<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31,
1997.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________
to _____________.
Commission file number: 0-24636
THE SIRENA APPAREL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2998726
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10333 VACCO STREET
SOUTH EL MONTE, CALIFORNIA 91733
(Address of principal executive offices)(Zip code)
(626)442-6680
(Registrant's telephone number including area code)
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. [X] Yes [ ] No
Number of shares of Common Stock, $0.01 par value, of the registrant
outstanding as of January 31, 1997: 4,649,230
This Form 10-Q contains 15 pages Exhibit index appears on page 13.
1
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FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets 3
December 31, 1997 and June 30, 1997
Statements of Operations 5
Three and Six months ended December 31, 1997 and 1996
Statements of Cash Flows 6
Six months ended December 31, 1997 and 1996
Notes to Financial Statements 7
December 31, 1997
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
THE SIRENA APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 500,000 202,000
Accounts receivable, net of
allowance of $ 1,172,000
(December 31, 1997) and
$1,773,000 (June 30, 1997)
(Note 2) 2,781,000 6,942,000
Inventories (Note 3) 13,188,000 4,251,000
Prepaids and other current assets 510,000 385,000
----------- -----------
Total current assets 16,979,000 11,780,000
Equipment and leasehold improvements:
Furniture, fixtures and equipment 3,548,000 3,415,000
Leasehold improvements 843,000 836,000
----------- -----------
4,391,000 4,251,000
Less accumulated depreciation
and amortization (3,324,000) (3,134,000)
----------- -----------
1,067,000 1,117,000
Equipment under capital lease,
less accumulated amortization
of $58,000 (December 31, 1997)
and $36,000 (June 30, 1997) 155,000 177,000
Intangible assets, less accumu-
lated amortization of $1,036,000
(December 31, 1997) and $974,000
(June 30, 1997) 3,436,000 3,487,000
Deposits 138,000 127,000
----------- -----------
Total assets $21,775,000 $16,688,000
=========== ===========
</TABLE>
See accompanying notes
3
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<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 1,514,000 $ 372,000
Due to factor 2,615,000 --
Accounts payable 5,483,000 1,810,000
Accrued liabilities 744,000 1,545,000
Current portion of
capital lease obligations 59,000 40,000
----------- -----------
Total current liabilities 10,415,000 3,767,000
Capital lease obligations,
less current portion 99,000 137,000
Other liabilities 120,000
Stockholders' equity
Common Stock,$.01 par value
Authorized, 20,000,000 shares
Issued and outstanding,
4,649,230 shares 46,000 46,000
Additional paid-in capital 32,425,000 32,425,000
Accumulated deficit (21,330,000) (19,687,000)
----------- -----------
Total stockholders' equity 11,141,000 12,784,000
----------- -----------
Total liabilities and stock-
holders' equity $21,775,000 $16,688,000
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE> 5
THE SIRENA APPAREL GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $9,627,000 $7,042,000 $11,160,000 $ 9,228,000
Cost of goods sold 5,529,000 4,269,000 7,055,000 6,400,000
---------- ---------- ----------- -----------
Gross profit 4,098,000 2,773,000 4,105,000 2,828,000
Selling, general, & administrative expenses 3,266,000 2,237,000 5,395,000 4,324,000
Depreciation and amortization 82,000 71,000 160,000 140,000
---------- ---------- ----------- -----------
Total operating expenses 3,348,000 2,308,000 5,555,000 4,464,000
---------- ---------- ----------- -----------
Income (loss) from operations 750,000 465,000 (1,450,000) (1,636,000)
Interest expense 133,000 242,000 168,000 384,000
---------- ---------- ----------- -----------
Income (loss) before provision
for income taxes 617,000 223,000 (1,618,000) (2,020,000)
Provision for income taxes(Note 5) 25,000 9,000 25,000 9,000
---------- ---------- ----------- -----------
Net income (loss) $ 592,000 $ 214,000 $(1,643,000) $(2,029,000)
========== ========== =========== ===========
Net income (loss) per share (basic & diluted) $ .13 $ .05 $( 0.35) $( 0.44)
====== ====== ======== ========
Weighted average number of
common shares outstanding:
Basic 4,649,230 4,649,230 4,649,230 4,649,230
Diluted 4,695,462 4,649,230 4,649,230 4,649,230
</TABLE>
See accompanying notes.
