-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SocwAZW/8ChPjYdmX3NIWrDdTeOY1SnODWsnnKGIaPR3aiMx2zZRRqb02iG/CFHX MkfcB1OYqVKmm/VYF5INWw== 0001047469-97-006420.txt : 19971203 0001047469-97-006420.hdr.sgml : 19971203 ACCESSION NUMBER: 0001047469-97-006420 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970917 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971201 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC COAST APPAREL CO INC CENTRAL INDEX KEY: 0001005185 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-APPAREL, PIECE GOODS & NOTIONS [5130] IRS NUMBER: 954536683 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-28760 FILM NUMBER: 97730707 BUSINESS ADDRESS: STREET 1: 1920 S LOS ANGELES STREET CITY: LOS ANGELES STATE: CA ZIP: 90015 BUSINESS PHONE: 2137489724 MAIL ADDRESS: STREET 1: 1920 S LOS ANGELES STREET CITY: LOS ANGELES STATE: CA ZIP: 90015 8-K/A 1 FORM 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): September 17, 1997 PACIFIC COAST APPAREL COMPANY, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) California 0-28760 95-4536683 ------------------------ --------------------------- ------------------------ (STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER JURISDICTION OF IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1620 S. Los Angeles Street Los Angeles, California 90015 --------------------------------- ---------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (213) 748-9724 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On September 17, 1997, as previously reported, the registrant acquired the business and assets of Cotton Stuff, Inc., a designer and manufacturer of casual sportswear. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Business Acquired Independent Auditor's Report F-1 Balance Sheet, December 31, 1996 F-2 Statement of Operations and Retained Earnings, Years Ended December 31, 1996 and 1995 F-3 Statement of Cash Flows, Years Ended December 31, 1996 and 1995 F-4 Notes to Financial Statements, December 31, 1996 and 1995 F-5 Unaudited Financial Statements: Balance Sheet, June 30, 1997 F-6 Statement of Income and Retained Earnings, Six Months Ended June 30, 1997 and 1996 F-7 Statement of Cash Flows, Six Months Ended June 30, 1997 and 1996 F-8 Notes to Unaudited Financial Statements F-9 (b) Unaudited Pro Forma Financial Statements Preface to Unaudited Pro Forma Combined Financial Statements P-1 Balance Sheet, June 30, 1997 P-2 Statement of Operations, Six Months Ended June 30, 1997 and year Ended December 31, 1996 P-3 Notes to Pro Forma Financial Statements P-4 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned hereunto duly authorized. PACIFIC COAST APPAREL COMPANY, INC. Date: December 1, 1997 By: /s/ Terrence L. McGovern ------------------------------------ Terrence L. McGovern Chief Executive Officer 3 COTTON STUFF, INC. DECEMBER 31, 1996 I N D E X PAGE NO. -------- INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . F - 1 FINANCIAL STATEMENTS Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . F - 2 Statement of Operations and Retained Earnings. . . . . . . . . . F - 3 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . F - 4 Statement of Cash Flows - Supplemental Information . . . . . . . F - 4 Notes to Financial Statements. . . . . . . . . . . . . . . . . . F - 5 [Letterhead] INDEPENDENT AUDITOR'S REPORT To the Stockholders Cotton Stuff, Inc. We have audited the accompanying balance sheet of Cotton Stuff, Inc. as of December 31, 1996 and the related statements of operations and retained earnings and cash flows for the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial position of Cotton Stuff, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. November 24, 1997 Los Angeles, California F-1 COTTON STUFF, INC. BALANCE SHEET DECEMBER 31, 1996 ASSETS CURRENT ASSETS Cash $ 15,657 Due from factor, less unused customer credits (Note 2) 388,080 Accounts receivable, less allowance for doubtful accounts of $3,000 (Note 2) 5,075 Inventories (Notes 1 and 3) 425,677 Other receivables 24,592 Advances to stockholders (Note 5) 41,000 Prepaid and