26, 1999, by two other institutional investors). The transaction also reflects
the Company's decision to forego the private placement of an additional $5,000
of 5% Series G2 Preferred Stock under the original purchase agreement with the
Series G1 Preferred investors. In connection with the sale of the $5,000 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 $2,250 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. Effective September 14, 1999, in connection
with the Company's late payment of interest that was due July 1, 1999 and the
holders' waiver of the associated Event of Default, the Company agreed with the
two holders of the Debentures that (A) the Debentures would be amended to
eliminate an election that the Company previously had to make interest payments
in either stock or cash and (B) the conversion price for the debentures would
remain fixed at $2.00 per share of Common Stock until December 31, 1999, at
which time the holders may adjust the conversion price to $1.00 per share unless
Signal procures the posting of not less than $10,000 of new collateral in
support of additional funding under its GMAC loan on or before such date (in
which case the Company may elect to adjust the conversion price to $1.25 per
share of Common Stock which election the Company has made).
Under its Restated Articles of Incorporation, as amended, the Company has the
authority to issue 1,600,000 shares of preferred stock having no par value,
issuable in series, with the designation, powers, preferences, rights,
qualifications and restrictions to be established by the board of directors. At
December 31, 1999, the Company had authorized 400 shares of Series A Preferred
Stock, 250 shares of Series B Preferred Stock, and 1,000 shares of Series C
Preferred Stock, and 20,000 shares of Series E Preferred Stock, and 1,000 shares
of Series F Preferred Stock.
A summary of the Company's warrant activity for 1999, 1998 and 1997 is as
follows:
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<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ----------------------------- -----------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, at
Beginning of year 14,571,106 $2.05 10,889,560 $4.21 9,754,560 $5.22
Issued, at market price 0 $0.00 8,816,546 $1.75 250,000 $2.38
Issued, at above market price 4,475,000 $1.73 162,500 $3.05 5,710,000 $1.86
Issued, at below market price 2,500,000 $1.00 $0.00 250,000 $2.50
Exercised 0 $0.00 $0.00 (4,630,000) $3.01
Canceled or expired (300,000) $7.06 (5,297,500) $6.02 (445,000) $7.06
Outstanding, at end of year 22,199,106 $1.70 14,571,106 $2.05 10,889,560 $4.21
Exercisable, at end of year 15,081,146 $2.16 11,138,075 $2.13 9,824,560 $4.40
Weighted average fair value of
warrants granted:
At market price $ N/A $1.27 $1.22
At below market price $1.27 N/A $1.69
At above market price $1.50 $1.21 $0.46
</TABLE>
Of the 22,199,106 warrants outstanding at December 31, 1999, 21,967,046 have
exercise prices between $1.00 and $3.125, with a weighted average exercise price
of $1.60 and a weighted average remaining contractual life of 5.27 years. Of
these warrants, 14,849,086 are exercisable with a weighted average exercise
price of $1.65. The remaining 232,060 warrants, all of which are presently
exercisable, have exercise prices of $8.52 or $11.61, with a weighted average
exercise price of $11.10 and a weighted average remaining contractual life of
1.85 years.
6. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
reporting and income tax bases using enacted tax rates in effect for the year in
which the differences are expected to reverse.
There was no income tax provision or benefit recorded during the years ended
December 31, 1999, 1998 and 1997, due to the losses sustained by the Company.
Deferred income tax assets and liabilities for 1999 and 1998 reflect the impact
of temporary differences between the amount of assets and liabilities for
financial reporting and income tax reporting purposes. The Company has
established a valuation allowance for the entire amount of the net deferred tax
asset due to the uncertainty regarding the realizability of these assets.
Temporary differences and carry forwards which give rise to deferred tax assets
as of December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
---------------------------
Deferred tax assets:
Tax loss carry forwards $ 114,600 $ 95,425
Inventory reserves 418 1,135
Accounts receivable reserves 95 1,748
Accrued interest 2,419
Nonrecurring charges 1,229
Other 1,719
---------------------------
Total deferred tax asset 117,532 101,256
Valuation allowance (117,532) (101,017)
Deferred tax liabilities:
LIFO to FIFO change (239)
---------------------------
Net deferred tax asset $ 0 $ 0
===========================
Page 44 of 80
<PAGE>
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1999, the Company had tax loss carryforwards of approximately
$302,000 which expire in years 2000 through 2019 if not utilized earlier. At the
time certain subsidiaries were acquired, they had tax loss carry forwards of
$17,400, $11,800, and $3,021, respectively, which are included above. These tax
loss carry forwards are subject to annual limitations imposed for the change in
ownership (as defined in Section 382 of the Internal Revenue Code) and
application of the consolidated income tax return rules.
The Company did not pay any income taxes in 1999, 1998 and 1997.
The provisions for income taxes differs from the amount computed using the
federal statutory rate of 34% as a result of the following:
Year ended December, 1999 1998 1997
- -------------------- --------------------------------------
Tax at federal statutory rate (34)% (34)% (34)%
Increase in valuation allowance 34% 34% 34%
--------------------------------------
-0- -0- -0-
======================================
7. Restructuring Charges
In the fourth quarter of 1998, the Company reevaluated its business strategy.
The reevaluation resulted in a shift from a capital-intensive manufacturing
company to a sales and marketing company with lower fixed costs. In connection
with the reevaluation of the Company's business strategy, the Company analyzed
the performance of its operations and divisions. This analysis indicated that
significant strategic and operational changes would be necessary, including the
closure of the Big Ball operations and the Chattanooga and Tazewell locations,
as well as the sale of the Heritage division and Grand Illusion.
In January 1999, the Company completed the sale of its Heritage division to
Heritage Sportswear, LLC, a new company formed by certain former members of
management of the Heritage division. Under the terms of the sale dated January
20, 1999, the Company retained accounts receivable and accounts payable of
approximately $100 and $500, respectively, and received cash consideration of
$2,500 and a note receivable of $400, subject to post closing adjustments. The
note receivable bears principal interest at 10% with accrued interest payable
with each principal payment, payable over five years.
The Company reached a decision during the fourth quarter of 1998 to close the
Big Ball operations, as well as the Chattanooga and Tazewell facilities.
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 Avenel, New Jersey.
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 design functions to New York,
New York and has outsourced all of the manufacturing functions for the Big Ball
Sports line to third parties. The Company's negative gross profit for the second
quarter of 1999 includes $1,900 related to closeout goods and $500 from customer
chargebacks related to the Big Ball shutdown.
Page 45 of 80
<PAGE>
In July 1999, the Company completed the sale of its GIDI Holdings, Inc.
subsidiary (also known as Grand Illusion) to the previous president of the
Company. Under the terms of the sale dated July 31, 1999, the Company sold all
of the issued and outstanding common stock of GIDI Holdings in consideration of
the assumption by the buyer of $900 of short-term liabilities of GIDI Holdings
(including the release of any guarantees of the Company of such obligations).
This resulted in the Company recognizing a loss on sale of $85. The Company also
retained 35 shares of Series A Preferred Stock in GIDI Holdings. The Preferred
Stock has the following attributes: (a) Par value of $10,000 per share, (b)
senior to all other classes of capital stock in GIDI Holdings, (c) cumulative 6%
cash dividends accrue and are payable semi-annually on June 30 and December 31
each year, (d) if GIDI Holdings or its assets are sold within 18 months after
the last share of Preferred Stock has been redeemed, the Preferred Holders are
entitled to receive 35% of all proceeds of sale in excess of $1,000, (e) veto
rights on any organic change in GIDI Holdings, (f) convertible (in the
aggregate) into 35% of the common stock of GIDI Holdings, and (g) starting
December 31, 1999, mandatory redemption of 6 shares each 6 months.
Management also assessed (1) the realizability of the goodwill recorded for Big
Ball and Grand Illusion when they were acquired in late 1997 and (2) the fair
value of the assets associated with Big Ball and Grand Illusion and those
associated with the Chattanooga and Tazewell plant locations. The determination
of goodwill impairment for Big Ball and Grand Illusion was based on the
Company's plans to close down Big Ball and the expected loss resulting from the
sale of Grand Illusion. Neither Big Ball nor Grand Illusion was expected to
provide further cash flows sufficient to recover any of the remaining goodwill,
and the goodwill was deemed fully impaired. Accordingly, the Company recorded a
$4,542 charge in 1998 to write-off the remaining goodwill resulting from the Big
Ball and Grand Illusion acquisitions.
Both of these actions are due to continuing operating losses and the uncertainty
about the Company's ability to return the divisions to profitability. Net sales
and net operating losses for Big Ball and Grand Illusion for 1999, 1998 and 1997
were as follows (in thousands):
Big Ball Grand Illusion
-------- --------------
1999
----
Net Sales $2,327 $1,991
Net Loss $1,840 $28
1998
----
Net Sales $7,638 $3,091
Net Loss $6,885 $1,153
1997
----
Net Sales $1,362 $ 347
Net Loss $ 445 $ 167
In connection with the decisions discussed above, the Company recorded a $2,758
restructuring charge in 1998, which was composed of the write-down of fixed
assets of the aforementioned divisions and locations, employee termination
benefits, and other exit costs such as lease buyouts, contract buyouts, legal
and professional costs associated with plant closures, and cost of employees
incurred after operations cease that are associated with the closing of the
Chattanooga location.
Page 46 of 80
<PAGE>
8. Pension and Retirement Plans
The Company sponsors a defined contribution plan for employees. The Company
makes contributions to the plan equal to a percentage of the participants'
contributions within certain limitations. The Company recognized expense related
to this plan of $19, $120 and $121, in 1999, 1998 and 1997, respectively. The
Company's policy is to fund amounts accrued annually.
Certain former employees of Signal participate in a defined benefit pension plan
negotiated with a union (multi-employer plan) that no longer represents any
employee of the Company. The total multi-employer withdrawal liability was
approximately $69 as of December 31, 1998, which was paid in 1999.
9. Valuation and Qualifying Accounts
Valuation and qualifying accounts by classification amounted to the following as
of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Balance at
period expense Other Deductions end of period
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Deducted from asset accounts
Allowance to reduce inventories
to net realizable value $ 3,023 $ 599 $ 2,523 $ 1,099
Allowance for doubtful accounts 2,443 134 0 2,326 251
-------------------------------------------------------------------------------------
$ 5,466 $ 733 0 $ 4,849 $ 1,350
Year ended December 31, 1998
Deducted from asset accounts
Allowance to reduce inventories
to net realizable value $ 4,561 $ 1,194 $ 2,732 $ 3,023
Allowance for doubtful accounts 1,887 601 45(1) 2,443
-------------------------------------------------------------------------------------
$ 6,448 $ 1,795 0 $ 2,777 $ 5,466
Year ended December 31, 1997
Deducted from asset accounts
Allowance to reduce inventories
to net realizable value $ 3,544 $ 4,202 $ 3,185 $ 4,561
Allowance for doubtful accounts 1,573 107 391(2) 184(1) 1,887
-------------------------------------------------------------------------------------
$ 5,117 $ 4,309 391 $ 3,369 $ 6,448
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
(2) Represents allowance for doubtful accounts acquired in acquisition.
