<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1996
-------------------------------------------------
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: 04954
------------------------------
APPAREL AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2648900
- ------------------------------------ ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1175 State Street
New Haven, Connecticut 06511
- ------------------------------------------ -------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 777-5531
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
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 periods 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 whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.05 par value -- 7,689,560 shares as of March 8, 1996.
<PAGE>
INDEX
FORM 10-Q
APPAREL AMERICA, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets -
January 31, 1996 and July 31, 1995 3 - 4
Condensed Statements of Operations -
Six Months Ended January 31, 1996 and 1995 5
Condensed Statements of Operations -
Three Months Ended January 31, 1996 and 1995 6
Condensed Statements of Cash Flows -
Six Months Ended January 31, 1996 and 1995 7
Condensed Statement of Stockholders'
Deficit - Six Months Ended January 31, 1996 8
Notes to Condensed Financial Statements -
January 31, 1996 9 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
APPAREL AMERICA, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS January 31, July 31,
1996 1995
----------- ---------
(Unaudited) (Note)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $4 $29
Accounts receivable - net 12,726 463
Due from factor - net -- Note C -- 2,249
Inventories -- Note B 17,554 5,517
Due from affiliates 220 256
Prepaid expenses and other current assets 255 307
---------- ---------
TOTAL CURRENT ASSETS 30,759 8,821
PROPERTY AND EQUIPMENT -- at cost
Machinery and equipment 4,475 4,320
Leasehold improvements 2,547 2,420
---------- ---------
7,022 6,740
Less accumulated depreciation and amortization 5,369 5,123
---------- ---------
1,653 1,617
INTANGIBLES AND OTHER ASSETS:
Trademark, less accumulated amortization of $56 -- Note C 1,644 --
Cost in excess of net assets acquired, less accumulated
amortization of $1,117 and $1,037 4,567 4,647
Other assets 12 10
---------- ---------
6,223 4,657
---------- ---------
$38,635 $15,095
---------- ---------
---------- ---------
</TABLE>
NOTE: The balance sheet at July 31, 1995 has been derived from the audited
financial statements at that date.
See notes to condensed financial statements
3
<PAGE>
APPAREL AMERICA, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT January 31, July 31,
1996 1995
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt -- Note C $1,524 $1,520
Current portion of deferred interest -- Note C 511 573
Current portion of sub. note -- Note D 100 --
Accounts payable 4,970 1,366
Loan payable - revolver -- Note C 19,957 --
Other current liabilities and accrued expenses 877 690
Accrued compensation 404 859
Due to affiliates -- 525
------------ -----------
TOTAL CURRENT LIABILITIES 28,343 5,533
LONG-TERM DEBT, LESS CURRENT PORTION -- NOTE C 7,097 6,002
DEFERRED INTEREST --LONG TERM PORTION -- NOTE C 945 1,182
DIVIDENDS PAYABLE -- NOTE E 1,496 1,339
SUBORDINATED NOTE PAYABLE -- NOTE D 506 1,000
------------ -----------
TOTAL LIABILITIES 38,387 15,056
------------ -----------
$9 CUMULATIVE REDEEMABLE PREFERRED STOCK -- NOTE E 3,415 3,372
$8.50 CUMULATIVE REDEEMABLE PREFERRED STOCK -- NOTE E 1,165 1,165
STOCKHOLDERS' DEFICIT -- Notes E and F
$12 Preferred Stock, Series E - par value $.05 per share (stated
value $100 per share); authorized 300,000 shares; issued and
outstanding 163,833 shares 16,383 16,383
$12 Preferred Stock, Series F - par value $.05 per share (stated
value $100 per share); authorized 100,000 shares; issued and
outstanding 70,221 shares 7,022 7,022
$10 Preferred Stock, Series G - par value $.05 per share (stated
value $100 per share); authorized 200,000 shares; issued and
outstanding 170,793 shares 17,079 17,079
Common stock, par value $.05 per share; authorized 15,000,000
shares; issued 7,710,225 and 7,410,223 386 371
Additional paid-in capital 23,803 23,803
Deficit (41,044) (41,195)
Less:
Treasury stock-at cost - 20,665 shares (129) (129)
Acquisition cost in excess of historical basis of net assets
acquired from an affiliate (27,832) (27,832)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT (4,332) (4,498)
------------ -----------
$38,635 $15,095
------------ -----------
------------ -----------
</TABLE>
NOTE: The balance sheet at July 31, 1995 has been derived from the audited
financial statements at that date.
