<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________to _______________
Commission file number 33-80570
APPAREL VENTURES, INC.
----------------------------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
DELAWARE 95 - 4475766
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
204 WEST ROSECRANS, GARDENA, CALIFORNIA 90248
(Address of principal executive offices) (Zip Code)
(310) 538 - 4980
-----------------------------------------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
AT MAY 12, 1997, 1,000 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
<PAGE> 2
APPAREL VENTURES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1997 (Unaudited) and
June 30, 1996. 3
Consolidated Statement of Operations for the Three and Nine Months
ended March 31, 1997 and 1996 (Unaudited). 4
Consolidated Statement of Cash Flows for the Nine Months ended
March 31, 1997 and 1996 (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. 9
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 12
EXHIBIT INDEX 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APPAREL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
A S S E T S
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 393,000 $ 244,000
Due from factor 25,096,000 15,809,000
Accounts receivable, net of allowance for
doubtful accounts and discounts of $414,000 and $425,000 3,344,000 2,528,000
Inventories 15,751,000 7,684,000
Deferred charges 1,869,000 1,960,000
Deferred income taxes 1,236,000 999,000
Prepaid expenses 549,000 227,000
------------ ------------
Total current assets 48,238,000 29,451,000
------------ ------------
PROPERTY AND EQUIPMENT, AT COST, NET OF
accumulated depreciation and amortization 4,530,000 4,810,000
OTHER ASSETS
Goodwill and organizational costs 12,511,000 12,764,000
Deferred loan costs 1,721,000 2,110,000
Deferred income taxes 2,368,000 2,368,000
Other 545,000 546,000
------------ ------------
$ 69,913,000 $ 52,049,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ 18,721,000 $ 4,144,000
Accounts payable 5,466,000 1,500,000
Accrued interest and other expenses 4,322,000 4,458,000
Current portion of notes payable 87,000 128,000
------------ ------------
Total current liabilities 28,596,000 10,230,000
------------ ------------
SENIOR NOTES PAYABLE 35,531,000 35,459,000
NOTE PAYABLE TO BANK 2,450,000 2,450,000
NOTES PAYABLE, NET OF CURRENT PORTION 53,000 109,000
STOCKHOLDER'S EQUITY
Common stock $.01 par value, 10,000 shares authorized, 1,000 shares
issued and outstanding 1,000 1,000
Additional paid - in capital 11,038,000 11,038,000
Cumulative translation adjustment (48,000) (48,000)
Accumulated deficit (7,708,000) (7,190,000)
------------ ------------
3,283,000 3,801,000
------------ ------------
$ 69,913,000 $ 52,049,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 45,695,000 $ 50,378,000 $ 31,400,000 $ 30,192,000
COST OF SALES 27,172,000 31,663,000 18,483,000 17,550,000
------------ ------------ ------------ ------------
Gross profit 18,523,000 18,715,000 12,917,000 12,642,000
OPERATING EXPENSES
Design 2,017,000 2,056,000 455,000 434,000
Selling 4,851,000 5,460,000 2,238,000 2,905,000
Shipping 1,340,000 1,361,000 643,000 590,000
General and administrative 6,423,000 6,698,000 1,985,000 2,324,000
------------ ------------ ------------ ------------
14,631,000 15,575,000 5,321,000 6,253,000
------------ ------------ ------------ ------------
Income from operations 3,892,000 3,140,000 7,596,000 6,389,000
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME
Interest expense (4,405,000) (5,657,000) (1,663,000) (1,931,000)
Interest income 17,000 8,000 6,000 2,000
Royalty income 127,000 150,000 43,000 31,000
Miscellaneous (384,000) (107,000) (54,000) (102,000)
------------ ------------ ------------ ------------
(4,645,000) (5,606,000) (1,668,000) (2,000,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (753,000) (2,466,000) 5,928,000 4,389,000
INCOME TAX BENEFIT (PROVISION) 236,000 873,000 (1,902,000) (1,732,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 517,000) ($ 1,593,000) $ 4,026,000 $ 2,657,000
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 517,000) ($ 1,593,000)
Depreciation and amortization 1,386,000 1,589,000
Other (12,000) 37,000
Changes in assets and liabilities
Due from factor (9,287,000) (5,844,000)
Accounts receivable, net (816,000) (374,000)
Income taxes refundable/payable - 13,000
Inventories (8,067,000) (2,796,000)
Deferred charges and other assets 91,000 286,000
Deferred income tax benefits (237,000) (874,000)
Prepaid expenses and other assets (321,000) (57,000)
Accounts payable 3,966,000 (908,000)
Accrued interest and other expenses (136,000) (981,000)
------------ ------------
Net cash used in operating activities (13,950,000) (11,502,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (453,000) (465,000)
Acquisition of intangibles - (459,000)
------------ ------------
Net cash used in investing activities (453,000) (924,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under line of credit 14,577,000 10,013,000
Repayment to officer, net - (377,000)
Borrowing under (repayment of) senior notes payable 72,000 (3,942,000)
Borrowing under (repayment of) notes payable (97,000) 2,596,000
Additional capital infusion - 4,000,000
------------ ------------
Net cash provided by financing activities 14,552,000 12,290,000
------------ ------------
NET INCREASE (DECREASE)IN CASH 149,000 (136,000)
CASH, BEGINNING OF PERIOD 244,000 207,000
------------ ------------
CASH, END OF PERIOD $ 393,000 $ 71,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) which are necessary for a fair presentation of the
changes in financial position, results of operations and cash flows for the
interim periods reported.