10. Commitments and Contingencies
Operating Leases
The Company occupies sales and administrative offices and uses certain equipment
under operating lease arrangements. Rent expense aggregated approximately $1,048
in 1999, $1,377 in 1998 and $1,229 in 1997. Future minimum rental commitments
for all noncancelable operating leases as of December 31, 1999 are as follows:
Page 47 of 80
<PAGE>
2000 $885
2001 654
2002 493
2003 475
2004 456
Thereafter 821
------
$3,784
======
Real estate taxes, insurance, and maintenance expense are generally obligations
of the Company.
Letters of Credit Supported by Related Parties
The Company uses letters of credit (which are supported by commitments from
entities controlled by FS Signal) to assist the Company in certain matters.
During 1997, the Company entered into a Reimbursement Agreement and a Promissory
Note with FS Signal whereby the Company agreed to repay amounts that FS Signal
pays in support of these letters of credit. At December 31, 1999, the Company
had $3,981 in current portion of long-term due to FS Signal for creditor
drawdowns on these letters of credit, which were provided by FS Signal in 1999
($2,000) and prior years.
Letters of Credit
Outstanding letters of credit were $12,054 as of December 31, 1999.
Royalty and Other Commitments
Pursuant to the term of various license agreements, the Company is obligated to
pay future minimum royalties as follows as of December 31, 1999:
2000 $3,516
2001 2,910
2002 2,426
2003 960
------
$9,812
======
The Company has accrued all minimum royalties due as of December 31, 1999.
Financial Advisor Agreement
Effective May 9, 1997 the Company entered into an agreement with Weatherly
Financial ("Weatherly") pursuant to which Weatherly was engaged to act as
financial advisor to the Company on an exclusive basis with respect to
evaluating, pricing, negotiating and closing mergers and acquisitions and other
investments and arranging financing on the Company's behalf ( the "Weatherly
Agreement"). The Weatherly Agreement had a term of two years, subject to the
Company's right to terminate the agreement upon ninety days' prior written
notice after May 8, 1998. Weatherly was to be compensated for these services
through: (a) a $5 base monthly fee and (b) prescribed additional success fees
for completed financing or acquisition transactions arranged through Weatherly's
assistance. In addition, Weatherly was granted warrants, effective May 9, 1997,
to purchase 805,000 shares of the Company's Common Stock at $2.50 per share in
connection with such services. These warrants vest upon achievement of certain
business objectives with respect to the Company's business performance which
were part of an overall arrangement that also included additional warrant
opportunities. Subject to its fiduciary duties, the Company also agreed to use
its efforts to cause two persons selected by Weatherly to be nominated for
election to the Company's Board of Directors at each annual meeting through the
term of the Agreement.
Page 48 of 80
<PAGE>
When the Weatherly Agreement was executed, all of the parties thereto
anticipated that Thomas A. McFall and John W. Prutch, in their capacities as
associates of Weatherly, would play a significant role in performing the
services to be provided to the Company by Weatherly, and, in such capacity,
would receive a significant portion of the compensation payable under the
Weatherly Agreement. In connection with the Company's subsequent employment of
Mr. McFall as CEO of the Company, and Mr. Prutch as President of the Company,
the Company renegotiated the Weatherly Agreement, replacing it with an
agreement approved by the Board of Directors on August 10, 1998 to be effective
as of May 8, 1998, directly with Messrs. McFall and Prutch.
Under the terms of the May 8, 1998 Agreement, the Warrants previously issued to
Weatherly were assigned 50% to Mr. McFall and 50% to Mr. Prutch, and have been
repriced to $1.75 per share. Each of Messrs. McFall and Prutch also were issued
additional warrants, with a term of ten years, for the purchase of up to
1,902,273 shares of Common Stock at an exercise price of $1.75 per share. By an
agreement dated as of July 31, 1999, Mr. Prutch and Mr. McFall each assigned
768,258 warrants to Mr. Howard Weinberg, then Chief Financial Officer of the
Company, for his services to the Company as well as his services rendered to the
Company in connection with the activities covered by the Company's agreement
with Messrs. Prutch and McFall. Mr. Weinberg's warrants are subject to the same
terms and conditions as the Prutch and McFall warrants. All of these warrants
are subject to a new vesting schedule which provides that 33.4% of the warrants
(513,195 shares for each of Messrs. McFall, Prutch and Weinberg) are immediately
exercisable. Mr. Prutch also assigned to Mr. McFall all future rights to receive
compensation in any form pursuant to the May 8, 1998 Agreement.
Each of the three remaining incremental installments of 22.2% of the total
warrants (approximately 341,107 shares for each of Messrs. McFall, Prutch and
Weinberg) will vest on the basis of the achievement of goals concerning
prescribed increases in the Company's annual pre-tax earnings and/or the average
public trading price of its Common Stock over any period of 120 consecutive
calendar days. The warrants also will contain customary anti-dilution provisions
and piggyback registration rights, and Messrs. McFall, Prutch and Weinberg will
be restricted in their ability to dispose of the Common Stock issuable under the
Warrants without the prior consent of WGI, LLC.
In connection with the Company's sale of Grand Illusion, Mr. Prutch resigned as
President and as a director of the Company, and the Company and Mr. Prutch
agreed to terminate their May 8, 1998 agreement as of July 31, 1999. The May 8,
1998 agreement with Mr. McFall remains in effect. Under the terms of the
termination of that agreement, Mr. Prutch retained 1,536,515 warrants and was
issued 83,333 shares of the Company's Common Stock pursuant to the Company's
1999 Stock Incentive Plan in satisfaction of all obligations of that Company to
him under the May 8, 1998 Agreement. Mr. Prutch was also paid $50 in severance
payments during 1999.
The May 8, 1998 agreement also provides that Messrs. McFall and Prutch (prior to
the assignment of rights from Mr. Prutch to Mr. McFall and the termination of
the May 8, 1998 agreement with Mr. Prutch as of July 31, 1999), collectively,
will receive a success fee equal to three percent of the proceeds of any
financing transactions which they participate in developing, negotiating and
closing with third parties for the benefit of the Company, a portion of which
may be paid in additional equity under certain circumstances. They also
(collectively until the termination/assignment of Mr. Prutch's rights) will
receive a success fee in connection with identifying, negotiating and closing
any Acquisition Transactions (as defined in the agreement) equal to three
percent of the Aggregate Consideration paid by the Company (as defined in the
Agreement). All cash payments to Mr. McFall (and formerly Mr. Prutch) are
subject to reduction by the amount of any compensation which they receive in
their capacities as officers of the Company.
Page 49 of 80
<PAGE>
Guarantee
In connection with the sale of property, plant and equipment in a prior year,
the Company guaranteed certain debt of the purchaser. The balance outstanding at
December 31, 1999 was approximately $1,600. The purchaser's operations have
recently been curtailed and there is no assurance that normal operations will
shortly resume. The Company has provided for an estimated loss, after
liquidation of related collateral, of $700 which is included in selling, general
and administrative expenses for the year ended December 31, 1999.
Legal Proceedings
The Company is a party to various legal proceedings incidental to its business.
The ultimate disposition of these matters is not presently determinable but will
not, in the opinion of management, have a material adverse effect on the
Company's financial condition or results of operations.
On April 5, 1999, litigation was filed against the Company by former employees
of the Company's LaGrange, Georgia facility, which the Company closed in
December 1996, alleging that the Company violated the provisions of the WARN Act
in connection with the closing of the LaGrange facility. This litigation was
settled by the Company in December 1999 for an amount not material to the
financial condition or results of operations of the Company.
The Company is also in a dispute regarding certain finished garment purchases
from a third party vendor. The vendor had delivered a portion of the garments
pursuant to the Company's purchase agreement when a dispute arose between the
Company and the vendor concerning quality problems and failure of the goods to
meet the Company's specifications. At that time, the Company was obligated under
the agreement for the purchase of additional goods for which the Company did not
take delivery. The Company is asserting breach of contract against the vendor
for both failure of quality and timely delivery. The vendor is asserting breach
of contract against the Company. No lawsuit has been filed. The Company has
reserved $1,000 to cover anticipated costs relating to the resolution of its
dispute with this third party vendor, including legal fees. This $1,000 charge
is reflected in selling, general and administrative expenses for 1998 in the
accompanying consolidated statements of operations.
On April 14, 1999, litigation was commenced against the Company and an affiliate
of the Company's principal shareholders ("Shareholder Affiliate") by a
consulting and investment advisory services company alleging the Company and/or
the Shareholder Affiliate owes the plaintiff fees in connection with the
Company's acquisition of the business and assets of Tahiti Apparel in March
1999. The Company and the Shareholder Affiliate have independently filed answers
denying the allegations in the litigation complaint. The Company has accrued
$400 for legal fees and other potential costs of this litigation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The following information previously was reported by the Company in Current
Reports on Form 8-K dated July 21, 1999 and August 20, 1999, in connection with
the resignation of Arthur Andersen LLP as the Company's independent public
accountants and the subsequent appointment of the firm of Goldstein Golub
Kessler LLP as the Company's independent public accountants.
July 21, 1999 Form 8-K:
(a) On July 21, 1999, Arthur Andersen LLP ("Andersen"), resigned as the
independent public accountants and auditors of Signal Apparel Company,
Inc. (the "Registrant"). The
Page 50 of 80
<PAGE>
Registrant is currently in the process of selecting an independent
public accountant as a successor to Andersen.
During the Registrant's latest two fiscal years and the subsequent
period through July 21, 1999, the date on which Andersen resigned as
the Registrant's independent public accountants and auditors, there
were no disagreements between the Registrant and Andersen on any
matter relating to accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which if not
resolved to Andersen's satisfaction would have caused it to make
reference to the subject matter of such disagreement in connection
with its reports. Andersen's reports on the Registrant's financial
statements for the fiscal years ended December 31, 1997 and 1998 were
modified when issued with respect to an explanatory paragraph
describing a going concern issue; however, such reports did not
otherwise contain any adverse opinions or disclaimers of opinion, nor
were such reports modified as to audit scope, accounting principles,
or other uncertainty.
On July 16, 1999, Andersen issued a memorandum on internal control
structure relating to the year ended December 31, 1998. That
memorandum described certain deficiencies in internal control relating
to: (i) communications between accounting and executive management;
(ii) missing source documentation; (iii) general ledger closing
procedures; and (iv) account reconciliations.
The deficiencies noted in the Andersen memorandum resulted, in large
part, from the move of the Registrant's Corporate Headquarters from
Chattanooga, Tennessee to Avenel, New Jersey in the period from
December 1998 through January 1999. A near-complete turnover in
accounting personnel occurred during this period in addition to the
disruption in the Registrant's management information and financial
reporting systems that resulted from this move.
Prior to the receipt of the Andersen Memorandum, the Registrant
engaged the services of GDL Management Services Division of Mahoney
Cohen & Company, C.P.A., P.C. to upgrade the Registrant's accounting
function. This engagement has been expanded to address specifically
the issues raised by the Andersen Memorandum.
In response to the Andersen Memorandum, the Registrant has taken steps
to:
1. Implement more thorough policies and procedures to ensure more
complete and timely communications between its accounting
department and management regarding any activities having
significant financial implications so that such activities will
be appropriately reflected in the Registrant's books and records;
2. Update and publish its formal policies and procedures with
respect to document retention and storage in order to facilitate
distribution to appropriate accounting personnel; and
3. Update and publish its formal month-end closing procedures and
account reconciliation procedures to reduce to a reasonably low
level the possibility that the absence or weakness of such
procedures might result in inaccuracies in the Registrant's
financial statements.
