<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended February 28, 1998
[ ] 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 0-23138
APPAREL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4374952
- ------------------------------ ------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification )Number)
2300 South Eastern Avenue
City of Commerce, California 90040
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 213-725-4955
------------
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at April 17, 1998
- --------------------------- -------------------------------
Common Stock, par value 20,642,387
$ .001
<PAGE>
APPAREL TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTER ENDED NOVEMBER 30, 1997
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The financial statements included herein have been prepared by the Company
without audit, pursuant to the rules of the Securities and Exchange Commission
(the "SEC"). As contemplated by the SEC under Rule 310 of Regulation SB, the
accompanying financial statements and footnotes have been condensed, and
therefore, do not contain all the disclosures required in annual financial
statements. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-KSB and any amendments thereto for the year
ended May 31, 1997, as filed with the SEC.
<PAGE>
Apparel Technologies, Inc
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
May 31, February 28,
1997 1998
Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $155,000 $ -
Accounts receivable, net 102,000 277,000
Notes receivable 75,000
Inventory 300,000 424,000
Prepaid and other 28,000 92,000
------------ -------------
Total current assets 585,000 868,000
------------ -------------
Property and equipment
Office furnishings and equipment 182,000 158,000
Machinery and equipment 1,009,000
Computer hardware and software 251,000
Automobiles 17,000 28,000
Leasehold improvements 44,000
------------ -------------
199,000 1,490,000
Less accumulated depreciation
and amortization 115,000 486,000
Property and equipment, net 84,000 1,004,000
------------ -------------
Deposits 2,000 54,000
Goodwill - net of amortization 245,000 1,609,000
Deferred acquisition costs 10,000
Deferred loan fees - net of amortization 224,000
------------ -------------
Total assets $926,000 $3,759,000
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
Apparel Technologies, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
May 31, February 28,
1997 1998
<S> <C> <C>
Liability and Stockholders' Equity (Deficit)
Current Liabilities
Accounts Payable and accrued expenses $354,000 $2,140,000
Checks issued against future deposits - 93,000
Loan Payable (Note 4) 150,000
Payable to Factors 487,000
Convertible Debt (Note 5) 200,000
Short-term portion of capital lease
-------------- ---------------
Total current liabilities 704,000 2,720,000
Long-term portion of equipment lease 17,000
Convertible debt ( Note 5) 2,682,000
-------------- ---------------
Total liabilities 704,000 5,419,000
Commitments and contingencies (Note 2)
Stockholders' equity (Deficit) (Note 1)
Preferred stock: $.001 par value, 5,000,000 shares 848,000
authorized, none issued and outstanding
at May 31, 1997, and 900 issued and outstanding
at February 28, 1998.
Common stock: $.001 par value, 30,000,000 shares
Authorized, 8,251,054 issued and outstanding at May 31,
1997, and 20,642,387 issued and outstanding at February
28, 1998 8,000 21,000
Additional paid-in capital 8,593,000 11,484,000
Accumulated deficit (8,379,000) (13,165,000)
------------- ---------------
Total stockholders' equity (deficit) 222,000 (1,660,000)
-------------- ---------------
Total liabilities and stockholders' equity (deficit) $926,000 $3,759,000
-------------- ---------------
-------------- ---------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
APPAREL TECHNOLOGIES, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
Sales $526,000 $521,000 $1,925,000 $1,570,000
Cost of sales 376,000 336,000 1,207,000 868,000
Gross profit 150,000 185,000 718,000 702,000
Selling, general and administrative 1,514,000
expenses 412,000 4,637,000 1,313,000
---------------- ---------------- ---------------- ---------------
Operating loss (1,364,000) (227,000) (3,919,000) (611,000)
---------------- ---------------- ---------------- ---------------
Other income (expense)
Interest income (expense) (63,000) 5,000 (867,000) 25,000
---------------- ---------------- ---------------- ---------------
Net loss (1,427,000) (222,000) (4,786,000) (586,000)
Dividends to preferred shareholders 180,000 - 180,000 -
---------------- ---------------- ---------------- ---------------
Net loss allocable to common shareholders $(1,607,000) $(222,000) $(4,966,000) $(586,000)
---------------- ---------------- ---------------- ---------------
Net loss per common share $(0.08) $(0.03) $(0.25) $(.08)
Weighted average common
shares outstanding 20,642,000 6,943,000 19,960,000 6,920,416
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
Apparel Technologies, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Increase ( Decrease) in Cash and Cash Equivalents
Nine Months Nine Months
Ended Ended
February 28, February 28,
1997 1998
<S> <C> <C>
Cash flows from operating activities
Net loss $(586,000) $(4,786,000)
Adjustments to reconcile net loss to net cash used in
Operating activities
Depreciation and amortization 22,000 788,000
Non-cash interest expense 575,000
Non-cash compensation expense 128,000
Increase/(decrease) from changes in:
Accounts receivable (153,000) 91,000
Inventory (236,000) 24,000
Prepaids and other 31,000 24,000
Accounts payable and accrued expenses 254,000 (157,000)
Checks issued against future deposits - 93,000
Deferred revenue (51,000)
--------------- --------------
Net cash used in operating activities (719,000) (3,220,000)
--------------- --------------
Cash flow from investing activities
Investment in marketable securities 360,000
Acquisition of property and equipment (45,000) (538,000)
Deferred acquisition costs (138,000) 10,000
Note receivable (9,000) 225,000
Acquisition of net assets of Cactus (20,000)
--------------- --------------
Net cash provided/(used) by investing activities 168,000 (323,000)
--------------- --------------
Cash flow from financing activities
Payment of bank loan payable (94,000)
Payment of loan from stockholder (88,000)
Net proceeds from convertible debt 2,277,000
Payments capital lease (62,000)
Net proceeds from placement of Common Stock 984,000
Payment of advance from factor (437,000)
Loan from stockholder 100,000
Proceeds from issuance of Preferred Stock 430,000 808,000
--------------- --------------
Net cash provided by financing activities 530,000 3,388,000
Net increase/(decrease) in cash (21,000) (155,000)
Cash and cash equivalents at beginning of period 114,000 155,000
--------------- --------------
Cash and cash equivalents at end of period $93,000 $ -
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of Susan Burrowes, Ltd. in June 1997, the
Company received assets of approximately $846,000 and assumed liabilities of
approximately $2,303,000 in exchange for the issuance of 200,000 shares of its
common stock, with a fair market value of $0.58 per share
In June 1997, the Company issued 5,333,333 shares of its common stock to the
holder of a $200,000 convertible note. The conversion occurred at 60% of the
closing bid price at the time of the conversion, or $0.04, as prescribed by the
note agreement.
