UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 30, 1996
--------------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________.
Commission File Number 0-2127
GARMENT GRAPHICS, INC.
--------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1270170
- ---------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2260 Woodale Drive, Mounds View, MN 55112-4978
- ----------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(612) 786-6220
------------------------------------------------------------
(Registrant's telephone number, including area code)
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 issuers
classes of common stock, as of the latest practicable date: 3,247,188 shares of
common stock, $.001 par value, outstanding as of November 8, 1996.
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GARMENT GRAPHICS, INC.
Table of Contents
Page
Number
PART I. FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statement of Operations 5
Consolidated Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 11
Liquidity and Capital Resources 12
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE
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<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 March 31, 1996
(Unaudited)
------------------ ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 46,428 $ 20,301
Receivables:
Trade, less allowances, September 30, 1996 -
$280,552 and March 31, 1996 - $365,024 1,641,628 4,682,398
Income tax - 507,052
Inventories 5,809,766 6,097,402
Prepaid expenses 299,522 338,374
Deferred tax assets 515,000 515,000
------------ ------------
Total current assets 8,312,344 12,160,527
------------ ------------
Property and Equipment, at cost
Equipment and furniture 1,865,642 1,813,171
Leasehold improvements 143,451 143,451
------------ -------------
2,009,093 1,956,622
Accumulated depreciation (1,304,663) (1,159,079)
------------ ------------
Net property and equipment 704,430 797,543
------------ ------------
NonCurrent Assets
Intangibles, net of amortization, September 30,
1996 - $45,437 and March 31, 1996 - $25,313 357,063 377,187
Other 20,807 20,426
------------ ------------
Total noncurrent assets 377,870 397,613
------------ ------------
Total assets $ 9,394,644 $ 13,355,683
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 March 31, 1996
(Unaudited)
------------------ ---------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable -- bank (Note 2) $ 2,726,888 $ 5,637,020
Current portion -- long term debt 48,135 188,580
Accounts payable 3,289,721 3,449,472
Accrued expenses
Compensation 210,924 169,577
Royalties 285,781 679,754
Other 485,929 400,550
------------ ------------
Total current liabilities 7,047,378 10,524,953
------------ ------------
Long Term Debt, less current maturities 45,094 62,267
------------ ------------
Commitments and Contingencies (Notes 2, 3, 4 and 6)
Shareholders' Equity
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 3,242,128
and 3,075,186 shares 3,242 3,075
Additional paid - in capital 1,704,071 1,700,155
Retained earnings 594,859 1,065,233
------------ ------------
Total shareholders' equity 2,302,172 2,768,463
------------ ------------
Total liabilities and shareholders'
equity $ 9,394,644 $ 13,355,683
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Second Quarter Ended Six Months Ended
September 30, September 30,
----------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 9,755,898 $ 5,726,167 $ 17,859,369 $ 13,047,507
Cost of Sales 8,460,357 5,033,906 14,403,505 10,755,919
----------- ----------- ------------ ------------
Gross profit 1,295,541 692,261 3,455,864 2,291,588
Selling and Administrative Expenses 1,884,411 1,294,842 3,661,787 2,856,322
----------- ----------- ------------ ------------
Loss from operations (588,870) (602,581) (205,923) (564,734)
Miscellaneous Expense 0 490 0 9,501
Interest Expense 134,408 192,053 264,451 356,968
----------- ----------- ------------ ------------
Loss before income taxes (723,278) (795,124) (470,374) (931,203)
----------- ----------- ------------ ------------
Income Tax (Benefit) (87,237) (318,049) 0 (372,481)
----------- ----------- ------------ ------------
Net loss $ (636,041) $ (477,075) $ (470,374) $ (558,722)
=========== =========== ============ ============
Loss Per Common Share $ (0.21) $ (0.16) $ (0.15) $ (0.18)
=========== =========== ============ ============
Weighted Average Common and Common
Equivalent Shares Outstanding 3,081,128 3,071,654 3,080,901 3,069,045
=========== ========= ============ =========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
March 31, 1996 to September 30, 1996
Common Stock Additional
--------------------------- Paid - In Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 3,075,186 $ 3,075 $ 1,700,155 $1,065,233 $ 2,768,463
Issuance of common stock for
employee stock purchase plan 5,942 6 3,916 - 3,922
Issuance of common stock held
in escrow 161,000 161 - - 161
Net loss for the six months