recoverable income taxes 800 Prepaid expenses and other current assets 61,513 ----------- Total Current Assets 962,394 PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Notes 1, 4 and 9) 88,647 DEPOSITS 28,404 ----------- $ 1,079,445 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (Note 9) $ 9,544 Accounts payable 143,903 Accrued expenses and sundry liabilities (Note 10) 121,514 Due to related party (Note 8) 53,055 ----------- Total Current Liabilities 328,016 LONG-TERM DEBT (Note 9) 19,253 NOTE PAYABLE, RELATED PARTY (Note 6) 384,778 NOTES PAYABLE, STOCKHOLDERS (Note 7) 200,000 COMMITMENTS AND CONTINGENCY (Note 11) STOCKHOLDERS' EQUITY Common stock, no par value Authorized, 100,000 shares Issued and outstanding, 66,000 shares 100,000 Retained earnings 47,398 ----------- 147,398 ----------- $ 1,079,445 ----------- ----------- See accompanying independent auditor's report and notes to financial statements F-2 COTTON STUFF, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS Year Ended December 31, ------------------------- 1996 1995 ----------- ----------- NET SALES (Notes 1 and 12) $ 5,185,744 $ 7,612,131 COST OF GOODS SOLD 3,134,936 5,076,640 ----------- ----------- GROSS PROFIT 2,050,808 2,535,491 OPERATING EXPENSES Selling, shipping and general and administrative 1,953,383 2,422,592 Interest (Notes 6 and 7) 135,136 189,113 ----------- ----------- Total Operating Expenses 2,088,519 2,611,705 ----------- ----------- LOSS FROM OPERATIONS (37,711) (76,214) OTHER EXPENSE (Note 14) - (92,443) ----------- ----------- LOSS BEFORE INCOME TAXES (37,711) (168,657) (PROVISION) CREDIT FOR INCOME TAXES (Notes 1 and 13) (711) 14,600 ----------- ----------- NET LOSS (38,422) (154,057) RETAINED EARNINGS, beginning 181,970 336,027 DISTRIBUTIONS 96,150 - ----------- ----------- RETAINED EARNINGS, ending $ 47,398 $ 181,970 ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (.58) $ ( 2.33) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 66,000 66,000 See accompanying independent auditor's report and notes to financial statements F-3 COTTON STUFF, INC. STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH Year Ended December 31, ------------------------ 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (38,422) $ (154,057) ----------- ----------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 28,866 25,979 Changes in assets and liabilities Increase in due from factor (355,538) (403,263) Decrease in accounts receivable 24,135 4,980 Decrease in inventories 514,518 424,388 Decrease (increase) in other receivables 21,509 (18,633) Decrease (increase) in prepaid expenses and other current assets 33,550 (86,877) Decrease (increase) in prepaid and recoverable income taxes 6,400 (7,200) Decrease in due from affiliate - 64,160 Decrease (increase) in deposits 6,366 (6,366) (Decrease) increase in accounts payable (151,407) 295,310 Increase (decrease) in accrued expenses and sundry liabilities 4,768 (47,842) ----------- ----------- Total Adjustments 133,167 244,636 ----------- ----------- Net Cash Provided by Operating Activities 94,745 90,579 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (6,499) (25,468) CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in due to stockholders (28,244) 28,244 Payments on long-term debt (8,611) (41,449) Increase in due to related party 53,055 - Distributions to stockholders (96,150) - Decrease in outstanding checks payable - (3,545) Increase in advances to stockholders - (41,000) ----------- ----------- Net Cash Used by Financing Activities (79,950) (57,750) ----------- ----------- NET INCREASE IN CASH 8,296 7,361 CASH, beginning 7,361 - ----------- ----------- CASH, ending $ 15,657 $ 7,361 ----------- ----------- ----------- ----------- See accompanying independent auditor's report and notes to financial statements F-4 (Page 1 of 2) COTTON STUFF, INC. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION Year Ended December 31, ------------------------- 1996 1995 ----------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the years for: Interest $ 105,136 $ 219,113 Income taxes - 114,115 See accompanying independent auditor's report and notes to financial statements F-4 (Page 2 of 2) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company operates exclusively as a manufacturer of casual sportswear and sells to specialty retailers throughout the United States. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is being provided on the straight-line method over the estimated useful life of the related assets. Leasehold improvements are depreciated on the straight-line method over the term of the lease or estimated useful life, whichever is shorter. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. INCOME TAXES The Company has elected to be taxed under the provisions of Sub-Chapter S of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income and incurs a liability for California income taxes at a rate of 1-1/2%. The stockholders are liable for individual federal and California income taxes on their respective share of the Company's taxable income. USE OF ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. F-5 (Page 1 of 6) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 2 - DUE FROM FACTOR The Company uses a factor for working capital and credit administration purposes. Under the factoring agreement, the factor purchases substantially all trade accounts receivable and assumes substantially all credit risks with respect to such accounts. To the extent that the Company draws on funds prior to the average maturity date of accounts receivable sold to the factor, the Company pays interest on such funds. The Company is contingently liable to the factor for merchandise disputes, customer claims and the like on receivables sold to the factor. Receivables sold in excess of maximums established for each account by the factor are subject to recourse in the event of nonpayment by the customer. At December 31, 1996, items subject to such recourse were approximately $30,000. Indebtedness to the factor is collateralized by accounts receivable, a personal guarantee of the stockholders and a certificate of deposit in the amount of $150,000 pledged by one of the stockholders of the Company. 3 - INVENTORIES Inventories consist of the following: Raw materials $ 87,719 Work in process 216,845 Finished goods 121,113 ----------- $ 425,677 ----------- ----------- 4 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: Machinery and equipment $ 13,188 Furniture and fixtures 45,894 Computer 11,570 Computer software 11,380 Automobile 52,206 Leasehold improvements 26,143 ----------- 160,381 Accumulated depreciation 71,734 ----------- $ 88,647 ----------- ----------- F-5 (Page 2 of 6) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 5 - ADVANCES TO STOCKHOLDERS Advances to stockholders are unsecured, non-interest bearing and due on demand. 6 - NOTE PAYABLE, RELATED PARTY Note payable, related party is due to a corporation which is 100% owned by two of the Company's stockholders. The note is unsecured, bears interest at 10% per annum, is due 13 months after demand and is subordinated to all trade creditors until revoked. Interest on the note for the years ended December 31, 1996 and 1995 was approximately $40,000 in each year. 7 - NOTES PAYABLE, STOCKHOLDERS Notes payable, stockholders, are unsecured with interest at 10% per annum, are due 13 months after demand and are subordinated to the Company's factor. A stockholder has subordinated $10,000 of his note payable to all trade creditors until revoked. Interest expense on the notes for the years ended December 31, 1996 and 1995 was approximately $20,000 in each year. 8 - DUE TO RELATED PARTY Due to related party consists of advances from an entity which is 100% owned by two of the Company's stockholders. The advances are unsecured, non-interest bearing and are due on demand. 