The results of operations for the three and nine months ended March
31, 1997 are not necessarily indicative of the results to be expected for the
full year.
The accompanying consolidated financial statements should be read
with reference to "Management's Discussion and Analysis of Financial Condition
and Results of Operations " contained herein and the Notes to consolidated
financial statements, as set forth in the Company's Form 10 - K filing for the
fiscal year ended June 30, 1996.
COMPANY BACKGROUND - Apparel Ventures, Inc. (the "Company") is a wholly
owned subsidiary of AVI Holdings, Inc. (the "Parent"). The Company was
incorporated in Delaware under the name of AVI Acquisition Co. effective April
20, 1994 and concurrent with a series of transactions on May 23, 1994, changed
its name to Apparel Ventures, Inc.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its 79% - owned Portuguese subsidiary, Apparel
Ventures Europa -Textil, LDA. Significant intercompany accounts and transactions
are eliminated in consolidation.
NATURE OF BUSINESS - The Company is headquartered in Gardena, California and
designs, manufactures and markets branded and private label women's swimwear.
The Company offers ten proprietary lines catering to the Junior and Missy
categories, distributed through major department stores and specialty retail
stores nationwide and, through its subsidiary, throughout Europe.
TRANSLATION OF FOREIGN CURRENCIES - Cumulative translation adjustments, which
arise from consolidating Portuguese operations, are included in stockholder's
equity.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Piece goods and trim $ 4,212,000 $ 3,769,000
Work - in - process 2,560,000 836,000
Finished goods 8,979,000 3,079,000
----------- -----------
$15,751,000 $ 7,684,000
=========== ===========
</TABLE>
6
<PAGE> 7
NOTE 3 - LINE OF CREDIT
The Company has a line of credit with a bank (the "Credit Facility")
which provides for advances and commercial letters of credit of up to $32.0
million through May 23, 1999. The Credit Facility has a sublimit of $3.0 million
for commercial letters of credit and $10.0 million for finished goods inventory.
Borrowings are limited to a predetermined percentage of eligible factored
accounts receivable and eligible finished goods, plus a seasonal overadvance of
$2.5 million during September and increasing to $4.5 million from October to
March 15, of each year, the amount of which is tied to bookings. Interest on
base borrowings is charged at the bank's prime rate plus 1/2% or LIBOR plus
2.75%, while interest on seasonal overadvances is charged at the bank's prime
rate plus 1 1/2 % or LIBOR plus 3.75%. The Credit Facility is collateralized by
receivables, finished goods inventories and general intangibles.
The credit agreement includes a $2,450,000 term loan which was due
December 5, 1998. On April 30, 1997, the due date was amended and restated to
May 23, 1999. Interest on the term loan is payable monthly at the bank's prime
rate or LIBOR plus 2.5%. The term loan is collateralized by receivables,
finished goods inventories and general intangibles of the Company as well as
certain personal assets pledged by the Company's President.
The Credit Facility contains covenants requiring the maintenance of
minimum tangible net worth, fixed charge coverage ratios and other matters. The
Company was in compliance with these covenants for the quarter ended March 31,
1997.
NOTE 4 - SENIOR NOTES PAYABLE
On May 23, 1994, the Company issued $40 million principal amount of
Series A Senior Notes. The Senior Notes are due December 30, 2000 and bear
interest of 12 1/4%, payable July 1 and January 1 each year. The Senior Notes
were issued at a discount of $800,000, which is being amortized over the term of
the Senior Notes to yield a constant interest rate of 12.7%. As of March 31,
1997 there is $36.0 million principal amount of bonds outstanding net of
$469,000 in unamortized discount.
The Company may redeem the Senior Notes, subject to a premium for
redemption, after December 31, 1998. The Senior Notes contain certain
restrictions requiring the Company to offer to redeem the Senior Notes including
a premium for redemption, in the event of a change in control of the Company.
The indenture governing the Senior Notes contains customary covenants
regarding maintaining specified ratios of earnings to fixed charges,
restrictions on transactions with officers and affiliates, and other matters.
For the year ended June 30, 1996 the Company failed to meet the fixed charge
coverage ratio covenant required by the indenture. The bondholders agreed to
waive the violation and forego their right to require redemption of 10% of the
bonds. As part of this agreement with the Company, the bondholders received
stock warrants allowing them to purchase an additional 5% of the outstanding
shares of the Parent company's common stock at $0.01 per share. The fair value
of the warrants was estimated to be between $100,000 and $200,000. Although the
value of the warrants has not been recorded by the Company, management is of the
opinion that the effect of the transaction would not be significant to the
Company's operating results or financial position.
