<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 APRIL 30, 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
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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 -- 19,762,648 shares as of October 24, 1997.
<PAGE>
INDEX
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FORM 10-Q
APPAREL AMERICA, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 30, 1997 and July 31, 1996 3 - 4
Condensed Consolidated Statements of Income -
Nine Months Ended April 30, 1997 and 1996 5
Condensed Consolidated Statements of Income -
Three Months Ended April 30, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 1997 and 1996 7
Condensed Consolidated Statement of Stockholders'
Deficit - Nine Months Ended April 30, 1997 8
Notes to Condensed Consolidated Financial Statements -
April 30, 1997 9 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 16
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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<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)
ASSETS April 30, July 31,
1997 1996
------------- ---------
(Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents $14 $41
Accounts receivable - net 13,320 4,187
Inventories -- Note B 14,548 7,730
Due from affiliates 96 185
Prepaid expenses and other current assets 279 477
------------- ---------
TOTAL CURRENT ASSETS 28,257 12,620
PROPERTY AND EQUIPMENT -- at cost
Machinery and equipment 5,354 4,765
Leasehold improvements 2,771 2,549
------------- ---------
8,125 7,314
Less accumulated depreciation and amortization 6,029 5,613
------------- ---------
2,096 1,701
INTANGIBLES AND OTHER ASSETS:
Trademark, less accumulated amortization
of $198 and $113 -- Note C 1,502 1,587
Cost in excess of net assets acquired,
less accumulated amortization of $1,316 and $1,196 4,368 4,488
Other assets 19 12
------------- ---------
5,889 6,087
------------- ---------
$36,242 $20,408
------------- ---------
------------- ---------
NOTE: The balance sheet at July 31, 1996 has been derived from the audited
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)
LIABILITIES AND STOCKHOLDERS' DEFICIT April 30, July 31,
1997 1996
---------- --------
(Unaudited) (Note)
CURRENT LIABILITIES:
Current portion of long-term debt -- Note D $367 $1,649
Current portion of deferred interest -- Note D 366 452
Current portion of sub. note -- Note E -- 100
Accounts payable 3,940 2,062
Loan payable - revolver -- Note D 19,155 5,488
Other current liabilities and accrued expenses 1,109 908
Accrued compensation 412 554
---------- --------
TOTAL CURRENT LIABILITIES 25,349 11,213
LONG-TERM DEBT, LESS CURRENT PORTION -- NOTE D 6,490 5,032
ACCRUED PURCHASE PRICE - TRADEMARK -- NOTE C 1,125 1,200
DEFERRED INTEREST - LONG TERM PORTION -- NOTE D 465 730
DIVIDENDS PAYABLE -- NOTE F 1,890 1,654
SUBORDINATED NOTE PAYABLE -- NOTE E 584 468
---------- --------
TOTAL LIABILITIES 35,903 20,297
---------- --------
$9 CUMULATIVE REDEEMABLE PREFERRED STOCK -- NOTE F 3,485 3,450
$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 19,783,308 989 989
Additional paid-in capital 64,071 64,071
Deficit (41,363) (41,556)
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 (4,264) (4,457)
---------- --------
$36,242 $20,408
---------- --------
---------- --------
NOTE: The balance sheet at July 31, 1996 has been derived from
the audited financial statements at that date.
See notes to condensed consolidated financial statements.
4
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)
Nine Months Ended
April 30,
---------- --------
1997 1996
---------- --------
Net sales $39,290 $40,394
Cost of goods sold 29,429 29,195
--------- --------
Gross profit 9,861 11,199
Operating expenses
Selling, design and promotion 3,521 3,474
Shipping and warehousing 1,658 1,271
General and administrative 3,000 2,943
--------- --------
Total operating expenses 8,179 7,688
--------- --------
Operating income 1,682 3,511
Other non-operating charges:
Interest and financing costs - net 1,120 993
--------- --------
1,120 993
--------- --------
Income before provision for income taxes
and extraordinary item 562 2,518
Provision for income taxes 27 15
--------- --------
Net income before extraordinary item 535 2,503
Extraordinary income -- Note D -- 550
--------- --------
Net income 535 3,053
Preferred stock dividends and accretion on
redeemable preferred stock 342 385
--------- --------
Net income applicable to common stockholders $193 $2,668
--------- --------
--------- --------
Income per common share -- Note A:
Income before extraordinary item $0.01 $0.19
Income from extraordinary item -- $0.05
Net income per common share $0.01 $0.24
--------- --------
--------- --------
Average number of common shares outstanding 19,762,645 10,923,906
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements.