Additionally, the Registrant has addressed staffing issues in order to
improve the supervision and review of accounting matters generally.
The Registrant has authorized Andersen to respond fully to the
inquiries of the Registrant's successor accountant. The
Registrant has provided Andersen with a copy of the disclosures
contained in this Form 8-K, and has requested that Andersen
furnish the Registrant with a letter addressed to the Securities
and Exchange Commission stating whether it agrees with the
statements made by the Registrant therein.
Page 51 of 80
<PAGE>
August 20, 1999 Form 8-K:
(a) On August 20, 1999, the Registrant appointed the accounting firm of
Goldstein Golub Kessler LLP ("Goldstein") as the Registrant's
independent public accountants and auditors, effective immediately.
The decision to engage Goldstein as the Registrant's accountants and
auditors was approved by the full Board of Directors. During the
Registrant's two most recent fiscal years and the subsequent interim
period through August 20, 1999, Goldstein was not consulted with
respect to any of the items referred to in Item 304(a)(2) of
Regulation S-K.
[This Space Intentionally Left Blank]
Page 52 of 80
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names, ages, positions held with the Company
and business experience during the past five years of all directors:
<TABLE>
<CAPTION>
Year First
Became A
Name and Address Age Business Experience and Directorships Director
- ---------------- --- ------------------------------------- --------
<S> <C> <C> <C>
Henry L. Aaron 65 Senior Vice President of Atlanta National 1998
c/o Cohen Pollock Merlin League Baseball Club, Inc., since October
Axelrod & Tanenbaum 1998. Vice President of Atlanta National
2100 Riveredge Parkway League Baseball Club, Inc., from 1976 through
Suite 300 October 1998.
Atlanta, GA 30328
Zvi Ben-Haim 40 President and Chief Executive Officer of Tahiti 1999
Signal Apparel Company, Inc. Apparel, Inc., a designer and marketer of
500 7th Avenue, 7th Floor swimwear, body wear and active wear for ladies
New York, NY 10018 and girls, from 1992 until its acquisition by
the Company in March 1999. President of the Company
since November 1999. Director of the Company and
President and CEO of the Company's Tahiti Apparel
Division since March 1999. Executive Vice President
of the Company and President of the Company's Signal
Branded Division, from March 1999 to November 1999.
Paul R. Greenwood 53 Managing General Partner of Walsh, Greenwood & 1990
One East Putnam Avenue Co., an investment partnership.
Greenwich, CT 06830
</TABLE>
Page 53 of 80
<PAGE>
<TABLE>
<CAPTION>
Year First
Became A
Name and Address Age Business Experience and Directorships Director
- ---------------- --- ------------------------------------- --------
<S> <C> <C> <C>
Michael Harary 44 Senior Vice President of Tahiti Apparel, Inc., 1999
Signal Apparel Company, Inc. a designer and marketer of swimwear, body wear
500 7th Avenue, 7th Floor and active wear for ladies and girls, from 1992
New York, NY 10018 until its acquisition by the Company in March
1999. Executive Vice President of the Company's
Signal Branded Division from March 1999 until
December 1999. Executive Vice President of the
Company's Tahiti Apparel Division since March 1999
and Executive Vice President of the Company
since December 1999.
Thomas A. McFall 46 Vice Chairman of the Board of Directors since 1997
Signal Apparel Company, Inc. November 1999. Co-Chief Executive Officer of
34 Englehard Avenue the Company from June 1998 until January 1999
Avenel, NJ 07001 and Chief Executive Officer from January 1999
to November 1999. Chairman, Weatherly Financial
Companies, since 1984 (currently inactive).
Stephen Walsh 55 Chief Executive Officer since November 1999. 1990
3333 New Hyde Park Road Chairman of the Board of Directors since
North Hills, NY 11040 September 1997; Chief Executive Officer June
1998 to January 1999. General Partner of
Walsh, Greenwood & Co., an investment partnership.
</TABLE>
The information set forth above with respect to the principal occupation or
employment of each nominee during the past five years has been furnished to the
Company by the respective nominee.
Pursuant to an agreement among the Company and certain shareholders (a
predecessor to WGI, LLC, FS Signal Associates, L.P. and FS Signal Associates II,
L.P.), FS Signal Associates, L.P. and FS Signal Associates II, L.P., together,
have the right until 2001 to nominate two directors to be included in the slate
of nominees. As of the date of this Proxy Statement, neither FS Signal
Associates, L.P. nor FS Signal Associates II, L.P. has exercised this right by
nominating any individuals for election to the Board of Directors.
Page 54 of 80
<PAGE>
WGI, LLC also has the right, under the terms of the Credit Agreement dated
as of May 8, 1998 between the Company and WGI, LLC, until such time as all of
the Company's indebtedness to WGI, LLC under the terms of the agreement is paid
in full, to nominate two directors to be included in the slate of nominees. The
nomination of Messrs. Walsh and Greenwood for election to the Board of Directors
satisfies this requirement.
Pursuant to the Company's August 10, 1998 agreement with Mr. McFall
described in Item 13 herein under the heading "Certain Relationships and Related
Transactions," the Company agreed to use its reasonable best efforts (subject to
the fiduciary duties of its Board of Directors) to cause Mr. McFall to be
nominated for election to the Company's Board of Directors each year during the
term of such agreement.
Mr. Ben-Haim was appointed as a director of the Company and was employed as
Executive Vice President of the Company pursuant to the terms of an Employment
Agreement (as described herein) entered into simultaneously with the Company's
acquisition of Tahiti Apparel, Inc. Under the terms of that agreement, the
Company agreed to use its reasonable best efforts (subject to the fiduciary
duties of its Board of Directors) to cause Mr. Ben-Haim to be nominated for
election as a director of the Company at its 1999 Annual Meeting of
Shareholders.
The Board of Directors held nine meetings in 1999. Mr. Barry Cohen resigned
as a director of the Company, effective April 17, 2000.
Executive Officers
The following is a list of the names, ages, positions with the Company and
business experience during the past five years of the executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Office and Business Experience
<S> <C> <C>
Zvi Ben-Haim 40 President and Chief Executive Officer of Tahiti Apparel, Inc.,
a designer and marketer of swimwear, body wear and active wear
for ladies and girls, from 1992 until its acquisition by the
Company in March 1999. President of the Company since
November 1999. Director of the Company and President and CEO
of the Company's Tahiti Apparel Division since March 1999.
Executive Vice President of the Company and President of the
Company's Signal Branded Division, from March 1999 to November
1999.
</TABLE>
Page 55 of 80
<PAGE>
<TABLE>
<CAPTION>
Name Age Office and Business Experience
- ---- --- ------------------------------
<S> <C> <C>
Michael Harary 44 Senior Vice President of Tahiti Apparel, Inc., a designer and
marketer of swimwear, body wear and active wear for ladies
and girls, from 1992 until its acquisition by the Company in
March 1999. Executive Vice President of the Company's Signal
Branded Division from March 1999 until December 1999.
Executive Vice President of the Company's Tahiti Apparel
Division since March 1999 and Executive Vice President of the
Company since December 1999.
Kenneth L. Larsen 68 Chief Accounting Officer of the Company (acting) since August
1999. Senior Vice President and CFO of Buster Brown Apparel,
Inc. from June 1998 until January 1999 (temporary, member of
reorganization Crisis Team). Independent Business Consultant
since April 1997. CPA (Partner) in Mahoney Cohen & Company PC
(including predecessor firm) from May 1980 through March 1997.
Thomas A. McFall 46 Vice Chairman of the Board of Directors since November 1999.
Co-Chief Executive Officer of the Company from June 1998 until
January 1999 and Chief Executive Officer from January 1999
until November 1999. Chairman, Weatherly Financial Companies,
since 1984 (currently inactive).
Robert J. Powell 51 Vice President of Licensing and General Counsel since
September 1992; Secretary since January 1993.
Stephen Walsh 55 Chief Executive Officer since November 1999. Chairman of the
Board of Directors since September 1997; Chief Executive
Officer from June 1998 to January 1999. General Partner of
Walsh, Greenwood & Co., an investment partnership.
Michael J. Dervis 46 Chief Financial Officer of the Company since April 10, 2000.
Chief Financial Officer of Gemini Sound Products Corp.
(electronic equipment) from 1998 to October 1999. Executive
Vice President for financial and operational functions of
TropicTex International, a women's apparel company, 1994
through 1998.
</TABLE>
Page 56 of 80
<PAGE>
Officers are elected annually and serve at the pleasure of the Board of
Directors. There is no family relationship between any of the above executive
officers, directors and nominees for director.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the
Securities and Exchange Commission thereunder require the Company's executive
officers and directors and persons who own more than ten percent of the
Company's Common Stock, as well as certain affiliates of such persons, to file
initial reports of ownership and monthly transaction reports covering any
changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Executive officers, directors and persons owning more than
ten percent of the Company's Common Stock are required by Securities and
Exchange Commission regulations to furnish the Company with copies of all such
reports they file. Based solely on its review of the copies of such reports
received by it and written representations that no other reports were required
for those persons, the Company believes that during 1999 all filing requirements
applicable to its executive officers, directors and owners of more then ten
percent of the Company's Common Stock were complied with except for one report
concerning eight purchase of securities by WGI, LLC (a ten percent beneficial
owner and an affiliate of Messrs. Walsh and Greenwood) which was inadvertently
filed late by WGI, LLC and Messrs. Walsh and Greenwood and one additional
purchase by WGI, LLC which was reported late on Form 5 by WGI, LLC and Messrs.
Walsh and Greenwood.
[This space intentionally left blank]
Page 57 of 80
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is a summary of the annual and long-term compensation for
each of the last three fiscal years paid to and/or earned by the following
Company executives: (i) Thomas A. McFall, Co-Chief Executive Officer from June
1998 until January 1999 and Chief Executive Officer from January 1999 until
November 1999; (ii) Stephen Walsh, Chief Executive Officer from June 1998 until
January 1999 and since November 1999; and (iii) the Company's other four most
highly compensated executive officers serving as of December 31, 1999 (the
"Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------
Long-Term
Compensation
Awards
-------------
Securities
Other Underlying All
Name and Principal Salary Bonus Annual Compensation Options/SARs Other
Positions Year ($) ($)(1) $ (#)(2) Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stephen Walsh, 1999 -- -- -- -- --
Chief Executive Officer 1998 -- -- -- -- --
(since November 1999 and 1997 -- -- -- -- --
from June 1998 until
January 1999)
Thomas A. McFall 1999 -- 212,500 -- -- 112,500(3)
Co-Chief Executive Officer 1998 -- 37,500 -- -- 150,000(3)
(June 1998 through 1997 -- -- -- -- --
January 1999), Chief
Executive Officer (January
1999 to November 1999) (1)
Zvi Ben-Haim 1999 375,000 -- -- -- 250,000(4)
Executive Vice President 1998 -- -- -- -- --
March 1999 through 1997 -- -- -- -- --
November 1999, President
since November 1999
Michael Harary 1999 375,000 -- -- -- 250,000(4)
Executive Vice President 1998 -- -- -- -- --
since March 1999 1997 -- -- -- -- --
Robert J. Powell, 1999 126,914 29,808 -- -- 2,534(5)
Vice President 1998 143,654 7,500 -- 350,000 4,331
and Secretary (1) 1997 180,418 -- -- 150,000 4,868
Howard N. Weinberg 1999 100,000 212,500 -- -- 12,500(6)
Executive Vice President 1998 135,000 -- -- -- --
and Chief Financial 1997 -- -- -- -- --
Officer (from September 1998
to April 2000)(1)
</TABLE>
Page 58 of 80
<PAGE>
NOTES TO SUMMARY COMPENSATION TABLE
(1) Bonus amounts reported in the table for Messrs. McFall, Powell and Weinberg
do not include $495,000 of bonuses earned by such officers as a group for
transactions completed during fiscal 1999 but not yet paid and not yet
allocated among such officers on an individual basis as of December 31,
1999.