ended September 30, 1996 - - - (470,374) (470,374)
---------- --------- ----------- ----------- -----------
Balance, September 30, 1996 3,242,128 $ 3,242 $ 1,704,071 $ 594,859 $ 2,302,172
========= ========= =========== =========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
GARMENT GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended September 30, 1996 1995
- ------------------------------ ---- ----
<S> <C> <C>
Cash Flows From Operating Activities $ (2,180,056) $ (762,182)
Cash Flows From Investing Activities (52,471) (58,180)
Cash Flows from Financing Activities Increase (Decrease)
Issuance of stock - 7,524
Principal payments on long-term borrowings (50,618) (96,999)
Net borrowings on bank/financing notes 2,309,272 771,000
------------ ------------
Net cash provided by financing activities 2,258,654 681,525
------------ ------------
Decrease in cash 26,127 (138,837)
Cash
Beginning 20,301 171,124
------------ ------------
Ending $ 46,428 $ 32,287
============ ============
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest $ 292,509 $ 351,098
Income Taxes (net) (525,318) (39,270)
Supplemental schedule of noncash investing and financing
activities
Common stock issued for employee stock purchase plan $ 3,922 $ -
Debt retired with proceeds from factoring agreement 6,214,127 -
Common stock issued and held in escrow 161 -
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
GARMENT GRAPHICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the second quarter and six months ended September 30,
1996, are not necessarily indicative of the results that may be expected for the
fiscal year ended March 31, 1997. For further information, refer to the
financial statements and footnotes included in the Company's financial
statements for the year ended March 31, 1996.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Signet, Inc. ("Signet"). Significant
intercompany transactions are eliminated in consolidation.
NOTE 2 - NOTE PAYABLE-BANK
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% and a
letter of credit facility of up to $1,000,000. 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, through
September 30, 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. The Company has received a waiver
regarding certain financial covenant violations as of September 30, 1996,
relating to working capital and interest coverage. Net borrowing availability
through this credit facility was $150,822 at September 30, 1996.
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. At September 30, 1996, accounts
receivable carried at the Company's risk was $952,469, relating primarily to
accounts receivable balances assigned to Heller on the date the Credit Facility
was entered into. Heller will provide credit and collection administration on
these balances, and the Company anticipates no additional reserves will be
required. As of April 12, 1996, Heller assumed the bad debt credit risk on all
approved accounts.
NOTE 3 - COMMITMENTS
The Company has entered into various licensing agreements which permit it
to manufacture and market apparel with copyrighted characters and logos. Under
the terms of these agreements, the Company is required to pay minimum guaranteed
fees to some licensors. Remaining minimum annual obligations under these
agreements are approximately: fiscal 1997 --- $270,000 and fiscal 1998 ---
$17,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company recently entered into a new facilities lease with R. Neil
Hamlin, Chairman of the Board and Chief Executive Officer of the Company, on an
arms' length basis. The decision to effect a lease with Mr. Hamlin was made by
the non-interested directors. The lease will be classified as an operating lease
and is for a term of 8.5 years commencing December 1, 1996. Rent is $3.41 per
square foot and taxes currently are $1.50 per square foot, for a total of
$39,633 per month, net of a monthly credit of $4,350 relating to a sublease
which terminates in one year. Annual rents will be $368,400 for lease years one
through five and annual rents of $384,188 for the balance of the lease term. The
new lease rates are lower than other comparable current lease rates, and the
Board believes that the new lease rate is competitive. The Company expects to
receive operational efficiencies and additional cost savings from having the
warehouse and production operations at one facility. The Company plans to move
during December and January. After the costs of the move are absorbed, the
Company expects to obtain annual expense reductions of approximately $250,000.
The Company anticipates costs associated with the move will total approximately
$200,000.
NOTE 5 - 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.
NOTE 6 - ESCROW AGREEMENT
On September 17, 1996, the Company issued 161,000 shares of common stock
under the terms of an Escrow Agreement pursuant to an operating agreement
entered into in November 1995 for the manufacture and sale of licensed apparel.