The fair value of the senior notes payable is determined based on the
estimated current rates available to the Company for debt of similar maturities
and terms. The fair value of senior notes payable as of March 31, 1997 is
estimated to be between $37.5 million and $39.5 million.
Based on information currently available, the Company is unable at this
time to determine whether it will be in compliance with the fixed charge
coverage ratio covenant in the indenture for the year ending June 30, 1997.
7
<PAGE> 8
NOTE 5 - COMMITMENT - PARENT COMPANY CAPITAL STRUCTURE
In connection with the acquisition of the Company, AVI Holdings, Inc.
(the "Parent") issued $10 million of Subordinated Senior Notes, $3.8 million of
Subordinated Junior Notes, $300,000 of common stock, $1.7 million of Class A
Preferred Stock, $1.7 million of Class B Preferred Stock and $1.0 million of
Class C Stock. A Subordinated Junior Note in the amount of $650,000 was
immediately repaid in full for $350,000. Since the Company is a wholly - owned
subsidiary of the Parent and is the sole operating unit of the consolidated
entity, the Company is the sole source of any cash to be paid by the parent on
such securities in the form of interest, dividends or principal repayments. The
cash required by the Parent to make these payments will be provided by dividends
or cash advances by the Company. While the Parent company's debt service
requirements will be funded by the Company, the debt of the Parent is not
reflected in the balance sheet of the Company since the Company has not
guaranteed, pledged assets as security for, or have plans, intentions, or a
requirement to directly assume or repay the Parent company's organizational
obligations.
On December 5, 1995, in order for the Company to obtain waivers of
certain defaults from the Senior Note holders, the Parent authorized the
issuance of 6,450 shares of Class D Preferred Stock and issued to certain
subscribers 4,000 shares of Class D Preferred Stock for cash consideration of
$4.0 million. Such proceeds were then contributed by the Parent to the Company.
The $10.0 million Senior Subordinated Notes issued by the Parent bear
interest at 12% and require semi-annual interest payments on April 30 and
October 31 each year, commencing October 31, 1994. The notes are due on April
30, 2004. The remaining $3.15 million Junior Subordinated Notes bear interest at
10.78% and require semi-annual interest payments on the 150th day following the
second and fourth quarter of each fiscal year, commencing with the second fiscal
quarter ended December 31, 1994. The notes are due in equal annual installments
on June 30, 2002, 2003 and 2004. In the aggregate, annual debt service
requirements for each of the next 5 years is $1,540,000.
The Company did not meet the fixed charge ratio requirement for the
fiscal year ended June 30, 1996 and therefore is precluded under its bond
indenture from making any advances to the Parent for its payment obligation.
However, the Parent has satisfied these payment obligations by issuing
promissory notes (bearing interest at the default rate) in the amounts of the
interest due.
All classes of preferred stock of the Parent are 6% cumulative shares.
The dividends shall be paid, at the option of the Board of Directors, in the
form of cash or preferred stock, payable November 1 of each year. The payment of
cash dividends shall be restricted if such payment would result, directly or
indirectly, in a default under any obligation of the Company. The preferred
shares may be redeemed at any time for $1,000 per share plus accrued but unpaid
dividends. All shares not previously redeemed shall be redeemed by payment of
cash of $1,000 per share plus all accrued and unpaid dividends on September 30,
2004.
NOTE 6 - FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standard No. 107 " Disclosures About
Fair Value of Financial Instruments " (SFAS 107) requires the disclosure of the
fair market value of financial instruments for which it is practicable to
estimate fair value. The Company's financial instruments include cash,
receivables, accounts payable, line of credit, notes payable, and senior notes
payable. The Company considers the carrying amounts of all financial instruments
except for senior notes payable to approximate their fair value. The estimated
fair value of senior notes payable is indicated in Note 4.