5
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THE SIRENA APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $(1,643,000) $(2,029,000)
Adjustments to reconcile
net (loss) to net
cash used in
operating activities:
Depreciation and amortization 273,000 230,000
Changes in operating
assets and liabilities:
Accounts receivable 4,161,000 2,538,000
Inventories (8,937,000) (4,824,000)
Prepaid and other assets (147,000) (214,000)
Due from factor 2,615,000 3,102,000
Accounts payable 3,673,000 1,299,000
Accrued liabilities (700,000) (168,000)
----------- ------------
Net cash used in operat-
ing activities (705,000) (66,000)
INVESTING ACTIVITIES
Purchases of property,
plant and equipment (139,000) (165,000)
----------- ------------
Net cash used in investing
activities (139,000) (165,000)
FINANCING ACTIVITIES
Payment on capital lease
obligations -- (18,000)
Increase in bank
overdraft 1,142,000 257,000
----------- ------------
Net cash provided by
financing activities 1,142,000 239,000
Increase in cash 298,000 8,000
Cash at beginning of period 202,000 18,000
----------- ------------
Cash at end of period $ 500,000 $ 26,000
=========== ============
</TABLE>
See accompanying notes.
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THE SIRENA APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals)considered necessary for a fair presentation have been included.
Operating results for the six months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 1997.
2. ACCOUNTS RECEIVABLE
On June 23, 1997, the Company amended its advance factoring agreement. Under the
terms of the amended agreement, the Company will receive factor advances up to
80% of uncollected receivables, less reserves determined by the factor. In
addition, the Company may draw short-term advances up to 50% of eligible
inventory, as defined to a maximum of $5.0 million (in January, February and
March) and ranging to a maximum of $1.0 million (in June and July). The Company
may also borrow seasonal over-advances from September 1 to March 31 each year up
to a maximum of $2.0 million (in December and January). Interest at the prime
rate plus 0.375%, 2.0% and 2.0% is to be charged on factor advances, short-term
advances and seasonal over-advances, respectively. Aggregate obligations under
the agreement cannot exceed $20.0 million. The agreement expires on August 18,
2000 and includes certain financial covenants, including minimum tangible net
worth, working capital, and debt to tangible net worth. The Company was in
compliance with all covenants at December 31, 1997.
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3. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ----------
<S> <C> <C>
Raw materials $ 3,610,000 $2,401,000
Work-in-process 4,122,000 134,000
Finished goods 5,456,000 1,716,000
----------- ----------
Total $13,188,000 $4,251,000
=========== ==========
</TABLE>
4. INCOME TAXES
No benefit for income taxes for the six months ended December 31, 1997 has been
recorded as the Company has historically not been a taxpayer.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Reform Act of 1995 which are subject to a variety of risks
and uncertainties. The Company's actual results, performance, or achievements
may differ significantly from the results, performance, or achievements
expressed or implied in such forward-looking statements.
Net Sales. Net sales increased to $9,627,000 for the second quarter ended
December 31 1997 from $7,042,000 in the comparable period last year, an increase
of 37%. Net sales in the six months ended December 31, 1997 increased to
$11,160,000 from $9,228,000 in the comparable period last year, an increase of
21%. The increase in net sales for the second quarter consisted of: (i) a 59%
increase in the revenues of the Branded swimwear division which resulted from
revenues of the new Liz Claiborne Swimwear brand($1.2 million) for which there
were no comparable revenues last year, higher per unit revenue due to
adjustments to pricing effected at the start of the fiscal year, lower levels of
liquidation inventory, and the impact of lower merchandise returns as compared
with the prior year; (ii) a 20% increase in the revenues of the Resortwear
division which resulted from a general price increase, lower levels of returned
merchandise, and greater acceptence of the line due to prior year sell-through
results; and (iii) an 8% increase in the revenue of the Private Label division
resulting from a timing difference in order and shipping patterns, which moved
planned first quarter sales into the second quarter.