The shares will be released upon fulfillment of the Company's obligations under
the agreement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales. Net sales for the second quarter of fiscal 1997 ended September
30, 1996, increased 70.4% to $9,755,898 from $5,726,167 for the comparable
period in fiscal 1996. The increase in net sales is mainly attributed to more
favorable market conditions created by an improvement in the retail apparel
market compared to a very soft retail apparel market in fiscal 1996 and the sale
of National Football League (NFL) licensed product under the operating agreement
with Cliff Engle. Net sales for the six months ended September 30, 1996,
increased 36.9% to $17,859,369 from $13,047,507 in the six months ended
September 30, 1995. The increase in sales for the six month period relates to
the factors discussed previously and also to a shift in sales mix to higher
priced garments. Actual unit sales increased 57.6% for the second quarter and
22.0% for the six month period ended September 30, 1996, respectively, compared
with the same periods in fiscal 1996.
Gross Profit. Gross profit increased 87.2% to $1,295,541, or 13.2% of net
sales, for the second quarter of fiscal 1997 compared to $692,261, or 12.1% of
net sales for the comparable period in fiscal 1996. Gross profit increased 50.8%
to $3,455,864, or 19.4% of Net Sales for the six months ended September 30,
1996, compared to $2,291,588, or 17.6% of Net Sales for the comparable period in
fiscal 1996. The dollar and percentage increase is related to higher sales
volume as described in net sales above. Also, while labor costs increased 1.1%
as a percentage of net sales for the first six months of fiscal 1997, raw
material costs decreased 2.3% as a percentage of net sales compared with the
same period in fiscal 1996. Labor costs increased and product costs decreased
due to higher cost value processes added to the garment. This includes more
sophisticated graphic prints, multi-location prints and other mixed media
applications. In addition, shorter production runs resulted in overtime
requirements and higher per unit costs.
Margin was negatively impacted by the Company's efforts to cleanse
inventory of slower moving product. During the second quarter of fiscal 1997,
the Company sold close-outs and slow moving goods at a nominal loss. The
September 30, 1996 inventory balance is the lowest it has been since May 1994.
It is management's intention to continue to reduce inventory balances throughout
the balance of the fiscal year. This reduction may result in margin reductions
in the future. Margins were also impacted by the Company's tight cash situation,
which increased the challenge of obtaining the materials needed at a cost that
allows the Company to remain competitive. Pricing continues to be tight due to
the competitive market. Effective November 1, 1996, both production and support
staff was cut back to meet competitive margin pressures.
Selling and Administrative Expenses. Selling and administrative expenses
increased 45.5% to $1,884,411 for the second quarter of fiscal 1997 from
$1,294,842 in the same period in fiscal 1996, but decreased as a percent of Net
Sales to 19.3% in fiscal 1997 from 22.6% in fiscal 1996. Selling and
administrative expenses increased $805,465 to $3,661,787 for the six months
ended September 30, 1996, compared to $2,856,322 for the six months ended
September 30, 1995, but decreased as a percent of net sales to 20.5% in fiscal
1997 from 21.9% in fiscal 1996 . The dollar increase relates primarily to a
88.0% and 51.0% increase in royalty and commission expense for the three and six
month periods ended September 30, 1996, respectively, compared with the same
periods in fiscal 1996, due to increased sales levels. As a percent of sales,
total Selling and administrative expenses decreased 3.3% for the second quarter
of 1997 and 1.4% for the six months ended September 30, 1996, compared with the
same periods in fiscal 1996. Royalty expense, included in selling and
administrative expenses, actually increased 1.9% and 1.6% as a percentage of net
sales for the three and six month periods ended September 30, 1996, compared
with the same periods in fiscal 1996, relating to changes in product mix and
related royalty rates. Therefore, selling and administrative expenses excluding
royalties actually decreased 5.2% and 3.0% as a percentage of net sales for the
three and six months ended September 30, 1996, compared with the same periods in
fiscal 1996. Consistent with the Company's production staff cut back, general
and administrative staffing levels were also reduced.