8
<PAGE> 9
PART I - FINANCIAL INFORMATION
APPAREL VENTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS
The following tables set forth information with respect to the
percentage relationship of net sales of certain items of the consolidated
statement of operations of the Company for the three and nine months ended March
31, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
1997 % 1996 %
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
NET SALES $31,400,000 100.0% $30,192,000 100.0%
COST OF SALES 18,483,000 58.9% 17,550,000 58.1%
----------- -----------
Gross profit 12,917,000 41.1% 12,642,000 41.9%
OPERATING EXPENSES
Design 455,000 434,000
Selling 2,238,000 2,905,000
Shipping 643,000 590,000
General and administrative 1,985,000 2,324,000
----------- -----------
5,321,000 16.9% 6,253,000 20.7%
----------- -----------
Income from operations 7,596,000 24.2% 6,389,000 21.2%
OTHER (EXPENSE) INCOME
Interest expense (1,663,000) (1,931,000)
Interest income 6,000 2,000
Royalty income 43,000 31,000
Miscellaneous (54,000) (102,000)
----------- -----------
(1,668,000) -5.3% (2,000,000) -6.6%
----------- -----------
INCOME BEFORE INCOME TAXES 5,928,000 18.9% 4,389,000 14.5%
INCOME TAX PROVISION (1,902,000) -6.1% (1,732,000) -5.7%
----------- -----------
NET INCOME $ 4,026,000 12.8% $ 2,657,000 8.8%
=========== ===========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
------------------------------------------------------------
1997 % 1996 %
----------- ------ ------------ -------
<S> <C> <C> <C> <C>
NET SALES $45,695,000 100.0% $50,378,000 100.0%
COST OF SALES 27,172,000 59.5% 31,663,000 62.9%
----------- ------------
Gross profit 18,523,000 40.5% 18,715,000 37.1%
OPERATING EXPENSES
Design 2,017,000 2,056,000
Selling 4,851,000 5,460,000
Shipping 1,340,000 1,361,000
General and administrative 6,423,000 6,698,000
----------- ------------
14,631,000 32.0% 15,575,000 30.9%
----------- ------------
Income from operations 3,892,000 8.5% 3,140,000 6.2%
OTHER (EXPENSE) INCOME
Interest expense (4,405,000) (5,657,000)
Interest income 17,000 8,000
Royalty income 127,000 150,000
Miscellaneous (384,000) (107,000)
----------- ------------
(4,645,000) -10.2% (5,606,000) -11.1%
----------- ------------
LOSS BEFORE INCOME TAXES (753,000) -1.6% (2,466,000) -4.9%
INCOME TAX BENEFIT 236,000 0.5% 873,000 1.7%
----------- ------------
NET LOSS ($517,000) -1.1% ($1,593,000) -3.2%
=========== ============
</TABLE>
NET SALES
Net sales for the nine months of fiscal 1997 decreased by $4.7 million
or 9.3%, as compared to the same period of fiscal 1996. This decrease was due
primarily to the decrease in the sale of prior season merchandise totaling
475,000 units or $5.4 million. Current season merchandise sales of Private Label
product increased $3.8 million, while current season merchandise sales for the
brands decreased $4.8 million. The decrease in branded sales was primarily in
the Sassafras Group and was due to lackluster performance at retail and the
Company's reduction in the amount of allowances given to department store
retailers in fiscal 1996. This decrease was offset by $1.1 million decrease in
returns and allowances which was primarily due to the discontinued "preview"
line for the La Blanca label in the fourth quarter of fiscal 1996.
Net sales for the quarter ended March 31, 1997 increased by $1.2
million or 4.0%, as compared to the same period of fiscal 1996. This increase
was due primarily to a $3.6 million increase in Private Label and a $1.1 million
increase in La Blanca Studio sales, offset by a decrease of $3.3 million in
Sassafras Group sales and $0.2 million in other sales in the period.
GROSS PROFIT
Gross profit for the nine months of fiscal 1997 decreased $0.2 million
or 1.0% but increased as a percent of net sales from 37.1% to 40.5%, due
primarily to the decrease in prior season merchandise sales, offset by the $3.7
million or 71% increase in Private Label sales which carry a lower gross profit
margin than the branded merchandise. Branded merchandise gross profit decreased
$1.6 million but increased as a percent of net sales, from 39.1% to 43.8%.
Gross profit for the quarter ended March 31, 1997 increased $0.3
million or 2.2% but decreased as a percent of net sales from 41.9% to 41.1% due
primarily to the $3.6 million or 87% increase in Private Label sales which carry
a lower gross profit margin than the branded merchandise.
10
<PAGE> 11
OPERATING EXPENSES
Operating expenses for the nine months of fiscal 1997 decreased $0.9
million due primarily to reduced advertising expense of $0.8 million, decrease
in net commission expense of $0.2 million and decrease in bonus expense of $0.2
million, offset by other increased costs.
Operating expenses for the quarter ended March 31, 1997 decreased $0.9
million due primarily to reduced advertising expense of $0.5 million, decrease
in net commission expense of $0.2 million and decrease in bonus expense of $0.2
million, offset by other increased costs.
OTHER EXPENSES
Other expenses for the first nine months of fiscal 1997 decreased $1.0
million due primarily to a decrease in interest expense of $1.3 million, offset
by expenses relating to a litigation settlement and the related legal expenses
(as previously discussed in the Company's Form 10-Q for the period ended
September 30, 1996) and reduced royalty income from an international licensee.
Other expenses for the quarter ended March 31, 1997 decreased $0.3
million due primarily to decrease in interest expense of $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are seasonal, with peak
needs arising near the end of the third quarter and the beginning of the fourth
quarter of the fiscal year, primarily as a result of building inventories in the
first and second quarters of the fiscal year to supply third and fourth quarter
demand and the financing of accounts receivable in the fourth quarter of the
fiscal year. The Company meets its seasonal working capital needs by utilizing
amounts available under its line of credit. The Company's loan balance was
$18,721,000 at March 31, 1997.
At March 31, 1997, the net collateral availability under the line of
credit was approximately $8,400,000.
