<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 August 31, 1997
/ / 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 October 3, 1997
----- ------------------------------
Common Stock, par value 18,001,387
$ .001
<PAGE>
APPAREL TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTER ENDED AUGUST 31, 1997
PART I - FINANCIAL INFORMATION
The financial statements included herein have been prepared by Apparel
Technologies, Inc. (formerly known as American CinemaStores Inc. (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.
2
<PAGE>
APPAREL TECHNOLOGIES, INC.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
May 31, August 31,
1997 1997
Assets
- -----------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 155,319 $ 166,825
Marketable securities - -
Accounts receivable, net 101,645 272,538
Accounts receivable - factor - 154,259
Notes receivable 300,000 75,000
Inventory 28,180 230,084
Prepaid and other - 89,567
Total current assets 585,144 988,273
- -----------------------------------------------------------------------------
Property and equipment
Office furnishings and equipment 181,655 156,284
Machinery and equipment - 342,410
Computer hardware and software - 268,731
Automobiles 17,326 28,179
Leasehold improvements - 20,164
198,981 810,208
- -----------------------------------------------------------------------------
Less accumulated depreciation
and amortization 114,622 363,537
- -----------------------------------------------------------------------------
Property and equipment, net 84,359 452,231
- -----------------------------------------------------------------------------
Deposits 1,750 36,206
Goodwill - net of amortization 244,699 1,711,442
Deferred acquisition costs 10,000 834
Deferred loan fees - 230,000
- -----------------------------------------------------------------------------
Total assets $ 925,952 $ 3,418,986
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
3
<PAGE>
APPAREL TECHNOLOGIES, INC.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
May 31, August 31,
1997 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Liability and Stockholders' Equity
Current liabilities
Accounts payable and
accrued expenses $ 353,576 $ 1,414,736
Loan Payable (Note 4) 150,267 -
Convertible Debt (Note 5) 200,000 -
Short term portion of capital lease - 31,910
- -----------------------------------------------------------------------------
Total current liabilities 703,843 1,446,646
Long term portion of equipment lease - 47,312
Convertible Debt (Note 5) - 1,100,000
Total liabilities 703,843 2,593,958
Commitments and contingencies (Note 2)
- -----------------------------------------------------------------------------
Stockholders' Equity (Note 1)
Preferred stock: $.01 par value
5,000,000 shares authorized, - -
none issued
Common stock: $.001 par value
30,000,000 shares authorized,
8,251,054 issued and outstanding
at May 31, 1997, and 18,924,387 8,251 18,924
issued and outstanding at August 31,1997 8,593,211 10,107,538
Additional paid-in capital (8,379,353) (9,301,434)
Accumulated deficit
- -----------------------------------------------------------------------------
Total stockholders' equity 222,109 825,028
- -----------------------------------------------------------------------------
Total liabilities and
stockholder equity $ 925,952 $3,418,986
- -----------------------------------------------------------------------------
</TABLE>
4
<PAGE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
APPAREL TECHNOLOGIES, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three Months Three Months
Ended Ended
August 31, August 31,
1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Sales $ 404,295 $ 952,820
Cost of sales 199,509 545,671
- -----------------------------------------------------------------------------
Gross profit 204,786 407,149
Selling, general and administrative expenses 480,015 1,064,738
- -----------------------------------------------------------------------------
Operating loss (275,229) (657,589)
- -----------------------------------------------------------------------------
Other income (expense)
Interest income (expense) 8,537 (264,492)
- -----------------------------------------------------------------------------
Net loss $ (266,692) $ (922,081)
- -----------------------------------------------------------------------------
Net loss per common share $ (0.04) $ (0.07)
Weighted average common shares
outstanding 6,892,638 13,401,387
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
5
<PAGE>
APPAREL TECHNOLOGIES, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Three Months Three Months
Ended Ended
August 31, August 31,
1996 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (266,692) $ (922,081)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 9,327 144,847
Non-cash interest expense - 225,500
Increase (decrease) from changes in:
Accounts receivable (172,731) (221,344)
Inventory (144,024) 91,693
Prepaids and other 30,294 24,358
Deferred revenue 123,549 -
Accounts payable and accrued expenses 159,443 (622,687)
- -----------------------------------------------------------------------------
Net cash used in operating activities (260,834) (1,279,714)
- -----------------------------------------------------------------------------
Cash flow from investing activities
Investment in marketable securities 277,217 -
Acquisition of property and equipment (749) (26,620)
Deferred costs (36,927) (834)
