<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 October 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: 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 -- 19,762,649 shares as of December 5, 1997.
<PAGE>
INDEX
FORM 10-Q
APPAREL AMERICA, INC. AND SUBSIDIARY
Part I. Financial Information Page No.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
October 31, 1997 and July 31, 1997 3 - 4
Condensed Consolidated Statements of Operations -
Three Months Ended October 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 1997 and 1996 6
Condensed Consolidated Statement of Stockholders'
Deficit - Three Months Ended October 31, 1997 7
Notes to Condensed Consolidated Financial Statements -
October 31, 1997 8 - 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. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1997
------------ ---------
ASSETS (UNAUDITED) (NOTE)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 223 $ 238
Accounts receivable--net................................................................ 276 355
Due from factor--net.................................................................... 3,583 5,198
Inventories--Note B..................................................................... 12,223 8,365
Due from affiliates..................................................................... -- 64
Prepaid expenses and other current assets............................................... 485 655
----------- ---------
TOTAL CURRENT ASSETS................................................................ 16,790 14,875
PROPERTY, PLANT AND EQUIPMENT--at cost
Machinery and equipment................................................................. 5,487 5,468
Leasehold improvements.................................................................. 2,786 2,773
----------- ---------
8,273 8,241
Less accumulated depreciation and amortization.......................................... (6,403) (6,214)
----------- ---------
1,870 2,027
INTANGIBLES AND OTHER ASSETS:
Trademark, less accumulated amortization of $255 and $227--- Note C..................... 1,445 1,473
Cost in excess of net assets acquired, less accumulated amortization of $1,397 and
$1,357................................................................................ 4,288 4,328
Other assets............................................................................ 17 19
----------- ---------
5,750 5,820
----------- ---------
$ 24,410 $ 22,722
----------- ---------
----------- ---------
</TABLE>
NOTE: The balance sheet at July 31, 1997 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements
3
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT OCTOBER 31, JULY 31,
1997 1997
------------ ----------
(UNAUDITED) (NOTE)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt-- Note D........... $316 $ 355
Current portion of deferred interest--Note D......... 308 330
Current portion of accrued purchase price
-trademark--- Note C............................... 330 464
Loan payable--revolver (factor)-- Note D............. 15,354 12,204
Accounts payable..................................... 4,774 3,847
Other current liabilities and accrued
expenses........................................... 1,854 1,860
Accrued compensation................................. 57 201
---------- -----------
TOTAL CURRENT LIABILITIES...................... 22,993 19,261
LONG-TERM DEBT, LESS CURRENT PORTION--NOTE D........... 6,433 6,460
ACCRUED PURCHASE PRICE-- TRADEMARK--NOTE C............. 545 586
DEFERRED INTEREST--LONG TERM PORTION--NOTE D........... 331 400
DIVIDENDS PAYABLE--NOTE F.............................. 2,071 1,969
SUBORDINATED NOTE PAYABLE--NOTE E...................... 550 550
---------- -----------
TOTAL LIABILITIES.................. 32,923 29,226
---------- -----------
$9 CUMULATIVE REDEEMABLE PREFERRED STOCK--NOTE F....... 3,497 3,492
$8.50 CUMULATIVE REDEEMABLE PREFERRED STOCK--NOTE F.... 1,118 1,118
STOCKHOLDERS' DEFICIT
Common stock, par value $.05 per share;
authorized 30,000,000 shares; issued
19,783,310 and 19,783,312.......................... 989 989
Additional paid-in capital........................... 64,071 64,071
Deficit.............................................. (50,227) (48,213)
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.......... (13,128) (11,114)
---------- -----------
$24,410 $ 22,722
---------- -----------
---------- -----------
</TABLE>
NOTE: The balance sheet at July 31, 1997 has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
4
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Net sales............................................................................. $ 2,783 $ 3,153
Cost of goods sold.................................................................... 2,464 2,702
------------ ------------
Gross profit........................................................................ 319 451
Operating expenses
Selling, design and promotion....................................................... 557 953
Shipping and warehousing............................................................ 393 400
General and administrative.......................................................... 830 943
------------ ------------
Total operating expenses.......................................................... 1,780 2,296
