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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended November 30, 1998
Commission File No. 0-14674
THE ANDOVER APPAREL GROUP, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 13-5677957
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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1333 Broadway, New York, New York 10018
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 244-0700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
par value
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 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value at February 24, 1999 of shares of the Registrant's
Common Stock, $.10 par value (based upon the mean between the bid and asked
price of such stock as reflected in the over-the-counter market on such date),
held by non-affiliates of the Registrant was approximately $345,000. Solely for
the purpose of this calculation, shares held by the directors and executive
officers of the Registrant have been excluded. Such exclusion should not be
deemed an admission by the Registrant that such individuals are affiliates of
the Registrant.
Indicate by checkmark 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 [ ]
The number of shares outstanding of the Registrant's Common Stock, $.10 par
value, as of February 24, 1999 was 4,470,815.
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This Annual Report on Form 10-K contains forward looking information and
describes the expectations of The Andover Apparel Group, Inc. (the "Company")
concerning future business conditions and the outlook for the Company based on
currently available information. Wherever possible, the Company has identified
these forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the items set forth under
"Item 1. Business -- Certain Cautionary Factors" and other risks and
uncertainties as may be disclosed from time to time in the Company's public
announcements and filings with the Securities and Exchange Commission. The
Company assumes no obligation to update publicly any forward looking statements,
whether as a result of new information, future events or otherwise.
PART I
Item 1. Business.
Reorganization under the Bankruptcy Code
In the year ended November 30, 1995, the Company sustained a loss of
$4,279,000. The loss caused the Company to cease to be in compliance with many
of the financial covenants in its various credit agreements, resulting in
defaults under those agreements. Negotiations with the Company's lenders to
obtain waivers in connection with such defaults were unsuccessful. Negotiations
with such lenders and other prospective lenders to obtain more permanent
financing facilities were also unsuccessful. As a result of the ensuing severe
liquidity crisis, on March 19, 1996, the Company filed for protection under
Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code"). The
Company obtained debtor-in-possession financing and conducted operations as a
debtor-in-possession from March 19, 1996 to May 12, 1997 when it emerged from
bankruptcy. The Company's shares of common stock were removed from listing on
the Nasdaq Stock Market and now trades in the over-the-counter market in what
are commonly referred to as the "pink sheets."
On April 10, 1997, the U.S. Bankruptcy Court confirmed the Company's
Joint Plan of Reorganization and Disclosure Statement ("Joint Plan"). The Joint
Plan became effective May 12, 1997. On that date, the Company entered into a new
two year financing agreement for a credit facility of up to $10,500,000 of which
$3,000,000 is available for letters of credit (the "Facility"). Advances under
the Facility, as amended, are to be made at the discretion of the lender and
bear interest at prime plus .85%. The Facility is secured by all of the
Company's assets other than its real estate.
On May 12, 1997, allowed and disputed general unsecured claims ("Class 4
Claims") totaled approximately $5,636,000. Each holder of an allowed Class 4
Claim has received (i) a pro-rata share of $786,000 in cash and (ii) a
beneficial interest in a note (the "Note") in principal amount equal to the
amount by which the sum of all allowed Class 4 Claims exceeds $786,000. The Note
is payable quarterly, with interest at the rate of 6% per annum on the unpaid
balance, commencing June 1997 based on a ten-year amortization schedule with the
balance payable on May 12, 2002. The Note also requires prepayments annually
commencing March 1998 in amounts aggregating 50% of the Company's excess cash
flow (as
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defined) for the preceding fiscal year. There was no excess cash flow in the
fiscal years 1998 or 1997. The Note is secured by a second lien on the same
assets which secure the Facility.
At November 30, 1998, there was one remaining disputed Class 4 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 pending in the U.S. Bankruptcy Court. See "Item 3. Legal
Proceedings." 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.
Recent Developments
On December 1, 1998, the Company hired Richard Moskowitz as its new
President and Chief Operating Officer. See "Item 10. Directors and Officers of
the Registrant" regarding Mr. Moskowitz's background.
On December 18, 1998, the Company signed a ten year license agreement
(the "WWF License") with Titan Sports, Inc. ("Titan"). The WWF License provides
the Company with the exclusive license to use the World Wrestling Federation
("WWF") trademarks for men's and young men's above size 20 sportswear and
outerwear and a non-exclusive license for T-shirts and sweatshirts. The Company
has issued to Titan ten year warrants to purchase an amount of Common Stock
equal to eight percent of the sum of (i) the amount of outstanding Common Stock
on the date of exercise plus (ii) the amount of Common Stock issuable upon (a)
the exercise of all then existing options and warrants and (b) the conversion of
all securities convertible into Common Stock (the "Fully Diluted Common Stock").
The exercise price of the warrants is $.10 per share. A warrant with respect to
two percent of the Fully Diluted Common Stock became exercisable upon the
execution of the WWF License. The warrants become exercisable with respect to an
additional two percent of the Fully Diluted Common Stock at the time that the
Company's annual gross revenues of WWF licensed products reaches each of the
following thresholds: $10,000,000; $25,000,000 and $50,000,000.
General
The Company reincorporated in 1986 under the laws of the State of
Delaware. The Company was previously incorporated in New York in 1949. On June
3, 1998, the Company changed its name from Andover Togs, Inc. to The Andover
Apparel Group, Inc. The Company and its subsidiaries are referred to
collectively herein as the "Company". The Company conducts its operations
directly, except that the Company's manufacturing facility in the Dominican
Republic is operated by its subsidiary, Tortoni Manufacturing Corporation.
Products and Product Design
The Company designs, manufactures and sells popular-priced children's
active sportswear, including separate tops, dresses, slack sets, short sets,
three-piece sets, warm-up sets, pants, jeans, skirts, coordinates and related
separates. Such products are manufactured in girls' sizes infant through 14 and
boys' sizes infant through size 7. The Company also designs, manufactures and
sells girls' sleepwear. The majority of the
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Company's children's and girls products are everyday garments required in the
wardrobe of the age group served. The garments are sold as non-branded
merchandise, under store labels.
The Company's children's and girl's products are designed and marketed
for two principal selling seasons: Spring/Summer and Fall/Holiday. During 1998,
retail prices for items in the Company's Spring/Summer collection of children's
sportswear generally ranged from $4 to $20 and ranged from $6 to $25 for items
in the Company's Fall/Holiday Collection. The Company's product lines of
sportswear for each season typically consist of a variety of clothing items sold
as separates as well as in coordinated sets. Each seasonal offering of separates
contain items designed to enable customers to assemble coordinated outfits
consisting of separate items within a product line.
On December 18, 1998, the Company entered into the WWF License which
provides for the manufacture and sale by the Company of men's and young men's
apparel under the WWF trademarks. Such products are to be manufactured in men's
and young men's sizes above size 20. The WWF License includes an exclusive
license covering men's and young men's sportswear and outerwear and a
non-exclusive license for T-shirts and sweatshirts. The Company is currently
marketing its first line of WWF licensed products.
The Company's products are designed by an in-house staff which studies
such indicators as prior years' product performance and current fashions as
represented in retail stores and other apparel markets. Designers meet
frequently with suppliers and customers to assess market reaction to the
Company's product lines, to accommodate individual design requirements and to
anticipate future retail demand.
Sales and Marketing
Sales during fiscal 1998 were made to approximately 150 customers,
although the Company's 6 largest customers accounted for approximately 86% of
the Company's sales. Wal-Mart Stores, Inc. and K-Mart Corp., accounted for
approximately 57% and 15%, respectively, of the Company's 1998 sales. Wal-Mart
Stores, Inc. currently accounts for approximately 54% of the Company's orders
and the loss of Wal-Mart Stores, Inc. as a customer would have a material
adverse effect on the Company's business. The Company has no long-term
commitments from its customers. Accordingly, the Company is dependent upon the
continued support of its largest customers, and it is essential that the Company
expand its customer base in order to reduce its reliance on them. At various
times during the year, the Company has substantial credit exposure to its major
customers.
The Company currently has a salaried sales force of six persons. In
addition, the Company retains five commission sales representatives. The Company
maintains a showroom at its principal office in New York City.
Production and Distribution
Products accounting for approximately 80% of the Company's net sales in
fiscal 1998 were manufactured in the Company's facility located in the Dominican
Republic. The Company's domestic facility in Pisgah Alabama is used primarily
for cutting, distribution and warehousing. The balance of sales in fiscal 1998
was derived from imported goods and goods manufactured by outside contractors
which are made to the Company's specifications.
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The Company's products are made from a variety of natural and synthetic
fabrics and blends such as cotton, poly-cottons and acrylics, in such forms as
knits, fleeces, corduroy and twills purchased from unaffiliated suppliers. As is
customary in the industry, the Company does not have any long-term, formal
arrangements with any of its suppliers of raw materials. The fabric and
accessories market in which the Company purchases its raw materials is composed
of a substantial number of suppliers with similar products and is characterized
by a high degree of competition. The Company has experienced little difficulty
in satisfying its requirements for raw materials, considers its sources of
supply to be adequate and believes that it would be able to obtain sufficient
raw materials of comparable quality should the products of any one of its
suppliers become unavailable.
Shipments are made against customer delivery schedules, generally from
three to seven months after booking. The Company's customers have been reducing
the lead time between the time when an order is firm and its scheduled delivery
time. This has forced the Company in some instances to order piece goods based
upon less than firm orders and increased the risk and extent of markdowns.
Approximately 85% of the Company's garments are made to fill orders. Orders are
booked and processed either through an electronic data interface system or
through paper purchase orders.
Certain Cautionary Factors
The following factors, in addition to those discussed elsewhere in this
Report, should be considered carefully in evaluating the Company and its
business.
Competition. The apparel industry, including children's active
sportswear and men's and young men's sportswear and outerwear, is fragmented and
highly competitive. Although the Company's products have been historically less
sensitive to fashion trends than higher fashion lines, the apparel industry is
subject to rapidly changing consumer preferences, which may have an adverse
effect on the results of the Company's operations if the Company does not
accurately judge such preferences. The Company competes with domestic and
foreign manufacturers on the basis of quality, reliability and price. Some of
the Company's competitors have substantially greater financial resources than
the Company. In addition, the Company's customers have steadily increased the
products they import directly.
During the past several years, there has been a consolidation in the
retail apparel industry, resulting in a reduction in the number of retailers
available to purchase the Company's products. The remaining retailers are
relatively larger and possess strengthened negotiating positions. These
retailers have placed strong pricing pressures on the Company. It has become
increasingly important that the Company cooperate closely with its customers,
who are among the largest retailers in the United States, in the development of
products and programs and that it be able to quickly and completely ship orders.
In the period leading up to its filing under the Bankruptcy Code, the Company
experienced difficulty in filling all of its orders, caused in large part by the
inability to finance letters of credit. In addition, because of the bankruptcy
proceedings, some of the Company's customers lost confidence in the Company's
ability to deliver quality goods on time and turned to the Company's
competitors.
Financial Condition and History of Losses. The Company has suffered net
losses in each of its last four fiscal years. The Company has not yet fully
realized the benefits from its turnaround strategy, commenced during the
bankruptcy proceedings, which included closing manufacturing facilities,
reducing
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workforce, eliminating unprofitable product lines, strengthening senior
management and making numerous other operational and financial improvements.
Company Outlook and Current Uncertainties. The Company seeks to rebuild
and refresh the Company's core childrenswear business and to offer fashion and
value childrenswear products. The Company has expanded its apparel line to men's
and young men's products in connection with the WWF License with Titan and the
Company hopes to identify additional opportunities for expanding its apparel
lines beyond its current offerings. The Company expects 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. During this rebuilding process, the
Company anticipates that it will continue to report losses. The resumption of
profitable operations will require the Company to both increase total sales and
expand its customer base. A return to profitable operations is necessary if
the Company is to remain stable.
Dependence on Major Customers. The Company's six largest customers
accounted for approximately 86% of the Company's sales in fiscal 1998. In fiscal
1998, approximately 57% and 15% of the Company's sales were made to Wal-Mart
Stores, Inc. and K-Mart Corp., respectively. Wal-Mart Stores, Inc. accounted for
approximately 68% of the Company's fiscal 1997 sales. Currently, Wal-Mart
Stores, Inc. accounts for approximately 54% of the Company's orders and the loss
of Wal-Mart Stores, Inc. as a customer would have a material adverse effect on
the Company's business. The Company has no long-term commitments from its
customers. Accordingly, the Company is dependent upon the continued support of
its largest customers and it is essential that the Company expand its customer
base in order to reduce its reliance on them.
Year 2000. Many existing computer systems and programs process
transactions using two digits rather than four digits for the year of a
transaction. Unless the hardware and/or the software has been modified, a
significant number of those computer systems and programs may process a
transaction with a date of the year 2000 as the year "1900", which could cause
the system or the program to fail or create erroneous results before, on or
after January 1, 2000 (the "Year 2000 Issue"). The Company has initiated its
Year 2000 project which is intended to reduce the effects on the Company's
business of the Year 2000 Issue. See Item 7. Management's Discussion and
analysis of Financial Condition and Results of Operations. The failure to
correct a material Year 2000 Issue could result in an interruption in, or
failure of, certain of the Company's normal business activities or operations.
Such failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Because of the general
uncertainty inherent in the Year 2000 Issue, resulting in part from the
uncertainty of the Year 2000 readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the
Year 2000 Issue will have a material impact on the Company's results of
operations, liquidity or financial condition.
Control by Officer and Director. William L. Cohen, the Company's
Chairman of the Board and Chief Executive Officer and his brother Peter A.
Cohen, a director of the Company, together own approximately 60% (70% together
with their sister, Carolyn Cohen Zelikovic) of the Company's common stock, $.10
par value ("Common Stock"), although they disclaim ownership of each other's
shares. Consequently, they could, acting together, elect all of the Company's
directors and control the outcome of all other issues submitted to the Company's
stockholders. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management."