Note receivable - 225,000
- -----------------------------------------------------------------------------
Net cash provided by investing activities 239,541 197,546
- -----------------------------------------------------------------------------
Cash flow from financing activities
Payment of bank loan payable - (91,987)
Payment of loan from shareholder - (70,000)
Net proceeds from convertible debt - 880,000
Net proceeds from placement of Common Stock - 983,500
Payment of advance from factor - (607,839)
- -----------------------------------------------------------------------------
6
<PAGE>
Net cash provided by financing activities - 1,093,674
Net increase (decrease) in cash (21,293) 11,506
Cash and cash equivalents
at beginning period
113,997 155,319
- -----------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ 92,704 $ 166,825
- -----------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
Three Months Ended August 31,
1997 1996
------- ------
<S> <C> <C>
Cash paid for:
Interest $38,992 $ 0
Income Taxes $ 0 $ 0
</TABLE>
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, of which approximately
$94,000 were intangible assets, and assumed liabilities of approximately
$2,303,000 in exchange for the issuance of 200,000 shares of its common
stock, valued at its fair market value of $0.25 per share.
In August 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.
7
<PAGE>
APPAREL TECHNOLOGIES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT AND PRESENTATION AND ORGANIZATION
Apparel Technologies, Inc. (formerly known as "American CinemaStores, Inc.")
(the "Company"), a Delaware corporation designs, manufactures, and markets under
three wholly owned subsidiaries, Sierra Fixture and Design, Susan Burrowes,
Ltd., and Just Jackets. The Company was incorporated in February 1992 to engage
in retail mini stores offering movie related products. The Company completed an
initial public offering in March 1994. In November, 1995 the Company decided to
discontinue all of its retail operations. The Company has now restructured and
refocused on acquisitions and mergers to build revenues.
In October 1996, the Company acquired Just Jackets, Inc. to design, manufacture
and sell leather and wool as well as other fabric jackets and denim shirts to
the advertising specialty industry. On June 12, 1997, the Company acquired 100%
of the stock of Susan Burrowes, Ltd. Susan Burrowes is engaged in the design,
manufacture, and distribution of moderately priced missy and women's apparel
items. Susan Burrowes, Ltd. was incorporated in California in 1978. The
Company has relocated it corporate headquarters as well as all of its
subsidiaries to the 62,000 square foot Susan Burrowes facility in Commerce,
California. Susan Burrowes also has a showroom in New York City. For their
fiscal year ended February 29, 1997, Susan Burrowes reported net sales of $15
million. Their labels include Susan Burrowes, Just Clothes and Laura Keiffer
with significant customers being J.C. Penney's, Sears, and Macy's.
The accompanying consolidated financial statements include the accounts of
American Cinema Stores, Inc. and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
LOSS PER SHARE
Loss per share is based on the weighted average number of shares of common stock
outstanding during the period using a treasury stock method. Common Stock
equivalents are anti-dilutive and have not been considered in the calculations.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
the affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
8
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE. On
March 31, 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). This pronouncement requires a different
method of calculating earnings per share than is currently used in accordance
with AFB 15, "Earnings Per Share." SFAS 128 provides for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. This pronouncement is effective for the fiscal years and interim periods
ending after December 15, 1997. Early adoption is not permitted. The Company
has not determined the effect, if any, of the adoption on its EPS computations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING COMPREHENSIVE
INCOME. In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), which established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
incomes is defined to include all changes except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 31, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
Reporting Comprehensive Income (SFAS 131), which supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise SFAS 131 establishes
standard for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 31, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of
9
<PAGE>
this standard, management has been unable to fully evaluate the impact, if any,
the standard may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by implementation
of this standard.
10
<PAGE>
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 $50,080 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 $983,500, net of offering expenses, was 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 convertible debentures of common stock to a
single accredited investor for use as working capital for the Company. The
investor is entitled to convert the debentures into shares of common stock at a
rate of 83% of the five day average closing bid price at the time of conversion.
