UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q/A (1)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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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.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1270170
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
2260 Woodale Drive, Mounds View, MN 55112-4978
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(Address of principal executive offices) (Zip Code)
(612) 786-6220
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(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: 3,081,128 shares of
common stock, $.001 par value, outstanding as of July 26, 1996.
<PAGE>
Garment Graphics, Inc. (the "Company") hereby amends Item 2 of its Form
10-Q for the quarter ended June 30, 1996.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net Sales. Net sales for the first quarter of Fiscal 1997 ended June 30,
1996, increased 10.7% to $8,103,471 from $7,321,340 for the comparable period in
Fiscal 1996. The increase in net sales resulted primarily from a shift in sales
mix to higher priced garments. For the three months ended June 30, 1996, actual
unit sales increased 1.0% compared with the same period in Fiscal 1996.
Gross Profit. Gross profit increased 35.1% to $2,160,323, or 26.7% of net
sales, for the first quarter of Fiscal 1997 compared to $1,599,327, or 21.8% of
net sales for the comparable period in Fiscal 1996. The dollar increase is
related to higher sales volume as described in Net Sales above. Also, while
labor costs increased 2.8% as a percentage of net sales for the first quarter of
Fiscal 1997, raw material costs decreased 6.5% 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. Inventory levels in fiscal 1996
were abnormally high as discussed in the Form 10-K. During the quarter ended
June 30, 1996 the Company decreased historical balances by only minor amounts.
Inventories in total during the quarter actually increased by $454,038 due to
seasonal increases for higher forecast sales levels in the second quarter. The
seasonal increase was less than prior years due to the carryover of fleece
product from the last fleece ("sweatshirt") season. It is the Company's
intention to continue to reduce balances from the prior year throughout the
remainder of the current fiscal year. This reduction may result in margin
reductions in future periods.
Selling and Administrative Expenses. Selling and Administrative expenses
increased 13.8% to $1,777,376 for the first quarter of Fiscal 1997 from
$1,561,480 for the first quarter of Fiscal 1996. The dollar increase relates
primarily to a 23.3% increase in royalty and commission expense for the first
quarter of Fiscal 1997 from the comparable period in Fiscal 1996 due to
increased sales levels. As a percent of sales, total Selling and Administrative
expenses for the first quarter of 1997 increased 0.6% compared with the same
period in Fiscal 1996. Commission and royalty expense increased 1.3% as a
percentage of Net Sales compared with the same period in 1996 relating to
changes in product mix and related commission and royalty rates. Excluding
commissions and royalties, Selling and Administrative expenses actually
decreased 0.7% for the quarter compared with the same period in Fiscal 1996.
Interest Expense. Interest expense decreased 21.1% to $130,043 for the
first quarter of fiscal 1997, from $164,915 in the first quarter of fiscal 1996,
due to: i) lower outstanding loan balances (average outstanding borrowings of
$5,846,575 during the first quarter of fiscal 1997 compared to $6,434,750 for
the first quarter of fiscal 1996) which were related to lower asset levels
during the first quarter of fiscal 1997; and ii) lower interest rates (average
rate of 8.15% for the first quarter of fiscal 1997 compared to 9.53% for the
first quarter of fiscal 1996).
The Company has an asset based loan and has traditionally needed to utilize
the full amount available under the loan. Receivable balances averaged
$1,034,238 higher in fiscal 1997 than fiscal 1996, offset by inventory balances
which averaged $3,242,755 lower in fiscal 1997 than fiscal 1996. Receivable and
inventory combined average balances for the quarters decreased $2,208,517 and,
as a result, the Company was able to reduce its average loan balance $524,273
for the related quarters.
Net Income (Loss). Net Income increased $247,313 to a profit of $165,666
for the first quarter of Fiscal 1997 compared with a net loss of $81,647 for the
same period in Fiscal 1996. This increase in net income is directly attributable
to the increase in gross profit and selling and administrative expense decreases
discussed above.
Liquidity and Capital Resources
Current assets decreased 21.4% to $9,556,700 as of June 30, 1996, from
$12,160,527 as of June 30, 1995. The change relates primarily to a 75.2%
decrease in Accounts Receivable to $1,161,743 as of June 30, 1996, from
$4,682,398 as of June 30, 1995. This decrease is due to advances received by the
Company pursuant to the factoring agreement entered into on April 12, 1996, with
Heller Financial, Inc. The decrease in accounts receivable was partially offset
by a $454,038 increase in inventories due to planned build-up of certain
products in anticipation of increased sales as the Company enters the fall
selling season.
Current liabilities decreased 27.0% to $7,688,894 as of June 30, 1996, from
$10,524,953 at June 30, 1995. The decrease relates primarily to a decrease in
Notes Payable-Bank to $2,539,874 as of June 30, 1996, from $5,637,020 as of June
30, 1995. This decrease is due to the classification of advances received from
Heller Financial, Inc. pursuant to the factoring agreement entered into on April
12, 1996, as a reduction to accounts receivable.
The Company maintains substantial blank garment inventory levels in order
to be able to deliver products promptly to its customers. The seasonal nature of
the business and growth in the Company's sales has increased its requirements
for working capital resources to support ongoing inventory levels. Net cash used
by operating activities for the quarter ended June 30, 1996, was $236,691 and
for the quarter ended June 30, 1995, was $682,554.
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.
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. 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. 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.
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,
supplier support and internally generated funds will be adequate for its
liquidity and capital needs.
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
GARMENT GRAPHICS, INC.
(Registrant)
Date: November 15, 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)