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Disclosure Relating to Thinly-Traded and Low-Priced Stocks. During the
bankruptcy proceedings, the Common Stock was delisted from the Nasdaq Stock
Market and now trades only sporadically in the over-the-counter market. From May
2, 1996 to May 29, 1998, quotations for the Common Stock were published in the
National Quotations Bureau's "Pink Sheets." Since June 1, 1998, quotations are
no longer published in the Pink Sheets but are reported to the National
Quotations Bureau by market makers. In addition, the Securities Exchange
Commission has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities, like the Company's Common Stock, with a price of less than $5.00 per
share (other than securities registered on certain national securities exchanges
or quoted on Nasdaq, provided that current price and volume information with
respect to transactions in that security is provided by the exchange or system).
The penny stock rules, particularly Rule 15g-9, require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. Bid and offer quotations, and the broker dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from such rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the Company's Common Stock.
Backlog
At February 5, 1999, the amount of the Company's booked orders believed
to be firm was approximately $4,255,000, all of which are expected to be filled
during the current fiscal year. This compares with approximately $5,084,000 of
such orders at February 5, 1998.
Seasonality
The Company's products are designed and marketed for two principal
selling seasons: Spring/Summer and Fall/Holiday. Shipments for the Spring/Summer
season are made in the first half of the fiscal year, and shipments for the
Fall/Holiday season are made in the second half of the fiscal year. The Company
generally sells most of its merchandise and receives most of its revenues in the
second half of the fiscal year, as demand is heaviest in connection with
back-to-school and holiday merchandise. Because of seasonal shipping patterns,
the Company's production and inventory levels fluctuate during the year.
Employees
In order to control costs, the Company has reduced its workforce by
approximately 65% since November 30, 1994. At November 30, 1998, the Company
employed approximately 425 persons, of whom approximately 390 persons were
engaged in manufacturing, six were engaged in sales, and the balance were
engaged in managerial and administrative functions. Reflecting its reduced sales
volume and increasing use of contract production, the Company is continuously
evaluating its staffing requirements.
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None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.
Item 2. Properties.
The following table sets forth in summary fashion the location of each
of the Company's principal production facilities, its principal use, approximate
floor space and the lease expiration date where leased.
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Approximate Floor Year of Lease
Location Description of Use Space (sq. ft.) Expiration(1)
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New York, New York Executive offices and 15,700 2001
showrooms
Pisgah, Alabama Cutting, finishing 120,000 --
and distribution(2)
Warehouse(2) 80,000 --
Warehouse 10,000 --
Warehouse 15,000 --
La Romana, Dominican Sewing and finishing 40,000 1999(3)
Republic
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(1) Facility is owned if no lease expiration date is set forth.
(2) This building is listed for sale or lease.
(3) There are two leases relating to this facility which expire in August
and November of 1999, respectively. The Company intends to seek renewal
of both leases. The Company has an option to construct an additional
section of 20,000 square feet of space at this facility.
The 1333 Broadway space is utilized for design, costing and procurement
functions in addition to housing the Company's executive offices and showrooms.
The Company believes that the space will be suitable and adequate for these
needs for the foreseeable future.
The Pisgah, Alabama facility consists of four separate buildings on
approximately 22 acres of property, utilized as shown in the table above. In
addition to functions already conducted at Pisgah, some of which are being moved
to New York or are being outsourced, many of the Company's operations previously
conducted by the Company in other locations have been consolidated into the
Pisgah facility. The facility is relatively old with high maintenance costs. Its
location requires additional ground transportation costs from ports of entry for
products manufactured in the Dominican Republic and import goods. Expansion of
services at the facility is limited by the availability of labor. The Company
intends in the future to analyze alternative locations to serve as
manufacturing, warehousing and distribution centers in place of Pisgah in order
to reduce transportation costs and manufacturing times.
The Company believes that its Dominican Republic facility is suitable
and adequate for its needs at this time. Expansion of the facility may become
necessary in the future, and for that purpose, the Company has an option to
construct an additional 20,000 square feet. The two leases relating to the
facility expire in August and November of 1999, respectively. The Company
intends to seek renewal of both leases.
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Item 3. Legal Proceedings.
On March 19, 1996 the Company, together with its wholly owned
subsidiaries, Springdale Fashions, Inc., Tortoni Manufacturing Corp. and
Stonehenge Financial Corp., filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York (the "U.S. Bankruptcy Court"). The Company and
such subsidiaries operated their respective businesses as debtors-in-possession
pursuant to the Bankruptcy Code until May 12, 1997 when they emerged from
bankruptcy pursuant to the Plan (See "Item 1. Business -- Reorganization under
the Bankruptcy Code").
The Company is defending in the U.S. Bankruptcy Court a lease rejection
claim (and related pre-petition rental claim) by Mid-City Associates asserted
against the Company in the bankruptcy proceedings seeking a total amount of
approximately $1,552,000 relating to the Company's former executive offices and
showroom at One Penn Plaza in New York City. The trial has concluded, and the
dispute is now before the judge for decision. Even if the Company prevails, the
decision can be appealed. Any amount so allowed will be treated as an allowed
Class 4 Claim in the manner described under "Item 1. Business -- Reorganization
under the Bankruptcy Code."
On December 4, 1998, the Company, together with its wholly-owned
subsidiaries, Springdale Fashions, Inc., Tortoni Manufacturing Corp. and
Stonehenge Financial Corp., commenced an adversary proceeding against The Chase
Manhattan Bank (f/k/a Chemical Bank) ("Chase") in the U.S. Bankruptcy Court by
the filing of a complaint, which seeks damages of at least $20 million on
following claims, each of which arises from Chase's conduct in connection with
its lending relationship with the Company: (1) breach of agreements to provide
continued financing; (2) breach of obligation to continue paying letters of
credit in accordance with the parties' established course of dealing; (3) fraud;
(4) breach of the implied covenant of good faith and fair dealing; and (5) prima
facie tort.
On February 16, 1999, the Company commenced an action in the Supreme
Court of the State of New York, New York County against U-Neek, Inc. ("U-Neek")
and a former employee of the Company. The Company seeks damages in an amount in
excess of $1,180,000 resulting primarily from U-Neek's failure to effect
arrangements for the Company to be paid for sales orders obtained by U-Neek and
fulfilled by the Company as provided by an agreement between the Company and
U-Neek. The Company also seeks an injunction against U-Neek prohibiting U-Neek
from receiving proceeds from sales orders fulfilled by the Company and from
orders the former employee solicited prior to December 1, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.
Market Information
On May 2, 1996, the Common Stock was delisted from the Nasdaq Stock
Market and began trading in the over-the-counter market (symbol: "ATOQ").
Trading and quotations have been sporadic. From May 2, 1996 to May 29, 1998,
quotations were published in the National Quotation Bureau's "Pink Sheets."
Commencing June 1, 1998 quotations are no longer published in the Pink Sheets
but are reported to the National Quotations Bureau by market makers. The
following table sets forth the high and low bid prices for the Common Stock as
reported by the National Quotation Bureau by quarters for the period from
December 1, 1996 through the fiscal year ended November 30, 1998.
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Bid Prices
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Fiscal Year Ended November 30, 1997 High Low
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First Quarter $.625 $.047
Second Quarter $.500 $.250
Third Quarter $.625 $.375
Fourth Quarter $.375 $.250
Fiscal Year Ended November 30, 1998
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First Quarter $.375 $.156
Second Quarter $.156 $.156
Third Quarter $.188 $.188
Fourth Quarter $.188 $.188
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All over-the-counter market quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission and do not necessarily represent
actual transactions.
Number of Stockholders
On February 23, 1999, there were approximately 124 holders of record of
the Common Stock. A substantial number of shares of the Common Stock is held of
record by brokers and depositories. Accordingly, the Company believes that the
actual number of holders of the Common Stock may be substantially higher.
Dividends
The Company has not paid cash dividends on its Common Stock for more
than the past five years. The Facility prohibits the declaration or payment of
dividends of any kind on the Common Stock.
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Item 6. Selected Financial Data.
The following information has been derived from the audited Consolidated
Financial Statements of the Company included elsewhere herein and in earlier
filings of the Company on Form 10-K and should be read in conjunction with the
audited Consolidated Financial Statements and the notes thereto included herein.
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Fiscal Year Ended November 30,
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1998 1997 1996 1995 1994
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(in thousands, except per share data)
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Income Statement Data
Net sales $19,307 $19,488 $43,057 $80,552 $73,767
Cost of goods sold 15,468 16,139 37,363 70,582 60,138
Gross profit 3,839 3,349 5,694 9,970 13,629
Selling, general and
administrative expenses 4,802 3,661 8,129 13,619 12,481
(Loss) income before interest,
reorganization items and
write-off of cost in excess
of net assets acquired (963) (312) (2,435) (3,649) 1,148
Reorganization items -- 1,617(2) 6,375 (2) -- --
Write-off of cost in excess
of net assets acquired -- -- -- 832(1) --
Operating (loss) income (963) (1,929) (8,810) (4,481) 1,148
Interest expense, net 313 35 992 1,435 1,006
(Loss) income before income
tax provision (benefit) (1,276) (1,964) (9,802) (5,916) 142
Income tax provision (benefit) 7 27 10 (1,637) 17
Net (loss) income ($1,283) ($1,991) ($9,812) ($4,279) $125
Net (loss) income per share ($.29) ($.45) ($2.19) ($.96) $.03
Weighted average shares 4,471 4,471 4,471 4,435 4,358
Balance Sheet Data
Working capital $3,782 $ 5,068 $ 6,524 $ 10,161 $ 16,086
Total assets 9,694 9,994 17,689 33,981 36,880
Long-term debt,
excluding current portion 3,462 3,963 4,527 4,002 5,238
Stockholders' equity 2,020 3,229 5,160 14,972 18,956
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(1) Write-off of cost in excess of net assets acquired related to the Dobie
acquisition.
(2) Costs relating to proceedings under Chapter 11 of the Bankruptcy Code.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Bankruptcy and Reorganization
On March 19, 1996, the Company filed for bankruptcy under Chapter 11 of
the Bankruptcy Code. During the bankruptcy, the Company continued to operate as
a debtor-in-possession. On May 12, 1997, the Company emerged from Chapter 11.
The Company has taken various steps to reduce its debts and restructure its
business. See "Item 1. Business -- Reorganization under the Bankruptcy Code."
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Company's Statements of Operations expressed as a percentage of sales:
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of goods sold............................ 80.1 82.8 86.8
----- ----- -----
Gross profit.................................. 19.9 17.2 13.2
Selling, general and administrative expenses.. 24.9 18.8 18.9
----- ----- -----
Loss before interest and reorganization (5.0) (1.6) (5.7)
items......................................
Reorganization items.......................... -- 8.3 14.8
----- ----- -----
Operating loss................................ (5.0) (9.9) (20.5)
Interest expense, net......................... 1.6 .2 2.3
----- ----- -----
Loss before income tax........................ (6.6) (10.1) (22.8)
Income tax.................................... -- .1 --
----- ----- -----
Net loss...................................... (6.6%) (10.2%) (22.8%)
===== ===== =====
</TABLE>
1998 vs. 1997
Sales for the 1998 fiscal year were $19,307,000 as compared to
$19,488,000 in fiscal 1997, a decrease of $181,000 or .9%. In the fourth
quarter, the Company was unable to fulfill approximately $380,000 in orders due
to damage caused to the Company's Dominican Republic facility by hurricane
Georges. Sales for the 1998 fiscal year would have been slightly higher if not
for the effect of the hurricane.
Gross profit for the 1998 fiscal year was $3,839,000 as compared to
$3,349,000 in fiscal 1997 an increase of $490,000. The Company's gross profit as
a percentage of net sales increased to 19.9% from 17.2% in 1997. The increase in
gross profit was primarily attributable to reductions in manufacturing overhead
and sales of certain licensed products at higher margins.
Selling, general and administrative expenses increased $1,141,000 to
$4,802,000 in 1998 from $3,661,000 in 1997. As a percentage of net sales, the
expenses increased from 18.8% to 24.9%. The increase in expenses was primarily
attributable to increased salaries related to the hiring of a new President in
December 1997 and additional sales and merchandising personnel, professional
fees, commissions and
11
<PAGE>
<PAGE>
royalties, net of a gains of approximately $349,000 relating to machinery and
equipment sales and insurance proceeds from damage caused by the hurricane.
Interest expense increased $148,000 to $374,000 in 1998 from $226,000 in
1997. The increase is primarily attributable to interest payments on long term
debt, which became payable on and after May 12, 1997 when the Company emerged
from bankruptcy and interest on borrowings against the Facility in fiscal 1998.
1997 vs. 1996
Sales for the 1997 fiscal year were $19,488,000 as compared to
$43,057,000 in fiscal 1996, a decrease of $23,569,000 or 54.7%. The decrease is
attributable to a number of factors. In fiscal 1996, the Company discontinued
its big boys division and a division that relied on imported merchandise as its
product source, leaving it with girls' sizes infant through 14 and boys sizes
infant through toddler. The Company discontinued the import-sourced division
because it was unable to finance letters of credit. The Company's resulting
inability to meet orders for imported merchandise affected the Company's
credibility. The Dobie division, which was phased out and discontinued in 1995,
continued to close out merchandise through fiscal 1996. The import-sourced
division's sales decreased approximately $6,015,000 in 1997 compared to 1996.
Dobie and big boys division sales decreased $1,850,000 and $4,900,000,
respectively, in 1997 compared to 1996. The remaining decrease represents the
decrease in the volume of sales to many of the Company's customers due to the
bankruptcy proceedings.
The Company's gross profit as a percentage of net sales increased to
17.2% in fiscal 1997 from 13.2% in fiscal 1996. The lower margin in fiscal 1996
was a reflection of large sales and markdown allowances to close out inventory
in the discontinued divisions and costs associated with the closing of
inefficient manufacturing facilities, as the Company attempted to combat further
margin erosion.
