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As filed with the Securities and Exchange Commission on September 26, 1997.
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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
For the fiscal year ended June 30, 1997
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: (626) 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 [ ]
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 8, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $13,947,690, 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
8, 1997: 4,649,230
Portions of the Registrant's Proxy Statement, which will be filed with the
Securities and Exchange Commission in connection with the Registrant's 1998
Annual Meeting of Shareholders, are incorporated by reference in Part III
hereof.
This report includes a total of 41 pages, including exhibits.
The exhibit index appears on page 22.
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TABLE OF CONTENTS
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Item 1. BUSINESS......................................................................................... 3
General.......................................................................................... 3
Strategy.......................................................................................... 3
Products.......................................................................................... 4
Product Design.................................................................................... 6
Manufacturing..................................................................................... 6
Marketing......................................................................................... 7
Bookings.......................................................................................... 7
Competition....................................................................................... 7
Anne Klein License................................................................................ 8
Liz Claiborne License..............................................................................8
Employees......................................................................................... 8
Item 2. PROPERTIES.........................................................................................8
Trademarks.........................................................................................8
Physical Properties............................................................................... 9
Item 3. LEGAL PROCEEDINGS................................................................................. 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 9
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 10
Nasdaq Listing................................................................................... 10
Dividends........................................................................................ 10
Item 6. SELECTED FINANCIAL DATA.......................................................................... 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 12
Results of Operations............................................................................ 13
Variability of Quarterly Results and Seasonality................................................. 14
Liquidity and Capital Resources.................................................................. 15
Inflation........................................................................................ 16
Factors That May Effect Future Results............................................................16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 18
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT................................................... 19
Item 11. EXECUTIVE COMPENSATION........................................................................... 19
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 19
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 20
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PART 1
ITEM 1. BUSINESS
This Report on Form 10-K contains forward-looking statements
which are subject to a variety of risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth below in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results."
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 collection of
children's swimwear, and the WearAbouts collection of resortwear. In August
1997, the Company introduced the Liz Claiborne(R) collection of designer
contemporary swimwear. 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, 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 60.4% of the Company's net sales in fiscal 1997 private label
swimwear for approximately 26.0%, and resortwear for approximately 13.6%.
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 branded 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 a
"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, such as Liz
Claiborne. 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.
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 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
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display of the Company'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 product lines, 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 effect 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 pursue its goal of being the quality, low cost producer. In
fiscal 1997, the Company expanded its 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 Signature and Sirena Concepts
collections of better misses' and better contemporary 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 childrens'
swimwear. In August 1997, the Company introduced the Liz Claiborne collection of
contemporary designer 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 60.4% of the Company's net sales
for fiscal 1997.
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
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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. 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 $45 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.
Liz Claiborne. Liz Claiborne, Inc. ("Liz Claiborne") has
granted the Company the right to use the trademarks Liz Claiborne and Elisabeth
in connection with the sales of women's designer swimsuits and related
accessories in the United States of America and its territories and possessions,
and Canada. In August 1997, the Company introduced the Liz Claiborne and
Elisabeth collections of contemporary designer swimwear. Elaborating on the
sophisticated styling of Liz Claiborne sportwear, the Liz Claiborne and
Elisabeth swimwear collections take an unprecedented approach to designer
swimwear. Featuring original designs and silhouettes in a signature color
palette, the collections include a complete range of swimwear and coordinating
cover-ups from the modern classic to sporty athletic looks. Retail price points
range from $70 to $110, and will be sold in prestige department stores, and
traditional department stores, and apparel specialty stores.
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 lines. The Hot Water brand is
sold in 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 specialty 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 26.0% of the Company's net sales for fiscal 1997.
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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 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 13.6% of the Company's net sales for fiscal 1997. 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
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.
In fiscal 1997, the Company cut approximately 35% and sewed
approximately 51% of its products in its own facilities, used four contractors,
who cut exclusively for the Company, to cut approximately 65% of its products
and used one contractor to sew approximately 7% of its products. The balance of
the Company's products in fiscal 1997 were sewn by 26 sewing contractors in the
Los Angeles area and four sewing contractors 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. A resortwear
manufacturing facility was opened in Sonora, Mexico, in fiscal 1997, to support
the continuing growth of this division.
The Company believes that the use of contractors enables it to
reduce capital expenditures, more efficiently employ its facilities,
particularly in light of 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 readily
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, 95% of which currently is
acquired from suppliers and textile mills located in the United States. The
Company purchased 17% and 11% of its total requirements in fiscal 1997 from H.
Warshaw & Sons and Guilford Mills, respectively. No other source accounted for
more than 10% of the Company's fabric purchases for fiscal 1997. 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 eight account
executives and eleven 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 55%
of the Company's net sales for fiscal 1997. May Department Stores accounted for
11% of the Company's net sales for fiscal 1997, and no other customer accounted
for more than 10% of such sales.
In fiscal 1997, 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 $16,229,671
at September 8, 1997 compared to approximately $13,300,028 at September 9, 1996,
an increase of 22.0%. All such 1997 bookings are for shipment before May 15,
1998. 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 reasons occurs from time to time. The Company generally has not
experienced difficulty in shipping orders by the dates requested by its
customers. This increase in bookings is a function of the timing of receipt of
the bookings, of stronger acceptance of the Company's products by the
marketplace. The peak booking period runs from November through April and the
receipt of bookings 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" and
Catalina(R) brand names, among others, 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" 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 long-term increased market share, there can be no assurance that
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.
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ANNE KLEIN LICENSE
Anne Klein has granted the Company the right to use the
trademarks Anne Klein, Anne Klein II 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, 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, other than Liz
Claiborne. 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.
LIZ CLAIBORNE LICENSE
In 1997, Liz Claiborne, Inc. granted the Company the right to
use the trademarks Liz Claiborne and Elisabeth 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, and Canada. The license currently
terminates on June 30, 2000. The license may be terminated earlier by Liz
Claiborne, Inc. under certain circumstances, including the Company's failure to
achieve minimum annual sales levels, the Company's failure to pay certain
guaranteed minimum royalties, the acquisition of a controlling interest in the
Company or a change in management of the Company. No assurance can be given that
the Company will achieve the minimum sales levels in the future. The designs,
materials, fabrication, labels and packaging of the Liz Claiborne and Elisabeth
collections must be approved by, and are the sole property of, Liz Claiborne,
Inc., and must include the number of styles determined by Liz Claiborne, Inc.
The Company is required to spend specified minimum amounts on advertising for
the collections, and all creative elements of such advertising are developed
with and controlled by Liz Claiborne, Inc. The collections may be sold only in
retail outlets approved by Liz Claiborne Inc. In consideration for the license
and design services, the Company pays Liz Claiborne, Inc. 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, other than Anne Klein.
EMPLOYEES
At September 8, 1997, the Company had 415 full-time employees
in the United States and Mexico, of whom two were engaged in corporate
management, 14 in administration, seven in merchandising and design, 16 in
pattern and sample making, 32 in production supervision, six in cutting, 290 in
sewing, 25 in sales and customer service, four in management information systems
and 19 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 trademarks of the
Company and some are registered in certain foreign countries. Rose Marie Reid
and WearAbouts are federally registered trademarks in the United States and
Sirena and Hot Water are pending federal registration. 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.
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Anne Klein, and Anne Klein II 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. Liz Claiborne and Elisabeth are federally registered trademarks of
Liz Claiborne, Inc. in the United States. Under the Company's license agreement,
Liz Claiborne, Inc. 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 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. Cross-complaints against the
Company were filed by both Plasa and Apparel Venture, Inc. These actions were
settled by an agreement entered into among the Company, Plasa and Apparel
Venture, Inc. in December 1996. The settlement of the Plasa litigation has had
no adverse effect on the Company.
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 1997.
9
<PAGE> 10
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.
<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
Sale Price
------------------------
Low High
--------- -------
Low High
FISCAL 1997
First Quarter.................................... $ 2.13 $ 3.13
Second Quarter................................... 2.13 2.94
Third Quarter.................................... 2.50 3.50
Fourth Quarter................................... 3.00 3.75
Sale Price
Sale Price
------------------------
Low High
--------- -------
FISCAL 1997
First Quarter (through September 8, 1997)........ $ 2.63 $ 3.13
</TABLE>
On September 8 1997 the closing price of the Company's Common
Stock as reported by the Nasdaq National Market System was $3.06. Stockholders
are urged to obtain current market quotations for the Common Stock. As of
September 8, 1997, 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 contained in the
Company's loan agreement on the payment of dividends, capital requirements and
general business conditions.
10
<PAGE> 11
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>
Year Ended June 30,
------------------------------------------------------------------------
1993(1)
(In thousands, except share and per share amounts) (Nine months) 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 28,937 $ 38,932 $ 49,206 $ 49,206 $ 43,732
Cost of goods sold 19,947 26,751 34,010 38,390 31,393
----------- ----------- ----------- ----------- -----------
Gross profit 8,991 12,181 15,196 10,816 12,339
Selling, general and administrative expenses 6,997 9,633 10,893 14,030 13,124
Depreciation and amortization(2) 148 204 241 274 284
----------- ----------- ----------- ----------- -----------
Income (loss) before interest and income taxes 1,846 2,343 4,062 (3,488) (1,069)
Interest expense 1,122 1,417 1,033 908 896
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 724 926 3,030 (4,396) (1,965)
Income taxes 54 25 142 15 20
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 671 $ 901 $ 2,888 $ (4,411) $ (1,985)
=========== =========== =========== =========== ===========
Net income (loss) per common share $ 0.38 $ 0.52 $ 0.93 $ (1.05) $ (0.43)
=========== =========== =========== =========== ===========
Weighted average common shares outstanding 1,743,971 1,743,971 3,104,255 4,205,946 4,649,230
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 1,940 $ 1,410 $ 6,120 $ 9,900 $ 8,013
Total assets 8,646 10,372 14,738 18,678 16,688
Total current liabilities 3,277 4,164 3,885 3,858 3,766
Long-term debt, less current maturities 3,673 3,611 86 50 138
Stockholders' equity 1,696 2,596 10,768 14,770 12,784
</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 Consolidated Financial Statements.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-K contains forward-looking statements
which are subject to a variety of risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in "Factors
That May Affect Future Results."
