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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 1998
Commission file number 0-14674
THE ANDOVER APPAREL GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-5677957
-------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1333 Broadway, New York, New York 10018
----------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 244-0700
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 twelve months (or for such shorter period 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 practicable date. 4,470,815 shares of common
stock, $.10 par value, of the Registrant were outstanding as of July 8, 1998.
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Part I - FINANCIAL INFORMATION
- ------------------------------
Item 1. - Financial Statements:
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In Thousands)
----------------------------------
May 31, November, 30
1998 1997
------------- -------------
<S> <C> <C>
ASSETS (Note 3)
CURRENT ASSETS:
Cash $ 1,527 $ 3,045
Accounts receivable-net 2,691 1,841
Inventories (Note 2) 2,788 2,487
Marketable securities 202 113
Other current assets 409 171
-------- --------
Total current assets 7,617 7,657
PROPERTY, PLANT AND EQUIPMENT - Net 2,036 2,237
OTHER ASSETS 92 100
-------- --------
TOTAL $ 9,745 $ 9,994
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,511 $ 815
Accrued expenses and other current liabilities 1,085 992
Current portion of long-term debt (Note 4) 835 782
-------- --------
Total current liabilities 3,431 2,589
OTHER LIABILITIES 206 213
LONG TERM DEBT (Note 4) 3,715 3,963
-------- --------
Total liabilities 7,352 6,765
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 465 465
Additional paid-in capital 11,154 11,154
Unrealized gain-securities 149 60
Accumulated deficit (8,735) (7,810)
Less treasury stock, at cost (640) (640)
-------- --------
Total stockholders' equity 2,393 3,229
-------- --------
TOTAL $ 9,745 $ 9,994
======== ========
</TABLE>
See notes to consolidated financial statements.
1
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THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In Thousands, Except
Per Share Amounts)
- -------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 7,712 $ 8,296
COST OF GOODS SOLD (Note 2) 6,353 6,815
------- -------
GROSS PROFIT 1,359 1,481
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,171 1,813
------- -------
LOSS BEFORE INTEREST AND
REORGANIZATION ITEMS
(812) (332)
REORGANIZATION ITEMS
-- 1,074
------- -------
OPERATING LOSS
(812) (1,406)
INTEREST EXPENSE (INCOME),
NET OF INTEREST INCOME OF $56 IN 1998
NET OF INTEREST EXPENSE OF $36 IN 1997 113 (92)
------- -------
NET LOSS $ (925) $(1,314)
------- -------
------- -------
BASIC AND DILUTIVE LOSS PER SHARE $ (.21) $ (.29)
------- -------
------- -------
WEIGHTED AVERAGE SHARES 4,471 4,471
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
2
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THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(In Thousands, Except
Per Share Amounts)
- -----------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
NET SALES $ 4,742 $ 4,290
COST OF GOODS SOLD (Note 2) 3,873 3,519
------- -------
GROSS PROFIT 869 771
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,171 907
------- -------
LOSS BEFORE INTEREST AND
REORGANIZATION ITEMS (302) (136)
REORGANIZATION ITEMS -- 808
------- -------
OPERATING LOSS (302) (944)
INTEREST EXPENSE (INCOME),
NET OF INTEREST INCOME OF $22 IN 1998
NET OF INTEREST EXPENSE OF $28 IN 1997 64 (39)
------- -------
NET LOSS $ (366) $ (905)
------- -------
BASIC AND DILUTIVE LOSS PER SHARE $ (.08) $ (.20)
------- -------
WEIGHTED AVERAGE SHARES 4,471 4,471
------- -------
</TABLE>
See notes to consolidated financial statements.
