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 March 31, 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 May 8, 2000
----- --------------------------
Common Stock 53,467,041 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANTS' 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 March 31, 2000 and the
related consolidated statements of operations and cash flows for the three-
month period then ended. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the 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 raise 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
April 26, 2000
<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, Dec. 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash $ 123 $ 0
Receivables, less allowance for doubtful
accounts of $207 in 2000 and $251 in 1999 322 304
Note receivable 129 100
Inventories 12,212 7,346
Prepaid expenses and other current assets 1,501 1,139
--------- ---------
Total current assets: 14,287 8,889
Property, plant and equipment, net 2,648 2,848
Goodwill, less accumulated amortization of $2,296
in 2000 and $1,827 in 1999 25,781 26,249
Debt issuance costs 5,198 5,528
Other assets 1,091 1,090
--------- ---------
Total assets $ 49,005 $ 44,604
========= =========
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable $ 8,827 $ 4,922
Accrued liabilities 5,151 6,358
Accrued interest 7,052 6,365
Current portion of long-term debt 8,431 8,722
Revolving advance account 45,407 39,994
Term loans 49,565 49,639
--------- ---------
Total current liabilities 124,433 116,000
Long-term debt, principally to related parties, less
current portion, net of unamortized discount of
$4,484 and $4,768, respectively 22,874 22,475
--------- ---------
Total liabilities 147,307 138,475
Shareholders' Deficit:
Preferred Stock, including unpaid dividends of
$7,977 in 2000 and $6,980 in 1999 52,293 51,296
Common Stock 535 535
Additional Paid-in Capital 191,263 191,263
Accumulated Deficit (341,276) (335,848)
--------- ---------
Subtotal (97,185) (92,754)
Less: Cost of Treasury shares (140,220 shares) (1,117) (1,117)
--------- ---------
Total shareholders' deficit (98,302) (93,871)
--------- ---------
Total liabilities and shareholders' deficit $ 49,005 $ 44,604
========= =========
</TABLE>
The Accompanying Notes and Independent Accountants' Report should be read in
conjunction with the Consolidated Financial Statements.
<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, April 3,
2000 1999
-------- --------
<S> <C> <C>
Net Sales $ 38,400 $ 33,418
Cost of Sales 29,328 24,765
-------- --------
Gross Profit 9,072 8,653
Royalty Expense 1,445 1,986
Selling, General and Administrative Expenses 7,852 7,009
Interest Expense 4,206 3,298
Other Income, net (31)
-------- --------
Loss Before Income Taxes (4,431) (3,609)
Income Taxes 0 0
-------- --------
Net Loss (4,431) (3,609)
Less: Preferred Stock Dividends 997 0
-------- --------
Net Loss Applicable to Common Stock ($ 5,428) ($ 3,609)
======== ========
Weighted Average Shares Outstanding,
Basic and Diluted 53,352 36,591
======== ========
Basic/Diluted Net Loss Per Share ($ 0.10) ($ 0.10)
======== ========
</TABLE>
The Accompanying Notes and Independent Accountants' Report should be read in
conjunction with the Consolidated Financial Statements.
<PAGE>
SIGNAL APPAREL COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, April 3,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net Loss ($ 4,431) ($ 3,609)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 910 1,538
Non-cash interest charges 1,158 907
(Gain) loss on disposal and writedown
of property, plant and equipment 38 (52)
Changes in operating assets and liabilities:
Receivables (47) 961
Inventories (4,866) 3,129
Prepaid expenses and other current assets (362) (567)
Accounts payable and accrued
liabilities 2,698 (8,882)
-------- --------
Net cash used in operating
activities (4,902) (6,575)
-------- --------
Investing Activities:
Purchases of property, plant and equipment (42) (699)
Proceeds from sale of property, plant and
equipment 93 0
Restricted cash (8)
Proceeds from the sale of Heritage Division 2,000
-------- --------
Net cash provided by investing activities 51 1,293
-------- --------
Financing Activities:
Increase in bank overdraft 1,439
Net (decrease) increase in revolving
advance account 5,413 (45,986)
Net (decrease) increase in term loan borrowings (74) 50,000
Principal payments on borrowings (365) (544)
Repurchase of Series G1 Preferred Stock (2,398)
Proceeds from sale of convertible debt 2,350
New common stock issued 0 18
-------- --------
Net cash provided by financing activities 4,974 4,879
-------- --------
Net (decrease) increase in cash and cash equivalents 123 (403)
Cash and cash equivalents at beginning of period 0 403
-------- --------
Cash and cash equivalents at end of period $ 123 $ 0
======== ========
</TABLE>
The Accompanying Notes and Independent Accountants' Report should be read in
conjunction with the Consolidated Financial Statements.