GENERAL
Last year, in response to net losses incurred in fiscal 1996,
management and the Board of Directors laid out an action plan of corrective
measures, which has resulted in improved gross margin, lower overhead expenses,
and reduced year end inventory levels. The Company intends to build upon that
plan, while pursuing initiatives in a few crucial areas to effect sales and
margin improvement. The two key drivers for improved financial performance in
fiscal 1998 are sales growth and gross margin improvement.
o BUILD LIZ CLAIBORNE INTO A DOMINANT SWIMWEAR BRAND: The acquisition of the
license, and subsequent launch of Liz Claiborne Swimwear is the most
significant development in the recent history of The Sirena Apparel Group,
Inc. The implications for the Company's market position and future growth
prospects are enormous when one considers the impact of the designer mega
brand strategy extended to swimwear. The Company believes there is no
stronger brand in today's ready-to-wear market than Liz Claiborne(R).
Through the Company's close collaboration with Liz Claiborne, Inc., an
updated fashion perspective for today's active woman, the roll-out of
in-store Liz Claiborne Swimwear shops and graphic enhancements, a first for
the swimwear industry, the Company believes it can make the swimwear
shopping experience a more satisfying one. The Company's goal is to
establish Liz Claiborne Swimwear as a dominant brand in the years to come.
o CAPITALIZE ON STRONG FISCAL 1997 RETAIL SELL-THROUGHS: The Company's
products have earned the right, based on strong retail sell-throughs and
profitability, to an increased share of retailers' open-to-buy in fiscal
1998. The Company plans to aggressively exploit its strong retail
performance in fiscal 1997 into expanded retail shelf space in fiscal 1998,
commensurate with its sales performance.
o ENHANCE GROSS MARGIN: The Company's management has completed a critical
review of the pricing of its products vis-a-vis the competition and what
its believes the value its products to be in the market. Based on this
analysis, the Company's pricing structure this year should yield improved
initial mark-ups over the prior year. Further, expanded use of Mexican and
other off-shore sourcing, combined with less close-out inventory due to
improved inventory management and sell-throughs, should have a positive
impact on fiscal 1998 margin.
o IMPROVE EXECUTION AND EFFICIENCY: An organization is only as good as its
people, the procedures and information available to make the best decisions
and to measure the results of these decisions. The Company has appointed
Maurice Newman as Chairman of the Board and Chief Operating Officer. This,
and other key personnel changes in the design and private label areas over
the past year, are aimed at strengthening the Company's infrastructure.
Effort and incentive programs are being put into place to expand the
concept of accountability throughout each key operating segment of the
Company, and to emphasize each employee's role in contributing to the
success of the Company as a whole.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which certain items in the statements of operations data bear to net
sales and the percentage dollar increase (decrease) of such items from period to
period.
<TABLE>
<CAPTION>
Percent of Net Sales Percentage Dollar
Fiscal Year Ended June 30, Increase (Decrease)
------------------------------- --------------------
1995 and 1996 and
1995 1996 1997 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% (11.1%)
Cost of goods sold 69.1 78.8 71.8 12.9 (18.2)
----- ----- ----- ----- -----
Gross profit 30.9 22.0 28.2 (28.9) 14.1
Selling, general and administrative expenses 22.1 28.5 30.0 28.8 (6.5)
Depreciation and amortization(1) 0.5 0.6 0.7 13.7 3.7
Income (loss) before interest and income taxes 8.3 (7.1) (2.5) (185.9) 69.4
Interest expense 2.1 1.8 2.0 (12.1) (1.3)
----- ----- -----
Income (loss) before income taxes 6.2 (8.9) (4.5) (245.1) 55.3
Income taxes 0.3 0.1 0.05 (89.4) 33.3
----- ----- -----
Net income (loss) 5.9% (9.0%) (4.5%) (252.7%) 55.0%
===== ===== =====
</TABLE>
- --------------
(1) See Note 2 of Notes to Consolidated Financial Statements
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>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Branded 62.7% 58.3% 60.4%
Resortwear 10.9 11.2 13.6
Private Label 26.4 30.5 26.0
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales declined from $49,206,000 in fiscal 1996
to $43,732,000 in fiscal 1997, a decrease of 11.1%. The decrease in net sales
resulted from a 24.3% decrease in the revenue of the private label division due
primarily to a significant reduction in orders from a major account caused by
their shift in sourcing from the U.S. to the Far East, and a 7.9% decrease in
the revenue of the branded division due to a reduction in early season orders of
the Sirena brand based on lower fiscal 1996 retail sales performance. The
decline in net sales was partially offset by a 7.7% increase in revenue of the
resortwear division due to increased penetration and market share of the
existing account base.
Gross Profit. Gross profit increased from $10,816,000 (22.0%
of net sales) in fiscal 1996 to $12,339,000 (28.2% of net sales) in fiscal 1997,
an increase of 14.1%. The increase in gross profit and gross margin resulted
from (i) improved capacity utilization of the Company's manufacturing
facilities, (ii) expanded production levels of the Company's lower cost
Sirenamex facility in Mexico, and (iii) an additional inventory reserve
provision of $600,000 in fiscal 1997 compared to an additional inventory
provision of $1,600,000 in fiscal 1996.
Selling, General, and Administrative Expenses. Selling,
general and administrative expenses declined from $14,304,000 (29.1% of net
sales) in fiscal 1996 to $13,408,000 (30.7% of net sales) in fiscal 1997, a
decrease of 6.3%. The decrease in such expenses resulted from (i) lower
advertising expenses relating to a reduction in co-operative advertising
committments as well the costs of a national print advertising compaign in
fiscal 1996 for which there was no comparable expenditure in fiscal 1997, (ii)
lower distribution expenses resulting from improved efficiency levels and lower
sales volume, (iii) headcount reductions effected in late fiscal 1996 whose
financial impact was fully realized in fiscal 1997, and (iv) legal expenses
offset by the net settlement of litigation in fiscal 1997. The decrease was
partially offset by
13
<PAGE> 14
additional expenses related to the abandonment of a consulting agreement with a
former board member, and development costs related to the new Liz Claiborne
swimwear brand, for which there were no comparable expenses in fiscal 1996. The
increase in selling, general and administrative expenses as a percentage of net
sales resulted primarily from lower net sales in fiscal 1997 as compared to
fiscal 1996.
Interest Expense. Interest expense declined from $908,000
(1.8% of net sales) to $896,000 (2.0% of net sales) in fiscal 1997, a decrease
of 1.3%. The decrease resulted primarily from lower average borrowings in fiscal
1997, driven by a reduction in year over year ending inventory.
Net Loss. As a result of the foregoing factors, net loss
declined from $4,411,000 ($1.05 per common share) for fiscal 1996 to net loss of
$1,985,000 ($0.43 per common share) for fiscal 1997. Both periods reflect a
nominal tax rate.
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.
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 a customer orders, (v) the timing
of expenditures in anticipation of increased sales and customer delivery
requirements, (vi) the weather and (vii) actions of competitors. Accordingly, a
comparison of the Company's results of operations from period to period is not
necessarily meaningful, and the Company's results of operations for any period
are not necessarily indicative of future performance. As a result of the effect
of adverse weather in fiscal 1996 on industry sales of swimwear, retail
customers were 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 1997, 41.6% of the Company's net sales were generated in
the third fiscal quarter. If the Company's sales during the third quarter are
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
14
<PAGE> 15
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.
In thousands, except share and per share amounts
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1995 1995 1996 1996 1996 1996 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 3,100 $ 9,803 $ 24,967 $ 11,336 $ 2,185 $ 7,042 $ 18,207 $ 16,298
Income (loss) from
operations (1,235) 739 3,170 (6,162) (2,101) 465 2,520 (1,953)
Net income (loss) (916) 377 1,892 (5,764) (2,243) 214 2,254 (2,210)
Net income (loss)
per common share $ (0.29) $ 0.09 $ 0.40 $ (1.24) $ (0.48) $ 0.05 $ 0.48 $ (0.48)
Weighted average common
shares outstanding 3,143,971 4,059,607 4,734,740 4,649,230 4,649,230 4,649,230 4,649,230 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. 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. The Company believes that its present sources of working capital
will enable it to finance its current and anticipated growth in sales for the
foreseeable future.
Net cash provided by operating activities for fiscal 1997 was
$517,000, compared to $7,905,000 used by operating activities for fiscal 1996.
At June 30, 1997, working capital was approximately $8,013,000, compared to
$9,900,000 at June 30, 1996.
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 decreased from $7,713,000 at June 30, 1996 to
$4,251,000 at June 30, 1997, a decrease of 44.9%, as a result of (i) the
aggressive liquidation of prior season inventory in fiscal 1997, and (ii) a more
conservative inventory build plan in fiscal 1997
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 June
23, 1997, the Company sells to Heller all of the Company's accounts receivable
at their net invoice price less a commission of .60%, 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 0.375% over the prime rate established from
time to time by Bank of America (8.50% at June 30, 1997). 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
$5,000,000 and ranging to a maximum of $1,000,000 (in June and July) 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
$500,000 from September 1 to September 30, $1,000,000 from October 1 to October
31, $1,500,000 from November 1 to November 30, $2,000,000 from December 1 to
January 31, $1,000,000 from February 1 to March 31, and $0 from April 1 to
August 30, 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
15
<PAGE> 16
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 $20 million. The Company's
agreement with Heller has a term expiring on August 18, 2000, 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. In addition, the agreement provides for various financial
covenants to be maintained, including tangible net worth, working capital, and
ratio of indebtedness to tangible net worth that vary depending on the time of
year.
