<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended November 30, 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 JANUARY 12, 1998
Common Stock, par value 20,642,387
$ .001
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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.
2
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APPAREL TECHNOLOGIES, INC.
Consolidated Balance Sheet
(Unaudited)
- -------------------------------------------------------------------------------
May 31, November 30,
1997 1997
- -------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $155,319 $ 183,988
Accounts receivable, net 101,645 190,118
Accounts receivable - factor - -
Notes receivable 300,000 75,000
Inventory 28,180 257,794
Prepaid and other - 111,625
Total current assets 585,144 818,525
- ------------------------------------------------------------------------------
Property and equipment
Office furnishings and equipment 181,655 158,178
Machinery and equipment - 542,472
Computer hardware and software - 251,321
Automobiles 17,326 28,180
Leasehold improvements - 22,309
- -------------------------------------------------------------------------------
198,981 1,002,460
Less accumulated depreciation
and amortization 114,622 306,100
- -------------------------------------------------------------------------------
Property and equipment, net 84,359 696,360
- -------------------------------------------------------------------------------
Deposits 1,750 53,900
Goodwill - net of amortization 265,840 2,078,029
Deferred acquisition costs 10,000 -
Deferred Loan Fees - net of amortization - 329,930
- -------------------------------------------------------------------------------
Total assets $947,093 $3,976,744
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
3
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APPAREL TECHNOLOGIES, INC.
Consolidated Balance Sheet
(Unaudited)
- -------------------------------------------------------------------------------
May 31, November 30,
1997 1997
- -------------------------------------------------------------------------------
Liability and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable and
accrued expenses $ 353,576 $ 1,979,959
Loan Payable (Note 4) 150,267 -
Convertible Debt (Note 5) 200,000 -
Short-term portion of capital lease - -
- -------------------------------------------------------------------------------
Total current liabilities 703,843 1,979,959
Long-term portion of equipment lease - 61,081
Convertible Debt (Note 5) - 2,700,000
Total liabilities 703,843 4,741,040
Commitments and contingencies (Note 2)
- -------------------------------------------------------------------------------
Stockholders' Equity (Deficit) (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 19,024,387
issued and outstanding at
November 30, 1997
Additional paid-in capital 8,251 19,024
Accumulated deficit 8,593,211 10,654,426
(8,358,212) (11,437,746)
- -------------------------------------------------------------------------------
Total stockholders' equity (deficit) 243,250 (764,296)
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity (deficit) $ 947,093 $ 3,976,744
- -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
4
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APPAREL TECHNOLOGIES, INC.
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ----------------------------
November 30, November 30, November 30, November 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales 446,738 645,393 1,399,558 1,049,688
Cost of sales 390,452 331,774 936,123 531,283
Gross profit 56,286 313,619 463,435 518,405
Selling, general and
administrative expenses 1,806,708 392,016 2,760,206 901,411
- --------------------------------------------------------------------------------------------------
Operating loss 1,750,422 78,397 2,296,771 383,006
- --------------------------------------------------------------------------------------------------
Other income (expense)
Interest income (expense) (518,271) 11,015 (782,763) 19,552
- --------------------------------------------------------------------------------------------------
Net loss 2,268,693 67,382 3,079,534 363,454
- --------------------------------------------------------------------------------------------------
Net loss per common share (0.12) (0.01) (0.19) (0.05)
Weighted average common shares
outstanding 19,024,387 6,909,305 16,289,942 6,900,971
</TABLE>
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
5
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APPAREL TECHNOLOGIES, INC.
Consolidated Statement of Cash Flows
(Unaudited)
- -------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Six Months Six Months
Ended Ended
November 30, November 30,
1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(3,079,534) $ (363,454)
Adjustments to reconcile net
loss to net cash used
in operating activities
Depreciation and amortization 105,465 21,140
Non-cash interest expense 553,500
Non-cash compensation expense 75,021
Increase (decrease) from changes in:
Accounts receivable 162,787 (226,569)
Inventory 170,412 (337,349)
Prepaids and other (40,434) 20,950
Accounts payable and accrued (281,778) 323,853
expenses (65,702)
- --------------------------------------------------------------------------------
Net cash used in operating activities (2,334,561) (617,600)
- --------------------------------------------------------------------------------
Cash flow from investing activities
Investment in marketable securities 359,934
Acquisition of property and equipment (88,661) (69,010)
Deferred acquisition costs (41,500) (135,127)
Forgiveness of note receivable (50,080)
Note receivable 225,000 (7,448)
Acquisition of net assets of Cactus (20,000)
- --------------------------------------------------------------------------------
Net cash provided by investing activities 24,759 148,349
- --------------------------------------------------------------------------------
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Cash flow from financing activities
Payment of bank loan payable (91,987)
Payment of loan from stockholder (70,000)
Net proceeds from convertible debt 2,277,535
Payments capital lease (18,141)
Net proceeds from placement of Common
Stock 1,035,000
Payment of advance from factor (793,936)
Loan from stockholder - 100,000
Proceeds from issuance of preferred stock 430,374
- --------------------------------------------------------------------------------
Net cash provided by financing activities 2,338,471 530,374
Net increase (decrease) in cash 28,669 61,123
Cash and cash equivalents
at beginning of period 155,319 113,997
Cash and cash equivalents at end of period 183,988 $175,120
- --------------------------------------------------------------------------------
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 $814,000 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, and
cancellation of a $50,000 note receivable.
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.
7
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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 six months ended November 30, 1997.
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, 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 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
8
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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 of the Company's Common Stock immediately prior to conversion.
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 November 30,
1997, there are 15 months remaining on the lease; three 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 on February 8, 1999.
Additionally, as a result of the Susan Burrowes acquisition, during the
periods ended November 30, 1997, the Company leased an apparel showroom in
New York City for $90,000 per 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 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 for a term of three years. Under the 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
schedules.