In addition to the cash paid in the acquisition of Cactus, the Company issued
40,000 restricted shares of common stock to the former owner of Cactus.
<PAGE>
APPAREL TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT AND PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Apparel Technologies, Inc., a Delaware corporation (the "Company") and its
subsidiaries. Until November 10, 1997 the Company's name was American
CinemaStores Inc. All significant intercompany transactions have been eliminated
in consolidation.
In the opinion of management, the accompanying consolidated financial statements
reflect all adjustments (which include only normal recurring adjustments) and
reclassifications for comparability necessary to present fairly the financial
position and results of operations as of and for the three and nine months ended
February 28, 1998. The results for the interim periods presented are not
necessarily indicative of the results of the Company for the entire fiscal year.
APPAREL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. CAPITAL TRANSACTIONS
On June 12, 1997, the Company acquired 100% of the stock of Susan Burrowes, Ltd.
in exchange for 200,000 shares of the Company's common stock to the shareholder
of Susan Burrowes and forgiveness of a $50,000 note owed to Susan Burrowes by
the shareholder (see Note 3).
In conjunction with the acquisition of Susan Burrowes, the Company completed a
Regulation D private placement of 5,040,000 shares of its common stock to
accredited investors as of June 12, 1997 at a price of $0.25 per share. The
proceeds totaling $985,000, net of offering expenses, were used for working
capital for Susan Burrowes.
On July 23, 1997, the Company raised $880,000, net of offering expenses, via a
Regulation D private placement of a convertible debenture in the principal
amount of $1,100,000 to a single accredited investor for use as working capital
for the Company. The debentures bear interest at the rate of 6% per annum, and
the principal amount is due and payable in June 1999. The investor is entitled
to convert the debenture into shares of common stock at a rate of 83% of the
five-day average closing bid price of the Company's Common Stock at the time of
conversion, subject to adjustment.
On September 4, 1997, the Company raised $1,400,000, net of offering expenses,
via a Regulation D private placement of convertible debentures in the principal
amount of $1,600,000 to two accredited investors for use as working capital for
the Company. The debentures bear interest at the rate of 6% per annum, and the
principal amount is due and payable in July 1999. The investors are entitled to
convert the debentures into shares of common stock, initially at a rate of 83%
of the five-day average closing bid price of the Company's Common Stock
immediately prior to conversion subject to adjustment.
<PAGE>
NOTE 2. COMMITMENTS AND CONTINGENCIES
As part of the acquisition of Susan Burrowes, Ltd. (see Note 3), the Company
relocated its corporate facilities to the Susan Burrowes location. At this
facility, the Company currently leases approximately 62,000 square feet of
office and manufacturing space in Commerce, California. As of February 28,
1998, there are 12 months remaining on the lease, which require a monthly lease
payments of $20,208. The lease expires on February 8, 1999. Additionally, in
February 1998, the Company entered into a five year lease agreement for its New
York City application center. The beginning monthly payment for this lease is
$6,456. The lease has an annual escalation clause based on increases in
operating costs.
The Company entered into employment agreements with two of its officers, Mr.
Natale and Mr. Ebert, which were effective on March 15, 1997 and were for a term
of two years. The agreements provided for aggregate base salaries of $125,000
and $110,000 per year to be paid to the officers, respectively. The agreements
also provide for the officers to receive perquisites including the use of an
automobile and life insurance. On June 15, 1997, Mr. Natale resigned as an
officer and director of the Company whereby the Company must pay 10.5 months of
severance accrued for as of May 31, 1997. On September 26, 1997, Mr. Ebert
resigned as an officer and director of the Company to be effective October 15,
1997, whereby the Company must pay between 2.5-7.5 months as severance
consideration, up to $75,000. Amounts related to these agreements have been
accrued in the Company's current financial statements.
The Company entered into an employment agreement with its Chief Executive
Officer, Kathryn Van Ness, for a term of three years. Under the agreement
Ms. Van Ness will receive an annual salary $200,000 plus annual increases,
and incentive compensation as defined within the agreement. In addition, the
individual will receive 1,500,000 shares of Common Stock which will vest
equally over the term of the agreement, and an option to purchase 750,000
shares of Common Stock at a purchase price of $.25, exercisable over a period
of 10 years. The fair value of these securities has been recorded as deferred
compensation and is being amortized into income in accordance with the
securities' vesting schedules.
In September 1997, the Company created a wholly owned subsidiary, Digital Group,
Inc. ("DGI"), to engage in the development and commercial exploitation of
digital print technology for apparel and sewn products, and it acquired certain
proprietary rights from its founders relating to digital print technology. In
connection with the acquisition of this technology the Company entered into
Employment Agreements with the three founders of DGI whereby they are to receive
options to acquire an aggregate of 800,000 shares of the Company's Common Stock
exercisable at prices between $1.25 - $15.00 per share. The options vest over a
period of three years and are subject to the continued employment of the
founders.
NOTE 3. ACQUISITIONS
SUSAN BURROWES ACQUISITION
On June 12, 1997, the Company acquired 100% of the stock of Susan Burrowes,
Ltd., which is engaged in the design, manufacture and distribution of moderately
priced missy and women's apparel items. The Company acquired all of the
outstanding stock of Susan Burrowes, Ltd in exchange for 200,000 shares of the
Company's common stock recorded at its fair market value of $0.25 per share, to
the shareholder of Susan Burrowes. In conjunction with the acquisition, the
Company recorded $1,507,000 of goodwill, which will be amortized on a
straight-line basis over five years as calculated in the following table:
<TABLE>
<CAPTION>
<S> <C>
Fair value of stock issued 50,000
Liabilities assumed 2,303,000
Less: Assets acquired (846,000)
------------------
<PAGE>
Goodwill recorded 1,507,000
------------------
------------------
</TABLE>
In conjunction with the acquisition of Susan Burrowes, the Company completed a
Regulation D private placement of common stock to accredited investors as of
June 12, 1997 at a price of $0.25 per share. The net proceeds of this offering
were used for working capital for Susan Burrowes.
Condensed unaudited pro forma results of the operations of the Company, Susan
Burrowes, Ltd. and Cactus as if the respective purchases occurred at the
beginning of the nine months and quarters ended February 28, 1998 and 1997 are
presented below. The unaudited pro forma financial statements have been
prepared for comparative purposes only and are not necessarily indicative of
what would have occurred had the acquisition been completed as of those dates or
any results that may occur in the future.