The balance of advances from the factor was $3,532,000 at June
30, 1997, compared to $7,032,000 at June 30, 1996. At June 30, 1997, 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 $6,276,000, compared to $5,008,000 at June 30, 1996. The Company bears the
entire risk of non-approved receivables which decreased from $521,000 at June
30, 1996 (4.3% of gross receivables due from factor) to $339,000 at June 30,
1997 (3.5% 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Variability of Quarterly Results. The Company has experienced,
and expects to continue to experience, a substantial variation in its net sales
and operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include the timing
of the Company's introduction of new product lines, the level of consumer
acceptance of each new product line, general economic and industry conditions
that affect consumer spending and retailer purchasing, the availability of
manufacturing capacity, the seasonability of the markets in which the Company
participates, the timing of trade shows, the product mix of customer orders, the
timing of the placement or cancellation of customer orders, the occurrence of
chargebacks in excess of reserves and the timing of expenditures in anticipation
of increased sales and actions of competitors. Accordingly, a comparison of the
Company's results of operations from period to period is not necessarily
meaningful, and the Company's results of operations for any period are not
necessarily indicative of future performance.
Economic Conditions. The apparel industry historically has
been subject to substantial cyclical variation, and a recession in the general
economy or uncertainties regarding future economic prospects that affect
consumer spending habits have in the past had, and may in the future have, a
materially adverse effect on the Company's results of operations. In addition,
certain retailers, including some of the Company's customers, have experienced
in the past, and may experience in the future, financial difficulties which
increase the risk of extending credit to such retailers. These retailers have
attempted to improve their own operating efficiencies by concentrating their
purchasing power among a narrowing group of vendors. There can be no assurance
that the Company will remain a preferred vendor for its existing customers. A
decease in business from or loss of a major customer could have a material
adverse effect on the Company's results of operations. The Company has entered
into a non-recourse accounts receivable factoring agreement. There can be no
assurance that the Company's factor will approve the extension of credit to
certain retail customers in the future. If a customer's credit is not approved
by the factor, the Company could either assume the collection risk on sales to
the customer itself, require that the customer provide a letter of credit or
choose not to make sales to the customer.
Reliance on Key Customers. In fiscal 1997, ten customers
accounted for 55% of the Company's net sales. The loss of any such customer
could have a material adverse effect on the Company's results of operations.
From time to time, certain of the Company's major customers have experienced
financial difficulties. The Company does not have long-term contracts with any
of its customers and, accordingly, there can be no assurance that any customer
will continue to place orders with the Company to the same extent it has in the
past, or at all. In addition, the Company's results of operations will depend to
a significant extent upon the commercial success of its major customers.
16
<PAGE> 17
Dependence on Contract Manufacturers. Approximately 49% of the
Company's products are manufactured by independent cutting, sewing and finishing
contractors. The use of contract manufacturers and the resulting lack of direct
control over the production of its products could result in the Company's
failure to receive timely delivery of products of acceptable quality. Although
the Company believes that alternative sources of cutting, sewing and finishing
services are readily available, the loss of one or more contract manufacturers
could have a material adverse effect on the Company's results of operations
until an alternative source is located and has commenced producing the Company's
products.
Price and Availability of Raw Materials. Although the Company
believes that its suppliers will continue to be able to procure a sufficient
supply of the principal fabrics used by the Company in manufacturing its
products, the price and availability of such fabrics may fluctuate significantly
depending on supply, world demand, and currency fluctuations. There can be no
assurance that fluctuations in the price and availability of fabric or other raw
materials used by the Company will not have a material adverse effect on the
Company's results of operations.
Management of Growth. No assurance can be given that the
Company will be successful in maintaining or increasing its sales in the future.
Should be Company experience significant future growth in sales, such growth
will require additional working capital and may place a significant strain on
the Company's management, management information systems, inventory management,
production capability, distribution facilities and receivables management. Any
disruption in the Company's order processing, sourcing or distribution systems
could cause orders to be shipped later, and under industry practices, retailers
generally can cancel orders or refuse to accept goods due to late shipment. Such
cancellations and returns could result in a reduction in revenue, increased
administrative and shipping costs and a further burden on the Company's
distribution facilities. In addition, the failure to timely enhance the
Company's operating systems, or unexpected difficulties in implementing such
enhancements, could have a material adverse effect on the Company's results of
operations.
Foreign Manufacturing. Approximately 30% of the Company
products were manufactured in Mexico in fiscal 1997. As a result, the Company's
operations are subject to the customary risks of doing business abroad,
including, among other things, transportation delays, economic or political
instability, currency fluctuations, restrictions on the transfer of funds and
the imposition of tariffs, export duties, quotas and other trade restrictions.
Risk of Brand Acceptance. The Company's success depends in
substantial part on its ability to correctly anticipate, gauge and respond to
rapidly changing consumer preferences in a timely manner. If the Company
materially misjudges the market for a particular product or product line, the
Company may be faced with a reduction in sales and profitability, excess
inventory and diminished customer loyalty. A substantial portion of the
Company's sales are derived from branded products and accordingly, any decline
in consumer acceptance of the Company's brand could have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company will be able to correctly anticipate, gauge and respond to changing
consumer preferences in a timely manner in the future.
Dependence on Licensed Trademarks. The Company's manufacture
and sale of the Anne Klein collection is pursuant to a license agreement with
Anne Klein which terminates on December 31, 1999. The Anne Klein collection
accounted for more than 15% and less than 20% of the Company's net sales for
fiscal 1997. The license may be terminated earlier by Anne Klein under certain
circumstances. See "Business-Anne Klein License." The Company's manufacture and
sales of the Liz Claiborne and Elizabeth collections is pursuant to a license
agreement with Liz Claiborne, Inc. which terminates in June 30, 2000, and may be
terminated earlier by Liz Claiborne under certain circumstances. See
"Business-Liz Claiborne License." Termination of either of these license
agreements could have a material adverse effect on the Company's financial
condition and results of operations. Furthermore, a decline in the consumer
appeal of Anne Klein or Liz Claiborne apparel could adversely affect sales of
the Company's Anne Klein or Liz Claiborne lines. In addition, the Company is
prohibited under the Anne Klein agreement from manufacturing or marketing
women's swimwear bearing the name of any other well known American designer of
high end products, other than Liz Claiborne. The prohibition may impair the
Company's ability to expand its sales of designer swimwear. See "Business-Anne
Klein License."
17
<PAGE> 18
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
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors and executive
officers is incorporated herein by reference from the section entitled "ELECTION
OF DIRECTORS" of the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated
herein by reference from the section entitled "EXECUTIVE COMPENSATION" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain
beneficial owners and management is incorporated by reference from the sections
entitled "SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
19
<PAGE> 20
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements and Schedules. Reference is made to the Index
to Financial Statements and Schedules on page F-1 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 1997.
c) Exhibit Number
10.1 Amendment Number Six to Factoring, Credit, and Security
Agreement By and Between Heller Financial, Inc. and The
Sirena Apparel Group, Inc., dated June 23, 1997.
10.2 Amendment Number Seven to Factoring, Credit, and
Security Agreement By and Between Heller Financial,
Inc. and The Sirena Apparel Group, Inc., dated June 23,
1997.
10.3 Amendment Number Eighth to Factoring, Credit, and
Security Agreement By and Between Heller Financial,
Inc. and The Sirena Apparel Group, Inc., dated June 23,
1997.
10.4 Modification of Lease By and Between 1411
Trizechahn-Swig L.L.C. and The Sirena Apparel Group,
Inc., dated May 15, 1997.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and June 30, 1997 F-2
Consolidated Statements of Operations for the fiscal
years ended June 30, 1995, 1996 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the fiscal years ended June 30, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for
the fiscal years ended June 30, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts F-19
</TABLE>
20
<PAGE> 21
Consolidated Financial Statements
The Sirena Apparel Group, Inc.
and Subsidiary
Years ended June 30, 1997 and 1996
with Report of Independent Auditors
<PAGE> 22
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, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years ended June 30, 1997. 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, 1996 and 1997 and the consolidated
results of their operations and their cash flows for the three years ended June
30, 1997, 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.
