SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-2782
SIGNAL APPAREL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Indiana 62-0641635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 Englehard Avenue, Avenel, New Jersey 07001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (732) 382-2882
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 3, 2000
----- -----------------------------
Common Stock 53,512,406 shares
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Signal Apparel Company, Inc.
We have reviewed the accompanying consolidated balance sheet of Signal Apparel
Company, Inc. and Subsidiaries (the "Company") as of June 30, 2000 and the
related consolidated statements of operations for the three-month and six-month
periods then ended and the statement of cash flows for the six-month period then
ended. These consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered recurring
losses from operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. 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
July 28, 2000
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SIGNAL APPAREL COMPANY, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash $ 19 $ 0
Receivables, less allowance for doubtful
accounts of $443 in 2000 and $251 in 1999 1,285 304
Note receivable 134 100
Inventories 6,816 7,346
Prepaid expenses and other current assets 521 1,139
--------- ---------
Total current assets 8,775 8,889
Property, plant and equipment, net 2,550 2,848
Goodwill, less accumulated amortization of $2,765
in 2000 and $1,827 in 1999 25,312 26,249
Debt issuance costs 4,868 5,528
Other assets 1,017 1,090
--------- ---------
Total assets $ 42,522 $ 44,604
========= =========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable $ 5,967 $ 4,922
Accrued liabilities 4,524 6,358
Accrued interest 7,735 6,365
Current portion of long-term debt, net of unamortized discount
of $4,200 at June 30, 2000 24,335 8,722
Revolving advance account 53,532 39,994
Term loans 48,754 49,639
--------- ---------
Total current liabilities 144,847 116,000
Long-term debt, principally to related parties, less
current portion, net of unamortized discount of
$4,768 at December 31, 1999 7,004 22,475
--------- ---------
Total liabilities 151,851 138,475
Shareholders' Deficit :
Preferred Stock, including unpaid dividends of $8,974 53,290 51,296
in 2000 and $6,980 in 1999
Common Stock 535 535
Additional Paid-in Capital 191,263 191,263
Accumulated Deficit (353,300) (335,848)
--------- ---------
Subtotal (108,212) (92,754)
--------- ---------
Less: Cost of Treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total shareholders' deficit (109,329) (93,871)
--------- ---------
Total liabilities and shareholders'
deficit $ 42,522 $ 44,604
========= =========
</TABLE>
The Accompanying Notes and Independent Accountant's Report should be read in
conjunction with the Consolidated Financial Statements.
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SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, July 3, June 30, July 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 29,107 $ 35,203 $ 67,507 $ 68,621
Cost of sales 26,552 38,709 55,880 63,474
-------- -------- -------- --------
Gross profit 2,555 (3,506) 11,627 5,147
Royalty expense 1,283 1,408 2,728 3,393
Selling, general and administrative expenses 7,501 12,292 15,353 19,302
Interest expense 4,799 3,690 9,005 6,988
Other income, net 0 (31) 0 0
-------- -------- -------- --------
Loss before income taxes (11,028) (20,865) (15,459) (24,536)
Income taxes 0 0 0 0
-------- -------- -------- --------
Net loss (11,028) (20,865) (15,459) (24,536)
Less: Preferred stock dividends 997 1,449 1,994 1,449
-------- -------- -------- --------
Net loss applicable to common stock (12,025) (22,314) (17,453) (25,985)
======== ======== ======== ========
Weighted-Average shares outstanding,
Basic and diluted 53,365 44,498 53,358 40,544
======== ======== ======== ========
Basic/diluted net loss per share ($ 0.23) ($ 0.50) ($ 0.33) ($ 0.64)
======== ======== ======== ========
</TABLE>
The Accompanying Notes and Independent Accountant's Report should be read in
conjunction with the Consolidated Financial Statements.