(2) Reflects the number of shares of the Company's Common Stock subject to
options granted to the Named Executive Officers for the periods presented.
(3) In the case of Mr. McFall, the amounts reported represent draws paid to Mr.
McFall which are offset against compensation earned under the agreement
described below in Part III, Item 13 under the heading "Certain
Relationships and Related Transactions."
(4) The amounts reported for Messrs. Ben-Haim and Harary represent payments
made as consideration for entering into employment agreements with the
Company.
(5) For Mr. Powell, this amount represents Company matching contributions to a
401(k) plan maintained by the Company for the account of Mr. Powell for
1999.
(6) For Mr. Weinberg, this amount represents severance benefits paid in
connection with the termination of Mr. Weinberg's employment as the
Company's Chief Financial Officer.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the fiscal year ended December 31, 1999, the Company did not grant
any stock options or stock appreciation rights to any of the Named Executives
under either its 1999 Stock Incentive Plan or its 1985 Stock Option Plan. The
Company ceased to grant any awards under its 1985 Stock Option Plan following
adoption of the new Stock Incentive Plan in 1999.
[This space intentionally left blank]
Page 59 of 80
<PAGE>
The following table provides information about options held by the Named
Executives. The 1985 Stock Option Plan does not provide for the granting of
stock appreciation rights, and as of December 31, 1999 the Company had not yet
granted any stock options or stock appreciation rights to any of the Named
Executives under its 1999 Stock Incentive Plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Shares FY-End (#) FY-End($)(1)
Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Stephen Walsh -- -- 0 exer./ --
0 unexer. --
Thomas A. McFall -- -- 0 exer./ --
0 unexer. --
Zvi Ben-Haim -- -- 0 exer./ --
0 unexer. --
Michael Harary -- -- 0 exer./ --
0 unexer. --
Robert J. Powell -- -- 200,000 exer./ --
150,000 unexer. --
Howard N. Weinberg -- -- 0 exer./ --
0 unexer. --
</TABLE>
(1) Value of unexercised in-the-money options based on a fair market value of a
share of the Company's Common Stock of $0.938 as of December 31, 1999.
Based on such value, none of the options held by any of the Named
Executives were "in-the-money" at December 31, 1999.
Page 60 of 80
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Paul R. Greenwood and Stephen Walsh are the current members of the Board's
Compensation Committee. As previously stated, Paul R. Greenwood and Stephen
Walsh are Managers of WGI, LLC, the Company's principal shareholder.
In connection with the Company's 1997 Restructuring Plan for its
outstanding subordinated debt and preferred stock, the Company agreed with WGI,
LLC, that all funds advanced to the Company by WGI, LLC after August 21, 1997
(which indebtedness was not part of the Restructuring Plan) would be documented
in the form of a new Credit Agreement with interest payable quarterly at a rate
of 10% per annum and with other terms to be agreed upon between the Company and
WGI. As of August 10, 1998, the Company was indebted to WGI in an aggregate
principal amount of $19,360,000 pursuant to such advances.
On August 10, 1998, the Company's Board of Directors approved a new Credit
Agreement between the Company and WGI, 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:
o Maximum funding of $25,000,000, available in increments of $100,000 in
excess of the minimum funding of $100,000.
o 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 were held for sale), subordinate to the security
interests of the Company's senior lender.
o 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.
o During the term of the WGI Credit Agreement, WGI, LLC is entitled to
have two designees nominated by the Company for election to its Board
of Directors at the Company's Annual Meeting of Shareholders; Messrs.
Walsh and Greenwood are the Board nominees designated by WGI, LLC
pursuant to this provision.
Pursuant to the WGI Credit Agreement, WGI received warrants to purchase up
to 5,000,000 shares of the Company's Common Stock at $1.75 per share, with the
following additional terms:
(1) the warrants 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 March 31, 2000, the largest outstanding
balance to date has been $19,810,000, which means that warrants to
acquire 3,962,000 shares of Common Stock would have been vested as of
such date);
(2) 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; and
Page 61 of 80
<PAGE>
(3) the warrants contain antidilution provisions which require that the
number of shares subject to such warrants shall be adjusted in
connection with any future issuance of the Company's Common Stock (or
of other securities exercisable for or convertible into Common Stock)
such 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.
In compliance with the rules of the New York Stock Exchange, these warrants were
subject to approval by the Company's shareholders, which was obtained at the
1998 Annual Meeting.
As of April 24, 2000, the Company had not made any antidilution adjustments
to these warrants based on the formula described above, although the Company
intends to calculate an appropriate initial antidilution adjustment which will
take into account all additional issuances of shares, options and warrants from
December 1998 through the transactions approved by shareholders at the 1999
Annual Meeting.
During the second quarter of 1999, in order to further assist the Company
in meeting its ongoing liquidity needs, WGI, LLC made certain direct payments to
a third party licensor on the Company's behalf and provided additional
collateral and guarantees in connection with the Company's Revolving Credit and
Term Loan facility with its senior lender, GMAC Financial Corporation (successor
in interest to BNY Financial Corporation). Specifically, WGI, LLC:
(1) Posted additional T-bills as collateral for the term loan portion of
the GMAC facility in the amount of $8.5 million, bringing the total
amount of such collateral posted by WGI to $25.5 million;
(2) Posted additional T-bills as collateral for additional advances under
the revolving loan portion of the GMAC facility in the amount of
$5.626 million.
(3) Provided additional firm Guaranties of the Company's obligations to
GMAC in the amount of $5.0 million, plus additional contingent
Guaranties of up to $2.5 million (the amount of which will be fixed
based on the results of an appraisal of the Company's Umbro License
and fixed assets), bringing the maximum amount of the Company's
indebtedness guaranteed by WGI, LLC to $20.0 million.
(4) Made certain cash payments on behalf of the Company directly to a
third party licensor in the amount of $2.1 million.
As a mechanism for reimbursing WGI, LLC for payments made on the Company's
behalf outside of the terms of the WGI Credit Agreement, as well as for any loss
that it might suffer as a result of a decision by GMAC Financial Corporation to
proceed against the guaranties and/or collateral posted by WGI with respect to
the Company's obligations under its senior loan, the Company entered into a
Reimbursement Agreement and related Promissory Note with WGI, LLC, effective as
of June 30, 1999, having the following key terms:
o Indebtedness under the Reimbursement Agreement will be unsecured and will
be subordinate to the Company's obligations to its senior lender.
Page 62 of 80
<PAGE>
o The Reimbursement Agreement will remain outstanding for as long as WGI, LLC
is obligated under any guaranties, or has any collateral posted, with
respect to the Company's obligations under agreements with its senior
lender or until all obligations under the Reimbursement Agreement are
repaid, whichever is later.
o The Promissory Note created in connection with the Reimbursement Agreement
will have a nominal principal amount of up to $53.226 million, with $2.1
million of principal indebtedness initially outstanding (due to the
licensor payment described above). The Company's principal indebtedness
under the note will automatically increase from time to time in an amount
equal to any payments made by WGI, LLC pursuant to any of the GMAC
guaranties, plus the value of any WGI collateral which is offset by GMAC
against the Company's obligations.
o Indebtedness under the Reimbursement Agreement will bear interest at the
rate of eight percent (8.0%) per annum, payable in annual installments
either in cash or (at the Company's option, and subject to shareholder
approval which was obtained at the 1999 Annual Meeting) with shares of
Common Stock valued at the then-current market price.
o The principal amount of the Company's indebtedness under the Reimbursement
Agreement will be payable at any time upon demand of WGI, LLC.
As compensation to WGI, LLC for the opportunity cost and additional risk
involved in issuing the guaranties and posting the collateral in support of the
Company's financing arrangements with GMAC as described above, and in
consideration of WGI's agreement to leave these arrangements in place at least
through March 12, 2004 (the initial term of the new GMAC Credit Agreement), the
Company's Board of Directors approved, and recommended for approval by the
shareholders (which was obtained at the 1999 Annual Meeting) to comply with New
York Stock Exchange rules, the issuance of additional shares of Common Stock to
WGI, LLC based on the following formula: the Company issued shares of Common
Stock having a fair market value of $200,000 with respect to each $1 million (or
fraction thereof) which WGI either has paid on the Company's behalf to third
parties or has placed at risk in the form of new guaranties and/or collateral in
support of the Company's Revolving Credit and Term Loan Agreement with B.N.Y.
Financial Corporation and its participating banks (a total of $23.726 million).
Based on a fair market value of $1.125 per share for the Common Stock (the
closing price on June 30), this resulted in the issuance of 4,217,956 additional
shares of Common Stock to WGI, LLC following approval by the Company's
shareholders at the 1999 Annual Meeting.
DIRECTORS' COMPENSATION
During 1998 and through November 18, 1999, directors who are not employees
of the Company were paid (i) $4,000 for each Board meeting attended in person up
to a maximum of $20,000 per year and (ii) $500 for each Board committee meeting
attended in person or telephonically. Effective November 18, 1999, Mr. Aaron's
annual compensation was adjusted to include payments of $50,000 from the Company
in consideration of his services as a director as well as promotional services
rendered by Mr. Aaron in connection with certain of the Company's licensed
products. Effective November 18, 1999, Mr. Cohen's annual compensation was
adjusted to include payments of $25,000 from the Company in consideration of his
services as a director. Additionally, effective November 18, 1999 and in
consideration of their continued service as directors of the
Page 63 of 80
<PAGE>
Company, Mr. Aaron was granted options to purchase 100,000 shares of the
Company's Common Stock at $1.00 per share and Mr. Cohen was granted options to
purchase 25,000 shares of the Company's Common Stock at $1.00 per share. These
warrants vest as to 50% of the shares covered on November 18, 2000 and as to the
remaining 50% of such shares on November 18, 2001, and expire on November 18,
2004.
EMPLOYMENT AGREEMENTS
Until his resignation became effective August 12, 1999, John W. Prutch was
employed as the Company's President under the terms of an employment agreement
which originally extended through December 31, 1999. Pursuant to the terms of
this agreement, Mr. Prutch's base salary is $150,000 with the right to receive
an annual bonus. As a further inducement to employment, the Company granted Mr.