9 - LONG-TERM DEBT Long-term debt consists of the following: Contract payable in monthly installments of $1,006, including interest at 10.3% per annum, maturing in September 1999, secured by automotive equipment with an undepreciated cost of $52,206 $ 28,797 Current maturities 9,544 ---------- $ 19,253 ---------- ---------- F-5 (Page 3 of 6) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 9 - LONG-TERM DEBT (Continued) Future maturities of long-term debt are as follows: Year Ending December 31, ------------ 1997 $ 9,500 1998 10,500 1999 9,000 ---------- $ 29,000 ---------- ---------- 10 - ACCRUED EXPENSES AND SUNDRY LIABILITIES Accrued expenses and sundry liabilities consist of the following: Insurance $ 29,450 Salaries and payroll taxes 14,403 Contract labor 16,825 Supplies 7,888 Utilities 9,930 Other 43,018 ---------- $ 121,514 ---------- ---------- 11 - COMMITMENTS AND CONTINGENCY COMMITMENTS The Company is committed under noncancelable operating leases for the use of its office, showroom and warehouse facilities through March 2000. The terms of the lease agreements also require the payment of various expenses incidental to the use of the properties. The Company subleases a portion of its leased premises to unrelated parties on a month-to-month basis. Total rent charged to operations for the years ended December 31, 1996 and 1995 was approximately $148,000 and $201,000, respectively, net of sublease rental income of approximately $106,000 and $54,000, respectively. F-5 (Page 4 of 6) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 11 - COMMITMENTS AND CONTINGENCY (Continued) Minimum annual lease obligations are as follows: Other Entity's Portion (See Year Ending 100% of contingency December 31, Leases below) Net ------------ ---------- ----------- ---------- 1997 $ 366,000 $ (186,000) $ 180,000 1998 333,000 (186,000) 147,000 1999 333,000 (186,000) 147,000 2000 84,000 (47,000) 37,000 ---------- ----------- ---------- $1,116,000 $ (605,000) $ 511,000 ---------- ----------- ---------- ---------- ----------- ---------- CONTINGENCY The Company shares leased office and warehouse space with an unrelated entity. The Company is contingently liable to the lessor in the event of non-payment by the unrelated party. The Company is contingently liable for future rent payments of approximately $600,000 through March 2000. 12 - MAJOR CUSTOMERS For the year ended December 31, 1996, two customers generated sales in excess of 10% of the Company's total sales. Sales to these customers approximated $2,070,000. For the year ended December 31, 1995, one customer generated sales in excess of 10% of the Company's total sales. Sales to this customer approximated $2,550,000. F-5 (Page 5 of 6) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 13 - INCOME TAXES Income tax (provision) credit consists of the following: Year Ended December 31, ------------------------- 1996 1995 ---------- ---------- Currently payable state income taxes $ (800) $ (800) Overaccrual of prior year's state income tax provision when the Company was taxed as a C-Corporation - 15,400 Other 89 - ---------- ---------- $ (711) $ 14,600 ---------- ---------- ---------- ---------- 14 - OTHER EXPENSE During the year ended December 31, 1995, the Company settled a legal dispute with two former employees. The agreed upon settlement amount, including legal fees incurred for the year ended December 31, 1995 was $92,443. F-5 (Page 6 of 6) COTTON STUFF, INC. JUNE 30, 1997 I N D E X Page No. -------- UNAUDITED FINANCIAL STATEMENTS Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . F - 6 Statement of Income and Retained Earnings . . . . . . . . . . . F - 7 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . F - 8 Statement of Cash Flows - Supplemental Information. . . . . . . F - 8 Notes to Financial Statements . . . . . . . . . . . . . . . . . F - 9 COTTON STUFF, INC. BALANCE SHEET JUNE 30, 1997 (Unaudited) ASSETS CURRENT ASSETS Cash $ 17,675 Due from factor, net of unused customer credits (Note 2) 481,961 Accounts receivable, less allowance for doubtful accounts of $3,000 (Note 2) 16,911 Inventories (Note 1) 356,319 Advances to stockholders (Note 4) 41,000 Other receivables 13,746 Prepaid expenses and other current assets 64,637 ----------- Total Current Assets 992,249 PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation (Notes 1, 3 and 8) 79,270 DEPOSITS 17,404 ----------- $ 1,088,923 