Interest Expense. Interest expense decreased 30.0% to $134,408 for the
second quarter of fiscal 1997, from $192,053 for the same period in fiscal 1996,
due primarily to lower interest rates (average 7.37% for the second quarter of
fiscal 1997 compared to 9.72% for the second quarter of fiscal 1996). Interest
expense for the six month period ending September 30, 1996, decreased 25.9% to
$264,451 from $356,968 for the same period in fiscal 1996. The decrease for the
six month period was due to: i) lower outstanding loan balances (average
outstanding borrowings of $6,523,370 during the six months ended September 30,
1996 compared to $6,728,857 for the same period of fiscal 1996), which were
related to lower asset levels during the period; and ii) lower interest rates
(average rate of 7.71% for the six months of fiscal 1997 compared to 9.63% for
the same period of fiscal 1996).
Net Loss. Net loss decreased $88,348 to a net loss of $470,374 for the six
months ended September 30, 1996, from a net loss of $558,722 for the six months
ended September 30, 1995. Net loss increased $158,966 to a net loss of $636,041
for the second quarter of fiscal 1997 from a net loss of $477,075 for the same
period in fiscal 1996. The changes in net loss are directly attributable to the
challenges discussed above with respect to gross profit.
Liquidity and Capital Resources
Current assets decreased 31.6% to $8,312,344 as of September 30, 1996, from
$12,160,527 as of March 31, 1996. The change relates primarily to a 64.9%
decrease in Accounts Receivable to $1,641,628 as of September 30, 1996, from
$4,682,398 as of March 31, 1996. This decrease is due to advances loaned to the
Company against receivables pursuant to the factoring agreement entered into on
April 12, 1996, with Heller Financial, Inc. At September 30, 1996, the
outstanding balance of advances loaned was $4,620,958. In addition, income tax
receivable was eliminated as of September 30, 1996, due to the receipt of a
refund carried at $507,052 at March 31, 1996. Inventories also decreased
$287,636 or 4.7% due to higher sales levels and the sell-off of excess and slow
moving inventory.
Current liabilities decreased 49.3% to $7,047,378 as of September 30, 1996,
from $10,524,953 at March 31, 1996. The decrease relates primarily to a decrease
in Notes Payable-Bank to $2,726,888 as of September 30, 1996, from $5,637,020 as
of March 31, 1996. This decrease is due to the classification of advances loaned
to the Company against accounts receivable by Heller Financial, Inc. pursuant to
the factoring agreement entered into on April 12, 1996, as a reduction to
accounts receivable. At September 30, 1996, the outstanding balance of advances
loaned was $4,620,958.
Net cash used by operating activities for the six months ended September
30, 1996, was $2,180,056 due to a combination of the reported losses incurred by
the Company and changes in current assets. The Company's business has
historically been somewhat seasonal, with the bulk of sales generally occurring
in the second fiscal quarter as a result of back-to-school sales. The next
highest level generally occurs in the third fiscal quarter due to sales reorders
for back-to-school merchandise and the holiday season. Working capital
requirements reflect this seasonality as receivable balances have increased due
to higher sales levels in relation to the prior year.
The Company recently entered into a new facilities lease with R. Neil
Hamlin, Chairman of the Board and Chief Executive Officer of the Company, on an
arms' length basis. The decision to effect a lease with Mr. Hamlin was made by
the non-interested directors. The lease is for a term of 8.5 years commencing
December 1, 1996. Rent is $3.41 per square foot and taxes currently are $1.50
per square foot, for a total of $39,633 per month, net of a monthly credit of
$4,350 relating to a sublease which terminates in one year. Annual rents will be
$368,400 for lease years one through five and annual rents of $384,188 for the
balance of the lease term. The new lease rates are lower than other comparable
current lease rates, and the Board believes that the new lease rate is
competitive. The Company expects to receive operational efficiencies and
additional cost savings from having the warehouse and production operations at
one facility. The Company plans to move during December. After the costs of the
move are absorbed, the Company expects to obtain annual expense reductions of
approximately $250,000.
In October 1996, the Company entered into a 12-month agreement with a
supplier whereby the supplier will warehouse goods at the Company's location and
the Company will purchase goods from this inventory supply as needed. Any goods
remaining in the Company's warehouse at the expiration of this agreement must be
purchased by the Company. The Company anticipates that it will fully utilize the
quantity of goods available under the terms of this agreement in the normal
course of business.