------------ ------------
Operating loss........................................................................ (1,461) (1,845)
Other non-operating charges:
Interest and financing costs--net................................................... 436 239
------------ ------------
436 239
------------ ------------
Loss before provision for income taxes................................................ (1,897) (2,084)
Provision for income taxes............................................................ 9 9
------------ ------------
Net loss.............................................................................. (1,906) (2,093)
Preferred stock dividends and accretion on redeemable preferred stock................. 108 117
------------ ------------
Net loss applicable to common stockholders............................................ ($ 2,014) ($ 2,210)
------------ ------------
------------ ------------
Net loss per common share............................................................. ($ 0.10) ($ 0.11)
------------ ------------
------------ ------------
Average number of common shares outstanding........................................... 19,762,648 19,762,644
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net cash used in operating activities........................................................ ($ 4,507) ($ 5,819)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................................. (32) (200)
--------- ---------
Net cash used in investing activities........................................................ (32) (200)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving debt............................................................... 3,150 5,770
Increase in long-term debt................................................................. -- 300
Payment of preferred stock dividends....................................................... -- (24)
Payments on long-term debt................................................................. (241) (60)
Decrease in due from factor................................................................ 1,615 --
--------- ---------
Net cash provided by financing activities.................................................... 4,524 5,986
DECREASE IN CASH AND CASH EQUIVALENTS........................................................ (15) (33)
Cash and cash equivalents, at beginning of period............................................ 238 41
--------- ---------
Cash and cash equivalents, at end of period.................................................. $ 223 $ 8
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------------- PAID-IN STOCKHOLDERS'
ISSUED IN TREASURY CAPITAL DEFICIT OTHER (1) DEFICIT
----------- ------------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at August 1, 1997......................... $ 989 ($ 129) $ 64,071 ($ 48,213) ($ 27,832) ($ 11,114)
Net loss for the three months ended October 31,
1997............................................. (1,906) (1,906)
Dividends and accretion on Redeemable Preferred
Stock............................................ (108) (108)
----- ----- ----------- ---------- ---------- ------------
Balance, at October 31, 1997....................... $ 989 ($ 129) $ 64,071 ($ 50,227) ($ 27,832) ($ 13,128)
----- ----- ----------- ---------- ---------- ------------
----- ----- ----------- ---------- ---------- ------------
</TABLE>
(1) Represents acquisition costs in excess of historical basis of net assets
from affiliates.
See notes to condensed consolidated financial statements.
7
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 31, 1997
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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.
The Company's financial statements have been prepared on the basis that it is
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has experienced negative cash flows over the last three years and recently
completed a restructuring of its term loan and working capital loan (see Note
D for additional information). The Company's continued existence is
dependent upon its ability to operate profitably, maintain adequate financing
and generate sufficient cash flows to meet its obligations and sustain
operations.
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, 1997.
The operations of the Company are significantly affected by seasonal
influences. The results for the three month period ended October 31, 1997
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.
NOTE B--INVENTORIES
The components of inventory consist of the following:
October 31, July 31,
1997 1997
----------- ---------
(000's omitted)
Raw materials $ 3,584 $ 3,036
Work in process 2,730 1,219
Finished goods 5,909 4,110
--------- ----------
$ 12,223 $ 8,365
--------- ----------
--------- ----------
8
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued
October 31, 1997
NOTE C -- ACQUISITION
In August 1995, the Company acquired from Milady Brassiere and Corset Co.,
("Milady") 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 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 paid Milady a
$500,000 advance against such purchase price at the closing and additional
$325,000 has been paid through October 31, 1997. The Company is amortizing
the trademark on a straight line basis over a period of fifteen years.
