<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, 1998
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 - 19,762,652 shares as of March 10, 1998.
<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 -
January 31, 1998 and July 31, 1997 3 - 4
Condensed Consolidated Statements of Operations -
Six Months Ended January 31, 1998 and 1997 5
Condensed Consolidated Statements of Operations -
Three Months Ended January 31, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended January 31, 1998 and 1997 7
Condensed Consolidated Statement of Stockholders'
Deficit - Six Months Ended January 31, 1998 8
Notes to Condensed Consolidated Financial Statements -
January 31, 1998 9 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<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>
JANUARY 31, JULY 31,
1998 1997
ASSETS (UNAUDITED) (NOTE)
- ---------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 250 $ 238
Accounts receivable--net............................................. 299 355
Due from factor--net................................................. 8,566 5,198
Inventories--Note B.................................................. 12,930 8,365
Due from affiliates.................................................. 0 64
Prepaid expenses and other current assets............................ 283 655
----------- ---------
TOTAL CURRENT ASSETS............................................. 22,328 14,875
PROPERTY AND EQUIPMENT--at cost
Machinery and equipment.............................................. 5,516 5,468
Leasehold improvements............................................... 2,786 2,773
----------- ---------
8,302 8,241
Less accumulated depreciation and amortization....................... (6,584) (6,214)
----------- ---------
1,718 2,027
INTANGIBLES AND OTHER ASSETS:
Trademark, less accumulated amortization of $283
and $227--Note C.................................................... 1,417 1,473
Cost in excess of net assets acquired, less accumulated
amortization of $1,437 and $1,357................................... 4,248 4,328
Other assets......................................................... 17 19
----------- ---------
5,682 5,820
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$ 29,728 $ 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>
JANUARY 31, JULY 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT (UNAUDITED) (NOTE)
- ------------------------------------- ----------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt--Note D............ $205 $ 355
Current portion of deferred interest-- Note D........ 280 330
Current portion of accrued purchase price -
trademarks--Note C.................................. 330 464
Accounts payable..................................... 4,669 3,847
Loan payable--revolver (factor)--Note D.............. 20,037 12,204
Other current liabilities and accrued expenses....... 1,941 1,860
Accrued compensation................................. 184 201
--------- ----------
TOTAL CURRENT LIABILITIES............................. 27,646 19,261
LONG-TERM DEBT, LESS CURRENT PORTION--NOTE D.......... 6,445 6,460
ACCRUED PURCHASE PRICE-- TRADEMARKS--NOTE C........... 545 586
DEFERRED INTEREST--LONG TERM PORTION--NOTE D.......... 270 400
DIVIDENDS PAYABLE--NOTE F............................. 2,126 1,969
SUBORDINATED NOTE PAYABLE-- NOTE E.................... 600 550
--------- ----------
TOTAL LIABILITIES..................................... 37,632 29,226
--------- ----------
$9 CUMULATIVE REDEEMABLE PREFERRED STOCK--NOTE F...... 3,500 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
19,783,316 and 19,783,312.......................... 989 989
Additional paid--in capital.......................... 64,071 64,071
Deficit.............................................. (49,621) (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....................... (12,522) (11,114)
--------- ----------
$29,728 $ 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>
SIX MONTHS ENDED
JANUARY 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Net sales............................................................................. $ 12,872 $ 16,677
Cost of goods sold.................................................................... 9,338 12,048
------------ ------------
Gross profit........................................................................ 3,534 4,629
Operating expenses
Selling, design and promotion....................................................... 1,409 2,155
Shipping and warehousing............................................................ 849 993
General and administrative.......................................................... 1,426 1,821
------------ ------------
Total Operating expenses......................................................... 3,684 4,969
------------ ------------
Operating loss........................................................................ (150) (340)
Other non-operating charges:.......................................................... 1,026 721
------------ ------------
Interest and financing costs--net................................................... 1,026 721
------------ ------------
Loss before provision for income taxes................................................ (1,176) (1,061)
Provision for income taxes............................................................ 18 18
------------ ------------
Net loss.............................................................................. (1,194) (1,079)
Preferred stock dividends and accretion on redeemable preferred stock................. 214 231
------------ ------------