During late fiscal 1995 and early 1996, the Company initiated several
changes in executive personnel and instituted more comprehensive financial
reporting and controls to improve the Company's performance. Taken as a whole,
these initiatives have resulted in lower inventory levels, higher gross profit
margins, reduced costs and greater financial liquidity than in fiscal 1995 and
1996. The number of days sales outstanding (DSO) in accounts receivable has been
reduced from 70 days at March 31, 1996 to 68 days at March 31, 1997. The number
of days sales in inventory on hand has decreased from 169 at March 31, 1996 to
91 days at March 31, 1997, which is the direct result of improved planning and
scheduling.
Apparel Ventures, Inc. has committed to establishing a sewing plant in
Mexico. AVI has formed an operating company and has obtained a Maquiladora
Permit. The Company has signed a letter of intent to lease the land and the
building, with an option to purchase, and is in process of building a 33,000
square foot building with an option to build another building of similar size.
The facility is located near Curernavaca, approximately one hour south of Mexico
City. In year two of its operation, the Company believes the plant will
accommodate approximately 300 operators, which will be capable of producing 33%
of the Company's current production needs. The investment in start-up costs,
equipment and improvements will be approximately $2.0 million, excluding the 5
year lease. AVI expects that this plant will make a significant contribution to
its operating income, as the Mexico fully loaded wage rate is approximately 25%
of the comparable U.S. rate. The construction of the plant is expected to be
completed by June 30, 1997.
The Company does not have any mandatory long - term debt principal
payment requirements until May 1999. Based upon current levels of operations,
anticipated growth and construction of the Mexico sewing facility, the Company
expects that sufficient cash flow will be generated from operations so that,
with the other financing alternatives available to it, the Company will be able
to meet all of its debt service requirements as well as its capital expenditure
requirements for the foreseeable future.
11
<PAGE> 12
SEASONALITY
The Company's business is highly seasonal. In fiscal 1996,
approximately 73% of the Company's gross sales were generated in the second half
of its fiscal year. The Company expects this pattern to continue in its current
and subsequent fiscal years. This seasonality and the relatively long times
required to design and manufacture new products have led to the development of
this standard selling cycle. The Company operates with a deficit in cash flow
from operations (seasonal working capital requirements) for the first nine
months of each fiscal year.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
Agreement was signed on February 13, 1997 between the Company and Ocean
Pacific Apparel Corporation to license Junior and kids swimwear and cover-ups
under "Ocean Pacific" and "Op" and related labels. The early Cruise '98
collections will be available for shipment at the end of June 1997.
ITEM 6 - EXHIBITS AND REPORTS ON 8 - K
(A) EXHIBITS
The exhibits listed in the Index to Exhibits are filed as part of
this Quarterly Report on Form 10 - Q.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPAREL VENTURES, INC.
May 12, 1997 /s/ WILLIAM F. SINGLETARY
--------------- --------------------------------
Date WILLIAM F. SINGLETARY
Chief Financial Officer
(Duly authorized officer and
principal financial and
accounting officer)
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibit Page No.
- ----------------- ------------------------------------------------ ----------
<S> <C> <C>
10.5 Amendment No. 6 to Loan and Security Agreement
dated April 30, 1997 by and between Apparel
Ventures, Inc. and Fleet Capital Corporation. 14
</TABLE>
13
<PAGE> 1
EXHIBIT 10.5
AMENDMENT NO. 6
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 6 ("Amendment") is entered into as of April 30,
1997, by and between APPAREL VENTURES, INC., a Delaware corporation having its
chief executive office and principal place of business at 204 West Rosecrans
Avenue, Gardena, California 90248 ("Borrower") and FLEET CAPITAL CORPORATION
(f/k/a Shawmut Capital Corporation) ("Lender").
BACKGROUND
----------
Borrower and Lender are parties to a Loan and Security Agreement dated
as of May 23, 1994 (as same has been or may further be amended, supplemented,
restated or otherwise modified from time to time, the "Loan Agreement")
pursuant to which Lender provided Borrower with certain financial
accommodations.
Borrower has requested that Lender amend certain provisions of the Loan
Agreement and Lender is willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by
Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to the satisfaction of
the Conditions Precedent set forth in Section 3 below, the Loan Agreement is
hereby amended as follows:
(a) Section 1.1 of the Loan Agreement is hereby amended as follows:
(i) the following defined terms are hereby added in their
appropriate alphabetical order:
"Amendment No. 6 Closing Date" shall mean April 30, 1997.
"Advances to AVE" has the meaning assigned to that term in subsection
7.2(B)(1).
<PAGE> 2
"Advances to Mexican Subsidiary" has the meaning assigned to that term
in subsection 7.2(B)(2).
"Cash Charge Coverage Ratio" - shall mean the ratio of
(1) (a) EBITDA, less (b) non-financed Capital Expenditures,
TO
(2) (a) Interest Expense, plus (b) Advances to AVE, plus (c)
Advances to Mexican Subsidiary, plus (d) Taxes, plus (e) the
principal portion of payments with respect to a Capitalized
Lease Obligation.
