SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A (1)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: MARCH 31, 1996
Commission File Number 0-21270
GARMENT GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1270170
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2260 Woodale Drive 55112-4978
Mounds View, MN (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (612) 786-6220
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares, par value $.001 per share
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 at least the past 90 days.
Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 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 [ X ].
The aggregate market value of the common stock held by persons other than
affiliates of the registrant, as of June 12, 1996, is approximately $2,293,627.
The number of shares outstanding of the Registrant's common stock, par
value $.001 per share, as of June 12, 1996 is 3,081,128.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report to Shareholders are
incorporated by reference into Part II; portions of the Registrant's proxy
statement in connection with its 1996 annual meeting of shareholders is
incorporated by reference into Part III.
<PAGE>
Garment Graphics, Inc. (the "Company") hereby amends Item 14 and the
Exhibit Index to amend Exhibit 13 of its Form 10-K for the year ended March 31,
1996.
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
(a) Documents Filed as Part of this Report
(1) Consolidated Financial Statements
Balance Sheets as of March 31, 1996 and 1995*
Statements of Operations for the years ended March 31, 1996, 1995,
and 1994*
Statements of Changes in Shareholders' Equity for the years ended
March 31, 1996, 1995 and 1994*
Statements of Cash Flows for years ended March 31, 1996, 1995,
and 1994*
Notes to Financial Statements*
Report of Independent Accountants*
* Incorporated by reference to the Company's 1996 Annual Report to
Shareholders, attached as Exhibit 13 hereto.
(2) Financial Statement Schedules
Schedule 2 - Valuation and Qualifying Accounts**
Report of Independent Accounts**
(3) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the last quarter of the period
covered by this report.
** Filed with original Form 10-K for year ended March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of
Mounds View, State of Minnesota, on November 14, 1996.
GARMENT GRAPHICS, INC.
(Registrant)
Date: November 15, 1996 By: /s/ R.Neil Hamlin
Chairman and Chief Executive Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------------------------------------------------------------------------------
3.1 Articles of Incorporation of Garment Graphics, Inc., as amended
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4 Reg. No. 33-56472).
3.2 Bylaws of Garment Graphics, Inc. (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-4 Reg. No. 33-56472).
4.1 Form of Stock Certificate (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-4 Reg.
No. 33-56472).
4.2 Form of Warrant Agreement for Class A and Class B Warrant
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4 Reg. No. 33-56472).
4.3 Form of Class A Warrant Certificate (incorporated by reference to
Exhibit 4.3 to the Registrant's Registration Statement on Form
S-4 Reg. No. 33-56472).
4.4 Form of Class B Warrant Certificate (incorporated by reference to
Exhibit 4.4 to the Registrant's Registration Statement on Form
S-4 Reg. No. 33-56472).
4.5 Form of Underwriters' Warrant (incorporated by reference to
Exhibit 4.5 to the Registrant's Registration Statement on Form
S-4 Reg. No. 33-56472).
4.6 Letter Amendment dated April 7, 1995 extending the expiration
date of Class A & B common stock purchase warrants. (Incorporated
by reference to Exhibit 4.6 to the Registrants Annual Report on
Form 10-K for the year ended March 31, 1995.)
10.1 Office/Warehouse Lease Agreement, dated August 31, 1989, with
Everest Investments Limited Partnership relating to space in
Mounds View, Minnesota (incorporated by reference to Exhibit 10.5
to the Registrant's Registration Statement on Form S-4 Reg. No.
33-56472).
10.2 First Amendment, dated June 28, 1991, to Office/Warehouse Lease
Agreement with Everest Investments Limited Partnership.
(incorporated by reference to Exhibit 10.6 to the Registrant's
Registration Statement on Form S-4 Reg. No. 33-56472).
10.3+ The Registrant's 1990 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.7 to the Registrant's Registration
Statement on Form S-4 Reg. No. 33-56472).
10.4+ The Registrant's 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-4 Reg. No. 33-56472).
10.5 Standardized 401(k) Profit Sharing Plan (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration
Statement on Form S-4 Reg. No. 33-56472).
10.6 License Agreement with Inetics, Inc. (incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993).
10.7 License Agreements with United Feature Syndicate, Inc.
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993).
10.8 Amendment to License Agreement with Inetics, Inc. (incorporated
by reference to Exhibit 10.7 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1993).
10.9 Lease Agreement with Berger Transfer relating to warehouse space
at 204 Old Hwy. 8, New Brighton, Minnesota (incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1993).
10.10+ Amendment to Employment Agreement, dated July 1, 1992, with
Robert A. Lucas, amended November 5, 1993 and revised June 11,
1994. (incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the year ended March
31, 1994).
10.11 Profit Share Plan for 1995 (incorporated by reference to Exhibit
10.19 to the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1994).
10.12 Garment Graphics, Inc. 1993 Employee Stock Purchase Plan.
(incorporated by reference to Exhibit 10.23 to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1994).
10.13 Letter amendments to the United Feature Syndicate, Inc. license
agreement assigning all licensing rights to Paws, Incorporated.
(incorporated by reference to Exhibit 10.24 to the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1994).
10.14 First Amendment dated June 29, 1994 to Phone Lease Agreement with
Norstan Financial Services (incorporated by reference to Exhibit
10.1 to the registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994.)
10.15 Agreement to purchase shares of Signet, Inc. dated August 2, 1994
(incorporated by reference to Exhibit 10.2 to the registrants
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994.)
10.16 Letter Amendment, dated July 28, 1994, to Credit Agreement
(incorporated by reference to Exhibit 10.5 to the registrants
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994.)
10.17 Garment Graphics, Inc. 1993 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994).
10.18 Amended and restated Demand Discretionary Line of Credit and Term
Loan Agreement Dated as of August 18, 1994 (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994).
10.19 Letter Amendment, dated September 30, 1994 to Credit Agreement
(incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994).
10.20 Term Promissory Note, dated September 30, 1994 (incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994).
10.21 License Agreement with Times Mirror Magazines, Inc. (incorporated
by reference to Exhibit 10.6 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994).
10.22 Signet, Inc. License Agreement with The University of Notre Dame
Du Lac (incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.23 Letter Amendment dated November 4, 1994 to Paws, Inc. License
Agreement Contract No.: GAR_USA01-01 (incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994).
10.24 Letter Amendment dated November 4, 1994 to Paws, Inc. License
Agreement Contract No.: GAR_USA02-02 (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994).
10.25 Letter Amendment dated November 4, 1994 to Paws, Inc. License
Agreement Contract No.: GAR_USA04-03 (incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report of Form 10-Q
for the quarter ended December 31, 1994).
