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As filed with the Securities and Exchange Commission on September 27, 1996.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ______________
Commission file number: 0-24636
THE SIRENA APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2998726
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10333 Vacco Street
South El Monte, California 91733
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 442-6680
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of September 6, 1996, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $11,050,000, based upon the
closing price of the Common Stock on that date.
Number of shares of Common Stock of the registrant outstanding as of September
6, 1996: 4,649,230
This report includes a total of 57 pages, including exhibits.
The exhibit index appears on page 31.
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TABLE OF CONTENTS
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Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Product Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Bookings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Anne Klein License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Physical Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . 10
Nasdaq Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 13
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Variability of Quarterly Results and Seasonality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . 17
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Committees of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Limitations on Liability and Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Employees' Profit Sharing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 31
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PART 1
ITEM 1. BUSINESS
GENERAL
The Sirena Apparel Group, Inc. (the "Company" and "Sirena") is a
leading designer, manufacturer and marketer of branded and private label
swimwear and resortwear for each principal segment of the women's market. The
Company's branded products include the Anne Klein collection of designer
swimwear, the Sirena collections of better misses' and better contemporary
swimwear, the Hot Water collection of junior's swimwear, the Rose Marie Reid
collection of traditional misses' swimwear, the Sirena Kids brand of children's
swimwear, and the WearAbouts collection of resortwear. In addition, the
Company's private label division provides value-priced swimwear and resortwear
to national chain department stores and mass merchandisers under various
labels. The Company also designs exclusive products, sold under the Company's
existing labels, for certain prestige and traditional department stores. The
Company believes that the Anne Klein and Sirena brands are among the leaders in
their respective categories and have achieved a high degree of brand
recognition and customer loyalty. In addition, the Company believes that its
brands are widely recognized for their fashionable styling, consistent fit and
quality construction at prices tailored to specific market segments. The
Company's products are targeted at women and young girls who have a youthful
attitude regardless of age.
The Company has leveraged its distribution network, fashion leadership
and merchandising and manufacturing expertise in several ways, including the
introduction of new brands. The Company's products are sold in prestige
department stores (such as Bloomingdales, Lord & Taylor, Neiman Marcus,
Nordstrom and Saks Fifth Avenue), traditional department stores (such as Belk,
Dillard, May Department Stores and Federated Department Stores), apparel
specialty stores (such as Swim & Sport), national chain department stores (such
as JC Penney and Sears), mass merchandisers (such as Kmart and Wal-Mart),
off-price retailers (such as Loehmann's) and mail order catalogs (such as Eddie
Bauer, Talbots and Victoria's Secret). Branded swimwear accounted for
approximately 58.3% of the Company's net sales in fiscal 1996, private label
swimwear for approximately 30.5%, and resortwear for approximately 11.2%.
STRATEGY
The Company's objective is to be the leading supplier of women's
fashion swimwear and resortwear in the United States. Key elements of the
Company's strategy include:
Develop a Diversified Portfolio of Branded and Private Label Products.
The Company has developed a diversified portfolio of branded and private label
products that enables the Company to offer products to its customers at varying
price points through each principal channel of distribution. The Company's
experience with brand products has led to the development of a broad range of
private label products that are marketed to mass merchandisers and national
chain department stores. By offering a broad array of products for each
principal market segment, the Company aims to be "one-stop-shop" for swimwear
and resortwear for its retail customers. The Company believes that
opportunities exist to grow its branded lines, primarily through increased
penetration of existing retail customers, including increased sell-through of
existing lines and the introduction of new lines. The Company also intends to
focus on achieving growth in its private label lines, primarily through
increased penetration of existing retail customers and the addition of new
retail customers.
Sirena recently introduced a collection of girls' branded and private
label swimwear, and a collection of junior's branded and private label
swimwear, to address what it believes are underserved markets and to further
penetrate the Company's retail customers. Based upon the Company's experience
with its women's swimwear lines, the Company has introduced its girls'
collections through each of its distribution channels primarily under Sirena
Kids, Look & Sea Kids and private label brands, and its junior's collection
under the Hot Water brand.
The Company believes that its strategy of developing product lines for
specific channels of distribution enhances its ability to maintain the
integrity of its brands while reducing the fashion risk associated with any
particular line.
Emphasize Fashion Innovation and Quality. The Company believes that
the success of its product lines is dependent, in large part, on its ability to
continue to develop innovative fashions and design features capable of
achieving
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broad consumer acceptance. The Company continuously updates its lines and
develops new products in a combination of colors, fabrics and styles intended
to enable retailers to make powerful merchandising statements in their display
of Sirena's products. The Company incorporates successful fashion elements
from its own top lines into its other branded and private label lines, which
enables the Company to capitalize in a timely manner on key fashion trends. In
addition to introducing entirely new fashion designs and features into each of
its lines on an annual basis, the Company attempts to reduce its fashion risk
by incorporating into each of its lines, certain designs and features that have
proven successful for the Company and the swimwear industry in the past. The
Company's sales force continually monitors the sell-through of its products to
determine and react to changing consumer preferences. With each of its brands,
the Company emphasizes fashionable styling, consistent fit and quality
construction at prices tailored to specific market segments.
Build Strong Relationships with Retail Customers. Sirena builds and
maintains close working relationships with its retail customers. The Company
believes that such relationships enable it to better understand the needs of
its retail customers and enhance its ability to develop products and marketing
programs that can favorably impact the sales volume and profitability realized
by both the Company and its retail customers. Furthermore, by developing these
close working relationships, Sirena believes that it increases its importance
to its retail customers as a major product resource. The Company also believes
that such relationships facilitate the identification of marketing
opportunities, design trends and shifting demographics based upon information
provided by retail buyers. Sirena's ability to interact effectively with its
retail customers is enhanced by the fact that many key members of the Company's
senior management have significant prior experience as buyers of swimwear and
other apparel for major department stores.
Achieve Operating Efficiencies. To provide retailers in various
channels of distribution with products that can be designed and priced to
deliver value to consumers, Sirena focuses on controlling its costs and
achieving certain operating efficiencies. The Company employs a portfolio
approach to manufacturing, utilizing its own manufacturing operations as well
as outside contractors both in the United States and in Mexico. This approach
enables Sirena to maintain manufacturing flexibility, handle quick response
requirements and to pursue its goal of being the quality, low cost producer.
In fiscal 1996, the Company opened its own manufacturing facility in Mexico.
As part of its continuing program to achieve manufacturing efficiencies and
better serve customers, the Company has made investments in recent years in
management information systems and material handling systems. These
investments include the installation of material requirement planning systems
that enhance inventory management, electronic data interchange systems ("EDI")
that enhance communication and service to select retail customers and computer
aided design systems that improve the capability and capacity of design,
pattern and grading functions.
Expand Through Acquisitions. Sirena believes that consolidation
within the apparel industry is creating opportunities for Sirena to acquire
product lines and businesses that are complementary to those of the Company.
Sirena intends to explore acquisition opportunities that may exist from time to
time to expand its swimwear and resortwear lines or to diversify its business
into other segments of the apparel market where it believes that it may
capitalize on its design, manufacturing, marketing and distribution expertise.
PRODUCTS
The Company participates in three segments of the women's apparel
industry: branded swimwear, private label swimwear and resortwear. In
addition, the Company provides custom designed swimwear for major retail
accounts. Each product line has a unique combination of fashionable styling
and quality construction appropriate to the prices prevailing in a specific
distribution channel. The Company's products primarily target the women's, or
"misses," as opposed to the "junior's," market and include both constructed and
unconstructed garments.
BRANDED SWIMWEAR
The Company's branded swimwear includes the Anne Klein collection of
designer swimwear, the Sirena collection of better misses swimwear, the Rose
Marie Reid collection of traditional misses swimwear, the Hot Water collection
of better junior's swimwear, and the Sirena Kids collection of better girl's
swimwear. Each established brand is among the leaders in its category and is
widely recognized for its fashionable styling and quality construction.
Branded swimwear accounted for 58.3% of the Company's net sales for fiscal
1996.
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Anne Klein. Anne Klein & Company ("Anne Klein") has granted the
Company the right to use certain Anne Klein trademarks in connection with the
sale of women's designer bathing suits and related accessories in the United
States of America. Although the Anne Klein collection is jointly developed by
the Company and Anne Klein, the colors and styles of this collection are
generally directly related to the sportswear collections designed by Anne
Klein. This collection is characterized by fashion fabrics, including tricot,
and imported trim and is manufactured in the Company's own facilities to
maintain its high quality. As a result, the Anne Klein collection is intended
to appeal to the fashion forward consumer and currently is sold in prestige
department stores, traditional department stores and apparel specialty stores,
including Bloomingdales, Lord & Taylor, Neiman Marcus, Nordstrom and Saks Fifth
Avenue. Retail prices for the Anne Klein collection range from $40 to $150.
This collection also includes selected items of resortwear coordinated by color
or fabric to the swimwear, including cover-ups, kimono jackets and robes.
Sirena. The Sirena collection consists of better misses swimwear for
women with an active, youthful attitude. This collection is characterized by
quality construction and fashionable fabrics and styles. Retail prices range
from $40 to $90, and the Sirena collection currently is sold in prestige
department stores, traditional department stores and apparel specialty stores,
including Bloomingdales, Lord & Taylor, Belk, Dillard, May Department Stores
and Federated Department Stores. This collection also includes selected items
of resortwear coordinated by color or fabric to the swimwear, including
T-shirts, caftans, cover-ups and anorak jackets.
Hot Water. In mid-1996, the Company launched the Hot Water brand of
better junior's swimwear to provide merchandise for teenagers who were not
previously targeted by the Company's product line-up. The Hot Water brand is
intended for prestige department stores, traditional department stores, apparel
specialty stores, and surf shops.
Rose Marie Reid. In May 1994, the Company acquired the trademark to
the Rose Marie Reid brand, which was established in 1937 and was a competitor
of the Sirena brand. In fiscal 1995, the Company broadened the distribution of
the Rose Marie Reid brand to include traditional department stores, apparel
specialty stores and national chain department stores. The Rose Marie Reid
brand provides traditional department stores and apparel specialty stores with
a leading brand name for the traditional misses customer, thereby complementing
the Sirena brand, which is targeted towards a somewhat younger customer. The
Rose Marie Reid brand also provides the national chain department stores with a
leading brand name to complement the Company's private label swimwear.
Sirena Kids. To expand the Company's branded swimwear portfolio to
fill a void for fashion-oriented swimwear for girls and pre-teens, the Company
launched Sirena Kids in mid-1995. The collection primarily uses selected
silhouettes and fabrics from the Sirena collection. Retail prices for Sirena
Kids range from $24 to $30, and the collection is intended for prestige
department stores, traditional department stores and apparel specially stores.
Custom Designed Swimwear. The Company provides custom swimwear design
for catalog marketers, including Eddie Bauer, Talbots and Victoria's Secret.
In this effort, the Company's employees work with a customer to develop, design
and manufacture swimwear to be sold under the Company's brand names and the
customer's own labels, thereby providing the customer with the fashion and
manufacturing expertise developed by the Company in designing and manufacturing
its branded swimwear.
PRIVATE LABEL SWIMWEAR
The Company provides its fashion, merchandising and manufacturing
expertise to department stores and mass merchandisers through its private label
swimwear. Such products are designed by the Company using the fashion
inspiration provided by the Company's branded swimwear and are characterized by
the use of simplified construction, fewer embellishments, lower cost fabrics
and lower cost domestic and foreign cutting and sewing contractors. Retail
prices for private label swimwear range from $17 to $30. Private label
swimwear accounted for 30.5% of the Company's net sales for fiscal 1996.
RESORTWEAR
The Company's resortwear, currently consisting of jackets, pants,
shorts, tops, coverups, rompers, dresses and jumpsuits, is sold under the
WearAbouts brand name primarily in swimwear departments to complement the
Company's
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swimwear and to enhance the consumer's contemporary leisure lifestyle. Retail
prices range from $18 for a coverup to $50 for a romper. Resortwear accounted
for 11.2% of the Company's net sales for fiscal 1996. The Company continues
to expand the product offerings and distribution channels of its resortwear in
the same manner as it previously expanded its swimwear and, thereby, maximize
growth and minimize risk by reducing the seasonality of the Company's business.
PRODUCT DESIGN
The Company produces one line annually, except for the Anne Klein
brand for which two lines are produced. The Preview line, which accounts for
approximately 2% of the Company's net sales of such brands, is shown in January
and February and shipped in May and June. The Cruise line, which accounts for
approximately 98% of the Company's net sales of such brands, is shown primarily
between July and January and shipped primarily between January and April. The
Company uses the Preview line to test the response of retailers and consumers
to its new product offerings.
The Company's merchandising staff determines market trends by visiting
retail stores and trade shows throughout the United States and Europe, studying
fashion trends in swimwear, sportswear and lingerie and consulting with the
Company's sales force, buyers for retail stores and representatives of textile
suppliers and mills. Based upon such research, the merchandising staff selects
the styles, fabrics and colors for each new product line. The design staff
then prepares concept boards containing proposed designs and fabric selections
which are reviewed both within the Company and, on occasion, with major
customers. The production staff then determines whether each item can be
manufactured within the line's established cost structure, prepares a working
prototype of each garment and finalizes the design and production patterns
ensuring the high standards of the "Sirena" fit. The Company's sales force
actively monitors the sell-through of each product to determine changes in
consumer preferences.
MANUFACTURING
In fiscal 1992, the Company implemented a continuing program of
reducing manufacturing costs and developing alternative manufacturing sources.
As a result of these efforts, the Company believes that it can substantially
expand its sales volume in a timely manner without incurring substantial
capital expenditures.
Orders for the Company's products generally are received up to three
months prior to the scheduled shipping date. Furthermore, the Company seeks to
manufacture its products based primarily on orders. The time required from the
decision to manufacture an order to the shipment of the order is approximately
six weeks if the fabric is in stock and approximately ten to twelve weeks if
the fabric is not in stock.