"EBITDA" means, for any period, without duplication, the total of the
following for Borrower and its subsidiaries on a consolidated basis,
each calculated for such period: (1) net income determined in accordance
with GAAP; plus, to the extent included in the calculation of net
income, (2) the sum of (a) taxes based on income or profits ("Taxes");
(b) Interest Expenses, net of interest income, paid or accrued; (c)
interest paid in kind; (d) amortization and depreciation and (e) other
non-cash charges (excluding accruals for cash expenses made in the
ordinary course of business).
"Eligible Foreign Accounts" - shall mean an Eligible Account except that
it arises from a sale to an Account Debtor outside the United States and
the sale is on letter of credit which is acceptable to Lender in its
reasonable discretion.
"Eligible Licensed Inventory" - Inventory which is subject to the (1) OP
License Agreement and (2) OP Consent.
"Interest Expenses" means, without duplication, for any period, the
following, for Borrower and its subsidiaries on a consolidated basis,
each calculated for such period: interest expenses deducted in the
determination of net income (excluding (i) the amortization of fees and
costs with respect to the transactions contemplated by this Agreement
which have been capitalized as transaction costs; and (ii) non-cash
interest, such as interest paid in kind, imputed interest or original
issue discount).
"Mexican Subsidiary" means AVI De Mexico, S.A. De C.V.
"OP Consent" means the consent relating to the OP License Agreement
between Lender and Ocean Pacific Apparel, Corp.
"OP License Agreement" means the certain License Agreement between
Borrower and Ocean Pacific Apparel, Corp. dated January 31, 1997.
"Taxes" has the meaning assigned to that term in the definition of
"EBITDA" in this subsection 1.1.
<PAGE> 3
"Term Loan Rate" shall mean the interest rate for the Term Loan, as
provided in subsection 3.1(A).
(ii) the following defined terms are hereby amended in their
entirety to provide as follows:
"Bank" shall mean Fleet National Bank.
"Borrowing Base" as at any date of determination thereof, an amount
equal to:
(a) ninety percent (90%) of the Factor Credit Balance owing
to Borrower at such date;
PLUS
(b) the lesser of (1) $10,000,000 or (2) the sum of
(i) sixty percent (60%), of the value of Eligible
Inventory (other than Eligible Licensed Inventory) plus
(ii) the lesser of (1) $4,000,000 or (2) fifty-six
percent (56%), of the value of Eligible Licensed
Inventory
at such date calculated on the basis of the lower of cost or
market with the cost of finished goods calculated on a fist-in,
first-out basis,
PLUS
(c) the lesser of (1) $1,500,000 or (2) eighty percent (80%), of
the Eligible Foreign Accounts outstanding at such date;
PLUS
(d) solely during the Seasonal Advance Period, the Seasonal
Advance Amount;
MINUS
(subtract from the sum of
clauses (a), (b), (c) and (d) above)
(d) an amount equal to the sum of (a) the face amount of all
Letters of Credit outstanding at such date and (b) any unpaid
amounts due and payable which Lender may pay pursuant to any of
the Loan documents for the account of Borrower.
<PAGE> 4
"Business Day" -- a day excluding Saturday, Sunday and any day which is
a legal holiday under the laws of the State of New York or is a day on
which banking institutions located in such state are closed, or for the
purpose of Eurodollar Loans only, a day on which Commercial Banks are
open for dealings in Dollar deposits in the London, England (UK) market.
"Term Note" -- the secured Amended and Restated Term Note executed by
Borrower on or about April 30, 1997, in favor of Lender to evidence the
Term Loan."
(b) Section 3.1(A) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"(A) Interest.
(1) Base Rate Loans:
(i) Base Rate Revolving Loans: Interest shall accrue on
the principal amount of those Base Rate Loans (other
than Seasonal Advances and the Term Loan) outstanding at
the end of each day at a fluctuating rate per annum
(computed on the actual days elapsed over a year of 360
days) equal to one-half of one percent (0.50%) above the
Base Rate.
(ii) Base Rate Seasonal Loans: Interest shall accrue on
the principal amount of those Base Rate Loans which are
Seasonal Advances outstanding at the end of each day at
a fluctuating rate per annum (computed on the actual
days elapsed over a year of 360 days) equal to one and
one-half percent (1.50%) above the Base Rate.
(iii) Base Rate Term Loans: Interest shall accrue on the
principal amount of those Base Rate Loans which are Term
Loans outstanding at the end of each day at a
fluctuating rate per annum (computed on the actual days
elapsed over a year of 360 days) equal the Base Rate.
(iv) Determining Base Rate: After the date hereof, the
foregoing rates of interest shall be increased or
decreased, as the case may be, by an amount equal to any
increase or decrease in the Base Rate, with such
adjustments to be effective as of the opening of
business on the day that any such change in the Base
Rate becomes effective. The Base Rate in effect on the
date hereof shall be the Base Rate effective as of the
opening of business on the date hereof, but if this
Agreement is executed on a day that is not a Business
Day, the Base Rate in effect on the date hereof shall be
the Base Rate effective as of the opening of business on
the last Business Day immediately preceding the date
hereof.