Net loss applicable to common stockholders............................................ ($ 1,408) ($ 1,310)
------------ ------------
------------ ------------
Net loss per common share............................................................. ($ 0.07) ($ 0.07)
------------ ------------
------------ ------------
Average number of common shares outstanding........................................... 19,762,649 19,762,644
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
5
<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
JANUARY 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Net sales............................................................... $ 10,089 $ 13,524
Cost of goods sold...................................................... 6,787 9,346
------------ ------------
Gross profit.......................................................... 3,302 4,178
Operating expenses
Selling, design and promotion......................................... 852 1,202
Shipping and warehousing.............................................. 456 593
General and administrative............................................ 683 879
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Total Operating expenses............................................ 1,991 2,674
------------ ------------
Operating income........................................................ 1,311 1,504
Other non-operating charges:............................................ 590 481
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Interest and financing costs--net 590 481
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Income before provision for income taxes................................ 721 1,023
Provision for income taxes.............................................. 9 9
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Net income.............................................................. 712 1,014
Preferred stock dividends and accretion on redeemable
preferred stock...................................................... 106 114
------------ ------------
Net income applicable to common stockholders............................ $ 606 $ 900
------------ ------------
------------ ------------
Income per common share................................................. $ 0.03 $ 0.05
------------ ------------
------------ ------------
Average number of common shares outstanding............................. 19,762,650 19,762,645
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 31,
---------------------
<S> <C> <C>
1997 1998
--------- ----------
OPERATING ACTIVITIES:
Net cash used in operating activities....................................................... ($ 4,102) ($ 16,144)
--------- ----------
INVESTING ACTIVITIES:
Purchase of property, plant, and equipment................................................ (61) (674)
--------- ----------
Net cash used in investing activities....................................................... (61) (674)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from revolving debt.............................................................. 7,833 16,575
Decrease (increase) in due from factor.................................................... (3,368) 0
Payments on long-term debt................................................................ (280) (142)
Increase in long-term debt................................................................ 50 450
Litigation settlement payments............................................................ (60) (50)
Payment of redeemable preferred stock dividends........................................... 0 (48)
--------- ----------
Net cash provided by financing activities................................................... 4,175 16,785
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 12 (33)
Cash and cash equivalents, at beginning of period........................................... 238 41
--------- ----------
Cash and cash equivalents, at end of period................................................. $ 250 $ 8
--------- ----------
--------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
(in thousands)
<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 six months
ended January 31, 1998........................... (1,194) (1,194)
Dividends and accretion on
Redeemable Preferred Stock....................... (214) (214)
--------- ----------- ----------- ---------- ---------- ------------
Balance, at January 31, 1998...................... $ 989 ($ 129) $ 64,071 ($ 49,621) ($ 27,832) ($ 12,522)
--------- ----------- ----------- ---------- ---------- ------------
--------- ----------- ----------- ---------- ---------- ------------
</TABLE>
- ------------------------
(1) Represents acquisition costs in excess of historical basis of net assets
acquired from affiliates. See notes to condensed consolidated financial
statements.
8
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 31, 1998
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.
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's sole division, Robby Len Fashions, are
significantly affected by seasonal influences. The results for the six month
period ended January 31, 1998 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 outstanding during each of the respective periods. The Company
adopted Statement of Financial Accounting Standards No. 128 in the current
period and applied the provisions thereof retroactively to all prior periods.
Only basic income (loss) per share information is presented since the impact of
stock options and warrants were anti-dilutive in all periods presented.