Prutch options pursuant to the Company's 1985 Stock Option Plan to purchase
150,000 shares of the Company's Common Stock at an exercise price of $2.375 per
share, subject to adjustment ($.625 above the market price on the date of
grant), with such options vesting at the rate of 100,000 shares two years after
the date of grant and the remaining 50,000 shares three years after the date of
grant. All such options would have expired five years from the date of grant.
Additionally, Mr. Prutch was entitled to participate in all other incentive
bonus, stock option, savings and retirement programs and benefit programs
maintained for the Company's executive officers from time to time. Under the
terms of a Separation Agreement dated as of July 31, 1999 and executed in
connection with Mr. Prutch's resignation from the Company and the Company's sale
to Mr. Prutch of its GIDI Holdings subsidiary (the Grand Illusion Sportswear
business), Mr. Prutch's salary was continued for four months at the annual rate
of $150,000, his health benefits were continued through October 31, 1999 and all
of the stock options granted in connection with his original employment
agreement were canceled as of July 31, 1999. Additionally, the Company agreed to
allow Mr. Prutch to retain the warrants previously granted in connection with
the separate compensatory agreement with Messrs. McFall and Prutch (discussed in
greater detail in Item 13 below under the heading "Certain Relationships and
Related Transactions") and agreed to issue Mr. Prutch 83,333 shares of Common
Stock, which was issued as an equity award under the 1999 Stock Incentive Plan,
in lieu of certain additional payments due under such agreement. Mr. Prutch also
agreed generally not to compete with the Company for a period of one year
following his resignation (except for the continuation of the Grand Illusion
Sportswear business which the Company sold to Mr. Prutch simultaneously with his
resignation).
In addition to being employed in their capacities as executive officers of
the Company, John W. Prutch was, and Thomas A. McFall currently is, a party to
separate agreements with the Company involving financial advisory services which
have been provided by Messrs. Prutch and McFall, as described below in Part III,
Item 13 under the heading "Certain Relationships and Related Transactions."
Messrs. Zvi Ben-Haim and Michael Harary, majority stockholders of Tahiti
Apparel, Inc. prior to its acquisition by the Company, both were employed by the
Company under 5-year employment agreements following closing of the acquisition,
with Mr. Ben-Haim initially serving as Executive Vice President of the Company
and as President and CEO of Tahiti and its Premier Active Group as well as
President of the newly formed Signal Branded Division and Mr. Harary serving as
Executive Vice President of Tahiti and Executive Vice President of the Signal
Branded Division. (Effective November 18, 1999, Mr. Ben-Haim was named President
of the Company. Mr. Harary was elected Executive Vice President of the Company
effective December 31, 1999) The agreements also provided that Messrs. Ben-Haim
and Harary both will be appointed to the Company's Executive Management
Committee, and that (subject to the fiduciary duties of its Board of Directors)
the Company would use its
Page 64 of 80
<PAGE>
reasonable best efforts to cause Mr. Ben-Haim to be nominated for election as a
director of the Company at the 1999 Annual Meeting. Mr. Ben-Haim was appointed
to serve as a director of the Company following the acquisition, and both
Messrs. Ben-Haim and Harary were elected to the Company's Board of Directors at
the 1999 Annual Meeting.
Each of these agreements provided for a signing bonus of $250,000, a base
salary of $500,000 per year, with annual bonuses based on a sliding scale tied
to the annual amount of net operating income ("NOI") generated by the Signal
Branded Division, expense allowances, automobile allowances and additional
fringe benefits generally commensurate with those of the Company's other senior
executives, and participation in all insurance, retirement and other benefit
programs available to the Company's employees generally. No bonus will be
payable under these agreements unless Tahiti's NOI reaches an annual level of at
least $4.5 million. The employment agreements also provide certain payments in
the event of any Change in Control of the Company (as defined) and for excise
tax gross up payments to each of Messrs. Ben-Haim and Harary if it is determined
that, as a result of any payment made by the Company to either executive
(including any payments under the change in control provision), such executive
would be liable for the excise tax imposed on "excess parachute payments" by
Section 4999 of the Code.
The agreements each contain a covenant not to compete with the Company: (1)
if the employee voluntarily terminates, generally, or is terminated by the
Company for cause, for a period extending through the lesser of two years or
December 31, 2004, (2) if the employee voluntarily terminates (under certain
circumstances) or is terminated without cause, during the Post Termination
Period (as defined below) and (3) for a period of one year at the end of the
5-year term (provided that the average closing price for the Company's Common
Stock over a period of 60 days at the end of such 5-year period is at least
$5.00 per share and the average daily trading volume is at least 150,000 shares
per day). This covenant not to compete would not be effective in the event of
any termination of employment pursuant to the change in control provision of the
employment agreements.
Upon any termination of employment due to death or disability, either of
Messrs. Ben-Haim or Harary (or his beneficiary) would receive any then-earned
salary and bonus plus six months base salary and any reimbursable expenses. Upon
termination without cause or due to a constructive termination or certain
extraordinary corporate events, each of the employment agreements provides for
(A) the immediate vesting of any incentive compensation benefits or compensatory
option grants, (B) the payment, in a lump sum, of all base salary that would
have continued for a period equal to the shorter of two years or the remaining
term of the agreement (the "Post Termination Period"), (C) a continuation of all
benefits through the Post Termination Period, and (D) payment of any bonus which
otherwise would have been applicable as if the executive were employed through
December 31 of the year in which such termination occurs. No additional
compensation would be payable for any period following a voluntary termination
or a termination for cause.
Additionally, pursuant to the terms of separate Securities Transfer
Agreements executed in conjunction with their Employment Agreements, each of
Messrs. Ben-Haim and Harary received warrants to purchase up to 2,000,000 shares
of the Company's Common Stock at an exercise price of $1.75 per share (subject
to customary antidilution adjustments). Subject to shareholder approval (which
was obtained at the Company's 1999 Annual Meeting), warrants to purchase 500,000
such shares vested as of the Closing Date, March 22, 1999. Vesting of the
additional warrants will occur in 500,000 share installments, subject to meeting
certain specified performance criteria for each of three fiscal year measurement
periods ending on March 31, 2000, March 31, 2001 and March 31, 2002, (for a
total of up to 1,500,000 additional warrants for each of Messrs. Ben-Haim and
Harary). All of such warrants will expire on March 22, 2009.
Page 65 of 80
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's equity securities as of April 24, 2000, by each
shareholder that the Company knows to own beneficially more than 5% of the
issued and outstanding shares of the Company's Common Stock, director of the
Company, nominee for director, Named Executive (as defined herein) and by the
directors and Named Executives of the Company as a group.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
- ------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
FS Signal Associates, L.P.; FS Signal Common Stock 11,640,002 21.8%
Associates II, L.P.; FS Signal, Inc.; and $.01 par value
Kevin S. Penn, as a group
65 E. 55th St., 32nd Floor
New York, New York 10022 (2)
Kevin S. Penn Common Stock 11,640,002 21.8%
65 E. 55th St., 32nd Floor $.01 par value
New York, New York 10022 (2)
FS Signal, Inc. Common Stock $.01 11,640,002 21.8%
65 E. 55th St., 32nd Floor par value
New York, New York 10022(2)(3)
FS Signal Associates, L.P. Common Stock 4,645,013 8.7%
c/o Kenneth Musen $.01 par value
157 Church Street, Box 426
New Haven, Connecticut 06502 (2)(4)
FS Signal Associates II, L.P. Common Stock 6,994,989 13.1%
c/o Kenneth Musen $.01 par value
157 Church Street, Box 426
New Haven, Connecticut 06502 (2)(5)
Walsh, Greenwood & Co.; WGI, LLC; WG Common Stock 30,153,255 48.8%
Partners, L.P.; Stephen Walsh; and Paul R. $.01 par value
Greenwood, as a group
One East Putnam Avenue Series H 504.78 100%
Greenwich, Connecticut 06830 (6) Preferred Stock
$100,000 stated
value
Walsh, Greenwood & Co. Common Stock 2,700,149 5.1%
One East Putnam Avenue $.01 par value
Greenwich, Connecticut 06830 (6)(7)
WG Partners, L.P. Common Stock 2,700,149 5.1%
One East Putnam Avenue $.01 par value
Greenwich, Connecticut 06830 (6)(7)
</TABLE>
Page 66 of 80
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
- ------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
WGI, LLC Common Stock 27,431,456 44.4%
One East Putnam Avenue $.01 par value
Greenwich, Connecticut 06830 (6)(7)
Series H 504.78 100%
Preferred Stock
$100,000 stated
value
Ming-Yiu Chan Common Stock 5,396,772 10.1%
c/o Manley, Ltd., 8/F $.01 par value
HK Spinners International Building
818 Cheung Sha Wan Road
Kowloon, Hong Kong (8)
Henry L. Aaron (9) Common Stock 150,000 *
$.01 par value
Zvi Ben-Haim (10) Common Stock 4,284,772 8.0%
$.01 par value
Paul R. Greenwood (6)(7) Common Stock 30,145,005 48.8%
$.01 par value
Series H 504.78 100%
Preferred Stock
$100,000 stated
value
Michael Harary (11) Common Stock 2,663,662 5.0%
$.01 par value
Kenneth L. Larsen Common Stock -- --
$.01 par value
Thomas A. McFall (12) Common Stock $.01 513,196 1.0%
par value
Stephen Walsh (6)(7) Common Stock 30,139,855 48.8%
$.01 par value
Series H 504.78 100%
Preferred Stock
$100,000 stated
value
Howard N. Weinberg (13) Common Stock 513,196 1.0%
$.01 par value
</TABLE>
Page 67 of 80
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Title of Class Beneficial Ownership(1) Percent of Class
- ------------------------------------ -------------- ----------------------- ----------------
<S> <C> <C> <C>
Robert J. Powell (14) Common Stock 200,000 *
$.01 par value
All directors and executive officers Common Stock 37,964,885 59.2%
as a group [9 individuals] (15) $.01 par value
Series H 504.78 100%
Preferred Stock
$100,000 stated
value
</TABLE>
- ---------------
* Less than 1%
NOTES TO TABLE OF BENEFICIAL OWNERSHIP
(1) As of April 24, 2000, the Company had issued and outstanding 53,326,821
shares of Common Stock and 504.78 shares of Series H Preferred Stock. In
general, a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to vote
or direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such
security, or if a person has the right to acquire either voting power or
investment power over such security through the exercise of an option or
the conversion of another security within 60 days. More than one person may
be a beneficial owner of the same security, and a person may be deemed to
be a beneficial owner of securities as to which he has no personal economic
interest or which he may not vote. In the case of persons who hold options
or warrants to purchase shares of Common Stock that are exercisable either
immediately or within 60 days of April 24, 2000, the shares of Common Stock
represented thereby have been treated as outstanding for purposes of
calculating the ownership totals and percentages (and the percentage of
voting power) for only the persons holding such options and warrants, and
have not otherwise been treated as outstanding shares.
(2) FS Signal Associates, L.P. ("FS Signal"); FS Signal Associates II, L.P.