<TABLE>
<CAPTION>
Unaudited
-------------
Quarter ended February 28, 1997
------
<S> <C>
Revenues $ 4,387,000
Net loss (550,000)
Net loss per share $ (0.05)
Nine months ended February 28, 1998 1997
------ ------
Revenues $ 2,698,000 $ 11,004,000
Net loss (4,853,000) (1,711,000)
Net loss per share $ (0.24) $ (0.14)
</TABLE>
Per share data adjustments are reflected pursuant to the issuance of common
stock.
ACQUISITION OF CACTUS EUROPE
On November 25, 1997, the Company, through its wholly owned French subsidiary,
completed the acquisition of all of the assets of Cactus Europe, a French
corporation ("Cactus"), pursuant to an Asset Purchase Agreement dated November
25, 1997, by and among the Company, Cactus and James Tick,
<PAGE>
the sole shareholder of Cactus ("Tick"). Cactus is principally engaged in the
business of providing digital production of designs on fabric, with its
executive offices and production facilities in Paris, France.
Pursuant to the terms of the Asset Purchase Agreement, the Company acquired all
of the assets of Cactus and assumed substantially all of its liabilities,
estimated at approximately $550,000. As additional consideration for the
acquisition, the Company issued 40,000 restricted shares of its Common Stock to
Tick and made a cash payment of $20,000. In addition, pursuant to employment
agreements entered into on the Closing Date, Tick has agreed to be employed by
the Company for three years for additional cash and equity compensation. In
conjunction with the acquisition, the Company recorded $130,000 of goodwill,
which will be amortized on a straight-line basis over 15 years.
NOTE 4. LOAN PAYABLE
On October 27, 1996, the Company's former president loaned the Company $100,000
to be repaid to him within one year. On June 12, 1997, the note was completely
repaid.
NOTE 5. CONVERTIBLE DEBT AND PREFERRED STOCK
Monument Trust Company loaned $200,000 to the Company on March 28, 1997 in
exchange for a promissory note. The terms of the promissory note stated that
the note would bear interest at a rate of 12% per annum and was due and payable
on April 15, 1997. In the event that the note was not paid by the due date, the
principal and accrued interest automatically converted into a 4% Cumulative
Convertible Debenture of the Company (the "Debenture"). The note was not repaid
on April 15, 1997 and the Company issued the Debenture. The Debenture provided
for a conversion price of the lesser of the bid price of the Common Stock on the
date of issuance of the Note or 60% of the bid price on the date of conversion.
The Debenture was fully converted into 5,333,333 shares of Common Stock under
this agreement in June 1997 at a conversion price of $.0375, which was 60% of
the closing bid price on the date of conversion.
During fiscal 1997, the Company recorded $133,333 in deferred interest on the
convertible debt and fully amortized that amount into interest expense. The
deferred interest is the result of the implied yield provided by the 60%
conversion feature. The amount was amortized over the period from the issuance
date through the date that the debt first became convertible into common stock.
During July 1997, the Company raised $880,000, net of expenses, via a Regulation
D private placement of a convertible debenture to a single accredited investor
for use as working capital for the Company. The debenture is in the original
principal amount of $1,100,000, and accrues interest at the rate of 6% per
annum, payable quarterly. The entire principal amount is due and payable in
1999. The investor is entitled to convert the debentures into shares of common
stock, initially at a rate of 83% of the five-day average closing bid price
immediately prior to conversion, subject to adjustment.
During the quarter ended August 31, 1997, the Company recorded $225,500 in
non-cash interest expense on the debt. The interest was the result of the
implied yield provided by the 83% conversion feature and was recognized in full
as the debt was convertible upon issuance.
During September 1997, the Company raised $1,400,000, net of expenses, via a
Regulation D private placement of convertible debentures to two accredited
investors for use as working capital for the Company. The debenture is in the
original principal amount of $1,600,000, and accrues interest at the
<PAGE>
rate of 6% per annum, payable quarterly. The entire principal amount is due and
payable in 1999. The investor is entitled to convert the debentures into shares
of common stock at the initial rate of 83% of the five-day average closing bid
price immediately prior to conversion, subject to adjustment.
During the quarter ended November 30, 1997, the Company recorded $328,000 in
non-cash interest expense on the debt. The interest was the result of the
implied yield provided by the 83% conversion feature and was recognized in full
as the debt was convertible upon issuance.
On February 6, 1988, the Company completed an offering of $900,000 principal
amount of its Series B Preferred Stock, and received $808,000, net of offering
expenses. Of these proceeds, $287,000 was used to retire short-term debt. The
Series B Preferred Stock accrues a dividend of 6% per annum and is convertible
into the Company's Common Stock at a conversion price initially equal to 80% of
the market price of the Company's Common Stock during the five days immediately
preceding the date of conversion subject to adjustment. The Preferred Stock has
a liquidation preference over the Common Stock equal to the principal amount
plus accrued dividends, and has no voting rights except as required by Delaware
law. During the quarter ended February 28, 1998, the Company recorded
$180,000 in deferred accretion on the preferred stock and fully amortized
that amount into dividends.
NOTE 6. AGREEMENT WITH FACTORS
During the year, the Company terminated its agreement with its existing factor
and entered into an agreement with a different factor whereby funds are advanced
on 85% of accounts receivable. The Company normally sells account receivables
to the factor without recourse. The factor charges a fee of 0.85% when the
factored balance is below $10,000,000 and reduces this fee to 0.75% when the
balance exceeds $10,000,000. For accounts which bear payment terms in excess of
60 days, the factoring fee will be increased by 0.25% for each 30 days or part
thereof that the stated terms exceed sixty days. Interest is charged at a rate
of 1.5% plus "Prime" of the daily balance, and 3.0% plus "Prime" on all balances
which are in default.
As part of the financing from the factor, the Company negotiated a $700,000 line
of credit over the 85% advance rate on accounts receivable, with interest
payable at a rate of 1.5% plus "Prime" of the daily balance. The factor, to the
extent of any financing provided, holds a security interest in all receivables
and inventory of the Company.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This section contains forward-looking statements and includes assumptions
concerning the Company's operations, future results and prospects. These
forward-looking statements are based on current expectations and are subject to
a number of risks, uncertainties and other factors. In connection with the
Private Securities Litigation Reform Act of 1995, the Company provides the
following cautionary statements identifying important factors which, among other
things, could cause the actual results and events to differ materially from
those set forth or implied by the forward looking statements and related
assumptions contained in this Section and in this entire report. Such factors
include, but are not limited to: product demand and market acceptance risks; the
effect of economic conditions; the impact of competitive products and pricing;
product development and commercialization difficulties; capacity and supply
constraints or difficulties; availability of capital resources; general business
and economic conditions; and changes in government laws and regulations,
including taxes.
