<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, 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 -- 19,762,645 shares as of March 6, 1997.
<PAGE>
INDEX
FORM 10-Q
APPAREL AMERICA, INC.
Part I. Financial Information Page No.
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets -
January 31, 1997 and July 31, 1996 3 - 4
Condensed Statements of Operations -
Six Months Ended January 31, 1997 and 1996 5
Condensed Statements of Operations -
Three Months Ended January 31, 1997 and 1996 6
Condensed Statements of Cash Flows -
Six Months Ended January 31, 1997 and 1996 7
Condensed Statement of Stockholders'
Deficit - Six Months Ended January 31, 1997 8
Notes to Condensed Financial Statements -
January 31, 1997 9 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<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,
1997 1996
----------- ---------
(Unaudited) (Note)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $8 $41
Accounts receivable - net 10,722 4,187
Inventories -- Note B 19,193 7,730
Due from affiliates 129 185
Prepaid expenses and other current assets 453 477
----------- ---------
TOTAL CURRENT ASSETS 30,505 12,620
PROPERTY AND EQUIPMENT -- at cost
Machinery and equipment 5,221 4,765
Leasehold improvements 2,767 2,549
----------- ---------
7,988 7,314
Less accumulated depreciation and amortization 5,916 5,613
----------- ---------
2,072 1,701
INTANGIBLES AND OTHER ASSETS:
Trademark, less accumulated amortization of $170
and $113 - - Note C 1,530 1,587
Cost in excess of net assets acquired, less accumulated
amortization of $1,276 and $1,196 4,408 4,488
Other assets 18 12
----------- ---------
5,956 6,087
----------- ---------
$38,533 $20,408
----------- ---------
----------- ---------
</TABLE>
NOTE: The balance sheet at July 31, 1996 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,
1997 1996
----------- ----------
(Unaudited) (Note)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt -- Note D 1,698 1,649
Current portion of deferred interest -- Note D 394 452
Current portion of subordinated note
payable - - Note E 100 100
Accounts payable 5,232 2,062
Loan payable - revolver -- Note D 22,063 5,488
Other current liabilities and accrued expenses 875 908
Accrued compensation 58 554
----------- ----------
TOTAL CURRENT LIABILITIES 30,420 11,213
LONG-TERM DEBT, LESS CURRENT PORTION -- NOTE D 5,247 5,032
ACCRUED PURCHASE PRICE - TRADEMARK--NOTE C 1,200 1,200
DEFERRED INTEREST - LONG TERM PORTION -- NOTE D 550 730
DIVIDENDS PAYABLE -- NOTE F 1,811 1,654
SUBORDINATED NOTE PAYABLE -- NOTE E 478 468
----------- ----------
TOTAL LIABILITIES 39,706 20,297
----------- ----------
$9 CUMULATIVE REDEEMABLE PREFERRED STOCK -- NOTE F 3,476 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 (42,866) (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 (5,767) (4,457)
----------- ----------
38,533 20,408
----------- ----------
----------- ----------
</TABLE>
NOTE: The balance sheet at July 31, 1996 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,
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Net sales $16,677 $16,876
Cost of goods sold 12,048 11,997
---------- ---------
Gross profit 4,629 4,879
Operating expenses
Selling, design and promotion 2,155 1,919
Shipping and warehousing 993 708
General and administrative 1,935 1,843
---------- ---------
Total operating expenses 5,083 4,470
---------- ---------
Operating income (loss) (454) 409
Other non-operating charges:
Interest and financing costs -- net 607 534
---------- ---------
607 534
---------- ---------
Loss before provision for income taxes (1,061) (125)
and extraordinary item
Provision for income taxes 18 10
---------- ---------
Loss before extraordinary item (1,079) (135)
Extraordinary income -- Note E -- 550
---------- ---------
Net income (loss) (1,079) 415
Preferred stock dividends and accretion on
redeemable preferred stock 231 264
---------- ---------
Net income (loss) applicable to common stockholders ($1,310) $151
---------- ---------
---------- ---------
Income (loss) per common share
Primary
Loss before extraordinary item ($0.07) ($0.04)
Income from extraordinary item -- 0.05
---------- ---------
Net income (loss) per common share ($0.07) $0.01
---------- ---------
---------- ---------
Fully-diluted
Loss before extraordinary item ($0.07) ($0.04)
Income from extraordinary item -- 0.05
---------- ---------
Net income (loss) per common share $0.07 $0.01
---------- ---------
---------- ---------
Average number of common shares outstanding
Primary 19,762,644 10,943,607
---------- ---------
---------- ---------
Fully-diluted 19,762,644 10,943,607
---------- ---------
---------- ---------
</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,
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Net sales $13,524 $14,080
Cost of goods sold 9,346 9,613
---------- ---------
Gross profit 4,178 4,467
Operating expenses
Selling, design and promotion 1,202 1,094
Shipping and warehousing 593 381
General and administrative 945 986
---------- ---------
Total operating expenses 2,740 2,461
---------- ---------
Operating income 1,438 2,006
Other non-operating charges:
Interest and financing costs - net 415 363
---------- ---------
415 363
---------- ---------
Income before provision for income taxes 1,023 1,643
and extraordinary item
Provision for income taxes 9 5
---------- ---------
Net income before extraordinary item 1,014 1,638
Extraordinary income - Note E -- 550
---------- ---------
Net income 1,014 2,188
Preferred stock dividends and accretion on
redeemable preferred stock 114 124
---------- ---------
Net income applicable to common stockholders 900 2,064
---------- ---------
---------- ---------
Income per common share
Primary
Loss before extraordinary item $0.05 $0.14
Income from extraordinary item -- 0.05
---------- ---------
Net income per common share $0.05 $0.19
---------- ---------
---------- ---------