("FS Signal II"); FS Signal, Inc. ("FSSI"); and Kevin S. Penn ("Penn") have
filed a report, as a group, on Schedule 13D disclosing their various
relationships. Such persons may be deemed to be a group for purposes of the
beneficial ownership of the securities disclosed in the table, although
they disclaim membership in a group. The 11,640,002 shares of Common Stock
include (i) 4,645,013 shares of Common Stock held directly by FS Signal and
(ii) 6,994,989 shares of Common Stock held directly by FS Signal II. The
reporting persons may be deemed to be members of a group and, accordingly,
could each be deemed to have beneficial ownership (by virtue of Rule
13(d)-5) of all shares of Common Stock held directly by the various members
of the group. Except as disclosed herein, no other entity or person that
may be deemed to be a member of the group holds direct beneficial ownership
of such Common Stock. Penn is the President of FSSI, which is the general
partner of both FS Signal and FS Signal II. Both FS Signal and FS Signal II
are limited partnerships. Pursuant to both the bylaws of FSSI and an
understanding among the limited partners of FS Signal and FS Signal II,
Penn, as President of FSSI, has the sole voting and investment power over
the securities held by both limited partnerships.
(3) As the general partner of both FS Signal and FS Signal II, FSSI may be
deemed to be the beneficial owner of (i) 4,645,013 shares of Common Stock
held directly by FS Signal and (ii) 6,994,989 shares of Common Stock held
directly by FS Signal II. Kevin S. Penn is the President of FSSI. Pursuant
to both the bylaws of FSSI and an understanding among the limited partners
of FS Signal and FS Signal II, Penn, as President of FSSI, has the sole
voting and investment power over the securities held by both limited
partnerships.
(4) FS Signal, a Connecticut limited partnership, owns directly 4,645,013
shares of Common Stock. Kevin S. Penn, in his capacity as President of FS
Signal, Inc., the general partner of FS Signal, may be deemed to own
beneficially all shares of Common Stock held by FS Signal.
Page 68 of 80
<PAGE>
(5) FS Signal II, a Connecticut limited partnership, owns directly 6,994,989
shares of Common Stock. Kevin S. Penn, in his capacity as the President of
FS Signal, Inc., the general partner of FS Signal II, may be deemed to own
beneficially all shares of Common Stock held by FS Signal II.
(6) Walsh Greenwood & Co. ("Walsh Greenwood"); Walsh Greenwood's sole general
partners, Stephen Walsh and Paul R. Greenwood; WG Partners, L.P. ("WGP"), a
New York limited partnership whose sole general partners is Walsh
Greenwood; and WGI, LLC ("WGI"), a Connecticut limited liability company
whose Managers are Stephen Walsh and Paul R. Greenwood, have filed a
report, as a group, on Schedule 13D disclosing their various relationships.
Such persons may be deemed to be a group for purposes of the beneficial
ownership of the securities disclosed in the table, although they disclaim
membership in a group. The 30,153,255 shares of Common Stock include (i)
2,700,149 shares of Common Stock held directly by WGP on behalf of certain
managed accounts (as to which WGP has voting power and investment power but
does not have any pecuniary interest therein); (ii) 18,969,456 shares of
Common Stock owned directly by WGI; (iii) 12,400 shares of Common Stock
owned by two trusts for the benefit of the minor children of Stephen Walsh,
as to which Paul R. Greenwood serves as trustee; (iv) 1,000 shares of
Common Stock owned by Mr. Greenwood's spouse; (v) 8,250 shares of Common
Stock beneficially owned by Mr. Walsh's spouse; and (vi) presently
exercisable warrants to acquire a total of 8,462,000 shares of Common Stock
held by WGI. All 504.78 shares of Series H Preferred Stock are held
directly by WGI.
(7) WGP has the sole power to vote and dispose of 2,700,149 shares of Common
Stock (all of which shares are held by WGP on behalf of certain managed
accounts and as to which WGP has voting power and investment power but does
not have any pecuniary interest therein). WGI has (i) the sole power to
vote and dispose of the 18,969,456 shares of Common Stock it owns directly;
(ii) the sole power to dispose of the presently exercisable warrants to
acquire a total of 8,462,000 shares of Common Stock, which warrants are
exercisable by WGI's Managers, Stephen Walsh and Paul R. Greenwood; and
(iii) the sole power to vote and dispose of the 504.78 shares of Series H
Preferred Stock that it owns directly. As sole general partner of WGP,
Walsh Greenwood (as well as Messrs. Walsh and Greenwood in their individual
capacities as general partners of Walsh Greenwood), may be deemed to share
the power to vote and direct the disposition of the shares of Common Stock
beneficially owned by WGP. In their individual capacities as Managers of
WGI, both Messrs. Walsh and Greenwood may be deemed to share the power to
vote and direct the disposition of the shares of Common Stock and Series H
Preferred Stock beneficially owned by WGI. Paul R. Greenwood, in his
capacity as trustee, has sole power to vote and to direct the disposition
of the 12,400 shares of Common Stock held in two trusts for the benefit of
Mr. Walsh's minor children (but Mr. Greenwood has no financial interest in
such shares). Under S.E.C. rules, Mr. Greenwood may be deemed to share
voting and investment power with respect to the 1,000 shares of Common
Stock held by his wife, and Mr. Walsh may be deemed to share voting and
investment power with respect to the 8,250 shares of Common Stock held by
his wife; however, Messrs. Greenwood and Walsh disclaim any beneficial
ownership with respect to such shares.
(8) Beneficial ownership reported for Ming-Yiu Chan consists of 5,396,772
shares of Common Stock issued to Mr. Chan in connection with the Company's
acquisition of substantially all of the assets and business of Tahiti
Apparel, Inc. To date, the Company has not received a report of beneficial
ownership on Schedule 13D from Mr. Chan.
(9) Beneficial ownership reported for Mr. Aaron consists of warrants to
purchase 150,000 shares of Common Stock which were granted in connection
with a licensing transaction between the Company and Mr. Aaron prior to Mr.
Aaron becoming a director. These Warrants became exercisable on December
31, 1998 as to 75,000 shares and on December 31, 1999 as to an additional
75,000 shares.
(10) Beneficial ownership reported for Mr. Ben-Haim includes presently
exercisable warrants to purchase 500,000 shares of Common Stock.
(11) Beneficial ownership reported for Mr. Harary includes presently exercisable
warrants to purchase 500,000 shares of Common Stock.
(12) Beneficial ownership reported for Mr. McFall includes presently exercisable
warrants to purchase 256,598 shares of Common Stock held by Mr. McFall's
spouse and presently exercisable warrants to purchase 256,598 shares of
Common Stock held by a trust for the benefit of Mr. McFall's minor children
(as to which his spouse serves as trustee). Mr. McFall disclaims beneficial
ownership of the warrants held by his spouse and by the trust.
Page 69 of 80
<PAGE>
(13) Beneficial ownership reported for Mr. Weinberg consists of presently
exercisable warrants to purchase 513,196 shares of Common Stock.
(14) Beneficial ownership reported for Mr. Powell consists of presently
exercisable options to purchase 200,000 shares of Common Stock.
(15) This figure includes shares held by certain entities for which indirect
beneficial ownership may be attributed to Messrs. Walsh and Greenwood,
directors of the Company, as discussed in Notes (6) and (7) above, and to
Mr. McFall, as discussed in Note (11) above. The figure includes warrants
to acquire 10,638,392 shares of Common Stock and options to acquire 200,000
shares of Common Stock. All such warrants and options are exercisable
either immediately or within 60 days of April 24, 2000 and, consequently,
have been treated as outstanding shares of Common Stock for calculations of
share ownership and voting power for the group of directors and executive
officers. See Note (1) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the information presented below, see also discussion under
heading "Compensation Committee Interlocks and Insider Participation" in Part
III, Item 11.
Effective May 9, 1997, the Company contracted with Weatherly Financial
("Weatherly") for Weatherly to act as financial advisor to the Company on an
exclusive basis with respect to evaluating, pricing, negotiating and closing
mergers and acquisitions and other investments and arranging financing on the
Company's behalf. Weatherly was to be compensated for these services through
prescribed fees and, in addition, Weatherly was granted Warrants, effective May
9, 1997, to purchase 805,000 shares of the Company's Common Stock at $2.50 per
share. These warrants were to vest upon the achievement of certain objectives
with respect to the Company's business performance and were part of a complex
overall arrangement that also included additional warrant opportunities.
All of the parties to the Weatherly Agreement anticipated that Thomas A.
McFall and John W. Prutch, in their capacities as associates of Weatherly, would
play a significant role in performing the services under the agreement and would
receive a significant portion of the compensation payable under the Weatherly
Agreement. When it later employed Mr. McFall as its CEO and Mr. Prutch as its
President, the Company replaced the former arrangement with Weatherly with an
agreement, approved by the Board of Directors on August 10, 1998 to be effective
as of May 8, 1998, directly with Messrs. McFall and Prutch. Under the terms of
the new agreement, the warrants previously issued to Weatherly have been
assigned 50% to Mr. McFall and 50% to Mr. Prutch, the exercise price of these
warrants has been reset to $1.75 per share (the closing market price for the
Common Stock on May 8, 1998).
Each of Messrs. McFall and Prutch also were issued additional warrants,
with a term of 10 years for the purchase of up to 1,902,273 shares of Common
Stock at an exercise price of $1.75 per share. All of the warrants issued to
Messrs. McFall and Prutch (including those originally issued to Weatherly) now
are subject to the following vesting schedule:
o Warrants to purchase 33.4% of the total number of shares of Common
Stock (769,793 shares for each of Messrs. McFall and Prutch) were
vested immediately upon obtaining shareholder approval at the
Company's Annual Meeting on January 27, 1999.
o Warrants to purchase the remaining shares will vest in incremental
installments of 22.2% each, based on achievement by the Company
(including its subsidiaries) of each of the following goals:
Page 70 of 80
<PAGE>
Goal 1:
$4.0 million in annual pre-tax earnings or an average daily
closing price of at least $2.75 per share for the Company's Common
Stock over any period of 120 consecutive calendar days
(Approx. 511,660 additional shares vest for each of Messrs.
McFall and Prutch)
Goal 2:
$5.0 million in annual pre-tax earnings or an average daily
closing price of at least $4.00 per share for the Company's Common
Stock over any period of 120 consecutive calendar days
(Approx. 511,660 additional shares vest for each of Messrs.
McFall and Prutch)
Goal 3:
$6.0 million in annual pre-tax earnings or an average daily
closing price of at least $5.00 per share for the Company's Common
Stock over any period of 120 consecutive calendar days
(Approx. 511,660 additional shares vest for each of Messrs.
McFall and Prutch)
o More than one of the preceding goals may be met simultaneously,
provided that the threshold of the higher goal is met.
The Warrants contain customary antidilution provisions and piggyback
registration rights and, subject to certain exceptions, any holder of these
Warrants may not dispose of the Common Stock issuable under the Warrants without
the prior consent of WGI, LLC. The new 3,804,546 warrants issued to Messrs.
McFall and Prutch after they became directors of the Company were subject to
approval by the Company's shareholders, which approval was obtained at the
Company's Annual Meeting of Shareholders on January 27, 1999.