<PAGE> 5
(2) Eurodollar Loans:
(i) Eurodollar Revolving Loans: Interest shall accrue on
the principal amount of those Eurodollar Loans, which
are Revolving Loans (other than Seasonal Advances),
outstanding at a rate per annum equal to two and three
quarters percent (2.75%) above the Eurodollar Rate.
(ii) Eurodollar Seasonal Loans: Interest shall accrue on
the principal amount of those Eurodollar Loans, which
are Seasonal Advances, outstanding at a rate per annum
equal to three and three quarters percent (3.75%) above
the Eurodollar Rate.
(iii) Eurodollar Term Loans: Interest shall accrue on
the principal amount of those Eurodollar Loans, which
are Term Loans, outstanding at a rate per annum equal to
two and one half percent (2.5%) above the Eurodollar
Rate."
(c) Section 7.2(B) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"(B) Loans. Make any loans or other advances of money (other
than for salary, travel advances, advances against commissions
and other similar advances in the ordinary course of business)
to any Person, including, without limitation, any of Borrower's
Affiliates, officers or employees, except for:
(1) loans or other advances to AVE which together with
the value of all assets transferred to AVE by Borrower
at any time outstanding ("Advances to AVE") does not
exceed (i) $2,500,000 from the Closing Date through
January 31, 1996, (ii) $2,630,000 from February 1, 1996
through March 31, 1996, (iii) $3,000,000 from April 1,
1996 through June 29, 1996, (iv) $2,500,000 on June 30,
1996, (v) $2,600,000 from July 1, 1996 through September
29, 1996, (vi) $2,700,000 from September 30, 1996
through October 30, 1996, (vii) $3,600,000 from October
31, 1996 through December 30, 1996, (viii) $3,800,000
from December 31, 1996 through January 30, 1997, (ix)
$4,200,000 from January 31, 1997 through June 29, 1997
and (x) $3,500,000 on June 30, 1997 and thereafter, and
(2) loans or other advances to Mexican Subsidiary which,
together with the value of all assets transferred to
Mexican Subsidiary by Borrower, at any time outstanding
("Advances to Mexican Subsidiary") does not exceed (i)
$2,200,000 from the
<PAGE> 6
Amendment No. 6 Closing Date through June 30, 1997 (ii)
$2,800,000 from July 1, 1997 through September 30, 1997,
(iii) $3,300,000 from October 1, 1997 through December
31, 1997, (iv) $3,500,000 from January 1, 1998 through
March 31, 1998 (v) $4,000,000 on April 1, 1998 and
thereafter."
(d) Section 7.2(O) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"(O) Disposition of Assets. Sell, lease, or otherwise dispose of
any of its Properties to or in favor of any Person, except (i)
sales of Inventory in the ordinary course of Borrower's
business, (ii) sales or other disposals of equipment, (iii)
dispositions expressly authorized by this Agreement, or (iv)
transfers to AVE and Mexican Subsidiary the value of which
together with all loans and advances made by Borrower to AVE and
Mexican Subsidiary is permitted under subsection 7.2(B)."
(e) Section 7.3 of the Loan Agreement is hereby amended by adding a
new subsection (C) to provide as follows:
"(C) Cash Charge Coverage Ratio. Maintain a Cash Charge
Coverage Ratio of not less than:
(i) .60 to 1.0 for the four consecutive fiscal quarter
periods ending on June 30, 1997 and September 30, 1997;
(ii) .75 to 1.0 for the four consecutive fiscal quarter
periods ending on December 31, 1997;
(iii) 1.0 to 1.0 for each four consecutive fiscal
quarter periods ending thereafter."
3. Conditions of Effectiveness. This Amendment shall become
effective upon satisfaction of the following conditions precedent: (i) Lender
shall have received four (4) copies of this Amendment executed by Borrower and
such other certificates, instruments, documents, agreements and opinions of
counsel as may be required by Lender or its counsel, and (ii) the Amended and
Restated Term Note, each of which shall be in form and substance satisfactory
to Lender and its counsel.
4. Representations and Warranties. Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended
hereby, constitute legal, valid and binding obligations of Borrower and
are enforceable against Borrower in accordance with their respective
terms.
(b) Upon the effectiveness of this Amendment, Borrower
hereby reaffirms all covenants, representations and warranties made in
the Loan
<PAGE> 7
Agreement to the extent the same are not amended hereby and agree that
all such covenants, representations and warranties shall be deemed to
have been remade as of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is
continuing or would exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset with
respect to the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import shall mean and be a reference to the Loan Agreement as
amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and
all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not, operate as a waiver of any right, power or remedy of Lender, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns and shall be governed by and construed in accordance with the laws of
the State of New York.
7. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by the parties
hereto in one or more counterparts, each of which shall be deemed an original
and all of which taken together shall constitute one and the same agreement.
<PAGE> 8
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
APPAREL VENTURES, INC.