Los Angeles, California ERNST & YOUNG LLP
August 21, 1997
F-1
<PAGE> 23
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30
1996 1997
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 17,964 $ 202,293
Accounts receivable, net of allowance of $2,290,968
(1996) and $1,772,621 (1997) (Note 3) 4,938,331 6,941,649
Inventories (Notes 4 and 6) 7,713,427 4,250,681
Prepaids and other current assets 1,088,486 384,770
----------- -----------
Total current assets 13,758,208 11,779,393
Equipment and leasehold improvements:
Furniture, fixtures and equipment 3,109,941 3,415,407
Leasehold improvements 813,747 836,177
----------- -----------
3,923,688 4,251,584
Less accumulated depreciation and amortization (2,787,925) (3,133,957)
----------- -----------
1,135,763 1,117,627
Equipment under capital lease, less accumulated
amortization of $86,708 (1996) and $36,716 (1997)
(Note 7) 81,115 177,153
Intangible assets, less accumulated amortization of
$849,289 in (1996) and $973,569 (1997) 3,590,029 3,486,923
Deposits 112,466 127,071
----------- -----------
Total assets $18,677,581 $16,688,167
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 24
<TABLE>
<CAPTION>
JUNE 30
1996 1997
-----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 336,305 $ 371,754
Accounts payable 2,665,718 1,809,980
Accrued liabilities (Note 5) 820,400 1,544,826
Current portion of capital leases obligations 35,714 39,522
------------ ------------
Total current liabilities 3,858,137 3,766,082
Capital lease obligations, less current portion 49,670 137,628
Commitments and contingencies (Note 7)
Stockholders' equity (Note 6)
: Common stock, $.01 par value:
Authorized, 20,000,000
Issued and outstanding, 4,649,230 in
1996 and 1997 46,492 46,492
Additional paid-in capital 32,424,627 32,424,627
Accumulated deficit (17,701,345) (19,686,662)
------------ ------------
Total stockholders' equity 14,769,774 12,784,457
------------ ------------
Total liabilities and stockholders' equity $ 18,677,581 $ 16,688,167
============ ============
</TABLE>
F-3
<PAGE> 25
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 49,206,280 $ 49,206,288 $ 43,731,965
Cost of goods sold 34,010,181 38,390,021 31,393,031
------------ ------------ ------------
Gross profit 15,196,099 10,816,267 12,338,934
Selling, general and administrative expenses 10,892,630 14,029,878 13,123,862
Depreciation and amortization 241,000 274,145 284,206
------------ ------------ ------------
Total operating expenses 11,133,630 14,304,023 13,408,068
------------ ------------ ------------
Income (loss) from operations 4,062,469 (3,487,756) (1,069,134)
Interest expense (1,032,822) (908,049) (896,183)
------------ ------------ ------------
Income (loss) before provision for income
taxes 3,029,647 (4,395,805) (1,965,317)
Provision for income taxes (Note 8) 141,986 15,000 20,000
------------ ------------ ------------
Net income (loss) $ 2,887,661 $ (4,410,805) $ (1,985,317)
============ ============ ============
Net income (loss) per share $ 0.93 $ (1.05) $ (0.43)
============ ============ ============
Weighted average number of common shares
outstanding (Note 2) 3,104,255 4,205,946 4,649,230
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 26
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------
Number of Number of
Series A Series B
Shares Par Value Shares Par Value
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 10,500,000 $14,562,500 2,600,000 $ 2,600,000
Net income for year ended
June 30, 1995 -- -- -- --
Recapitalization (Note 6) (10,500,000) (14,562,500) (2,600,000) (2,600,000)
Initial public offering (Note 6) -- -- -- --
----------- ----------- ---------- -----------
Balance at June 30, 1995 -- -- -- --
Net loss for year ended
June 30, 1996 -- -- -- --
Secondary offering (Note 6) -- -- -- --
Options exercised (Note 6) -- -- -- --
----------- ----------- ---------- -----------
Balance at June 30, 1996 -- -- -- --
Net loss for year ended
June 30, 1997 -- -- -- --
----------- ----------- ---------- -----------
Balance at June 30, 1997 -- $ -- -- $ --
=========== =========== ========== ===========
<CAPTION>
Common Stock
------------------------- Additional
Number Paid-In Accumulated
of Shares Par Value Capital Deficit Total
------------ --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 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 6) (11,425,741) (114,257) 17,276,757 -- --
Initial public offering (Note 6) 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 6) 1,448,782 14,487 8,129,758 -- 8,144,245
Options exercised (Note 6) 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
Net loss for year ended
June 30, 1997 -- -- -- (1,985,317) (1,985,317)
------------ --------- ----------- ------------ -----------
Balance at June 30, 1997 $ 4,649,230 $ 46,492 $32,424,627 $(19,686,662) $12,784,457
============ ========= =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 27
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,887,661 $(4,410,805) $(1,985,317)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 321,404 415,525 470,312
Change in accounts receivable allowance 429,738 528,520 (518,347)
Changes in operating assets and liabilities:
Accounts receivable (2,862,727) (1,923,748) (1,484,971)
Inventories (2,476,987) (1,742,869) 3,462,746
Prepaids and other current assets (211,429) (656,847) 703,716
Accounts payable (207,692) 565,191 (855,738)
Accrued liabilities (149,295) (680,183) 724,426
----------- ----------- -----------
Net cash (used in) provided by operating
activities (2,269,327) (7,905,216) 516,827
INVESTING ACTIVITIES
Purchases of property, plant and equipment (502,123) (610,716) (423,934)
Acquisition of trademark (241,186) - (21,174)
(Increase) decrease in deposits (10,000) 9,697 (14,605)
----------- ----------- -----------
Net cash used in investing activities (753,309) (601,019) (459,713)
FINANCING ACTIVITIES
Proceeds from debt 1,579,898 - -
Repayments of debt (5,228,774) - -
Payments under capital lease obligations (29,609) (32,487) (36,116)
Additional borrowings under capital lease - - 127,882
Proceeds from stock issuance 5,779,463 8,412,511 -
Increase in bank overdraft 230,659 84,874 35,449
----------- ----------- -----------
Net cash provided by financing
activities 2,331,637 8,464,898 127,215
----------- ----------- -----------
(Decrease) increase in cash (690,999) (41,337) 184,329
Cash at beginning of year 750,300 59,301 17,964
----------- ----------- -----------
Cash at end of year $ 59,301 $ 17,964 $ 202,293
=========== =========== ===========
</TABLE>
F-6
<PAGE> 28
The Sirena Apparel Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 1,087,398 $ 908,049 $ 896,183
Income taxes 100,647 372,559 32,129
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During 1997, the Company incurred an additional capital lease obligation of
$127,882 in connection with a current lease agreement to acquire equipment.
See accompanying notes.
F-7
<PAGE> 29
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1997
1. 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 part 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 6).
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.
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
F-8
<PAGE> 30
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
amortization period, the Company's carrying value of the goodwill would be
reduced by the estimated shortfall of cash flows. In addition, costs associated
with a trademark of $1,006,000 are being amortized using the straight-line
method over 25 years. Amortization of intangible assets amounted to
approximately $120,000, $125,000 and $124,000 for the years ended June 30, 1995,
1996 and 1997, 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. One customer accounted for
11%, 10% and 11% of the Company's net sales for the years ended June 30, 1995,
1996 and 1997, respectively.
The Company has sewing operations in a facility in Sonora, Mexico. 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.
F-9
<PAGE> 31
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
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, 1995,
1996 and 1997 were approximately $1,014,000, $1,771,000 and $788,000,
respectively.
NET INCOME (LOSS) PER COMMON SHARE
The computation of net income (loss) per common share 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Accounting for Earnings Per
Share," which will be effective for the Company in fiscal 1998. At that time,
the Company will be required to change the method currently used to compute
earnings per share and restate all prior periods.
The impact of SFAS No. 128 is not expected to be material.
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.
F-10
<PAGE> 32
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 adopted the provisions for pro forma
disclosure requirements of SFAS 123 during the year ended June 30, 1997. The pro
forma impact on net loss and net loss per share was not material.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1996 1997
----------- -----------
<S> <C> <C>
Receivables assigned to factor:
Nonrecourse $11,518,548 $ 9,470,144
Recourse 521,100 338,700
Advances from factor (7,031,559) (3,532,369)
----------- -----------
Due from factor 5,008,089 6,276,475
Nonfactored accounts receivable 2,221,210 2,437,795
Allowance for customer credits and doubtful
accounts (2,290,968) (1,772,621)
----------- -----------
$ 4,938,331 $ 6,941,649
=========== ===========
</TABLE>
The Company has entered into an accounts receivable, inventory, seasonal
overadvance and factoring services arrangement, which was amended as of June 23,
1997, with Heller Financial, Inc. (Heller) pursuant to which the Company sells
to Heller all of the
F-11
<PAGE> 33
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE (CONTINUED)
Company's accounts receivable at their net invoice price less a commission of
0.60% 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 .375% over the prime rate
established from time to time by Bank of America (8.50% at June 30, 1997).
Additional interest of 1% is due on excess inventory levels, as defined, over
short-term advances. 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.
The Company's short-term advances are limited to a maximum of $5,000,000 (in
January, February and March) and ranging to a maximum of $1,000,000 (in June and
July) 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 $500,000 from September 1 to September 30, $1,000,000 from
October 1 to October 31, $1,500,000 from November 1 to November 30, $2,000,000
from December 1 to January 31, $1,000,000 from February 1 to March 31, and $0
from April 1 through August 30 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 $20
million. The Company's agreement with Heller has a term expiring on August 18,
2000, 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. In addition, the agreement provides for
various financial covenants to be maintained.
F-12
<PAGE> 34
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1996 1997
----------- -----------
<S> <C> <C>
Raw materials $ 3,917,042 $ 2,400,844
Work-in-process 450,397 133,864
Finished goods 3,345,988 1,715,973
----------- -----------
$ 7,713,427 $ 4,250,681
=========== ===========
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30
1996 1997
----------- -----------
<S> <C> <C>
Accrued payroll $ 207,601 $ 227,255
Accrued vacation and benefits 282,090 321,895
Accrued - other 330,709 995,676
----------- -----------
$ 820,400 $ 1,544,826
=========== ===========
</TABLE>
6. 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
canceled.
F-13
<PAGE> 35
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 stock owned by existing shareholders
were sold to the public at $6.50 per share.
The Company 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. During 1996, 150,000 options for shares of common stock were
granted at $3.13 to certain officers and directors and are exercisable
immediately upon grant and expire five to ten years after the date of the grant.
In addition, during 1996, 53,500 options for shares of common stock were granted
to other employees at $6.00 which vest in three equal amounts commencing in 1996
and expire on the tenth anniversary of the date of grant. In 1997, 15,000
options for shares of common stock were granted at $3.50 to certain directors of
the Company, vesting immediately and expiring in ten years. Based on
acceleration clauses of the stock options extended to the Company's employees
and directors, outstanding options would become fully vested upon
termination/separation through May 1998.
Pro forma information regarding net loss and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1997; weighted-average risk-free interest rates of 6%; dividend yields of
0%; weighted-average volatility factors of the expected market price of the
Company's common stock of .40; and a weighted average expected life of the
option of 5 years. The impact of net loss and earnings per share was not
material.