Selling, general and administrative expenses decreased $4,468,000 to
$3,661,000 in fiscal 1997 from $8,129,000 in fiscal 1996. As a percentage of net
sales, the expenses decreased from 18.9% to 18.8%. The decrease in expenses was
attributable primarily to reduced salaries and fringe benefits relating to
terminated employees; professional fees; rent; and depreciation and
amortization, relating to fixed assets written off in 1996.
The decrease in reorganization items of $4,758,000 from $6,375,000 in
fiscal 1996 to $1,617,000 in fiscal 1997 resulted from the Company's emergence
from bankruptcy on May 12, 1997. The reorganization items in fiscal 1997
included primarily professional fees related to the bankruptcy proceedings.
Interest expense decreased $795,000 to $226,000 in 1997 from $1,021,000
in 1996. The decrease was due to the payment in fiscal 1996 of all bank debt and
the release of interest payments relating to the Industrial Revenue Bond on the
Scottsboro, Alabama facility. Interest expense in fiscal 1996 included $385,000
of facility fees relating to the various financings.
12
<PAGE>
<PAGE>
Liquidity and Capital Resources
On May 12, 1997, the Company emerged from Chapter 11 of the Bankruptcy
Code and entered into the 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. 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 secured by all of the
Company's assets other than its real estate. Under the Facility, the Company is
prohibited, among other restrictions, from pledging assets, creating additional
indebtedness or paying dividends. An amendment to the Facility eliminated the
financial covenants previously contained therein.
At November 30, 1998, working capital was $3,782,000, compared to
$5,068,000 at November 30, 1997. The reduction in working capital is due
primarily to the Company's net loss for the year. The Company believes that cash
generated from operations and available borrowings will be sufficient to meet
working capital needs for the current fiscal year. The Company's current ratio,
at November 30, 1998 and 1997, was 1.9 and 3.0 respectively.
Under the provisions of the Internal Revenue Code, the Company has
approximately $11.7 million of net operating loss carryforwards available to
offset future tax liabilities of the Company, that expire from 2010 through
2013.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
fiscal 1999. Reclassification for earlier periods is required for comparative
purposes. Because the statement requires only additional disclosure, the Company
does not expect the statement to have a material impact on its financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
manner in which a public business enterprise reports certain information about
operating segments and discloses enterprise-wide information about its products
and services, activities in different geographic areas, and its reliance on
major customers. The statement is effective for the Company's financial
statements in fiscal 1999. The adoption of this statement will not have a
material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement establishes standards that require
that all derivative instruments be recorded on the balance sheet at their fair
value. This statement is effective for the Company's financial statements in
fiscal 2000. The adoption of this Statement will not have a material effect on
the Company's financial statements.
13
<PAGE>
<PAGE>
Year 2000
Many existing computer systems and programs process transactions using
two digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
2000 as the year "1900", which could cause the system or the program to fail or
create erroneous results before, on or after January 1, 2000 (the "Year 2000
Issue").
The Company's Year 2000 project is intended to reduce the effects on the
Company's business of the Year 2000 Issue. The Year 2000 project involves: (i)
an inventory of Year 2000 items and an assessment of the Year 2000 compliance of
items determined to be material to the Company; (ii) modifying or replacing
material items that are determined not to be Year 2000 compliant (iii) testing
material items and evaluating Year 2000 compliance of the Company's customers,
suppliers and contractors and (iv) designing and implementing contingency plans.
All phases of the project are being performed by the Company's management
information systems department. Simulations of actual use conditions are
scheduled to be completed before July 1999.
The Company's principal computer systems consist of: (i) management
information software ("MIS"), for accounts receivable, general ledger and
payables and order entry and sales reporting; (ii) electronic data interchange
("EDI") for order-taking, invoicing and the like between the Company and its
major customers; (iii) systems involved in the Company's manufacturing
operations such as materials purchasing and manufacturing scheduling; and (iv)
mainframe and personal computer operating systems.
The Company's MIS systems are not currently Year 2000 compliant. The
Company has modified the software in each such system to accept transactions
dated on or after January 1, 2000. Testing of the individual systems indicate
that the modifications were generally successful although further modifications
are necessary. In the event that any of the Company's software modifications do
not resolve the Year 2000 Issue, the Company intends to purchase and test
software upgrades or replace non-compliant MIS systems. The Company is in the
process of pricing MIS software upgrades and replacements. The Company
anticipates that upgrade costs, if incurred, would be paid from cash flow
generated by operations. No assurance can be made at this time that software
upgrades or replacement will resolve the Company's MIS Year 2000 Issues.
The Company expects to complete its upgrade and testing of Year 2000
compliant EDI software by approximately May 1, 1999. This upgrade is coordinated
with EDI upgrades by many of the Company's customers and is not solely for the
purpose of resolving Year 2000 Issues. The upgrade is being provided at no cost
to the Company by the EDI intermediary which routes EDI communications between
the Company and its customers. No assurance can be made at this time that the
upgrade will cause the EDI system to be Year 2000 compliant.
The Company's tests have confirmed that the Company's mainframe
operating system is Year 2000 compliant. The Company intends to replace personal
computers found not to be Year 2000 compliant and estimates that the cost of
replacement to be approximately $25,000.
The Company believes that its manufacturing operations software does not
require material modifications to be Year 2000 compliant.
14
<PAGE>
<PAGE>
The Company continues to communicate with its customers, contractors and
suppliers to evaluate their Year 2000 compliance. The Company believes that over
the upcoming months its major customers who have not yet done so plan to test
their EDI systems for internal, intermediary and supplier Year 2000 compliance.
The Company would be unable to receive and invoice orders from a customer
through EDI if the customer or its EDI intermediaries are not Year 2000
compliant. Although the Company does not transmit electronic orders to its
contractors and suppliers, delays or non-delivery of goods to the Company could
arise from Year 2000 Issues affecting their businesses.
The failure to correct a material Year 2000 issue could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Because of the general
uncertainty inherent in the Year 2000 Issue, resulting in part from the
uncertainty of the Year 2000 readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the
Year 2000 Issue will have a material impact on the Company's results of
operations, liquidity or financial condition.
To date, the Company has not established a contingency plan for possible
Year 2000 Issues. Where needed, the Company intends to establish contingency
plans based on its testing and evaluation experience.
The completion dates referenced above and the cost of personal computer
replacement are based on management's best estimates and may be updated as
additional information becomes available. Reference is made to this Item 7.
- -- Forward-Looking Statements, which addresses forward-looking statements made
by the Company.
Company Outlook and Current Uncertainties
The Company seeks to rebuild and refresh the Company's core
childrenswear business and to offer fashion and value childrenswear products.
The Company has expanded its apparel line to men's and young men's products in
connection with the WWF License with Titan and hopes to identify additional
opportunities for expanding its apparel lines beyond its current offerings. The
Company expects 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.
During this rebuilding process, the Company anticipates that it will continue to
report losses. The resumption of profitable operations will require the Company
to both increase total sales and expand its customer base. A return to
profitable operations is necessary if the Company is to remain stable.
The Company's six largest customers accounted for approximately 86% of
the Company's sales in fiscal 1998. In fiscal 1998, approximately 57% and 15% of
the Company's sales were made to Wal-Mart Stores, Inc. and K-Mart Corp.,
respectively. Wal-Mart Stores, Inc. accounted for approximately 68% of the
Company's fiscal 1997 sales. Currently, Wal-Mart Stores, Inc. accounts for
approximately 54% of the Company's orders and the loss of Wal-Mart Stores, Inc.
as a customer would have a material adverse effect on the Company's business.
The Company has no long-term commitments from its customers. Accordingly, the
Company is dependent upon the continued support of its largest customers and it
is essential that the Company expand its customer base in order to reduce its
reliance on them.
15
<PAGE>
<PAGE>
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking
statements that involve risks and uncertainties. Discussion containing such
forward-looking statements may be found in the materials set forth under "Item
1. Business" and in this Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results to differ materially
from those anticipated in the forward-looking statements. Such factors include
those discussed under "Item 1. Business -- Certain Cautionary Factors" and
elsewhere in this Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included herein immediately
following Part IV of this Report.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
Not applicable.
16
<PAGE>
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Identification of Directors.
The following table sets forth the names and ages and principal
occupations of each of the Company's directors and the year in which each was
first elected director.
<TABLE>
<CAPTION>
Name and Age Principal Occupation Director Since
------------ -------------------- --------------
<S> <C> <C>
George S. Blumenthal (55) Chairman of the Board and Treasurer of 1991
OCOM Corporation and NTL Incorporated,
Chairman of the Board and Treasurer of
Cellular Communications of Puerto Rico,
Chairman of the Board of CoreCom Limited (1)
Peter A. Cohen (52) Managing Member of Ramius Capital 1981
Group, LLC (2)(3)(4)
William L. Cohen (57) Chairman of the Board and Chief Executive 1979
Officer of the Company (3)(5)
Donald D. Shack (70) Attorney, Shack & Siegel, P.C. (6) 1986
Monte Wolfson (73) President of Monte Wolfson 1994
Associates, Inc. (7)
</TABLE>
- --------------------
(1) Mr. Blumenthal has been Chairman of the Board and Treasurer of OCOM
Corporation since 1990. He has been Chairman of the Board and Treasurer
of NTL Incorporated since April 1993. Mr. Blumenthal has also been
Chairman of the Board and Treasurer of Cellular Communications of Puerto
Rico, Inc. (formerly CoreCom Incorporated) since April 1989 and has been
Chairman of the Board of CoreCom Limited since March 1998. Mr.
Blumenthal was President of Blumenthal Securities, Inc., a New York
Stock Exchange member firm for in excess of five years prior to November
1992. Mr. Blumenthal was the Chairman and Treasurer of Cellular
Communications International, Inc. until April 1994. He was the Chairman
and Treasurer of Cellular Communications, Inc. until August 1996, when
such company merged into AirTouch Communications, Inc. He is a director
of CoreComm Incorporated, OCOM Corporation and NTL Incorporated.
(2) Mr. Cohen is the Managing Member of Ramius Capital Group LLC, a private
investment firm, which is the successor to Ramius Capital Corporation,
of which Mr. Cohen had been the Managing Director since August 1994.
From August 1994 until July 1997 he was a partner in Palladin Partners,
a private investment management firm. From December 1992 through May
1994, Mr. Cohen was the Chairman of Republic New York Securities Corp.
and Vice Chairman of Republic New York Corp. Prior to January 1990, Mr.
Cohen was employed in various senior executive capacities by Shearson
Lehman Hutton Inc., an investment banking firm, including as its Chief
Operating Officer from 1979 to 1984 and as its Chairman and Chief
Executive Officer from 1984 to January 1990. From May 1991 through
December 1992 Mr. Cohen was President of Andrew Lauren & Co., Inc., an
investment consulting firm. He is currently a director of Presidential
Life Corporation, Trace Holdings, Inc., GRC International, Inc. and
Olivetti SpA.
17
<PAGE>
<PAGE>
(3) Messrs. William L. Cohen and Peter A. Cohen are siblings.
(4) Peter A. Cohen renders financial and management consulting services to
the Company. Until March 19, 1996, he was paid a fee at the annual rate
of $75,000 plus certain benefits. Effective March 19, 1996 his
consulting fee was eliminated. Mr. Cohen received $18,750 in consulting
fees during fiscal 1996. He has continued to render services without
charge.
(5) For information regarding William L. Cohen's business history, see
"Identification of Executive Officers" below.
(6) For information regarding Mr. Shack's business history, see
"Identification of Executive Officers" below.
(7) Mr. Wolfson has been the President of Monte Wolfson Associates, Inc., a
retail and marketing consultant, for over five years. In addition, Mr.
Wolfson has been a United States Government advisor on the retail
textile industry for over 25 years. From 1975 until his retirement in
1986, Mr. Wolfson was employed as President of Netco, Inc., the New York
subsidiary of Zayre Group, an apparel retailer. Prior thereto he served
as Chairman and CEO of Diana Stores, Corp., an apparel retailer. He was
also Chairman of the Board of Ice Nine, Inc., an apparel manufacturer,
from 1992 until March 1995.
Each director holds office until the next annual meeting of stockholders
and until his successor is elected and qualifies.
Identification of Executive Officers.
The following table sets forth the names and ages of executive officers
of the Company and all offices held by each such person on the date hereof.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
William L. Cohen 57 Chairman of the Board and
Chief Executive Officer
Richard Moskowitz 54 President and Chief Operating
Officer
Stephen Fenyves 54 Senior Vice President -
Administration and Operations
Alan Kanis 49 Treasurer and Chief Financial
and Chief Accounting Officer
Stanley F. Schmoller 60 Vice President - Manufacturing
Donald D. Shack 70 Secretary
</TABLE>
Mr. William L. Cohen has been principally employed in senior managerial
positions with the Company since 1965, as its Vice President-Administration from
1970 to 1983 and as its Chief Executive Officer since 1983. He was also
President of the Company from 1983 until December 1997. Mr. Cohen was elected
to the office of Chairman of the Board of Directors in 1987.
Mr. Moskowitz was the President of Universal Marketing and
Manufacturing, Inc., a consulting and product sourcing firm primarily servicing
the apparel industry, from 1996 to 1998. For more than five years prior to 1996,
Mr. Moskowitz was the majority stockholder and President of California
Connection, Inc. a manufacturer and distributor of ladies sportswear.
18
<PAGE>
<PAGE>
Mr. Fenyves has been employed by the Company since 1969 in various
executive capacities, including Vice President-Administration from 1986 to 1988,
Senior Vice-President-Administration, from 1989 to 1996 and in his present
capacity since 1996.