The increase in net sales for the six months ended December 31, 1997 over the
comparable period last year resulted from: (i) revenues of the new Liz Claiborne
Swimwear brand for which there were no comparable revenues last year;(ii)
adjustments to pricing effected at the start of the fiscal year, lower
liquidation sales of prior season inventory, and less returned merchandise
resulting from satisfactory market performance which increased unit revenues,
and (iii) greater acceptance of the branded and resortwear lines in general due
to prior year sell-through results. The volume increase was partially offset by
diminished liquidation sales of prior year inventory, resulting from lower
quantities of such inventory compared with last year, particularly in the
Private Label Division.
Gross Profit. Gross profit increased to $4,098,000 (42.6% of net sales) for the
second quarter ended December 31, 1997 from $2,773,000 (39.4% of net sales) for
the comparable period last year, an increase of 48%. Gross profit in the six
months ended December 31, 1997 increased to $4,105,000 (36.8% of net sales)
9
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from $2,828,000 (30.6% of net sales) for the comparable period last year, an
increase of 45%. The increase in gross profit for the second quarter resulted
from the increase in net sales, and an increase in gross profit as a percentage
of net sales. Gross margin increased in the second quarter due to improved
margin performance of the Branded and Resortwear divisions, reflecting the
impact of favorable pricing adjustments, lower returned merchandise levels, and
less inventory liquidation.
The increase in gross profit and gross margin for the six months ended December
31, 1997 resulted from increased net sales, less inventory liquidation sales at
low margins due to the lower inventory levels of such merchandise, the impact of
favorable pricing adjustments and lower levels of returned merchandise compared
to the prior year
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,348,000 (34.8% of net sales) for the
second quarter ended December 31, 1997 from $2,308,000 (32.8% of net sales) in
the comparable period last year, an increase of 45%. Selling, general and
administrative expenses increased to $5,555,000 (49.8% of net sales) for the six
months ended December 31, 1997 from $4,464,000 (48.4% of net sales) in the
comparable period last year, an increase of 24.4%. The increase in such expenses
in both the three and six months ended December 31, 1997 was due to (i) the
offset of litigation expenses with the net proceeds from a settlement in the
second quarter of last year for which there was no such offset in the current
period; (ii) increased administrative expenses arising out of strengthening of
the infrastructure with the appointment of a Chief Operating Officer; and (iii)
higher selling expenses associated with the new Liz Claiborne division for which
there were no expenses in the prior year.
Interest expense. Interest expense decreased to $133,000 (1.4% of net sales) for
the second quarter ended December 31, 1997 from $242,000 (3.4% of net sales) in
the comparable period last year, a decrease of 45%. Interest expense decreased
to $168,000 (1.5% of net sales) in the six months ended December 31, 1997 from
$384,000 (4.2% of net sales) in the comparable period last year, a decrease of
56%. Such decrease resulted from lower borrowings on the seasonal line of credit
from our factor in the three and six month periods.
Net Income. Net income increased to $592,000, $0.13 per common share (Basic and
Diluted), for the second quarter ended December 31, 1997 from $214,000, $0.05
per common share in the comparable period last year. Net loss decreased
to($1,643,000),($0.35) per common share, for the six months ended December
31,1997 from ($2,029,000), ($0.44) per common share in the comparable period
last year. The increase in net income for the three and six months ended
December 31, 1997 was due to (i) higher net sales, (ii) higher gross profit,
(iii) higher gross margin percentages,
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and (iv) lower interest expense. These effects were partially offset by higher
selling, general, and administrative expenses, which include an offset of
litigation expenses with the net proceeds from a settlement in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended December 31, 1997
was $705,000 compared to $66,000 in the comparable period last year. Higher
bookings generated higher inventory levels which consumed more cash.