10.26 Letter Amendment dated December 23, 1994 to Paws, Inc. License
Agreement Contract No.: GAR_USA03-02 (incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1994).
10.27 Renewal Signet, Inc. License Agreement with The University of
Notre Dame Du Lac dated January 1, 1995 (incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1994).
10.28 Attachment B to License Agreement with University of Notre Dame
Du Lac dated May 3, 1995 with Signet, Inc.
10.29 Renewal Revolving Promissory Note in the amount of $9,000,000 in
favor of the Bank, dated June 15, 1995.
10.30 Waiver Letter regarding noncompliance of covenants from the Bank
dated June 15, 1995.
10.31 License Agreement with Warner Bros. Consumer Products (License
#5653-WBLT).
10.32 License Agreement with Warner Bros. Consumer Products (License
#5570-WBLT/CLC).
10.33 License Agreement with the Bradford Exchange, Ltd. dated June 1,
1995 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995).
10.34 Second Amended and Restated Demand Discretionary Line of Credit
and Term Loan Agreement dated as of November 13, 1995.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995).
10.35 Revolving Promissory Note, dated as of November 13, 1995 in favor
of National City Bank. (Incorporated by reference to Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995).
10.36 Revolving Promissory Note, dated as of November 13, 1995 in favor
of NBD Bank. (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1995)
10.37 Term Promissory Note, dated as of November 13, 1995 in favor of
National City Bank. (incorporated by reference to Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995)
10.38 Garment Graphics, Inc. Amended and Restated Security Agreement
dated as of November 13, 1995 (incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995).
10.39 Signet, Inc. Guaranty, dated as of November 13, 1995.
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995)
10.40 Signet, Inc. Security Agreement, dated as of November 13, 1995.
(incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1995)
10.41 Letter agreement between Garment Graphics, Inc. and Cliff Engle
Ltd., dated as of November 13, 1995. (incorporated by reference
to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1995)
10.42+ Second Amendment to Employment Agreement, dated May 28, 1996,
with Robert A. Lucas, amended November 5, 1993 and revised June
11, 1994.*
10.43 Factoring and Revolving Inventory Loan and Security Agreement
dated April 12, 1996 with Heller Financial, Inc.*
10.44 Addendum to factoring and Revolving Inventory Loan and Security
Agreement dated April 12, 1996.*
10.45 Revolving Note in the amount of $4,000,000 dated April 12, 1996.*
10.46 Signet, Inc. Corporate Guaranty dated April 12, 1996.*
10.47 Guarantor's Security Agreement dated April 12, 1996.*
10.48 Guaranty of Validity April 12, 1996.*
13 Registrant's Annual Report to Shareholders for fiscal 1996.**
21 Garment has one wholly owned subsidiary Signet, Inc., a Minnesota
corporation.
23 Consent of McGladrey & Pullen, LLP.*
24 Power of attorney from certain Directors and Officers.*
+ Indicates a management contract or compensatory plan or arrangement
required to be filed as an Exhibit to this Form 10-K.
* Previously filed.
** Filed herewith.
Garment Graphics, Inc.
Annual Report
1996
<PAGE>
ABOUT YOUR COMPANY
Throughout our 20 year history, a basic tenet of Garment Graphics' business
strategy has been to service customers with innovative, quality garments
delivered on time at competitive prices. Our success is attributable to the
pride we take in our Company, our work and our performance, the confidence our
customers have in us and the respect we have for each individual making a
valuable contribution to the Company.
Garment is licensed to replicate the images of top collegiate and
professional sports teams as well as well known, highly visible cartoon
characters in a variety of sport, action and lifestyle themes. The Company's
products, which include embellished tee shirts, sweatshirts, denim shirts, hats,
jean jackets and shorts, are sold to some of the finest retailers, mass
merchandisers, catalog distributors and corporations throughout the United
States.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial statements,
related notes and other financial information included herein.
INCOME STATEMENT DATA
(in thousands, except per share data)
Year Ended March 31,
1996 1995 1994 1993 1992 1991
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 28,719 $ 33,588 $ 30,807 $ 18,543 $ 21,847 $ 13,793
Cost of Sales 23,788 26,824 22,666 14,968 17,249 10,101
Selling and Administrative Expenses 5,833 6,494 6,481 3,599 3,245 2,520
Net Income (Loss) (1,062) (159) 806 (231) 670 593
Earnings (Loss) Per Common Share $ (0.35) $ (0.05) $ 0.27 $ (0.09) $ 0.26 $ 0.24
Weighted Average Common and Common
Equivalent Shares Outstanding 3,071 3,043 3,035 2,474 2,615 2,521
BALANCE SHEET DATA
(in thousands)
As of March 31,B7
1996 1995 1994 1993 1992 1991
---------- ----------- ---------- ---------- ---------- ----------
Working Capital $ 1,636 $ 2,843 $ 3,059 $ 1,609 $ 1,570 $ 1,013
Total Assets 13,356 13,873 9,004 6,682 5,656 3,378
Note Payable - Bank $ 5,637 $ 6,014 $ 2,198 $ 2,622 $ 2,024 $ 464
Long Term Obligations 62 154 230 293 310 235
Shareholders' Equity 2,768 3,819 3,761 2,149 2,055 1,385
</TABLE>
<PAGE>
TO OUR SHAREHOLDERS
For Garment Graphics Fiscal 1996 was a period of transition and a basis for
some optimism about Fiscal 1997. First half results were buffeted by lingering
industry weakness caused by a soft retail apparel market coupled with the
slowdown in licensed athletic apparel. Significant capacity was removed from the
market due to competitors' downsizing, consolidating or closing their doors.
Garment Graphics survived, in spite of external challenges and internal issues
which impacted the Company throughout the year.
Although our strategy for expanding Garment Graphics' customer base and
improving our internal systems began to take shape in Fiscal 1996, it was a
difficult and disappointing year. Total sales dropped 15 percent to $28.7
million against the backdrop of the worst pricing environment in industry
history. Even though costs were trimmed, in part by reducing overhead and
lowering inventories significantly, we still reported a net loss of $1,062,418.
That is totally unacceptable. Yet, as difficult as Fiscal 1996 was from a
financial standpoint, we believe we laid the groundwork for making Garment
Graphics a long-term winner. An important accomplishment was the completion of
the most extensive strategic analysis and business planning in the Company's
history. This analysis identified Garment Graphics' competitive strengths, which
will allow us to focus on those areas where we could bring to bear the greatest
competitive advantage. We are building on Garment Graphics' strengths in
creative art utilizing our stable of desirable licenses, capitalizing on
production efficiencies and targeting new departments and new customers.