NOTE B--INVENTORIES
The components of inventory consist of the following:
January 31, July 31,
1998 1997
----------- --------
(000's omitted)
Raw materials $ 2,872 $ 3,036
Work in process 3,041 1,219
Finished goods 7,017 4,110
----------- --------
$12,930 $ 8,365
----------- --------
----------- --------
9
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1998
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 at the closing and an additional $325,000 has been paid through January
31, 1998. 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:
January 31, July 31,
1998 1997
----------- -----------
(000's omitted)
Term loan payable (a) $ 6,060 $ 6,060
Litigation settlement (b) 0 60
Other (including $590 due to
related parties) (c) 590 695
----------- -----------
$ 6,650 $ 6,815
Less: current portion (205) (355)
----------- -----------
$ 6,445 $ 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 six months
ended January 31, 1998 and 1997, amortization of deferred interest amounted to
$180,000 and $238,000, respectively.
10
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1998
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 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.
During fiscal years July 1997 and July 1998, the Company negotiated additional
amendments to the credit agreement dated October 15, 1996, June 1, 1997, 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 were made through the fiscal year
July 1997. The remaining balance of $60,000 was paid in December 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 $14,000 per month and will pay interest monthly at a rate equal to
the prime 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 to
$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.
11
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1998
NOTE D -- LONG-TERM DEBT AND CREDIT ARRANGEMENTS (continued)
Under the terms of the amended agreement, 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 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 at the maturity of the note. 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 was amortized over the scheduled redemption period
which concluded December 1997. Accrued dividends on the Series B Preferred
Stock are subject to certain restricted payment covenants of senior debt. At
January 31, 1998, such accrued dividends amounted to $2,126,000.
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 January 1998, 11,185
shares of Series H Preferred Stock were outstanding.
12
<PAGE>
APPAREL AMERICA, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
January 31, 1998
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 fiscal year ended July 1997, the Company incurred
certain non-recurring expenses associated with the start of operations which
amounted to approximately $100,000. TBM began sewing operations in May 1997.
TBM is anticipated to fulfill approximately 15% of the Company's production
requirements for the July 1998 fiscal year.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six Months Ended January 31, 1998
Net sales decreased by $3,805,000, or 22.8%, to $12,872,000 for the six months
ended January 31, 1998 as compared to $16,677,000 for the six months ended
January 31, 1997. The decline in net sales is principally related to an
approximate $2,700,000 reduction in sales of Robby Len branded swimwear along
with a $1,500,000 sales reduction due to the discontinuation of two marginally
profitable product lines, "Lenee" and "Coco Reef," for fiscal year 1998. This
decline was partially offset by a reduction in customer return expense of
approximately $400,000 for the six months ended January 31, 1998 as compared to
the prior year period.
Gross margin as a percentage of net sales was 27.5% for the six months ended
January 31, 1998 as compared to 27.8% for the six months ended January 31, 1997.
Gross margin remained relatively flat despite the decline in sales primarily as
the result of reductions of certain manufacturing overhead expenses and
increased offshore production of swimwear resulting in lower manufacturing
costs.
Operating expenses declined by $1,285,000, or 25.9%, to $3,684,000 for the six
months ended January 31, 1998 as compared to $4,969,000 for the six months ended
January 31, 1997. This decline is primarily attributable to (a) an approximate
$750,000 reduction in selling and design expense related to showroom facility
consolidation, staff reductions and certain selling overhead expenses resulting
from the operational restructuring of the Company (see Item 2. - Liquidity and
Capital Resources - Recent Events for additional information), (b) a $150,000
reduction of certain variable shipping expenses due to lower sales volume, and
(c) an approximate $400,000 decrease in general and administrative expenses
relating to certain staff and administrative overhead reductions.
The above activities resulted in an operating loss of $150,000 for the six
months ended January 31, 1998 as compared to an operating loss of $340,000 for
the six months ended January 31, 1997.
Interest and financing costs increased by $305,000, or 42.3%, to $1,026,000 for
the six months ended January 31, 1998 as compared to $721,000 for the prior year
period. The increase is due primarily to increased borrowing levels under the
Company's 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 under the revolving loan/factor
agreement also contributed to this increase.