NOTE D -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
October 31, July 31,
1997 1997
------------ ----------
(000's omitted)
Term loan payable (a) $ 6,060 $ 6,210
Litigation settlement (b) 60 60
Other (including $598 and $84
due to related parties) 629 695
----------- ----------
$ 6,749 $ 6,815
Less: current portion (316) (355)
----------- ----------
$ 6,433 $ 6,460
----------- ----------
----------- ----------
(a) Term Loan
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 three months ended October 31, 1997 and 1996,
amortization of deferred interest amounted to $91,000 and $120,000,
respectively.
9
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued
October 31, 1997
NOTE D -- LONG TERM DEBT AND CREDIT ARRANGEMENTS - continued
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.
During fiscal year ended July 1996, the Fifth Amended and Restated Credit
Agreement was amended to authorize, among other things, the establishment of
a foreign subsidiary, the deferral of a portion of the schedule June 1996
principal payments, the payment of dividends and redemption of a portion of
Series H Preferred Stock and the revision of certain financial covenants.
During fiscal year July 1997, the Company negotiated additional amendments to
the credit agreement dated October 15, 1996, June 1, and September 1, 1997.
The amendments provided for, among other things, the deferral of certain
scheduled 1997 and 1998 principal and interest payments, the reduction of the
loan interest rate and the modification of certain financial covenants.
(b) Litigation Settlement
In December 1994, the Company entered into an agreement to pay $460,000 to a
former executive in settlement of certain litigation. According to the terms
of the agreement, payments aggregating $400,000 have been made through
October 31, 1997. The remaining unpaid balance of $60,000 is due in December
1997. The unpaid balance has been discounted at an annual effective interest
rate of 9% to reflect its present value at October 31, 1997.
(c) Other
Other long-term debt is composed of certain equipment and leasehold
improvement loans under which the Company is to make equal principal payments
of $14,000 per month and will pay interest monthly at a rate equal to the
prime rate plus 2% on the unpaid principal balance.
(d) Revolving Line of Credit/Factor Agreement
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 was increased
$23,000,000. This agreement was amended effective July 1997 to provide for
the factoring of substantially all accounts receivable on a recourse basis
and modified the permitted seasonal overadvance borrowing levels.
10
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued
October 31, 1997
NOTE D -- LONG TERM DEBT AND CREDIT ARRANGEMENTS - continued
The Company pays a commission rate of .45% of the gross amount of each
invoice evidencing a receivable. All receivables collections will reduce the
outstanding principle balance of the revolving line of credit. In addition,
the agreement was further amended to modify certain financial covenants and
cure existing events of default. The amended agreement is partially secured
by guarantees aggregating $5,800,000 provided by a corporate affiliate and a
member of the family holding majority ownership of the Company. The amended
agreement expires August 31, 1999.
NOTE E -- SUBORDINATED NOTE PAYABLE
Effective November 1, 1995, the Company entered into an agreement for the
exchange of its $1,000,000 Subordinated Note plus unpaid interest of $150,000
for an Amended and Restated Subordinated Note in the amount of $600,000. As
a result of this exchange, a gain of $550,000 was recognized and recorded in
the 1996 fiscal year. A principal payment of $50,000 was made in February
1996 and additional annual principal payments of $50,000 can be made subject
to excess cash flow provisions of senior debt. Interest accrues on the unpaid
principal balance of the amended note at a rate of 81/2% and is payable on a
quarterly basis. Additional interest accrues at a rate of 4% on the unpaid
principal balance and is payable on June 30, 1998. The amended and restated
note is subordinate to payment in full of all senior debt. In October 1997,
the maturity of the amended and restated note was extended from June 30, 1998
to June 30, 2000.
NOTE F -- 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 not permitted under the terms of
the Company's term loan agreement until payment in full of the 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 October
31, 1997, such accrued dividends amounted to $2,071,000.
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 Series H
Preferred Stock has a redemption value of $100 per share and is subject to
mandatory annual redemption requirements commencing May 1996 with a final
redemption in May 2002. In October 1997, certain scheduled redemptions for
May 1996 and May 1997 were waived by the holder of the Series H Preferred
Stock. At October 31, 1997, 11,185 shares of Series H Preferred Stock were
outstanding.