See notes to condensed financial statements.
4
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
NET SALES $16,876 $13,071
COST OF GOODS SOLD 11,997 8,435
----------- ----------
GROSS PROFIT 4,879 4,636
OPERATING EXPENSES
Selling, design and promotion 1,919 1,400
Shipping and warehousing 708 473
General and administrative 1,843 1,700
----------- ----------
TOTAL OPERATING EXPENSES 4,470 3,573
----------- ----------
OPERATING INCOME 409 1,063
OTHER NON-OPERATING CHARGES:
Interest and financing costs - net 534 272
Other expense -- Note G -- 412
----------- ----------
534 684
----------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM (125) 379
Provision for income taxes 10 10
----------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (135) 369
Extraordinary income - Note D 550 --
----------- ----------
NET INCOME 415 369
Preferred stock dividends and accretion on
redeemable preferred stock 264 379
----------- ----------
Net income (loss) applicable to common stockholders $151 $(10)
----------- ----------
----------- ----------
INCOME (LOSS) PER COMMON SHARE:
PRIMARY
Loss before extraordinary item $(0.04) --
Income from extraordinary item 0.05 --
----------- ----------
NET INCOME PER COMMON SHARE $0.01 --
----------- ----------
----------- ----------
FULLY-DILUTED
Loss before extraordinary item $(0.04) --
Income from extraordinary item 0.05 --
----------- ----------
NET INCOME PER COMMON SHARE $0.01 --
----------- ----------
----------- ----------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Primary 10,943,607 7,389,551
----------- ----------
----------- ----------
Fully-diluted 10,943,607 7,389,551
----------- ----------
----------- ----------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
---------------------------
1996 1995
----------- ----------
<S> <C> <C>
NET SALES $14,080 $10,904
COST OF GOODS SOLD 9,613 6,872
----------- ----------
GROSS PROFIT 4,467 4,032
OPERATING EXPENSES
Selling, design and promotion 1,094 869
Shipping and warehousing 381 271
General and administrative 986 904
----------- ----------
TOTAL OPERATING EXPENSES 2,461 2,044
----------- ----------
OPERATING INCOME 2,006 1,988
OTHER NON-OPERATING CHARGES:
Interest and financing costs - net 363 228
----------- ----------
363 228
----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 1,643 1,760
Provision for income taxes 5 5
----------- ----------
NET INCOME BEFORE EXTRAORDINARY ITEM 1,638 1,755
Extraordinary income - Note D 550 --
----------- ----------
NET INCOME 2188 1755
Preferred stock dividends and accretion on
redeemable preferred stock 124 179
----------- ----------
Net income applicable to common stockholders $2,064 $1,576
----------- ----------
----------- ----------
INCOME PER COMMON SHARE:
PRIMARY
Income before extraordinary item $0.14 $0.21
Income from extraordinary item 0.05 --
----------- ----------
NET INCOME PER COMMON SHARE $0.19 $0.21
----------- ----------
----------- ----------
FULLY-DILUTED
Income before extraordinary item $0.14 $0.21
Income from extraordinary item 0.05 --
----------- ----------
NET INCOME PER COMMON SHARE $0.19 $0.21
----------- ----------
----------- ----------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Primary 10,744,674 7,389,551
----------- ----------
----------- ----------
Fully-diluted 10,911,142 7,389,551
----------- ----------
----------- ----------
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities $(21,282) $(4,666)
----------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (282) (472)
Purchase of trademark (500) --
----------- ----------
Net cash used in investing activities (782) (472)
----------- ----------
FINANCING ACTIVITIES:
Decrease in due from factor 2,249 5,240
Payments on long-term debt (61) (514)
Increase in long-term debt 6 412
Increase in loan payable - revolver 19,957 --
Litigation settlement payments (50) --
Payment of redeemable preferred stock dividends (62) --
----------- ----------
Net cash provided by financing activities 22,039 5,138
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (25) --
Cash and cash equivalents, at beginning of period 29 80
----------- ----------
Cash and cash equivalents, at end of period $4 $80
----------- ----------
----------- ----------
</TABLE>
See notes to condensed financial statements.