Mr. Kanis joined the Company as Treasurer and Chief Financial and Chief
Accounting Officer effective September 1, 1990. Prior to his employment by the
Company, Mr. Kanis had been Vice President-Finance of Shelburne Shirt Co. Inc.
for over five years.
Mr. Schmoller has been employed by the Company in various production
capacities since 1958 and in his present capacity for in excess of 16 years.
Mr. Shack has served as Secretary of the Company since 1986. Mr. Shack
is a director and shareholder of the law firm of Shack & Siegel, P.C., which has
served as general counsel to the Company since April 1993. Prior to April 1993,
Mr. Shack was a member of Whitman & Ransom, which served as general counsel to
the Company from January 1990 through March 1993. Prior to January 1990, Mr.
Shack was a member of the law firm of Golenbock and Barell, which served as
general counsel to the Company from 1986 through 1989. Mr. Shack is a director
of Ark Restaurants Corp., International Citrus Corporation and Just Toys, Inc.
Each executive officer holds office at the pleasure of the Board of
Directors or until his successor has been duly elected and qualifies.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10 percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Such reporting persons are required by regulation to furnish the Company with
copies of all Section 16(a) reports that they file.
Based solely on its review of the copies of such reports received by it,
or written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that, during the period from
December 1, 1997 through November 30, 1998, all filing requirements applicable
to its officers, directors and greater than 10 percent beneficial owners were
complied with.
Item 11. Executive Compensation.
The Summary Compensation Table below sets forth, for the last three
fiscal years, all compensation paid or accrued to the chief executive officer
and each other executive officer receiving salary and bonus in excess of
$100,000 for services rendered to the Company and its subsidiaries during the
last fiscal year.
19
<PAGE>
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------ ------------
Other Annual Options
Year Salary Compensation(1) Awarded
---- ------ -------------- -------
<S> <C> <C> <C> <C>
William L. Cohen, 1998 $200,000(2) $17,553 50,000
Chairman of the Board 1997 200,000(2) 21,734 --
and Chief Executive Officer(3) 1996 433,077(2) -- --
Steven A. Schwartz 1998 $175,000 -- 300,000(5)
Former President and
Chief Operating Officer(4)
Stephen Fenyves, 1998 $140,000 -- 35,000
Senior Vice President - 1997 140,000 -- --
Administration and Operations(3) 1996 175,000 -- --
Alan Kanis, 1998 $150,000 -- 35,000
Treasurer and Chief Financial 1997 150,000 -- --
and Chief Accounting Officer(3) 1996 166,000 -- --
Stanley F. Schmoller, 1998 $108,820 -- 10,000
Vice President --Manufacturing 1997 109,150 -- --
1996 132,807 -- --
</TABLE>
- ---------------------------
(1) Except as shown, officers' benefits, including car allowances, medical,
disability and life insurance and other benefits are valued, in the
aggregate, below reportable thresholds.
(2) Pursuant to the employment agreement between the Company and Mr. Cohen,
more fully described below, Mr. Cohen was entitled to be paid a base
salary of $500,000. Effective March 19, 1996, Mr. Cohen voluntarily
reduced his base salary by 20% to $400,000. Effective December 1, 1996,
Mr. Cohen further voluntarily reduced his base salary to $200,000.
(3) See "Other Officer Compensation Arrangements," below.
(4) Mr. Schwartz was employed by the Company as its President and Chief
Operating Officer from December 1, 1997 to November 30, 1998.
(5) Mr. Schwartz's option was cancelled on November 30, 1998.
The following table sets forth certain information with respect to
options to purchase Common Stock granted in fiscal year 1998 under the Company's
Amended 1995 Stock Option Plan for the executive officers named in the Summary
Compensation Table above.
20
<PAGE>
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
- ----------------------------------------------------------------------------------- -----------------------------
Percent of Total
Options Granted Exercise
to Employees Price Expiration
Name Options Granted (#) 1998 ($/Share) Date 5%($) 10%($)
- ------------------- ------------------- -------------- --------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
William L. Cohen 50,000 9.11% .125 04/01/03 1,725 3,815
Steven A. Schwartz 300,000(1) 54.64% .25 12/07/07 47,160 119,520
Stephen Fenyves 35,000 6.38% .125 04/01/03 1,208 2,671
Alan Kanis 35,000 6.38% .125 04/01/03 1,208 2,681
Stanley F. Schmoller 10,000 1.82% .125 04/01/03 345 763
</TABLE>
- ----------------
(1) Mr. Schwartz's option was canceled on November 30, 1998.
The following table details the total number and value of securities
underlying unexercised options held at the end of the fiscal year ended November
30, 1998, separately identifying the exercisable and unexercisable options of
the persons named in the summary compensation table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options In-the-Money
Acquired Value at FY-End(#) Options at FY-End
Name on Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
William L. Cohen -- -- 25,000 45,000 $1,563 $6,250
Stephen Fenyves -- -- 14,500 30,500 $1,094 $4,375
Alan Kanis -- -- 18,250 31,750 $1,094 $4,375
Stanley F. Schmoller -- -- 9,500 10,500 $ 313 $1,250
</TABLE>
Stock Options
On June 13, 1995, the Company's stockholders ratified the Company's a
new 1995 Stock Option Plan (the "1995 Plan"), which replaced the Company's prior
Non-Qualified Stock Option Plan (the "NQ Plan"). The NQ Plan was terminated,
although 100,500 options granted under the NQ Plan remain outstanding, 98,625 of
which are currently exercisable. Officers, directors, employees and independent
sales representatives were eligible for option grants to purchase shares of
Common Stock under the NQ Plan. The 1995 Plan permits the grant of both
non-qualified and incentive stock options to employees and consultants of the
Company. On June 2, 1998, the Company's stockholders ratified amendments to the
1995 Plan to (i) increase the number of shares of Common Stock subject to the
plan from 225,000 to 500,000, (ii) increase from three months to one year the
period of time before expiration of an option after an optionee's death or
retirement, (iii) increase from three to six months the period of time before
expiration of a non-qualified option after an optionee leaves the Company for a
reason other than cause, (iv) permit the exercise price of an option to be paid
with shares of Common Stock without the approval of the Stock Option Committee,
(v) increase the annual grant of options to outside directors from 2,500 shares
to 5,000 shares of Common Stock and permit the grant of additional options to
outside directors at the discretion of the Stock Option Committee and (vi)
effect certain
21
<PAGE>
<PAGE>
technical changes to the 1995 Plan to reflect various changes in the law since
1995. To date, options to purchase 221,500 shares of Common Stock are
outstanding under the 1995 Plan of which 51,675 are exercisable.
On January 30, 1998, Donald D. Shack, the Company's Secretary and a
director, received options outside of the plans described above to purchase
15,000 shares of Common Stock at the exercise price of $.25 per share, the
market value on the date of grant, exercisable immediately, in consideration of
legal services rendered to the Company. On April 2, 1998, William L. Cohen, the
Company's Chairman and Chief Executive Officer and a director, received options
outside of the plans described above to purchase 50,000 shares of Common Stock
at an exercise price of $.125 per share, the market value on the date of grant.
The options became exercisable with respect to 10,000 shares on July 1, 1998 and
becomes exercisable with respect to an additional 10,000 shares on each
anniversary of the date of grant. See "Other Officer Compensation Arrangements"
for information with respect to options granted outside of the plans described
above to Richard Moskowitz and Steven A. Schwartz.
Director Compensation
During each of the Company's past three fiscal years, a fee of $10,000
was paid to each of Messrs. Blumenthal and Wolfson in consideration of their
acting as directors of the Company, except that in fiscal 1996, Mr. Blumenthal
received $7,500. The remaining $2,500 is being paid to Mr. Blumenthal over a
five year period as an allowed Class 4 claim in the manner described under "Item
1. Business -- Reorganization under the Bankruptcy Code."
The NQ Plan provided, and the 1995 Plan provides, for the annual grant
of options to purchase 2,500 shares of Common Stock to members of the Company's
Stock Option Committee (the "Committee") and outside directors who are not
members of the Committee. During fiscal 1996, 1997 and 1998, Messrs. Blumenthal,
Shack and Wolfson were each granted such options. These options are exercisable
with respect to 25% of the shares covered thereby commencing one year from the
date of grant and as to an additional 25% of the shares covered by the option
upon each of the three succeeding anniversary dates of the date of grant.
Officer Compensation Arrangements
William L. Cohen was employed under an agreement which expired in June
1996. The agreement provided for a base salary of $500,000 per annum, or such
greater amount from time to time determined by the Board of Directors of the
Company, incentive compensation in an amount equal to 5% of the Company's pretax
income up to $3,000,000 and 6% of the Company's pretax income in excess of
$3,000,000 and certain other benefits. Effective March 19, 1996, Mr. Cohen
voluntarily reduced his base salary by 20% to $400,000, and effective December
1, 1996, Mr. Cohen further reduced his base salary to $200,000.
The Company maintains a $4,000,000 split dollar life insurance policy on
Mr. Cohen. Annual premiums for the policy are approximately $122,600. The
Company currently pays approximately $115,600 of the premiums, and the William
L. Cohen Irrevocable Life Insurance Trust (the "Trust") pays the balance. Upon
Mr. Cohen's death, the Corporation will receive an amount approximately equal to
all premium payments made by it, and the Trust will receive the balance of the
$4,000,000 death benefit. The trustees of the Trust have assigned the policy to
the Corporation to secure such payment. In addition, the Company has borrowed
against the policy.
22
<PAGE>
<PAGE>
The Company and Mr. Stephen Fenyves are parties to an agreement pursuant
to which the Company has agreed to pay Mr. Fenyves a retirement benefit in the
form of salary continuation for 15 years after his retirement in annual amounts
ranging from $27,500 to $55,000 per year depending upon the age between 55 and
65 at which Mr. Fenyves retires. In the event of his death prior to attaining
age 65, but while he is employed by the Company, the Company will pay a death
benefit of $55,000 per year until Mr. Fenyves would have attained age 65 but in
any event for a minimum of 10 years. The Company currently maintains insurance
coverage to fund the death obligation.
On December 1, 1998 Richard Moskowitz was employed as the Company's new
President and Chief Operating Officer. Mr. Moskowitz's salary is $200,000 per
annum, subject to increase by the Company's Board of Directors. Mr. Moskowitz is
to receive an annual performance bonus based upon the Company's net sales.
On December 1, 1998, Mr. Moskowitz was granted a five year option outside of the
Company's Amended 1995 Stock Option Plan (described above) to purchase up to
300,000 shares of Common Stock at the exercise price of $.10 per share, the
market value of the Common Stock on the date of grant. The option is currently
exercisable with respect to 50,000 shares of Common Stock. The option becomes
exercisable with respect to an additional 50,000 shares of Common Stock at the
times that the Common Stock reaches and maintains each of the following
progressive trading price thresholds: $.75, $1.50, $2.00, $2.50 and $3.00. If
the Company terminates Mr. Moskowitz's employment without cause prior to
December 1, 1999, Mr. Moskowitz will receive severance equal to six months of
his base salary. If Mr. Moskowitz's employment is terminated by the Company
without cause after such date, he will receive severance equal to one year of
his base salary.
Effective December 1, 1998, Steven A. Schwartz was appointed as the
Company's President - Licensed Products Division. Mr. Schwartz's employment
ended on January 19, 1999. Mr. Schwartz's arrangements with the Company
provide that he is to receive a percentage of the Company's net sales of WWF
licensed merchandise through November 30, 2000. Mr. Schwartz is also entitled to
severance equal to eight months of his base salary commencing on the date he
left the Company's employ. On December 1, 1998, Mr. Schwartz was granted a five
year option outside of the Company's Amended 1995 Stock Option Plan (described
above) to purchase up to 200,000 shares of Common Stock. The option has an
exercise price of $.25 per share and became exercisable with respect to
100,000 shares upon the signing of the WWF License. The option becomes
exercisable with respect to an additional 100,000 shares in installments if
the Company's net sales of WWF licensed merchandise exceeds certain
progressive thresholds.
23
<PAGE>
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Compensation
decisions are made by the Board of Directors. The members of the Board include
William L. Cohen, Peter A. Cohen and Donald D. Shack. William L. Cohen is
Chairman of the Board and President of the Company. Peter A. Cohen is his
brother. Mr. Shack is Secretary of the Company and a shareholder and director of
the law firm of Shack & Siegel, P.C., the Company's general counsel.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Beneficial Owners of More than Five Percent of Common Stock.
The following table sets forth certain information at February 23, 1998
with respect to the beneficial owners of more than five percent of the Common
Stock.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- --------
<S> <C> <C>
William L. Cohen 1,425,697(1)(2) 31.6%
c/o The Andover Apparel Group, Inc.
1333 Broadway
New York, New York 10118
Peter A. Cohen 1,304,407(1) 29.2%
c/o The Andover Apparel Group, Inc.
1333 Broadway
New York, New York 10118
Carolyn Cohen Zelikovic 436,142(3) 9.8%
c/o The Andover Apparel Group, Inc.
1333 Broadway
New York, New York 10118
Herbert Rosenstock, Stanley Rosenstock 230,787(4) 5.2%
and General Sportswear Co., Inc.
23 Market Street
Ellenville, New York 12428
</TABLE>
- ------------------------
(1) Does not include 41,250 shares held by a charitable foundation. Messrs.
William L. and Peter A. Cohen are two of the five directors of such
foundation and exercise shared voting power with respect to such shares.
(2) Includes 40,000 shares of Common Stock which Mr. Cohen has the right to
acquire upon exercise of stock options exercisable as of April 2, 1999.
(3) Ms. Zelikovic is the sister of William and Peter Cohen.
(4) Based upon information provided to the Company on February 22, 1999.
24
<PAGE>
<PAGE>
Beneficial Ownership of Common Stock by Directors and Executive Officers.