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt (Note 8) $ 9,000 Accounts payable 191,918 Accrued expenses and sundry liabilities 107,537 Due to related party (Note 7) 25,079 ----------- Total Current Liabilities 333,534 LONG-TERM DEBT (Note 8) 18,163 NOTE PAYABLE, RELATED PARTY (Note 5) 384,778 NOTES PAYABLE, STOCKHOLDERS (Note 6) 200,000 COMMITMENTS AND CONTINGENCY (Note 9) STOCKHOLDERS' EQUITY Common stock, no par value Authorized, 100,000 shares Issued and outstanding, 66,000 shares 100,000 Retained earnings 52,448 ----------- 152,448 ----------- $ 1,088,923 ----------- ----------- F-6 COTTON STUFF, INC. STATEMENT OF INCOME AND RETAINED EARNINGS Six Months Ended June 30, -------------------------- 1997 1996 ------------ ----------- (Unaudited) -------------------------- NET SALES (Notes 1 and 10) $ 2,121,107 $ 3,030,581 COST OF GOODS SOLD 1,272,664 1,843,119 ----------- ----------- GROSS PROFIT 848,443 1,187,462 OPERATING EXPENSES Selling, shipping and general and administrative 814,899 1,014,280 Interest (Notes 5 and 6) 27,694 59,562 ----------- ----------- Total Operating Expenses 842,593 1,073,842 ----------- ----------- INCOME BEFORE INCOME TAXES 5,850 113,620 PROVISION FOR INCOME TAXES (Note 1) 800 1,550 ----------- ----------- NET INCOME 5,050 112,070 RETAINED EARNINGS, beginning 47,398 181,970 DISTRIBUTIONS - 66,000 ----------- ----------- RETAINED EARNINGS, ending $ 52,448 $ 228,040 ----------- ----------- ----------- ----------- NET INCOME PER SHARE $ .08 $ 1.70 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 66,000 66,000 F-7 COTTON STUFF, INC. STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH
Six Months Ended June 30, ----------------------------- 1997 1996 ----------- ------------ (Unaudited) ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,050 $ 112,070 ----------- ----------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 9,377 9,969 Changes in assets and liabilities Increase in due from factor (93,881) (515,902) Increase in accounts receivable (11,836) (3,091) Decrease in inventories 69,358 378,311 Decrease in other receivables 10,846 20,946 (Increase) decrease in prepaid expenses and other current assets (3,124) 16,707 Decrease in prepaid and recoverable income taxes 800 7,200 Decrease in other assets 11,000 5,366 Increase (decrease) in accounts payable 48,015 (176,134) (Decrease) increase in accrued expenses and sundry liabilities (13,977) 22,300 ----------- ----------- Total Adjustments 26,578 (234,328) ----------- ----------- Net Cash Provided (Used) by Operating Activities 31,628 (122,258) CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt (1,634) (4,768) (Decrease) increase in due to related party (27,976) 202,117 Distributions to stockholders - (66,000) ----------- ----------- Net Cash (Used) Provided by Financing Activities (29,610) 131,349 ----------- ----------- NET INCREASE IN CASH 2,018 9,091 CASH, beginning 15,657 7,361 ----------- ----------- CASH, ending $ 17,675 $ 16,452 ----------- ----------- ----------- -----------
F-8 (Page 1 of 2) COTTON STUFF, INC. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION Six Months Ended June 30, --------------------------- 1997 1996 ------------- ----------- (Unaudited) --------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 27,694 $ 59,562 Income taxes 800 - F-8 (Page 2 of 2) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UNAUDITED FINANCIAL STATEMENTS The financial information included herein is unaudited; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. NATURE OF OPERATIONS The Company operates exclusively as a manufacturer of casual sportswear and sells to specialty retailers throughout the United States. INVENTORIES Inventories at June 30, 1997 are calculated based upon a gross profit percentage estimated by management. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is being provided on the straight-line method over the estimated useful life of the related assets. Leasehold improvements are depreciated on the straight-line method over the term of the lease or estimated useful life, whichever is shorter. Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. INCOME TAXES The Company has elected to be taxed under the provisions of Sub-Chapter S of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporate income taxes on its taxable income and incurs a liability for California income taxes at a rate of 1-1/2%. The stockholders are liable for individual federal and California income taxes on their respective share of the Company's taxable income. The provision for income taxes represents primarily currently payable state taxes. F-9 (Page 1 of 5) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) USE OF ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. 2 - DUE FROM FACTOR The Company uses a factor for working capital and credit administration purposes. Under the factoring agreement, the factor purchases substantially all trade accounts receivable and assumes substantially all credit risks with respect to such accounts. To the extent that the Company draws on funds prior to the average maturity date of accounts receivable sold to the factor, the Company pays interest on such funds. The Company is contingently liable to the factor for merchandise disputes, customer claims and the like on receivables sold to the factor. Receivables sold in excess of maximums established for each account by the factor are subject to recourse in the event of nonpayment by the customer. At June 30, 1997, items subject to such recourse were not significant. Indebtedness to the factor is collateralized by accounts receivable and a personal guarantee of the stockholders. 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: Machinery and equipment $ 13,188 Furniture and fixtures 45,894 Computer 11,570 Computer software 11,380 Automobile 52,206 Leasehold improvements 26,143 ----------- 160,381 Accumulated depreciation 81,111 ----------- $ 79,270 ----------- ----------- F-9 (Page 2 of 5) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 4 - ADVANCES TO STOCKHOLDERS Advances to stockholders are unsecured, non-interest bearing and due on demand. 5 - NOTE PAYABLE, RELATED PARTY Note payable, related party is due to a corporation which is 100% owned by two of the Company's stockholders. The note is unsecured, bears interest at 10% per annum, is due 13 months after demand and is subordinated to all trade creditors until revoked. Interest on the note for the six months ended June 30, 1997 and 1996 approximates $20,000 in each period. 6 - NOTES PAYABLE, STOCKHOLDERS Notes payable, stockholders, are unsecured, with interest at 10% per annum, are due 13 months after demand and are subordinated to the Company's factor. A stockholder has subordinated $10,000 of his note payable to all trade creditors until revoked. Interest expense on the notes for the six months ended June 30, 1997 and 1996 approximates $10,000 in each period. 7 - DUE TO RELATED PARTY Due to related party consists of advances from an entity which is 100% owned by two of the Company's stockholders. The advances are unsecured, non-interest bearing and are due on demand. 8 - LONG-TERM DEBT Long-term debt consists of the following: Contract payable in monthly installments of $1,006, including interest at 10.3% per annum, maturing in September 1999, secured by automotive equipment with an undepreciated cost of $52,206 $ 27,163 Current maturities 9,000 ---------- $ 18,163 ---------- ---------- F-9 (Page 3 of 5) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 8 - LONG-TERM DEBT (Continued) Future maturities of long-term debt are as follows: Year Ending December 31, ------------ 1997 (Six months) $ 7,500 1998 10,500 1999 9,000 ---------- $ 27,000 ---------- ---------- 9 - COMMITMENTS AND CONTINGENCY COMMITMENTS The Company is committed under noncancelable operating leases for the use of its office, showroom and warehouse facilities through March 2000. The terms of the lease agreements also require the payment of various expenses incidental to the use of the properties. The Company subleases a portion of its leased premises to unrelated parties on a month-to-month basis. Total rent charged to operations for the six months ended June 