The new computer system installation was finally completed, allowing for
improved information flow, inventory control and efficient management of
day-to-day operations. This new system also provides more options to communicate
with constituents via EDI (electronic data interchange). The art department has
also been upgraded with additional computer equipment and training. As a result,
we can be increasingly responsive to our customers and operate more cost
effectively.
Seasonal employees have been engaged, providing a stable yet flexible work
force rather than strictly utilizing temporaries as we have in the past for the
peaks throughout the year. This has had a dramatic positive impact on labor
costs and quality.
Inventory levels were slashed, negatively impacting margins; but this also
eliminated much of the carrying costs and allows for better inventory management
going forward. Our Quality Assurance team has set high standards for incoming
and outgoing product and institutes regular testing to assure compliance.
Meaningful top-line sales growth will be the key to winning for the
long-term. That means broadening our customer base, particularly in the retail
and corporate and premium markets, and stepping up our sales and marketing
efforts while selectively offering meaningful licenses to our customers.
In 1996, we entered into a licensing agreement to represent the National
Football League (NFL) in the women's market working with Cliff Engle, Ltd. This
license provides Garment Graphics yet another opportunity to offer its customers
professional sports and major cartoon characters (Looney Tunes, Snoopy and the
Peanuts Gang, Garfield), along with a full complement of collegiate and
non-royalty proprietary lines.
Improving the bottom line and shareholder value will require attention to
detail and renewed health in the retail markets. The consolidation of our
facilities under one roof by year end will eliminate duplication, lower overhead
and generally improve operating efficiencies. The retail environment will be an
ongoing concern, although we have already seen some recovery, as indicated by
our fourth quarter results. Our backlog is strong.
We appreciate the support, concerns and patience of all our shareholders as
we pursue our strategy --- to serve our customers with innovative first quality
products delivered on time, while improving our competitiveness and developing
our employees' skills. Most importantly, we have survived in the wake of the
toughest times in the retail industry and utilized this time to revamp our
internal controls and procedures. In the midst of this recovery, a new two year
bank line was secured in April 1996, providing us with added liquidity to adjust
to our operating environment. We are emerging a much stronger company, leaner,
more flexible and ready to aggressively capitalize on market opportunities.
/s/ R. Neil Hamlin /s/ Barbara S. Remley
R. Neil Hamlin Barbara S. Remley
Chairman President and Chief Operating Officer
Chief Executive Officer
June 6, 1996
<PAGE>
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's statements of
operations:
Fiscal Year Ended March 31,
1996 1995 1994
------------ ------------ -----------
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Sales 82.8 79.9 73.6
------------ ------------ -----------
Gross Profit 17.2 20.1 26.4
Selling and Administrative expenses 20.3 19.3 21.0
------------ ------------ -----------
Income (Loss) from Operations (3.1 ) 0.8 5.4
Interest Expense 2.7 1.5 1.2
------------ ------------ -----------
Income (Loss) Before Income Taxes (5.8 ) (0.7 ) 4.2
Income Tax Expense (Benefit) (2.1 ) (0.2 ) 1.6
============ ============ ===========
Net Income (Loss) (3.7 )% (0.5 )% 2.6 %
============ ============ ===========
Fiscal 1996 Compared To Fiscal 1995
Net Sales
Net sales for the fiscal year ended March 31, 1996, decreased 14.5% to
$28,719,367 from $33,588,232 for the fiscal year ended March 31, 1995. The
decrease in sales was the result of a 24.5% reduction in sales during the first
nine months of the year. Sales for the fourth quarter actually increased 39.2%
over the fourth quarter of the prior year. The decrease resulted from soft
retail, a sales mix change and the elimination of dual royalty sales for
characters in conjunction with the `Major League Baseball Association' and the
`National Football League'. Soft retail and a transition to basic product has
resulted in a significant decrease in the per unit sell price as margins
tightened and customers ordered more tee shirts and less fleece. During the
first nine months of the year, while sales dollars decreased significantly,
units shipped decreased only 1.5%. The Company has since offset the dollar
decreases by the sales of generic character product, as demonstrated by fourth
quarter volume increases. The Company's character licensed product offerings
include `Looney Tunes', `Peanuts' and `Garfield'.
Gross Profit
Gross profit decreased to $4,930,874, or 17.2% of net sales, in Fiscal 1996
compared to $6,764,017, or 20.1% of net sales, for the comparable period in
Fiscal 1995. The decrease in gross profit resulted from tighter pricing due to a
highly competitive marketplace and the need to accept tighter margins to reduce
excess inventory balances. Inventory balances were reduced from a high of
approximately $9,500,000 as of June 1995 to $6,097,402 as of March 31, 1996. The
excess inventory in fiscal 1995 was due to three factors. First, during fiscal
1995, the Company anticipated an increase in sales in fiscal 1996, and thus,
increased inventory levels. However, rather than increasing, sales decreased in
fiscal 1996 leaving higher than planned inventory levels. Second, during fiscal
1995, the Company had certain computer problems which resulted in making excess
inventory purchases. Although the excess purchases were in basic products such
as T-shirts and fleece, the Company was not able to use such excess products as
had been anticipated because of the lower than expected demand for
back-to-school fleece sales resulting from the unusually warm late summer and
early fall. Finally, the Company had an excess inventory level of baseball
shirts due primarily to the baseball strike. The sales mix shift to lower unit
sell prices reduced the Company's margins, especially during the quarters ended
June 30th and September 30th, which have historically been the Company's most
profitable. Gross margins improved to 23.6% during the Company's fourth quarter
due to lower raw material costs as a percentage of net sales.
Selling and Administrative Expenses
Selling and administrative costs decreased in dollars to $5,833,148 for
Fiscal 1996 compared to $6,494,123 for the comparable period in Fiscal 1995.
However, selling and administrative costs as a percent of net sales increased
during this same period to 20.3% from 19.3% of net sales the prior year. Sales
decreased, while related percentages increased, primarily due to the Company's
lower sales volume. During the year, the Company cut overhead expenses. As a
result of these cuts, the administrative and fixed portion of selling expenses
decreased in dollars and as a percentage of net sales in comparison to the prior
year.