The following table sets forth certain information at February 23, 1999
with respect to Common Stock beneficially owned by all directors, the executive
officers named in the Summary Compensation Table above and all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
<S> <C> <C>
George S. Blumenthal, Director 65,285 (1) 1.5%
Peter A. Cohen, Director 1,304,407 (2) 29.2%
William L. Cohen, Director, 1,425,697 (2) 31.6%
Chairman of the Board
and Chief Executive Officer
Steven Fenyves, Senior Vice 29,500 (3) *
President - Administration and Operations
Alan Kanis, Treasurer and Chief Financial 29,000 (4) *
and Chief Accounting Officer
Stanley F. Schmoller, Vice President - 22,250 (5) *
Manufacturing
Steven A. Schwartz, Former President
and Chief Operating Officer 100,000 (6) 2.2%
Donald D. Shack, Director and Secretary 82,650 (7) 1.8%
Monte Wolfson, Director 6,250 (8) *
All directors and executive officers 3,115,039 (9) 65.2%
as a group (10 persons)
</TABLE>
- ---------------------------
* Less than one percent
(1) Includes 44,110 shares beneficially owned by Mr. Blumenthal as
co-trustee and income beneficiary under a trust created under the will
of Klara Blumenthal. Also includes 13,750 shares of Common Stock which
Mr. Blumenthal has the right to acquire upon the exercise of stock
options exercisable as of April 10, 1999.
(2) See "Beneficial Owners of More Than Five Percent of Common Stock" above
for information in respect of shares of Common Stock beneficially owned
by the Messrs. Cohen.
(3) Includes 24,000 shares of Common Stock which Mr. Fenyves has the right
to acquire upon the exercise of stock options exercisable as of April 2,
1999.
(4) Includes 29,000 shares of Common Stock which Mr. Kanis has the right to
acquire upon the exercise stock options exercisable as of April 2, 1999.
(5) Includes 14,000 shares of Common Stock which Mr. Schmoller has the right
to acquire upon the exercise of stock options exercisable as of April 2,
1999.
25
<PAGE>
<PAGE>
(6) Includes 100,000 shares of Common Stock which Mr. Schwartz has the right
to acquire upon the exercise of currently exercisable stock options.
(7) Includes 53,900 shares owned by Skylark Partners, a partnership of which
Mr. Shack is a member. Also includes 26,250 shares of Common Stock which
Mr. Shack has the right to acquire upon the exercise of stock options
exercisable as of April 10, 1999.
(8) Includes 3,750 shares of Common Stock which Mr. Wolfson has the right to
acquire upon the exercise of stock options exercisable as of April 10,
1999.
(9) Includes 303,875 shares of Common Stock which certain directors and
executive officers have the right to acquire upon the exercise of stock
options that are currently exercisable or exercisable before April 23,
1999.
Item 13. Certain Relationships and Related Transactions.
Peter A. Cohen renders financial and management consulting services to
the Company. Until March 19, 1996, he was paid a fee at the rate of $75,000 plus
certain benefits. Effective March 19, 1996 his consulting fee was eliminated. In
fiscal 1996, Mr. Cohen received $18,750 in consulting fees. He has continued to
render services without charge. Mr. Cohen is William Cohen's brother.
The firm of Shack & Siegel, P.C., of which Donald D. Shack is a director
and shareholder, has served as general counsel to the Company since April 1993.
Prior thereto, the firms of Whitman & Ransom and Golenbock and Barell, in both
of which Mr. Shack was a member, served as general counsel.
At November 30, 1998 William L. Cohen was indebted to the Company in the
amount of $97,080 in respect of certain expenses paid by the Company on his
behalf.
26
<PAGE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements:
<TABLE>
<S> <C>
The following consolidated financial statements of The Andover Apparel
Group, Inc. and its subsidiaries are included herein.
Independent Auditor's Report F-1
Consolidated Balance Sheets -
As of November 30, 1998 and 1997 F-2
Consolidated Statements of Operations -
Years ended November 30, 1998, 1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity -
Years ended November 30, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows -
Years ended November 30, 1998, 1997 and 1996 F-5
Notes To Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-17
</TABLE>
Exhibits:
2(a) Debtors' Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code dated January 30, 1997, incorporated by reference
to Exhibit 16 to the Company's current report on Form 8-K dated
April 10, 1997.
3(a) Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3(a) to Registration Statement on Form S-1
(SEC File No. 33-5363) of the Company (the "Form S-1").
3(b) Certificate of Merger of Andover Togs, Inc., a New York
corporation, into and with Andover Togs, Inc., a Delaware
corporation, incorporated by reference to Exhibit 3(b) to the
Form S-1.
3(c) Certificate of Amendment of Certificate of Incorporation, filed
June 1, 1987, incorporated by reference to Exhibit 3(a) to the
Company's quarterly report on Form 10-Q dated May 31, 1994 (the
"May 1994 10-Q").
3(d) Restated By-laws of the Company, as amended through December 4,
1997, incorporated by reference to Exhibit 3(d) to the Company's
annual report on Form 10-K dated November 30, 1998.
27
<PAGE>
<PAGE>
3(e) Certificate of Amendment of Certificate of Incorporation, filed
June 3, 1998.
10(a) English translation of Lease between Zona Franca Romana, S.A. and
Tortoni Manufacturing Corp., dated 1987, incorporated by
reference to Exhibit 10(h) to the May 1994 10-Q.
10(b) The Company's Non-Qualified Stock Option Plan, as amended May 21,
1987 and April 9, 1992, incorporated by reference to Exhibit 4(a)
to the Amendment to the Registration Statement on Form S-8 (SEC
File No. 33-33963), as filed with the Securities and Exchange
Commission on November 2, 1992.
10(c) Form of Indemnity Agreement between the Company and its officers
and directors, incorporated by reference to Exhibit 10(j) to the
May 1994 10-Q.
10(d) Insurance Agreement dated as of September 1, 1994 by and among
the Company, William L. Cohen and Peter A. Cohen and Stanley I.
Schachter, as trustees of the William L. Cohen Irrevocable Life
Insurance Trust Agreement, dated January 31, 1984, incorporated
by reference to Exhibit 10(a) to the Company's quarterly report
on Form 10-Q dated February 28, 1995.
10(e) Post-Petition Revolving Credit and Security Agreement among
Chemical Bank and Fleet Bank, N.A. as lenders, Fleet Bank, N.A.
as agent and the Company dated May 28, 1996 incorporated by
reference to Exhibit 10 to the Company's current report on Form
8-K dated May 28, 1996 (the "May 1996 8-K").
10(f) The Company's Amended 1995 Stock Option Plan.
10(g) Replacement DIP Financing and Security Agreement between the CIT
Group/Commercial Services, Inc. and the Company dated as of
September 19, 1996 incorporated by reference to Exhibit 99(a) to
the Company's current report on Form 8-K dated September 19, 1996
(the "September 1996 8-K").
10(h) Amended and Restated Financing Security Agreement dated as of May
12, 1997 between the Registrant and CIT incorporated by reference
to Exhibit 99(a) to the Company's current report on Form 8-K
dated May 12, 1997 (the "May 1997 8-K").
10(i) Amended and Restated Subsidiary Security Agreement dated as of
May 12, 1997 made by Springdale, Tortoni and Stonehenge in favor
of CIT incorporated by reference to Exhibit 99(b) to the May 1997
8-K.
10(j) Amended and Restated Guaranty dated as of May 12, 1997 by
Springdale in favor of CIT incorporated by reference to Exhibit
99(c) to the May 1997 8-K.
10(k) Amended and Restated Guaranty dated as of May 12, 1997 by Tortoni
in favor of CIT incorporated by reference to Exhibit 99(d) to the
May 1997 8-K.
10(l) Amended and Restated Guaranty dated as of May 12, 1997 by
Stonehenge in favor of CIT incorporated by reference to Exhibit
99(e) to the May 1997 8-K.
10(m) Amended and Restated Security Agreement and Mortgage for
Trademarks and Patents dated as of May 12, 1997 between the
Registrant and CIT incorporated by reference to Exhibit 99(f) to
the May 1997 8-K.
10(n) Amended and Restated Security Agreement and Mortgage for
Trademarks and Patents dated as of May 12, 1997 between Tortoni
and CIT incorporated by reference to Exhibit 99(g) to the May
1997 8-K.
28
<PAGE>
<PAGE>
10(o) Amended and Restated Security Agreement and Mortgage for
Trademarks and Patents dated as of May 12, 1997 between
Springdale and CIT incorporated by reference to Exhibit 99(h) to
the May 1997 8-K.
10(p) Amended and Restated Security Agreement and Mortgage for
Trademarks and Patents dated as of May 12, 1997 between
Stonehenge and CIT incorporated by reference to Exhibit 99(i) to
the May 1997 8-K.
10(q) Intercreditor Agreement dated as of May 12, 1997 between CIT and
M.J. Sherman and Associates (the "Collateral Trustee")
incorporated by reference to Exhibit 99(j) to the May 1997 8-K.
10(r) Note dated as May 12, 1997 made by the Registrant in favor of the
Collateral Trustee incorporated by reference to Exhibit 99(k) to
the May 1997 8-K.
10(s) Note and Collateral Trust Agreement dated as of May 12, 1997
between the Registrant, Springdale, Tortoni and Stonehenge and
the Collateral Trustee incorporated by reference to Exhibit 99(l)
to the May 1997 8-K.
10(t) Class 4 Security Agreement dated as of May 12, 1997 by the
Registrant, Springdale, Tortoni and Stonehenge in favor of the
Collateral Trustee incorporated by reference to Exhibit 99(m) to
the May 1997 8-K.
10(u) Guaranty dated as of May 12, 1997 by Springdale in favor of the
Collateral Trustee incorporated by reference to Exhibit 99(n) to
the May 1997 8-K.
10(v) Guaranty dated as of May 12, 1997 by Stonehenge in favor of the
Collateral Trustee incorporated by reference to Exhibit 99(o) to
the May 1997 8-K.
10(w) Guaranty dated as of May 12, 1997 by Tortoni in favor of the
Collateral Trustee incorporated by reference to Exhibit 99(p) to
the May 1997 8-K.
10(x) Class 4 Security Agreement and Mortgage for Trademarks and
Patents dated as of May 12, 1997 between Springdale and the
Collateral Trustee incorporated by reference to Exhibit 99(q) to
the May 1997 8-K.
10(y) Class 4 Security Agreement and Mortgage for Trademarks and
Patents dated as of May 12, 1997 between the Registrant and the
Collateral Trustee incorporated by reference to Exhibit 99(r) to
the May 1997 8-K.
10(z) Class 4 Security Agreement and Mortgage for Trademarks and
Patents dated as of May 12, 1997 between Stonehenge and the
Collateral Trustee incorporated by reference to Exhibit 99(s) to
the May 1997 8-K.
10(aa) Class 4 Security Agreement and Mortgage for Trademarks and
Patents dated as of May 12, 1997 between Tortoni and the
Collateral Trustee incorporated by reference to Exhibit 99(t) to
the May 1997 8-K.
16 Letter from Deloitte & Touche LLP dated August 15, 1997
incorporated by reference to the Company's current report on Form
8-K dated August 15, 1997.
21 List of subsidiaries of the Company, incorporated by reference to
Exhibit 21 to the May 1994 10-Q.
29
<PAGE>
<PAGE>
23 Consent of Mahoney Cohen & Company, CPA, P.C.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on From 8-K were filed during the last quarter of fiscal 1998.