30, 1997 and 1996 was approximately $83,000 and $80,000, respectively, net of sublease rental income of approximately $23,000 and $35,000, respectively. Minimum annual lease obligations are as follows: Other Entity's Portion (See Year Ending 100% contingency December 31, of Leases below) Net ------------ ---------- ----------- ---------- 1997 (Six months) $ 176,000 $ (93,000) $ 83,000 1998 333,000 (186,000) 147,000 1999 333,000 (186,000) 147,000 2000 84,000 (47,000) 37,000 ---------- ---------- ---------- $ 926,000 $ 512,000 $ 414,000 ---------- ---------- ---------- ---------- ---------- ---------- F-9 (Page 4 of 5) COTTON STUFF, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 9 - COMMITMENTS AND CONTINGENCY (Continued) CONTINGENCY The Company shares leased office and warehouse space with an unrelated entity. The Company is contingently liable to the lessor in the event of non-payment by the unrelated party. The Company is contingently liable for future rent payments of approximately $500,000 through March 2000. 10 - MAJOR CUSTOMERS For the six months ended June 30, 1997, approximately 20% of the Company's sales were to two customers. For the six months ended June 30, 1996, approximately 45% of the Company's sales were to three customers. F-9 (Page 5 of 5) PACIFIC COAST APPAREL COMPANY, INC. PREFACE TO UNAUDITED PRO-FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro-forma combined financial statements as of June 30, 1997 and for the six months then ended and for the year ended December 31, 1996 give effect to the acquisition by Pacific Coast Apparel Company, Inc. of certain assets of Cotton Stuff, Inc. as if such acquisition had occurred as of and for the periods indicated above. The source of the historical financial statements is as follows: June 30, 1997 and the six months then ended - Unaudited historical financial statements for each Company as of and for the dates indicated. Note: Due to the different fiscal year-ends of the two Companies, in the opinion of management, pro-forma financial information for the six months ended June 30, 1997 is the most meaningful presentation. Year ended December 31, 1996: Pacific Coast Apparel Company, Inc. - Audited historical financial statements for the year ended September 30, 1996 (in the opinion of management, the difference in fiscal year-ends of the Companies does not cause any significant distortion). Cotton Stuff, Inc. - Audited historical financial statements for the year ended December 31, 1996. These unaudited pro-forma combined financial statements should be read in conjunction with the related historical financial statements used in the preparation of such pro-forma statements. The pro-forma information is not necessarily indicative of the results that would have been attained had the above transaction occurred at an earlier date, nor is it indicative of future results. P-1 PACIFIC COAST APPAREL COMPANY, INC. PRO-FORMA COMBINED BALANCE SHEET JUNE 30, 1997 (UNAUDITED)
Pacific Coast Apparel Cotton Company, Stuff, Pro-forma Pro-forma Inc. Inc. Adjustments Adjusted --------- --------- ----------- --------- ASSETS CURRENT ASSETS Cash $ 20,983 $ 17,675 $ - $ 38,658 Short-term investments 1,450,830 - (475,000) 975,830 Due from factors 93,498 481,961 - 575,459 Inventories 1,067,964 356,319 - 1,424,283 Prepaid expenses and other current assets 132,899 95,294 - 228,193 Advances to stockholders - 41,000 (41,000) - ----------- ----------- ----------- ----------- Total Current Assets 2,766,174 992,249 (516,000) 3,242,423 PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation 156,175 79,270 (34,170) 201,275 OTHER ASSETS 78,312 17,404 (5,554) 90,162 ----------- ----------- ----------- ----------- $ 3,000,661 $ 1,088,923 $ (555,724) $ 3,533,860 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 451,541 $ 191,918 $ - $ 643,459 Other current liabilities 178,421 107,537 - 285,958 Loan payable, stockholder 6,899 25,079 (25,079) 6,899 ----------- ----------- ----------- ----------- Total Current Liabilities 636,861 324,534 (25,079) 936,316 LONG-TERM DEBT 2,049 611,941 (611,941) 2,049 NEGATIVE