Interest Expense
Interest expense increased by $260,950 for the fiscal year ended March 31,
1996, to $760,718 from $499,768 for fiscal 1995. This increase was due to: i)
higher outstanding loan balances in fiscal 1996 (average outstanding borrowings
of $6,468,925) compared to fiscal 1995 (average outstanding borrowings of
$4,897,538) which were related to higher asset levels during fiscal 1996, ii)
higher interest rates on outstanding loans (average rate of 10.56% for fiscal
1996 compared to an average rate of 9.22% for fiscal 1995), which high rates
were triggered by the Company's failure to comply with certain loan covenants
regarding Working Capital, Adjusted Tangible Net Worth, and ratio of Total
Liabilities to Tangible Net Worth, and iii) the payment of approximately $33,000
in fees to the Company's lenders as consideration for waivers of certain loan
covenants as described above. Increased borrowings were used to fund the
increase in inventories and operating losses.
Net (Loss) Income
Net loss increased $903,494 to a net loss of $1,062,418 for Fiscal 1996,
from a net loss of $158,924 for Fiscal 1995. The increased loss is mainly due to
soft retail apparel markets requiring reduced prices during the period when the
Company needed to reduce outstanding inventory balances and unfavorable product
mix to lower priced product.
Fiscal 1995 Compared To Fiscal 1994
Net Sales
Net sales for the fiscal year ended March 31, 1995, increased 9.0% to $33.6
million from $30.8 million for the fiscal year ended March 31, 1994. The
increase resulted primarily from new customer accounts and an expanded product
base, including new licensed product offerings. New customer accounts are
largely with large national retailers. The Company's licensed product offerings
now include `Looney Tunes', `Peanuts', `Garfield', `Outdoor Life', collegiate
and cross license agreements (i.e., a character in conjunction with a collegiate
or professional sports team) with the `Major League Baseball Association,' the
`National Football League' and select colleges.
Gross Profit
Gross profit decreased to $6.8 million, or 20.1% of net sales for Fiscal
1995 compared to $8.1 million, or 26.4% of net sales for the comparable period
in Fiscal 1994. The decrease in gross profit resulted from tighter pricing due
to a highly competitive marketplace, operating inefficiencies and a $300,000
inventory adjustment.
Increased competition precipitated by the Major League Baseball and
National Hockey League strikes created additional margin pressure. This was
exasperated by a sluggish retail environment and rising material costs due to a
cotton shortage. Blank garment quality issues impacted the timely flow of goods
and created scheduling problems requiring overtime and the use of more temporary
employees to meet shipping deadlines. The evolving changes in product mix
required the use of more contract printers and embroiderers. While we expect
adjusting to product mix changes and competitive challenges to continue in the
upcoming year, significantly improved product quality control systems should
result in better flow of goods and improved production scheduling.
During the year, the Company outgrew its computer system before the new
system was fully functional. As a result, hardware and software problems
negatively impacted production efficiencies and inventory balances. A new highly
efficient computer system is being installed, with Phase I already completed,
which is significantly increasing controls over inventory management.
Selling and Administrative Expenses
Selling and administrative expenses remained consistent with the prior year
at $6.5 million. Selling and administrative expenses decreased as a percentage
of sales to 19.3% for the year ended March 31, 1995 from 21.0% for the
comparable prior year. The lower percentage in selling and administrative
expenses resulted from lower commission expense from the sale of products to a
few large retail accounts through the Company's internal sales force which were
historically sold through an external commissioned sales force. This decrease
was offset by an increase in royalty and computer expenses. More royalties were
paid due to increased sales of licensed product. The higher level of computer
expenses were incurred to help support the existing system as the Company
converted to a new computer system.
Interest Expense
Interest expense increased by $136 thousand for the fiscal year ended March
31, 1995, to $500 thousand from $364 thousand for Fiscal 1994. Average
outstanding borrowings and the accompanying rates increased during 1995 as
compared to 1994. The increased borrowings were used to fund the increase in
accounts receivable and inventories.
Net (Loss) Income
Net income decreased $965 thousand to a net loss of $159 thousand for
Fiscal 1995, from $806 thousand for Fiscal 1994. The decrease is due mainly to
operating inefficiencies and an unfavorable shift in product and customer mix
which resulted in sales of lower margin products as discussed in gross profit.
Liquidity and Capital Resources
Working capital at March 31, 1996 decreased $1,207,380 from the prior year.
Working capital was required in 1996 to fund the losses incurred by the Company.
Current assets decreased $582,756 to $12,160,527 as of March 31, 1996, from
$12,743,283 as of March 31, 1995. The decrease relates to a $2,556,872 decrease
in inventories which was offset by a $1,913,538 increase in receivables. Current
liabilities increased by $624,624 to $10,524,953 as of March 31, 1996, from
$9,900,329 as of March 31, 1995. The increase relates to a $648,644 increase in
accounts payable.
The Company maintains substantial blank garment inventory to be able to
deliver products promptly to its customers. Historically higher inventories at
this time of year were attributable to a planned build-up in anticipation of
increased sales in the first and second quarters; however, this year efforts
during the past year to reduce inventory balances resulted in a lower balance as
of March 31, 1996. The increase in receivables relates to higher sales levels
for the months of February and March and longer dating requirements by new
customers.
Net cash provided by operating activities for the year ended March 31,
1996, was $623,023. The net loss of $1,062,418 and a $1,913,538 increase in
trade receivables were the primary uses of funds in 1996. These items were
offset by a $2,556,872 lower inventory level and a $1,006,354 increase in
accounts payable and accrued expenses.
Net cash used in investing activities was $234,000, primarily from a
purchase of an intangible asset. Net cash used in financing activities was
$539,846 and relates to payments made on long-term borrowings and on the bank
note.
The Company satisfied its working capital needs with short term borrowings
and internally generated funds. At March 31, 1996 and 1995, there were
$5,637,020 and $6,014,000, respectively, in notes payable-bank. Effective April
15, 1996, the Company refinanced the revolving credit facility. The prior
facility and the new facility both provide for a maximum borrowing limit of
$9,000,000. This limit is based on eligible accounts receivable and inventory
levels, with a maximum level of $4,000,000 on inventory. Under the new facility
the interest rate floats with changes in the bank's base rate, plus one percent
in excess of that rate. At March 31, 1996, the Company had available
approximately $488,000 based on its defined borrowing base. Certain financial
covenants relating to current ratio, working capital, net worth, and
debt-to-equity ratio are required. The bank note is secured by receivables and
inventory.
Capital expenditures for Fiscal 1996 were $34,000 versus $244,855 for
Fiscal 1995. The Fiscal 1996 and 1995 amounts consisted primarily of production
and computer equipment. The Company is not capital intensive; however,
appropriate expenditures for necessary equipment and property to efficiently
produce high quality product are made when necessary.