30
<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors of
The Andover Apparel Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of The
Andover Apparel Group, Inc. and Subsidiaries as of November 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows and the related Schedule II for each of the three years in the period
ended November 30, 1998. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Andover
Apparel Group, Inc. and Subsidiaries as of November 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
January 29, 1999
F-1
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands, Except Share Amounts)
1998 1997
---- ----
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash $ 308 $3,045
Accounts receivable, net of allowance for doubtful accounts
of $50 in 1998 and $250 in 1997 3,182 1,841
Insurance claim receivable (Note 6) 843 --
Inventories (Note 3) 3,103 2,487
Marketable securities (Note 1) 187 113
Other current assets 168 171
------ ------
Total current assets 7,791 7,657
PROPERTY, PLANT AND EQUIPMENT, NET (Note 4) 1,827 2,237
OTHER ASSETS 76 100
------ ------
TOTAL ASSETS $9,694 $9,994
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable (Note 5) $ 513 $ --
Accounts payable 1,571 815
Accrued expenses and other current liabilities (Notes 8 and 9) 1,024 992
Current portion of long-term debt (Notes 2 and 7) 901 782
------ ------
Total current liabilities 4,009 2,589
OTHER LIABILITIES 203 213
LONG-TERM DEBT (Notes 2 and 7) 3,462 3,963
------ ------
7,674 6,765
------ ------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (Note 12):
Common stock, $.10 par value per share, authorized 7,500,000 shares;
Issued 4,655,490 in 1998 and 1997;
Outstanding 4,470,815 in 1998 and 1997 465 465
Additional paid-in capital 11,154 11,154
Unrealized gain -- securities (Note 1) 134 60
Accumulated deficit (9,093) (7,810)
Less treasury shares, at cost (184,675 shares in 1998 and 1997) (640) (640)
------ ------
2,020 3,229
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,694 $9,994
====== ======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1998, 1997, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $19,307 $19,488 $43,057
COST OF GOODS SOLD 15,468 16,139 37,363
------- ------- -------
GROSS PROFIT 3,839 3,349 5,694
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,802 3,661 8,129
------- ------- -------
LOSS BEFORE INTEREST AND
REORGANIZATION ITEMS (963) (312) (2,435)
REORGANIZATION ITEMS (Note 9) -- 1,617 6,375
------- ------- -------
OPERATING LOSS (963) (1,929) (8,810)
INTEREST EXPENSE, NET OF INTEREST
INCOME OF $61 IN 1998,
$191 IN 1997 AND $29 IN 1996 313 35 992
------- ------- -------
LOSS BEFORE INCOME TAX
PROVISION (1,276) (1,964) (9,802)
INCOME TAX PROVISION
(Note 10) 7 27 10
------- ------- -------
NET LOSS $(1,283) $(1,991) $(9,812)
======= ======= =======
NET LOSS PER SHARE $(0.29) $(0.45) $(2.19)
======= ======= =======
WEIGHTED AVERAGE SHARES 4,471 4,471 4,471
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL UNREALIZED EARNINGS TREASURY STOCK
----------------- PAID-IN GAIN- (ACCUMULATED ----------------
SHARES AMOUNT CAPITAL SECURITIES DEFICIT) SHARES AMOUNT TOTAL
------ ------ ------- ---------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 1, 1995 4,655 $ 465 $11,154 $ -- $ 3,993 185 $ (640) $14,972
Net loss -- -- -- -- (9,812) -- -- (9,812)
----- ------ ------- ----- ------- --- ------ -------
BALANCE, NOVEMBER 30, 1996 4,655 465 11,154 -- (5,819) 185 $ (640) 5,160
Unrealized gain--securities (Note 1) -- -- -- 60 -- -- -- 60
Net loss -- -- -- -- (1,991) -- -- (1,991)
----- ------ ------- ----- ------- --- ------ -------
BALANCE, NOVEMBER 30, 1997 4,655 465 11,154 60 (7,810) 185 (640) 3,229
Unrealized gain--securities (Note 1) -- -- -- 74 -- -- -- 74
Net loss -- -- -- -- (1,283) -- -- (1,283)
----- ------ ------- ----- ------- --- ------ -------
BALANCE, NOVEMBER 30, 1998 4,655 $465 $11,154 $134 ($9,093) 185 $ (640) $ 2,020
===== ====== ======= ===== ======= === ====== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,283) $(1,991) $ (9,812)
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Depreciation and amortization 358 514 1,195
Write-down of net fixed assets to reorganization items -- 280 1,542
Gain on exchange of property,
plant, equipment and restricted cash -- (434) --
Gain on sale of property, plant and equipment (169) (148) --
Gain on insurance recovery (190) -- --
Settlement of unsecured claim -- (63) --
Deferred rent (11) 84 --
Changes in operating assets and liabilities:
Accounts receivable (1,341) 1,029 6,826
Insurance claim receivable, net (843) -- --
Inventories (616) 1,130 9,674
Refundable income taxes -- -- 915
Other assets 41 84 253
Accounts payable 756 (46) (3,751)
Liabilities subject to compromise -- -- 5,003
Accrued expenses and other current liabilities 115 (1,490) 434
------- ------- --------
Net cash (used in) provided by operating activities (3,183) (1,051) 12,279
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in cash surrender value 23 17 --
Proceeds from sale of property, plant, equipment and
insurance claim 304 412 --
Capital expenditures (12) (4) (110)
------- ------- --------
Net cash provided by (used in) investing activities 315 425 (110)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) notes payable 513 -- (6,200)
Repayment of long-term debt (382) (1,194) (1,967)
------- ------- --------
Net cash provided by (used in) financing activities $ 131 $(1,194) $ (8,167)
======= ======= ========
</TABLE>
See notes to consolidated financial statements. (Continued)
F-5
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH $(2,737) $(1,820) $ 4,002
CASH, BEGINNING OF YEAR 3,045 4,865 863
------- ------- --------
CASH, END OF YEAR $ 308 $ 3,045 $ 4,865
======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 247 $ 199 $ 1,055
======= ======= ========
Income taxes $ 14 $ 24 $ 12
======= ======= ========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exchange of property, plant and equipment:
Release of Industrial Revenue Bond $ -- $ 3,055 $ --
Property, plant and equipment and restricted cash -- (2,621) --
------- ------- --------
Gain on exchange $ -- $ 434 $ --
======= ======= ========
CONVERSION OF LIABILITIES SUBJECT TO COMPROMISE:
Balance beginning of period $ -- 9,057 $ --
Exchange of Scottsboro-IRB -- (3,055) --
Conversion to Class 4 Notes -- (3,316) --
Mid-City disputed claim -- (1,399) --
Amounts paid -- (1,067) --
Adjustment of accrual -- (220) --
------- ------- --------
Balance end of period $ -- $ -0- $ --
======= ======= ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
<PAGE>
THE ANDOVER APPAREL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - On June 3, 1998, the Company changed its name from Andover Togs,
Inc. to The Andover Apparel Group, Inc. The Andover Apparel Group, Inc. (the
"Company") is engaged in the design, manufacture, import and sale of active
sportswear primarily for infants, toddlers and children, principally to
national retail stores.
The Company is headquartered in New York with manufacturing facilities
located in Alabama and the Dominican Republic. The Company's North Carolina
facility closed in November 1996. A significant amount of inventory is
manufactured in the Dominican Republic.
Basis of Presentation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Springdale
Fashions, Inc., Tortoni Manufacturing Corporation and Stonehenge Financial
Corporation. All material intercompany profits, transactions and balances
have been eliminated.
Fair Value of Financial Instruments - For financial instruments including
cash, accounts receivable and payable and accruals, it was assumed that the
carrying amount approximated fair value because of their short maturity.
Based on the borrowing rates currently available to the Company, the
estimated fair value of the current portion of long term debt and long term
debt is approximately $3,750,000 as of November 30, 1998.
Available-For-Sale Securities - Debt and equity securities are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component
of stockholders' equity. As of November 30, 1998 and 1997, $134,000 and
$60,000, respectively, has been classified as unrealized gain-securities.
Concentration of Credit Risk - The Company maintains cash balances at various
banks earning interest. Accounts at banks are insured up to certain limits.
The Company does not anticipate any losses with respect to cash.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from those estimates.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Net Loss Per Share - For the year ended November 30, 1997, the Company
adopted SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance
with this statement, primary net loss per common share is replaced with basic
loss per common share, which is calculated by dividing net loss by the
weighted-average number of common shares outstanding for the period. Fully
diluted net income per common share is replaced with diluted net income per
common share reflecting the maximum dilutive effect of common stock issuable
upon exercise of stock options, stock warrants, stock subscriptions, and
conversion of preferred stock. Diluted net loss per common share is not
shown, as common equivalent shares from stock options and stock warrants
would have an antidilutive effect.
F-7
<PAGE>
<PAGE>
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of an asset may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market or discounted cash flow value is required. The impact of this is
discussed in Note 4.
Property, Plant and Equipment - Property, plant and equipment is stated at
cost less accumulated depreciation and amortization. Depreciation and
amortization are provided by the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings 30
Machinery and equipment 3 - 10
Leasehold improvements Lesser of useful life or lease term
</TABLE>
Upon sale or retirement of property, plant and equipment, the related cost
and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in operations.
Revenue Recognition - Revenue is recognized at the time the merchandise is
shipped.
New Accounting Standards - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." This statement requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The statement will be
effective for annual periods beginning after December 15, 1997 and the
Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required for comparative purposes. Because the statement
requires only additional disclosure, the Company does not expect the
statement to have a material impact on its financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for
the manner in which a public business enterprise reports certain information
about operating segments and discloses enterprise-wide information about its
products and services, activities in different geographic areas, and its
reliance on major customers. The Statement is effective for the Company's
financial statements in fiscal 1999. The adoption of this Statement will not
have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement establishes standards that
require that all derivative instruments be recorded on the balance sheet at
their fair value. This statement is effective for the Company's financial
statements in fiscal 2000. The adoption of this statement will not have a
material effect on the Company's financial statements.
Accounting for Stock Options - Prior to December 1, 1996, the Company
accounted for its stock option plans in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. APB No. 25 requires that
compensation expense be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. During the
fiscal year ended November 30, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income (loss) per share
disclosures for employee stock option grants made from 1995 forward as if the
fair-valued-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide pro forma disclosure provisions of SFAS No. 123.
F-8
<PAGE>
<PAGE>
Reclassification - Certain 1997 amounts have been reclassified to conform to
the 1998 financial statement presentation.
2. CHAPTER 11 FILING
On March 19, 1996, the Company filed for protection under Chapter 11 of the
United States Bankruptcy Code.
On February 28, 1997, the Company filed its Plan of Reorganization under
Chapter 11 of the Bankruptcy Code. The Plan, among other things, classifies
the claims in categories for payment. The priority and convenience class
claims (under $2,000) were to be paid immediately. The general unsecured
claims are to be paid 100% of their claim with interest at 6% per annum,
payable in quarterly installments of principal and interest to commence on
June 30, 1997 based on a ten-year amortization schedule with the balance
payable on the fifth anniversary (see Note 7(a)). On May 12, 1997, the
Company emerged from Chapter 11 of the Bankruptcy Code and entered into a new
financing agreement.
3. INVENTORIES
<TABLE>
<CAPTION>
(In Thousands)
November 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 424 $ 497
Work-in-process 1,262 992
Finished goods 1,417 998
------- -------
$ 3,103 $ 2,487
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In Thousands)
November 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Land $ 14 14
Buildings 3,110 3,110
Leasehold improvements 276 276
Machinery and equipment 4,152 4,790
------- -------
7,552 8,190
Less accumulated depreciation
and amortization 5,725 5,953
-------- -------
$ 1,827 $ 2,237
======== =======
</TABLE>
Property, plant and equipment was adjusted by approximately $314,000 during
fiscal 1997, representing an impairment as determined by Management.
In 1998, the Company sold machinery and equipment which resulted in a gain of
$169,000 that was offset against selling general and administrtive expenses.
5. REVOLVING CREDIT FACILITY
The Company has 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%, which, at November 30, 1998, was
8.85%. 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. Under the Facility, the Company is prohibited,
among other restrictions, from pledging assets, creating additional
indebtedness or paying dividends.
F-9
<PAGE>
<PAGE>
6. INSURANCE CLAIM RECEIVABLE
On September 22, 1998, the Company's manufacturing facility in the Dominican
Republic suffered property, equipment and merchandise damage from Hurricane
Georges. The damage from the storm had the effect of temporarily stopping and
then reducing the facility's operations which resulted in some lost sales
during the fourth quarter due to unfulfilled orders. The Company has filed
insurance claims with its carriers for the damage and the business
interruption. The Company has subsequently settled with the insurance carrier
for the damage to the property and equipment. The Company received
approximately $310,000 of which approximately $180,000 represented a gain on
the equipment that was offset against selling, general and administrative
expenses.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
(In Thousands)
November 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Long-term debt (a) $ 4,228 $ 4,563
Other 135 182
------- -------
4,363 4,745
Less current portion 901 782
------- -------
$ 3,462 $ 3,963
======= =======
</TABLE>
a. On May 12, 1997 (the effective date the Company emerged from bankruptcy),
a note was established for allowed and disputed general unsecured claims.
Each holder of an allowed claim has received (i) a pro rata 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 commenced
on 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 is no excess cash flow (as defined) for fiscal 1998 and 1997. The
Note is secured by a second lien on the same assets which secure the
Facility.
At November 30, 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 1 Penn Plaza, New York City. The
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 November 30, 1998
and 1997.
At November 30, 1998, repayment terms for the principal portion of
long-term debt were as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Amount
---- ------
<S> <C>
1999 $ 901
2000 506
2001 479
2002 2,477
-------
$ 4,363
=======
</TABLE>
F-10
<PAGE>
<PAGE>
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
(In Thousands)
November 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Accrued payroll 227 $ 212
Accrued professional fees 182 160
Accrued interest 170 88
Accrued reorganization items -- 231
Liability to repair building 84 --
Other 361 301
------- -------
$ 1,024 $ 992
======= =======
</TABLE>
9. REORGANIZATION ITEMS
Due to the filing for protection under Chapter 11 of the Bankruptcy Code, the
Company incurred expenses relating to the hiring of professionals and
facility closing costs for the year ended November 30, 1997 and 1996. Since
the Company emerged from Chapter 11 on May 12, 1997 there were no expenses
for the year ended November 30, 1998. The following represents reorganization
items:
<TABLE>
<CAPTION>
(In Thousands)
November 30,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Professional fees $ -- $ 1,758 $ 2,448
Write-off of property and other costs
relating to plant closings -- 280 1,542
Gain on exchange of property, plant and equipment -- (434) --
Gain on sale of property and equipment -- (95) --
Moving expenses -- -- 366
Lease rejection claim -- -- 1,000
Employment agreement claims -- -- 458
Interest on convenience and priority claims -- 38 --
Payroll taxes on priority and unsecured claims -- 93 --
Severance pay -- 37 275
Settlement of claims -- (63) --
Other -- 3 286
------- ------- --------
$ -0- $ 1,617 $ 6,375
======= ======= ========
</TABLE>
F-11
<PAGE>
<PAGE>
The following is a summary of the reorganization activity for the years ended
November 30, 1998 and 1997:
<TABLE>
<CAPTION>
(In Thousands)
--------------
<S> <C>
Balance at December 1, 1996 $ 1,384
1997 provision 1,617
1997 activity:
Cash outflow for professional fees (2,179)
Non-cash write-off of property and other
costs relating to plant closings (280)
Interest and payroll taxes on claims (131)
Reduction in workforce-severance pay (177)
Other (3)
-------
Balance at December 1, 1997 231
1998 activity:
Cash outflow for professional fees (231)
-------
Balance at November 30, 1998 $ --
=======
</TABLE>
10. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
(In Thousands)
Year Ended November 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State and local 7 27 10
----- ----- ------
Total current 7 27 10
Deferred -- -- --
----- ----- ------
$ 7 $ 27 $ 10
===== ===== ======
</TABLE>
The provision for income taxes differs from amounts computed at statutory
rates as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Ended November 30,
------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income taxes at statutory rates $ (434) $ (648) $ (3,333)
Increase (decrease) resulting from:
Valuation allowance 434 648 3,333
State and local taxes,
net of Federal income tax benefits 7 27 10
------- ------ -------
$ 7 $ 27 $ 10
======= ====== =======
</TABLE>
F-12
<PAGE>
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of
November 30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(In Thousands)
November 30, November 30,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Difference between book and tax basis of property $ 222 $ 88
Expenses capitalized into inventory 37 52
Expenses not currently deductible 593 596
Reserves not currently deductible 19 96
Net operating loss 4,534 4,066
-------- --------
Deferred tax asset 5,405 4,898
Less valuation allowance (5,405) (4,898)
-------- --------
Deferred tax $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $507,000 for the year ended November 30,
1998.