The following discussion provides an analysis of the Company's results of
operations as of and for the three and nine months ended February 28, 1998,
compared to the corresponding periods in the prior fiscal year. This discussion
is qualified in its entirety by, and should be read in conjunction with, the
other information and financial statements contained elsewhere in this report.
DEVELOPMENT OF BUSINESS
The former business of the Company involved the operation of retail
"mini-stores" which sold movie-related merchandise in lobbies of movie
theaters. In 1994 the Company opened temporary mini-stores offering similar
merchandise in malls. In 1995 the Company established the business of Sierra
Fixture & Design, Inc. ("Sierra"), which is engaged in the business of the
design, manufacturing and installation of high quality retail fixtures and
freestanding kiosks utilized in shopping malls and retail establishments
nationally.
In 1995 the Company concluded that the retail cinema store business was not
economically viable and discontinued this business in 1996. In 1996, the
Company determined to embark upon a restructuring of the Company through
strategic acquisitions of businesses.
On June 12, 1997, the Company acquired Susan Burrowes, Ltd., which has been
engaged in the design, manufacturing and distribution of missy and women's
career apparel since 1978. Their labels include Susan Burrowes(TM), Just
Clothes(TM), Laura Keefer(TM) and Independence(TM). The Company subsequently
relocated its corporate headquarters to the 62,000 square foot Susan Burrowes
facility in Commerce, California.
Under a new management team headed by Kathryn Van Ness, the Company's
President and Chief Executive Officer since June 23, 1997, the Company made a
strategic decision to establish the Company as the leader in digitally
integrated print production and digital print technology in the apparel and
sewn products industries. To implement this strategy the Company formed
Digital Group, Inc. ("DGI"), a wholly owned subsidiary, and acquired
proprietary and patent pending technology and know-how relating to digital
printing on fabrics.
<PAGE>
The proprietary digital printing technology allows apparel manufacturers to
complete the full cycle of design, manufacture and distribution of high
quality apparel and fabric products in less than 30 days, versus the normal
cycle of 90-150 days. This digital printing process also permits inventory
to be replenished on demand, with turnaround in less than 24 hours. Unlike
standard color-dye processes, which require dyeing material before cutting
fabrics, digital printing is done on only white unsewn garment parts. As a
result, excess fabric and production time is reduced, allowing retailers and
manufacturers to limit inventory requirements and speeding to the marketplace
those items which consumers are purchasing. The "quick response" and "on
demand" production allow manufacturers of textile goods to more effectively
respond to changing consumer markets and to reduce millions of dollars of
inventory writedowns through more effective control of inventory.
On November 25, 1997 the Company concluded the acquisition of the operations
of Cactus Europe, a French corporation ("Cactus"). Cactus is principally
engaged in the business of providing digital production of designs on fabric,
with its executive offices and production facilities in Paris, France. In
January 1998 the Company commenced digital print production operations on
fabric at its Commerce, California facility.
RESULTS OF OPERATIONS
For the three months ended February 28, 1998, the Company incurred a net loss
of $1,427,000, or $0.08 per share, on revenues of $526,000 as compared to a
net loss of $222,000 or $.03 per share, on revenues of $521,000 in the
comparable three month period in the prior year. For the nine months ended
February 28, 1998, the Company incurred a net loss of $4,786,000 or $0.25 per
share, on revenues of $1,925,000, as compared to a net loss of $586,000 or
$.08 per share, on revenues of $1,570,000 in the comparable nine month period
in the prior year.
Revenues for the three month period ending February 28, 1998 increased by
$5,000 or 1%, compared to the prior comparable period, primarily as a result
of the inclusion of revenues from Susan Burrowes offset by a decrease in
sales of Sierra and Just Jackets operations. Revenues for the nine-month
period ending February 28, 1998 increased by $355,000 or 23%, from the
corresponding period in the prior year primarily as a result of the inclusion
of revenues from Susan Burrowes in the first three-quarters of fiscal 1998.
During the three month period ended February 28, 1998, gross profit decreased
from $185,000 to $150,000, or 19%, primarily as a result of certain
non-recurring costs associated with initial digital printing operations. The
Company's margins for digital printing are a function of volume and due to
the low volume of digital printing revenue during the quarter, fixed overhead
was spread over a small number of jobs. During the nine month period ended
February 28, 1998, gross profits increased due to higher year-to-date sales
volume, partially offset by an increase in discounts, returns and allowances
recognized in the quarter ended November 30, 1997, which relate primarily to
merchandise shipped in the prior fiscal year. Gross margins for the three and
nine months ended February 28, 1998 were 28% and 37%, respectively compared
to gross margins for the three and nine months end February 28, 1997 of 36%
and 45%, respectively.
Selling, general and administrative expenses for the three and nine months
ended February 28, 1998, increased by $1,102,000 and $3,324,000 respectively,
reflecting non-capitalized acquisition costs and fees associated with the
acquisition of Susan Burrowes and Cactus, the establishment of digital
printing operations in the U.S. and France, expenses associated with the
Susan Burrowes operations, and amortization of goodwill and deferred
compensation expense.
<PAGE>
The increase in interest expense during the three month period ended February
28, 1998 over the respective prior period is the result of the amortization
of deferred loan fees in connection with convertible debt. The increase in
interest expense during the nine month period ended February 28, 1998 over
the same period in the prior year is primarily the result of a non-cash
interest charges related to the discounted conversion rate on convertible
debt described in Note 5, and the amortization of deferred interest expense
related to convertible debt.
The Company anticipates that revenues during fourth fiscal quarter of 1998 will
increase significantly from revenues reported for the quarter ended February 28,
1998, as a result of increase orders for digital print production operations in
Commerce, California and New York City in the third quarter of fiscal 1998, the
acquisition of the digital printing operations acquired in Paris, France in
November 1997, and anticipated shipments of orders from the Sierra division.