<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 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 March 31, 2000 and its results of operations
and cash flows for the three months ended March 31, 2000. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated 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 months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
3. Inventories consisted of the following:
March 31, December 31,
2000 1999
------- -------
(In Thousands)
Raw materials $ 897 $ 1,129
Work in process 1,294 583
Finished goods 10,021 5,634
------- -------
$12,212 $ 7,346
======= =======
4. Pursuant to the terms of various license agreements, the Company is
obligated to pay future minimum royalties of approximately $2.0 million for
the nine 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 quarter ended April 3, 1999.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Signal Apparel Company, Inc. and Subsidiaries (the "Company") is engaged in the
sales and marketing of apparel within the following product lines:
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000
Net sales of $38.4 million for the quarter ended March 31, 2000 represent an
increase of approximately $5 million (15%) from $33.4 million in net sales for
the corresponding period of 1999. The first quarter of 2000 does not reflect any
sales from the Big Ball division which was closed in July 1999. The first
quarter of 1999 included sales of $1.2 million from the Big Ball division.
<PAGE>
Total gross profit increased $0.4 million in the first quarter of 2000 compared
to the corresponding period in 1999 due to higher sales volume. Gross profit
percentage was 24% for the quarter ended March 31, 2000 compared to 26% for the
quarter ended April 3, 1999.
Royalty expense related to licensed product sales was 4% of sales for the
quarter ended March 31, 2000, compared to 6% for the corresponding period of
1999. This decrease resulted primarily from an increase in the Company's sales
of proprietary products.
Selling, general and administrative expenses (S, G & A) as a percentage of total
sales were 20% of sales for the quarter ended March 31, 2000 compared to 21% of
sales for the corresponding period of 1999. The total amount of S, G & A
expenses increased $0.8 million in the quarter ended March 31, 2000 compared to
the corresponding period in 1999. The increase of $0.8 million is principally
related to additional sales expenses resulting from the additional $5 million in
sales and approximately $0.3 million in excess freight costs due to late
delivery of merchandise.
Depreciation and amortization decreased from $1.5 million in the quarter ended
April 3, 1999 to $0.9 million in the comparable 2000 period primarily as a
result of the sale of property, plant and equipment in the quarter ended April
3, 1999.
Interest expense for the quarter ended March 31, 2000 was $4.2 million compared
to $3.3 million in the comparable quarter of 1999. In the quarter ended March
31, 2000, $1.2 million of the $4.2 million of interest expense is non-cash
interest and $0.3 million 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 $0.9 million in the quarter ended
April 3, 1999.
FINANCIAL CONDITION
The Company's working capital deficit at March 31, 2000 increased $3 million
compared to the year ended December 31, 1999.
Inventories increased $4.9 million or 66% compared to December 31, 1999.
Inventories increased in order to ship the open orders on hand at March 31,
2000.
Total current liabilities increased $8.4 million principally due to increased
borrowings in the revolving advance account of $5.4 million and an increase in
accounts payable of $3.9 million.
Cash used in operations was $4.9 million during the first three months of 2000
compared to $6.6 million used in operating activities during the same period in
1999.
Commitments to purchase equipment totaled less than $1.0 million at March 31,
2000. The Company anticipates capital expenditures not to exceed $1.0 million
for 2000.