NOTE 3. ACQUISITIONS
SUSAN BURROWES ACQUISITION
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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 to the shareholder of Susan Burrowes and
forgiveness of a $50,080 note owed to Susan Burrowes by the shareholder. In
conjunction with the acquisition, the Company recorded $2,002,000 of goodwill
which will be amortized on a straight-line basis over 15 years.
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 Europe as if the respective purchases occurred at
the beginning of the six months and quarters ended November 30, 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.
Unaudited
-------------
Quarter ended November 30 1997 1996
------ ------
Revenues $ 643,738 $4,070,310
Net loss (2,291,114) (523,007)
Net loss per share $ (0.12) $ (0.04)
Six months ended November 30 1997 1996
------ ------
Revenues $2,172,832 $8,286,521
Net loss (3,146,452) (942,204)
Net loss per share $ (0.18) $ (0.08)
Per share data adjustments are reflected pursuant to the issuance of common
stock.
DIGITAL GROUP ACQUISITION
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
10
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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.
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, 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
$767,920 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
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 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
11
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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 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 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 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.
NOTE 6. SUBSEQUENT EVENTS
AGREEMENT WITH FACTOR
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
accounts receivable 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.
12
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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 six months ended November 30, 1997,
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
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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.
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 November 30, 1997, the Company incurred a net loss of
$2,269,000, or $.12 per share, on revenues of $447,000, as compared to a net
loss of $67,000, or $.01 per share, on revenues of $645,000 in the comparable
three month period in the prior year. For the six months ended November 30,
1997, the Company incurred a net loss of $3,080,000, or $.19 per share, on
revenues of $1,400,000, as compared to a net loss of $363,000, or $.05 per
share, on revenues of $1,050,000 in the comparable six month period in the prior
year.
Revenues for the three month period ending November 30, 1997 decreased by
$198,000, or 30.8%, compared to the prior comparable period, primarily as a
result of a decrease in sales of Sierra and Just Jackets operations offset by
the inclusion of revenues from Susan Burrowes. Revenues for the six month
period ending November 30, 1997, increased by $349,000, or 33%, from the
corresponding period in the prior year primarily as a result of the inclusion of
revenues from Susan Burrowes in the first two quarters of fiscal 1998.
During the three and six month periods ended November 30, 1997, gross profit
decreased from $314,000 to $56,000, or 82.1%, in the three month period, and
from $518,000 to $463,000, or 10.6%, in the six month period. For the three and
six-months ended November 30, 1997 gross profit decreased when compared to the
prior comparable periods as a result of 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 six months ended November 30, 1997 were 12.6% and 33.1%, respectively
compared to gross margins for the three
14
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and six-months end November 30, 1996 of 48.6% and 49.4%, respectively.
Selling, general and administrative expenses for the three and six months ended
November 30, 1997, increased by $1,415,000 and $1,859,000, 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, and expenses associated with the Susan
Burrowes operations.
The increase in interest expense during the three and six month periods ended
November 30, 1997, is primarily the result of non-cash interest charges
related to the discounted conversion rate on convertible debt described in
Note 5, and interest paid by Susan Burrowes.
The Company anticipates that revenues during the remainder of fiscal 1998 will
increase from levels reported for the quarter ended November 30, 1997, as a
result of the commencement of 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 digital printing operations, the Company does not expect to
achieve profitability during 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.
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.
Subsequent to the end of the November 30, 1997 quarter the Company established 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
15
<PAGE>
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 external financing, which financing is subject to certain
conditions, and intends to seek 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In July 1996, the Company and Sierra were named by a former vendor in a lawsuit
alleging infringement on proprietary technology and trade secrets. The suit was
filed in the Superior Court of the State of California and the plaintiff was
seeking undisclosed compensatory and punitive damages as well as attorney fees.
Following a jury trial in November 1997, verdicts were entered in favor of the
Company and Sierra terminating the proceeding.
ITEM 2 - CHANGES IN SECURITIES
Following is certain information regarding the issuance of the Company's
securities during the three months ended November 30, 1997, other than
securities issued under Regulation S and securities which are registered under
the Securities Act of 1933.
In September 1997 the Company completed a private placement of $1.6 million of
its 6% Convertible Note to two accredited investors in reliance upon Section
4(2) of the Securities Act of 1933 and Regulation D thereunder. The Notes bear
interest at the rate of 6%, payable quarterly, with principal due in July 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, subject to adjustment.
In June 1997, the Company agreed to issue to Christopher Ebert, the Company's
former chief financial officer, 250,000 shares of its Common Stock at the price
of $.06 per share, which shares were not issued. Pursuant to a severance
agreement entered into with Mr. Ebert in September 1997, the Company agreed to
issue 100,000 shares to Mr. Ebert at $.06 per share, and Mr. Ebert agreed to
relinquish his right to the additional 150,000 shares.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on November 6, 1997. At
the Annual Meeting the Company's four nominees for director, Kathryn Van Ness,
William P. Conlin, Samuel S. Guzik and C. Douglas Plank, were elected to serve
as directors until the next annual meeting.
16
<PAGE>
In addition, at the Annual Meeting the Company's shareholders approved an
amendment to the Company's Certificate of Incorporation changing the
corporation's name from "American CinemaStores Inc." to "Apparel Technologies,
Inc," with all 10,086,409 shares at the meeting voting in favor of the proposed
amendment.
ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated December 9, 1997, regarding
the acquisition of the operations of Cactus Europe.
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 January 19 , 1998
---------------------------------
Kathryn Van Ness
President,
Chief Executive Officer,
By: /s/BARRY HALL January 19, 1998
--------------------------------
Barry Hall,
Chief Financial Officer
17
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