The Company cuts approximately 29% and sews approximately 32% of its
products in its own facilities, uses three contractors, who cut exclusively for
the Company, to cut approximately 71% of its products and uses one contractor
to sew approximately 12% of its products. The balance of the Company's
products are sewn by 27 sewing contractors in the Los Angeles area and four
sewing contractor in Mexico. The use of its own facilities permits the Company
to maintain the high quality of its products, reduce fabric waste and respond
more quickly to the demands of retailers. In fiscal 1996, the Company
established a wholly owned subsidiary, SIRENAMEX S.A. de C.V., a Mexican
corporation, to own and operate a swimwear manufacturing facility in Sonora,
Mexico. This facility became operational in September 1995 and supports the
growth of the Company's private label swimwear business and has enhanced the
Company's capacity for quality, low cost production.
The Company believes that the use of contractors enables it to reduce
capital expenditures, more efficiently employ its facilities notwithstanding
the seasonality of the swimwear business and reduce the costs associated with a
larger production force. Although the Company has no master manufacturing
agreements with any of its domestic contractors and competes with other apparel
companies for production capacity, the Company believes that its relationships
with its contractors are satisfactory and that alternative domestic sources of
cutting and sewing services are available.
The Company has an extensive quality control program to maintain the
consistent fit and quality of its products. The Company's staff of quality
control inspectors monitors sewing quality and fit throughout the production
process at its in-house production facilities, as well as at its outside
contractors, to ensure that the Company's specifications and tolerances are
met. Each finished garment is inspected prior to shipment to the Company's
warehouse.
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The principal fabrics used in the Company's products are raschel,
tricot, cotton/Lycra, terry and cotton, 90% of which currently is acquired from
suppliers and textile mills located in the United States. The Company
purchased 23% of its total requirements in fiscal 1996 from Guilford Mills. No
other source accounted for more than 20% of the Company's fabric for fiscal
1996. Although the Company has no long- term agreements with any of its fabric
suppliers and competes with other apparel companies for fabric, the Company
believes that its relationships with its suppliers are satisfactory and that
alternative sources of fabric are readily available.
MARKETING
The Company sells its products through 13 account executives and 12
independent sales representatives located in six showrooms across the United
States. No sales representative markets directly competitive products
manufactured by others. The Company's products are sold in prestige department
stores (including Bloomingdales, Lord & Taylor, Neiman Marcus, Nordstrom and
Saks Fifth Avenue), traditional department stores (including Belk, Dillard, May
Department Stores and Federated Department Stores), apparel specialty stores
(including Swim & Sport), national chain department stores (including JC Penney
and Sears), mass merchandisers (including Kmart and Wal-Mart) and mail order
catalogs (including Eddie Bauer, Talbots and Victoria's Secret). The Company's
ten largest customers accounted for an aggregate of 51% of the Company's net
sales for fiscal 1996. May Department Stores accounted for 10% of the
Company's net sales for fiscal 1996, and no other customer accounted for more
than 8% of such sales.
In fiscal 1996, the Company continued to expand EDI and Quick
Response with selected retail accounts. EDI permits the computerized placement
of orders, billing and exchange of information, including current inventory
levels and selling trends, between the Company and its customers. Quick
Response is a program in which the Company commits to shipping selected styles
within 72 hours of order. This program enables a retailer to maintain a full
size range of a featured style and turn its inventory faster, thereby
encouraging the retailer to commit to the selected styles.
BOOKINGS
The Company's booking of orders was approximately $12,827,000 at
September 6, 1996 compared to approximately $13,719,000 at September 8, 1995, a
decrease of 7%. All such 1996 bookings are for shipment before May 15, 1997.
In general, bookings may be canceled by the customer only in the event of late
delivery or delivery of non-conforming goods, although cancellation for other
reason occurs from time to time. The Company generally has not experienced
difficulty in shipping orders by the dated requested by its customers. This
decrease in bookings is a function of the timing of receipt of the bookings,
and the elimination of cut-up programs in fiscal 1997, which were obtained in
the prior fiscal year. The peak booking period runs from November through
April and the receipts of booking may fluctuate from year to year.
Accordingly, year-to-date bookings are not necessarily indicative of annual
bookings, In addition, the amount of bookings manufactured and shipped during
any period is highly dependent on the season and on various other factors and,
accordingly, the amount of bookings at any date is not necessarily indicative
of actual shipments. Further, returns and allowances have ranged between 10%
and 15% of gross sales during the last three fiscal years.
COMPETITION
Each segment of the women's apparel industry in which the Company
offers products is highly competitive. The Company competes with numerous
apparel manufacturers, including those with their own retail stores, as well as
department stores, retail chains and mass merchandisers, including certain of
the Company's customers, which sell apparel under their own labels. The
Company's principal competitors include Authentic Fitness Corporation which
markets women's swimwear under the Anne Cole(R), Cole of California(R) and
Catalina(R) brand names, VF Corp. which markets under the Jantzen(R) brand
name, Apparel Ventures, Inc. which markets women's swimwear under the La
Blanca(R) and Sessa(R) brand names and Robby Len Fashion which markets under
the Robby Len(R) brand name. Many of the Company's competitors have
substantially greater financial, distribution, marketing and other resources,
including greater brand awareness, than the Company.
The Company competes primarily on the basis of offering a combination
of fashionable styling, consistent fit and quality construction appropriate to
the prices prevailing in the specific distribution channel. Although the
Company believes that its competitive strategy in the past has resulted in its
increased market share, there can be no assurance that
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the Company will be able to maintain or increase its revenues or earnings or to
correctly anticipate, gauge and respond to changing preferences of consumers
and retailers in a timely manner.
ANNE KLEIN LICENSE
Anne Klein has granted the Company the right to use the trademarks
Anne Klein, Anne Klein II, A Line Anne Klein and the "lion's head" design in
connection with the sale of women's designer bathing suits and related
accessories in the United States of America and its territories and
possessions. This license first was granted in 1987, subsequently was renewed
in 1990 and 1993 and was amended and restated effective July 1, 1995. The
license currently terminates on December 31, 1999. The license may be
terminated earlier by Anne Klein under certain circumstances, including the
Company's failure to pay certain guaranteed minimum royalties, the acquisition
of a controlling interest in the Company by any person other than Signal or a
change in management of the Company. Although the Company's sales in calendar
year 1996 exceed those necessary to generate sales royalties in excess of the
guaranteed minimum royalty for that year, no assurance can be given that the
Company will achieve adequate sales in the future. The designs, materials,
fabrication, labels and packaging of the Anne Klein collection must be approved
by, and are the sole property of, Anne Klein, and the Anne Klein collection
must include the number of styles determined by Anne Klein. The Company is
required to spend specified minimum amounts on advertising for the collections,
and all creative elements of such advertising are developed and controlled by
Anne Klein. The collections may be sold only in retail outlets approved by
Anne Klein. In consideration of the license and design services, the Company
pays Anne Klein a royalty based upon the net sales of the collections. The
Company is prohibited from manufacturing or marketing women's swimwear bearing
the name of any other well known American designer of high end products. Anne
Klein has the right to use the Anne Klein trademarks in connection with women's
bathing suits and related accessories contained in its collection or a couture
or limited edition line. Signal guaranteed certain obligations of the Company
to Anne Klein, which guarantee was released in 1996 since the Company
achieved the minimum net income prescribed in fiscal 1995.
EMPLOYEES
At September 6, 1996, the Company had 352 full-time employees in the
United States and Mexico, of whom two were engaged in corporate management, 18
in administration, five in merchandising and design, 14 in pattern and sample
making, 26 in production supervision, six in cutting, 235 in sewing, 25 in
sales and customer services, four in management information systems and 17 in
warehousing and shipping. The Company's employees are not covered by a
collective bargaining agreement, and the Company considers its relations with
its employees to be satisfactory.
ITEM 2. PROPERTIES
TRADEMARKS
Sirena, Hot Water, Rose Marie Reid, Sirena Kids, WearAbouts and
various private label trademarks owned by the Company are federally registered
trademarks in the United States and are registered in certain foreign
countries. The Company regards these trademarks as valuable assets and
believes that they are an important factor in marketing its products. It is
the policy of the Company to defend vigorously these trademarks against
infringement.
Anne Klein, Anne Klein II and A Line Anne Klein are federally
registered trademarks of Anne Klein in the United States. Under the Company's
license agreement, Anne Klein has the sole right to defend their trademarks
against infringement.
PHYSICAL PROPERTIES
The Company's principal executive offices and warehouse are located in
South El Monte, California. These premises contain approximately 93,000 square
feet, of which 15,000 square feet are used for administrative offices, 45,000
square feet are used for manufacturing and 33,000 square feet are used as a
warehouse, and are leased from an independent third party under leases which
expire on October 31, 1999. The annual rent on such premises is $464,000
subject to a cost-of-living adjustment in alternate years commencing on
November 1, 1991. In addition, the Company leases
9
<PAGE> 10
showrooms in New York, Miami, Chicago, Boston, Dallas and Los Angeles and a
factory building in Sonora, Mexico. As a result of the growth in inventory
resulting from its growth in sales, the Company currently is seeking additional
warehouse facilities on a contract basis. The Company does not anticipate any
difficulty in obtaining such facilities on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
On June 27, 1995, the Company brought an action in the Superior Court
of the State of California for the County of Los Angeles against (i) Plasa S.A.
de C.V. ("Plasa") and related defendants for breach of a written Manufacturing
Production Agreement dated July 11, 1994, between Plasa and the Company (the
"Agreement"), and other claims, and (ii) Apparel Ventures, Inc. and related
defendants for interference with the Company's relationship with Plasa and
trade secret violations. The Agreement provided for the manufacture of the
Company's swimwear and resortwear by Plasa at its Mexican manufacturing plant.
Plasa declared the Agreement, which had a three year term, terminated in May
1995 with two years remaining on the contract. On July 31, 1995, Plasa filed
a cross-complaint against the Company alleging breach of the Agreement by the
Company and breach of the implied covenant of good faith and fair dealing.
Plasa's cross-complaint alleges damages in an unspecified sum to be proven at
trial. Trial is set for October 7, 1996. The Company filed a motion to
strike Plasa's Cross-Complaint which was granted, although Plasa could attempt
to revive the Cross-Complaint but has not done so.
On August 28, 1996, the court granted Apparel Ventures' motion for
leave to file a Cross-Complaint against the Company. Apparel Ventures claims,
among other things, that the Company mislabeled swimwear manufactured at Plasa
in Mexico as "Made in the U.S.A." and this violated the Lanham Act and unfair
competition statutes. The proposed Cross-Complaint seeks unspecified damages,
including the Company's profits from the sale of any mislabeled garments, and
punitive damages. Only limited discovery has been taken on these issues and is
continuing; the Company is, therefore, unable at this time to determine whether
the likelihood of an unfavorable outcome is probable or remote. The Company
intends to vigorously defend the Cross-Complaint, and has no present belief that
the Cross-Complaint has any merit.
The Company, Plasa, and Apparel Ventures have reached an agreement in
principle regarding the settlement of these actions subject to the completion
of appropriate documentation. The Company does not believe that the ultimate
disposition of such actions will have a material adverse effect on the
Company's financial condition or results of operations.
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 operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NASDAQ LISTING
The Company's Common Stock began trading publicly on the Nasdaq
National Market under the symbol "SIRN" on August 12, 1994. The following
table sets forth, for the periods indicated, the range of high and low sale
prices for the Company's Common Stock as reported by the Nasdaq National
Market. Those prices do not include retail markups, markdowns or commissions.
10
<PAGE> 11
<TABLE>
<CAPTION>
Sale Price
----------
Low High
--- ----
<S> <C> <C>
FISCAL 1995
First Quarter (Since August 12, 1994) . . . $ 4.75 $ 6.25
Second Quarter . . . . . . . . . . . . . . 4.75 6.75
Third Quarter . . . . . . . . . . . . . . . 5.625 7.50
Fourth Quarter . . . . . . . . . . . . . . 7.25 8.50
</TABLE>
<TABLE>
<CAPTION>
Sale Price
----------
Low High
--- ----
<S> <C> <C>
FISCAL 1996
First Quarter . . . . . . . . . . . . . . . $ 7.25 $ 9.25
Second Quarter . . . . . . . . . . . . . . 5.375 8.125
Third Quarter . . . . . . . . . . . . . . 5.125 6.75
Fourth Quarter . . . . . . . . . . . . . . 2.875 5.75
</TABLE>
On September 6, 1996, the closing price of the Company's Common Stock
as reported by the Nasdaq National Market System was $2.375. Stockholders are
urged to obtain current market quotations for the Common Stock. As of
September 6, 1996, there were approximately 16 stockholders of record of the
Company.
DIVIDENDS
Since 1987, the Company has not paid dividends on its Common Stock.
The Company currently intends to retain any future earnings to provide funds
for the operation and expansion of its business and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Company's Board of Directors, and
will depend upon, among other things, the Company's earnings, financial
condition, level of indebtedness, contractual restrictions on the payment of
dividends, capital requirements and general business conditions.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified in its entirety by,
and should be read in conjunction with, the other information and financial
statements, including the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year Ended Year Ended June 30,
September 30,
-----------------------------------------------------------------
1992 1993(1) 1994 1995 1996
(Nine months)
----------- ------------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales . . . . . . . . . . . . . $ 26,998 $ 28,937 $ 38,932 $ 49,206 $49,206
Cost of goods sold . . . . . . . . 17,619 19,947 26,751 34,010 38,390
----------- --------- --------- ---------- -------
Gross profit . . . . . . . . . . . 9,379 8,991 12,181 15,196 10,816
Selling, general and
administrative expenses . . . . 7,382 6,997 9,633 10,893 14,030
Depreciation and amortization(2) . 781 148 204 241 274
----------- --------- --------- ---------- -------
Income (loss) before interest and
income taxes . . . . . . . . . . 1,216 1,846 2,343 4,062 (3,488)
Interest expense . . . . . . . . . 1,308 1,122 1,417 1,033 908
----------- --------- --------- ---------- -------
Income (loss) before income taxes . (92) 724 926 3,030 (4,396)
Income taxes . . . . . . . . . . . -- 54 25 142 15
----------- --------- --------- ---------- -------
Net income (loss) . . . . . . . . . $ (92) $ 671 $ 901 $ 2,888 $(4,411)
=========== ========= ========= ========== =======
Net income (loss) per common share $ (0.05) $ 0.38 $ 0.52 $ 0.93 $ (1.05)
=========== ========= ========= ========== =======
Weighted average common shares
outstanding . . . . . . . . . . . 1,743,971 1,743,971 1,743,971 3,104,255 4,205,020
=========== ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended June 30,
September 30,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital . . . . . . . . . . . . . . . . . . . . $ 618 $ 1,940 $ 1,410 $ 6,120 $ 9,900
Total assets . . . . . . . . . . . . . . . . . . . . . 9,248 8,646 10,372 14,738 18,678
Total current liabilities . . . . . . . . . . . . . . . 5,111 3,277 4,164 3,885 3,858
Long-term debt, less current maturities . . . . . . . . 3,111 3,673 3,611 86 50
Stockholders' equity . . . . . . . . . . . . . . . . . 1,025 1,696 2,596 10,768 14,770
</TABLE>
________________
(1) In 1993, the Company changed its fiscal year-end from September 30 to
June 30. For interim reporting purposes, the Company's first, second
and third quarters end on September 30, December 31 and March 31,
respectively.