Cash provided by investing activities was $51 thousand for the first three
months ended March 31, 2000 compared to cash provided of $1.3 million for the
same period in 1999.
Cash provided by financing activities was $5.0 million for the three months of
2000 compared to cash provided of $4.9 million for the same period in 1999.
The revolving advance account increased $5.4 million from $40 million at
December 31, 1999. The overadvance is secured, in part, by the guarantee of two
principal shareholders.
Interest expense for the three months ended March 31, 2000 was $4.2 million
compared to $3.3 million for the same period in 1999. The $4.2 million of
interest in this period included non-cash interest charges of $1.2 million
compared to $0.8 million in the comparable quarter of 1999. Total outstanding
debt averaged $143 million and $96 million for the first three 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
$9.2 million as of March 31, 2000.
<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 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 quarter ended March 31, 2000 have been funded through
several transactions with its principal shareholders and with the Company's
senior lender that were consummated in 1999.
As of May 5, 2000, for the period through March 31, 2000, 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. During
the first quarter of 2000 and continuing into the second 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 $49.6
million in term loans be classified as a current liability even though the term
of the loans is longer than one year.
If the Company's sales and profit margins do not substantially improve in the
near term, the Company will be required to seek additional capital in order to
continue its operations and to move forward with the Company's turnaround plans,
which include seeking appropriate additional acquisitions. To obtain such
additional capital and such financing, the Company may be required to issue
additional securities that may dilute the interests of its 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 1-5
Not Required
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit (10.53) Letter agreement dated May 5, 2000 waiving certain events of
default between the Company, its senior lender, GMAC Commercial Credit LLC "as
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.
(b) 8-K Reports:
During the first quarter of 2000, the Company filed no reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNAL APPAREL COMPANY, INC.
(Registrant)
Date: May ___, 2000 /s/ Stephen Walsh
-----------------
Stephen Walsh
Chief Executive Officer
Date: May ___, 2000 /s/ Kenneth L. Larsen
---------------------
Kenneth L. Larsen
Chief Accounting Officer
GMAC
COMMERCIAL CREDIT LLC
1290 AVENUE OF THE AMERICAS o NEW YORK, NY 10104
212-408-7000
May 5, 2000
SIGNAL APPAREL COMPANY, INC.
500 7th Avenue, 7th Floor
New York, New York 10018
Gentlemen:
Reference is made to the Revolving Credit, Term Loan and Security
Agreement, dated March 12, 1999 (as amended from time to time, the "Credit
Agreement") by and among SIGNAL APPAREL COMPANY, INC. ("Borrower") and GMAC
COMMERCIAL CREDIT LLC, as Agent (in such capacity, "Agent") for the Lenders
("Lenders") parties from time to time to the Credit Agreement. All capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Credit Agreement.
1. The Borrower has advised Lenders that for the fiscal quarter ending
March 31, 2000, its Tangible Net Worth was less than ($71,500,000), the minimum
Tangible Net Worth permitted as of March 31, 2000 under Section 6.5 (Tangible
Net Worth) of the Credit Agreement; (ii) the Current Ratio was less than
0.70:1.00, the minimum Current Ratio permitted as of March 31, 2000 under
Section 6.6 (Current Ratio) of the Credit Agreement; (iii) Working Capital was
less than ($5,500,000), the minimum Working Capital permitted as of March 31,
2000 under Section 6.7 (Working Capital) of the Credit Agreement; and (iv) net
loss, excluding any extraordinary or non-recurring items was greater than the $0
permitted as of March 31, 2000 under Section 6.13(a) of the Credit Agreement. As
a result of such noncompliance, Events of Default have occurred under Section
10.2 of Article X (Events of Default) of the Credit Agreement ("Subject Events
of Default"). Borrowers have requested Lender to waive the Subject Events of
Default, and Lenders hereby waives the Subject Events of Default.