11
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
continued
October 31, 1997
NOTE G -- FOREIGN SUBSIDIARY - continued
In September 1996, the Company incorporated a foreign subsidiary, Trajes de
Bano Morelos, S.A. de C.V. ("TBM"), for the purpose of establishing a
manufacturing facility in Mexico. The Company's investment in the subsidiary
to date has been immaterial. During the fiscal year ended July 31, 1997, the
Company incurred certain non-recurring expenses associated with the start up
of operations which amounted to approximately $100,000. TBM began sewing
operations in early May 1997.
NOTE H -- RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the financial difficulties incurred by the Company in the
fiscal year ended July 31, 1997, various restructuring and other special
charges aggregating $750,000 were recorded and accrued as of July 31, 1997.
These charges consisted primarily of certain financial and operational
consulting fees, severance pay for terminated employees and certain bank and
professional fees. At October 31, 1997, the accrued and unpaid balance for
restructuring and other special charges amounted to $487,000.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended October 31, 1997
Net sales decreased by $370,000, or 11.7%, to $2,783,000 for the three months
ended October 31, 1997 as compared to $3,153,000 for the three months ended
October 31, 1996. The decline in net sales is attributable primarily to
decreased sales of prior year inventory of approximately $250,000 along with
an approximate $300,000 decline in sales of Robby Len branded swimwear. This
decrease was partially offset by a reduction in return expense of
approximately $200,000 due to lower levels of customer returns for the three
months ended October 31, 1997 as compared to the prior year period.
Gross margin as a percentage of net sales decreased to 11.5% for the three
months ended October 31, 1997 as compared to 14.3% for the three months ended
October 31, 1996. The reduction in gross margin is primarily attributable to
sales of certain promotional swimwear utilizing prior year inventory.
Operating expenses decreased by $516,000, or 22.5%, to $1,780,000 for the
three months ended October 31, 1997 as compared to $2,296,000 for the three
months ended October 31, 1996. This decline is principally attributable to a
decrease in selling and design expense of approximately $400,000 related to
the consolidation of showroom facilities, sales and design staff reductions
and certain selling overhead reductions as a result of the operational
restructuring of the Company (see Item 2. -- Liquidity and Capital Resources
- - Recent Events for additional information). In addition, an approximate
$115,000 decline in general and administrative expenses relating to certain
staff and administrative overhead reductions also contributed to the decline
in operating expenses.
The above activities resulted in a reduction in the operating loss by
$384,000, or 20.8%, to $1,461,000 for the three months ended October 31, 1997
as compared to an operating loss of $1,845,000 for the three months ended
October 31, 1996.
Interest and financing costs increased by $197,000, or 82.4%, to $436,000 for
the three months ended October 31, 1997 as compared to $239,000 in the prior
year period. The increase is due primarily to increased revolving debt
borrowing levels under the revolving loan/factoring agreement which was
amended in July 1997 (see Item 2 - Liquidity and Capital Resources for
additional information). In addition, increased fees and commissions
relating to the revolving loan/factoring agreement also contributed to the
increase in interest and financing costs.
The aggregate effect of the above activities resulted in a loss before
provision for income taxes of $1,897,000 for the three months ended October
31, 1997 as compared to a loss before provision for income taxes of
$2,084,000 for the three months ended October 31, 1996.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
The ratio of current assets to current liabilities was 0.73 to 1.00 at
October 31, 1997 as compared to 0.77 to 1.00 at July 31, 1997. The working
capital deficit increased by $1,817,000, or 41.3%, to $6,203,000 at October
31, 1997 as compared to the working capital deficit of $4,386,000 at July 31,
1997. This decrease in working capital is primarily attributable to the net
loss for the period of $1,906,000.
The Company's working capital requirements are affected significantly by the
highly seasonal nature of its business through which it markets women's
swimwear and related sportswear under the Robby Len, Longitude and Roxanne
labels, among others, to leading national and regional department stores and
specialty stores. The Company also markets women's swimwear to a variety of
national and regional department stores and catalogs under non-branded, or
"private label", programs.