(2) See Note 2 of Notes to Financial Statements.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which certain items in the statement of operations data bear to net
sales and the percentage dollar increase (decrease) of such items from period
to period.
<TABLE>
<CAPTION>
Percentage Dollar
Percent of Net Sales Increase (Decrease)
------------------------------ --------------------
Year Ended June 30,
------------------------------
1994 1995
and and
1994 1995 1996 1995 1996
----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . 100.0% 100.0% 100.0% 26.4% 0%
Cost of goods sold . . . . . . . 68.7% 69.1% 78.0% 27.1% 12.9%
----- ----- -----
Gross profit . . . . . . . . . . 31.3% 30.9% 22.0% 24.8% (28.9)
Selling, general and
administrative expenses . . . . 24.7% 22.1% 28.5% 13.1% 28.8%
Depreciation and
amortization . . . . . . . . . 0.5% 0.5% 0.6% 18.1% 13.7%
----- ----- -----
Income (loss) before interest
and income taxes . . . . . . . 6.1% 8.3% (7.1%) 73.4% (185.9%)
Interest expense . . . . . . . . 3.7% 2.1% 1.8% (27.1%) (12.1%)
----- ----- -----
Income (loss) before income
taxes . . . . . . . . . . . . . 2.4% 6.2% (8.9%) 227.1% (245.1%)
Income taxes . . . . . . . . . . 0.1% 0.3% 0.1% 468.0% (89.4%)
----- ----- -----
Net income (loss) . . . . . . . . 2.3% 5.9% (9.0%) 220.4% (252.7%)
===== ===== =====
</TABLE>
13
<PAGE> 14
The following table sets forth, for the periods indicated, the
percentage which net sales for each division bears to the Company's aggregate
net sales.
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Branded . . . . . . . . . . . . . . 65.8% 62.7% 58.3%
Resortwear . . . . . . . . . . . . 10.7% 10.9% 11.2%
Private label . . . . . . . . . . . 23.5% 26.4% 30.5%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales remained unchanged at $49,206,000 for fiscal
1995 as compared to $49,206,000 for fiscal 1996. Changes in the components of
net sales included (i) a 6.4% decrease in the revenue of the branded division
resulting from adverse weather conditions in the spring which reduced consumer
traffic and limited reorders of branded merchandise, (ii) a 14.3% increase in
the revenue of the private label division, resulting from increased market
penetration into the existing account base, and (iii) a 3.7% increase in the
resortwear division resulting from the greater importance of the resortwear
category at the Company's major retail accounts.
Gross Profit. Gross profit declined from $15,196,000 (30.9% of net
sales) in fiscal 1995 to $10,816,000 (22% of net sales) in fiscal 1996, a
decrease of 28.8%, due to a decrease in gross profit margin. The decrease in
gross profit margin was due primarily to (i) a reduction in regular priced
reorders due to reduced consumer traffic in the spring as a result of adverse
weather conditions, (ii) additional reserves provided for inventory of end of
season merchandise of $1,600,000 due to lower than historical wholesale prices
for close-out merchandise after the merger of two of the Company's largest
off-price retail customers, (iii) the unilateral cancellation of a Mexican
production contract by the contractor which caused the Company to source
elsewhere, including domestically, at additional cost, and (iv) a sales mix
which included an increase in sales of the private label division which
generally has a lower gross profit margin than the Company's branded products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $11,134,000 (22.6% of net sales) in
fiscal 1995 to $14,304,000 (29.1% of net sales) in fiscal 1996, an increase of
28.5%. This increase in such expenses consisted primarily of (i) increased
costs associated with the expansion of the Company's distribution operations,
(ii) costs associated with the launch in fiscal 1996 of the A-Line Anne Klein
and Sirena Kids divisions, and (iii) costs of a national print advertising
compaign for which there was no comparable expenditure in fiscal 1995.
Interest Expense. Interest expense decreased from $1,033,000 (2.1% of
net sales) in fiscal 1995 to $908,000 (1.8% of net sales) in fiscal 1996, a
decrease of 12.1%, due primarily to use of the proceeds from the secondary
public stock offering in November 1995, partially offset by additional working
capital requirements.
Net Income. As a result of the foregoing factors, net income
declined from $2,888,000, $0.93 per common share for fiscal 1995 to a net loss
of $4,411,000, $1.05 per common share for fiscal 1996. Net income in fiscal
1995 reflected a 4% tax rate, and the utilization of operating loss carry
forwards, compared to a nominal tax rate in fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales increased from $38,932,000 for fiscal 1994 to
$49,206,000 for fiscal 1995, an increase of 26%. The increase in net sales
consisted of (i) a 29% increase in the WearAbouts division based on strong
shipping of "gift with purchase" tank swimsuit and T-shirt sets, (ii) a 15%
increase in the Anne Klein division based on sales of products using the newly
exploited "lion's head" logo as well as strong promotional programs, (iii) a
43% increase in the private label division resulting from the opening of J.C.
Penney as a new account and the expansion of existing accounts, (iv) a 34%
increase in the Look & Sea division based on a favorable response to a
refocused sales and merchandising effort and (vi) sales generated by the Rose
Marie Reid division for which there were no corresponding sales in the
comparable period of fiscal 1994.
14
<PAGE> 15
Gross Profit. Gross profit increased from $12,181,000 (31.3% of net
sales) for fiscal 1994 to $15,196,000 (30.9% of net sales) for fiscal 1995, an
increase of 24.8%. The increase in gross profit resulted from the increase in
net sales, partially offset by a reduction in gross profit margin. The
decrease in gross profit margin in fiscal 1995 resulted primarily from (i) a
reduction in the gross profit margin of the WearAbouts line resulting from
strong sales of "gift with purchase" tank swimsuit and T-shirt sets, which
carry a somewhat lower mark-up than higher priced fashion offerings in that
line, (ii) a reduction in the gross profit margin of the Anne Klein line
resulting from the Company's strategy of defending large market share gains in
the prior year in the face of increased competition in fiscal 1995 by expanded
promotional programs and (iii) a larger percentage of lower margin private
label product in fiscal 1995 than fiscal 1994. Such reductions in gross profit
margin were partially offset by improved margins of the Sirena division
reflecting greater emphasis on quality of earnings and improved sales mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9,838,000 (25.2% of net sales) for
fiscal 1994 to $11,134,000 (22.6% of net sales) for fiscal 1995, an increase of
13.2% The increase in such expenses was due to overhead associated with the
recently acquired Rose Marie Reid brand which was not sold by the Company in
fiscal 1994, increased travel and entertainment to promote the new season's
product lines, costs incurred to expand the staffing and management of the
Company's distribution operations and on-going expenses of being a publicly
traded company. These expenses, however, rose at a slower rate than the
increase in net sales, resulting in the decrease in selling, general and
administrative expenses as a percentage of net sales in fiscal 1995 compared to
fiscal 1994.
Interest Expense. Interest expense decreased from $1,417,000 (3.7% of
net sales) in fiscal 1994 to $1,033,000 (2.1% of net sales) for fiscal 1995, a
decrease of 27.1%, primarily due to (i) the retirement of the term note and
revolving credit arrangement with Signal Capital Corporation with proceeds from
the initial public offering and (ii) the Company's lower debt requirements as a
result of the availability of the initial public offering proceeds. These
decreases were partially offset by increases in the prime rate and use of the
factoring arrangement and seasonal line of credit for working capital purposes
to support the 26.4% increase in net sales.
Net Income. Net income increased from $901,000 ($0.52 per common
share) in fiscal 1994 to $2,888,000 ($0.93 per common share) for fiscal 1995.
This was due to (i) the increase in gross profit and (ii) the reduction in
interest expense, and was partially offset by (i) the increase in selling,
general and administrative expenses and (ii) the increase in tax provision in
fiscal 1995 to 4.7% from 2.7% in fiscal 1994. Earnings per share were affected
by the dilution from the initial public offering in August 1994, as well as
common share equivalents in the form of options and warrants.
VARIABILITY OF QUARTERLY RESULTS AND SEASONALITY
The Company has experienced, and expects to continue to experience,
variability in its net sales and operating results on a quarterly basis. The
Company believes the factors which influence this variability include (i) the
timing of the Company's introduction of new apparel lines, (ii) the level of
consumer acceptance of each new line, (iii) general economic and industry
conditions that affect consumer spending and retailer purchasing, (iv) the
timing of the placement or cancellation of customer orders, (v) the timing of
expenditures in anticipation of increased sales and customer delivery
requirements, (vi) the weather and (vii) actions of competitors. As a result
of adverse weather in fiscal 1996 on industry sales of swimwear, the Company
believes that retail customers may be conservative with their initial orders in
fiscal 1997. The Company has sought to reduce this variability by diversifying
its brand names and distribution channels.
In addition, the Company's swimwear business is highly seasonal. For
fiscal 1996, 50.7% of the Company's net sales were generated in the third
fiscal quarter. If the Company's sales during the third quarter were
materially below seasonal norms, the Company's operating results could be
materially and adversely affected. The Company has sought to reduce the effect
of this seasonality by (i) increasing sales of resortwear products which
generally are less seasonal than branded swimwear and (ii) reducing excess
production capacity and increasing overhead absorption by scheduling the
manufacturing of private label swimwear into the slower first quarter of the
fiscal year. The Company has traditionally generated an operating loss in its
first fiscal quarter due to limited retailer demand in advance of the slower
Fall selling season. The Company anticipates that these first quarter losses
will continue and may increase in the foreseeable future.
15
<PAGE> 16
The following table sets forth the Company's net sales, income (loss)
from operations and net income (loss) for each fiscal quarter in fiscal 1995
and fiscal 1996.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1994 1994 1995 1995 1995 1995 1996 1996
---------- --------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ...... $ 2,694 $ 8,551 $ 21,927 $ 16,034 $ 3,100 $ 9,803 $ 24,967 $ 11,336
Income (loss)
from operations (1,286) 596 3,948 804 (1,235) 739 3,170 (6,162)
Net income
(loss) ........ (1,397) 425 3,459 400 (916) 377 1,892 (5,764)
Net income
(loss) per
common share .. $ (0.56) $ 0.14 $ 1.05 $ 0.12 $ (.29) $ .09 $ 0.40 $ (1.24)
Weighted
average
common
shares
outstanding .. 2,505,000 3,143,971 3,296,244 3,362,988 3,143,971 4,059,607 4,734,740 4,649,230
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds has been to finance its growth in
receivables and inventory, to finance the development of new product lines and
the improvement of its operating, manufacturing and customer service
capabilities and, prior to its initial public offering in August 1994, to pay
the interest on debt incurred in connection with the Leveraged Buyout. The
Company has financed its working capital requirements from its cash flow from
operations, advances drawn under its factoring and revolving credit
arrangements and proceeds from its initial and secondary public offerings. In
November 1995, the Company completed a secondary offering raising $8.1 million
which was used to pay down advances under its factoring arrangement. Although
the Company believes that its present sources of working capital are sufficient
to maintain its current level of operations, the Company believes that the
Company's cash flow from operations, together with volume adjustments to its
existing credit facility, will enable it to finance its current and anticipated
growth in sales for the foreseeable future.
Net cash used by operating activities for fiscal 1996 was $7,905,000,
compared to $2,269,000 used by operating activities for fiscal 1995. At June
30, 1996, working capital was approximately $9,900,000, compared to $6,120,000
at June 30, 1995.
The Company's inventory generally is highest during November through
April as it prepares for and enters its principal selling season, and advances
under its credit facilities generally are highest during January through April.
Inventory increased from $5,971,000 at June 30, 1995 to $7,713,000 at June 30,
1996, an increase of 29.2%, (i) as a result of adverse weather conditions in
the last five months of fiscal 1996 which resulted in higher than anticipated
cancellations and reduced reorders, and (ii) residual inventory of A Line Anne
Klein and Sirena Kids which did not contribute sales in fiscal 1995, partially
offset by an increase in the inventory reserve for lower of cost or market of
$1,600,000.
On August 19, 1994, the Company entered into an accounts receivable,
inventory, seasonal overadvance and factoring services arrangement with Heller
Financial, Inc. ("Heller") pursuant to which, as amended as of September 15,
1995, the Company sells to Heller all of the Company's accounts receivable at
their net invoice price less a commission of .675%, up to $75 million in gross
sales and 0.575% thereafter, with no minimum or ancillary fees. Advances are
made without recourse for the financial inability of the customer to pay with
respect to all accounts receivable approved by Heller. The Company bears the
entire risk of non-approved receivable and accounts receivable returned by the
factor to the Company. Prior to Heller's payment, the Company may draw
short-term advances from Heller up to 80% of the uncollected receivables less
reserves as determined by Heller, which advances bear interest at an annual
rate of 0.75% over the prime
16
<PAGE> 17
rate established from time to time by Bank of America (8.25% at June 30, 1996).