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.
The Company has obtained a waiver from its lender (Heller Financial, Inc.)
to waive compliance with working capital and interest coverage covenants. Heller
has agreed to suspend measuring all financial covenants for the period ended
October 31, 1996 only. The Company believes that it will need to seek additional
waivers for November 1996. Additionally, the amount of the Company's past due
accounts payable with its vendors is approximately $1,700,000. Many of the
Company's vendors are now requesting cash in advance of orders. The Company is
currently making partial payments to its vendors, and, in return, a number of
them have continued to cooperate with the Company. The Company is in an
extremely tight cash situation which is, in some situations, making it difficult
to purchase the materials needed to deliver finished product. Efforts are being
made to obtain additional equity or debt financing which have not been
successful to date, and the Company currently has no assurance that it will be
able to obtain the needed financing. The Company is currently at its borrowing
limits with Heller Financial, Inc. As a result, without additional working
capital, the ability of the Company to continue its operations is limited and
the board of directors has directed management to explore all feasible
alternatives, including a sale of the business. There is no assurance that the
Company's business can be sold.
Cautionary Statement Regarding Forward Looking Information
The foregoing contains "forward looking statements" within the meaning of
federal securities laws which represent management's expectations or beliefs
concerning future events. These and other forward looking statements made by the
Company must be evaluated in the context of a number of factors that may affect
the Company's financial condition and results of operations, such as the recent
losses experienced by the Company, uncertain sales, dependency on new licenses
and others, including those set forth in the Company's annual and quarterly
reports filed with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
Item 1- Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
(a) The Annual Meeting of the Registrant's shareholders was held on
Thursday, July 25, 1996.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934. The
following persons were elected Class II Directors of the
Registrant to serve until the 1999 annual meeting of shareholders
and until their successors shall have been duly elected and
qualified:
Number of Number of
Nominee Votes For Votes Withheld
----------------------- ----------------- ---------------------
John M. Gunnarson 2,799,910 11,160
William H. Spell 2,787,910 23,160
(c) The names of each other director whose term of office as a
director continued after the Annual Meeting are as follows:
Terms expiring at 1997 Annual Meeting:
R. Neil Hamlin
Richard W. Perkins
Donald M. Roux
Terms expiring at 1998 Annual Meeting:
Barbara S. Remley
Edwin N. Peterson
(d) At the Annual Meeting, the shareholders approved a 150,000 share
increase in the number of shares reserved for issuance under the
Registrant's 1992 Stock Option Plan by a vote of 2,732,093 shares
in favor, with 48,777 shares against, 9,020 shares abstaining and
21,180 shares represented no votes.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment of Factoring and Revolving Inventory Loan and
Security Agreement with Heller Financial, Inc.
effective July 1, 1996
10.2 Stock Escrow Agreement among Cliff Engle, Ltd., Garment
Garment Graphics, Inc. and St. John & Wayne dated
September 27, 1996. 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<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.
GARMENT GRAPHICS, INC.
(Registrant)
Date: November 13, 1996 By: /s/ R. Neil Hamlin
R. Neil Hamlin
Chairman and Chief Executive Officer
By: /s/ Barbara S. Remley
Barbara S. Remley
President, Chief Operating and Financial
Officer (Principal Financial Officer and
Chief Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10.1 Amendment of Factoring and Revolving Inventory
Loan and Security Agreement with Heller Financial, Inc.
effective July 1, 1996.
10.2 Stock Escrow Agreement among Cliff Engle, Ltd.,
Garment Graphics, Inc. and St. John & Wayne dated
September 27, 1996.
27 Financial Data Schedule
Effective July 1, 1996
Garment Graphics, Inc.
2260 Woodale Drive
Mounds View, MN 55112
Attention: Ms. Barbara Remley
RE: AMENDMENT OF FACTORING AND REVOLVING INVENTORY LOAN AND SECURITY AGREEMENT
Gentlemen:
We refer to that certain Factoring and Revolving Inventory Loan and Security
Agreement dated April 12, 1996, by and between GARMENT GRAPHICS, INC. ("Client")
and HELLER FINANCIAL, INC. ("Heller"), as amended from time to time (the
"Factoring Agreement") and that certain Addendum to the Factoring Agreement
dated April 12, 1996 ("Addendum"). Capitalized terms used herein and not
otherwise defined herein shall have those meanings ascribed to them in the
Addendum.