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<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, July 3,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net Loss ($15,459) ($25,985)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,824 2,295
Non-cash interest charges 2,321 1,179
(Gain) loss on disposal and writedown
of property, plant and equipment 45 (52)
Changes in operating assets and liabilities:
Receivables (1,015) 965
Inventories 530 14,615
Prepaid expenses and other current
assets 618 243
Other assets 73 0
Accounts payable and accrued liabilities (789) (2,785)
-------- --------
Net cash used in operating
activities (11,852) (9,525)
-------- --------
Investing activities:
Purchases (sales) of property, plant and equipment (60) 153
Proceeds from sale of property, plant and equipment 81 0
Restricted cash 0 476
Proceeds from sale of Heritage Division 0 2,000
-------- --------
Net cash provided by investing activities 21 2,629
-------- --------
Financing activities:
Increase in bank overdraft 0 0
Net (decrease) increase in revolving
advance account 13,538 (42,541)
Net (decrease) increase in term loan borrowings (885) 50,000
Principal payments on other long-term borrowings (803) (635)
Repurchase of Series G1 Preferred Stock 0 (2,398)
Proceeds from sale of convertible debt 0 2,350
New common stock issued 0 18
-------- --------
Net cash provided by financing activities 11,850 6,794
-------- --------
Net (decrease) increase in cash and cash equivalents 19 (102)
Cash and cash equivalents, at beginning of period 0 403
-------- --------
Cash and cash equivalents, at end of period $ 19 $ 301
======== ========
</TABLE>
The Accompanying Notes and Independent Accountant's Report should be read in
conjunction with the Consolidated Financial Statements.
5
<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements have been prepared on a
basis consistent with that of the consolidated financial statements for the year
ended December 31, 1999. The accompanying consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of the Company, necessary to present fairly the financial
position of the Company as of June 30, 2000 and its results of operations and
cash flows for the three month and six month periods ended June 30, 2000. These
consolidated financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1999.
2. The results of operations for the three month and six month periods ended
June 30, 2000 are not necessarily indicative of the results to be expected for
the full year.
3. Inventories consisted of the following:
June 30, December 31,
2000 1999
------ ------
(In Thousands)
Raw materials $ 478 $1,129
Work in process 211 583
Finished goods 6,127 5,634
------ ------
$6,816 $7,346
------ ------
4. Pursuant to the terms of various license agreements, the Company is obligated
to pay future minimum royalties of approximately $1.3 million for the six months
ended December 31, 2000.
5. The computation of basic net loss per share is based on the weighted average
number of common shares outstanding during the period. 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.
6. WGI, LLC waived its right to receive approximately $1.0 million in preferred
dividends that would have accrued in relation to the Series H Preferred Stock
during the six months ended June 30, 1999.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Signal Apparel Company, Inc. (the "Company") is engaged in the sales and
marketing of apparel within the following product lines:
Printed and embroidered knit and woven active wear for men and boys and printed
and embroidered ladies' and girls' active wear, body wear and swimwear. The
Company outsources all of its manufacturing and embellishment processes to third
parties located in the United States and throughout the world.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000
Net sales of $29.1 million for the quarter ended June 30, 2000 represents a
decrease of $6.1 million (17.3%) from $35.2 million in net sales for the
corresponding period of 1999. This decrease is principally attributable to the
absence during 2000 of $1.2 million and $0.8 million, respectively, of sales
from its Big Ball subsidiary (closed in 1999) and Grand Illusion subsidiary
(sold in 1999), as well as a reduction of sales due to the discontinuance of
certain unprofitable licensing agreements and their related sales.
Total gross profit increased $6.1 million in the quarter ended June 30, 2000
compared to the corresponding period of 1999. Gross profit percentage was 8.8%
for the three months ended June 30, 2000 compared to a negative 10.0% for the
quarter ended July 3, 1999. The gross profit for the three months ended July 3,
1999 was substantially lower than the comparable 2000 period due to (1) a $1.9
million net loss on closeout goods and $0.5 million in customer charge backs
related to the closing of the Big Ball subsidiary in 1999, (2) $2.4 million in
excessive costs to import goods by air freight and then transporting such goods
by overnight delivery to customers and (3) a markdown during 1999 of $1.1
million of obsolete and slow moving inventory.
Royalty expense related to licensed product sales was 4.4% of net sales for the
quarter ended June 30, 2000, compared to 4.0% for the corresponding period of
1999. The small increase is attributable to a greater amount of licensed
products being sold in the quarter ended June 30, 2000 compared to the
corresponding period of 1999.