Heller collects such advances and interest by offsetting against amounts due to
the Company upon the collection of factored receivables. In addition, the
Company may draw short-term from Heller of (i) up to 50% of eligible inventory
which is current season inventory and (ii) up to 40% prior to October 31, (iii)
and up to 25% during the period between November 1 and June 30, in each case of
eligible inventory which is not current season inventory, less (iv) such
reserves as Heller elects to establish. The Company's short-term advances are
limited to a maximum of $6,000,000 or $1,000,000 in excess of the Company's
projected short-term advance requirements, whichever is less. The Company may
also borrow seasonal overadvances of up to $1,000,000 from September 1 to
September 30, $2,000,000 from October 1 to October 31, $2,500,000 from November
1 to November 30, $3,000,000 from December 1 to January 31, $2,500,000 from
February 1 to February 28, $1,500,000 from March 1 to March 31 and $500,000
from April 1 to May 31 each year. The inventory advances and the overadvances
bear interest at an annual rate of 2% over the prime rate established from time
to time by Bank of America. Finally, the Company may request Heller to issue
guarantees for the Company's purchase of raw materials for up to $575,000 at
any one time. Under the Company's agreement with Heller, the maximum credit
available to the Company at any time is limited to $26 million. The Company's
agreement with Heller has a term expiring on August 19, 1997, after which time
either party may terminate upon 60 days written notice. The Company's
obligations to Heller are secured by the Company's accounts receivable,
inventory, general intangibles, other than trademarks or trade names, and cash
deposit accounts.
The balance of advances from the factor was $7,032,000 at June 30,
1996, compared to $8,928,000 at June 30, 1995. At June 30, 1996, the amount
payable to the Company for factored receivables upon the collection thereof
less the amount of outstanding advances to the Company (the "amount due from
factor") was $5,008,000, compared to $4,301,000 at June 30, 1995. The Company
bears the entire risk of non-approved receivables which decreased from $573,100
at June 30, 1995 (4.3% of gross receivables due from factor) to $521,100 at
June 30, 1996 (4.3% of gross receivables due from factor).
The Company has no material commitments for capital expenditures.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation in the past three years have had a significant effect on its net
sales or its profitability. Historically, the Company has been able to offset
any inflationary effect by either increasing prices or improving cost
efficiencies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8K" for the Company's financial statements, and the notes thereto, and the
financial statement schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are set forth
below. The Company has three classes of directors which are elected for
staggered three year terms. The terms of each class expire at the annual
meetings of
17
<PAGE> 18
shareholders in 1998 (Class I), 1999 (Class II) and 1997 (Class III). Officers
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position Class of Director
---- --- -------- -----------------
<S> <C> <C> <C>
Douglas Arbetman 48 President, Chief III
Executive Officer and
Director
Henry R. Mandell 39 Executive Vice President, --
Chief Financial Officer
and Secretary
Nicholas B. Binkley (1) 50 Director I
Jeffrey J. Holland (1), (2) 36 Director II
Eben S. Moulton (2) 50 Director III
Arthur H. Warshaw (2) 63 Director II
</TABLE>
__________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DOUGLAS ARBETMAN has been employed as the President and the Chief
Executive Officer and has been a director of the Company since February 1990.
From 1989 to joining the Company, Mr. Arbetman was the President of Cherokee
Swimwear. From 1987 to 1989, Mr. Arbetman was President of Reebok Apparel, a
division of Reebok International Ltd. From 1982 to 1987, Mr. Arbetman was Vice
President of Merchandising for Cole of California. Prior to 1982, Mr.
Arbetman held various Management positions and was a women's swimwear buyer for
Bloomingdales and Robinsons Department Stores. Mr. Arbetman received a B.S.
degree from Emerson College in 1969.
HENRY R. MANDELL has been employed as Senior Vice President, Chief
Financial Officer and Secretary of the Company since November 1990, and as
Executive Vice President since November 1995. From 1985 to November 1990, Mr.
Mandell was employed in various executive capacities by Media Home
Entertainment, a manufacturer and distributor of videocassettes, including as
Senior Vice President, Finance and Administration, and a director since 1987.
From 1982 to 1985, Mr. Mandell held various financial positions with Oak
Industries, a publicly-held communications company listed on the New York Stock
Exchange. Prior to 1982, Mr. Mandell was employed by 20th Century-Fox Film
Corporation and by Arthur Young and Company where he qualified as a Certified
Public Accountant. Mr. Mandell received a B.S. degree in management, magna cum
laude, from Syracuse University in 1978.
NICHOLAS B. BINKLEY has served on the Board of Directors since October
26, 1994. Since July 1993, Mr. Binkley has been a partner in Forrest Binkley &
Brown, a venture capital firm located in Newport Beach, California. From 1977
to 1993, he was employed in various executive capacities by Security Pacific
Corporation and various of its subsidiaries, including as Chairman and Chief
Executive Officer of Security Pacific Financial Services System, Inc. and a
member of the investment committee of Security Pacific Venture Capital Group.
Following the merger of Security Pacific Corporation and BankAmerica
Corporation, Mr. Binkley served as Vice Chairman of the Board of BankAmerica
Corporation and Bank of America, a director and a member of the Office of the
Chief Executive of Security Pacific Corporation and a member of the Managing
and Operating Policy Committee of BankAmerica Corporation and Bank of America.
Mr. Binkley received a B.A. degree in political science from The Colorado
College in 1968 and a M.A. degree in international studies from Johns Hopkins
School of Advanced International Studies in 1971.
18
<PAGE> 19
JEFFREY J. HOLLAND has been a director of the Company since January
1990. Since 1987, Mr. Holland has been employed in various capacities by
Signal, a subsidiary of Itel Corporation and a principal stockholder of the
Company, including as a Senior Investment Manager since 1990. In January 1995,
he became a partner in Seacoast Capital, an investment firm which provides
mezzanine and equity capital to middle market companies. From 1982 to 1985, he
was employed by Arthur Andersen & Co. as a consultant in the Management
Information Consulting Division. Mr. Holland received a B.S. degree in
industrial engineering from Stanford University in 1982 and a MBA from Harvard
Graduate School of Business Administration in 1987.
EBEN S. MOULTON has been a director of the Company since January 1990.
Since 1984, Mr. Moulton has been employed in various executive capacities by
Signal, a subsidiary of Itel Corporation and a principal stockholder of the
Company, including as President since 1989. In January 1995, he became
managing partner of Seacoast Capital, an investment firm which provides
mezzanine and equity capital to middle market companies. From 1980 to 1984, he
was a Vice President of Bank of New England, and from 1977 to 1980, he was an
Assistant Vice President of Shawmut Bank. Mr. Moulton is a director of IEC
Electronics Corp., an electronics contract manufacturer. Mr. Moulton received
a B.A. degree in philosophy from The Colorado College in 1968, a Ph.D. in
philosophy from Vanderbilt University in 1974 and a MBA degree from Columbia
University in 1977.
ARTHUR H. WARSHAW has been a director of the Company since June 1994
and has been a consultant to the Company since November 1989. Since 1987, he
has been the President of Apparel Management, Inc. a consulting and advisory
firm, and Editor of The Apparel Strategist, an industry business journal. From
1977 to 1986, Mr. Warshaw was Senior Vice President of Warnaco Inc. Mr.
Warshaw received a B.S. degree in business administration from Syracuse
University in 1953.
There are no family relationships among directors or executive
officers of the Company and, except as set forth above, as of the date hereof,
no directorships are held by any director in a company which has a class of
securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or subject to the requirements of
Section 15(d) of the Exchange Act or any company registered as an investment
company under the Investment Company Act of 1940. None of the directors or
executive officers were selected pursuant to any arrangement or understanding,
other than with the directors and executive officers of the Company acting
within their capacity as such.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation
Committee, each of which consists of two or more directors who serve at the
pleasure of the Board of Directors.
The Audit Committee is chaired by Mr. Binkley and its members are
Messrs. Binkley and Holland. The primary purposes of the Audit Committee are
(i) to review the scope of the audit and all non-audit services to be performed
by the Company's independent certified public accountants and the fees incurred
by the Company in connection therewith, (ii) to review the results of such
audit, including the independent accountants' opinion and letter of comment to
management and management's response thereto, (iii) to review with the
Company's independent accountants the Company's internal accounting principles,
policies and practices and financial reporting, (iv) to make recommendations
regarding the selection of the Company's independent accountants and (v) to
review the Company's quarterly financial statements prior to public issuance.
The Audit Committee met three times during fiscal 1996.
The Compensation Committee is chaired by Mr. Warshaw, and its members
are Messrs. Holland, Moulton and Warshaw. The purposes of the Compensation
Committee are (i) to review and recommend to the Board of Directors the
salaries, bonuses and perquisites of the Company's executive officers, (ii) to
determine the individuals to whom, and the terms upon which, awards under the
Company's stock incentive plan and profit sharing plan will be granted, (iii)
to make periodic reports to the Board of Directors as to the status of such
plans and (iv) to review and recommend to the Board of Directors additional
compensation plans. The Compensation Committee met once during fiscal 1996.
19
<PAGE> 20
MEETINGS OF DIRECTORS
The Board of Directors met six times during fiscal 1996. All of the
persons who were directors of the Company during fiscal 1996 attended at least
75% of (i) the total number of meetings of the Board of Directors and (ii) the
total number of meetings held by all committees on which they served during
fiscal 1996.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
The Amended and Restated Certificate of Incorporation of the Company
limits the liability of the Company's directors for monetary damages arising
from a breach of their fiduciary duties to the Company and its shareholders,
except to the extent otherwise required by the Delaware General Corporation
Law. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or recision.
The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by applicable law,
including circumstances in which indemnification is otherwise discretionary.
Such provisions may require the Company, among other things, (i) to indemnify
its officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers provided such persons acted
in good faith and in a manner reasonably believed to be in the best interests
of the Company and, with respect to any criminal action, had no cause to
believe their conduct was unlawful, (ii) to advance the expenses actually and
reasonably incurred by its officers and directors as a result of any proceeding
against them as to which they could be indemnified and (iii) to obtain
directors' and officers' insurance if available on reasonable terms. There is
no action or proceeding pending or, to the knowledge of the Company, threatened
which may result in a claim for indemnification by any director, officer,
employee or agent of the Company.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16
Under Section 16(a) of the Exchange Act, the Company's directors,
executive officers and any person holding ten percent or more of the Common
Stock are required to report their ownership of Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC") and to
furnish the Company with copies of such reports. Specific due dates for these
reports have been established, and the Company is required to report in this
Annual Report any failure to file on a timely basis by such persons. Based
solely upon a review of copies of reports filed with the SEC prior to June 30,
1996, all persons subject to the reporting requirements of Section 16(a) have
filed all required reports on a timely basis.
20
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities during fiscal 1996 to each
person who acted in the capacity of an executive officer (the "Named
Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
---------------------------------------- ------------------------- ----------
Securities
Restricted Underlying All Other
Other Annual Stock Options/ LTIP Compensation
Name and Principal Position Salary($) Bonus($) Compensation($)(1) Award(s)($) SARs(#)(2) Payouts($) ($)(3)
- --------------------------- -------- -------- ------------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas Arbetman,
President and
Chief Executive Officer ... 350,000 39,375 16,031 -- 86,000 -- 1,500
Henry R. Mandell,
Executive Vice President,
Chief Financial Officer
and Secretary ............. 152,849 8,598 9,250 -- 22,000 -- 1,500
</TABLE>
___________________
(1) Consists of automobile lease, insurance, fuel and maintenance expenses,
premiums on supplemental long-term disability insurance and, for Mr.
Arbetman, premiums on key man life insurance payable to him.
(2) Consists of shares issuable pursuant to options granted under the
Company's stock incentive plan subsequent to the consummation of the
Company's secondary public offering in November 1995.
(3) Consists of reimbursement of medical and dental expenses not covered by
insurance plans provided by the Company to employees generally.
EMPLOYMENT AGREEMENTS
Effective as of August 19, 1994, the completion of its initial public
offering, and as amended on November 9, 1995, the Company entered into a
three-year employment agreement with Mr. Arbetman pursuant to which he is
entitled to (i) receive an annual base salary of $350,000, (ii) receive an
annual bonus, up to 100% of his base salary, based upon the satisfaction of
performance goals to be determined by the Board of Directors, (iii) participate
in all plans sponsored by the Company for employees in general, (iv) receive
$500,000 of life insurance payable as directed by him, (v) receive an option to
purchase up to 267,150 shares of the Common Stock of the Company at the initial
public offering price and 86,000 shares of the Common Stock of the Company at
the closing price on June 28, 1996 and (vi) receive a $850 monthly automobile
allowance, together with reimbursement of expenses for insurance, fuel and
maintenance. In the event the Company terminates his employment before the end
of the stated term without cause or Mr. Arbetman terminates his employment for
specified causes, the Company is obligated to pay the base salary for 730 days.
In the event the Company terminates his employment before the end of the
stated term with cause, the Company is obligated to pay the base salary only
through the date of termination.
Effective as of August 19, 1994, the completion of its initial public
offering, and as amended on November 9, 1995, the Company entered into a
two-year employment agreement with Mr. Mandell pursuant to which he is entitled
to (i) receive an annual base salary of $160,000, (ii) receive an annual bonus,
up to 50% of his base salary, based upon the satisfaction of performance goals
to be determined by the Board of Directors, (iii) participate in all plans
sponsored by the Company for employees in general, (iv) receive an option to
purchase up to 66,788 shares of the Common Stock of the
21
<PAGE> 22
Company at the initial public offering price and 22,000 shares of the Common
Stock of the Company at the closing price on June 28, 1996 and (v) receive a
$536 monthly automobile allowance, together with reimbursement of expenses for
insurance, fuel and maintenance. In the event the Company terminates his
employment before the end of the stated term without cause or Mr. Mandell
terminates his employment for specified causes, the Company is obligated to pay
the base salary for 360 days. In the event the Company terminates his
employment before the end of the stated term with cause, the Company is
obligated to pay the base salary only through the date of termination.
STOCK OPTION GRANTS
The following table sets forth certain information concerning the grant of
stock options during the fiscal 1996 to the Named Executives.