The Factoring Agreement is hereby amended with respect to sales to Kmart only as
follows:
A. The Addendum is of no further force and effect.
To induce Heller to enter into this amendment, Client represents and warrants
that after giving effect to this amendment no violations of the terms of the
Factoring Agreement exist and all representations and warranties contained in
the Factoring Agreement are true, correct and complete in all material respects
on and as of the date hereof.
Except as amended above, all of the terms and conditions of the Factoring
Agreement are unchanged, and said agreement, as amended, shall remain in full
force and effect and is hereby confirmed, affirmed and ratified.
If the foregoing is in accordance with your understanding of our agreement,
please so indicate by signing in the place and manner provided below.
Sincerely yours, Accepted and Agreed:
HELLER FINANCIAL, INC. GARMENT GRAPHICS, INC.
By: /s/ Frank J.Jones By: /s/ Barbara S. Remley
Title: Sr. Vice President Title: President
STOCK ESCROW AGREEMENT
This Stock Escrow Agreement is made effective as of the 27th day of
September, 1996, among Cliff Engle, Ltd., a New York corporation ("CE"), Garment
Graphics, Inc., a Minnesota corporation ("GG") and St. John & Wayne, as Escrow
Agent ("Escrow Agent").
Background
1. Reference is made to a certain Letter Agreement dated as of November 13,
1995 and any amendments thereto between CE and GG regarding CE's agreement
to engage GG to provide various services under CE's NFL license number
R01932 (the "License") (hereafter referred to as the "Agreement").
2. CE and GG intended to provide up to 350,000 shares of the common stock of
GG to be held by the Escrow Agent as security for GG's timely payments in
accordance with the terms of the Agreement.
3. In consideration of certain payments already made to C.E. the parties
hereto agree that 161,000 shares of G.G's Common Stock (the "Shares") will
be placed in the Escrow pursuant to the terms herein.
4. Escrow Agent, subject to the terms and conditions hereof, has consented to
hold and release such Shares in accordance with the terms of this Escrow
Agreement.
Terms
In consideration of the mutual promises and the covenants and agreements of
the parties contained herein, the parties hereto agree as follows:
1. Escrow Agent acknowledges receipt of the Shares and agrees to hold and
release such Shares (the "Escrow Shares") in accordance with the terms and
provisions of this Escrow Agreement.
2. Disbursement of the Escrow Shares shall be made to CE if:
(i) Escrow Agent receives a certification from CE to the effect that:
(a) CE has not received any Override Payment required by paragraph
4(B), of the Agreement, or timely payment of a royalty payment
required by paragraph 5 of the Agreement;
(b) delivery of demand for payment has been made by C.E. to GG and
five (5) days has elapsed following such notice, and that notice
of certification in paragraph 2 above has been delivered to GG;
and
(ii) Escrow Agent has not received written notification of a dispute about
such payment from GG within five (5) days of receipt of the
certification referenced in 2 above (the "Notification Dispute"),
Escrow Agent will immediately release such Escrow Shares on a one
share for each one dollar ($1) that has not been timely paid as
required by the Agreement. If Escrow Agent receives a timely notice of
dispute from GG, Escrow Agent shall not make any release of the Escrow
Shares until it receives either (i) written direction signed by both
CE and GG regarding a release of the Escrow Shares; or (ii) a copy of
an order from an arbitrator requiring a release of the Escrow Shares.