NOTE 2. COMMITMENTS AND CONTINGENCIES
As part of the acquisition of Susan Burrowes, Ltd. (see Note 6), 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 August 31, 1997,
there are 18 months remaining on the lease; six months of which will require a
monthly lease payment of $19,596 and twelve months of a monthly lease payment of
$20,208. The lease expires in February 8, 1999. Additionally, as a result of
the Susan Burrowes acquisition, the Company now leases an apparel showroom in
New York City for $90,000 per year. That lease expires in April, 1998. The
Company has as a result of the Susan Burrowes acquisition has a lease for a New
York apartment for an annual lease of $24,000. The apartment is approximately
2,200 square feet and is located at 347 West 57th Street, #24C. The Company
believes the rent will be offset with expenses saved from sales personnel using
the apartment throughout the year.
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 7.5 months as severance consideration on his
contract equal to $75,000.
On July 22, 1996, the Company and Sierra Fixture and Design were named by a
former vendor in a
11
<PAGE>
lawsuit alleging infringement on proprietary technology and trade secrets. The
Company and its attorneys, retained with respect to such proceeding, believe the
action to be frivolous and without merit and are defending such proceeding. The
suit was filed in the Superior Court of the State of California and the
plaintiff is seeking undisclosed compensatory and punitive damages as well as
attorney fees.
The Company entered into an employment agreement with its Chief Executive
Officer for a term of three years. Under this agreement this individual will
receive an annual salary of $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 schedule.
NOTE 3. 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 5 years as calculated on the
following table:
<TABLE>
<S> <C>
Fair value of stock issued 50,000
Liabilities assumed 2,303,000
Less: Assets acquired (846,000)
---------
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. This $1,200,000 was used for
working capital for Susan Burrowes.
Condensed unaudited pro forma results of the operations of the Company and Susan
Burrowes, Ltd. as if the respective purchases occurred at the beginning of the
quarters ended August 31, 1997 and 1996 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 August 31: 1997 1996
---- ----
<S> <C> <C>
Revenues $1,332,427 $3,782,295
Net loss (514,426) (338,692)
Net loss per share $ (0.03) $ (0.03)
</TABLE>
Per share data adjustments are reflected pursuant to the issuance of
common stock.
12
<PAGE>
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.
Additionally, the Just Jackets subsidiary maintained an overdraft line with the
bank with a $100,000 money market certificate of deposit in the name of the
Company held as collateral. In August, 1997, the Company used the certificate
of deposit to repay the overdraft in full.
NOTE 5. CONVERTIBLE DEBT
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 state that the
note will bear interest at a rate of 12% per annum and is 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 Debenture was issued by the Company. 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.
On July 23, 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 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.
NOTE 6. AGREEMENT WITH FACTOR
In conjunction with the acquisition of SBL, the Company became party to an
agreement with a factor to sell its accounts receivable without recourse, for
collectibility issues only, upon receiving approval by the factor. The factor
will advance funds to the Company up to 90% of factored receivables, and
13
<PAGE>
charges a fee of 0.90% of each factored receivable. Interest is charged at a
rate of 1.5% plus "Prime" of the daily balance of advances to the Company.
NOTE 7. SUBSEQUENT EVENTS
On September 4, 1997, the Company raised $1,400,000, net of expenses, via a
Regulation D private placement of convertible debentures of common stock 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 at a rate of
83% of the five day average closing bid price immediately prior to conversion.
The Company will recognize $328,000 of non-cash interest expense during the
quarter ended November 30, 1997, as a result of the implied yield provided by
this conversion feature.
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. The Company was
granted certain proprietary rights form the founders, who are individuals
unrelated to the Company prior to this transaction, of a type of digital
print technology in exchange for employment agreements whereby these founders
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 three years and are subject to the continued
employment of the founders.
14
<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 for its first fiscal quarter which ended August 31, 1997 compared to
fiscal quarter ended August 31, 1996. 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.
The Company incurred significant losses in connection with implementation of its
plan to operate mini-retail stores in movie theater lobbies and shopping malls
between 1993-1995. In 1995 the Company determined that is retailing concepts
were not viable and discontinued all retail operations as of May 31, 1996.