The aggregate effect of the above activities resulted in a net loss before
provision for income taxes of $1,176,000 for the six months ended January 31,
1998 as compared to a loss before provision for income taxes of $1,061,000 for
the six months ended January 31, 1997.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - continued
Three Months Ended January 31, 1998
Net sales declined by $3,435,000, or 25.4%, to $10,089,000 for the three months
ended January 31, 1998 as compared to $13,524,000 for the three months ended
January 31, 1997. This decrease is principally related to an approximate
$2,400,000 reduction in sales of Robby Len branded swimwear. Also contributing
to the decrease was the discontinuation of the marginally profitable "Lenee" and
"Coco Reef" product lines for the 1998 fiscal year.
Gross margin as a percentage of net sales increased by 1.8 percentage points to
32.7% for the three months ended January 31, 1998 as compared to 30.9% for the
three months ended January 31, 1997. Principal factors contributing to this
increase were a change in product mix coupled with reduced manufacturing labor
costs related to increased offshore production. The change in product mix was
primarily related to the discontinuation of the "Lenee" budget swimwear line,
which produced low gross profit margins in the prior fiscal year period.
Operating expenses decreased by $683,000, or 25.5%, to $1,991,000 for the three
months ended January 31, 1998 as compared to $2,674,000 for the three months
ended January 31, 1997. This decrease is primarily attributable to a $350,000
decline in selling and design expense as a result of showroom consolidation and
sales and design staff reductions relating to the operational restructuring of
the Company. In addition, reductions in certain variable shipping expenses of
approximately $137,000 along with general and administrative staff reductions
and overhead expenses of approximately $196,000 also contributed to the
reduction in operating expenses.
The above activities resulted in a $193,000 decline in operating income to
$1,311,000 for the three months ended January 31, 1998 as compared to operating
income of $1,504,000 for the three months ended January 31, 1997.
Interest and financing costs increased by $109,000, or 22.7%, to $590,000 for
the three months ended January 31, 1998 as compared to $481,000 for the prior
year period. This increase is the result of a $62,000 increase in factor fees
and commissions along with a $47,000 increase in interest expense related to
increased borrowing levels under the Company's revolving loan/factoring
agreement.
The aggregate effect of the above activities resulted in income before provision
for income taxes of $721,000 for the three months ended January 31, 1998 as
compared to income before provision for income taxes of $1,023,000 for the three
months ended January 31, 1997.
15
<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 0.81 to 1.00 at January
31, 1998 as compared to 0.77 to 1.00 at July 31, 1997. The working capital
deficit increased by $932,000, or 21.2%, to $5,318,000 at January 31, 1998 as
compared to the working capital deficit of $4,386,000 at July 31, 1997. This
increase in working capital deficit is primarily attributable to the net loss
for the period of $1,194,000.
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 $4,565,000 increase in
inventory and $3,368,000 increase in due from factor for the six months ended
January 31, 1998 are attributable to the seasonality of the business. The
$886,000 increase in accounts payable and accrued expenses and the $7,833,000
increase in the revolving loan balance are primarily attributable to the
increases in the inventory and due from factor. The $4,102,000 of net cash used
in operating activities for the six months ended January 31, 1998 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
facility commenced operations in May 1997 and it is anticipated that it will
manufacture approximately 15% of the Company's production needs for fiscal year
1998.
16
<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 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 January 31, 1998 was $20,037,000.
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
marginally profitable 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.
17
<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
18
<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, 1998 /s/ Frederick M. D'Amato
--------------------------- ------------------------------------
Frederick M. D'Amato, Vice
President - Finance, both on
behalf of the Registrant and as its
Principal Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 1998
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-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 250
<SECURITIES> 0
<RECEIVABLES> 9665
<ALLOWANCES> 800
<INVENTORY> 12,930
<CURRENT-ASSETS> 22,328
<PP&E> 8,302
<DEPRECIATION> 6,584
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<CURRENT-LIABILITIES> 27,646
<BONDS> 9,986
4,618
0
<COMMON> 989
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<SALES> 12,872
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<CGS> 9,338
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<OTHER-EXPENSES> 3,736
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<INTEREST-EXPENSE> 1,026
<INCOME-PRETAX> (1,176)
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