3. Disbursement of all remaining Escrow Shares shall be made to GG by Escrow
Agent on May 15, 1997, provided:
(i) Escrow Agent receives a certification signed by GG to the effect that:
(a) GG has made all Override Payments required by paragraph 4(B), of
the Agreement, and timely payment of the royalty payments
required by paragraph 5 of the Agreement;
(b) delivery of demand for escrow share release has been made to CE
and five (5) days has elapsed following such notice and that
notice of certification in paragraph 3 above has been delivered
to CE; and
(ii) Escrow Agent has not received written notification of a dispute about
such payment from CE within five (5) days of receipt of the
certification referenced in 3 above (the "Notification of Dispute"),
Escrow Agent will immediately release all remaining Escrow Shares. If
Escrow Agent receives a timely notice of dispute from CE, Escrow Agent
shall not make any release of the Escrow Shares until it receives
either (i) written direction signed by both CE and GG regarding a
release of the Escrow Shares; or (ii) a copy of an order from an
arbitrator requiring the release of the Escrow Shares.
4. Disbursement of the Escrow Shares shall be made to GG and/or C.E. if Escrow
Agent receives a certification signed by GG and CE that the Agreement has
been terminated and that it is mutually acceptable to GG and CE that the
Escrow Shares be released as they mutually direct.
5. Escrow Agent, CE and GG agree to submit all disputes following a
Notification of Dispute to arbitration before the American Arbitration
Association in Chicago, IL. The arbitrator's final decision shall be
enforceable in the courts of the state where required to effectuate the
arbitrator's decision. Each party shall be responsible for the payment of
their respective expenses related to such arbitration with any arbitrator
fee to be evenly split. However, it is agreed that if any arbitrator's
decision holds clearly for one party the prevailing party shall have its
fees and expenses paid by the other party. The arbitrator shall determine
for the parties if there is a prevailing party. Notwithstanding the
foregoing, Escrow Agent shall not be responsible for the fees and expenses
of either GG or CE, and CE and GG shall be responsible for Escrow Agent's
fees and expenses (jointly and severally) under all circumstances.
6. The Escrow Agent shall receive $500 to carry out its duties in accordance
with the terms and provisions of this Agreement in advance. Each party
shall pay one-half of the Escrow Agent's fee.
7. To induce Escrow Agent to act hereunder, it is agreed by CE and GG that:
a. Escrow Agent may act in reliance upon any instrument or signature
furnished to it hereunder and which it, in good faith, believed to be
genuine and may assume that any person purporting to give any writing,
notice, advice or instruction in connection with the provisions hereof
has been duly authorized to do.
b. Escrow Agent may act relative hereto upon advice of counsel in
reference to any matter connected herewith, and shall not be liable to
any of the parties hereto, or their respective legal representatives,
heirs, successors and assigns, for any mistake of fact or error of
judgment, or for any acts or omissions of any kind taken or made in
good faith unless caused by its willful misconduct or gross
negligence.
c. This Escrow Agreement sets forth exclusively the duties of Escrow
Agent with respect to any and all matters pertinent hereto and no
implied duties or obligations shall be read into this Escrow Agreement
against Escrow Agent.
d. Escrow Agent makes no representation as to the validity, value,
genuineness or collectibility of any portion or all of the Escrow
Shares held by or delivered to it.
e. Except as provided below, Escrow Agent does not have and will not have
any interest in the Escrow Shares but is serving only as escrow holder
and has only possession thereof.
f. Escrow Agent has not read or received a copy of the Agreement, is not
a party to the Agreement and has no duties or obligations under same.
8. CE and GG hereby release Escrow Agent from any act done or omitted to be
done by Escrow Agent in good faith in the performance of its duties
hereunder, CE and GG hereby agree to indemnify Escrow Agent for, and to
hold it harmless against, any loss, liability or reasonable expense
(including reasonable attorneys' fees and expenses) incurred by Escrow
Agent, arising out of or in connection with its entering into this Escrow
Agreement and carrying out its duties hereunder, including the reasonable
costs and expenses of defending itself from any claim or liability;
provided however, that Escrow Agent shall not be entitled to
indemnification hereunder for losses, liabilities and expenses which arise
out of the willful misconduct or gross negligence of Escrow Agent.
9. Escrow Agent may resign at any time or be removed by the mutual consent of
CE and GG. No resignation or removal of Escrow Agent and no appointment of
a successor Escrow Agent, however, shall be effective until the acceptance
by a successor Escrow Agent in the manner herein provided. In the event of
the resignation or removal of Escrow Agent, CE and GG shall within 30 days
of any resignation or removal in good faith agree upon and appoint a
successor Escrow Agent. Any successor Escrow Agent shall execute and
deliver to predecessor Escrow Agent, CE and GG an instrument accepting such
appointment and the transfer of the Escrow Shares and agreeing to the terms
of this Escrow Agreement, and thereupon such successor Escrow Agent shall,
without further act, become vested with all the estates, properties, rights
powers and duties of predecessor Escrow Agent shall have no further duties,
responsibilities or obligations hereunder.