7
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED COMMON
STOCK ISSUED STOCK ISSUED ADDITIONAL
------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at August 1, 1995 404,847 $40,484 7,410,223 $371 $23,803 $(41,195)
Issuance of common stock 300,000 15
Fractional shares 2
Net income for the six months
ended January 31, 1996 415
Dividends and accretion on Redeemable
Preferred Stock (264)
-------- -------- -------- -------- --------- ---------
Balance, at January 31, 1996 404,847 $40,484 7,710,225 $386 $23,803 $(41,044)
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
</TABLE>
See notes to condensed financial statements.
8
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with the 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.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended July 31, 1995.
The operations of the Company's sole division, Robby Len Fashions, are
significantly affected by seasonal influences. The results for the six month
period ended January 31, 1996 are not necessarily indicative of the results that
may be expected for a full fiscal year.
Net income (loss) per common share has been computed, after deducting applicable
preferred stock dividend requirements, based upon the weighted average number of
common shares and equivalents outstanding during each of the respective periods.
In the 1996 fiscal year, the assumed exercise of the common share equivalents
relating to warrants were dilutive and, therefore, were included in the
computation.
NOTE B--INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
---------- ---------
(000's omitted)
<S> <C> <C>
Raw materials $ 4,417 $ 2,791
Work in process 4,351 790
Finished goods 8,786 1,936
---------- ---------
$ 17,554 $ 5,517
---------- ---------
---------- ---------
</TABLE>
9
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1996
NOTE C -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1996 1995
---------- ----------
(000's omitted)
<S> <C> <C>
Term loan payable $ 6,999 $ 6,999
Litigation settlement (see Note G) 189 229
Trademark purchase payable 1,200 -
Other (including $108 due to
a related party) 233 294
---------- ----------
$ 8,621 $ 7,522
Less: current portion (1,524) (1,520)
---------- ----------
$ 7,097 $ 6,002
---------- ----------
---------- ----------
</TABLE>
Effective July 31, 1994, the Company and its lenders entered into a Fifth
Amended and Restated Credit Agreement which, among other things, extended the
maturity dates of the term loan, modified the payment terms and interest rates
and reduced the outstanding principal amount of the debt by a total of
$4,755,000. The loan principal is repayable in varying amounts through fiscal
2001. Interest is payable monthly on the outstanding loan balance.
Accounting for the amended agreement was based on Statement of Financial
Accounting Standards No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings." Accordingly, the carrying amount of the debt was reduced
to the equivalent of the total future cash payments (approximately $8,745,000 of
principal and $2,457,000 of estimated future interest), resulting in the
recognition of an extraordinary gain of $4,165,000 in the fourth quarter of
fiscal year 1994. The estimated future interest is to be amortized against
interest expense over the term of the credit agreement. For the six months
ended January 31, 1996 and 1995, amortization of deferred interest amounted to
$299,000 and $365,000, respectively.
The amended agreement contains various covenants and limitations on a) the
creation of new debt, b) the amortization of the subordinated debt (see Note D)
and the redemption of the cumulative redeemable preferred stock (see Note E), c)
the level of capital expenditures, and d) dividends and other restricted
payments, as defined. The amended agreement also contains certain mandatory
repayment provisions.
10
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1996
NOTE C -- LONG TERM DEBT AND CREDIT ARRANGEMENTS - CONTINUED
In August 1995, the Company acquired from Milady Brassiere and Corset Co., Inc.
the trademarks Roxanne and Harbour Casual and the tradename Coco Reef. The
purchase price for the trademarks and tradename is to be determined based on a
percentage of net sales of goods bearing the Roxanne and Harbour Casual
tradenames over the next seven years, with a minimum guaranteed purchase price
of $1,700,000. The Company has paid a $500,000 advance against such purchase
price and the unpaid minimum balance of $1,200,000 is included in long-term
debt. The Company is amortizing the trademark on a straight line basis over a
period of fifteen years.
Other long-term debt is composed of certain equipment loans under which the
Company is to make equal principal payments of $10,250 per month and will pay
interest equal to the prime rate plus 2% on the unpaid principal balance.