On August 2, 1994, the Company issued 60,000 shares of common stock in
exchange for all the outstanding common stock of Signet. The Company has agreed
to pay the difference in cash between the market price of the Company's common
stock and $3.375 if the market price should be less than $3.375 on December 31,
1996. Under the agreement, market price is defined as the average between the
bid and ask prices of the Company's common stock. Assuming the market price, as
defined, is $0.75 per share on December 31, 1996, the Company would be required
to make a payment of $157,500 by January 15, 1997. The Company is currently
exploring alternatives to fund this payment or negotiate a payment plan. There
is no assurance that such efforts will be successful.
The Company believes that its borrowings under existing credit facilities
and internally generated funds will be adequate for its liquidity and capital
needs at least through Fiscal 1997 based on current sales and margins. Should
sales levels grow significantly, the Company will require additional vendor
support and/or funds generated external of operations. Additional debt or
capital may be required to meet increased operational levels and there is no
assurance that such capital will be available.
Inflation
The Company believes the impact of inflation has had a negligible impact on
the Fiscal 1996 financial performance of Garment. It is anticipated that
inflation will have no material impact on Fiscal 1997 financial results.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which establishes new standards for stock-based employee
compensation plans. The statement establishes a fair-value-based method of
accounting for stock-based compensation plans and encourages, but does not
require, entities to adopt that method in place of APB Opinion No. 25,
Accounting for Stock Issued to Employees. Entities that elect to continue under
Opinion No. 25 must disclose pro forma net income and earnings per share for all
years presented as if Statement No. 123 had been adopted.
The Company does not intend to adopt Statement No. 123 in measuring
expense, however it will present the proforma disclosures beginning in Fiscal
1997, and those pro forma amounts will likely reflect higher compensation
expense than the amounts shown in future statements of operations.
Statement of Financial Accounting Standards No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of is
not expected to have a material effect on the financial position of the Company.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 20,301 $ 171,124
Receivables:
Trade, less allowances, 1996-$365,024 and
1995-$369,982 (Notes 2 and 4) 4,682,398 2,768,860
Income tax 507,052 281,743
Inventories (Note 2) 6,097,402 8,654,274
Prepaid expenses 338,374 402,282
Deferred tax assets (Note 5) 515,000 465,000
------------ ------------
Total current assets 12,160,527 12,743,283
------------ ------------
Property and Equipment, at cost (Note 3)
Equipment and furniture 1,813,171 1,703,832
Leasehold improvements 143,451 142,753
------------ ------------
1,956,622 1,846,585
Accumulated depreciation (1,159,079) (938,074)
------------ ------------
Net property and equipment 797,543 908,511
------------ ------------
NonCurrent Assets
Intangibles 377,187 197,437
Other 20,426 23,847
------------ ------------
Total noncurrent assets 397,613 221,284
------------ -------------
Total assets $ 13,355,683 $ 13,873,078
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note payable -- bank (Note 2) $ 5,637,020 $ 6,014,000
Current portion -- long term debt (Note 3) 188,580 181,837
Accounts payable 3,449,472 2,800,828
Accrued expenses
Compensation 169,577 241,455
Royalties 679,754 248,169
Other 400,550 414,040
------------ ------------
Total current liabilities 10,524,953 9,900,329
------------ ------------
Long Term Debt, less current maturities (Note 3) 62,267 153,525
------------ ------------
Commitments and Contingencies (Notes 2 and 3)
Shareholders' Equity (Notes 6 and 8)
Preferred stock, par value $ .01 per share;
authorized 1,000,000 shares; no shares issued - -
Common stock, par value $ .001 per share;
authorized 50,000,000 shares; issued 3,075,186 and
3,066,407 shares 3,075 3,066
Additional paid - in capital 1,700,155 1,688,507
Retained earnings 1,065,233 2,127,651
------------ ------------
Total shareholders' equity 2,768,463 3,819,224
------------ ------------
Total liabilities and shareholders' equity $ 13,355,683 $ 13,873,078
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales (Note 4) $ 28,719,367 $ 33,588,232 $ 30,807,563
Cost of Sales 23,788,493 26,824,215 22,665,773
------------ ------------ ------------
Gross profit 4,930,874 6,764,017 8,141,790
Selling and Administrative Expenses 5,833,148 6,494,173 6,480,600
------------ ------------ ------------
Income (loss) from operations (902,274) 269,844 1,661,190
Miscellaneous Expense 9,426 - 1,684
Interest Expense 760,718 499,768 363,952
------------ ------------ ------------
Income (loss) before income taxes (1,672,418) (229,924) 1,295,554
------------ ------------ ------------
Income Tax Expense (Benefit) (Note 5) (610,000) (71,000) 490,000
============ ============ ============
Net income (loss) $ (1,062,418) $ (158,924) $ 805,554
============ ============ ============
Earnings (Loss) Per Common Share $ (0.35) $ (0.05) $ 0.27
============ ============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 3,071,430 3,042,618 3,035,407
============ ============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended March 31, 1996, 1995 and 1994
Common Stock Additional
-------------------------------- Paid - In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1993 2,385,024 $ 2,385 $ 665,644 $ 1,481,021 $ 2,149,050
Issuance of common stock
(Note 8) 605,147 605 773,630 - 774,235
Issuance of common stock
upon exercise of Class B
Warrants (Note 8) 10,748 11 32,233 - 32,244
Net income - - - 805,554 805,554
----------- ----------- ----------- ----------- -----------
Balance, March 31, 1994 3,000,919 $ 3,001 $ 1,471,507 $ 2,286,575 $ 3,761,083
Issuance of common stock for
acquisition of Signet, Inc.