OPTION/SAR GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(1)
--------------------------------------------------------------- ------------------------
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees Price Expiration
Name Granted (#) in FY 1996 ($/Sh) Date 5%($) 10%($)
------------------------ ------------ ------------ -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Douglas Arbetman . . . . 86,000 (2) 53.3 3.125 June 2006 168,990 427,850
Henry R. Mandell . . . . 22,000 (3) 13.6 3.125 June 2006 43,230 109,450
</TABLE>
___________________
(1) The Potential Realizable Value is the product of (a) the difference
between (i) the product of the closing sale price per share at the date of
grant and the sum of (A) 1 plus (B) the assumed rate of appreciation of
the Common Stock compounded annually over the term of the option and (ii)
the per share exercise price of the option and (b) the number of shares of
Common Stock underlying the option at June 28, 1996. THESE AMOUNTS
REPRESENT CERTAIN ASSUMED RATES OF APPRECIATION ONLY. ACTUAL GAINS, IF
ANY, ON STOCK OPTION EXERCISES ARE DEPENDENT ON A VARIETY OF FACTORS,
INCLUDING MARKET CONDITIONS AND THE PRICE PERFORMANCE OF THE COMMON STOCK.
THERE CAN BE NO ASSURANCE THAT THE RATE OF APPRECIATION PRESENTED IN THIS
TABLE CAN BE ACHIEVED.
(2) Consists of shares which Mr. Arbetman has the right to purchase upon the
exercise of stock options granted pursuant to the Company's stock
incentive plan, which options became exercisable upon the date of grant.
(3) Consists of shares which Mr. Mandell has the right to purchase upon the
exercise of stock options granted pursuant to the Company's stock
incentive plan, which options became exercisable upon the date of grant.
22
<PAGE> 23
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information with respect to the
Named Executives concerning the exercise of options during fiscal 1996 and
unexercised options held by the Named Executives as of June 30, 1996.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options at
Options at 06/30/96(#) 06/30/96 ($)(1)
------------------------------ ------------------------------
Shares
Acquired Value
on Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas Arbetman 32,192 56,336 320,958(2) -- 0 --
Henry R. Mandell 8,471 14,824 80,317(3) -- 0 --
</TABLE>
___________________
(1) The value of unexercised "in-the-money" options is the difference between
the closing sale price of the Common Stock on June 28, 1996 ($3.125 per
share) and the exercise price of the option, multiplied by the number of
shares subject to the option.
(2) Consists of shares Mr. Arbetman currently has the right to purchase upon
the exercise of stock options granted pursuant to the Company's stock
incentive plan at an exercise price of between $3.125 and $4.75 per
share, which options became exercisable on the date of grant.
(3) Consists of shares Mr. Mandell has the right to purchase upon the exercise
of stock options granted pursuant to the Company's stock incentive plan at
an exercise price of between $3.125 and $4.75 per share, which options
became exercisable on the date of grant.
DIRECTOR COMPENSATION
The Company pays to each director who is not employed by the Company or
affiliated with Signal $10,000 per year, payable in equal quarterly
installments, and reimburses such person for all expenses incurred by him in
his capacity as a director of the Company. The Board of Directors may modify
such compensation in the future. In addition, each director not employed by
the Company or affiliated with Signal, upon joining the Board of Directors,
will receive an option to purchase 5,000 shares of the Common Stock of the
Company. Such options will have an exercise price equal to the fair market
value of such shares on the date of grant, are immediately exercisable and will
expire on the fifth anniversary of the date of grant. Upon the completion of
the Company's initial public offering, each of Messrs. Binkley and Warshaw was
granted options to purchase 5,000 shares of Common Stock at $4.75 per share,
the initial public offering price. In addition, Mr. Warshaw was granted
options to purchase 128,575 shares of Common Stock at $4.75 per share and
42,000 shares of Common Stock at $3.125 the closing price on June 28, 1996, in
consideration of consulting services rendered by him. Such additional options
are immediately exercisable and will expire on the fifth and tenth anniversary
of the date of grant, respectively.
23
<PAGE> 24
STOCK INCENTIVE PLAN
General. The Board of Directors of the Company has adopted the 1994
Employee Stock Incentive Plan (the "Plan") pursuant to which officers,
directors, employees and independent contractors (including independent sales
representatives) of the Company will be eligible to receive shares of the
Common Stock of the Company or other securities or benefits with a value
derived from the value of the Common Stock of the Company.
The purpose of the Plan is to enable the Company to attract, retain and
motivate officers, directors, employees and independent contractors by
providing for or increasing their proprietary interests in the Company and, in
the case of non-employee directors, to attract such directors and further align
their interests with those of the Company's stockholders by providing for or
increasing their proprietary interests in the Company.
The maximum number of shares of Common Stock that may be issued pursuant
to awards granted under the Plan, as amended and ratified by the shareholders
on March 27, 1996 is 822,465 (subject to adjustments to prevent dilution).
Administration. The Plan is administered by a committee of two or more
disinterested directors appointed by the Board of Directors of the Company (the
"Committee"), except that grants to non-employee directors will be made by the
Board of Directors pursuant to a predetermined formula. The Committee has full
and final authority to select the recipients of awards and to grant such
awards. Subject to the provisions of the Plan, the Committee has a wide degree
of flexibility in determining the terms and conditions of awards and the number
of shares to be issued pursuant thereto, including conditioning the receipt or
vesting of awards upon the achievement by the Company of specified performance
criteria. Subject to limitations imposed by law, the Board of Directors may
amend or terminate the Plan at any time and in any manner. However, no such
amendment or termination may deprive the recipient of an award previously
granted under the Plan of any rights thereunder without his consent. The
expenses of administering the Plan will be borne by the Company.
Terms of Awards. The Plan authorizes the Committee to enter into any type
of arrangement with an eligible recipient that, by its terms, involves or might
involve the issuance of Common Stock or any other security or benefit with a
value derived from the value of Common Stock. Awards are not restricted to any
specified form or structure and may include, without limitation, sales or
bonuses of stock, restricted stock, stock options, reload stock options, stock
purchase warrants, other rights to acquire stock, securities convertible into
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. An award may consist of
one such security or benefit or two or more of them in tandem or in the
alternative. Options to purchase 5,000 shares of Common Stock are
automatically granted to directors who are not employed by the Company or
affiliated with Signal upon their election to the Board of Directors have, an
exercise price equal to the fair market value of such shares on the date of
grant and are immediately exercisable.
An award granted under the Plan may include a provision accelerating the
receipt of benefits upon the occurrence of specified events, such as a change
of control of the Company or a dissolution, liquidation, merger,
reclassification, sale of substantially all of the property and assets of the
Company or other significant corporate transactions. Options granted to
non-employee directors must be exercised by the fifth anniversary of the date
of grant. Any stock option granted to an employee may be a tax-benefited
incentive stock option or a non-qualified stock option that is not
tax-benefited. Awards to non-employee directors may only be non-qualified
stock options.
An award may permit the recipient to pay all or part of the purchase price
of the shares or other property issuable pursuant thereto, or to pay all or
part of such employee's tax withholding obligation with respect to such
issuance, by (i) delivering previously owned shares of capital stock of the
Company or other property, (ii) reducing the amount of shares or other property
otherwise issuable pursuant to the award or (iii) delivering a promissory note,
the terms and conditions of which will be determined by the Committee. If an
option permits the recipient to pay for the shares issuable pursuant thereto
with previously owned shares, the recipient would be able to exercise the
option in successive transactions, starting with a relatively small number of
shares and, by a series of exercises using shares acquired from each such
transaction to pay the purchase price of the shares acquired in the following
transaction, to exercise an option for a large number of shares with no more
investment than the original share or shares delivered. The exercise price and
any withholding taxes are payable in cash by non- employee directors, although
the Board of Directors at its discretion may permit such payment by
24
<PAGE> 25
delivery of shares of Common Stock, or by delivery of broker instructions
authorizing a loan secured by the shares acquired upon exercise or payment to
the Company of proceeds from the sale of such shares.
Pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), directors, certain officers and ten percent
shareholders of the Company are generally liable to the Company for repayment
of any "short-swing" profits realized from any non-exempt purchase and sale of
Common Stock occurring within a six-month period. Rule 16b-3, promulgated
under the Exchange Act, provides an exemption from Section 16(b) liability for
certain transactions by an officer or director pursuant to an employee benefit
plan that complies with such Rule. Specifically, the grant of an option under
an employee benefit plan that complies with Rule 16b-3 will not be deemed a
purchase of a security for purposes of Section 16(b). The Plan is designed to
comply with Rule 16b-3.
Awards may not be granted under the Plan after the tenth anniversary of
the adoption of the Plan. Although any award that was duly granted on or prior
to such date may thereafter be exercised or settled in accordance with its
terms, no shares of Common Stock may be issued pursuant to any award after the
twentieth anniversary of the adoption of the Plan.
Federal Income Tax Treatment. The following is a brief description of the
federal income tax treatment that generally will apply to awards made under the
Plan, based on federal income tax laws in effect on the date hereof. The exact
federal income tax treatment of any award will depend on the specific nature of
such award. Such an award may, depending on the conditions applicable to the
award, be taxable as an option, an award of restricted or unrestricted stock,
an award which is payable in cash or otherwise.
Pursuant to the Plan, participants may be granted options which are
intended to qualify as incentive stock options. Generally, the optionee is not
taxed, and the Company is not entitled to a deduction, on the grant or exercise
of an incentive stock option. However, if the optionee sells the shares
acquired upon the exercise of an incentive stock option at any time within (i)
one year after the date of exercise of the option or (ii) two years after the
date of grant of the option, then the optionee will recognize ordinary income
in an amount equal to the excess, if any, of the lesser of the sale price or
the fair market value on the date of exercise over the exercise price of the
option. The Company will generally be entitled to a deduction in an amount
equal to the amount of ordinary income recognized by the optionee.
The grant of an option or other similar right to acquire stock that does
not qualify for treatment as an incentive stock option generally is not a
taxable event for the optionee. Upon exercise of the option, the optionee
generally will recognize ordinary income in an amount equal to the excess of
the fair market value of the stock acquired upon exercise (determined as of the
date of exercise) over the exercise price of such option, and the Company will
be entitled to a deduction equal to such amount.
Special rules will apply, however, if the optionee is subject to Section
16 of the Exchange Act. During any period of time (the "Section 16(b) Period")
in which a sale of the stock acquired upon exercise of the option could subject
such optionee to suit under Section 16, the optionee will not recognize
ordinary income and the Company will not be entitled to a deduction. Upon the
expiration of the Section 16(b) Period, the optionee will recognize ordinary
income, and the Company will be entitled to a deduction, equal to the excess of
the fair market value of the stock (determined as of the expiration of the
Section 16(b) Period) over the option exercise price. As described below, such
an optionee may elect under Section 83(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), to recognize ordinary income on the date of exercise,
in which case the Company would be entitled to a deduction at that time equal
to the amount of the ordinary income recognized.
Awards under the Plan may also include stock sales, stock bonuses or other
grants of stock. Stock issued pursuant to these awards may be subject to
certain restrictions. Pursuant to Section 83 of the Code, stock sold or
granted under the Plan will give rise to taxable income at the earliest time at
which such stock is not subject to a substantial risk of forfeiture or is
freely transferable for purposes of Section 83. At that time, the holder will
recognize ordinary income equal to the excess of the fair market value of the
shares (determined as of such time) over the purchase price, and the Company
will be entitled to a deduction equal to such amount. If the holder of the
stock is a person subject to Section 16(b) and if the sale of the stock at a
profit could subject such person to suit under Section 16(b), income will be
recognized in accordance with
25
<PAGE> 26
the rules described above regarding stock issued to such persons upon the
exercise of an option, unless the holder makes an election under Section 83(b)
to recognize income on the date the stock is issued.
Awards may be granted under the Plan that do not fall clearly into the
categories described above. The federal income tax treatment of these awards
will depend upon the specific terms of such awards. The Company generally will
be required to withhold applicable taxes with respect to any ordinary income
recognized by a participant in connection with awards made under the Plan.
The terms of the agreements pursuant to which specific awards are made
under the Plan may provide for accelerated vesting or payment of an award in
connection with a change in ownership or control of the Company. In that event
and depending upon the individual circumstances of the recipient, certain
amounts with respect to such awards may constitute "excess parachute payments"
under the golden parachute provisions of the Code. Pursuant to such
provisions, an employee will be subject to a 20% excise tax on any "excess
parachute payment," and the Company will be denied any deduction with respect
to such excess parachute payment.
1994 Awards. Concurrently with the consummation of the Company's initial
public offering on August 19, 1994, options were granted to (i) Mr. Arbetman,
the President and the Chief Executive Officer of the Company, to purchase up to
267,150 shares of Common Stock, (ii) Mr. Binkley, a director of the Company, to
purchase up to 5,000 shares of Common Stock, (iii) Mr. Mandell, the Chief
Financial Officer of the Company, to purchase up to 66,788 shares of Common
Stock, (iv) Mr. Warshaw, a director of the Company, to purchase up to 128,575
shares of Common Stock in consideration of consulting services rendered by him
and 5,000 shares as director's compensation and (v) five other employees of the
Company to purchase up to an aggregate of 22,500 shares of Common Stock, at an
exercise price equal to $4.75, the initial public offering price, and an
aggregate of 20,000 shares of Common Stock, at an exercise price equal to
$7.00. The options granted to Messrs. Arbetman, Binkley, Mandell and Warshaw
are exercisable immediately upon grant. The options granted to the other
employees become exercisable in three equal annual installments commencing on
August 19, 1995, and expire on the tenth anniversary of the date of grant. The
options granted to Messrs. Binkley and Warshaw will expire on the fifth
anniversary of the date of grant, and those granted to Messrs. Arbetman and
Mandell will expire on the earlier to occur of the tenth anniversary of the
date of grant or 30 days after the termination of such officer's employment by
the Company with cause.