3
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THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MAY 31, 1998 AND MAY 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
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COMMON STOCK ADDITIONAL UNREALIZED TREASURY STOCK
------------------ PAID-IN GAIN- ACCUMULATED --------------
SHARES AMOUNT CAPITAL SECURITIES DEFICIT SHARES AMOUNT TOTAL
------ ------ ----------- ---------- ----------- ------------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
MAY 31, 1998
- ------------
BALANCE
DECEMBER 1, 1997 4,655 $ 465 $11,154 $ 60 $(7,810) 185 $ (640) $ 3,229
UNREALIZED GAIN-SECURITIES -- -- -- 89 -- -- -- 89
NET LOSS -- -- -- -- (925) -- -- (925)
------- ------- ------- ------- ------- ------- ------- -------
BALANCE
MAY 31, 1998 4,655 $ 465 $11,154 $ 149 $(8,735) 185 $ (640) $ 2,393
======= ======= ======= ======= ======= ======= ======= =======
SIX MONTHS ENDED
MAY 31, 1997
BALANCE
DECEMBER 1, 1996 4,655 $ 465 $11,154 $ -- $(5,820) 185 $ (640) $ 5,159
NET LOSS -- -- -- -- (1,314) -- -- (1,314)
------- ------- ------- ------- ------- ------- ------- -------
BALANCE
MAY 31, 1997 4,655 $ 465 $11,154 $ $(7,134) 185 $ (640) $ 3,845
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
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THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In Thousands)
- -------------------------------------------------------------------------------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (925) $(1,314)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation and amortization 193 293
Gain on exchange of property,
plant and equipment -- (434)
(Gain) loss on sale of fixed assets (53) 18
Changes in assets and liabilities:
Accounts receivable (850) 1,698
Inventories (301) 758
Other current assets (230) 54
Accounts payable 696 219
Accrued expenses and other current liabilities 86 605
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Net cash (used in) provided
by operating activities (1,384) 1,897
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6) --
Proceeds from sale of property, plant and equipment 67 --
------- -------
Net cash provided by investing
activities 61 --
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (195) (959)
------- -------
Net cash used in financing
activities (195) (959)
------- -------
NET (DECREASE) INCREASE IN CASH (1,518) 938
CASH, BEGINNING OF YEAR 3,045 4,865
------- -------
CASH, END OF PERIOD $ 1,527 $ 5,803
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(Continued)
</TABLE>
5
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<TABLE>
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest $ 116 $ 61
============= =======
Income taxes $ 3 $ 21
============= =======
SCHEDULE OF NON CASH ACTIVITIES:
Exchange of property, plant and equipment:
Release of Industrial Revenue Bond $ -- $ 3,055
Property, plant, equipment and
restricted cash -- (2,621)
------------- -------
Gain on exchange $ -- $ 434
------------- -------
Reclassification of liabilities subject to
compromise to long-term debt and
current portion of long-term debt $ -- $ 5,043
============= =======
</TABLE>
See notes to consolidated financial statements.
6
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THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On June 3, 1998, the Company changed its name from Andover Togs, Inc.,
to The Andover Apparel Group, Inc.
The consolidated financial statements as of May 31, 1998 and for the
six month periods then ended have been prepared by the Company without
audit. In the opinion of management, all adjustments consisting of only
normal recurring adjustments necessary for a fair presentation of the
financial position of the Company, the results of its operations and
cash flows have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended November 30, 1997.
The results of operations for the period ended May 31, 1998 are not
necessarily indicative of the operating results for the full year.
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128"). Under FAS 128,
companies that are publicly held or have complex capital structures are
required to present basic and diluted earnings per share ("EPS") on the
face of the income statement. FAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS and, if applicable,
diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted and the resulting
additional shares are dilutive because their inclusion decreases the
amount of EPS. The effect on earnings (loss) per share of the Company's
outstanding stock options is antidilutive and therefore not included in
the calculation of the weighted average number of common shares
outstanding.
2. INVENTORIES
(In Thousands)
----------------------------
May 31, November 30,
1998 1997
-------- ------------
Raw materials $ 838 $ 497
Work in process 1,328 992
Finished goods 622 998
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$2,788 $2,487
====== ======
Inventories and cost of goods sold at May 31, 1998 are determined based
upon the estimated gross profit method.
7
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3. REVOLVING CREDIT FACILITY
On May 12, 1997, the Company emerged from Chapter 11 of the Bankruptcy
Code and entered into a two year financing facility (the "Facility").