(Note 8) 60,000 60 202,440 - 202,500
Issuance of common stock for
employee stock purchase
plan (Note 7) 5,488 5 14,560 - 14,565
Net loss - - - (158,924) (158,924)
----------- ------------ ----------- -------- --------
Balance, March 31, 1995 3,066,407 $ 3,066 $ 1,688,507 $ 2,127,651 $ 3,819,224
Issuance of common stock for
employee stock purchase
plan (Note 7) 8,779 9 11,648 - 11,657
Net loss - - - (1,062,418) (1,062,418)
----------- ----------- ----------- ---------- ----------
Balance, March 31, 1996 $ 3,075,186 $ 3,075 $ 1,700,155 $ 1,065,233 $ 2,768,463
=========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended March 31, 1996 1995 1994
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (1,062,418) $ (158,924) $ 805,554
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 241,255 266,174 208,870
Loss on sale of property and equipment 9,501 - 1,684
Deferred income taxes (50,000) (137,000) (103,000)
Changes in certain assets and liabilities:
Trade receivables (1,913,538) (228,418) (1,292,129)
Inventories 2,556,872 (3,691,323) (901,396)
Prepaid expenses and other assets 60,306 (266,913) (17,013)
Accounts payable and accrued expenses 1,006,354 1,217,820 1,026,965
Income taxes receivable/payable (225,309) (406,308) 237,751
------------ ----------- -----------
Net cash provided by (used in) operating activities 623,023 (3,404,892) (32,714)
------------ ----------- -----------
Cash Flows From Investing Activities
Acquisition of property and equipment (34,000) (244,855) (317,356)
Proceeds on sale of property and equipment - - 8,553
Purchase of intangible asset (200,000) - -
------------ ----------- -----------
Net cash used in investing activities (234,000) (244,855) (308,803)
------------ ----------- -----------
Cash Flows From Financing Activities
Issuance of common stock - - 806,479
Principal payments on long-term borrowings (162,866) (214,373) (143,868)
Proceeds from long-term borrowings - 110,000 126,000
Net borrowings (payments) on bank note (376,980) 3,816,000 (423,762)
------------ ----------- -----------
Net cash provided by (used in) financing activities (539,846) 3,711,627 364,849
------------ ----------- -----------
Increase (decrease) in cash (150,823) 61,880 23,332
Cash
Beginning 171,124 109,244 85,912
------------ ----------- -----------
Ending $ 20,301 $ 171,124 $ 109,244
============ =========== ===========
Supplemental disclosures of cash flow information
Cash paid (refunded) during the year for:
Interest $ 748,374 $ 469,809 $ 356,268
Income taxes (334,694) 472,308 355,249
Supplemental schedule of noncash investing and
financing activities
Capital lease obligations 78,351 20,585 -
Issuance of shares for acquisition of Signet - 202,500 -
Issuance of shares for employee stock purchase plan 11,656 14,565 -
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Garment Graphics, Inc. is a supplier of decorated sportswear serving
individual, corporate, retail and catalog customers on a national basis.
Credit Policy. The Company grants trade credit based on credit terms established
by the Company's management and consistent with industry standards.
Revenue Recognition Policy. Sales of the Company's product are recognized at the
point of shipment.
Inventories. Inventories are valued at the lower of cost (first-in, first-out
method) or market. Inventory consists almost entirely of raw materials.
Consolidation Policy. The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary Signet, Inc. Significant
intercompany transactions are eliminated in consolidation.
Fair value of financial instruments. At March 31, 1996, the Company adopted the
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments.
The fair value of the Company's notes payable-bank and long-term debt is
estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar terms with similar collateral requirements.
The cost recorded approximates fair market value at March 31, 1996.
Depreciation and Amortization. Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method based
on the estimated useful lives of individual assets over the following periods:
Equipment and furniture 3-7 years
Leasehold improvements 7 years
Intangibles 10 years
Accumulated amortization resulting from intangible assets is $25,313 and
$5,063 at March 31, 1996 and 1995, respectively. The Company reviews its
intangibles quarterly to determine potential impairment by comparing the
carrying value of the intangibles with expected future net cash flows provided
by operating activities of the business. Should the sum of the expected future
net cash flows be less than the carrying value, the Company would determine
whether an impairment loss should be recognized. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value of the business. Fair value will be determined based on appraised market
value. To date, management has determined that no impairment of intangibles
exists.
Depreciation expense includes amortization of assets recorded as capital
leases.
Intangibles. Intangible assets include the excess of cost over net book value
relating to the Signet, Inc. acquisition in fiscal 1995 and cash payments
relating to an operating agreement for certain product licenses through March
31, 2000.
Royalties. Royalties are accrued when the related licensed garments are shipped.
Additionally, the Company periodically reviews its royalty agreements which
contain guaranteed minimum payments and accrues the amount of the guaranteed
minimum royalties not expected to be met by sales of the licensed product.
Income Taxes. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
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.
Earnings Per Share. Earnings per share of common stock are computed by dividing
net income (loss) by the weighted average number of shares of common stock and
common stock equivalents (stock options/warrants) outstanding during each period
in which they have a dilutive effect.
Recently Issued Accounting Standard. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, which establishes new standards for
stock-based employee compensation plans. The statement establishes a
fair-value-based method of accounting for stock-based compensation plans and
encourages, but does not require, entities to adopt that method in place of APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that elect to
continue under Opinion No. 25 must disclose pro forma net income and earnings
per share for all years presented as if Statement No. 123 had been adopted.
The Company does not intend to adopt Statement No. 123 in measuring
expense, however it will present the proforma disclosures beginning in Fiscal
1997, and those pro forma amounts will likely reflect higher compensation
expense than the amounts shown in future statements of operations.
NOTE 2 - NOTE PAYABLE - BANK
Note Payable - Bank, in the amount of $5,637,020 and $6,014,000 represents
the balance owed at March 31, 1996 and 1995, respectively, on a revolving credit
facility with the maximum principal amount of $9,000,000. The maximum borrowing
base is computed on eligible accounts receivable and inventory levels with the
inventory level limited to $4,000,000. The principal is due on demand and the
interest rate floats at one percent in excess of the bank's base rate (9.25 % at
March 31, 1996). The note was paid in full in connection with the agreement
described below.
Effective April 12, 1996, the Company entered into a two-year agreement
with Heller Financial, Inc. (Heller) for the purpose of refinancing existing
bank debt and to provide additional working capital and credit protection
against customer bankruptcies in the retail industry through a credit and
receivable factoring program.
Under the terms of the agreement, Heller will provide the Company with up
to $9,000,000 via a Credit Facility. The facility provides for advances on
receivables of up to 85%, loans against eligible inventory of up to 55%, a
letter of credit facility of up to $1,000,000 and a 120 day $500,000 overadvance
facility through August 1, 1996, secured by income taxes receivable. Within the
Credit Facility, the loans against inventory will have a limit of up to
$4,000,000. The interest rate on the Credit Facility will be at the National
Bank Reference Rate or "Prime Rate" plus one percent per annum. The prime rate
at April 12, 1996, was 8.25%. The Company must meet certain financial covenants
relating to current ratio, working capital, net worth and debt to equity ratio.
In addition, the Company is restricted on paying dividends and would be required
to pay a termination fee if the Company were to cancel the agreement prior to
the expiration of the agreement.
As part of the Credit Facility, Heller will provide its credit and
collection administration services for a fee and agree to purchase substantially
all of the Company's trade accounts receivable. Heller will assume the bad debt
credit risk on approved accounts.