F-14
<PAGE> 36
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997
------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 512,513 $4.83 653,536 $4.54
Granted 203,500 $3.88 15,000 $3.50
Exercised (56,477) $4.75 - $ -
Cancelled (6,000) $6.00 (13,332) $5.84
-------- -------
Outstanding at end of year 653,536 $4.54 655,204 $4.53
======== =======
Exercisable at end of year 583,869 $4.26 621,871 $4.45
======== =======
Weighted average fair value of options
granted during the year $1.71 $1.54
</TABLE>
Exercise prices for options outstanding as of June 30, 1997, ranged from $3.13
to $7.00. The weighted average remaining contractual life of those options is 8
years.
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, 1997.
7. 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 $719,149, $778,589
and $830,947 for the years ended June 30, 1995, 1996 and 1997, respectively.
F-15
<PAGE> 37
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
Future minimum lease payments at June 30, 1997, under both capital and operating
leases having an initial noncancelable term of more than one year, are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING JUNE 30 LEASES LEASES
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 51,288 $ 827,106
1999 51,288 813,027
2000 51,288 457,072
2001 51,288 253,340
2002 - 248,392
Thereafter - 315,065
--------- -----------
Total minimum lease payments 205,152 $ 2,914,002
===========
Less imputed interest 28,002
---------
Present value of minimum lease payments 177,150
Less current portion 39,522
---------
$ 137,628
=========
</TABLE>
The Company has licenses for the right to use certain trademarks in connection
with the sale of lines of women's swimwear in the United States and related
territories. The first license terminates on December 31, 1999 and the second
license terminates June 30, 2000. Both agreements can be 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 agreements require 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 1999 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.
F-16
<PAGE> 38
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)
The Company retained a corporation, owned by a former director of the Company,
to provide management services. Payments for these services were $213,000,
$211,000 and $273,000 for the years ended June 30, 1995, 1996 and 1997,
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. The
Company has abandoned the services pursuant to the agreement and provided an
accrual for a settlement of amounts owed.
8. INCOME TAXES
The provision for income taxes included in the statements of operations amounted
to:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 54,251 $ - $ -
State 87,735 3,000 3,000
Foreign - 12,000 17,000
--------- -------- --------
141,986 15,000 20,000
Deferred:
Federal - - -
State - - -
--------- -------- --------
- - -
--------- -------- --------
$ 141,986 $ 15,000 $ 20,000
========= ======== ========
</TABLE>
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
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% (34.0)%
Foreign taxes - 0.3 0.3
State taxes (net of federal tax) 1.9 - -
Valuation allowance (34.8) 32.6 31.2
Permanent items 1.8 1.4 2.2
Net operating loss carryforwards - - -
Alternative minimum tax 1.8 - -
-------- ------- -------
Tax provision rate 4.7% 0.3% 0.3%
======== ======= =======
</TABLE>
F-17
<PAGE> 39
The Sirena Apparel Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The components of deferred tax assets (valuation allowance) as of June 30, 1996
and June 30, 1997, respectively, are as follows:
<TABLE>
<CAPTION>
JUNE 30
1996 1997
----------- -----------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable $ 919,549 $ 731,542
Inventory 1,329,912 1,426,313
Other 111,473 131,828
----------- -----------
2,360,934 2,289,683
Non-current deferred tax assets:
Property and leasehold improvements 191,752 119,574
Net operating loss carryforwards 1,775,965 2,502,238
----------- -----------
1,967,717 2,621,812
Valuation allowance (4,328,651) (4,911,495)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
The Company has available approximately $7,642,000 of operating loss
carryforwards expiring from 2003 to 2004 available for federal income tax
purposes. Approximately $3,934,000 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).
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, 1995, 1996 and 1997, 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> 40
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, 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
Year ended June 30, 1997 2,290,968 4,031,306 - (4,549,653) 1,772,621
</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> 41
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 26, 1997.
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>
<S> <C> <C>
/s/ MAURICE NEWMAN Chairman of the Board, Chief Operating September 26, 1997
- ----------------------------- Officer and Director
Maurice Newman
/s/ DOUGLAS ARBETMAN President, Chief Executive Officer September 26, 1997
- ----------------------------- and Director (Principal Executive Officer)
Douglas Arbetman
/s/ HOWARD HEDINGER Director September 26, 1997
- -----------------------------
Howard Hedinger
/s/ HENRY R. MANDELL Executive Vice President, September 26, 1997
- ----------------------------- Chief Financial Officer, Secretary
Henry R. Mandell and Director (Principal Financial and
Accounting Officer)
/s/ ELLISON C. MORGAN Director September 26, 1997
- -----------------------------
Ellison C. Morgan
</TABLE>
21
<PAGE> 42
EXHIBIT INDEX
DESCRIPTION
<TABLE>
<CAPTION>
Exhibit
Number
- -------
<S> <C>
10.1 Amendment Number Six to Factoring, Credit, and Security Agreement By and
Between Heller Financial, Inc. and The Sirena Apparel Group, Inc., dated
June 23, 1997.
10.2 Amendment Number Seven to Factoring, Credit, and Security Agreement By
and Between Heller Financial, Inc. and The Sirena Apparel Group, Inc.,
dated June 23, 1997.
10.3 Amendment Number Eighth to Factoring, Credit, and Security Agreement By
and Between Heller Financial, Inc. and The Sirena Apparel Group, Inc.,
dated June 23, 1997.
10.4 Modification of Lease By and Between 1411 Trizechahn-Swig L.L.C. and The
Sirena Apparel Group, Inc., dated May 15, 1997.
23.1 Consent of Ernst & Young LLP
</TABLE>
22
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NUMBER SIX TO FACTORING, CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER SIX TO FACTORING, CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of June 23, 1997, between THE SIRENA APPAREL
GROUP, INC., a Delaware corporation ("Sirena"), and HELLER FINANCIAL, INC., a
Delaware corporation ("Heller") and amends that certain Factoring, Credit and
Security Agreement, dated as of August 19, 1994, between Sirena and Heller, as
amended from time to time (the "Agreement") and is based upon the following
facts:
RECITALS
A. Sirena has requested that Heller amend certain terms of Agreement.
B. Heller has agreed to amend certain terms of the Agreement in
accordance with Sirena's request.
AGREEMENT
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sirena and Heller, intending to
be legally bound, hereby amend the Agreement as follows:
1. Unless specifically defined herein, all capitalized terms contained in
this Amendment shall have the definition ascribed to such terms in the
Agreement.
2. The Agreement is amended by deleting the definitions of "Maximum
Revolving Loan Amounts" and "Maximum Special Advances Amount" and substituting
the following definitions of "Maximum Revolving Loan Amount" and "Maximum
Special Advances Amount":
"Maximum Revolving Loan Amount" means, as of any date of determination,
an amount equal to the lesser of: (a) an amount equal to (i) fifty
percent (50%) of Eligible Inventory consisting of raw materials plus
(ii) fifty percent (50%) of Eligible Inventory either which is Current
Season Inventory or which consists of finished goods for which Sirena
has confirmed purchase orders in house for future shipments plus (iii)
forty percent (40%) of eligible Inventory consisting of Previous Season
Inventory which is on hand at any time on or prior to October 31st of
the then current Shipping Season plus (iv) twenty-five percent (25%) of
Eligible Inventory consisting of Previous Season Inventory which is on
hand at any time during the period from November 1 through June 30th of
the then current Shipping Season less (v) such reserves as Heller, in
its sole reasonable discretion, elects to establish; and (b) an amount
equal to the lesser of (i) the maximum aggregate outstanding amounts of
Revolving Loans as set forth in the following table for the applicable
periods set forth in the following table and (ii) $1,000,000 in excess
of each of the maximum aggregate outstanding
<PAGE> 2
amounts of Revolving Loans projected to be needed by Sirena for the periods set
forth in the following table in accordance with Projections delivered by Sirena
to Heller in accordance with the terms of this Agreement and acceptable to
Heller, in its sole discretion:
<TABLE>
<CAPTION>
MAXIMUM AGGREGATE OUTSTANDING
PERIOD AMOUNT OF REVOLVING LOANS
- ---------------------------------------------------------------------
<S> <C>
January and February, 1997 and
each January and February $5,000,000
thereafter
- ---------------------------------------------------------------------
March, 1997 and each March
thereafter $4,000,000
- ---------------------------------------------------------------------
April and May, 1997 and each
April and May thereafter $2,000,000
- ---------------------------------------------------------------------
June and July, 1997 and each
June and July thereafter $1,000,000
- ---------------------------------------------------------------------
August, 1997 and each August
thereafter $2,000,000
- ---------------------------------------------------------------------
September, 1997 and each
September thereafter $3,500,000
- ---------------------------------------------------------------------
October, 1997 and each October
thereafter $4,000,000
- ---------------------------------------------------------------------
November, 1997 and each November
thereafter $4,500,000
- ---------------------------------------------------------------------
December, 1997 and each December
thereafter $5,000,000
- ---------------------------------------------------------------------
</TABLE>
"Maximum Special Advances Amount" means, as of any date of determination, an
amount equal to the lesser of: (a) the maximum aggregate outstanding amounts of
Special Advances as set forth in the following table for the applicable periods
set forth in the following table; and (b) $1,000,000 in excess of each of the
maximum aggregate outstanding amounts of Special Advances projected to be
needed by Sirena for the periods set forth in the following table in accordance
with Projections delivered by Sirena to Heller in accordance with the terms of
this Agreement and acceptable to Heller, in its sole discretion:
<TABLE>
<CAPTION>
MAXIMUM AGGREGATE OUTSTANDING
PERIOD AMOUNT OF SPECIAL ADVANCES
- ---------------------------------------------------------------------
<S> <C>
January, 1997 and each January
thereafter $2,000,000
- ---------------------------------------------------------------------
February and March, 1997 and each
February and March thereafter $1,000,000
- ---------------------------------------------------------------------
April, May, June, July and
August, 1997 and each April, May,
June, July and August thereafter $-0-
- ---------------------------------------------------------------------
September, 1997 and each
September thereafter $ 500,000
- ---------------------------------------------------------------------
October, 1997 and each October
thereafter $1,000,000
- ---------------------------------------------------------------------
November, 1997 and each
November thereafter $1,500,000
- ---------------------------------------------------------------------
October, 1997 and each December
thereafter $2,000,000
- ---------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
3. The Agreement is amended by deleting subpart (B)(2) of subsection 2.1
and substituting the following new subpart:
(2) Heller shall have no obligation to make Factoring Advances,
Special Advances, Revolving Loans or issue Supplier/Factor Guaranties to the
extent the amount of any requested Factoring Advance, Special Advance,
Revolving Loan or Supplier/Factor Guaranty, when added to then outstanding
aggregate Obligations, would cause the then outstanding aggregate Obligations
to exceed $20,000,000.