The Facility, as amended, provides for a discretionary $10,500,000
revolving credit line, of which $3,000,000 is available for letters of
credit. Advances under the revolver are to bear interest at prime plus
.85%. Advances are based on 85% of eligible accounts receivable plus
50% of eligible inventory and are collateralized by all of the
Company's assets other than its real estate. The Company has not
borrowed on the Facility.
4. LONG TERM DEBT
May 31, November 30,
1998 1997
--------- ---------
Long term debt (a) $4,392 $4,563
Other 158 182
------ ------
4,550 4,745
Less current portion 835 782
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$3,715 $3,963
====== ======
(a) On May 12, 1997 (the effective date that the Company emerged from
bankruptcy), a note was established for allowed and disputed
general unsecured claims. Each holder of an allowed claim has
received or will receive (i) a prorata share of $786,000 being
paid in cash by the Company and (ii) a beneficial interest in a
note in principal amount equal to the amount by which the sum of
all such claims exceeds $786,000 (the "Note"). The Note is
payable quarterly, with interest at the rate of 6% per annum on
the unpaid balance, commencing June 30, 1997 based on a ten year
amortization schedule with the balance payable on May 12, 2002.
The Note also requires prepayments annually commencing in March
1998 in amounts aggregating 50% of the Company's excess cash flow
(as defined) for the preceding fiscal year. There was no excess
cash flow (as defined) for fiscal 1997. The Note is secured by a
second lien on the same assets which secure the Facility.
At May 31, 1998, there was one remaining disputed claim, which
relates to a lease rejection claim (and related pre-petition
rental claim) in the aggregate amount of approximately
$1,552,000, asserted by the owner of the Company's former office
space at One Penn Plaza, New York City. This claim is currently
under litigation in the U.S. Bankruptcy Court. The trial has
concluded, and the dispute is now before the judge for decision.
Even if the Company prevails, the decision can be appealed. The
Company has included in Long-Term Debt and Current Portion of
Long-Term Debt, approximately $1,399,000 as a reserve for this
claim at May 31,1998 and November 30, 1997.
8
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Item 2. -
MANAGEMENT'S DISCUSSION AN ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 19, 1996, the Company filed for bankruptcy under Chapter 11 of the
Bankruptcy Code. On May 12, 1997, the Company emerged from Chapter 11. On
June 3, 1998 the Company changed its name from Andover Togs, Inc. to The
Andover Apparel Group, Inc.
RESULTS OF OPERATIONS
Three Months Ended May 31, 1998 vs. 1997
----------------------------------------
Net sales for the three months ended May 31, 1998 (the "'98 Quarter") were
$4,742,000, an increase of $452,000 or 10.5% from 1997 net sales of
$4,290,000 in the comparable period in 1997 (the "'97 Quarter"). The
increase is primarily attributable to additional sales to the Company's
largest customer.
Gross profit as a percentage of net sales increased to 18.3% from 18.0% in
the `97 Quarter. The increase was primarily due to the effect of unabsorbed
overhead in the `97 Quarter.
Selling, general and administrative expenses for the `98 Quarter were
$1,171,000 or 24.7% of sales as compared to $907,000 or 21.1% of sales in
the `97 Quarter. The increase in expenses was primarily attributable to
increased salaries and fringe benefits related to the hiring of a President
and sales executives and professional fees.
In the `97 Quarter there were reorganization items of $808,000. There were
no reorganization items in the `98 Quarter since the Company emerged from
bankruptcy on May 12, 1997.
Interest expense increased $58,000 in the `98 Quarter compared to the `97
Quarter. The increase is primarily attributable to interest payments on
long-term debt, which became payable on May 12, 1997 when the Company
emerged from bankruptcy.
Six Months Ended May 31, 1998 vs. 1997
--------------------------------------
Net sales for the six months ended May 31, 1998 (the "`98 Period") were
$7,712,000, a decrease of $584,000 or 7.0% from $8,296,000 in the
comparable period in 1997 (the "`97 Period"). The decrease is
attributable to a decline in nets sales during the first quarter
resulting from a deterioration of the Company's customer base.