5
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share data)
Three Months Ended
April 30,
-------------------
1997 1996
-------- --------
Net sales $22,613 $23,518
Cost of goods sold 17,381 17,198
-------- --------
Gross profit 5,232 6,320
Operating expenses
Selling, design and promotion 1,366 1,555
Shipping and warehousing 665 563
General and administrative 1,065 1,100
-------- --------
Total operating expenses 3,096 3,218
-------- --------
Operating income 2,136 3,102
Other non-operating charges:
Interest and financing costs - net 513 459
-------- --------
513 459
-------- --------
Income before provision for income taxes 1,623 2,643
Provision for income taxes 9 5
-------- --------
Net income 1,614 2,638
Preferred stock dividends and accretion on
redeemable preferred stock 111 121
-------- --------
Net income applicable to common stockholders $1,503 $2,517
-------- --------
-------- --------
Income per common share -- Note A $0.08 $0.23
-------- --------
-------- --------
Average number of common shares outstanding 19,762,645 10,879,423
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements.
6
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
April 30,
------------------
1997 1996
------- --------
OPERATING ACTIVITIES:
Net cash used in operating activities ($12,903) ($17,906)
---------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (811) (448)
Purchase of trademark -- (500)
---------- ---------
Net cash used in investing activities (811) (948)
---------- ---------
FINANCING ACTIVITIES:
Decrease in due from factor -- 2,249
Payments on long-term debt (383) (618)
Proceeds from equipment and leasehold improvement loans 600 88
Proceeds from revolving debt 13,667 17,297
Litigation settlement payments (50) (50)
Payment of redeemable preferred stock dividends (72) (87)
Payment on trademark purchase (75) --
Redemption of preferred stock -- (47)
---------- ---------
Net cash provided by financing activities 13,687 18,832
---------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (27) (22)
Cash and cash equivalents, at beginning of period 41 29
---------- ---------
Cash and cash equivalents, at end of period $14 $7
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
7
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APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional TOTAL
COMMON STOCK Paid - In STOCKHOLDERS'
--------------------
ISSUED IN TREASURY CAPITAL DEFICIT OTHER (1) DEFICIT
------ ----------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, at August 1, 1996 $989 ($129) $64,071 ($41,556) ($27,832) ($4,457)
Net income for the nine months
ended April 30, 1997 $535 535
Dividends and accretion on
Redeemable Preferred stock ($342) (342)
------ ------- -------- --------- ---------- ---------
Balance, at April 30, 1997 $989 ($129) $64,071 ($41,363) ($27,832) ($4,264)
------ ------- -------- --------- ---------- ---------
------ ------- -------- --------- ---------- ---------
</TABLE>
(1) Represents acquisition costs in excess of historical basis of net
assets from affiliates.
See notes to condensed consolidated financial statements.
8
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 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 growing 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 it 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, 1996.
The operations of the Company are significantly affected by seasonal influences.
The results for the nine month period ended April 30, 1997 are not necessarily
indicative of the results that may be expected for a full fiscal year. For
additonal information concerning the Company's fourth quarter and year end
results see "Recent Events" under Item 2 - Liquidity and Capital Resources.
Net income 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:
April 30, July 31,
1997 1996
--------- --------
(000's omitted)
Raw materials $ 3,821 $4,058
Work in process 2,401 1,226
Finished goods 8,326 2,446
------- ------
$14,548 $7,730
======= ======
9
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 1997
NOTE C--ACQUISITION
In August 1995, the Company acquired from Milady Brassiere and Corset Co., Inc.
("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 and an additional $75,000 payment was made in April 1997. The remaining
unpaid minimum balance of $1,125,000 is included in long-term debt as of April
30, 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:
April 30, July 31,
1997 1996
--------- --------
(000's omitted)
Term loan payable (a) $6,060 $ 6,210
Litigation settlement (b) 106 147
Other (including $598 and $84
due to related parties) 691 691
------ -------
$6,857 $ 6,681
Less: current portion (367) (1,649)
------ -------
$6,490 $ 5,032
====== =======
(A) TERM LOAN
Effective July 31, 1994, the Company and its lender 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 nine months
ended April 30, 1997 and 1996, amortization of deferred interest amounted to
$351,000 and $443,000, respectively.