NOTE 3 - LONG TERM DEBT AND LEASES
Long term debt at March 31 consisted of the following:
1996 1995
--------- ----------
Note payable due in monthly installments of
$6,000 through August 1997, secured by
equipment. Interest rate floats at 3/4%
above the prime rate. $ 107,000 $ 179,000
Capitalized leases payable in 36-60 monthly
installments to 1997, including interest.
Secured by property and equipment. 143,454 151,436
Other 393 4,926
--------- ----------
250,847 335,362
Less current maturities 188,580 181,837
--------- ----------
$ 62,267 $ 153,525
========= ==========
Scheduled maturities of long term debt at March 31, 1996, including capital
lease obligations, are as follows: 1997-$188,580; 1998-$26,992; 1999-$20,679;
and 2000-$14,596.
The Company is the lessee of certain property and equipment under capital
leases expiring in various years through 2000. The Company also leases
facilities and equipment under operating leases. The facility leases are
non-cancelable leases expiring in January 1997, with an option to renew at the
end of the lease term.
Future minimum lease payments and non-cancelable lease payments for capital
and operating leases at March 31, 1996, are as follows:
Capital Operating
------------ -------------
Years ending March 31:
1997 $ 89,728 $ 364,819
1998 30,294 -
1999 22,462 -
2000 14,974 -
----------- ------------
$ 157,458 $ 364,819
============
Less amount representing interest 14,004
-----------
Present value of minimum capital
lease payments $ 143,454
===========
The total gross value of assets recorded under capital leases was $749,091
and $677,763 at March 31, 1996 and 1995, respectively, with related accumulated
amortization of $518,639 and $418,222, respectively.
Rent expense for the years ended March 31, 1996, 1995 and 1994 was
$457,711, $475,983, and $375,340, respectively.
NOTE 4 - MAJOR CUSTOMER INFORMATION
The Company's operations are conducted within one business segment. The
following table sets forth, for the period indicated, the net recurring sales
and accounts receivable with each customer of the Company whose sales
represented in excess of 10% of the Company's revenues.
Total percentage
Percentage of gross of gross sales for
sales for each customer the three customers
----------------------- -------------------
For the year ended December 31,
1996 17%, 10%, and 6% 33%
1995 14%, 13%, and 15% 43%
1994 21%, 22%, and 0% 43%
Accounts receivable related to these customers is 32% and 30% of total
accounts receivable as of March 31, 1996 and 1995, respectively.
NOTE 5 - INCOME TAXES
Net deferred tax assets consist of the following components as of March 31,
1996 and 1995:
Deferred tax assets 1996 1995
--------- ---------
Receivable allowances $ 140,000 $ 142,000
Inventory allowances 245,000 291,000
Nondeductible accruals for compensation 25,000 53,000
Loss carryforwards 137,000 -
--------- ---------
Deferred tax asset $ 547,000 $ 486,000
--------- ---------
Deferred tax liabilities
Prepaid royalties $ 10,000 $ -
Property and equipment 22,000 21,000
-------- ---------
Deferred tax liability $ 32,000 $ 21,000
-------- ---------
Net deferred tax asset $ 515,000 $ 465,000
======== =========
No valuation allowance for the net deferred tax asset was necessary at
March 31, 1996 or 1995. At March 31, 1996, the Company had net operating loss
carryforwards totaling $240,000 and $924,000 for federal and state taxes,
respectively, which will expire in 2011.
The following summarizes the components of the income tax (benefit)
expense:
1996 1995 1994
---- ---- ----
Currently payable (receivable)
- Federal $ (565,000) $ 50,000 $ 518,154
- State 5,000 16,000 74,846
Deferred income taxes (50,000) (137,000) (103,000)
---------- --------- ---------
Provision (benefit) for income taxes $ (610,000) $ (71,000) $ 490,000
---------- --------- ---------
A reconciliation of the statutory income tax (benefit) rate to the
effective tax rate appears below:
1996 1995 1994
---- ---- ----
Statutory U.S. rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit (3.5)% - 3.2
Other 1.0% 3.1 0.6
----- ---- ----
Effective tax rate (36.5)% (30.9)% 37.8%
----- ----- ----
NOTE 6 - SHAREHOLDERS' EQUITY
In November 1992, the Board of Directors adopted the Garment Graphics, Inc.
1992 Stock Option Plan (the "1992 Plan") which provides for the granting of
options for 350,000 shares of the Company's common stock. In May 1994, the Board
of Directors increased the options available under the Plan to 450,000 shares
which was approved by the shareholders at the Annual Meeting in August, 1994.
Under the 1992 Plan, options are granted at prices determined by the Board of
Directors but not less than 100 percent of the fair market value at the date of
the grant. The options may be either incentive stock options or non qualified
options. The stock options are exercisable over a period determined by the Board
of Directors, but no longer than ten years after the date they are granted. At
March 31, 1996, 20,000 options were available for the granting of additional
options. In June 1995, the Company granted 263,000 options to employees which
are exercisable at $1.50 - $1.65, and canceled 65,000 options which were
exercisable at $3.063 - $3.13 per share.
The Company previously reserved 350,000 shares of common stock for issuance
under an incentive stock option plan established in 1990 (the "1990 Plan"). All
options available under the 1990 Plan have been granted.
Common stock shares issued upon exercise of any of the stock options are
classified as restricted securities unless registered pursuant to the Securities
Act of 1933 as amended.
Information with respect to the stock options are summarized as follows:
Incentive Stock Options Non-Qualified Options
-------------------------- ---------------------
Shares Price Range Shares Price Range
----------- ------------- --------- -----------
Outstanding at March 31, 1993 103,400 $1.625 - $4.00 - -
Granted 129,000 3.75 36,000 $3.06
Canceled (10,000) 2.38 - -
-------- -------
Outstanding at March 31, 1994 222,400 1.625 - 4.00 36,000 3.06
Granted 51,000 2.875 - 3.125 - -
Canceled (9,000) 3.75 - -
-------- -------
Outstanding at March 31, 1995 264,400 1.625 - 4.00 36,000 3.06
Granted 263,000 1.50 - 1.65 - -
Canceled (65,000) 3.063 - 3.13 - -
-------- -------
Outstanding at March 31, 1996 462,400 $1.50 - $4.00 36,000 $3.06
======== =======
Options to purchase 220,400, 139,400 and 63,400 shares were exercisable at
March 31, 1996, 1995, and 1994, respectively.
NOTE 7 - EMPLOYEE BENEFIT PLANS
401(k) Plan
The Company has a plan pursuant to Section 401(k) of the Internal Revenue
Code, whereby participants may contribute a percentage of compensation, but not
in excess of the maximum allowed under the Code. The plan provides for a
matching contribution by the Company which amounted to approximately $20,000,
$15,000, and $13,000 in Fiscal 1996, 1995, and 1994, respectively.