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 $3,858,000 increase in
inventory and $1,615,000 decrease in due from factor for the three months
ended October 31, 1997 are attributable to the seasonality of the business.
The $777,000 increase in accounts payable and accrued expenses and the
$3,150,000 increase in the revolving loan balance are primarily attributable
to the increase in the inventory. The $4,507,000 of net cash used in
operating activities for the three months ended October 31, 1997 resulted
primarily from the net loss for the period (adjusted for non-cash items)
along with the increases in inventory and accounts payable and accrued
expenses.
The Company's investing activities consist primarily of purchases of
machinery and equipment. During fiscal years 1996 and 1997, the Company made
certain leasehold improvements and purchased certain production and pattern
making equipment financed primarily through long-term agreements (see Note D
to the condensed consolidated financial statements for further information).
The Company's planned capital expenditures for the next twelve months are not
material.
In connection with the Company's establishment of a foreign subsidiary (see
Note G to the condensed consolidated financial statements), approximately
$300,000 of sewing equipment was purchased in the second and third quarters
of the fiscal year ended July 31, 1997. This equipment was financed under
long-term arrangements discussed above. In addition, certain start-up costs
(principally consisting of certain operating overhead costs including
payroll, travel, legal and professional fees) associated the establishment of
the manufacturing facility of approximately $100,000 were incurred in fiscal
1997. Management believes that the Company's gross profit margin should
improve as it expands production in Mexico and achieves operating
efficiencies in that facility.
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
three present sources for the Company's liquidity needs are internally
generated funds, long-term capital expenditure borrowings and short-term
borrowing available under its revolving loan agreement (see Note D to the
condensed consolidated 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 October
31, 1997 was $15,354,000.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources - continued
Effective July 1997, this agreement was amended to provide for the factoring
of substantially all accounts receivable of the Company and for anticipated
seasonal overadvance requirements for the 1998 fiscal year (see Note D for
additional information). The amended agreement is partially secured by
guarantees aggregating $5,800,000 provided by a corporate affiliate and a
member of the family holding majority ownership of the Company.
In fiscal year ended July 1997 and September 1997, the Company and its term
lenders amended the Fifth Amended and Restated Credit Agreement to modify,
among other things, the principal and interest repayment terms, interest rate
and financial covenants. The ability of the Company to meets its foreseeable
liquidity requirements in the year ahead is contingent upon its ability to
regain profitability, generate cash flows sufficient to meet its obligations
and sustain operations and maintain adequate financing with its working
capital lender and its term lenders. The Company's accountants have included
an explanatory paragraph in their 1997 report regarding uncertainties about
the Company continuing as a going concern.
Recent Events
For the fiscal year ended July 31, 1997, the Company incurred a net loss of
approximately $6.2 million which was principally attributable to a weak
retail performance of certain swimwear product lines of the Company which
resulted in significant inventory liquidation and writedowns. In addition,
the Company recorded a $750,000 charge for restructuring in the fourth
quarter of 1997 relating to the financial and operational restructuring of
the Company which commenced in May 1997 (see Note H to the condensed
consolidated financial statements for additional information). The financial
restructuring included the renegotiation of the Company's term and working
capital loans as well as the extension of maturity of its Amended and
Restated Subordinated Note and waiver of certain redemptions of $8.50 Series
H Cumulative Redeemable Preferred Stock. The operational restructuring
includes a) the discontinuation of certain unprofitable product lines for
fiscal year July 1998 b) the implementation of an extensive overhead
reduction program and c) continued growth of low cost offshore production
sourcing including the expansion of the Company's Mexican production
subsidiary which commenced operations in May 1997. It is management's belief
that this restructuring program will enable the Company to regain
profitability and provide sufficient cash flow to meet its obligations and
operational requirements. However, there can be no assurance that the
Company will be successful in achieving its plans.
15
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -- 27 Financial Data Schedule
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.
---------------------
Date December 12, 1997 /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
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<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1997 AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
OCTOBER 31, 1997.
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4,615
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