Since revenue levels at such time were not sufficient to attain profitability,
the Company attempted to increase revenues and cash flow and attain
profitability through implementation of a restructuring plan involving the
discontinuance of retail operations, expansion of its shopping mall and retail
fixture business and the identification of strategic merger and acquisition
candidates.
On June 12, 1997, the Company acquired 100% of the stock of Susan Burrowes,
Ltd., which has been engaged in the design, manufacture, and distribution of
moderately priced missy and women's apparel items since 1979. The Company
subsequently relocated its corporate headquarters as well as all of its
subsidiaries to the 62,000 square foot Susan Burrowes facility in Commerce,
California. Susan Burrowes also has a showroom in New York City. For their
fiscal year ended February 29, 1997, Susan Burrowes reported net sales of $15
million. Their labels include Susan Burrowes, Just Clothes and Laura Keiffer
with significant customers being J.C. Penney's, Sears and Macy's.
RESULTS OF OPERATIONS
15
<PAGE>
THREE MONTHS ENDED AUGUST 31, 1997, COMPARED TO THE THREE MONTHS ENDED AUGUST
31, 1996
For the three months ended August 31, 1997, the Company incurred a net loss of
$922,081, or $.07 per share, on revenues of $952,820, as compared to a net loss
of $266,692, or $.04 per share, on revenues of $404,295 in the comparable three
month period in the prior year.
During the first quarter of fiscal 1998, revenues increased by $548,525, or
136%, compared to the first three months in the prior fiscal year, primarily as
the result of the inclusion of revenues from Susan Burrowes in the first quarter
of fiscal 1998. Sales by Susan Burrowes during the fiscal 1998 period consisted
primarily of sales to one of its significant customers, J.C. Penney.
During the first quarter of fiscal 1998, gross profit nearly doubled, from
$204,786 to $407,149, with a decrease in the gross profit margin from 50% to
42.7%, as compared to the first quarter of fiscal 1997. The increase in gross
profit primarily reflects the inclusion of revenues from Susan Burrowes in the
period ended August 31, 1997. The decrease in overall gross profit margin is
also primarily a reflection of the inclusion of the operations of Susan
Burrowes. In the first quarter of fiscal 1998, the Susan Burrowes division
maintained a gross profit margin of 41.4%, compared to 55% for the Sierra
division.
Selling, general and administrative expenses doubled between periods,
from $480,015 to $1,064,738. Most of the increase in these items represents
expenses associated with the Susan Burrowes operations.
The increase in interest expense during the first fiscal quarter of 1998 is
primarily the result of a non-cash interest charge related to the discounted
conversion rate on convertible debt described in Note 5, and interest paid by
Susan Burrowes of $37,894.
CAPITAL RESOURCES AND LIQUIDITY
Until 1996, the Company's primary cash requirements had been to support retail
operations. The Company relied on the proceeds of its 1994 public offering of
Common Stock and cash flow from retail operations to fund those working capital
requirements. As of May 31, 1996, the Company had discontinued all retail
operations. The Company is now devoting its resources to expand the operations
of Sierra, Susan Burrowes, Just Jackets and the newly acquired Digital Group.
The Company intends to utilize 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 merger with Just Jackets was completed on October 24, 1996. Just Jackets
was folded into a newly formed apparel subsidiary of the Company and the
shareholders of Just Jackets received an aggregate of $80,000 in cash and 50,000
shares of common stock of the Company.
On June 12, 1997, the Company acquired 100% of the common 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.
16
<PAGE>
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. The Company also plans to generate additional funds for
operations by selling its receivables under the terms of its factoring
agreement obtained in the acquisition of Susan Burrowes. 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. Fees incurred in conjunction with this debt placement
will be amortized into income over the term of the debt.
Net cash used in operating activities was $1,400,361 for fiscal quarter ended
August 31, 1997, as compared to net cash used in operating activities of
$260,834 for the first quarter of 1997. The increase in cash used in operating
activities was primarily attributable to the working capital requirements of
Susan Burrowes.
Subsequent to the end of the first quarter 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.