However, the Company does not anticipate achieving previously projected revenue
levels of $18 million for fiscal 1998. This is primarily a result of the
Company's decision to limit the focus of the Susan Burrowes division to higher
margin production and to redeploy assets from lower margin apparel production
previously engaged in by Susan Burrowes to the digital printing operations in
Los Angeles, New York and Paris. Further, primarily as a result in the delay of
the commencement of significant digital printing operations until March 1998,
the Company does not expect to achieve profitability for the year ended May 31,
1998.
CAPITAL RESOURCES AND LIQUIDITY
In conjunction with the acquisition of Susan Burrowes, a $1.26 million
Regulation D offering to accredited investors was accomplished whereby the
investors acquired shares of the Company's common stock at a price of $0.25
per share. On July 23, 1997, the Company raised an additional $880,000, net
of offering expenses, via a Regulation D private placement of $1,100,000 of
6% convertible notes to accredited investors. During the quarter ended
February 28, 1998, the Company recorded $180,000 in deferred accretion on the
preferred stock and fully amortized that amount into dividends.
In September 1997 the Company completed a private placement under Regulation D
of $1.6 million of 6% convertible notes due August 1999. The notes are
convertible into Common Stock at a conversion price of 83% of the average five
day closing bid price for the Company's Common Stock during the five days
preceding the date of conversion, subject to adjustment.
The Company has utilized the money raised on June 12, July 23, and September 4,
1997 from Regulation D private placements to accredited investors for its
working capital requirements. The Company is now devoting its resources to
develop and expand the operations of DGI.
On February 6, 1998, the Company completed an offering of $900,000 of its Series
B Preferred Stock to a single accredited investor, and received $808,000 net of
offering expenses. Of this amount, $287,500 was used to retire short term debt
and the balance was made available for working capital. The Series B Preferred
Stock accrues a dividend of 6% per annum and is convertible into the Company's
Common Stock at a stated conversion price, initially 80% of the market price of
the Company's Common Stock during the five days immediately preceding the date
of conversion. The Preferred Stock has a liquidation preference over the Common
Stock equal to the principal amount plus accrued and unpaid dividends, and has
no voting rights except as required by Delaware law. During the quarter ended
February 28, 1998, the Company recorded $180,000 in deferred accretion on the
preferred stock and fully amortized that amount into dividends.
The Company has a $700,000 credit facility with Heller Financial Corp. For
further information regarding the terms of this financing, see Note 6 to the
Company's Consolidated Financial Statements contained elsewhere in this report.
In the past, the Company's cash flow generated from operations has not been
sufficient to completely fund its working capital needs. Accordingly, the
Company has also relied upon external sources of financing to maintain its
liquidity, principally equity financing and private and bank indebtedness. The
Company believes that cash flow from operations and bank financing, although
sufficient to maintain current levels of operations, will not be sufficient to
allow the Company to continue to expand its digital printing production
operations. Accordingly, the Company intends to seek debt and/or equity funding
to support its expansion. Although the Company has received commitments for up
to $5 million in
<PAGE>
external financing, which financing is subject to certain conditions, and is
currently in involved in raising capital from alternative sources of financing,
there are no assurances that such capital will be available at the times or in
the amounts needed by the Company.
The Company's independent certified public accountants have included an
explanatory paragraph in their report stating that the Company's financial
statements as of and for the year ended May 31, 1998 have been prepared
assuming that the Company will continue as a going concern and that the
Company's working capital deficiency and continuous losses raises substantial
doubt as to the Company's ability to continue as a going concern. The
Company is dependent upon the proceeds of private placements or other
financing to continue in business.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for financial statements with fiscal years beginning
after December 15, 1997. Earlier application is permitted. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Company does not expect the adoption of SFAS No. 130 to have a material
effect, if any, on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" is effective for financial
statements with fiscal years beginning after December 15, 1997. The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, geographic areas in
which they operate and their major customers. The Company does not expect
the adoption of SFAS No. 131 to have a material effect, if any, on its
results of operations.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" is effective for financial
statements with fiscal years beginning after December 15, 1997, earlier
application is permitted. The new standard revises employers' disclosures
about pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required when no
longer useful. The Company does not expect the adoption of SFAS No. 132 to
have a material effect, if any, on its financial position or results of
operations.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending or threatened Legal proceedings.
ITEM 2 - CHANGES IN SECURITIES
Following is certain information regarding the issuance of the Company's
securities during the three months ended February 28, 1998, other than
securities issued under Regulation S and securities which are registered under
the Securities Act of 1933.
In December 1997 the Company issued 50,000 shares of its Common Stock to an
accredited person at $0.5625 per share in exchange for $28,125 of professional
services rendered to the Company. The issuance was made pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
On February 6, 1998, the Company completed an offering of $900,000 of its Series
B Preferred Stock to a single accredited investor pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder. For further information regarding this offering, see
Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Capital Resources and Liquidity."
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Certificate of Determination of Series B Preferred Stock
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended February 28, 1998, the Company filed the following
reports on Form 8-K:
(i) The Company filed a report on Form 8-K dated December 9, 1997,
regarding the acquisition of the operations of Cactus Europe. This
Form 8-K was amended pursuant to Form 8-K/A dated February 9, 1998 and
Form 8-K/A dated March 11, 1998, which contained financial statements
relating to the acquired business.
(ii) The Company filed a report on Form 8-K/A dated February 2, 1998, which
was amended pursuant to Form 8-K/A filed on March 11, 1998, relating
to the Company's acquisition of Susan Burrowes Ltd. in June 1997.
These reports contained financial statements relating to the acquired
business.
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
APPAREL TECHNOLOGIES, INC.
By: /s/ KATHRYN VAN NESS June 17, 1998
-----------------------------
Kathryn Van Ness
President,
Chief Executive Officer,
By: /s/ DEBORAH BERINI June 17, 1998
-----------------------------
Deborah Berini
Chief Accounting Officer
<PAGE>
EXHIBIT 4.1
APPAREL TECHNOLOGIES, INC.