Prior to September 1, 1995 the Company was party to a $15,000,000 factoring
agreement whereby the Company assigned substantially all accounts receivable to
the factor for advances up to 80% of unmatured accounts receivable and 35% of
eligible inventories. The assignment was on a recourse basis, whereby the
Company assumed all credit risk associated with the factored receivables.
Effective September 1, 1995, the Company entered into a $15,000,000 revolving
credit facility under which the Company can borrow up to 85% of eligible
receivables and 50% of eligible inventories along with specified seasonal
overadvances. In January 1996, the maximum loan amount under the revolving
credit facility was increased from $15,000,000 to $23,000,000. The revolving
credit agreement expires on August 31, 1997.
NOTE D--SUBORDINATED NOTE
Effective November 1, 1995, the Company entered into an agreement for the
exchange of its $1,000,000 Subordinated Note plus accrued and unpaid interest of
$150,000 for an Amended and Restated Subordinated Note in the aggregate
principal amount of $600,000. As a result of this exchange, a gain of $550,000
was recognized and recorded as extraordinary income for the period ended January
31, 1996. A principal repayment of $50,000 was made in February 1996 on the
amended note. The remaining balance is to be repaid as follows: a) $50,000 on
June 30, 1996 and $50,000 on June 30, 1997 subject to excess cash flow
provisions of the Company's term loan agreement (see Note C) and, b) the unpaid
balance on June 30, 1998. Interest accrues on the unpaid principal balance of
the amended note at a rate of 8 1/2% and is payable on a quarterly basis
commencing March 31, 1996. Additional interest accrues at the rate of 4% on the
unpaid principal balance and is payable on June 30, 1998.
11
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1996
NOTE E -- CUMULATIVE REDEEMABLE PREFERRED STOCK
The Company's $9 Series B Cumulative Redeemable Preferred Stock has a redemption
value of $100 per share and is subject to mandatory semi-annual redemption
requirements commencing on June 30, 1995, with a final redemption on December
31, 1997. Such redemptions are subject to certain restricted payment covenants
of senior debt. The shares were issued at a discount which is being amortized
over the redemption period. Accrued dividends on the Series B Preferred Stock
are subject to certain restricted payment covenants of senior debt. At January
31, 1996, such accrued dividends amounted to $1,496,000.
In fiscal 1995, the Company entered into agreements providing for the exchange
of 25,000 shares of the $9 Series B Redeemable Preferred Stock and accrued
dividends thereon for 11,650 shares of the Company's $8.50 Series H Redeemable
Preferred Stock plus consideration of $85,000. The excess of the carrying value
of the exchanged Series B Preferred Stock and accrued dividends thereon over the
redemption value of the Series H Preferred Stock and consideration paid has been
recorded as a capital contribution of approximately $2,097,000. Annual dividend
and stock redemption payments related to the Series H Preferred Stock (as
permitted under the term loan agreement) are approximately $200,000 to $250,000
through fiscal year 2002. For the six months ended January 31, 1996 such
dividend payments amounted to approximately $62,000.
NOTE F -- STOCKHOLDERS' EQUITY
In connection with the August 1995 acquisition of the Roxanne and Harbour Casual
trademarks and the Coco Reef tradename, the Company issued 300,000 shares of
common stock to the principals of Milady Brassiere and Corset Co., Inc.
NOTE G - OTHER EXPENSE
For the six months ended January 31, 1995, other expense of $412,000 is composed
of expenses related to the settlement of certain litigation to which the Company
was a party. Under the terms of the settlement, which involved a former Company
executive, an initial payment of $150,000 was made in December 1994 with the
balance payable in semi-annual installments through December 1997. The
settlement has been discounted at an annual effective rate at 9% to reflect its
present value at January 31, 1996.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1996
Net sales increased by $3,805,000, or 29.1%, to $16,876,000 for the six months
ended January 31, 1996 as compared to $13,071,000 for the six months ended
January 31, 1995. The increase in sales is primarily attributable to an
increase in unit sales volume as unit selling prices were relatively flat
compared to the prior year period. Sales of product relating to the recently
acquired Roxanne and Harbour Casual trademarks (see Note C to the condensed
financial statements) were the principal factors contributing to the increase in
sales.