The amended agreement contains various covenants and limitation on a) the
creation of new debt, b) the amortization of the subordinated debt (see Note E)
and the redemption of the cumulative redeemable preferred stock (see Note F), 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. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
April 30, 1997
NOTE D -- LONG TERM DEBT AND CREDIT ARRANGEMENTS - CONTINUED
During fiscal year 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 $350,000 have been made through April 30,
1997. In addition, a payment of $50,000 was made in July 1997 with the
remaining unpaid balance of $60,000 due in December 1997. The unpaid balance
has been discounted at an annual effective interest rate of 9% to reflect its
present value at April 30, 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 $30,000 per
month and will pay interest equal to the prime rate plus 2% on the unpaid
principal balance.
(D) REVOLVING LINE OF CREDIT
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. To support increased seasonal borrowing requirements from November
1996 to April 1997, an additional $2,000,000 was provided under the revolving
line of credit. Such increase was collateralized by an affiliate of the
Company. 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. In addition, the
agreement was further amended to modify certain financial covenants and cure
existing events of default. A portion of the borrowings under the factoring
agreement are secured by certain corporate affiliate and shareholder guarantees.
The agreement expires August 31, 1999.
11
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
April 30, 1997
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 8 1/2% 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 April 30, 1997, such accrued
dividends amounted to $1,890,000.
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.
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 was recorded as a capital contribution of
approximately $2,097,000 in fiscal 1995. In October 1997, certain scheduled
redemptions for May 1996 and May 1997 were waived by the holder of the Series H
Preferred Stock.
NOTE G --FOREIGN SUBSIDIARY
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 quarter ended April 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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NINE MONTHS ENDED APRIL 30, 1997
Net sales decreased by $1,104,000, or 2.7%, to $39,290,000 for the nine months
ended April 30, 1997 as compared to $40,394,000 for the nine months ended April
30, 1996. This decrease is primarily the result of an approximate $3.0 million
decline in Robby Len "branded" swimwear sales for the nine months ended April
30, 1997 as compared to the prior year period. This decline was partially
offset by and increase in sales of Roxanne "branded" swimwear of approximately
$2.0 million.
Gross profit decreased to 25.1% for the nine months ended April 30, 1997 as
compared to 27.7% for the nine months ended April 30, 1996. This decline is
primarily related to a weak retail environment which exerted downward pressure
on the Company's selling prices. In addition, a change in product mix also
contributed to the decline in gross profit. This change of product mix is
related principally to increased sales of "private label" swimwear and sales to
discount stores under the Company's "Lenee" label.
Operating expenses increased by $491,000, or 6.4%, to $8,179,000 for the nine
months ended April 30, 1997 as compared to $7,688,000 for the nine months ended
April 30, 1996. The increase in operating expenses is primarily attributable to
an increase in selling, design and promotion expense due primarily to an
increase in co-operative retail advertising expenditures as well as increased
shipping and warehousing expenses relating to an expansion of the Company's New
Haven, Connecticut warehousing and distribution facilities. In addition,
increased rent expense relating to the relocation and expansion of the "Roxanne"
sales showroom in New York City also contributed to the increase in operating
expenses.
The above activities resulted in a decline in operating income of $1,829,000, or
52.1%, to $1,682,000 for the nine months ended April 30, 1997 as compared to
operating income of $3,511,000 for the nine months ended April 30, 1996.
Interest and financing costs increased by $127,000, or 12.8%, to $1,120,000 for
the nine months ended April 30, 1997 as compared to $993,000 for the nine months
ended April 30, 1996. This increase is due primarily to increased borrowings
under the Company's revolving working capital loan agreement.
The aggregate effect of the above activities resulted in income before provision
for income taxes and extraordinary item of $562,000 for the nine months ended
April 30, 1997 as compared to income before provision for income taxes and
extraordinary item of $2,518,000 for the nine months ended April 30, 1996.
Extraordinary income of $550,000 for the nine months ended April 30, 1996 is a
result of the restructuring of the subordinated debt described in Note E 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 APRIL 30, 1997
Net sales for the three months ended April 30, 1997 decreased by $905,000, or
3.8%, to $22,613,000 as compared to $23,518,000 for the three months ended April
30, 1996. A $2.0 million decline in sales of Robby Len "brand" swimwear was
principally responsible for this decrease. Partially offsetting this decrease
was a $700,000 increase in sales of "Roxanne" brand swimwear and a $300,000
increase in sales to discount stores under the "Lenee" label.
Gross profit declined to 23.1% for the three months ended April 30, 1997 as
compared to 26.9% for the three months ended April 30, 1996. The principal
factor in the decline in gross profit for the period was the continued poor
retail selling environment which impaired selling prices for the Company's
swimwear. In addition, changes in the product mix, principally relating to
increased sales of non-branded (private label) product, also contributed to the
decline in gross profit.