CERTIFICATE OF DESIGNATION
SERIES "B" PREFERRED STOCK
SETTING FORTH THE POWERS, PREFERENCES,
RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS OF SUCH SERIES OF
SERIES "B" PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, Apparel Technologies, Inc., a corporation duly organized and existing
under the General Corporation law of the State of Delaware (the "ISSUER" or the
"Corporation") in accordance with the provisions of Section 103 thereof, DOES
HEREBY CERTIFY:
The Board of Directors of the Corporation (the "Board"), pursuant to the
authority set forth in the second paragraph of Article FOURTH of the Certificate
of Incorporation, as amended, of the said Corporation, and in accordance with
the provisions of Section 151 of the General Corporation Law of the State of
Delaware, adopted the following resolution creating a series of Preferred Stock
designated as "Series "B" Preferred Stock:
WHEREAS, the Certificate of Incorporation authorizes a class of stock
designated as Preferred Stock and provides that such Preferred Stock may be
divided into such number of series as the Board of Directors may determine, and
authorizes the Board of Directors to (1) determine and alter the powers,
preferences, rights, qualifications, limitations and restrictions granted to or
imposed upon any series of Preferred Stock, and (2) fix the number of any series
of Preferred Stock and the designation of such series of Preferred Stock; it is
RESOLVED, that pursuant to the authority granted to and vested in the Board
in accordance with the provisions of the Certificate of Incorporation, this
Board of Directors hereby creates a series of Series "B" Preferred Stock, $0.01
par value per share, of the Corporation (the "Securities") and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
and relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations and restrictions thereof, are
as follows:
SERIES "B" PREFERRED STOCK
A. DEFINITIONS.
The following terms shall have the respective meanings set forth as
follows:
<PAGE>
The "CLOSING DATE" shall be the date of the closing of the initial issuance
and sale of the initial Two Hundred (200) shares of the Securities by the
ISSUER, as set forth in the Closing Certificate prepared by the Escrow Agent for
such offering and delivered to the ISSUER.
The "EFFECTIVE DATE" shall be the first date upon which a Registration
Statement on Form S-3 covering the Common Stock issuable upon conversion of the
Securities and the exercise of the Warrants is declared effective by the U.S.
Securities and Exchange Commission and qualified under any applicable state
securities or Blue Sky laws.
The "APPLICABLE DISCOUNT RATE" shall initially be Twenty Percent (20%),
provided, however, that the Applicable Discount Rate shall be increased if the
Effective Date is more than ninety (90) days following the Closing Date, as
follows:
(i) By One-Half of One Percent (0.5%) if the Effective Date occurs between
Ninety-One (91) and One Hundred Twenty (120) days of the Closing Date; and
(ii) By an additional Two Percent (2%) for each thirty (30) day period
following such 120 days until the Effective Date occurs;
prorated in either case to reflect the actual number of days elapsed from and
after the 90th day from the Closing Date. Such increase in the Applicable
Discount Rate shall cease to accrue upon the earlier to occur of (i) the
Effective Date, or (ii) one year from the Closing Date. Such increases in the
Applicable Discount Rate shall similarly increase following the Effective Date
if the registration statement shall be suspended within one year of the Closing
Date. The ISSUER shall be entitled to suspend the effectiveness of a
registration statement for up to a total of ten (10) days during the one year
following the Closing Date, without an increase in the Applicable Discount Rate,
if the effectiveness is suspended as follows:
The ISSUER shall have the right after the Effective Date to suspend
effectiveness of any such registration statement, if, in the good
faith judgement of the board of directors of the ISSUER and upon the
advice of counsel to the ISSUER, such suspension of effectiveness is
necessary in light of (i) the requirement by the underwriter in a
public offering by the ISSUER that such registration statement be
suspended or (ii) the existence of material non-public information
(financial or otherwise) concerning the ISSUER, disclosure of which at
the time is not, in the opinion of the board of directors of the
ISSUER upon the advice of counsel, (A) otherwise required and (B) in
the best interests of ISSUER.
The HOLDER shall be the registered holder of the Securities as shown on the
books and records of the ISSUER's Transfer Agent from time to time.
B. RIGHTS, PREFERENCES, AND PRIVILEGES OF THE SERIES "B" PREFERRED STOCK
Section 1. DESIGNATION AND AMOUNT. The shares of such series
shall be
<PAGE>
designated as "Series 'B' Preferred Stock" (the "Securities") and the number of
shares constituting the Securities shall be One Thousand Five Hundred (1,500).
Such number of shares may be increased or decreased by a resolution of the Board
of Directors; provided, that no decrease shall reduce the number of shares of
Securities then outstanding plus the number of shares of Securities reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Securities. The certificates representing the Securities may
be divided or aggregate into different denominations, as requested by the
HOLDERS surrendering the same. No service charge will be made for such
resignation or transfer or exchange. These Securities have been issued subject
to representations of the original HOLDERS thereof and may be transferred or
exchanged only in compliance with the Securities Act of 1933, as amended (the
"Act"), and applicable state securities laws. Prior to the due presentment for
such transfer of these Securities, the ISSUER and any agent of the ISSUER may
treat the person in whose name these Securities are duly registered on the
ISSUER's books and records as the owner thereof for the purpose of receiving
payment as herein provided and all other purposes, and neither the ISSUER nor
any such agent shall be affected by notice to the contrary.
SECTION 2. RANK. The Securities shall rank: (i) prior to all of
the Corporation's Common Stock ("Common Stock"); (ii) (subject to the
provisions of Section 5 hereof) on parity with any class or series of capital
stock of the Corporation hereafter created specifically ranking by its terms on
parity with the Securities ("Parity Securities"); and (iii) (subject to the
provisions of Section 5 hereof) junior to any class or series of capital stock
of the Corporation hereafter created specifically ranking higher than the
Securities ("Senior Securities"), in each case as to distributions of assets
upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary (all such distributions being referred to collectively
as "Distributions").
SECTION 3. DIVIDENDS. The Securities will accrue dividends at the rate
of Six Percent (6%) or Sixty Dollars (USD$60.00) per share per annum, on the
basis of the actual number of days elapsed in a Three Hundred Sixty (360) day
year until maturity. Such annual dividends shall be paid prior and in
preference to any dividends to be paid, accrued, or set aside for payment on the
ISSUER's Common Stock. Dividends on each share of Series "B" Preferred Stock
shall begin to accrue from the Closing Date through and including the applicable
conversion date or redemption date, as the case may be. Upon conversion or
redemption of the Securities as provided herein, payment of accrued dividends
may be made, at the Company's option, in cash or in freely tradeable shares of
the ISSUER's Common Stock, computed based upon the applicable Conversion Price
at the time of conversion, with any fractional amounts being rounded down to the
nearest whole number. The dividends so payable will be paid to the person in
whose name the Securities are registered on the records of the ISSUER's Transfer
Agent at the address last appearing on the books and records of the ISSUER's
Transfer Agent. The ISSUER shall be entitled to withhold from all payments of
dividends on these Securities any amounts required to be withheld under the
applicable provisions of the United States income tax or other applicable laws
at the time of such payments.