Gross profit declined to 28.9% for the six months ended January 31, 1996 as
compared to 35.5% for the six months ended January 31, 1995. This decrease is
primarily related to increased manufacturing and product development costs
associated with the production of goods under the Roxanne and Harbour Casual
trademarks. Also contributing to the decline in gross profit is a change in
product mix resulting from increased sales of non-branded (private label) goods
as compared to the prior year period.
Operating expenses increased by $897,000, or 25.1%, to $4,470,000 for the six
months ended January 31, 1996 as compared to $3,573,000 for the six months ended
January 31, 1995. The increase in selling, design and promotion expenses of
$519,000 is composed principally of Roxanne and Harbour Casual sales salaries,
commissions, showroom rent and related overhead expenses. Shipping expenses
increased by $235,000 primarily due to staff additions, additional shipping
supplies and maintenance costs and increases in freight costs necessary to
warehouse and ship Roxanne and Harbour Casual product. The increase in general
and administrative expenses of $143,000 is related to certain accounting and
data processing staff increases along with increases in certain supplies,
services, and operating costs as a result of the acquisition of the Roxanne and
Harbour Casual trademarks. Certain inflationary increases in salaries, supplies
and other operating overhead costs also contributed to this increase.
The above activities resulted in a decline in operating income of $654,000, or
61.5%, to $409,000 for the six months ended January 31, 1996 as compared to
operating income of $1,063,000 for the six months ended January 31, 1995.
Interest and financing costs increased to $534,000 for the six months ended
January 31, 1996 as compared to $272,000 for the prior year period. This
increase is principally related to increased borrowing levels under the
Company's working capital loans necessary to fund the acquisition and
development of the Roxanne and Harbour Casual business.
Other expense of $412,000 for the six months ended January 31, 1995 is related
to the settlement of certain litigation described in Note G to the condensed
financial statements.
The aggregate effect of the above activities resulted in a loss before provision
for income taxes and extraordinary item of $125,000 for the six months ended
January 31, 1996 as compared to income of $379,000 before provision for income
taxes and extraordinary item in the six months ended January 31, 1995.
Extraordinary income of $550,000 for the six months ended January 31, 1996 is a
result of the restructuring of the subordinated debt described in Note D to the
condensed financial statements.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
THREE MONTHS ENDED JANUARY 31, 1996
Net sales for the three months ended January 31, 1996 increased by $3,176,000,
or 29.1%, to $14,080,000 as compared to $10,904,000 for the three months ended
January 31, 1995. Sales of goods bearing the recently acquired Roxanne and
Harbour Casuals trademarks were the primary factors contributing to the increase
in sales. In addition, increases in sales of non-branded (private label)
product also contributed to the sales increase.
Gross profit declined to 31.7% for the three months ended January 31, 1996 as
compared to 37.0% for the three months ended January 31, 1995. Principal
factors in the decline in gross profit for the period were increased
manufacturing and product development costs (including certain staff additions)
related to the production of Roxanne and Harbour Casual goods as well as a
change in product mix.
Operating expenses increased by $417,000, or 20.4%, to $2,461,000 for the three
months ended January 31, 1996 as compared to $2,044,000 for the prior year
period. This increase is primarily attributable to the recently acquired
Roxanne and Harbour Casual trademarks and the resulting increases in selling,
shipping and administrative expenses to develop and market the products bearing
these trademarks.
The above activities resulted in an increase in operating income of $18,000, or
1.0%, to $2,006,000 for the three months ended January 31, 1996 as compared to
operating income for $1,988,000 for the three months ended January 31, 1995.
For the three months ended January 31, 1996, interest and financing costs rose
by $135,000, or 59.2%, to $363,000 as compared to $252,000 in the three months
ended January 31, 1995. Increased borrowings under the Company's working
capital loan facility necessary to finance the acquisition, development and
production of goods for the Roxanne and Harbour Casual business were the primary
factors contributing to the increase.
The aggregate effort of the above activities resulted in income of $1,643,000
before provision for income taxes and extraordinary item for the three months
ended January 31, 1996 as compared to income of $1,760,000 before provision for
income taxes and extraordinary item in the prior year period.