At December 31, 1997, working capital was approximately $6,564,000 compared to
approximately $7,918,000 at December 31, 1996. The decrease in working capital
resulted primarily from increased accounts payable related to the purchases of
raw material inventory. Inventory increased to $13,188,000 at December 31, 1997
from $12,537,000 at December 31, 1996, an increase of 5.2%. This increase was a
result of a higher work-in-process level which is consistent with the level of
bookings activity in the period. Due to the seasonal nature of the Company's
business, inventory levels at December 31, 1997 and June 30, 1997 are not
comparable.
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 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 December
31, 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 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 (iii) such reserves as Heller elects to establish.
The Company's short-term advances are limited to a maximum of $5,000,000 (in
January and February) and ranging downward to a maximum of $1,000,000 (in June
and July) or $1,000,000 in excess
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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 30, $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.
This Company has no material commitments for capital expenditures.
12
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None
-----------------
Item 2. Changes in Securities. None
----------------------
Item 3. Defaults Upon Senior Securities. None
--------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None
----------------------------------------------------
Item 5. Other information.
------------------
EMPLOYMENT AGREEMENT
On September 29, 1997, Maurice B. Newman was appointed Chairman of the
Board and Chief Operating Officer of the Company. The Company entered into an
employment agreement with Mr. Newman that will provide for (i) a two-year term
of employment, (ii) an annual base salary of $300,000, plus annual increases,
(iii) an annual bonus, up to $200,000, based upon the satisfaction of
performance goals to be determined by the Board of Directors, (iv) a grant of
an option to purchase up to 25,000 shares of the Common Stock of the Company at
$3.50 per share, plus an additional grant of an option to purchase up to 80,000
shares at $3.875 per share, which options vest completely on grant dates of
July 1, 1997 and November 4, 1997, respectively; and (v) the right to receive
his salary and employee benefits (or the economic equivalent) for 90 days if
the employment agreement is not renewed or extended beyond its initial term, or
if the employment agreement is terminated early, subject to certain
restrictions.
ACQUISITION
Effective on February 4, 1998, the Company acquired substantially all of the
assets and liabilities of Renee of Hollywood dba Jezebel "Jezebel" in an
acquisition recorded as an asset purchase. Jezebel is a designer and
manufacturer of a broad line of intimate apparel for women. The purchase was
financed through a $500,000 term loan for a period of approximately three years
with our factor, Heller Financial Inc., the Company's factor, at the prime rate
established from time to time by Bank of America (8.50% at December 31, 1997)
plus 1.50%. The Company also entered into an employment agreement with the prior
owner of Jezebel which provides for salary and benefits commensurate with the
employment benefits accorded other Divisional Vice Presidents. In addition, the
employment agreement specifies future earn-out bonuses equal to diminishing
percentages of the pre-tax profits of the Jezebel Division. The assets acquired
consist primarily of the fixed assets and inventory used in the
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manufacture of intimate apparel, and the liabilities assumed were primarily
related to trade payables of Jezebel and payments to ex-owners of the acquired
Company.
Item 6. Exhibits and Reports on Form 8-K. None
--------------------------------------
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SIRENA APPAREL GROUP, INC.
Date: February 11, 1998 By /S/ WILLIAM B. SHAW
-------------------------------------
William B. Shaw
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Chief Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 500,000
<SECURITIES> 0
<RECEIVABLES> 3,953,000
<ALLOWANCES> (1,172,000)
<INVENTORY> 13,188,000
<CURRENT-ASSETS> 16,979,000
<PP&E> 4,391,000
<DEPRECIATION> (3,324,000)
<TOTAL-ASSETS> 21,775,000
<CURRENT-LIABILITIES> 10,415,000
<BONDS> 0
0
0
<COMMON> 46,000
<OTHER-SE> 11,141,000
<TOTAL-LIABILITY-AND-EQUITY> 21,775,000
<SALES> 9,627,000
<TOTAL-REVENUES> 9,627,000
<CGS> 5,529,000
<TOTAL-COSTS> 3,348,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,000
<INCOME-PRETAX> 617,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 592,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