GOODWILL - - 233,744 233,744 STOCKHOLDERS' EQUITY Preferred stock Authorized, 600,000 shares (A) - - - - No shares outstanding (A) Common stock, no par value Authorized, 10,000,000 shares (A) Issued and outstanding 2,954,000 shares (A) 5,777,163 100,000 (100,000) 5,777,163 Additional paid-in capital 162,500 - - 162,500 Deficit (3,577,912) 52,448 (52,448) (3,577,912) ----------- ----------- ----------- ----------- 2,361,751 152,448 (152,448) 2,361,751 ----------- ----------- ----------- ----------- $ 3,000,661 $ 1,088,923 $ (555,724) $ 3,533,860 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(A) Information for preferred and common shares relates to Pacific Coast Apparel Company, Inc. P-2 PACIFIC COAST APPAREL COMPANY, INC. PRO-FORMA COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
Pacific Coast Apparel Cotton Company, Stuff, Pro-forma Pro-forma Inc. Inc. Adjustments Adjusted ----------- ----------- ----------- ----------- NET SALES $ 574,419 $ 2,121,107 $ - $ 2,695,526 COST OF GOODS SOLD 453,545 1,272,664 - 1,726,209 ----------- ----------- ----------- ----------- GROSS PROFIT 120,874 848,443 - 969,317 OPERATING EXPENSES Selling, shipping and general and administrative 1,239,471 814,899 (95,000) 1,959,370 Interest (income) expense (31,197) 27,694 (30,000) (33,503) ----------- ----------- ----------- ----------- 1,208,274 842,593 (125,000) 1,925,867 ----------- ----------- ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES (1,087,400) 5,850 125,000 (956,550) PROVISION FOR INCOME TAXES (1,600) (800) - (2,400) ----------- ----------- ----------- ----------- NET (LOSS) INCOME $(1,089,000) $ 5,050 $ 125,000 $ (958,950) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET (LOSS) INCOME PER SHARE $ (0.37) $ 0.08 $ (0.32) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,961,000 66,000 2,961,000
P-3 (Page 1 of 2) PACIFIC COAST APPAREL COMPANY, INC. PRO-FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
Pacific Coast Apparel Cotton Company, Stuff, Pro-forma Pro-forma Inc. Inc. Adjustments Adjusted ----------- ----------- ----------- ----------- NET SALES $ 221,181 $ 5,185,744 $ - $ 5,406,925 COST OF GOODS SOLD 182,709 3,134,936 - 3,317,645 ----------- ----------- ----------- ----------- GROSS PROFIT 38,472 2,050,808 - 2,089,280 OPERATING EXPENSES Selling, shipping and general and administrative 1,677,036 1,953,383 (165,000) 3,465,419 Interest expense 186,028 135,136 (60,000) 261,164 ----------- ----------- ----------- ----------- 1,863,064 2,088,519 (225,000) 3,726,583 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (1,824,592) (37,711) 225,000 (1,637,303) PROVISION FOR INCOME TAXES (2,336) (711) - (3,047) ----------- ----------- ----------- ----------- NET LOSS $(1,826,928) $ (38,422) $ - $(1,640,350) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- NET LOSS PER SHARE $ (0.99) $ (0.58) $ (0.89) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,850,000 66,000 1,850,000
P-3 (Page 2 of 2) PACIFIC COAST APPAREL COMPANY, INC. NOTES TO UNAUDITED PRO-FORMA COMBINED FINANCIAL STATEMENTS 1 - On August 22, 1997, the Company agreed to purchase certain assets of Cotton Stuff, Inc. for $475,000. The Company agreed to purchase trade and factored accounts receivable, inventories, certain property and equipment and certain intangible assets. In addition, the Company assumed certain trade payables. The Company did not assume Cotton Stuff, Inc.'s loan payable, stockholder nor other related party debt which has been reflected as part of the pro-forma adjustments. The excess of the net assets acquired, less the assumed liabilities and the purchase price has been reflected on the pro-forma balance sheet as negative goodwill. 2 - The pro-forma adjustments in the pro-forma combined statement of operations for the six months ended June 30, 1997 and for the year ended December 31, 1996 represent estimated operating expense reductions for interest, rent, salaries and other expenses that would not have been incurred if the acquisition had occurred at an earlier date for the periods indicated above. P-4 -----END PRIVACY-ENHANCED MESSAGE-----