Extraordinary income of $550,000 for the three months ended January 31, 1996 is
a result of the restructuring of the subordinated debt described in Note D to
the condensed financial statements.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 1.09 to 1.00 at January
31, 1996 as compared to 1.59 to 1.00 at July 31, 1995. Working capital decreased
by $872,000 to $2,416,000 at January 31, 1996 as compared to $3,288,000 at July
31, 1995. This decrease in working capital is primarily attributable to a
$500,000 payment in connection with the purchase of the Roxanne and Harbour
Casual trademarks. In addition, capital expenditures of approximately $300,000
for the six months ended January 31, 1996 also contributed to the decline in
working capital.
The Company's working capital requirements are affected significantly by the
highly seasonal nature of its women's swimwear division (its sole operating
division), through which it markets goods under the Robby Len, Harbour Casual,
Roxanne and Coco Reef labels, among others. As a leading manufacturer of women's
swimwear, the Company builds inventory during the first five months of the
fiscal year (August - December) in order to meet its shipping requirements in
January through June (approximately 80% of annual sales are shipped in this time
period). The $12,037,000 increase in inventory, $19,957,000 increase in the
revolving loan balance, $12,263,000 increase in accounts receivable, $2,249,000
decrease in the due from factor balance and $3,604,000 increase in accounts
payable for the six months ended January 31, 1996 are attributable to the
seasonality of the business. In addition, the increases in the accounts
receivable and revolving loan balance as well as the decrease in the due from
factor balance is related to the September 1995 replacement of the Company's
factoring agreement with a revolving loan agreement (see Note C to the condensed
financial statements). The $21,282,000 of net cash used in operating activities
for the six months ended January 31, 1996 is primarily reflected in the
increases in inventory, accounts receivable and accounts payable.
The Company's investing activities consist primarily of purchases of machinery
and equipment. During fiscal year 1995, the Company purchased certain production
and pattern making equipment financed primarily through long-term arrangements
(see Note D to the condensed financial statements for further information). The
Company expects to finance its capital expenditures in the next twelve months
through internally generated funds or short-term borrowings.
The Company's primary ongoing cash needs are for working capital requirements,
capital expenditures, dividends and redemption of Series H Preferred Stock and
term debt amortization (both principal and interest). The two present sources
for the Company's liquidity needs are internally generated funds and short-term
borrowing available under its revolving loan agreement (see Note D to the
condensed financial statements). Through this agreement, the Company finances
its inventory and receivables build-up during the first five months of the
fiscal year and repays these borrowings over the remainder of the fiscal year.
The outstanding loan balance under the agreement at January 31, 1996 was
$19,957,000. In January 1996, the maximum loan balance under the revolving
credit facility was increased from $15,000,000 to $23,000,000 in order to
support increased borrowing requirements (including certain seasonal
overadvances) principally related to the acquisition, development and production
of goods under the newly acquired Roxanne and Harbour Casual trademarks.
Management believes that the current financial resources available to the
Company (short-term borrowings under revolving credit facility and funds from
operations) are expected to be adequate to meet its foreseeable liquidity
requirements, including scheduled repayments of term indebtedness along with
dividends and redemption of Series H Preferred Stock, in the next twelve months.
15
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -- none
b) Reports on Form 8-K -- none
16
<PAGE>
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.
APPAREL AMERICA, INC.
--------------------------------
Registrant
Date March 15, 1996 /s/ Frederick M. D'Amato
----------------------------- -------------------------------------------
Frederick M. D'Amato, Vice President -
Finance, both on behalf of the Registrant
and as its Principal Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF JANUARY 31, 1996 AND THE STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JANUARY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 13,115
<ALLOWANCES> 389
<INVENTORY> 17,554
<CURRENT-ASSETS> 30,759
<PP&E> 7,022
<DEPRECIATION> 5,369
<TOTAL-ASSETS> 38,635
<CURRENT-LIABILITIES> 28,343
<BONDS> 10,044
386
4,580
<COMMON> 40,484
<OTHER-SE> (45,202)
<TOTAL-LIABILITY-AND-EQUITY> 38,635
<SALES> 16,876
<TOTAL-REVENUES> 16,876
<CGS> 11,997
<TOTAL-COSTS> 11,997
<OTHER-EXPENSES> 4,386
<LOSS-PROVISION> 84
<INTEREST-EXPENSE> 534
<INCOME-PRETAX> (125)
<INCOME-TAX> 10
<INCOME-CONTINUING> (135)
<DISCONTINUED> 0
<EXTRAORDINARY> 550
<CHANGES> 0
<NET-INCOME> 415
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