Profit Sharing Plan
The Company also has a profit sharing plan that distributes earnings based
on the Company meeting certain financial objectives which amounted to
approximately $0, $13,000, and $148,000 in Fiscal 1996, 1995, and 1994,
respectively. The Plan is approved by the Board on an annual basis.
Stock Purchase Plan
The Company has a stock purchase plan that allows participating employees
to purchase, through payroll deductions, shares of the Company's common stock at
85% of the fair market value at specified dates. The stock purchase plan expires
on October 1, 1998. The Company reserved 150,000 shares of common stock for the
stock purchase plan. At March 31, 1996, there were 135,733 shares available for
purchase under the plan.
NOTE 8 - ISSUANCE OF STOCK
In May 1993, the Company merged with National Acquisition Corp.
("National"). National was a company formed for use as a vehicle to raise
capital to invest in a business determined to have long-term growth and profit
potential. The Company accounted for the merger as an issuance of stock since
National did not have any previous operations.
In connection with the merger and through subsequent action by the
Company, the Company issued 182,213 class A common stock purchase warrants and
302,579 class B common stock purchase warrants exercisable at $6.00 and $3.00,
respectively, expiring May 1998 and May 1997, respectively. During 1994, 10,748
class B common stock purchase warrants were exercised.
On August 2, 1994, the Company issued 60,000 shares of common stock in
exchange for all the outstanding common stock of Signet. The Company has agreed
to pay the difference in cash between the market price of the Company's common
stock and $3.375 if the market price should be less than $3.375 on December 31,
1996. Under the agreement, market price is defined as the average between the
bid and ask prices of the Company's common stock. Assuming the market price, as
defined, is $0.75 per share on December 31, 1996, the Company would be required
to make a payment of $157,500 by January 15, 1997. The Company is currently
exploring alternatives to fund this payment or negotiate a payment plan. There
is no assurance that such efforts will be successful.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Garment Graphics, Inc.
We have audited the accompanying consolidated balance sheets of Garment
Graphics, Inc. and subsidiary as of March 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Garment
Graphics, Inc. and subsidiary as of March 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
May 30, 1996
<PAGE>
Garment Graphics, Inc.'s Common Stock is currently traded on the national
over-the-counter market and quoted on the National Association of Securities
Dealers, Inc. (NASDAQ), SmallCap Market, under the symbol "GRMN". Following are
the high and low bid prices per share for Garment Graphics' Common Stock as
quoted by NASDAQ. The NASDAQ quotes represent interdealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.
1996 1995
-------------------------- ---------------------------
High Low High Low
-------------------------- ---------------------------
First Quarter $ 1 7/8 $ 1 1/4 $ 3 3/8 $ 2 3/4
Second Quarter 1 7/8 1 3 1/4 3
Third Quarter 1 3/8 11/16 3 1 7/8
Fourth Quarter 3/4 11/16 2 1 1/2
As of June 12, 1996, the Company had approximately 190 shareholders of
record and the bid and ask prices for its common stock were $1.375 and $1.50,
respectively. The Company has never paid a cash dividend on its common stock.
Payment of common stock dividends is at the discretion of the Board of Directors
subject to the Company's lending arrangements. The Board of Directors plans to
retain earnings, if any, for operations and does not intend to pay common stock
dividends in the near future.
QUARTERLY NET SALES - SEASONALITY
The Company's net sales fluctuate from quarter to quarter. Quarterly net
sales for 1996, 1995 and 1994 are set forth below.
Net Sales
(dollar amounts in thousands)
Fiscal 1996 Fiscal 1995 Fiscal 1994
-------------------- --------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
First Quarter $ 7,321 25.5 $ 8,383 25.0 $ 6,007 19.5
Second Quarter 5,726 19.9 10,844 32.3 10,594 34.4
Third Quarter 8,309 28.9 9,072 27.0 9,735 31.6
Fourth Quarter 7,363 25.7 5,289 15.7 4,471 14.5
------- ------- -------- ------- ------- -------
Total $ 28,719 100.0% $ 33,588 100.0% $ 30,807 100.0%
======= ======= ======== ======= ======= =======
The Company's business is seasonal, with its highest sales level generally
occurring in the second fiscal quarter as a result of back-to-school sales. The
third fiscal quarter benefits from the sale of back-to-school garments and the
holiday season. The second quarter of Fiscal 1996 was not indicative of this
trend due to a weak retail apparel market compounded by an unusually warm late
summer and early fall.
<PAGE>
INFORMATION FOR INVESTORS
DIRECTORS CORPORATE COUNSEL
R. Neil Hamlin + Fredrikson & Byron, P.A.
Chairman of the Board of the Company
Chief Executive Officer AUDITORS
Barbara Sima Remley McGladrey & Pullen, LLP
President, Chief Operating Officer
Chief Financial Officer TRANSFER AGENT/REGISTRAR
John M. Gunnarson + Norwest Stock Transfer
Vice Chairman - Secretary
Vice President - Manufacturing CORPORATE OFFICES
Richard W. Perkins, C.F.A. * Garment Graphics, Inc.
President, Perkins Capital Management, Inc. 2260 Woodale Drive
an investment management company. Mounds View, MN 55112-4978
Edwin N. Peterson ^ (612) 786-6220
Retired General Manager of the Company (612) 786-5775 Facsimile
Donald M. Roux * SECURITIES LISTING
President, Roux Marketing Services,
a marketing consulting firm. Garment Graphics, Inc. is traded
on the NASDAQ SmallCap Market
William H. Spell under the symbol: "GRMN".
President, Eagle Pacific Industries, Inc.,
a pipe and tubing manufacturer. FORM 10-K
^ Member of Audit Committee The Company has filed an annual
* Member of Compensation Committee report with the Securities and
+ Member of Options Committee Exchange Commission on Form 10-K.
Shareholders may obtain a copy of
OFFICERS this report, without charge, by
writing the Company at the above
R. Neil Hamlin address, attention of: Investor
Chief Executive Officer Relations.
Barbara Sima Remley ANNUAL MEETING
President, Chief Operating Officer
Chief Financial Officer The annual meeting of share-
holders will be held on July 25,
John M. Gunnarson 1996 at 3:15 p.m. at:
Vice President - Manufacturing
Minneapolis Athletic Club
Robert A. Lucas 615 Second Avenue South
Vice President - Sales and Marketing Minneapolis, Minnesota