By: /s/ MARVIN L. GOODMAN
---------------------------
Name: Marvin L. Goodman
Title: President
FLEET CAPITAL CORPORATION
By: /s/ WALTER SCHUPPE
---------------------------
Name: Walter Schuppe
Title: Vice President
<PAGE> 9
AMENDED AND RESTATED TERM NOTE
$2,450,000.00 New York, New York
Dated as of: April 30, 1997
This Amended and Restated Term Note is executed and delivered under and
pursuant to the terms of that certain Loan and Security Agreement dated May 23,
1994 (as has been and may further be amended, restated, supplemented or
modified from time to time the "Loan Agreement") by and between Apparel
Ventures, Inc., a Delaware corporation with its chief executive office and
principal place of business at 204 West Rosecrans, Gardena, California 90248
("Borrower") and Fleet Capital Corporation (f/k/a Shawmut Capital Corporation)
("Lender"). Capitalized terms not otherwise defined herein shall have the
meanings as provided in the Loan Agreement.
FOR VALUE RECEIVED, Borrower hereby promises to pay to the order of
Lender, at its offices located at 200 Glastonbury Boulevard, Glastonbury,
Connecticut 06033 or at such other place as Lender may from time to time
designate to Borrower in writing:
(i) the principal sum of TWO MILLION FOUR HUNDRED FIFTY THOUSAND
and 00/100 Dollars ($2,450,000.00) payable in full on May 23, 1999; and
(ii) interest on the principal amount of this Note from time to time
outstanding, payable, in arrears, on the last day of each month commencing with
the month of December, 1995 and on the last day of each month thereafter at a
rate of interest per annum equal to the Term Loan Rate provided in the Loan
Agreement. In no event, however, shall interest exceed the maximum interest
rate permitted by law. Except as otherwise provided herein, upon and after the
declaration of an Event of Default, and during the continuation thereof,
interest shall be payable at the Default Rate provided in the Loan Agreement.
This Note is the Amended and Restated Term Note referred to in the Loan
Agreement and is secured by the liens granted pursuant to the Loan Agreement
and the Loan Documents, is entitled to the benefits of the Loan Agreement and
the Loan Documents and is subject to all of the agreements, terms and
conditions therein contained.
This Note is subject to mandatory prepayment and may be voluntarily
prepaid, in whole or in part, on the terms and conditions set forth in the Loan
Agreement.
If an Event of Default under Sections 9.1(F) or 9.1(G) of the Loan
Agreement shall occur, then this Note shall immediately become due and payable,
without notice, together with reasonable attorneys' fees if the collection
hereof is placed in the hands of an attorney to obtain or enforce payment
hereof. If any other Event of Default shall occur under the Loan Agreement or
any of the Loan Documents, which is not cured within any applicable grace
period, then this Note may, as provided in the Loan Agreement, be declared
<PAGE> 10
to be immediately due and payable, without notice, together with reasonable
attorneys' fees, if the collection hereof is placed in the hands of an attorney
to obtain or enforce payment hereof.
This Note is being delivered in the State of New York, and shall be
construed and enforced in accordance with the laws of such state.
Borrower expressly waives any presentment, demand, protest, notice of
protest, or notice of any kind except as expressly provided in the Loan
Agreement.
This Note amends and restates in its entirety (and is given in
substitution for and not in satisfaction of) the Amended and Restated Term Note
dated December 5, 1995 made by Borrower in favor of Lender in the original
principal amount of $2,450,000.
APPAREL VENTURES INC.
By: /s/ MARVIN L. GOODMAN
--------------------------
Name: Marvin L. Goodman
Title: President
STATE OF CALIFORNIA,
ss.: [SEAL]
COUNTY OF LOS ANGELES
On the 30th day of April, 1997, before me personally came Marvin L.
Goodman, to me known, who being by me duly sworn, did depose and say that he is
the ___________________ of Apparel Ventures, Inc., the corporation described in
and which executed the foregoing instrument; and that he signed his name
thereto by order of the board of directors of said corporation.
/s/ DARYLLA K. FLORES
---------------------
Notary Public
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF APPAREL VENTURES, INC. FOR THE NINE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 393,000
<SECURITIES> 0
<RECEIVABLES> 28,854,000
<ALLOWANCES> 414,000
<INVENTORY> 15,751,000
<CURRENT-ASSETS> 48,238,000
<PP&E> 7,543,000
<DEPRECIATION> 3,013,000
<TOTAL-ASSETS> 69,913,000
<CURRENT-LIABILITIES> 28,596,000
<BONDS> 38,034,000
0
0
<COMMON> 1,000
<OTHER-SE> 3,282,000
<TOTAL-LIABILITY-AND-EQUITY> 69,913,000
<SALES> 45,695,000
<TOTAL-REVENUES> 45,695,000
<CGS> 27,172,000
<TOTAL-COSTS> 27,172,000
<OTHER-EXPENSES> 14,871,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,405,000
<INCOME-PRETAX> (753,000)
<INCOME-TAX> (236,000)
<INCOME-CONTINUING> (517,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (517,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