The new agreement also provides that Messrs. McFall and Prutch,
collectively, will receive a success fee in connection with identifying,
negotiating and closing any Acquisition Transaction (defined in the agreement as
any transaction involving a sale or purchase of a target company, a merger,
joint venture, or any other acquisition of all or any portion of the stock or
assets of any other company), equal to three percent (3%) of the Aggregate
Consideration (as defined in the agreement) paid in connection with an
Acquisition Transaction. Pursuant to these terms, each of Messrs. McFall and
Prutch became entitled to receive a success fee upon the Company's completion of
the acquisition of substantially all of the assets of Tahiti Apparel, Inc. equal
to one and one-half percent (1.5%) of the Aggregate Consideration paid by the
Company (as defined in the agreement). As described below, the net amount of
this payment was subject to offset against the annual draw which Mr. McFall
receives from the Company. All success fees due to Mr. Prutch under this
agreement were compromised through an award of 83,333 shares of Common Stock
under the Company's 1999 Stock Incentive Plan pursuant to a Separation
Agreement, as discussed below.
The new agreement also provides that Messrs. McFall and Prutch
(collectively) will receive a success fee equal to three percent (3%) of the
proceeds of any Financing transactions which they participate in developing,
negotiating and closing with third parties for the benefit of the Company. If
the Financing transaction raises cash for the Company (regardless of the
Company's use of the proceeds), then this fee will be payable entirely in cash
upon the closing of the transaction. The agreement defines a "Financing" broadly
as including any combination of committed senior term or revolving debt,
subordinated debt, preferred or common equity or equivalents, trade financing,
debt guarantees, any relief or assumption of debt or debt guarantees, any
Page 71 of 80
<PAGE>
sale and leaseback or other leasing arrangement, any restructuring, earnout or
other contingent payment, or any other debt or equity financing vehicle, but
excluding the Company's existing financing with its senior lender and any stock
options or warrants outstanding on May 8, 1998.
If the financing transaction occurs in connection with an Acquisition
Transaction, however, and a portion of the Aggregate Consideration paid by the
Company in connection with the Acquisition Transaction consists of Common Stock,
then the agreement provides that a portion of the applicable success fee may be
paid in the form of additional shares of Common Stock. In this situation, the
agreement provides that Messrs. McFall and Prutch would be entitled to receive
both the acquisition success fee (equal to 3% of the Aggregate Consideration (as
defined) payable in the Acquisition Transaction) and the financing success fee
(equal to 3% of the applicable Financing). Under these circumstances, a portion
of the financing success fee would be payable in the form of additional shares
of the Company's Common Stock, determined as follows:
(A) If the Financing raises sufficient cash to pay the cash portion of the
Aggregate Consideration for the Acquisition Transaction PLUS at least
some portion of the financing success fee, then up to one half (1/2)
of the 3% financing success fee will be paid in cash, with the
remainder of such fee being paid in shares of the Company's Common
Stock (valued as described below). The agreement also provides that,
under these circumstances, Messrs. McFall and Prutch could elect to
receive a portion of the financing success fee (up to 100% of the
entire fee) in shares of Common Stock rather than cash.
(B) If the Financing does not raise cash in excess of the cash portion of
the Aggregate Consideration for the Acquisition Transaction, then all
of the 3% financing success fee would be paid in the form of shares of
the Company's Common Stock.
The number of shares of the Company's Common Stock issuable in payment of a
given dollar amount of fees due under either (A) or (B) above will be determined
by valuing the Common Stock at its closing market price on the day immediately
prior to the closing of the Financing in question. Thus, the precise number of
shares that would be issuable under the terms of the agreement in payment of a
given dollar amount of fees will depend upon the then-current market price for
the Company's Common Stock.
Under the above-described provision of the agreement regarding Financing
transactions, Messrs. McFall and Prutch each received a cash payment of $50,000
in connection with the Company's private placement of $5,000,000 of its 5%
Series G1 Convertible Preferred Stock in September 1998.
The agreement also provides that Messrs. McFall and Prutch will abide by
certain restrictions concerning the use of the Company's confidential business
information and provides that, subject to the fiduciary duties of its Board of
Directors, the Company will use its best efforts to cause Messrs. McFall and
Prutch to be nominated for election as directors of the Company at each annual
meeting during the term of the agreement.
All cash payments to Mr. McFall called for under the terms of this
agreement are subject to offset against an annual draw of $150,000 which he
receives from the Company. All cash payments to Mr. Prutch called for under the
terms of this agreement were subject to offset against amounts paid to Mr.
Prutch by the Company as salary, bonus or otherwise pursuant to the terms of his
employment agreement prior to his separation from the Company as described
above.
Page 72 of 80
<PAGE>
Under the terms of the July 31, 1999 Separation Agreement executed in
connection with Mr. Prutch's resignation as an officer and director of the
Company, the Company agreed to pay Mr. Prutch $100,000 (in the form of a 83,333
share equity award under the Company's 1999 Stock Incentive Plan) as full
compensation for any remaining amounts deemed to be payable to Mr. Prutch under
the August 10, 1998 agreement, and Mr. Prutch agreed to waive all claims to an
additional $100,000 of fees in dispute under the terms of that agreement and to
any other future payments which he otherwise might be entitled to receive
thereunder. As a result of the Separation Agreement, all future compensation
under the August 10, 1998 agreement, which previously would have been payable to
Mr. McFall and Mr. Prutch in equal shares, will now be payable entirely to Mr.
McFall.
Both the August 10, 1998 agreement and Mr. Prutch's Separation Agreement
contemplate that Messrs. McFall and Prutch may elect to assign a portion of the
consideration otherwise payable to themselves under the August 10, 1998
agreement to other individuals (including other executives of the Company) who
have provided material assistance to Messrs. McFall and Prutch in performing the
services for which they are to receive compensation under such agreement. To
date, each of Messrs. McFall and Prutch have elected to assign 768,258 of the
Warrants which they receive under the Weatherly Agreement and the August 10,
1998 agreement (for a total of 1,538,516 warrants) to Howard Weinberg, then the
Company's Chief Financial Officer. These warrants remain subject to all of the
same vesting conditions and other material terms that were applicable to them in
the hands of Messrs. McFall and Prutch (as described above).
Messrs. McFall and Prutch agreed to allocate a portion of their success
fees to other executive officers of the Company for their assistance in
completing the transactions pursuant to which such fees were earned.
Henry Aaron, a director of the Company, is a principal of Henry-Aaron,
Inc., a corporation that holds various licenses from Major League Baseball
Properties. Pursuant to an agreement between the Company and Henry-Aaron, Inc.,
the Company is authorized to manufacture, market and sell various products
bearing the logos and trademarks of Major League Baseball pursuant to the
license held directly by Henry-Aaron, Inc. In connection with the execution of
this agreement, the Company granted Henry Aaron and another principal of
Henry-Aaron, Inc. warrants to purchase a total of 200,000 shares of Common Stock
at $1.75 per share, effective May 8, 1998, and vesting as to 100,000 shares on
December 31, 1998 and as to the remaining 100,000 shares on December 31, 1999;
all of such warrants expire December 31, 2003. Mr. Aaron holds 150,000 of such
warrants. In addition to paying royalties due to Major League Baseball
Properties under the arrangement with Henry-Aaron, Inc., the Company also pays
an override to Henry-Aaron, Inc. on its sales of Major League Baseball products.
These payments to Henry-Aaron, Inc. totaled $270,000 in 1997, $167,326 in 1998
$177,249 in 1999 and $37,500 through the first three months of 2000.
Page 73 of 80
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Financial Statements and Schedules
The financial statements are incorporated by reference under Part II, Item
8 and are set forth in the Index to Financial Statements and Schedules
found in Part II, Item 8.
(a)2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts (included herewith in
audited financial statements)
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
(a)3. Exhibits
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
2.1 Asset Purchase Agreement dated as of December 17, 1998, by and Exhibit 10.1 to current report on Form 8-K dated
among the Company, Tahiti Apparel, Inc. and the stockholders March 22, 1999.
of Tahiti Apparel, Inc.
2.2 Amendment, dated March 16, 1999, to Asset Purchase Agreement Exhibit 10.2 to current report on Form 8-K dated
dated as of December 17, 1998, by and among the Company, March 22, 1999.
Tahiti Apparel, Inc. and the stockholders of Tahiti
Apparel, Inc.
2.3 Second Amendment, dated April 15, 1999, to Asset Purchase Exhibit 10.1 to Form 10-Q for the quarter ended
Agreement dated as of December 17, 1998, by and among the April 3, 1999.
Company, Tahiti Apparel, Inc. and the stockholders of
Tahiti Apparel, Inc.
3.1 Restated Articles of Incorporation of Signal Apparel Company, Filed with original Form 10-K Annual Report for
Inc. as amended through January 5, 2000. the year ended December 31, 1999.
3.2 Copy of Bylaws as amended March 23, 1992. Exhibit 3-2 to Form 10-K for the year ended
December 31, 1991.
4.1 Form of 5% Convertible Debentures, due March 3, 2003, of Exhibit 4.1 to Current Report on Form 8-K dated
Signal Apparel Company, Inc. March 3, 1999.
10.1 Warrant Purchase Agreement, dated as of March 1, 1991, Exhibit 10.25 to Form 10-K for the year ended
between the Company, The Shirt Shed, Inc. and Licensing December 31, 1991.
Corporation of America.
10.2 Warrant No. 002 issued to Licensing Corporation of America, Exhibit 10.1 to the Form 10-Q for the quarter
covering 193,386 shares of the Company's Common Stock, ended September 30, 1994.
dated as of July 27, 1991 and expiring July 22, 2001.
</TABLE>
Page 74 of 80
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
10.3 Warrant No. 003 issued to Licensing Corporation of America, Exhibit 10.2 to the Form 10-Q for the quarter
covering 38,674 shares of the Company's Common Stock, ended September 30, 1994.
dated as of April 30, 1993 and expiring April 30, 2003.
10.4 Promissory Note dated March 31, 1994 between the Company Exhibit 10.2 to Form 10-Q for the quarter ended
and FS Signal Associates 1. March 31, 1994.
10.5 Subordination Agreement, dated March 30, 1994, between the Exhibit 10.47 to Form 10-K for the year ended
Company, FS Signal Associates and BNY Financial Corporation. December 31, 1993.
10.6 Real Estate Mortgage, Security Agreement, Assignment of Lease Exhibit 10.4 to current report on Form 8-K filed
and Rents and Fixture filing dated March 31, 1995 between The on May 10, 1995.
Shirt Shed and Walsh Greenwood.
10.7 First Amendment dated August 10, 1995, to Real Estate Mortgage, Exhibit 10.102 to Form 10-K for the year ended
Security Agreement, Assignment of Lease and Rents and Fixture December 31, 1995.
Filing dated March 31, 1995, between The Shirt Shed and Walsh
Greenwood.
10.8 Reimbursement Agreement and related Promissory Note dated Exhibit 10.108 to Form 10-K for the year ended
January 30, 1997, among the Company, FS Signal Associates December 31, 1996.
Limited Partnership and FS Signal Associates II Limited
Partnership, concerning renewal and guaranty arrangements
with respect to certain letters of credit.
10.9 Stock Purchase Agreement, dated October 31, 1997, by and Exhibit 2-1 to Current Report on Form 8-K dated
among the Company, Lee Ellis and Jimmy Metyko. November 5, 1997.
10.10 Stock Purchase Agreement, dated October 31, 1997, by and Exhibit 2-2 to Current Report on Form 8-K dated
among the Company and Elizabeth Miller. November 5, 1997.