Operating expenses decreased by $122,000, or 3.8%, to $3,096,000 for the three
months ended April 30, 1997 as compared to $3,218,000 for the prior year period.
This decrease is primarily attributable to reduced variable selling expenses,
including sales commissions, resulting from the decline in sales. This decline
was partially offset by increased shipping and warehousing expenses relating to
the expansion of the Company's facility in New Haven, Connecticut.
The above activities resulted in a decline in operating income of $966,000, or
31.1%, to $2,136,000 for the three months ended April 30, 1997 as compared to
operating income of $3,102,000 for the three months ended April 30, 1996.
For the three months ended April 30, 1997, interest and financing costs rose by
$54,000, or 11.8%, to $513,000 as compared to $459,000 in the three months ended
April 30, 1996. Increased borrowings under the Company's working capital loan
facility was the primary factor contributing to the increase.
The aggregate effect of the above activities resulted in income of $1,643,000
before provision for income taxes for the three months ended April 30, 1997 as
compared to income of $2,643,000 before provision for income taxes in the prior
year period.
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 1.11 to 1.00 at April 30,
1997 as compared to 1.13 to 1.00 at July 31, 1996. Working capital increased to
$2,908,000 at April 30, 1997 as compared to working capital of $1,407,000 at
July 31, 1996. The increase in working capital is primarily attributable to the
reclassification of the current portion of term debt to long-term debt as a
result of the September 1, 1997 amendment to the term loan agreement which
provided for the deferral of certain scheduled 1997 and 1998 principal payments
(see Note D to the condensed consolidated financial statements). Other factors
contributing to the change in working capital were a) the net income for the
period of $535,000 b) a $75,000 payment in connection with the purchase of the
Roxanne trademark and c) certain capital expenditures of approximately $200,000
which were not financed through long-term debt.
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, Roxanne, Coco Reef and Harbour
Casual labels, among others, to leading national and regional department stores
and specialty stores. The Company also markets women's swimwear to national and
regional discount chain stores under its Lenee label and 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 $6,818,000 increase in
inventory and $9,133,000 increase in accounts receivable for the nine months
ended April 30, 1997 are attributable to the seasonality of the business. The
$1,878,000 increase in accounts payable and the $13,667,000 increase in the
revolving loan balance are primarily attributable to the increase in inventory
and accounts receivable. The $12,903,000 of net cash used in operating
activities for the nine months ended April 30, 1997 results primarily from
increases in the inventory, accounts receivable, accounts payable and accrued
expenses.
The Company's investing activities consist primarily of purchases of machinery
and equipment. During fiscal 1996 and the nine months ended April 30, 1997, the
Company made certain leasehold improvements and purchased certain production and
pattern making equipment financed primarily through long-term arrangements (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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. 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 with the establishment of the manufacturing facility of approximately
$100,000 were incurred during the third fiscal quarter. 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 April 30, 1997 was $19,155,000. To support peak
seasonal borrowing requirements, an additional $2,000,000 (collateralized by a
Company affiliate)was provided under the revolving credit facility from November
1996 to April 1997. Effective July 1997, this agreement was amended to provide
for the factoring of substantially all accounts receivable of the Company (see
Note D for additional information).
In fiscal year 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 meet its foreseeable liquidity
requirements in the year ahead is contingent upon its ability to maintain
adequate financing with its working capital lender and its term lenders.
RECENT EVENTS
The Company has recently closed its books for the fiscal year ended July 31,
1997. The net loss for the year is approximately $6,200,000.00 and is
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. 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.
16
<PAGE>
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 29, 1997, the Company held its annual meeting of
shareholders.Matters voted on at the meeting included the election of
director and the appointment of independent public accountants.
All directors elected at the annual meeting were serving in that capacity
prior to the meeting. Following is a tabulation of the votes for the
election of directors:
VOTES FOR VOTES AGAINST ABSTENTIONS
Burton I. Koffman 17,650,976 1,430 -
Richard E. Koffman 17,651,010 1,396 -
Arthur G. Cohen 17,651,010 1,396 -
Jeffrey P. Koffman 17,650,010 2,396 -
Bernard Tessler 2,596,976 15,075,430 -
Eric T. Weitz 17,650,978 1,428 -
Votes for the appointment of BDO Seidman, LLP as independent public
accountants of the Company for the fiscal year 1997 were as follows:
For: 17,632,504
Against: 19,356
Abstentions: 546
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -- none
b) Reports on Form 8-K -- none
17
<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 OCTOBER 28, 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
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1997.
</LEGEND>
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<NAME> APPAREL AMERICA, INC.
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