Fully-diluted
Loss before extraordinary item $0.05 $0.14
Income from extraordinary item -- 0.05
---------- ---------
Net income per common share $0.05 $0.19
---------- ---------
---------- ---------
Average number of common shares outstanding
Primary 19,762,645 10,744,674
---------- ---------
---------- ---------
Fully-diluted 19,762,645 10,911,142
---------- ---------
---------- ---------
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended
January 31,
-----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net cash used in operating activities $(16,144) $(21,282)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (674) (282)
Purchase of trademark -- (500)
--------- ---------
Net cash used in investing activities (674) (782)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from revolving debt 16,575 19,957
Decrease in due from factor -- 2,249
Payments on long-term debt (142) (61)
Increase in long-term debt 450 6
Litigation settlement payments (50) (50)
Payment of redeemable preferred stock dividends (48) (62)
--------- ---------
Net cash provided by financing activities 16,785 22,039
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (33) (25)
Cash and cash equivalents, at beginning of period 41 29
--------- ---------
Cash and cash equivalents, at end of period $8 $4
--------- ---------
--------- ---------
See notes to condensed financial statements.
7
<PAGE>
APPAREL AMERICA, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid-In Stockholders'
Issued Amount 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)
Fractional shares
Net loss for the six months
ended January 31, 1997 (1,079) (1,079)
Dividends and accretion on Redeemable
Preferred Stock (231) (231)
Balance, at January 31, 1997 $989 ($129) $64,071 ($42,866) ($27,832) ($5,767)
</TABLE>
(1) Represents acquisition costs in excess of historical basis of net assets
acquired from affiliates.
See notes to condensed financial statements.
8
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 1997
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, 1996.
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, 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.
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:
January 31, July 31,
1997 1996
----------- --------
(000's omitted)
Raw materials $ 4,811 $ 4,058
Work in process 4,802 1,226
Finished goods 9,580 2,446
------- --------
$19,193 $ 7,730
------- --------
------- --------
NOTE C--ACQUISITION
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
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 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.
9
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1997
NOTE D -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
January 31, July 31,
1997 1996
----------- -----------
(000's omitted)
Term loan payable (A) $ 6,210 $ 6,210
Litigation settlement (B) 103 147
Other (including $490 due to
related parties) (C) 632 324
----------- -----------
$ 6,945 $ 6,681
Less: current portion (1,698) (1,649)
----------- -----------
$ 5,247 $ 5,032
----------- -----------
----------- -----------
(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 six months
ended January 31, 1997, amortization of deferred interest amounted to $238,000.
The amended agreement contains various covenants and limitations 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.
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 scheduled 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.
10
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1997
NOTE D -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS (continued)
(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 January 31,
1997. The remaining balance is scheduled to be repaid in installments of
$50,000 in June 1997 and $60,000 in December 1997. The unpaid balance has been
discounted at an annual effective interest rate of 9% to reflect its present
value at January 31, 1997.
(c) OTHER
Other long-term debt is composed of certain leasehold improvement and equipment
loans under which the Company is to make equal principal payments of
approximately $28,000 per month and will pay interest monthly 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 to
$23,000,000 and was further increased to $25,000,000 in November 1996. The
November 1996 loan increase is collateralized by an affiliate of the Company.
The revolving credit agreement expires on 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. The
amended and restated note is due on June 30, 1998. 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.
11
<PAGE>
APPAREL AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1997
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 January 31, 1997, such accrued
dividends amounted to $1,811,000.
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.
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. At the present time, it is anticipated that this facility
will begin operations in the spring of 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1997
Net sales decreased by $199,000, or 1.2%, to $16,677,000 for the six months
ended January 31, 1997 as compared to $16,876,000 for the six months ended
January 31, 1996. This decrease is primarily the result of an approximate $1.5
million decline in Robby Len "branded" swimwear sales for the six months ended
January 31, 1997 as compared to the prior year period. This decline was
partially offset by an increase in sales of Roxanne "branded" swimwear of
approximately $1.3 million.
Gross profit decreased to 27.8% for the six months ended January 31, 1997 as
compared to 28.9% for the six months ended January 31, 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,
principally relating to an increase in sales to discount chain stores under the
Company's "Lenee" budget label, also contributed to the decline in gross profit.