10.11 Convertible Preferred Stock Purchase Agreement dated Exhibit 10.1 to Current Report on Form 8-K dated
September 17, 1998, among the Company and four institutional September 17, 1998.
purchasers of the Company's 5% Convertible Preferred Stock,
Series G1.
10.12 Registration Rights Agreement dated September 17, 1998, Exhibit 10.2 to Current Report on Form 8-K dated
among the Company and four institutional purchasers of September 17, 1998.
the Company's 5% Convertible Preferred Stock, Series G1.
10.13 Warrants to purchase Common Stock, issued to purchasers of Exhibit 10.3 to Current Report on Form 8-K dated
Series G1 Preferred Stock, dated September 17, 1998. September 17, 1998.
</TABLE>
Page 75 of 80
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
10.14 Warrants to purchase Common Stock, issued to placement agent Exhibit 10.4 to Current Report on Form 8-K dated
for Series G1 Preferred Stock, dated September 17, 1998. September 17, 1998.
10.15 Securities Purchase Agreement dated March 3, 1999, among the Exhibit 10.1 to Current Report on Form 8-K dated
Company and two institutional purchasers of the Company's March 3, 1999.
5% Convertible Debentures due March 3, 2003.
10.16 Registration Rights Agreement dated March 3, 1999, among the Exhibit 10.2 to Current Report on Form 8-K dated
Company and two institutional purchasers of the Company's March 3, 1999.
5% Convertible Debentures due March 3, 2003.
10.17 Form of Warrants to purchase Common Stock issued to purchasers Exhibit 10.3 to Current Report on Form 8-K dated
of 5% Convertible Debentures, dated March 3, 1999. March 3, 1999.
10.19 Agreement, dated March 16, 1999, between Tahiti Apparel, Inc. Exhibit 10.4 to Current Report on Form 8-K dated
and Ming Yiu Chan, together with related Form of Promissory March 22, 1999.
Note (assumed by the Company at closing).
10.20 Stock Resale Agreement, dated March 16, 1999, between the Exhibit 10.5 to Current Report on Form 8-K dated
Company, Tahiti Apparel, Inc.,Zvi Ben-Haim, Michael Harary March 22, 1999.
and Ming Yiu Chan.
10.21 Registration Rights Agreement, dated March 16, 1999, between Exhibit 10.6 to Current Report on Form 8-K dated
the Company, Tahiti Apparel, Inc.,Zvi Ben-Haim, Michael March 22, 1999.
Harary and Ming Yiu Chan.
10.22 Securities Transfer Agreement, dated March 16, 1999, between Exhibit 10.9 to Current Report on Form 8-K dated
the Company and Zvi Ben-Haim. March 22, 1999.
10.23 Securities Transfer Agreement, dated March 16, 1999, between Exhibit 10.10 to Current Report on Form 8-K dated
the Company and Michael Harary. March 22, 1999.
10.24 Form of Warrants to be issued to each of Zvi Ben-Haim and Exhibit 10.11 to Current Report on Form 8-K dated
Michael Harary under Securities Transfer Agreements dated March 22, 1999.
March 16, 1999.
10.25 Revolving Credit, Term Loan and Security Agreement, dated Exhibit 10.12 to Current Report on Form 8-K dated
March 12, 1999, between the Company and GMAC [as successor March 22, 1999.
to BNY Financila Corporation (individually and as Agent)].
</TABLE>
Page 76 of 80
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
10.26 Second Amended and Restated Factoring Agreement, dated March Exhibit 10.13 to Current Report on Form 8-K dated
12, 1999, between the Company and GMAC (as successor to BNY March 22, 1999.
Financial Corporation).
10.27 Subscription and Stock Purchase Agreement, dated March 12, Exhibit 10.14 to Current Report on Form 8-K dated
1999, between the Company and GMAC [as successor to March 22, 1999.
BNY Financial Corporation].
10.28 Form of Warrants to purchase the Company's Common Stock issued Exhibit 10.15 to Current Report on Form 8-K dated
to GMAC [as successor to BNY Financial Corporation, dated March 22, 1999.
March 12, 1999.
10.29 Letter Agreement dated May 26, 1999 amending the Revolving Exhibit 10.2 to Form 10-Q/A, Amendment No. 1 to
Credit, Term Loan and Security Agreement dated March 12, 1999 Form 10-Q for the quarter ended April 3, 1999.
between the Company and its senior lender, BNY Financial
Corporation (in its own behalf and as agentfor other
participating lenders), and waiving compliance with certain
provisions thereof.
10.30 Letter Agreement dated August 23, 1999 amending the Revolving Exhibit 10.6 to Form 10-Q Form 10-Q for the
Credit, Term Loan and Security Agreement dated March 12, 1999 quarter ended July 3, 1999.
between the Company and its senior lender, BNY Financial
Corporation (in its own behalf and as agentfor other
participating lenders), and waiving compliance with certain
provisions thereof.
10.31 Letter Agreement dated November 15, 1999 amending the Revolving Exhibit 10.6 to Form 10-Q for the quarter ended
Credit, Term Loan and Security Agreement dated March 12, 1999 October 2, 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.
10.32 Restructuring Agreement dated as of November 21, 1997 between Exhibit 10.1 to Form 10-Q for the quarter ended
the Company and WGI, LLC. July 3, 1999
10.33 Warrant to Purchase 4,500,000 shares of Common Stock issued to Exhibit 10.2 to Form 10-Q for the quarter ended
WGI, LLC, dated December 30, 1997. July 3, 1999
10.34 Warrant to Purchase 5,000,000 shares of Common Stock issued to Exhibit 10.4 to Form 10-Q for the quarter ended
WGI, LLC, dated December 30, 1997. July 3, 1999
10.35 Credit Agreement dated as of May 8, 1998 among the Company, Exhibit 10.3 to Form 10-Q for the quarter ended
three subsidiaries of the Company (The Shirt Shed, Inc., GIDI July 3, 1999
Holdings, Inc. and Big Ball Sports, Inc.) and WGI, LLC.
10.36 Letter Agreement dated May 14, 1999 containing waiver of Exhibit 10.3 to Form 10-Q/A, Amendment No. 1 to
dividends on the Company's Series II Preferred Stock for the Form 10-Q for the quarter ended April 3, 1999.
First Quarter of 1999 by WGI, LLC, the sole holder of
such stock.
</TABLE>
Page 77 of 80
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
10.37 Reimbursement Agreement and related Promissory Note dated Filed with original Form 10-K Annual Report for
June 30, 1999, among the Company and WGI, LLC, concerning the year ended December 31, 1999.
collateral and guaranty arrangements with respect to the
Company's senior bank financing.
10.38 Letter Agreement dated August 10, 1998 among the Company, Exhibit 10.5 to Form 10-Q for the quarter ended
Thomas A. McFall and John W. Prutch. July 3, 1999.
10.39 Stock Purchase Agreement dated as of July 31, 1999 by and Exhibit 10.1 to Form 10-Q for the quarter ended
among the Company (as Seller) and John Prutch (as Buyer) October 2, 1999.
concerning sale of all of the outstanding common stock of
GIDI Holdings, Inc.
10.40 Warrant Certificate to purchase 1,536,515 shares of the Exhibit 10.2 to Form 10-Q for the quarter ended
Company's Common Stock issued to John Prutch as of October 2, 1999.
August 1, 1999.
10.41 Letter Agreement dated as of August 1, 1999 concerning the Exhibit 10.4 to Form 10-Q for the quarter ended
Revolving Credit, Term Loan and Security Agreement dated October 2, 1999.
March 12, 1999 between the Company and its senior lender,
GMAC Commercial Credit LLC (as successor to BNY Financila
Corporation, in its own behalf and as agent for other
participating lenders), waiving compliance with certain
provisions thereof.
10.42 Stock Pledge and Security Agreement and Collateral Assignment Exhibit 10.5 to Form 10-Q for the quarter ended
of Stock Purchase Agreement, dated as of August 1, 1999 October 2, 1999.
between the Company and its senior lender, GMAC Commercial
Credit LLC (as successor to BNY Financial Corporation, in its
own behalf and as agent for other participating lenders),
concerning Series A Preferred Stock of GIDI Holdings, Inc.
10.43 Letter Agreement dated September 14, 1999 regarding the Exhibit 10.7 to Form 10-Q for the quarter ended
Company's 5% Convertible Subordinated Debentures due October 2, 1999.
March 3, 2002.
10.44 Signal Apparel Company, Inc. 1999 Stock Incentive Plan Filed with original Form 10-K Annual Report for
the year ended December 31, 1999.
10.45 Separation Agreement with David E. Houseman, dated as of Exhibit 10.35 to Form 10-K for the year ended
October 1, 1998. December 31, 1998.
10.46 Separation Agreement dated as of July 31, 1999 by and among Exhibit 10.3 to Form 10-Q for the quarter ended
the Company and John W. Prutch. October 2, 1999.
10.47 Employment Agreement, dated March 16, 1999, between the Exhibit 10.7 to Current Report on Form 8-K dated
Company and Zvi Ben-Haim. March 22, 1999.
</TABLE>
Page 78 of 80
<PAGE>
<TABLE>
<CAPTION>
Exhibit Incorporation by Reference (to SEC
Number Description of Exhibit File No. 1-2782) or Filed Herewith
------ ---------------------- --------------------------------------
<S> <C> <C>
10.48 Employment Agreement, dated March 16, 1999, between the Company Exhibit 10.8 to Current Report on Form 8-K dated
and Michael Harary. march 22, 1999.
10.49 Lease Agreement dated as of May 1, 1997, for Tahiti Apparel New Filed with original Form 10-K Annual Report for
York Showroom. the year ended December 31, 1999.
10.50 Lease Agreement dated as of August 21, 1997, for Tahiti Apparel Filed with original Form 10-K Annual Report for
New York Executive Offices. the year ended December 31, 1999.
10.51 Sublease Agreement dated as of May 8, 1998, for the Company's Filed with original Form 10-K Annual Report for
principal executive offices in Avenel, New Jersey. the year ended December 31, 1999.
10.52 Letter Agreement dated March 17, 2000 amending the Revolving Filed with original Form 10-K Annual Report for
Credit, Term Loan and Security Agreement dated March 12, 1999 the year ended December 31, 1999.
between the Company and its senior lender, GMAC Commercial
Credit LLC (as successor to BNY Financial Corporation, in its
own behalf and as agent for other participating lenders), and
waiving compliance with certain provisions thereof.
21 List of Subsidiaries Filed with original Form 10-K Annual Report for
the year ended December 31, 1999.
23.1 Consent of Goldstein Golub Kessler LLP Filed with original Form 10-K Annual Report for
the year ended December 31, 1999.
23.2 Consent of Arthur Andersen LLP Filed with original Form 10-K Annual Report for
the year ended December 31, 1999.
27 Financial Data Schedule Filed with original Form 10-K Annual Report for
the year ended December 31, 1999.
(EDGAR version only).
</TABLE>
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNAL APPAREL COMPANY, INC.
By: /s/ Robert J. Powell
-------------------------
Robert J. Powell
Vice President and
Secretary
Date: April 30, 2000
Page 80 of 80