SECTION 4. CONVERSION. The HOLDERS of the Securities shall have
conversion
<PAGE>
rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Subject to the other provisions
in this Section 4 and the provisions of Section 6, the HOLDER of these
Securities is entitled, at its option, to convert shares of the Securities into
that number of shares of Common Stock of the ISSUER as is determined by dividing
the "Original Series "B" Issue Price" for each share of Securities to be
converted by the applicable Conversion Price (as defined below). The conversion
price (the "Conversion Price") shall be equal to the average closing bid price
of the Company's common stock for the five (5) trading days preceding the
conversion date multiplied by the difference between One Hundred Percent (100%)
and the Applicable Discount Rate. For purposes of this section, the closing bid
price of the common stock shall be the closing bid price on the Nasdaq Stock
Market ("NASDAQ") as reported by Bloomberg, L.P. or the closing bid price in the
over-the-counter market or, in the event the common stock is listed on a stock
exchange, the closing bid price on such exchange as reported in The Wall Street
Journal.
Notwithstanding the foregoing, the conversion rights of any HOLDER set
forth herein shall be limited solely, to the extent required, from time to time,
such that in no instance shall any HOLDER own, or be deemed to beneficially own
(within the meaning of the 1934 Act), more than 4.99% of the then issued and
outstanding shares of Common Stock of ISSUER following such conversion
(excluding for purposes of such calculation any shares remaining issuable to the
HOLDER upon conversion of the Securities or the Warrants) nor shall the ISSUER
be required to issue a number of shares which would cause the ISSUER to violate
any applicable listing requirements.
(b) CONVERSION PROCESS. For purposes of these
Securities, the "Conversion Date" on which notice of conversion is given
shall be deemed to be the date on which the ISSUER OR ITS TRANSFER AGENT have
received by facsimile the executed and completed Conversion Documents (as
defined below). For purposes of Conversion of the Securities, the Current
Market Price per share is calculated at the close of the NASDAQ Stock Market
on each trading day. Such conversion by the HOLDER shall be effected by
surrendering to the Transfer Agent (with a copy of all documents, by
facsimile or courier, to the ISSUER OR ITS TRANSFER AGENT) the following
documents (the "Conversion Documents): (i) the Securities to be converted
duly endorsed (or accompanied by executed stock powers); and (ii) a Notice of
Conversion specifying the number of shares to be converted (the "Notice of
Conversion"), executed by the HOLDER of these Securities. In order to
convert, the duly endorsed original Conversion Documents must be delivered by
express courier to the Transfer Agent within Three (3) NASDAQ Trading Days
thereafter (the "Due Date"). If the original shares of Securities to be
converted are not received by the Transfer Agent within five business days
after the Conversion Date, the Notice of Conversion shall, at the option of
the ISSUER, become null and void.
(c) ISSUANCE OF COMMON STOCK. Instructions to issue
the Common Stock plus any replacement Securities must be reasonably issued by
the ISSUER to the Transfer Agent within Three (3) NASDAQ Trading Days after the
receipt of the copies of the
<PAGE>
Conversion Documents. The Transfer Agent must return the Common Stock and any
replacement Securities to the HOLDER, or its agent, by express courier within
Two (2) NASDAQ Trading Days after the receipt of the originals of the endorsed
Conversion Documents and the receipt of the facsimile copies of the proper
authorizing documents required from the ISSUER.
(d) LIQUIDATED DAMAGES. The Company understands that
a delay in the issuance of the Common Shares beyond the Deadline could result in
economic loss to the HOLDER As compensation to the HOLDER for such a loss, and
not as penalty, the Company agrees to pay liquidated damages to the HOLDER for
late issuance of Common Shares upon conversion in accordance with the following
schedule (where "No. Business Days late" is computed based upon the number of
business days elapsed following the Due Date):
<TABLE>
<CAPTION>
No. of Business Days Late Liquidated Damages
- --------------------------- ---------------------
(per each $100,000 of the Securities not
converted as requested prior to the Due Date)
<S> <C>
1 $ 50
2 $100
3 $150
4 $200
5 $250
6 $300
7 $350
8 $400
9 $450
10 $500
>10 $500 + an additional $100
for each Business Day Late
beyond 10 days.
</TABLE>
The Company shall pay the HOLDER any liquidation damages incurred
under this Section by wire transfer of immediately available funds to an account
designated by HOLDER upon the earlier to occur of (i) issuance of the Common
Stock to the HOLDER or (ii) each monthly anniversary of the receipt by the
Company of such HOLDER's notice of conversion. Nothing herein shall waive the
Company's obligations to deliver Common Stock upon a conversion of the
Securities or limit HOLDER's rights to pursue actual damages for the Company's
failure to issue and deliver shares of Common Stock to such HOLDER in accordance
with the terms of the Securities. In addition to any other remedies which may
be available to the HOLDER, including, but not limited to, remedies available
under this subsection, in the event the
<PAGE>
Company fails for any reason to effect delivery to a HOLDER of certificates
representing Common Stock by the Deadline, a HOLDER will be entitled to revoke
the notice of conversion by delivering a notice to such effect to the Company
whereupon the Company and the HOLDER shall each be restored to their respective
positions immediately prior to delivery of such notice of conversion.
(e) AUTOMATIC CONVERSION. If there is any outstanding
amount of the Securities unconverted on February 28, 2003, the outstanding
unconverted Securities will be automatically converted at the applicable
Conversion Price, with February 28, 2003, being deemed to be the Conversion
Date. In addition, the Securities shall also automatically convert upon any
event described in Section 5(c) below with the Closing Date of any such event
being deemed the Conversion Date.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Securities, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of the Securities; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Securities, the Corporation will take such corporate action as may be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose. No provision of these
Securities shall alter or impair the obligation of the ISSUER, which is absolute
and unconditional, to pay the capital amount of, and dividends on, the
Securities at the place, time, and rate herein prescribed.
SECTION 5. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the HOLDERS of
shares of Securities shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Corporation's Articles of
Incorporation or any certificate of determination of preferences, and prior and
in preference to any distribution to Junior Securities but in parity with any
distribution to Parity Securities, an amount per share equal to the sum of (i)
One Thousand Dollars (USD $1,000) for each outstanding shares of Securities (the
"Original Series 'B' Issue Price), and (ii) an amount equal to any accrued but
unpaid dividend. If upon the occurrence of such event the assets and funds thus
distributed among HOLDERS of the Securities and Parity Securities shall be
insufficient to permit the payment to such HOLDERS of the full amounts due to
the HOLDERS of the Securities and the Parity Securities, respectively, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed among the HOLDERS of Securities and the Parity Securities,
pro rata, based on the respective liquidation amounts to which each such series
of stock is entitled by the Corporation's Articles of Incorporation and any
certificate of designation of preferences.