At November 30, 1998, the Company has a federal net operating loss
carryforward for income tax purposes of approximately $11,700,000 which will
expire as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Amount
---- ------
<S> <C>
2010 $ 2,200
2011 7,500
2012 900
2013 1,100
--------
$ 11,700
========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
a. Effective September 15, 1996, the Company negotiated a lease for its
executive office and showroom located in New York. The new lease expires
on December 31, 2001 and provides for minimum annual rental payments
ranging from approximately $224,000 to $267,000. The Company also leases
various warehousing, manufacturing and office facilities and equipment
under operating leases. Future minimum rental payments under these leases
as of November 30, 1998 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Amount
---- ------
<S> <C>
1999 $ 379
2000 266
2001 267
2002 22
--------
$ 934
========
</TABLE>
Rental expense was $442,000, $418,000 and $839,000 for the years ended
November 30, 1998, 1997 and 1996, respectively.
F-13
<PAGE>
<PAGE>
b. At November 30, 1998, the Company was contingently liable for open
letters of credit of approximately $26,000, and a standby letters of
credit of $100,000.
12. STOCK OPTION PLAN
The Company amended its non-qualified and incentive stock option plans in
June 1998 (the "1998 Plan"), that was adopted in May 1995 (the "1995 Plan").
The amended Plan increases the options to be granted for the purchase of up
to 500,000 shares of common stock at prices not less than 80% for the
non-qualified options and 100% for the incentive options of the fair market
value of the common stock at the date of the grant. Options granted as
incentive stock options are intended to qualify under Section 422 of the
Internal Revenue Code. No new options can be granted under the old plans,
although 103,500 options remained outstanding under the 1995 Plan, at
November 30, 1998. As of November 30, 1998, no incentive stock options had
been granted.
A summary of activities for the non-qualified stock options is as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Price per Share
--------- ---------------
<S> <C> <C>
Options outstanding,
December 1, 1995 362,900 $ 2.727
Granted 7,500 .875
Cancelled (249,200) 2.975
--------
Options outstanding,
November 30, 1996 121,200 2.104
Granted 7,500 .375
Cancelled (10,200) 2.927
--------
Options outstanding,
November 30, 1997 118,500 1.924
Granted (*) 571,500 .186
Cancelled (**) (328,000) .265
--------
Options outstanding,
November 30, 1998 362,000 $ .700
======== =======
Exercisable at November 30, 1998 139,550 $ 1.323
======== =======
Weighted average fair value of options granted
during period -- .19
Weighted average remaining contractural rights
(months) -- 52
</TABLE>
F-14
<PAGE>
<PAGE>
Exercise prices for options outstanding as of November 30, 1998 ranged from
$.063 to $4.40.
There were 303,500 shares reserved for future grant at November 30, 1998.
The options expire beginning April 1999 through March 2005.
(*) 365,000 shares were granted outside the Plan.
(**) 300,000 shares were cancelled outside the Plan.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires entities
to recognize as compensation expense over the vesting period the fair value
of stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB No. 25 and
provide pro forma net income and pro forma income (loss) per share
disclosures for employee stock option grants made from 1995 forward as if
the fair-value-based method, defined in SFAS No. 123, had been applied.
The Company has elected to adopt the disclosure-only provision of SFAS
No. 123, and as described above, will continue to apply APB No. 25 to
account for stock options. Had compensation expense been determined as
provided in SFAS No. 123, the pro forma effect on the results of operations
for each of the three years ended November 30, 1998 would not have had
an effect on the Company's net loss or loss per share.
13. MAJOR CUSTOMERS
The Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not
require collateral. The Company has historically incurred minimum trade
losses. Sales to one national retail chain accounted for approximately 57%
of the Company's net sales in fiscal 1998, 68% in 1997 and 36% in 1996.
Another national retail chain accounted for approximately 15% in 1998 and
29% in 1996.
14. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan subject to Section 401(k)
of the Internal Revenue Code. All employees who complete at least three
months of service and have attained the age of 20 - 1/2 are eligible to
participate. The Company may, at its sole discretion, make certain matching
contributions to this plan. The Company made no contributions in 1998, 1997
and 1996.
15. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is a director and shareholder in a law
firm which provided legal services to the Company during 1998, 1997 and
1996.
F-15
<PAGE>
<PAGE>
16. SUBSEQUENT EVENT
On December 18, 1998, the Company signed a ten year license agreement (the
"WWF License") with Titan Sports, Inc. ("Titan"). The WWF License provides
the Company with the exclusive license to use the World Wrestling
Federation ("WWF") trademarks for men's and young men's above size 20
sportswear and outerwear and a non-exclusive license for T-shirts and
sweatshirts. The Company has issued to Titan ten year warrants to purchase
an amount of Common Stock equal to eight percent of the sum of (i) the
amount of outstanding Common Stock on the date of exercise plus (ii) the
amount of Common Stock issuable upon (a) the exercise of all the existing
options and warrants and (b) the conversion of all securities convertible
into Common Stock (the "Fully Diluted Common Stock"). The exercise price of
the warrants is $.10 per share. A warrant with respect to two percent of
the Fully Diluted Common Stock became exercisable upon the execution of the
WWF License. The warrants become exercisable with respect to an additional
two percent of the Fully Diluted Common Stock at the time that the
Company's annual gross revenues of WWF licensed products reaches each of
the following thresholds: $10,000,000; $25,000,000 and $50,000,000.
17. QUARTERLY DATA (UNAUDITED)
Selected quarterly operating data is as follows (in thousands of dollars,
except per share amounts):
<TABLE>
<CAPTION>
Net Gross Net Per Share
Quarter Ended Sales Profit Income (Loss) Income (Loss)
- ------------- ----- ------ ------------- -------------
<S> <C> <C> <C> <C>
1998
- ----
February $ 2,970 $ 490 $ (559) $ (.13)
May 4,742 869 (366) (.08)
August 5,520 1,099 (315) (.07)
November 6,075 1,381 (43) (.01)
-------- -------- -------- ------
$ 19,307 $ 3,839 $ (1,283) $ (.29)
======== ======== ======== ======
1997
- ----
February $ 4,006 $ 710 $ (409) $ (.09)
May 4,290 771 (905) (.20)
August 3,821 627 (694) (.16)
November 7,371 1,241 17 --
-------- ------- -------- -------
$ 19,488 $ 3,349 $ (1,991) $ (.45)
======== ======= ======== =======
</TABLE>
F-16
<PAGE>
<PAGE>
Schedule II
THE ANDOVER APPAREL GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
-------------------------
(1) (2)
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Period Expenses Accounts Deductions End of Period
--------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended
November 30, 1998 $ 250 $200(A) $ 50
===== ======= ======
Year ended
November 30, 1997 $ 300 $ 50(A) $ 250
===== ======= ======
Year ended
November 30, 1996 $ 310 $ 10(A) $ 300
===== ======= ======
</TABLE>
(A) Write-off of uncollectible accounts.
F-17
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 25, 1999 The Andover Apparel Group, Inc.
By: /s/ William L. Cohen
------------------------
William L. Cohen, Chairman
of the Board and Chief
Executive Officer
By: /s/ Alan Kanis
------------------
Alan Kanis, Treasurer, Chief Financial
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George S. Blumenthal Director February 25, 1999
- -----------------------------------
George S. Blumenthal
/s/ Peter A. Cohen Director February 25, 1999
- -----------------------------------
Peter A. Cohen
/s/ William L. Cohen Director, Chairman of the Board February 25, 1999
- ----------------------------------- and Chief Executive Officer
William L. Cohen
/s/ Donald D. Shack Director and Secretary February 25, 1999
- -----------------------------------
Donald D. Shack
/s/ Monte Wolfson Director February 25, 1999
- -----------------------------------
Monte Wolfson
</TABLE>
<PAGE>
<PAGE>
Exhibit 3(e)
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
ANDOVER TOGS, INC.
--------------
It is hereby certified that:
(a) The name of the corporation is ANDOVER TOGS, INC.
(b) The certificate of incorporation of the corporation was filed with
the Department of State on April 22, 1986.
(c) The amendment to the certificate of incorporation of the corporation
effected by this certificate of amendment is to change the name of the
corporation to "The Andover Apparel Group, Inc."
(d) To accomplish the foregoing amendment, Article FIRST of the
certificate of incorporation of the corporation is hereby amended to read as
follows:
FIRST: The name of the corporation (hereinafter called the "Corporation"
is THE ANDOVER APPAREL GROUP, INC.
(e) The foregoing amendment of the certificate of incorporation of the
corporation was duly adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that this
document is the act and deed of the corporation named therein and that the facts
stated herein are true.
Dated: June 3, 1998 /s/ Donald D. Shack
----------------------------
Donald D. Shack, Secretary
<PAGE>
<PAGE>
Exhibit 10(f)
THE ANDOVER APPAREL GROUP, INC.
AMENDED 1995 STOCK OPTION PLAN
ARTICLE 1
Purpose And Scope Of The Plan
1.1 Purpose. This Stock Option Plan (the "Plan") is to advance the
interests of The Andover Apparel Group, Inc. (the "Company") and its
stockholders by assisting the Company in attracting and maintaining strong
management and consulting personnel upon whose judgment the success of the
Company depends. The Plan is also intended to enable the Company to reward the
efforts, abilities and industries of such officers, directors, employees and
consultants who render employment and other services which contribute materially
to the success of the Company's business. By encouraging ownership in the
Company, the Company seeks to increase the incentives of its employees,
officers, directors and consultants for enhancing shareholder value.
1.2 Definitions. For purposes of the Plan, unless the context otherwise
indicates, the following definitions shall be applicable:
(a) "Board" or "Board of Directors" means the Board of Directors of the
Company, as constituted from time to time.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
any successor statute.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Committee" means the Stock Option Committee of the Company which
shall be composed of not less than two persons appointed by the Board of
Directors, each of whom shall be a "non-employee director" as that term is
defined in Rule 16b-3(b)(3) of the General Rules and Regulations under the
Exchange Act and an "outside director" within the meaning of Section 162(m) of
the Code and the rules and regulations promulgated thereunder.
(e) "Consultant" means an individual who is not an Employee but who has
been retained by the Company to render services as an independent contractor.
(f) "Director" means any person who is a member of the Board of
Directors whether or not such person is an Employee.
(g) "Employee" means and includes any person who is an employee of the
Company (including officers and directors who are also employees) or of any
Subsidiary.
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(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Executive Officer" means and includes any "named executive officer"
as defined in Item 402(a)(3) of Regulation S-K under the Exchange Act of 1934,
as amended.
(j) "Exercise Price" means the price designated by the Committee at
which a Share may be purchased upon exercise of an Option as the same may be
adjusted pursuant to Article 5 hereof.
(k) "Fair Market Value" of a Share means if the Shares are quoted on
the Nasdaq National Market or listed on a national securities exchange, the
closing price on such market or such exchange, if the Shares are not quoted on
the Nasdaq National Market or listed on a national securities exchange, the mean
between the closing bid and asked prices of publicly-traded Shares in the
over-the-counter market as reported on the Nasdaq system or by any nationally
recognized quotation service selected by the Company, or if the Shares are not
then publicly-traded, as determined by the Committee.
(l) "Grant Date," as used with respect to a particular Option, means
the date an Option is granted by the Committee pursuant to the Plan.
(m) "Grantee" means an individual to whom an Option, or portion
thereof, is granted by the Committee pursuant to the Plan.
(n) "Incentive Stock Option" means an Option intended to qualify under
Section 422 of the Code.
(o) "Non-Qualified Stock Option" means an Option, or portion thereof
which has been designated by the Committee as a non-qualified stock option or an
Option, or portion thereof, which does not qualify as an Incentive Stock Option.
(p) "Option" means an option to purchase Shares granted pursuant to
Article 2 and Article 4 of the Plan.
(q) "Option Agreement" means a written agreement between a Grantee and
the Company evidencing an Option, consistent with the provisions of Article 2
and Article 4 of the Plan.
(r) "Outside Director" means, for all purposes other than Section
1.2(d), a Director who is not an Employee and who does not own 5% or more of the
Shares.
(s) "Service" means the term of employment of an Employee or the
retention of a Consultant by the Company or any Subsidiary or the term during
which of an individual serves as a director of the Company.
(t) "Shares" or "Shares of Stock" means shares of common stock, $.10
par value per share, of the Company. Shares may consist of authorized but
unissued Shares or Shares which have been previously issued and reacquired by
the Company.
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(u) "Subsidiary" means and includes any corporation more than 50% of
whose voting stock is beneficially owned or controlled by the Company.
1.3 Administration. The Plan shall be administered by the Committee.
Subject to the express provisions of the Plan, the Committee, in its sole
discretion, from time to time, shall determine the Directors, Employees and
Consultants from among those eligible to whom, and the time or times at which,
Options shall be granted, and the number of Shares to be subject to each Option.
In making such determinations the Committee may take into account
recommendations made by management, the nature and length of Service rendered by
the prospective Grantee, his or her level of compensation, his or her past,
present and potential contributions to the Company and such factors as the
Committee shall in its discretion deem relevant. Subject to the express
provisions of the Plan and any consents required by any applicable laws
affecting the Plan and Options, the Committee shall have complete authority to
interpret and construe the Plan, to prescribe, amend and rescind rules and
regulations related to it, to determine the terms and provisions of the
respective Option Agreements and to make all other determinations necessary or
advisable for the administration of the Plan. The determinations of the
Committee on the matters referred to in this Section 1.3 shall be conclusive.