4. Subsection 2.2 of the Agreement is amended by deleting subpart (A) and
substituting the following new subpart (A), and also by adding the following
new subpart (E):
(A) So long as no Event of Default has occurred and is continuing,
Factoring Advances shall bear interest from the date such Factoring Advances
are made to the date paid at a rate per annum (meaning 360 days) equal to three
eighths of one percent (0.375%) plus the Prime Rate (the "Factoring Advances
Inerest Rate"). So long as no Event of Default has occurred and is continuing,
Special Advances, Revolving Loans and all other Obligations of Sirena
(including, without limitation, reimbursement obligations in connection with
the Supplier/Factor Guaranties) shall bear interest from the date such Special
Advances and/or Revolving Loans are made or such other obligations (including
Obligations arising in connection with the Supplier/Factor Guaranties) of
Sirena become due to the date paid at a rate per annum (meaning 360 days) equal
to two percent (2.0%) plus the Prime Rate (the "Revolving Loan Interest Rate").
After the occurrence of an Event of Default and for so long as such Event of
Default continues, the Factoring Advances, Special Advances, Revolving Loans
and all other Obligations (including Obligations arising in connection with the
Supplier/Factor Guaranties) of Sirena shall, at Heller's option, bear interest
at a rate per annum (meaning 360 days) equal to three percent (3.0%) plus the
Revolving Loan Interest Rate. Interest on Factoring Advances, Special Advances,
Revolving Loans and all other Obligations shall be computed on the daily
principal balance net of all payments received from Sirena or on behalf of
Sirena and net of the Purchase Price of Accounts. Interest will be calculated
daily on the basis of a 360-day year for the actual number of days elapsed in
the period during which it accrues and shall be charged to the account of
Sirena at the end of each month. Any publicly announced change in the Prime
Rate shall result in an adjustment to the Factoring Advances Interest Rate and
the Revolving Loan Interest Rate on the next Business Day.
(E) Excess Inventory Interest. As of the last day of each month set
forth below, Siren's aggregate Inventory, at the lower of cost or market on a
FIFO basis in accordance with GAAP, shall be an amount less than or equal to
the amounts set forth below.
Month Target Inventory
----- ----------------
3
<PAGE> 4
- -------------------------------------------------------------
July, 1997 $6,000,000
- -------------------------------------------------------------
August, 1997 $7,000,000
- -------------------------------------------------------------
September, 1997 $8,000,000
- -------------------------------------------------------------
October, 1997 $11,000,000
- -------------------------------------------------------------
November, 1997 $11,500,000
- -------------------------------------------------------------
December, 1997 $13,000,000
- -------------------------------------------------------------
January, 1998 $15,500,000
- -------------------------------------------------------------
February, 1998 $16,000,000
- -------------------------------------------------------------
March, 1998 $14,000,000
- -------------------------------------------------------------
April, 1998 $9,500,000
- -------------------------------------------------------------
May, 1998 $6,500,000
- -------------------------------------------------------------
June, 1998 $5,000,000
- -------------------------------------------------------------
If on the last day of any month set forth above, Sirena's actual
Inventory exceeds the corresponding Target Inventory, then for such
month Sirena will pay to Heller additional interest of one percent
(1.0%) per annum on that portion of the Revolving Loans equal to the
difference between the actual Inventory minus the Target Inventory on
the last day of such month. For example, if on July 31, 1997 Sirena's
actual Inventory is $8,000,000, then for July, 1997 Sirena would pay the
one percent (1.0%) additional interest on the first $2,000,000 of
Revolving Loans.
5. The Agreement is amended by deleting subsection 2.5 in its entirety and
substituting the following new subsection:
2.5 Term of this Agreement. This Agreement will continue until August
18, 2000 (the "Original Term") and shall remain in force and effect
thereafter but it may be terminated by either party giving the other
written notice at least sixty (60) days prior to the end of the Original
Term or at any time after the end of the Original Term, which written
notice shall clearly state such party's intention to terminate at the
end of the Original Term or at the end of such sixty (60) day period if
after the Original Term; provided, however, that Sirena may prepay and
terminate the Revolving Loan Facility at any time by paying in full all
of the outstanding Revolving Loans, including all accrued and unpaid
interest thereon. The Commitments shall (unless earlier terminated)
terminate on the Termination Date. In addition, this Agreement may be
terminated as set forth in Section 8.3 hereof. Upon termination in
accordance with Section 8.3 or on the Termination Date, all Obligations
shall become immediately due and payable without notice or demand.
Notwithstanding any termination, until all Obligations have been fully
paid and satisfied, Heller, shall be entitled to retain security
interests in and liens upon all Collateral, and even after payment of
all Obligations hereunder, the obligation of Sirena to indemnify Heller
in accordance with the terms hereof shall continue.
6. The Agreement is amended by deleting subsection 5.3 in its entirety and
substituting the following new subsection.
5.3 Inspection. Sirena shall permit Heller and any authorized
representatives designated by Heller to visit and inspect any of the
properties of Sirena or any of its Subsidiaries, including
<PAGE> 5
its and their financial and accounting records, and to make copies and
take extracts therefrom, and to discuss its and their affairs, finances
and business with its and their officers and independent public
accountants, at such reasonable times during normal business hours and
as often as may be reasonably requested. Sirena acknowledges that Heller
intends to make such inspections on at least a quarterly basis.
7. The Agreement is amended by deleting Section 6 in its entirety and
substituting the following new section:
SECTION 6 FINANCIAL COVENANTS
Sirena covenants and agrees that so long as any of the Commitments
remain in effect and until payment in full of all Obligations, Sirena
shall comply with and shall cause each of its Subsidiaries to comply
with all covenants in this Section 6 applicable to such Person.
6.1 Tangible Net Worth. As of each date set forth below, Sirena shall
maintain Tangible Net Worth of at least the amounts set forth below.
<TABLE>
<CAPTION>
DATE TANGIBLE NET WORTH
---- ------------------
<S> <C>
06/30/97 $8,000,000
09/30/97 6,000,000
12/31/97 6,500,000
03/31/98 10,000,000
06/30/98 10,000,000
The last day of each
quarter of a Fiscal Year
thereafter 6,000,000
</TABLE>
6.2 Working Capital. As of each date set forth below, Sirena shall
maintain Working Capital of at least the amounts set forth below.
"Working Capital" means the current assets of Sirena on a consolidated
basis decreased by (a) the current liabilities of Sirena on a
consolidated basis and (b) the amount of any obligations owing to Sirena
or any of its Subsidiaries by any Affiliate of Sirena or any of its
Subsidiaries.
<TABLE>
<CAPTION>
DATE TANGIBLE NET WORTH
---- ------------------
<S> <C>
06/30/97 $7,000,000
09/30/97 5,000,000
12/31/97 5,000,000
03/31/98 8,000,000
06/30/98 8,000,000
The last day of each
quarter of a Fiscal Year
thereafter 6,000,000
</TABLE>
5
<PAGE> 6
6.3 Ratio of Indebtedness to Tangible Net Worth. As of each date
set forth below, the ratio of (a) Sirena's Indebtedness, on a consolidated
basis, to (b) Sirena's Tangible New Worth shall not be greater than the ratios
set forth below.
<TABLE>
<CAPTION>
DATE RATIO
-------- --------
<S> <C> <C>
06/30/97 0.8:1
09/30/97 1.1:1
12/31/97 1.4:1
03/31/98 0.8:1
06/30/98 0.8:1
The last day of each
quarter of a Fiscal Year 1.9:1
thereafter
</TABLE>
8. The Agreement is amended by adding the Second Allonge to Revolving Note
attached hereto as Attachment "A" to the form of Revolving Note attached to the
Agreement as Exhibit 1.1(D).
9. The Agreement is amended by adding the Second Allonge to Special
Advances Note attached hereto as Attachment "B" to the form of Special Advances
Note attached to the Agreement as Exhibit 1.1(E).
10. This Amendment shall be deemed effective as of the date of this
Amendment. Except as specifically amended herein, the Agreement shall remain
in full force and effect without any other changes, amendments or modifications.
THE SIRENA APPAREL GROUP, INC.,
a Delaware corporation
By: /s/ [SIG]
----------------------------------------
Title: Exec. V.P., Chief Financial Officer
-------------------------------------
HELLER FINANCIAL, INC.,
a Delaware corporation
By: /s/ [SIG]
----------------------------------------
Title: Sr. V.P. 7/1/97
-------------------------------------
6
<PAGE> 7
ATTACHMENT "A"
SECOND ALLONGE
TO
REVOLVING NOTE
The Revolving Note dated August 19, 1994 (the "Note") and issued by THE
SIRENA APPAREL GROUP, INC. ("Sirena") to HELLER FINANCIAL, INC. ("Heller") in
the principal amount of the lesser of (i) Six Million Dollars ($6,000,000.00)
or (ii) the unpaid principal amount of all Revolving Loans made by Heller to
Sirena under that certain Factoring, Credit and Security Agreement dated as of
August 19, 1994, to which this Second Allonge is attached, and which evidences
said Revolving Loans, is hereby amended by deleting the title and first
paragraph thereof and by substituting the following new title and first
paragraph.