10. This Escrow Agreement shall terminate when the Escrow Shares shall be
completely released in accordance with Section 2, 3 or 4, hereof.
11. All notices and communications hereunder shall be in writing and shall be
deemed to be fully given if delivered by hand or by overnight courier, as
follows:
if to CE, at: Cliff Engle, Ltd.
2 Bridge Avenue
Red Bank, NJ 07701
Fax No. (908) 530-2110
ATTN: Walter M. Craig, Jr., President
if to GG, at: Garment Graphics, Inc.
2260 Woodale Drive
Mounds View, MN 55112-4978
Fax No. (612) 786-6220
ATTN: Barbara Remley, President
if to Escrow Agent, at: St. John & Wayne
Two Penn Plaza East
Newark, NY 07102
Fax No. (201) 491-3333
ATTN: Lee A. Albanese, Esq.
12. This Escrow Agreement shall be construed in accordance with and governed by
the laws of the State of New Jersey.
13. This Escrow Agreement shall be binding upon and inure to the benefit of the
parties hereto, their heirs, legal representatives, successors and assigns.
14. This Escrow Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, and all such counterparts shall
constitute a single instrument.
15. CE and GG will cooperate with Escrow Agent and deliver to Escrow Agent such
additional information and documents as Escrow Agent shall reasonably
request in the performance of its obligations hereunder.
a. In the event of any ambiguity or uncertainty hereunder or in any
notice, instruction or other communication received by Escrow Agent
hereunder, Escrow Agent may, in its sole discretion, refrain from
taking any action other than retain possession of the Escrow Shares,
unless Escrow Agent receives written instructions signed by CE or GG
which eliminates such ambiguity or uncertainty.
b. In the event of any dispute between or conflicting claims by or among
CE or GG and/or any other person or entity with respect to the Escrow
Shares, Escrow Agent shall be entitled, in its sole discretion, to
refuse to comply with any and all claims, demands or instructions with
respect to such portion of the Escrow Shares so long as such dispute
or conflict shall continue and Escrow Agent shall not be or become
liable in any way to CE or GG for failure or refusal to comply with
such conflicting claims, demands, or instructions. Escrow Agent shall
be entitled to refuse to act until, in its sole discretion, either (i)
such conflicting or adverse claims or demands shall have been
determined by a final arbitrator's decision as set forth in paragraph
5 hereof is issued, or (ii) Escrow Agent shall have received security
or indemnity satisfactory to it sufficient to hold it harmless from
and against any and all losses which it may incur by reason of so
acting. Escrow Agent may, in addition, elect in its sole discretion,
to commence an interpleader action or seek other judicial relief or
orders as it may deem, in its sole discretion, necessary. The costs
and expenses (including reasonable attorneys' fees and expenses)
incurred in connection with such proceeding shall be paid by and shall
be deemed obligations of each of CE and GG.
16. This Escrow Agreement shall in no way modify, or alter any of the rights or
obligations of the parties pursuant to the Agreement, and the release of
the Escrow Shares to CE does not satisfy GG's obligation to make the actual
payments required to be made to CE or the NFL pursuant to the terms of the
Agreement. CE and GG acknowledge that the Agreement is in full force and
effect and to their best knowledge no party is in default currently
thereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement,
by their duly authorized officers, on and as of the date and year first year
above written.
St. John & Wayne
By: /s/ Lee A. Albanese
Name: Lee A. Albanese
Title: Partner
Cliff Engle, Ltd.
By: /s/ Walter M. Craig
Name: Walter M. Craig
Title: President
Garment Graphics, Inc.
By: /s/ Barbara S. Remley
Name: Barbara S. Remley
Title: President
<TABLE> <S> <C>
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(Replace this text with the legend)
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<NAME> GARMENT GRAPHICS, INC.
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