Gross profit as a percentage of net sales decreased to 17.6% from 17.9% in
the `97 Period, as a result of the Company's current customer base
producing a lower gross profit percentage than the customer base
existing during the '97 Period.
Selling, general and administrative expenses for the `98 Period were
$2,171,000 or 28.2% of sales as compared to $1,813,000 or 21.9% of sales in
the `97 Period. The increase in expenses was primarily attributable to
increased salaries and fringe benefits related to the hiring of a President
and sales executives and professional fees.
In the `97 Period there were reorganization items of $1,074,000. There were
no reorganization items in the `98 Period since the Company emerged from
bankruptcy on May 12, 1997.
Interest expense increased $133,000 in the `98 Period compared to the `97
Period. The increase is primarily
9
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attributable to interest payments on long-term debt, which became payable
on May 12, 1997 when the Company emerged from bankruptcy.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's working capital at May 31, 1998 decreased $882,000 to
$4,186,000 compared to $5,068,000 at November 30, 1997, due primarily to
the Company's net loss for the period. The Company believes that the cash
generated from operations and available borrowings will be sufficient to
meet anticipated working capital needs.
On May, 12, 1997, the Company emerged from Chapter 11 of the Bankruptcy
Code and entered into a new credit Facility. The Facility, as amended,
provides for a $10,500,000 discretionary revolving credit line, of which
$3,000,000 is available for letters of credit. An amendment to the Facility
eliminated the financial covenants previously contained therein. The
Company has not borrowed on the Facility to date. See Note 3 to the
Consolidated Financial Statements.
COMPANY OUTLOOK AND CURRENT UNCERTAINTIES
-----------------------------------------
The Company hired Steven A. Schwartz as its new President and Chief
Operating Officer at the beginning of fiscal 1998. The Company has
announced that Mr. Schwartz, together with a new team of experienced sales,
marketing and design executives, seeks to rebuild and refresh the Company's
core childrenswear business and to offer fashion and value childrenswear
products. The Company believes that this rebuilding process will result in
long term benefits for the Company by allowing it to build a stronger and
broader customer base, although there can be no assurance that the Company
will be able to do so. Currently, Wal-Mart Stores, Inc. accounts for
approximately 52% of the Company's orders. Accordingly, resumption of
stable and profitable operations will require the Company to both increase
its total sales and expand its customer base.
FORWARD LOOKING STATEMENTS
--------------------------
Statements in this Report include forward-looking statements that involve a
number of risks and uncertainties. These risks include, among others, the
Company's sharp reduction in sales, narrow customer base and the other
risks detailed from time to time in the Company's SEC reports. The
Company's actual results could differ materially from those anticipated in
the forward-looking statements.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
--------------------------------
(a.) Exhibits.
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b.) Reports on Form 8-K:
None
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SIGNATURES
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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.
THE ANDOVER APPAREL GROUP, INC.
-------------------------------
Date July 10, 1998 By /s/ William L. Cohen
--------------------- ----------------------------
William L. Cohen
Chairman of the Board and
Chief Executive Officer
Date July 10, 1998 By /s/ Alan Kanis
--------------------- ----------------------------
Alan Kanis
Treasurer and Chief Financial
and Accounting Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-1-1997
<PERIOD-END> MAY-31-1998
<CASH> 1,527,000
<SECURITIES> 0
<RECEIVABLES> 2,941,000
<ALLOWANCES> 250,000
<INVENTORY> 2,788,000
<CURRENT-ASSETS> 7,617,000
<PP&E> 8,465,000
<DEPRECIATION> 6,429,000
<TOTAL-ASSETS> 9,745,000
<CURRENT-LIABILITIES> 3,431,000
<BONDS> 0
<COMMON> 465,000
0
0
<OTHER-SE> 11,154,000
<TOTAL-LIABILITY-AND-EQUITY> 9,745,000
<SALES> 7,712,000
<TOTAL-REVENUES> 7,712,000
<CGS> 6,353,000
<TOTAL-COSTS> 6,353,000
<OTHER-EXPENSES> 2,171,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,000
<INCOME-PRETAX> (925,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (925,000)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