REVOLVING NOTE
$5,000,000 As of August 19, 1994
FOR VALUE RECEIVED, the undersigned, THE SIRENA APPAREL GROUP, INC., a Delaware
corporation ("Sirena"), promises to pay to the order of HELLER FINANCIAL, INC.
("Heller") at its office at 505 North Brand Boulevard, Glendale, California
91203, or at such other place as the holder hereof may appoint, the lesser of
(i) Five Million Dollars ($5,000,000) or (ii) the unpaid principal amount of
all Revolving Loans made by Heller to Sirena under that certain Factoring,
Credit and Security Agreement dated as of August 19, 1994, as amended from
time to time (the "Credit Agreement"), with interest from the date hereof
calculated daily at the rate per annum (meaning 360 days) equal to two percent
(2.0%) plus the reference rate of interests (the "Prime Rate") as announced
from time to time by Bank of America National Trust and Savings Association
(the "Reference Bank"), until due or declared due, payable on the whole amount
of said principal sum remaining from time to time unpaid, together with
exchange, commission, charges, collection expenses, and reasonable attorneys'
fees. The maximum principal amount of all outstanding Revolving Loans is
limited in accordance with the provisions contained in the Credit Agreement
and, at times, is less than Five Million Dollars ($5,000,000).
7
<PAGE> 8
This Second Allonge shall be governed by, and shall be construed and
enforced in accordance with, the laws of the State of California.
Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed to them in the Factoring, Credit and Security Agreement
described above.
Dated: June 23, 1997
THE SIRENA APPAREL GROUP, INC.
By: [SIG]
-------------------------------
Title: EVP, CFO
----------------------------
HELLER FINANCIAL, INC.
By: [SIG]
-------------------------------
Title: Sr. V.P. 7/1/97
----------------------------
8
<PAGE> 9
ATTACHMENT B
SECOND ALLONGE
TO
SPECIAL ADVANCES NOTE
The Special Advances Note dated January 27, 1995 (the "Note") and issued
by THE SIRENA APPAREL GROUP, INC. ("Sirena") to HELLER FINANCIAL, INC.
("Heller") in the principal amount of the lesser of (i) Three Million Dollars
($3,000,000.00) or (ii) the unpaid principal amount of all Special Advances made
by Heller to Sirena under the Factoring, Credit and Security Agreement dated as
of August 19, 1994, to which this Second Allonge is attached, and which
evidences said Special Advances, is hereby amended by deleting the title and
first paragraph thereof and by substituting the following new title and first
paragraph.
SPECIAL ADVANCES NOTE
$2,000,000 As of January 27, 1995
FOR VALUE RECEIVED, the undersigned, THE SIRENA APPAREL GROUP, INC., a
Delaware corporation ("Sirena"), promises to pay to the order of HELLER
FINANCIAL, INC. ("Heller") at its office at 505 North Brand Boulevard,
Glendale, California 91203, or at such other place as the holder hereof
may appoint, the lesser of (i) Two Million Dollars ($2,000,000) or (ii)
the unpaid principal amount of all Special Advances made by Heller to
Sirena under that certain Factoring, Credit and Security Agreement dated
as of August 19, 1994, as amended from time to time (the "Credit
Agreement"), with interest from the date hereof calculated daily at the
rate per annum (meaning 360 days) equal to two percent (2.0%) plus the
reference rate of interest (the "Prime Rate") as announced from time to
time by Bank of America National Trust and Savings Association (the
"Reference Bank"), until due or declared due, payable on the whole
amount of said principal sum remaining from time to time unpaid,
together with exchange, commission, charges, collection expenses, and
reasonable attorneys' fees. The maximum principal amount of all
outstanding Special Advances is limited in accordance with the
provisions contained in the Credit Agreement and, at times, is less than
Two Million Dollars ($2,000,000).
9
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NUMBER SEVEN TO FACTORING, CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER SEVEN TO FACTORING, CREDIT AND SECURITY AGREEMENT (this
"Amendment") is entered into as of June 23, 1997, between THE SIRENA APPAREL
GROUP, INC., a Delaware corporation ("Sirena"), and HELLER FINANCIAL, INC., a
Delaware corporation ("Heller") and amends that certain Factoring, Credit and
Security Agreement, dated as of August 19, 1994, between Sirena and Heller, as
amended from time to time (the "Agreement") and is based upon the following
facts:
RECITALS
A. Sirena has requested that Heller amend certain terms of Agreement.
B. Heller has agreed to amend certain terms of the Agreement in accordance
with Sirena's request.
AGREEMENT
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Sirena and Heller, intending to
be legally bound, hereby amend the Agreement as follows:
1. Unless specifically defined herein, all capitalized terms contained in
this Amendment shall have the definition ascribed to such terms in the
Agreement.
2. The Agreement is amended by deleting Schedule 4.7 to the Agreement and
substituting the attached new Schedule 4.7.
3. This Amendment shall be deemed effective as of the date of this
Amendment. Except as specifically amended herein, the Agreement shall remain in
full force and effect without any other changes, amendments or modifications.
THE SIRENA APPAREL GROUP, INC.
a Delaware corporation
By: [SIG]
----------------------------------
Title: EVP, CFO
----------------------------------
HELLER FINANCIAL, INC.
a Delaware corporation
By: [SIG]
----------------------------------
Title: Sr. V.P. 7/24/97
----------------------------------
<PAGE> 2
SCHEDULE 4.7
TRADE NAMES
Sirena
WearAbouts
Rose Marie Reid
Look & Sea
Anne Klein Swimwear for Sirena
Liz Claiborne Swimwear
Hot Water
Sirena Kids
<PAGE> 1
EXHIBIT 10.3
EIGHTH AMENDMENT OF
FACTORING, CREDIT AND SECURITY AGREEMENT
This Eighth Amendment of Factoring, Credit and Security Agreement (this
"Amendment") is made as of June 23, 1997, by and between SIRENA APPAREL GROUP
("Sirena") and HELLER FINANCIAL, INC. ("Heller") and amends that certain
Factoring, Credit and Security Agreement dated as of August 19, 1994, between
Sirena and Heller, as amended from time to time (the "Agreement"). All
capitalized terms used herein and not otherwise defined shall have the meanings
assigned to such terms in the Agreement.
Whereas, Sirena and Heller entered into the Agreement; and
Whereas, Sirena and Heller desire to amend certain terms of the
Agreement as set forth below;
Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENT
1.1 Delete subsection 2.3 in its entirety and substitute the
following new subsection:
2.3 Factoring Fees. At the time Heller purchases an Account from
Sirena, Sirena will pay a factoring fee equal to six-tenths of one
percent (.60%) of the Net Amount of such Account. If Sirena factors a
credit memo relating to an Account for which Sirena paid a factoring
fee, Heller will refund a portion of the factoring fee pro rated
according to the amount of the credit memo.
SECTION 2. RATIFICATION OF AGREEMENT
2.1 To induce Heller to enter into this Amendment, Sirena represents
and warrants that after giving effect to this Amendment no violation of the
terms of the Agreement exist and all representations and warranties contained in
the Agreement are true, correct and complete in all material respects on and as
of the date hereof except to the extent such representations and warranties
specifically relate to an earlier date in which case they were true, correct and
complete in all material respects on and as of such earlier date.
2.2 Except as expressly set forth in this Amendment, the terms,
provisions and conditions of the Agreement are unchanged, and said agreement, as
amended, shall remain in full force and effect and is hereby confirmed and
ratified.
SECTION 3. COUNTERPARTS; EFFECTIVENESS
This Amendment may be executed in any number of counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument. Signature pages may be detached from counterpart documents and
reassembled to form duplicate executed originals. This Amendment shall become
effective as of the date hereof upon the execution of the counterparts hereof
by Sirena and Heller.
SECTION 4. GOVERNING LAW
THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
<PAGE> 2
Witness the execution hereof by the respective duly authorized officers
of the undersigned as of the date first above written.
HELLER FINANCIAL, INC. SIRENA APPAREL GROUP
By: /s/ [SIG] By: /s/ [SIG]
------------------------------- ----------------------------
Title: SR. V.P. 7/24/97 Title: EOP, CFO
---------------------------- -------------------------
2
<PAGE> 1
EXHIBIT 10.4
MODIFICATION OF LEASE
THIS AGREEMENT is made as of the 15 day of May, 1997, between 1411
TRIZECHAHN-SWIG, L.L.C., a Delaware limited liability company having an office
at c/o TrizecHahn Office Properties Inc., 1411 Broadway, New York, New York
10018 (hereinafter referred to as "Landlord"), and THE SIRENA APPAREL GROUP,
INC., a Delaware corporation having an office at 10333 Vacco Street, South El
Monte, California 91733 (hereinafter referred to as "Tenant").
WHEREAS, Landlord's predecessor-in-interest, Keystone Associates, and
Tenant's predecessor-in-interest, Consolidated Foods Corp. Sirena Division,
entered into a lease dated as of July 12, 1984, as modified by (i) a
Modification and Extension of Lease dated as of July 18, 1990 and (ii) a
Modification and Extension of Lease dated as of April 14, 1994 (collectively,
the "Lease"), of a portion of the twenty-third (23rd) floor in the building (the
"Building") known as 1411 Broadway, New York, New York, more particularly
described therein (the "Original Demised Premises"); and
WHEREAS, Tenant desires to hire and take additional space on the
seventeenth (17th) floor of the Building, as shown on the hatched portion of the
floor plan annexed hereto and made a part hereof as Exhibit "A" (the
"Seventeenth Floor Additional Space").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration the receipt and sufficiency
of which are hereby conclusively acknowledged, Landlord and Tenant hereby agree
as follows:
1. Effective as of May 15, 1997 (the "Seventeenth Floor
Commencement Date"), the Seventeenth Floor Additional Space shall be added to
and become part of the premises demised under the Lease for a term (the
"Seventeenth Floor Term") that shall commence on the Seventeenth Floor
Commencement Date and expire on July 31, 2002 (the "Seventeenth Floor Expiration
Date"). During the Seventeenth Floor Term, the Original Demised Premises and the
Seventeenth Floor Additional Space shall collectively be deemed to constitute
the "Demised Premises". Landlord and Tenant hereby acknowledge that the
Expiration Date of the term of the Lease with respect to the Original Demised
Premises is August 31, 2004.