1995 Awards. On November 15, 1995 options were granted to 14 employees of
the Company to purchase up to an aggregate of 53,500 shares of Common Stock, at
an exercise price equal to $6.00 per share. The options granted become
exercisable in three equal annual installments commencing on November 15, 1996,
and expire on the tenth anniversary of the date of grant. On June 28, 1996,
options were granted to (i) Mr. Arbetman to purchase up to 86,000 shares of
Common Stock, (ii) Mr. Warshaw to purchase up to 42,000 shares of Common Stock,
and (iii) Mr. Mandell to purchase up to 22,000 shares of Common Stock, at an
exercise price of $3.125, the closing price on that date. The options granted
to Messrs. Arbetman, Warshaw, and Mandell are exercisable immediately upon
grant, and will expire on the tenth anniversary of the date of grant.
The Company has registered under the Securities Act of 1933, as amended,
the sale of the shares of its Common Stock pursuant to the Plan.
EMPLOYEES' PROFIT SHARING PLAN
General. The Board of Directors adopted the Employees' Profit Sharing
Plan (the "Plan"), originally effective as of July 1, 1976, for the benefit of
the eligible employees of the Company. The Company amended the Plan, effective
February 1, 1992, in order to add a 401(k) feature. In addition, the Company
amended and restated the Plan in its entirety in order to comply with the
requirements of the Tax Reform Act of 1986 and later legislation, generally
effective as of October 1, 1990.
The primary purpose of the Plan is to encourage participating employees to
adopt a regular savings program to provide security for their retirement.
26
<PAGE> 27
All employees of the Company who have completed at least one year of
service and attained 18 years of age are eligible to participate in the Plan on
the February 1 or July 1 falling on or next following the date they meet the
Plan's service and age requirements. Employees who are covered by a collective
bargaining unit and whose retirement benefits are the subject of good faith
bargaining, however, are not eligible to participate in the Plan.
Administration. The Plan is administered by the Plan Administrator, who
is the Director of Personnel of the Company. The Plan Administrator oversees
the day-to-day administration of the Plan and makes determinations regarding
eligibility, distributions and in-service withdrawals. The Plan Administrator
also oversees the transfer of assets to various investment options in
accordance with the participating employees' investment directions.
Plan Contributions and Vesting. The Plan provides for employee pretax
deferrals and discretionary employer contributions. Participating employees
may contribute, by way of payroll deductions, from 1% to 15% of their
before-tax compensation (up to a maximum of $9,500 for 1996) as a pretax
deferral annually, subject to certain legal limits. The annual maximum amount
is adjusted each year by the Internal Revenue Service (the "IRS") to reflect
cost-of-living increases or decreases. The Plan also permits participating
employees to make rollover contributions, but does not permit participating
employees to make any voluntary after-tax contributions.
The Company may make discretionary contributions on behalf of eligible
participants. Each Plan year (October 1 through September 30), the Board of
Directors determines what contribution, if any, to make to the Plan. The
Company has not made any employer contributions to the Plan since 1987. The
only contributions that the Company has made to the Plan have been employee
pretax deferrals since the addition of the 401(k) feature to the Plan in
February 1992.
If the Company determines to make a contribution to the Plan, the amount
contributed will be allocated to the accounts of participants who have
completed at least 1,000 hours of service for the Plan year on a pro rata
basis. However, if a participating employee terminates employment during the
Plan year due to death, disability or retirement while employed by the Company,
he would be entitled to an allocation of discretionary contribution regardless
of the fact that he has not completed the 1,000 hours of service requirement.
For purposes of calculating the amount of a participating employee's
contributions, compensation means all wages and salaries paid to the employee
during any year, but excluding pre-participation compensation earned in the
year of initial entry and certain items of fringe benefits.
Current tax law limits deductible contributions (both employer
discretionary contributions and employee pretax deferrals) to the Plan to 15%
of the total compensation paid during the Plan year to participating employees.
A participating employee is always 100% vested in his own pretax
deferrals, and vests 20% per year of service in any discretionary employer
contributions allocated to his account.
Plan Investments. The Plan is a non-trusteed plan. Accordingly, the Plan
is not funded through a trust but through a group annuity contract with
Connecticut General Life Insurance Company ("Connecticut"). All contributions
made to the Plan are paid directly to Connecticut for purposes of investment
under one or more of the six investment options within the group annuity
contract, as directed by participating employees.
Plan Amendment or Termination. Under the terms of the Plan, the Company
reserves the right to amend or terminate the Plan at any time and in any
manner. No amendment or termination, however, may deprive a participating
employee of any benefit he has accrued under the Plan prior to the effective
date of the amendment or termination.
Federal Income Tax Treatment. The IRS has previously issued a favorable
determination on the Plan's qualification. As a qualified plan, all
contributions made to the Plan by the Company are deductible to the Company in
the year the contributions are made, up to 15% of the compensation of
participating employees ("Covered Compensation"). All contributions allocated
to accounts of participating employees and all earnings on such contributions
are tax-deferred until they are distributed.
27
<PAGE> 28
Since the last determination letter, however, the Company has amended and
restated the Plan to comply with the Tax Reform Act of 1986 and later
legislation. The Company intends for the Plan to be a qualified plan under
Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"), and
it intends to submit the amended and restated Plan to the IRS for a favorable
determination letter on the qualification of the Plan as so amended and
restated.
Assuming that the IRS determines that the amended and restated Plan is a
qualified Plan, then all contributions made to the Plan will continue to be
deductible to the Company in the year that the contributions are made, up to
15% of Covered Compensation. Any contributions allocated to the accounts of
participating employees and any earnings on such contributions will continue to
be tax-deferred until they are distributed to the participating employees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares of
Common Stock beneficially owned as of September 6, 1996 by (i) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding Common Stock of the Company, (ii) each director and executive
officer and (iii) all directors and executive officers as a group.
28
<PAGE> 29
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
----------------------------
Number Percent of
Name and Address of Shares Class (2)
---------------- --------- ----------
<S> <C> <C>
Signal Capital Corporation
55 Ferncroft Road
Danvers, Massachusetts 01923 . . . . . . . . . . . . . . . . . . . . 1,096,185 23.58%
American Industries . . . . . . . . . . . . . . . . . . . . . . . . 370,000 7.96
1750 N.W. Front Avenue, Suite 106
Portland, Oregon 97209
U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,000 5.92
111 S.W. Fifth Avenue
Portland, Oregon 97204
Douglas Arbetman (3) . . . . . . . . . . . . . . . . . . . . . . . . 325,958 7.01
c/o The Sirena Apparel Group, Inc.
10333 Vacco Street
South El Monte, California 91733
Nicholas B. Binkley (4) . . . . . . . . . . . . . . . . . . . . . . . 9,350 *
Jeffrey J. Holland (5) . . . . . . . . . . . . . . . . . . . . . . . -- --
Henry R. Mandell (6) . . . . . . . . . . . . . . . . . . . . . . . . 81,317 1.75
Eben S. Moulton (7) . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Arthur H. Warshaw (8) . . . . . . . . . . . . . . . . . . . . . . . . 159,761 3.44
All directors and executive officers as a group
(six persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . 576,461 12.40
- -----------------------
</TABLE>
* Less than one percent.
(1) Each person has sole voting and investment power over the shares of Common
Stock shown as beneficially owned, subject to community property laws
where applicable.
(2) Shares which the person (or group) has the right to acquire within 60 days
after June 30, 1996 are deemed to be outstanding in calculating the
percentage ownership of the person (or group) but are not deemed to be
outstanding as to any other person (or group).
(3) Includes 267,150 shares issuable upon the exercise of stock options
granted to Mr. Arbetman, the President and the Chief Executive Officer and
a director of the Company upon the completion of the Company's initial
public offering pursuant to the Company's stock incentive plan, of which
(i) 32,192 shares were sold in the Company's secondary public offering in
November 1995, and (ii) 86,000 shares were granted to Mr. Arbetmen in June
1996. See "Item 11. Executive Compensation - Stock Incentive Plan."
(4) Includes 5,000 shares issuable upon the exercise of stock options granted
to Mr. Binkley, a director of the Company, pursuant to the Company's stock
incentive plan. See "Item 11. Executive Compensation - Stock Incentive
Plan."
(5) Mr. Holland, a director of the Company, is a Senior Investment Manager of
Signal Capital Corporation. Mr. Holland disclaims any interest in the
shares of the Company held by Signal Capital Corporation.
(6) Includes 66,788 shares issuable upon the exercise of stock options granted
to Mr. Mandell, the Chief Financial Officer of the Company, upon the
completion of the Company's initial public offering pursuant to the
Company's stock incentive plan. See "Item 11. Executive Compensation -
Stock Incentive Plan." of which (i) 8,471 were sold in the Company's
secondary public offering in November 1995, and (ii) 22,000 shares were
granted to Mr. Mandell in June 1996.
29
<PAGE> 30
(7) Mr. Moulton, a director of the Company, is the President of Signal Capital
Corporation. Mr. Moulton disclaims any interest in the shares of the
Company held by Signal Capital Corporation.
(8) Consists of 133,575 shares issuable upon the exercise of stock options
granted to Mr. Warshaw, a director of the Company, upon the completion of
the Company's initial public offering pursuant to the Company's stock
incentive plan, which of (i) 15,814 shares were sold in the Company's
secondary public offering in November 1995, and (ii) 42,000 shares were
granted to Mr. Warshaw in June 1996. See "Item 11. Executive
Compensation - Stock Incentive Plan."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1990, the Company retained Apparel Management, Inc., a
corporation substantially owned by Arthur H. Warshaw, to provide management
services. In fiscal 1994, 1995 and 1996 the Company paid Apparel Management,
Inc. $222,000, $213,000, and $211,000 respectively, for such services.
Apparel Management, Inc. is entitled to receive consulting fees at the rate of
$20,000 per month under its current agreement with the Company which terminates
on June 30, 1999.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. Reference is made to the Index
to Financial Statements on page 35 for a list of financial statements and
schedule filed as part of this report.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
the fourth quarter of fiscal 1996.
(c) Exhibits. The following is a list of exhibits filed as a part of
this report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<S> <C>
3.1+++ Amended and Restated Certificate of
Incorporation of the Company. [3.3.1]**
3.2+ Amended and Restated Bylaws of the
Company. [3.4]**
4.1+++ Form of stock certificate. [4.1]**
4.2 Warrant Agreement dated August 19, 1994,
between the Company and Wedbush Morgan
Securities. [4.2]**
4.3+++ Agreement of Merger between the Company
and the Predecessor. [4.3.1]**
4.4 Registration Rights Agreement dated July 22, 1994,
among the Company and certain stockholders of
the Company. [4.4]**
10.1+ Employment Agreement between the Company and
Douglas Arbetman. [10.1]**
10.1.1**** Amended and Restated Employment Agreement dated
October 9, 1995, between the Company and
Douglas Arbetman. [10.2.1]**
10.2+ Employment Agreement between the Company and
Henry R. Mandell. [10.2]**
10.2.1**** Amended and Restated Employment Agreement
dated October 9, 1995, between the Company and
Henry R. Mandell. [10.2.1]**
10.3+ The Sirena Apparel Group, Inc. 1994 Stock Incentive
Plan, together with forms of stock option and
restricted stock agreements. [10.3]**
10.4+ Connecticut General Life Insurance Company Defined
Contribution Plan Basic Plan Document Number 02,
as amended. [10.4]**
10.5+ Non-Standardized Profit Sharing/Thrift Plan with
401(k) Feature Adoption Agreement Number 004. [10.5]**
10.6+ Amendment to Sirena, Inc. Employees' Profit
Sharing Plan and Trust effective October 1,
1990. [10.6]**
10.7+ Discount Factoring Agreement dated July 13, 1990,
between Congress Talcott Corporation and the
Company, as amended. [10.7]**
10.8+ Corporate Guarantee and Waiver dated July 13,
1990 by Signal Capital Corporation in favor of
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C>
Congress Talcott Corporation. [10.8]**
10.9*+ License Agreement dated October 1, 1993, between
Anne Klein & Company and the Company, as
amended. [10.9]**
10.9.1* Amended and Restated License Agreement between
Anne Klein & Company and the Company. [10.9.1]**
10.10+ Guaranty dated as of October 1, 1993 by Signal
Capital Corporation in favor of Anne Klein &
Company. [10.10]**
10.11+++ License Agreement dated April 1, 1990, between
Cherokee Licensing, Inc. and the Company, as
amended. [10.11.1]**
10.12+ Lease Agreement dated May 4, 1989, between
Art Weiss, Inc. and the Company. [10.12]**
10.13+ Lease Agreement dated May 4, 1989, between
Art Weiss, Inc. and the Company. [10.13]**
10.14+ Lease Agreement dated May 4, 1989, between
Art Weiss, Inc. and the Company. [10.14]**
10.15+ Indenture of Lease dated July 12, 1984,
between Keystone Associates and Consolidated
Foods Corp. [10.15]**
10.16+ Modification and Extension of Lease dated
July 18, 1990, between Keystone Associates and
the Company. [10.16]**
10.17+ Modification and Extension of Lease dated
April 14, 1994, between Keystone Associates and
the Company. [10.17]**
10.18+ Lease dated December 22, 1987, between La
Salle National Bank and the Company, as
amended. [10.18]**
10.18.1*** Lease dated May 1, 1995, between La Salle National
Trust, NA and the Company. [10.18.1]**
10.19+ Lease dated December 15, 1989, between
California Mart and the Company. [10.19]**
10.19.1*** Lease Agreement dated February 8, 1995, between
The Equetable Life Assurance Society of the United
States and the Company. [10.19.1]**
10.20+ Lease Agreement dated February 26, 1991, between
MMH Venture and the Company. [10.20]**
10.20.1*** Lease Agreement dated February 13, 1995,
between MMH Venture and the Company. [10.20.1]**
10.21+ Lease Agreement dated August 12, 1989, between
Dallas Market Center Company and the
Company. [10.21]**
10.21.1*** Amendment to Lease Agreement effective June 1, 1992,
between Dallas Market Center Company and the Company.
[10.21.1]**
10.22+ Loan Agreement dated March 23, 1988, between
Signal Capital Corporation and the Company,
as amended. [10.22]**
10.22.1x Modification No. 15, dated June 23, 1994, to
Loan Agreement between Signal Capital Corporation
and the Company. [10.22.1]**
10.23+ Asset Purchase Agreement dated May 4, 1994,
between The CIT Group/Commercial Services, Inc.