2. Borrower hereby acknowledges, confirms and agrees that all amounts
charged or credited to the Borrower's account as of April 15, 2000 are correct
and binding upon the Borrower and that all amounts reflected to be due and owing
in the Borrower's account as of April 15, 2000 are due and owing without
defense, setoff, offset, recoupment, claim or counterclaim. Furthermore,
Borrower hereby also irrevocably releases and forever discharges Agent and
Lenders and each of Agent's and Lenders' respective affiliated concerns, as well
as all of Agent's and Lenders' respective directors, officers, employees,
shareholders and agents from any and all liabilities, demands, obligations,
causes of action and other claims, of every kind, nature and description, known
and unknown, which Borrower now has or may hereafter have, by reason of any
matter, cause or thing occurred, done, omitted or suffered to be done prior to
the date hereof.
<PAGE>
3. Except as specifically set forth herein, no other changes or
modification to the Credit Agreement are intended or implied and, in all other
respects the Credit Agreement shall continue to remain in full force and effect
in accordance with its terms as of the date hereof. Except as specifically set
forth herein, nothing contained herein shall evidence a waiver or an amendment
by Agents or Lenders of any other provision of the Credit Agreement nor of the
specific provisions referred to above for any other time period.
4. In consideration of the waiver given by Agent and Lenders herein,
Borrower agrees to pay a non-refundable waiver fee to Agent, for the benefit of
Lenders in the amount of $40,000, which fee shall be in addition to any fees,
charges or interest otherwise payable by borrower under the Credit Agreement,
and which fee shall be fully earned as of the date hereof and payment of which
may be effectuated by charging Borrower's loan account.
5. The terms and provisions of this Agreement shall be for the benefit of
the parties hereto and their respective successors and assigns; no other person,
entity or corporation shall have any right, benefit or interest under this
agreement.
6. This Agreement may be signed in counterparts, each of which shall be an
original and all of which taken together constitute one agreement. In making
proof of this Agreement, it shall not be necessary to produce or account for
more than one counterpart signed by the party to be charged.
7. This Agreement sets forth the entire agreement and understanding of the
parties with respect to the matters set forth herein. This agreement cannot be
changed, modified, amended or terminated except in a writing executed by the
party to be changed.
Very truly yours,
GMAC COMMERCIAL CREDIT LLC, as Agent
By: /s/ Wayne Miller VP
-------------------
Acknowledge and Agreed:
Signal Apparel Company, Inc.
By: /s/ Kenneth L. Larsen
---------------------
Title: Controller
----------
Attention: Document Control
Re: Signal Apparel Company, Inc. Form 10-Q
We are aware that our report dated April 26, 2000 on our review of the
consolidated balance sheet of Signal Apparel Company, Inc. and Subsidiaries as
of March 31, 2000, and the related consolidated statements of operations and
cash flows for the three-month period ended March 31, 2000, included in this
Form 10-Q, is incorporated by reference in the following registration
statements:
REGISTRATION NO.
----------------
On Form S-3 No. 333-65851
On Form S-3 No. 333-76671
On Form S-8 No. 333-83281
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not
be considered a part of the registration statement prepared or certified by us
within the meaning of Section 7 and 11 of that Act.
Goldstein Golub Kessler LLP
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF SIGNAL APPAREL COMPANY, INC., FOR THE FISCAL QUARTER ENDED MARCH
31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 123
<SECURITIES> 0
<RECEIVABLES> 529
<ALLOWANCES> 207
<INVENTORY> 12,212
<CURRENT-ASSETS> 14,287
<PP&E> 3,460
<DEPRECIATION> 812
<TOTAL-ASSETS> 49,005
<CURRENT-LIABILITIES> 124,433
<BONDS> 22,874
0
52,293
<COMMON> 535
<OTHER-SE> (150,013)
<TOTAL-LIABILITY-AND-EQUITY> 49,005
<SALES> 38,400
<TOTAL-REVENUES> 38,400
<CGS> 29,328
<TOTAL-COSTS> 29,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,206
<INCOME-PRETAX> (4,431)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,428)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