2. Commencing on the Seventeenth Floor Commencement Date and
continuing through and including the Seventeenth Floor Expiration Date, the
Lease shall be deemed modified as follows:
(a) the Fixed Minimum Rent Inclusive of Electricity, set forth
in Section 1.01 of the Lease, shall be increased by $94,810.00 per annum and
$7,900.83 per month;
(b) the Fixed Minimum Rent, set forth in Section 1.01 of the
Lease, shall be increased by $87,325.00 per annum and $7,277.08 per month;
(c) Tenant's Pro Rata Share, set forth in Section 1.01 of the
Lease, shall be increased by .2363%; and
(d) the Rentable Area, set forth in Section 1.01 of the Lease,
shall be increased by 2,495 square feet.
-1-
<PAGE> 2
3. Effective as of the Seventeenth Floor Commencement Date and
continuing through and including the Seventeenth Floor Expiration Date, with
respect to the Seventeenth Floor Additional Space only, the Lease shall be
modified as follows:
(a) the Base Tax Year, set forth in Subsection 19.02(c) of the
Lease, shall be deemed to mean the twelve (12) month fiscal year commencing on
July 1, 1996 and ending June 30, 1997;
(b) the Base Wage Rate, set forth in Subsection 19.02(e) of the
Lease, shall be deemed to mean the Wage Rate in effect on the first day of the
calendar year 1997;
(c) the date set forth on the third (3rd) line of Subsection
20.03A of the Lease, shall be deemed to mean the Seventeenth Floor Commencement
Date; and
(d) the calendar year set forth in Section 20.03B of the Lease
shall be deemed to mean the calendar year 1997.
4. A. Tenant shall deliver to Landlord, on the date hereof, an
additional cash security deposit in the amount of $15,801.56 (the "Seventeenth
Floor Security Deposit"), increasing the security deposit held by Landlord under
the Lease to $88,802.69. Tenant shall be obligated to maintain the Seventeenth
Floor Security Deposit with Landlord until the Seventeenth Floor Term shall have
expired (it being acknowledged that the provisions of Subparagraph 8C of the
Modification and Extension of Lease between Landlord and Tenant dated as of
April 14, 1994 shall not apply to the Seventeenth Floor Additional Space and
that Seventeenth Floor Security Deposit shall not be reduced at any time prior
to the Seventeenth Floor Expiration Date).
B. Simultaneously with the execution of this Agreement,
Tenant is delivering to Landlord a cash security deposit in the sum of
$20,100.19 in place of the letter of credit previously held by Landlord pursuant
to the provisions of Paragraph 5 of the Modification and Extension of Lease
dated as of July 18, 1990 between Landlord and Tenant. Landlord and Tenant
acknowledge that said letter of credit is null and void.
5. Tenant agrees to accept possession of the Seventeenth Floor
Additional Space in "as is" and "where is" condition on the Seventeenth Floor
Commencement Date, and Landlord shall not be obligated to perform any work
whatsoever to prepare the Seventeenth Floor Additional Space or any other
portion of the Demised Premises for Tenant's occupancy thereof, except that
Landlord shall perform the following work ("Landlord's Work") in the Seventeenth
Floor Additional Space: (i) paint the Demised Premises one coat using one
Building standard color per room or open area, (ii) install new Building
standard carpeting in a color selected by Tenant and (iii) demolish one interior
partition. All materials, work, labor, fixtures and installations required for
completion of the Seventeenth Floor Additional Space and the operation of
Tenant's business thereof other than Landlord's Work shall (subject to the
provisions of Article 5 of the Lease) be promptly furnished and performed by
Tenant at Tenant's own cost and expense. All provisions (if any) of the Lease
concerning the performance by Landlord of any work in connection with the
preparation of the Original Demised Premises for Tenant's occupancy thereof and
any related contribution, rent abatement or rent credit shall be inapplicable to
the Seventeenth Floor Additional Space.
6. If Landlord shall be unable to give possession of the
Seventeenth Floor Additional Space on any specific date by reason of the fact
that the Seventeenth Floor Additional Space is not ready for occupancy, or by
reason of the failure of a prior tenant or occupant thereof to vacate the same
or deliver possession thereof to Landlord, or for any other
-2-
<PAGE> 3
reason, Landlord shall not be subjected to any liability for the failure to
give possession on said date. No such failure to give possession on any
specific date shall affect the validity of the Lease or this Agreement or the
obligations of Tenant thereunder or under this Agreement or be deemed to extend
the Term of the Lease, but the rent reserved and covenanted to be paid with
respect to the Seventeenth Floor Additional Space only shall not commence until
possession of the Seventeenth Floor Additional space is given or is available
for occupancy by Tenant, except that if such failure to give possession has
been caused by any act or omission on the part of Tenant, there shall be no
abatement of rent. If repairs, improvements or decorations of the Seventeenth
Floor Additional Space, if any, as may be expressly provided in this Agreement
to be made by Landlord, are not completed on or before any specific date,
Landlord shall not be subject to any liability for any delay in such completion.
7. Landlord hereby grants an aggregate rent credit to be applied
against the first two (2) monthly installments of Fixed Minimum Rent inclusive
of Electricity becoming due under the Lease with respect to the Seventeenth
Floor Additional Space in the amount of $14,554.16, it being understood that
said rent credit shall be applied by granting to Tenant a rent credit in the
sum of $7,277.08 per month for each of said two months.
8. Except as expressly modified herein, Landlord and Tenant affirm
that the Lease is in full force and effect, and Tenant certifies that all
obligations of Landlord under the Lease as of this date have been fully
performed and complied with by Landlord. By entering into this Agreement,
Landlord does not and shall not be deemed either (i) to waive or forgive any
default, rent arrears or other condition with respect to the Lease or the use
of the Original Demised Premises, whether or not in existence or known to
Landlord at the date hereof, or (ii) to consent to any matter as to which
Landlord's consent is required under the terms of the Lease, except such as may
heretofore have been waived in writing or consented to in writing by Landlord.
9. All capitalized terms and other terms not otherwise defined
herein shall have the meanings ascribed to them in the Lease.
10. Tenant represents and warrants to Landlord that Tenant has not
employed, dealt with or negotiated with any broker other than Fashion Realty
Group, Ltd. in connection with this Agreement and Tenant shall indemnify,
protect, defend and hold Landlord harmless from and against any and all
liability, damage, cost and expense (including attorney's fees and
disbursements) arising out of any claim for a fee or commission by any broker
or other party, other than Fashion Realty Group, Ltd., in connection with this
Agreement.
11. The preamble and recitals contained in the "WHEREAS" clauses of
this Agreement are hereby incorporated into this Agreement.
12. Except as expressly modified or amended by this Agreement, all
of the terms, covenants and conditions of the Lease are hereby ratified and
confirmed and, except insofar as reference to the contrary is made in any such
instrument, all references to the "Lease" in any
-3-
<PAGE> 4
future correspondence or notice shall be deemed to refer to the Lease as
modified by this Agreement.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this
Modification of Lease as of the date first above written.
1411 TRIZECHAHN-SWIG, L.L.C., Landlord
By: TrizecHahn Office Properties Inc., Agent
By: /s/ CAROL A. MEYER
---------------------------------
Carol A. Meyer, Assistant Secretary
By: /s/ ANTONIO A. BISMONTE
---------------------------------
Antonio A. Bismonte, Vice-President
THE SIRENA APPAREL GROUP, INC., Tenant
By: /s/ HENRY R. MANDELL
---------------------------------
Name: Henry R. Mandell
Title: EVP, CFO
Tenant's Federal I.D. #36-2998726
<PAGE> 5
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 9 day of May, 1997, before me personally came Henry R. Mandell,
to me known, who being by me duly sworn, did depose and say that he is the
EVP-CFO of THE SIRENA APPAREL GROUP, INC., the corporation described in, and
which executed the above instrument; and that he signed his name thereto by
order of the Board of Directors of said corporation.
/s/ JENNIFER V. PINTO
---------------------
Notary Public
JENNIFER V. PINTO
Notary Public, State of New York
No. 24-4929844
Qualified in Kings County
Term Expires May 31, 1998
<PAGE> 6
EXHIBIT A
SEVENTH AVENUE
WEST 39th STREET WEST 40th STREET
M A P
<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 21,
1997, 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, 1997.
ERNST & YOUNG LLP
Los Angeles, California
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 202,293
<SECURITIES> 0
<RECEIVABLES> 8,714,270
<ALLOWANCES> (1,772,621)
<INVENTORY> 4,250,681
<CURRENT-ASSETS> 11,779,393
<PP&E> 4,251,584
<DEPRECIATION> (3,133,957)
<TOTAL-ASSETS> 16,688,167
<CURRENT-LIABILITIES> 3,766,082
<BONDS> 0
0
0
<COMMON> 46,492
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,688,167
<SALES> 43,731,965
<TOTAL-REVENUES> 43,731,965
<CGS> 31,393,031
<TOTAL-COSTS> 13,408,068
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 896,183
<INCOME-PRETAX> (1,965,317)
<INCOME-TAX> 20,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,985,317)
<EPS-PRIMARY> $(0.43)
<EPS-DILUTED> $(0.43)
</TABLE>