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 as a result of financings completed since May 31, 1997,
recent cost reductions, and anticipated growth in revenues during the remainder
of the fiscal year, cash flow from operations and bank financing will be
sufficient to fund its working capital needs. In addition, the Company may seek
external sources of capital to fund expansion and future acquisitions. However,
there are no assurances that such capital will be available at the times or in
the amounts needed by the Company.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On July 22, 1996, the Company and Sierra Fixture and Design were named by a
former vendor in a lawsuit alleging infringement on proprietary technology and
trade secrets. The Company and its attorneys retained with respect to such
proceeding believe the action to be frivolous and without merit and are
defending such proceeding. The suit was filed in the Superior Court of the
State of California and the plaintiff is seeking undisclosed compensatory and
punitive damages as well as attorney fees.
The Company is involved from time to time in litigation incidental to the
conduct of its business. The Company does not believe that any such litigation
currently pending will have a materially adverse effect on its financial
condition or results of its operations.
ITEM 2 - CHANGES IN SECURITIES
Following is certain information regarding the issuance of the Company's
securities during the three months ended August 31, 1997, other than securities
issued under Regulation S and securities which
17
<PAGE>
are registered under the Securities Act of 1933.
In June 1997 the Company issued 200,000 shares of Common Stock to Barbara
Weinstock in exchange for the outstanding shares of Susan Burrowes, Ltd., which
was acquired by the Company in June 1997. In connection with the acquisition,
the Company also issued 200,000 shares to Susan Weinstock and 100,000 shares to
Robert Weinstock. These shares, which vest over three years, were issued in
reliance upon Section 4(2) of the Securities Act of 1933.
In June 1997 the Company agreed to issue 1,500,000 shares to Kathryn Van Ness,
the Company's Chief Executive Officer, in connection with the employment of Ms.
Van Ness as the Company's Chief Executive Officer for a period of three years.
This transaction is being made in reliance upon Section 4(2) of the Securities
Act of 1933. The stock grant vests in three equal annual installments,
commencing June 1998, subject to the continued employment of Ms. Van Ness.
In June 1997 the Company agreed to issue 250,000 shares of Common Stock to
Christopher Ebert, the Company's former Chief Financial Officer, in exchange for
the surrender of 250,000 incentive stock options and a cash payment of $.06 per
share. In September 1997 the parties amended this agreement to provide for the
cancellation of the earlier agreements and the issuance of 100,000 shares of
Common Stock at $.06 per share. These transactions were made in reliance upon
Section 4(2) of the Securities Act of 1933.
In June 1997 the Company completed a private placement of 5,040,000 shares of
its Common Stock at $.25 per share to a group of accredited investors for $1.26
million in reliance upon Section 4(2) of the Securities Act of 1933 and
Regulation D thereunder.
In July 1997 the Company completed a private placement of 100,000 shares of its
Common Stock at $.50 per share to a group of accredited investors in reliance
upon Section 4(2) of the Securities Act of 1933 and Regulation D thereunder.
In July 1997 the Company completed a private placement of $1.1 million of its 6%
Convertible Note to a single accredited investor in reliance upon Section 4(2)
of the Securities Act of 1933 and Regulation D thereunder. The Note bears
interest at the rate of 6%, payable quarterly, with principal due in June 1999.
The Note is convertible into shares of Common Stock at a conversion price equal
to 83% of the closing bid price of the Common Stock during the five days
preceding conversion.
In September 1997 the Company issued $1.6 million of its 6% Convertible Notes to
two accredited investors in reliance upon Section 4(2) of the Securities Act of
1933 and Regulation D thereunder. The terms of the September 1997 financing,
including conversion, are identical to the July 1997, except that the maturity
date of the Notes issued in September 1997 is July 1999.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
first quarter of the fiscal year.
18
<PAGE>
ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company submitted Form 8-K on June 27, 1997, and July 14, 1997
announcing the acquisitions of Susan Burrowes and the presentation of audited
financial statements.
19
<PAGE>
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 March 2, 1998
----------------------------------
Kathryn Van Ness
President,
Chief Executive Officer,
By: /s/ BARRY HALL March 2, 1998
----------------------------------
Barry Hall,
Chief Financial Officer
20
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