<PAGE>
(b) Upon completion of the distribution required by
subsection 5(a), if assets remain in this Corporation, they shall be distributed
to HOLDERS of Parity Securities (unless HOLDERS of Parity Securities have
received distributions pursuant to subsection (a) above) and Junior Securities
in accordance with the Articles of Incorporation including any certificate of
determination of preferences.
(c) A consolidation or merger of the Corporation with or
into any other corporation or corporations, or a sale, conveyance or disposition
of all or substantially all of the assets of the Corporation or the effectuation
by the Corporation of a transaction or series of related transactions in which
more than 50% of the voting power of the Corporation is disposed of, shall be
deemed to be a liquidation, dissolution, and winding up within the meaning of
this Section 5.
SECTION 6. REDEMPTION OF SECURITIES.
The ISSUER shall have the right, in its sole discretion, to
redeem, in whole or in part, at any time after and from time to time after
issuance, the Securities. The ISSUER shall effect such redemption by giving the
HOLDER hereof at least two (2) business days prior written notice of its
election to so redeem. Such redemption notice shall not be effective for any
portion of the Securities for which a conversion notice shall have been
previously delivered to the ISSUER unless on the next business day following the
date of receipt of such conversion notice the ISSUER delivers to the HOLDER a
redemption notice. If the ISSUER timely delivers a redemption notice to the
HOLDER following the prior delivery of a conversion notice by the HOLDER, the
HOLDER shall be entitled, within one (1) business day of the receipt thereof, to
revoke the conversion notice. If such conversion notice is not revoked (or if
the redemption is effective upon two (2) business days prior written notice as
described above), the ISSUER shall deliver payment in full of the Redemption
Price (as hereafter defined), promptly (and in all events within three (3)
business days of the redemption date) to the Holder. The Redemption Price shall
mean the product of the principal amount of the Securities being called for
redemption multiplied by the applicable Redemption Percentage (as hereinafter
defined), plus accrued and unpaid dividends thereon. The applicable Redemption
Percentage shall be One Hundred Twenty Percent (125%).
SECTION 7. CORPORATE CHANGE. The provisions of the Series "B"
Preferred Stock shall be appropriately adjusted by the Corporation to reflect
any stock dividend, stock split or share combination of the Common Stock.
SECTION 8. VOTING RIGHTS. The HOLDERS of Securities will not have any
voting rights except as set forth below or as otherwise from time to time
required by law.
(a) The affirmative vote or consent of the HOLDERS of at
least a majority of the outstanding shares of the Securities, voting
separately as a class, will be required for any amendment, alteration or
repeal of the Corporation's Articles of Incorporation (including any
Certificate of Determination of Preferences) if, and only if, the amendment,
alteration or repeal adversely affects the powers, preferences or special
rights of the Securities.
<PAGE>
(b) To the extent that under Delaware law the vote of
the HOLDERS of the Securities, voting separately as a class, is required to
authorize a given action of the Corporation, the affirmative vote or consent
of the HOLDERS of at least a majority of the outstanding shares of the
Securities shall constitute the approval of such action by the class. To the
extent that under California law the HOLDERS of the Securities are entitled
to vote on a matter with HOLDERS of Common Stock, voting together as one
class, each share of Securities shall be entitled to a number of votes equal
to the number of shares of Common Stock into which it is then convertible
using the record date for the taking of such vote of shareholders as the date
as of which the Conversion Price is calculated. HOLDERS of the Securities
shall be entitled to notice of all shareholder meetings or written consents
with respect to which they would be entitled to vote, which notice shall be
provided pursuant to the Corporation's by-laws and applicable statutes.
SECTION 9. PROTECTIVE PROVISIONS. So long as shares of Securities are
outstanding, the Corporation shall not take any action that would impair the
rights of the HOLDERS of the Securities set forth herein and shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the HOLDERS of at least a majority of the then outstanding shares of Securities:
(a) alter or change the rights, preferences or
privileges of the shares or Securities or any Senior Securities so as to affect
adversely the Securities;
(b) create any new class or series of stock having a
preference over the Securities with respect to Distributions (as defined in
Section 2 above); or
(c) do any act or thing which would result in taxation
of the HOLDERS of shares of the Securities under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereafter from time to time amended).
SECTION 10. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any
shares of Securities shall be redeemed or converted pursuant to Section 4 or
Section 6 hereof, the shares so converted or redeemed shall be cancelled, shall
return to the status of authorized but unissued Preferred Stock of no designated
series, and shall not be issuable by the Corporation as Securities.
SECTION 11. NO RECOURSE AGAINST AFFILIATES. No recourse shall be had
for the payment of the capital amount of, or the dividends on, these Securities,
or for any claim based hereon, or otherwise in respect hereof, against any
incorporator, shareholder, officer or director, as such, past, present or
future, of the ISSUER or any successor corporation, whether by virtue of any
constitution, statute or rule of law, or by enforcement by any assessment or
penalty or otherwise, all such liability being, by acceptance hereof and as part
of the consideration for the issue hereof, expressly waived and released.
SECTION 12. ENFORCEABILITY. In case any provision of these Securities
is held by a court of competent jurisdiction to be excessive in scope or
otherwise invalid or unenforceable, such
<PAGE>
provision shall be adjusted rather than voided, if possible, so that it is
enforceable to the maximum extent possible, and the validity and enforceability
of the remaining provisions of these Securities will not in any way be affected
or impaired thereby. These Securities and the agreements referred to in these
Securities constitute the full and entire understanding and agreement between
the ISSUER and HOLDERS with respect thereto. Neither these Securities nor any
terms hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the ISSUER and the required vote of the then
outstanding Securities.
IN WITNESS WHEREOF, the ISSUER has caused this instrument to be duly
executed by an officer thereunto duly authorized on this 5th day of February,
1998.
ISSUER:
APPAREL TECHNOLOGIES, INC.
By: /s/ Kathryn Van Ness
-------------------------------------
Official Signatory of Issuer
Name: Kathryn Van Ness
Title: President
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<PAGE>
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