Selling, general and administrative (S,G&A) expenses as a percentage of total
sales were 25.8% of sales for the quarter ended June 30, 2000 compared to 34.9%
of sales for the corresponding period of 1999. The total amount of S,G&A
expenses decreased $4.8 million from $12.3 million in the quarter ended July
3,1999 to $ 7.5 million in the comparable quarter of 2000. The decrease is
principally attributable to a reduction in S,G&A expenses in 2000 as a result of
the closing and sale, respectively, of the Big Ball and Grand Illusion
subsidiaries, which had $1.0 million and $0.2 million, respectively, of S,G&A
expenses in 1999. The comparable period in 1999 also included $1.7 million of
consulting and professional fees (as compared to $0.9 million for the first six
months of 2000), and $1.5 million of temporary and
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<PAGE>
recruiting costs associated with the move to New Jersey and $0.8 million of
start-up expenses incurred in the second quarter of 1999 for the Company's new
Umbro and Premier Active Group divisions.
Depreciation and amortization decreased from $1.2 million in the quarter ended
July 3, 1999 to $0.9 million in the comparable 2000 period primarily as a result
of the sale of property and equipment in 1999.
Interest expense for the quarter ended June 30, 2000 was $4.8 million compared
to $3.7 million in the comparable quarter of 1999. The increase in interest
expense is primarily due to increased borrowing to fund the Company's continued
operating losses. In the quarter ended June 30, 2000, $1.2 million of the $4.8
million of interest expenses is non-cash interest and $0.3 is amortization of
debt issuance costs for the WGI, LLC warrants and the warrants issued to the
senior lender. The non-cash interest and amortization of debt issuance costs was
$1.9 million in the quarter ended July 3, 1999.
Six Months Ended June 30, 2000
Net sales of $67.5 million for the six months ended June 30, 2000 represents a
decrease of approximately $1.1 million or 1.6% from $68.6 million in net sales
for the corresponding period of 1999. The six months ended June 30, 2000 does
not reflect any sales from the Big Ball subsidiary and the Grand Illusion
subsidiary, which had provided sales of $2.3 million and $1.7 million,
respectively, in the six months ended July 3, 1999.
Total gross profit increased $6.5 million in the six months ended June 30, 2000
compared to the corresponding period in 1999. Gross profit percentage was 17.2%
for the six months ended June 30, 2000 compared to 7.5% for the corresponding
period of 1999, primarily due to the factors discussed above in relation to the
second quarter of 2000.
Royalty expense related to licensed product sales was 4.0% of sales for the six
months ended June 30, 2000, compared to 4.9% for the corresponding period of
1999. This decrease resulted primarily from an overall increase by the Company
in sales of proprietary products.
Selling, general and administrative expenses (S, G&A) as a percentage of total
sales were 22.7% of sales for the six months ended June 30, 2000 compared to
28.1% of sales for the corresponding period of 1999. The total amount of S, G&A
expenses decreased $3.9 million for the six months ended June 30, 2000 compared
to the corresponding period in 1999. The decrease of $3.9 million is principally
related to the closing of Big Ball in 1999, the sale of Grand Illusion in 1999
that had SG&A expenses in 1999 of $1.6 million and $0.5 million, respectively.
The six months ended June 30, 1999 also included $1.7 million of consulting and
professional fees (as compared to $1.0 million in 2000), $1.5 million of
temporary and recruiting costs associated with the move to New Jersey (as
compared to $0.3 million in 2000) and $0.8 million of start-up expenses related
to the Company's new Umbro and Premier Active Group divisions.
8
<PAGE>
Depreciation and amortization decreased from $2.3 million in the six months
ended July 3, 1999 to $1.8 million in the comparable 2000 period primarily as a
result of the sale of property and equipment in the six months ended July 3,
1999.
Interest expense for the six months ended June 30, 2000 was $9.0 million
compared to $6.9 million in the comparable 1999 period, due to increased
borrowing to fund the Company's operating losses. In the six months ended June
30, 2000, $2.3 million of the $9.0 million of interest expense is non-cash
interest and $0.7 million is amortization of debt issuance costs for the WGI,
L.L.C. warrants and the warrants issued to the senior lender. The non-cash
interest and amortization of debt issuance costs was $1.9 million in the six
months ended July 3, 1999.