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
and the Company. [10.23]**
10.24*+ Agreement dated September 24, 1965, between
Rose Marie Reid, a natural person, and Jonathan
Logan, Inc., a Delaware corporation, as
amended. [10.24]**
10.25*+ Royalty Settlement Agreement dated August 10,
1988, between the Representative of the Estate
of Rose Marie Reid and United Merchants and
Manufactures, Inc. [10.25]**
10.26*+ Collateral Transfer Instrument dated May 4, 1994,
by Rose Marie Reid Inc. in favor of The CIT
Group/Commercial Services, Inc. [10.26]**
10.27+ Consulting Agreement between the Company and
Apparel Management, Inc. [10.27]**
10.27.1xxx Amended and Restated Consulting Agreement dated
August 12, 1995, between the Company and Apparel
Management, Inc. [10.27.1]**
10.28x Underwriting Agreement dated August 12, 1994,
among the Company, Wedbush Morgan Securities
and Dakin Securities Corporation. [10.28]**
10.29x Factoring, Credit and Security Agreement dated
August 19, 1994, between the Company and Heller
Financial, Inc. [10.29]**
10.29.1xx Amendment Number One to Factoring, Credit and
Security Agreement dated December 1, 1994, between
the Company and Heller Financial, Inc. [10.1]**
10.29.2*** Amendment Number Two to Factoring, Credit and Security
Agreement dated September 15, 1995, between the
Company and Heller Financial, Inc. [10.29.2]**
10.30*xxxx Manufacturing Production Agreement dated July 11, 1994
between the Company and Plasa S.A. de C.V. [10.30]**
23.1 Consent of Ernst & Young LLP
</TABLE>
- ----------------
* The Company has requested confidential treatment for a portion of the
referenced exhibit.
** Indicates the exhibit number of the document in the original filing.
*** Filed as an exhibit to the Company's Registration Statement on Form S-1
dated Octber 9, 1995 (File No. 33- 97880).
**** Filed as an exhibit to Amendment No. 1 to Registration Statement on
Form S-1 dated November 6, 1995.
+ Filed as an exhibit to the Company's Registration Statement on Form S-1
dated June 14, 1994 (File No. 33-80268).
++ Filed as an exhibit to Amendment No. 1 to Registration Statement on
Form S-1 dated July 25, 1994.
+++ Filed as an exhibit to Amendment No. 2 to Registration Statement on
Form S-1 dated August 8, 1994.
x Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994.
xx Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 1994.
33
<PAGE> 34
xxx Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1995.
xxxx Filed as an exhibit to the Amendment to Annual Report on Form 10-K/A
for the fiscal year ended June 30, 1995.
34
<PAGE> 35
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements
Consolidated Balance Sheets as of June 30, 1995 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income for the
years ended June 30, 1994, 1995, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1994, 1995, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for
the years ended June 30, 1994, 1995, and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Consolidated Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Financial Statement Schedules
II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
</TABLE>
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 27, 1996.
THE SIRENA APPAREL GROUP, INC.
By /s/ Douglas Arbetman
------------------------------------------
Douglas Arbetman,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Douglas Arbetman President, Chief Executive September 27, 1996
- -------------------------------- Officer and Director
Douglas Arbetman
/s/ Nicholas B. Binkley Director September 27, 1996
- --------------------------------
Nicholas B. Binkley
/s/ Jeffrey J. Holland Director September 27, 1996
- --------------------------------
Jeffrey J. Holland
/s/ Henry R. Mandell Chief Financial Officer (Principal September 27, 1996
- -------------------------------- Financial and Accounting Officer)
Henry R. Mandell
/s/ Eben S. Moulton Director September 27, 1996
- --------------------------------
Eben S. Moulton
/s/ Arthur H. Warshaw Director September 27, 1996
- --------------------------------
Arthur H. Warshaw
</TABLE>
<PAGE> 37
Consolidated Financial Statements
The Sirena Apparel Group, Inc.
and Subsidiary
Years ended June 30, 1996 and 1995
with Report of Independent Auditors
<PAGE> 38
0398:Folder S
Report of Independent Auditors
Board of Directors
The Sirena Apparel Group, Inc.
We have audited the accompanying consolidated balance sheets of The Sirena
Apparel Group, Inc. and subsidiary as of June 30, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three years ended June 30, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Sirena
Apparel Group, Inc. and subsidiary as of June 30, 1995 and 1996 and the
consolidated results of their operations and their cash flows for the three
years ended June 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth herein.
ERNST & YOUNG LLP
Los Angeles, California
August 13, 1996
F-1
<PAGE> 39
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 59,301 $ 17,964
Accounts receivable, net of allowance of $1,762,448 (1995)
and $2,290,968 (1996) (Note 3) 3,543,103 4,938,331
Inventories (Notes 4 and 5) 5,970,558 7,713,427
Prepaids and other current assets 431,639 1,088,486
------------ ------------
Total current assets 10,004,601 13,758,208
Equipment and leasehold improvements (Note 6):
Furniture, fixtures and equipment 2,741,737 3,109,941
Leasehold improvements 748,470 813,747
------------ ------------
3,490,207 3,923,688
Less accumulated depreciation and amortization (2,707,479) (2,787,925)
------------ ------------
782,728 1,135,763
Equipment under capital lease, less accumulated amortization of
$53,144 (1995) and $86,708 (1996) (Note 6) 114,679 81,115
Intangible assets, less accumulated amortization of $725,009
(1995) and $849,289 (1996) 3,714,309 3,590,029
Deposits 122,163 112,466
------------ ------------
Total assets $ 14,738,480 $ 18,677,581
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 40
<TABLE>
<CAPTION>
JUNE 30
1995 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 251,431 $ 336,305
Accounts payable 2,100,527 2,665,718
Accrued liabilities 1,394,189 820,400
Current taxes payable 106,394 -
Current portion of capital leases obligations 32,286 35,714
------------ ------------
Total current liabilities 3,884,827 3,858,137
Capital lease obligations, less current portion 85,585 49,670
Commitments and contingencies (Note 6)
Stockholders' equity (Note 5):
Common stock, $.01 par value:
Authorized, 20,000,000
Issued and outstanding, 3,143,971 (1995) and 4,649,230
(1996) 31,440 46,492
Additional paid-in capital 24,027,168 32,424,627
Accumulated deficit (13,290,540) (17,701,345)
------------ ------------
Total stockholders' equity 10,768,068 14,769,774
------------ ------------
Total liabilities and stockholders' equity $ 14,738,480 $ 18,677,581
============ ============
</TABLE>
F-3
<PAGE> 41
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $38,932,132 $49,206,280 $49,206,288
Cost of goods sold 26,751,499 34,010,181 38,390,021
----------- ----------- -----------
Gross profit 12,180,633 15,196,099 10,816,267
Selling, general and administrative expenses 9,633,425 10,892,630 14,029,878
Depreciation and amortization 204,089 241,000 274,145
----------- ----------- -----------
Total operating expenses 9,837,514 11,133,630 14,304,023
----------- ----------- -----------
Income (loss) from operations 2,343,119 4,062,469 (3,487,756)
Interest expense:
Signal Capital Corporation (938,475) (100,676) -
Other (479,018) (932,146) (908,049)
----------- ----------- -----------
Income (loss) before provision for income
taxes 925,626 3,029,647 (4,395,805)
Provision for income taxes (Note 7) 25,000 141,986 15,000
----------- ----------- -----------
Net income (loss) $ 900,626 $ 2,887,661 $(4,410,805)
=========== =========== ===========
Net income (loss) per share $ 0.52 $ 0.93 $(1.05)
=========== =========== ===========
Weighted average number of common shares
outstanding (Note 2) 1,743,971 3,104,255 4,205,020
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------- Common Stock
Number of Number of -------------------- Additional
Series A Series B Number Paid-In Accumulated
Shares Par Value Shares Par Value of Shares Par Value Capital Deficit Total
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1993 10,500,000 $ 13,670,000 2,600,000 $ 2,600,000 13,169,712 $ 131,697 $ 2,372,949 $(17,078,827) $ 1,695,819
Net income for year
ended June 30,
1994 - - - - - - - 900,626 900,626
Accrued dividends
(Note 5) - 892,500 - - - - (892,500) - -
--------------------------------------------------------------------------------------------------------------
Balance at June 30,
1994 10,500,000 14,562,500 2,600,000 2,600,000 13,169,712 131,697 1,480,449 (16,178,201) 2,596,445
Net income for year
ended June 30,
1995 - - - - - - - 2,887,661 2,887,661
Recapitalization
(Note 5) (10,500,000) (14,562,500) (2,600,000) (2,600,000) (11,425,741) (114,257) 17,276,757 - -
Initial public
offering (Note 5) - - - - 1,400,000 14,000 5,269,962 - 5,283,962
--------------------------------------------------------------------------------------------------------------
Balance at June 30,
1995 - - - - 3,143,971 31,440 24,027,168 (13,290,540) 10,768,068
Net loss for year
ended June 30,
1996 - - - - - - - (4,410,805) (4,410,805)
Secondary offering
(Note 5) - - - - 1,448,782 14,487 8,129,758 - 8,144,245
Options exercised
(Note 5) - - - - 56,477 565 267,701 - 268,266
--------------------------------------------------------------------------------------------------------------
Balance at June 30,
1996 - $ - - $ - 4,649,230 $ 46,492 $32,424,627 $(17,701,345) $14,769,774
==============================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 900,626 $ 2,887,661 $(4,410,805)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 328,448 321,404 415,525
Change in accounts receivable allowance (54,894) 429,738 528,520
Changes in operating assets and liabilities:
Accounts receivable (61,255) (2,862,727) (1,923,748)
Inventories 468,969 (2,476,987) (1,742,869)
Prepaids and other current assets (116,261) (211,429) (656,847)
Accounts payable 1,242,709 (207,692) 565,191
Accrued liabilities and current taxes
payable 450,158 (149,295) (680,183)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 3,158,500 (2,269,327) (7,905,216)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (204,032) (502,123) (610,716)
Acquisition of trademark (764,368) (241,186) -
Increase in deposits (65,353) (10,000) 9,697
----------- ----------- -----------
Net cash used in investing activities (1,033,753) (753,309) (601,019)
FINANCING ACTIVITIES
Borrowings from Signal Capital Corporation 5,110,816 1,579,898 -
Repayments to Signal Capital Corporation (6,137,144) (5,228,774) -
Payments under capital lease obligations (20,345) (29,609) (32,487)
Proceeds from stock issuance - 5,779,463 8,412,511
Deferred offering costs (495,501) - -
Increase in bank overdraft 11,317 230,659 84,874
----------- ----------- -----------
Net cash (used in) provided by financing
activities (1,530,857) 2,331,637 8,464,898
Increase (decrease) in cash 593,890 (690,999) (41,337)
Cash at beginning of year 156,410 750,300 59,301
----------- ----------- -----------
Cash at end of year $ 750,300 $ 59,301 $ 17,964
=========== =========== ===========
</TABLE>
F-6
<PAGE> 44
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,432,493 $ 1,087,398 $ 908,049
Income taxes 12,945 100,647 372,559
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1994, the Company incurred a capital lease obligation of $167,823 in connection with
a lease agreement to acquire equipment.
</TABLE>
See accompanying notes.
F-7
<PAGE> 45
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1996
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The Sirena Apparel Group, Inc. (the Company), a Delaware corporation, designs,
manufactures and markets branded and private label swimwear and resortwear for
each principal segment of the women's market. On August 12, 1994, the Company
completed an initial public offering of 1,400,000 shares of common stock. On
November 9, 1995, the Company completed a secondary offering for 1,448,782
shares of common stock (see Note 5).
Prior to the initial public offering, Signal Capital Corporation (Signal) had
provided financing to the Company in the form of a revolving line of credit,
term debt and guarantees of the Company's indebtedness under a factoring
agreement. Proceeds from the initial public offering were used to repay all
Signal debt. After the initial and secondary offerings, Signal owned
approximately 53% and 24%, respectively, of the outstanding common stock of the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, SIRENAMEX S.A. de C.V., a Mexican corporation. All
significant intercompany accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in first-out
basis, or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation of
equipment is provided using the straight-line method over their estimated
useful lives, which is five years. Amortization of leasehold improvements is
provided for by the straight-line method over the shorter of the useful lives
or the terms of the leases.
F-8
<PAGE> 46
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets
acquired in the acquisition and is amortized using the straight-line method
over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on estimated undiscounted
cash flows of the Company over the remaining amortization period, the Company's
carrying value of the goodwill would be reduced by the estimated shortfall of
cash flows. In addition, in fiscal 1994, the Company acquired an existing
trademark. Costs associated with this trademark were $1,006,000, and are being
amortized using the straight-line method over 25 years. Amortization of
intangible assets amounted to approximately $89,000, $120,000 and $125,000 for
the years ended June 30, 1994, 1995 and 1996, respectively.
REVENUE RECOGNITION
The Company recognizes revenue as of the date merchandise is shipped to its
customers. Allowance for estimated returns and discounts are provided when the
related revenue is recorded.
CONCENTRATION OF CREDIT RISK
The Company manufactures and sells garments to retailers in the United States.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. The Company factors a
majority of all of its receivables (see Note 3) whereby one factor assumes
substantially all the risk of collection on these transactions. Credit losses
on nonfactored receivables are provided for in the financial statements and
have historically been within management's expectations. No customer accounted
for more than 10% of sales for the years ended June 30, 1994. One customer
accounted for 11% and 10% of the Company's net sales for the years ended June
30, 1995 and 1996, respectively.
F-9
<PAGE> 47
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Prior to the initial public offering, the Company was included in the
consolidated federal income tax return of Signal's parent (collectively, the
Consolidated Group). The provision for income taxes was computed as if the
Company had filed separate tax returns, pursuant to a tax sharing arrangement
with the Consolidated Group. Any resultant provision (credit) for income taxes
was due to (from) the Consolidated Group. As a result of the initial public
offering and the related change in ownership, the Company is no longer included
in the Consolidated Group effective August 12, 1994.