1.4 Eligibility for Participation. Any Director, Employee or Consultant
shall be eligible to receive Options granted under the Plan.
1.5 Shares Subject to the Plan. Subject to adjustment as hereinafter
provided, no more than 500,000 Shares may be issued pursuant to Options granted
under the Plan. If any Option shall expire or terminate for any reason without
having been exercised in full, the unpurchased Shares subject thereto shall
again be available for the purposes of the Plan.
1.6 Duration of the Plan. Unless previously terminated by the Committee
or the Board of Directors, the Plan will terminate on April 1, 2005. Such
termination will not terminate any Option then outstanding.
ARTICLE 2
Terms And Conditions Of Options
2.1 Options and Option Agreements. Each Option granted under the Plan
shall be subject to all of the applicable terms and conditions of the Plan and
shall be evidenced by an Option Agreement. The Option Agreement shall contain
such terms and conditions not inconsistent with the Plan as the Committee may
deem appropriate, including, among other things, when and to what extent the
Option is exercisable, the number of Shares that may be purchased upon exercise
of an Option, the Exercise Price, and the conditions to the exercise of any
Option. The Option Agreement may also designate the Option as a Non-Qualified
Stock Option or an Incentive Stock Option.
2.2 Exercisability and Term. (a) Except as otherwise provided below, the
Committee shall determine the term of each Option and whether the Option shall
be exercisable in full or in installments and, if in installments, the number of
installments. No Option, however, may remain outstanding for more than 10 years
after the Grant Date.
(b) Except as otherwise provided herein, an Option granted under the
Plan may be exercised from time to time during its term for the full number of
Shares then purchasable upon exercise of
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the Option or from time to time for any part thereof; provided, however, that no
Option may be exercised in part with respect to fewer than 25 Shares, except to
purchase the remaining Shares then purchasable under such Option.
(c) Except as otherwise provided below, Options shall terminate
immediately upon the termination of the Service of the Grantee. Options granted
under the Plan shall not, however, be affected by any change of Service so long
as the Grantee continues to be a Director, Employee or Consultant.
(d) If a Grantee dies while he or she is a Director, Employee or
Consultant or within three months after the termination of such Grantee's
Service by reason of his or her retirement with the written consent of the
Company, such Option may be exercised within one year after such Grantee's death
by his or her personal representative or by the person or persons to whom the
Grantee's rights under the Option pass by will or by the applicable laws of
descent and distribution; provided, however, that no Option may be exercised
after its expiration and provided further than such Option may only be exercised
for the number of Shares which could have been purchased by the Grantee on the
date of such termination.
(e) If a Grantee voluntarily retires or quits his or her Service with
the written consent of the Company, or if the Service of the Grantee is
terminated by the Company for reasons other than cause, such Grantee may
exercise his or her Option within six months (or three months in the case of an
Incentive Stock Option) following such termination of Service; provided,
however, that no Option may be exercised after its expiration and provided
further that the Grantee may only exercise his or her Option for the number of
Shares which he or she could have purchased as of the date of such termination.
(f) Nothing herein shall impose upon the Company the obligation to
continue the Service of any Grantee. The rights of the Company to terminate the
Service of a Grantee shall not be diminished or affected by reason of the
granting of an Option.
2.3 Exercise Price. The Exercise Price for Options shall be determined
by the Committee at the time the Option is granted, but shall not be less than
80% of the Fair Market Value of the Shares on the Grant Date provided, however,
that the Exercise Price per Share subject to an Incentive Stock Options shall
equal at least 100% of the Fair Market Value of a Share on the Grant Date.
2.4 Nontransferability. No Option granted under the Plan shall be
transferable by the Grantee otherwise than by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Grantee solely
by such Grantee.
2.5 Method of Exercise. A Grantee electing to exercise an Option shall
exercise such Option by delivering to the Company written notice of such
election to exercise, specifying the number of Shares such Grantee has elected
to purchase, together with the Exercise Price for the Shares being purchased in
accordance with the terms of Section 2.6 below.
2.6 Payment for Shares. The Exercise Price shall become immediately due
and payable upon exercise of the Option and payment thereof shall be made to the
Company as follows: in cash (including check, bank draft or money order) or by
delivering to the Company Shares of Stock already owned by the Grantee and
having a Fair Market Value on the date of the exercise equal to the Exercise
Price or a
4
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<PAGE>
combination of such Shares and cash, or at the discretion of the
Committee, by any other proper method specifically approved by the Committee.
2.7 Limitation on Aggregate Shares. The number of Shares with respect
to which Options may be granted under the Plan to any Executive Officer in any
fiscal year of the Company shall not exceed 100,000 Shares and the number of
Shares with respect to which Options may be granted under the Plan to any
individual who is not an Executive Officer in any fiscal year of the Company
shall not exceed 75,000 Shares.
2.8 Incentive Stock Option Limitations. Options granted under the Plan
may be Non-Qualified Stock Options or Incentive Stock Options, as specified by
the Committee; provided, however, that no Incentive Stock Option may be granted
to any Grantee who, at the time of grant, owns stock of the Company (or any
Subsidiary) representing more than 10% of the total combined voting power of all
classes of stock of the Company (or such Subsidiary). Options shall be
exercisable at such time or times as the Committee shall determine; provided,
however, that the aggregate Fair Market Value of the Shares (measured on the
Grant Date) with respect to which Incentive Stock Options are exercisable for
the first time by any Grantee during any calendar year (under all stock options
plans of the Company) may not exceed $100,000.
ARTICLE 3
Loans And Financial Accommodations To Grantees
3.1 Purpose. In order to assist the Grantee with the acquisition of
Shares of Stock pursuant to the exercise of an Option granted under the Plan,
including the payment of any taxes resulting from such exercise, the Board may,
in its discretion, whenever, in the judgment of the Board, such assistance is
permitted by applicable law and may reasonably be expected to benefit the
Company, authorize, either at the time of the grant of the Option or thereafter
the extension of a loan to the Grantee by the Company, or the guarantee by the
Company of a loan obtained by the Grantee from a third party.
3.2 Terms of Loan or Guarantee. The Committee or Board shall determine
the terms of any loan or guarantee made pursuant to this Article 3, including
the interest rate and other terms of repayment thereof, and whether such loan or
guarantee shall be secured or unsecured. Each loan shall be evidenced by a
promissory note having a maximum term to maturity of not more than sixty (60)
months. The maximum amount of any loan or guarantee shall be the Exercise Price
for Shares purchased upon exercise of an Option plus related interest payments
and the amount of tax liability incurred by the Grantee as a result of the
exercise of an Option.
3.3 Use of Loaned or Guaranteed Funds. No amount loaned to a Grantee
and no amount repayment of which is guaranteed by the Company shall be used for
any purpose other than payment of the Exercise Price of Shares acquired on the
exercise of an Option granted or to be granted under the Plan and taxes
attributable to such exercise.
5
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<PAGE>
ARTICLE 4
Grant Of Options To Outside Directors
4.1 Application of the Plan to Outside Directors. All terms and
conditions of the Plan govern the grant of options to Outside Directors, and
nothing in this Article 4 is intended to limit the authority of the Committee to
grant options to any such person under Section 1.3 or this Article 4 even though
such person may be a member of the Committee.
4.2 Annual Grant of Options. Each Outside Director shall be granted an
Option to purchase 5,000 Shares (as adjusted pursuant to Section 5.1) on April 1
of each year during the term of the Plan so long as on such date he is an
Outside Director. The provisions of this Section 4.2 shall not be amended more
than once every twelve months.
4.3 Exercisability and Term of Options. An option granted to an Outside
Director pursuant to Section 4.2 shall become exercisable with respect to 25% of
the Shares covered thereby commencing one year after the Grant Date of such
Option and as to an additional 25% of the Shares covered by the Option upon each
of the three succeeding anniversary dates of the Grant Date. Options granted to
Outside Directors pursuant to Section 4.2 shall expire seven years from their
respective Grant Date.
4.4 Option Price. The Exercise Price for Options granted to Outside
Directors pursuant to Section 4.2 shall be 100% of the Fair Market Value of the
Shares on the Grant Date.
ARTICLE 5
General Provisions
5.1 Adjustments upon Changes in Capitalization. (a)The aggregate number
and class of Shares for which Options may be granted under the Plan, the number
and class of Shares covered by each outstanding Option and the Exercise Price
per Share thereof (but not the total price) and each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, split-up or consolidation of Shares or any
like capital adjustment or reclassification of Shares or the payment of any
stock dividends, or any other increase or decrease in the number of Shares of
the Company outstanding, without receipt of consideration by the Company.
(b) Subject to any required action by its stockholders, if the Company
shall be the surviving corporation in any merger or consolidation, except as
otherwise provided below, any Option granted hereunder shall be adjusted so as
to pertain and apply to the securities to which the holder of the number of
Shares of the Company subject to the Option would have been entitled in such
merger or consolidation.
(c) Upon the dissolution or liquidation of the Company or upon a merger
or consolidation of the Company in a transaction in which all or substantially
all of the stockholders of the Company receive cash, securities of another
company or other consideration in exchange for their Shares of Stock, whether
or not the Company is the surviving corporation, or upon a sale of all or
substantially all of the assets of the Company, any Option granted hereunder
shall terminate, but the Grantee may, immediately prior to any such
6
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<PAGE>
transaction exercise his or her Option, in whole or in part, as to the full
number of Shares which he or she would otherwise have been entitled to purchase
during the remaining term of the Option irrespective of any installment
features. If such transaction consists in part of a tender offer for the
Company's Shares, the Committee may, prior to or simultaneous with the closing
of such tender offer, elect to accelerate all or any portion of an Option and
cancel such Option upon payment to the respective Grantees of an amount equal to
the amount by which the cash and other consideration to be paid to public
stockholders in such tender offer exceeds the Exercise Price multiplied by the
number of Shares remaining subject to such Option. Notwithstanding the
foregoing, the Company may elect not to permit a Grantee to exercise his or her
Option immediately prior to any such event in accordance with the foregoing, but
in lieu thereof the Company may, in its discretion and immediately prior to any
such dissolution, liquidation, merger, consolidation or sale substitute or cause
to be substituted a new option for his or her Option, such new option to be
applicable to the stock of the surviving or acquiring corporation or any of its
affiliates and to be on terms no less favorable to the Grantee than those
contained in his or her prior Option.
(d) Adjustment and elections under this Section 5.1 shall be made by the
Committee whose determination as to what adjustments shall be made and the
extent thereof shall be final, binding and conclusive.
5.2 Privileges of Stock Ownership. No Grantee shall be entitled to the
privileges of stock ownership as to any Shares of Stock not actually issued and
delivered to him or her.
5.3 Securities Regulations. Unless at the time of the exercise of an
Option and the issuance of the Shares purchased by a Grantee pursuant thereto
there shall be in effect as to such Shares a Registration Statement under the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission, the Grantee exercising such Option shall deliver to the Company at
the time of exercise, a certificate certifying that he or she is acquiring the
Shares issuable to him or her upon such exercise for the purpose of investment
and not with a view to their sale or distribution. The Company shall not be
required to issue or deliver certificates for Shares until there shall have been
compliance with all applicable laws, rules and regulations, including rules and
regulations of the Commission.
5.4 Suspension, Amendment and Termination of the Plan. (a) The Committee
may at any time suspend, amend or terminate the Plan, provided that the approval
of the Board of Directors of the Company will be required for any amendment
which will:
(i) increase the maximum number of Shares which may be issued pursuant
to Options; or
(ii) change the provisions of Section 1.4; or
(iii) change the provisions of Section 4.2; or
(iv) extend the term of Options.
(b) The power of the Committee to amend the Plan under this Section 5.4
is subject in certain instances to the requirements of the Exchange Act and
other provisions of applicable law which may
7
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<PAGE>
require stockholder approval of such amendments in order to achieve the
Company's objectives and the purposes of the Plan.
(c) Unless the Plan shall theretofore have been terminated by the
Committee or the Board of Directors, the Plan shall terminate April 1, 2005. No
Option may be granted during the term of any suspension of the Plan or after
termination of the Plan. The amendment or termination of the Plan shall not,
without the written consent of the Grantee, alter or impair any rights or
obligations of such Grantee under any Option theretofore granted.
5.5 Amendment of Outstanding Options. The Committee may amend or modify
any Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant or prescribe the terms of such
Option; provided that, except as expressly contemplated elsewhere herein or in
any agreement evidencing such Option, no such amendment or modification shall
impair the rights of any Grantee under any outstanding Option without the
consent of such Grantee.
5.6 Section 16 of the Exchange Act. With respect to persons subject to
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of the Plan or action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.
5.7 Governing Law. This Plan and the Committee's actions in respect
thereof shall be governed and construed in accordance with the substantive law
of the State of Delaware.
5.8 Effective Time. This Plan shall become effective upon approval
thereof by the holders of a majority of the Company's Shares present and
entitled to vote at a meeting of the Company's stockholders duly held.
8
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<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors of
The Andover Apparel Group, Inc.
We consent to incorporation by reference in the registration statement (No.
33-33963) on Form S-8 of The Andover Apparel Group, Inc. of our report dated
January 29, 1999, relating to the consolidated balance sheets of The Andover
Apparel Group, Inc. and Subsidiaries as of November 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows and the related Schedule II for each of the three years in the period
ended November 30, 1998, which report appears in the November 30, 1998 annual
report on Form 10-K of The Andover Apparel Group, Inc.
/s/ MAHONEY COHEN & COMPANY, CPA, P.C.
New York, New York
February 25, 1999
<PAGE>
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<RECEIVABLES> 3,232,000
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