FINANCIAL CONDITION
The Company's working capital deficit at June 30, 2000 increased $29.0 million
or 27% compared to the year ended December 31, 1999.
Inventories decreased $0.5 million or 7.2 % compared to December 31, 1999.
Total current liabilities increased $28.8 million or 24.9% due to increased
borrowings of $13.5 million in the revolving advance account, an increase of
$0.3 million in the short term portion of capital lease obligations, a $15.6
million shift from long term to short term debt from a credit agreement with
WGI, LLC that matures May 2001 and a reduction of $0.6 million in other current
liabilities.
Cash used in operations was $11.9 million during the first six months of 2000
compared to $9.5 million used in operating activities during the same period in
1999.
Commitments to purchase equipment totaled less than $1.0 million at June 30,
2000. The Company anticipates capital expenditures not to exceed $1.0 million
for 2000.
Cash provided by investing activities was $21 thousand for the six months ended
June 30, 2000 compared to cash provided of $2.6 million for the same period in
1999. This difference is due principally to the sale of the Company's Heritage
division during the 1999 period, which resulted in proceeds of $2.0 million.
Cash provided by financing activities was $11.9 million for the six months ended
June 30, 2000 compared to cash provided of $6.8 million for the same period in
1999. This difference is due principally to increased borrowing under the
Company's revolving advance account with its senior lender to finance operating
losses incurred during the period, offset in part by principal payments of $0.9
million on the Company's term loan with its senior lender.
The revolving advance account increased $13.5 million from $40.0 million at
December 31, 1999. The revolving advance account is secured, in part, by the
guarantee of two principal shareholders.
9
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Interest expense for the six months ended June 30, 2000 was $9.0 million
compared to $7.0 million for the same period in 1999, due primarily to the
increase in the Company's overall indebtedness to its senior lender. The $9.0
million of interest in this period included non-cash interest charges of $2.3
million compared to $1.9 million in the same period in 1999. Total outstanding
debt averaged $145.8 million and $85.2 million for the first six months of 2000
and 1999, respectively.
The Company uses letters of credit to support foreign and some domestic sourcing
of inventory and certain other obligations. Outstanding letters of credit were
$4.9 million as of June 30, 2000 as compared to $6.2 million at July 3, 1999.
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 our 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 the six months ended June 30, 2000 have been funded
through several transactions with its principal shareholders and with the
Company's senior lender that were consummated in 1999, as well as through
additional collateral posted by the principal shareholders during the first six
months of 2000 to support the Company's overadvance with the senior lender.
As of August 14, 2000, for the period through June 30, 2000, the Company's
senior lender waived certain covenant violations (tangible net worth, current
ratio, working capital and net loss) under the Company's credit agreement and
extended until August 15, 2000 the period in which the Company must reduce its
permitted overadvance facility to the level required by the credit agreement.
During the first six months of 2000 and continuing into the third 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 Agreement and
Term Loans for the year ended December 31, 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. Accordingly, Generally Accepted Accounting Principles require that the
$48.8 million in term loans be classified as a current liability even though the
term of the loan is longer than one year.
10
<PAGE>
If the Company's sales and profit margins do not substantially improve in the
near term, the Company will be required to seek additional capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate additional acquisitions. To obtain such
additional capital and such financing, the Company may be required to issue
additional securities that may dilute the interests of its shareholders.
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 to its business.
PART II. OTHER INFORMATION
Items 1 to 5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit (10.1) Letter agreement dated August 14, 2000 waiving certain covenant
violations and extending the time period for compliance with certain other
terms, between the Company, its senior lender GMAC Commercial Credit LLC
"successor to BNY Financial Corporation, in its own behalf and as agent for
other participating lenders."
Exhibit (15) Letter regarding unaudited interim financial information.*
Exhibit (27) Financial Data Schedule. Submitted in electronic format only.
* Incorporated by reference to the Letter presented on page 2 of this Report.
(b) 8-K Reports
During the first six months of 2000, the Company filed no reports on Form
8-K.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNAL APPAREL COMPANY, INC.
Date: August 14, 2000 /s/ Stephen Walsh
--------------- -----------------
Stephen Walsh
Chief Executive Officer
Date: August 14, 2000 /s/ Michael Dervis
--------------- ------------------
Michael Dervis
Chief Financial Officer
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