The Company accounts for its income taxes under Financial Accounting Standards
Board Statement No. 109 (FAS 109). FAS 109 provides that the liability method
is used in accounting for income taxes whereby deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
ADVERTISING COSTS
The Company expenses nonreimbursable advertising costs as costs are incurred.
The amounts charged to advertising expense during the years ended June 30,
1994, 1995 and 1996 were approximately $1,034,000, $1,014,000 and $1,771,000,
respectively.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company does not provide postretirement or postemployment benefits.
NET INCOME PER COMMON SHARE
The computation of net income per common share in 1995 and 1996 is based on the
weighted average number of common shares outstanding. When dilutive, stock
options and warrants are included as share equivalents using the treasury stock
method.
Net income per common share for 1994 is based on the weighted average common
shares outstanding after giving effect to the Recapitalization, as described in
Note 5, for all periods presented. Pursuant to the Recapitalization,
immediately prior to the effective
F-10
<PAGE> 48
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
date of the initial public offering, the Series A Preferred stock held by
Signal were converted into 1,743,971 shares of common stock and Series B
Preferred stock and existing common stock were cancelled.
In connection with the initial public offering (Note 5), the Company used
proceeds from the sale of 1,400,000 shares of common stock to retire certain
debt. Supplementary earnings per share, reflecting the elimination of $100,676
of interest expense and related adjustments for income taxes for the year ended
June 30, 1995, would be $.91 based on 3,262,422 common shares outstanding after
the offering.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends
to continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for pro
forma disclosure requirements of SFAS 123 during the year ended June 30, 1997.
F-11
<PAGE> 49
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1995 1996
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse $12,655,576 $11,518,548
Recourse 573,100 521,100
Advances from factor (8,928,000) (7,031,559)
----------- -----------
Due from factor 4,300,676 5,008,089
Nonfactored accounts receivable 1,004,875 2,221,210
Allowance for customer credits and doubtful accounts (1,762,448) (2,290,968)
----------- -----------
$ 3,543,103 $ 4,938,331
=========== ===========
</TABLE>
The Company has entered into an accounts receivable, inventory, seasonal
overadvance and factoring services arrangement, which was amended as of
September 15, 1995, with Heller Financial, Inc. (Heller) pursuant to which the
Company sells to Heller all of the Company's accounts receivable at their net
invoice price less a commission of 0.675%, up to $75 million in gross sales and
0.575% thereafter, with no minimum or ancillary fees. Advances are made without
recourse for the financial inability of the customer to pay with respect to all
accounts receivable approved by Heller. The Company bears the entire risk of
non-approved receivables and accounts receivable returned by the factor to the
Company. Prior to Heller's payment, the Company may draw short-term advances
from Heller up to 80% of the uncollected receivables less reserves as
determined by Heller, which advances bear interest at an annual rate of 0.75%
over the prime rate established from time to time by Bank of America (8.25% at
June 30, 1996). Heller collects such advances and interest by offsetting
against amounts due to the Company upon the collection of factored receivables.
In addition, the Company may draw short-term advances from Heller of (i) up to
50% of eligible inventory which is current season inventory and (ii) up to 40%
prior to October 31, (iii) and up to 25% during the period between November 1
and June 30, in each case of eligible inventory which is not current season
inventory, less (iv) such reserves as Heller elects to establish.
F-12
<PAGE> 50
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE (CONTINUED)
The Company's short-term advances are limited to a maximum of $6,000,000 or
$1,000,000 in excess of the Company's projected short-term advance
requirements, whichever is less. The Company may also borrow seasonal
overadvances of up to $1,000,000 from September 1 to September 30, $2,000,000
from October 1 to October 31, $2,500,000 from November 1 to November 30,
$3,000,000 from December 1 to January 31, $2,500,000 from February 1 to
February 28, $1,500,000 from March 1 to March 31 and $500,000 from April 1 to
May 31 of each year. The inventory advances and the overadvances bear interest
at an annual rate of 2% over the prime rate established from time to time by
Bank of America. Finally, the Company may request Heller to issue guarantees
for the Company's purchase of raw materials for up to $575,000 at any one time.
Under the Company's agreement with Heller, the maximum credit available to the
Company at any time is limited to $26 million. The Company's agreement with
Heller has a term expiring on August 19, 1997, after which time either party
may terminate upon 60 days written notice. The Company's obligations to Heller
are secured by the Company's accounts receivable, inventory, general
intangibles, other than trademarks or trade names, and cash deposit accounts.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1995 1996
----------- -----------
<S> <C> <C>
Raw materials $ 2,805,586 $ 3,917,042
Work-in-process 644,937 450,397
Finished goods 2,520,035 3,345,988
----------- -----------
$ 5,970,558 $ 7,713,427
=========== ===========
</TABLE>
F-13
<PAGE> 51
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY
On August 12, 1994, the Company successfully completed an initial public
offering of 1,400,000 shares of common stock at a price of $4.75 per share. The
offering raised approximately $5,300,000, net of offering expenses. Immediately
prior to the effective date of the offering, the Company reincorporated in
Delaware through the merger of the Company into a newly formed subsidiary, The
Sirena Apparel Group, Inc. (Recapitalization). In the Recapitalization, the
outstanding Series A Preferred stock, including all accrued but unpaid
dividends, were converted to 1,743,971 shares of the common stock of the
surviving corporation and the outstanding Series B Preferred stock, including
all accrued but unpaid dividends, and the outstanding common stock were
cancelled.
Any holder of the Company's Series A Preferred stock that did not consent to
the Recapitalization had the right to exercise its dissenter's rights and
require the Company to purchase such shares for cash at their fair market
value. No such dissenter's rights were exercised during the allowed period.
On November 9, 1995, the Company completed a public offering for 1,448,782
shares of common stock (including 198,750 shares issued to the offering
Underwriters upon their exercise of options to purchase such shares to cover
over-allotments) at a price of $6.50 per share. The offering raised
approximately $8,100,000, net of offering costs. In addition to the shares sold
by the Company, 550,000 shares of common stocks owned by existing shareholders
were sold to the public at $6.50 per share.
The Company also established the 1994 Stock Incentive Plan, and as amended by
the Board of Directors and ratified by the shareholders on March 27, 1996, and
reserved 822,465 common shares for issuance under the Plan. Officers,
directors, employees and independent contractors are eligible to receive one
share of the common stock of the Company for each option granted. Options for
shares of common stock are granted at no less than the fair market value of the
shares on the date of grant. Concurrent with the initial public offering,
certain officers and directors were granted options for 472,513 shares of
common stock at an exercise price equal to $4.75, the initial public offering
price. Such options are exercisable immediately upon grant and expire five to
ten years after the date of grant. Additionally, in 1994, 22,500 and 20,000
options for shares of common stock were granted at $4.75 and $7.00,
respectively, to other employees which vest in three equal amounts commencing
in 1995 and expire on the tenth anniversary of the date of grant. In 1996,
150,000 options for shares of common stock were granted at $3.13 to certain
officers and directors and 53,500 options for shares of common stock
F-14
<PAGE> 52
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
were granted to other employees at $6.00. Such options are exercisable
immediately upon grant and expire five to ten years after the date of the
grant. During 1996, certain officers and a director exercised options to
purchase 56,477 shares of common stock at an exercise price of $4.75, resulting
in proceeds to the Company of $268,266. At June 30, 1995 and 1996, 472,513 and
583,869 options, respectively, were vested and exercisable.
In connection with the initial public offering, the Company granted to the
underwriters warrants to purchase and reserved 70,000 shares of the Company's
common stock during 1995. These warrants are exercisable at $5.70 per share and
expire in August 1999. No warrants have been exercised as of June 30, 1996.
6. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases computer equipment under a capital lease agreement which
expires in 1999. Amortization on the capitalized amounts is included in
depreciation expense. The Company also leases operating facilities, showrooms,
computer equipment and vehicles under operating leases which expire at various
dates through 2005. Total operating rent expense approximated $697,180,
$719,149 and $778,589 for the years ended June 30, 1994, 1995 and 1996,
respectively.
Future minimum lease payments at June 30, 1996, under both capital and
operating leases having an initial noncancellable term of more than one year,
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING JUNE 30 LEASES LEASES
-------------------- -------- -----------
<S> <C> <C>
1997 $ 42,300 $ 754,572
1998 42,300 720,171
1999 10,575 704,958
2000 - 330,302
2001 - 153,582
Thereafter - 601,530
-------- -----------
Total minimum lease payments 95,175 $ 3,265,115
===========
Less imputed interest 9,791
--------
Present value of minimum lease payments 85,384
Less current portion 35,714
--------
$ 49,670
========
</TABLE>
F-15
<PAGE> 53
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has a license for the right to use a trademark in connection with
the sale of a line of women's swimwear in the United States and related
territories. The license terminates on December 31, 1999, unless earlier
terminated under specified circumstances, including the Company's failure to
achieve certain minimum sales, the change in control of the Company or a change
in management of the Company. The license agreement requires minimum royalty
payments.
The Company has entered into a five year employment agreement expiring in 1999
with an officer of the Company providing for annual base compensation of
$350,000 with a bonus provision, up to 100% of the base compensation based on
performance targets as determined by the Board of Directors. In addition, the
Company has entered into a two year employment agreement expiring in 1997 with
another officer of the Company providing for annual base compensation of
$160,000 with a bonus provision up to 50% of the base compensation based on
performance targets as determined by the Board of Directors.
In 1990, the Company retained a corporation, owned by a director of the
Company, to provide management services. Fees for these services were $222,000,
$213,000 and $211,000 for the years ended June 30, 1994, 1995 and 1996,
respectively. The current agreement for management services provides for fees
of $20,000 per month and out-of-pocket expenses, terminating on June 30, 1999.
7. INCOME TAXES
The provision for income taxes included in the statements of income amounted
to:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Current:
Federal $ 13,000 $ 54,251 $ -
State 12,000 87,735 3,000
Foreign - - 12,000
-------- --------- --------
25,000 141,986 15,000
Deferred:
Federal - - -
State - - -
- - -
-------- --------- --------
$ 25,000 $ 141,986 $ 15,000
======== ========= ========
</TABLE>
F-16
<PAGE> 54
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The following represents the reconciliation of the tax provision rate to the
U.S. federal income statutory tax rate:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)%
Foreign taxes - - 0.3
State taxes (net of federal tax) 0.9 1.9 -
Valuation allowance (47.9) (34.8) 32.6
Permanent items 5.1 1.8 1.4
Net operating loss carryforwards 8.7 - -
Alternative minimum tax 1.9 1.8 -
----- ----- -----
Tax provision rate 2.7% 4.7% 0.3%
===== ===== =====
</TABLE>
The components of deferred tax assets (valuation allowance) as of June 30, 1995
and June 30, 1996, respectively, are as follows:
<TABLE>
<CAPTION>
JUNE 30
1995 1996
------------ ------------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable $ 706,248 $ 919,549
Inventory 615,044 1,329,912
Other 80,530 111,473
------------ ------------
1,401,822 2,360,934
Non-current deferred tax assets:
Property and leasehold improvements 173,890 191,752
Net operating loss carryforwards 1,616,611 1,775,965
------------ ------------
1,790,501 1,976,717
Valuation allowance (3,192,323) (4,328,651)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
</TABLE>
F-17
<PAGE> 55
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company has available approximately $5,032,000 of operating loss
carryforwards expiring from 2003 to 2004 available for federal income tax
purposes. Approximately $3,786,000 of these losses are subject to an annual
limitation of $1,771,000 based on an ownership change that occurred on November
9, 1995 (secondary offering).
8. FOREIGN MANUFACTURING AND SUPPLIERS
In September 1995, the Company commenced initial sewing operations in a
facility in Sonora, Mexico. This facility will primarily manufacture private
label swimwear. In addition, certain of the Company's fabric is purchased from
foreign suppliers. Accordingly, the Company's operations are subject to the
customary risks of doing business abroad, including fluctuations in the value
of currencies, export duties, quotas, restrictions on the transfer of funds,
work stoppage and political instability.
9. EMPLOYEE PROFIT SHARING PLAN
The Company has a qualified profit sharing plan (the Plan) covering all
employees with one or more years of service. Contributions to the Plan are on a
discretionary basis. For the years ended June 30, 1994, 1995 and 1996, the
Company has elected not to make any contributions to the Plan. The Plan,
however, is not expected to be terminated. Plan assets will remain in the Plan
to meet future Plan obligations.
F-18
<PAGE> 56
The Sirena Apparel Group, Inc. and Subsidiary
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGES TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER ASSETS AT END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) WRITE-OFFS(A) PERIOD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounts receivable allowances:
Year ended June 30, 1994 $ 1,387,604 $ 4,413,401 $ - $ (4,468,295) $ 1,332,710
Year ended June 30, 1995 1,332,710 4,263,261 - (3,833,523) 1,762,448
Year ended June 30, 1996 1,762,448 5,083,370 - (4,554,850) 2,290,968
</TABLE>
(a) Uncollectible accounts written off net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.
The above reserves are deducted from the related assets in the balance sheets.
F-19
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-91650) pertaining to the Employee Stock Incentive Plan and in the
Registration Statement (Form S-3 No. 333-954) pertaining to 70,000 shares of
common stock of The Sirena Apparel Group, Inc. of our report dated August 13,
1996, with respect to the financial statements and schedule of The Sirena
Apparel Group, Inc. included in the Annual Report (Form 10-K) for the year ended
June 30, 1996.
ERNST & YOUNG LLP
Los Angeles, California
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<CASH> 17,964
<SECURITIES> 0
<RECEIVABLES> 4,938,331
<ALLOWANCES> 0
<INVENTORY> 7,713,427
<CURRENT-ASSETS> 13,758,208
<PP&E> 3,923,688
<DEPRECIATION> (2,787,925)
<TOTAL-ASSETS> 18,677,581
<CURRENT-LIABILITIES> 3,858,137
<BONDS> 0
0
0
<COMMON> 46,492
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 18,677,581
<SALES> 49,206,288
<TOTAL-REVENUES> 49,206,288
<CGS> 38,390,021
<TOTAL-COSTS> 14,304,023
<OTHER-EXPENSES> 0
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