Operating expenses increased by $613,000, or 13.7%, to $5,083,000 for the six
months ended January 31, 1997 as compared to $4,470,000 for the six months ended
January 31, 1996. The increase in operating expenses is primarily attributable
to a) an increase in selling, design and promotion expense due primarily to an
increase in co-operative retail advertising expenditures, b) increased shipping
and warehousing expenses relating to an expansion of the Company's New Haven,
CT. warehousing and distribution facilities and c) the reversal of an
overaccrual for retro insurance premiums recognized in the prior year period of
approximately $170,000.
The above activities resulted in an operating loss of $454,000 for the six
months ended January 31, 1997 as compared to operating income of $409,000 for
the six months ended January 31, 1996.
Interest and financing costs increased by $73,000, or 13.7%, to $607,000 for the
six months ended January 31, 1997 as compared to $534,000 for the six months
ended January 31, 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 a loss before provision
for income taxes and extraordinary item of $1,061,000 for the six months ended
January 31, 1997 as compared to a loss before provision for income taxes and
extraordinary item of $125,000 for the six months ended January 31, 1996.
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 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 JANUARY 31, 1997
Net sales for the three months ended January 31, 1997 declined by $556,000, or
3.9%, to $13,524,000 as compared to $14,080,000 for the prior year period. This
decline is attributable to a decline in "private label" sales to Lands' End
catalog of approximately $1.2 million and sales of Robby Len "branded" swimwear
sales of approximately $500,000 for the three months ended January 31, 1997.
This decline was partially offset by an increase in sales of Roxanne "branded"
swimwear of approximately $500,000 and sales of "Lenee" label swimwear of
approximately $700,000. "Lenee" swimwear is marketed to leading national and
regional discount chain stores.
Gross profit declined to 30.9% for the three months ended January 31, 1997 as
compared to 31.7% for the three months ended January 31, 1996. This decline is
principally due to a poor retail selling environment which impaired selling
prices for the Company's swimwear. In addition, a change in product mix also
contributed to the decline in gross profit.
Operating expenses increased by $279,000, or 11.3%, to $2,740,000 for the three
months ended January 31, 1997 as compared to $2,461,000 for the three months
ended January 31, 1996. Shipping and warehousing expenses increased by $212,000
due primarily to additional overhead costs relating to the expansion of the
Company's warehousing and distribution operations in New Haven, CT. The balance
of the increase in operating expenses is primarily related to increased
co-operative advertising costs for the three months ended January 31, 1997 as
compared to the prior year period.
The above activities resulted in a decline in operating income of $568,000, or
28.3%, to $1,438,000 for the three months ended January 31, 1997 as compared to
operating income of $2,006,000 for the three months ended January 31, 1996.
Interest and financing costs increased to $415,000 for the three months ended
January 31, 1997 as compared to $363,000 for the three months ended January 31,
1996. Increased borrowings under the Company's revolving working capital loan
agreement were primarily responsible for the increase in interest and financing
costs for the period.
The aggregate effect of the above activities resulted in income before provision
for income taxes and extraordinary item of $1,023,000 for the three months ended
January 31, 1997 as compared to income before provision for income taxes and
extraordinary item of $1,643,000 for the three months ended January 31, 1996.
Extraordinary income of $550,000 for the three months ended January 31, 1996 is
a result of the restructuring of subordinated debt described in Note E 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 1.00 to 1.00 at January
31, 1997 as compared to 1.13 to 1.00 at July 31, 1996. Working capital
decreased by $1,322,000 to $85,000 at January 31, 1997 as compared to working
capital of $1,407,000 at July 31, 1996. This decrease in working capital is
primarily attributable to the net loss for the period of $1,079,000.
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, Roxanne, Coco Reef and Harbour
Casuals 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 $11,463,000 increase in
inventory and $6,535,000 increase in accounts receivable for the six months
ended January 31, 1997 are attributable to the seasonality of the business. The
$3,170,000 increase in accounts payable and the $16,575,000 increase in the
revolving loan balance are primarily attributable to the increase in inventory
and accounts receivable. The $16,144,000 of net cash used in operating
activities for the six months ended January 31, 1997 is primarily reflected in
the net loss for the period as well as the increases in inventory, accounts
receivable, accounts payable and accrued expenses.
The Company's investing activities consist primarily of purchases of machinery
and equipment. During fiscal year 1996 and the six months ended January 31,
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 financial statements for further
information). The Company expects to finance its capital expenditures in the
next twelve months through a combination of long-term borrowings and internally
generated funds.
In connection with the Company's establishment of a foreign subsidiary (see Note
G to the condensed financial statements), approximately $250,000 of sewing
equipment was purchased in the second quarter 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 are anticipated
for 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.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 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, 1997 was $22,063,000. In November 1996, the
maximum loan balance under the revolving credit facility was increased from
$23,000,000 to $25,000,000.
Management believes that the current financial resources available to the
Company (short-term borrowings under revolving credit facility, certain
long-term capital expenditure borrowings and funds from operations) are expected
to be adequate to meet its foreseeable liquidity requirements in the next twelve
months.
16
<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
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 March 13, 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>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET AS OF JANUARY 31, 1997 AND THE CONDENSED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 1997 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-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 8
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<RECEIVABLES> 11,200
<ALLOWANCES> 478
<INVENTORY> 19,193
<CURRENT-ASSETS> 30,505
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4,594
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