<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________ to ___________________
Commission file number 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT : None
Name of each exchange
Title of each class on which registered
------------------- ---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: None
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 the 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 the 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]
AT SEPTEMBER 28, 1998, 1,000 SHARES OF $.01 PAR VALUE COMMON STOCK OF
THE REGISTRANT WERE OUTSTANDING.
Documents incorporated by reference : None
<PAGE> 2
PART I
ITEM 1. BUSINESS
Apparel Ventures, Inc. , a Delaware corporation ("AVI" or the
"Company"), was incorporated on April 20, 1994 and is headquartered in Gardena,
California. AVI is a wholly - owned subsidiary of AVI Holdings, Inc. ("AVI
Holdings") The principal stockholders of AVI Holdings are partners and
affiliates of The Jordan Company, a firm that structures and invests in
acquisitions of private companies, and members of the Company's management.
AVI designs, manufactures and markets branded women's swimwear. The
Company offers seven proprietary branded lines catering to the children and
pre-teen (age 7 to 13), Junior (age 14 to 30 years) and Missy (age 30 and over)
categories, distributed through major department stores and specialty retail
stores nationwide. By using multiple brand lines, AVI is able to achieve the
broadest possible coverage of the women's swimwear market.
PRODUCT LINE
The Company's current product line offerings by its U.S. Division are
as follows:
<TABLE>
<CAPTION>
SASSAFRAS GROUP LA BLANCA GROUP
--------------- ---------------
<S> <C> <C> <C>
Sassafras Citrus La Blanca Elisabeth Stewart
Sessa Too Hot Studio La Blanca Private Label
Private Label Nautica (licensed) Ocean Pacific (licensed)
</TABLE>
SASSAFRAS GROUP
The Sassafras Group, focusing on the junior market (ages 14 to 30)
and the missy market (ages 30 and over), is currently comprised of five major
branded product lines, as described below.
SASSAFRAS. Introduced in 1976, Sassafras has been successfully positioned as
both fashionable and practical swimwear appealing to younger women with an eye
for value. Sassafras offers approximately 90 styles, with most featuring full
derriere coverage and padded bra tops. Featured cover-ups include matching
sarongs. Priced at retail around $58, management believes that Sassafras'
innovative design and high quality fabrication provide one of the best
price/value relationships in the junior market. Sassafras is distributed
primarily through department stores, national chain stores and specialty stores.
SESSA. Introduced in 1991, Sessa has been designed to bridge the junior and
missy segments of the contemporary swim market by focusing on the fashion
conscious baby boomer who seeks support and coverage while maintaining a forward
style. Sessa targets ages 25 to 50 and is priced at retail between $55 and $90.
Sessa offers approximately 140 styles featuring a multitude of textures and
patterns in its one and two piece styles. Sessa's extensive cover-up and
beachwear collection features pareaus, dresses, boy shorts, oversize shirts ,
shorts and skirts at retail prices ranging from $32 to $79. Sessa is primarily
distributed through department stores, catalog accounts and specialty stores.
CITRUS. Introduced in 1987, Citrus swimwear is designed to focus on the active,
surf, fashion forward juniors aged 13 to 28, and is priced at retail between $44
and $72. Citrus offers approximately 140 styles with each featuring sporty
v-neck tanks, halter boy shorts, sport bras or triangle tops, with vivid colors
in graphic prints and textures. Shapely padding and functional lingerie strap
underwire styles characterize the Citrus two piece tops. Cover-ups include hot
pants, sundresses and board shorts. A junior separates collection is offered
annually, sized extra small to large in novelty textures and prints, and
features full, moderate and surfer cut bottoms, as well as D cups. Citrus is
distributed primarily through department stores and specialty stores.
2
<PAGE> 3
TOO HOT. Reintroduced in 1998, Too Hot is designed to focus on the "surfer
girl", aged 14 to 26, and is priced at retail between $50 and $74. Too Hot
offers approximately 60 styles, mostly two piece designs, including "cami" tops,
sport bras, triangles and the hot trend "Tankinis". The Too Hot color story is a
retro Hawaiian one that appeals to the customer who wants a unique look for
herself. Too Hot is primarily distributed through swim and specialty stores.
NAUTICA. The Nautica license was acquired in June 1996. The initial controlled
release was very successful. The 1999 lines take the Nautica brand into two
directions. The first direction is Nautica collections, a brand concept with all
American styling and attitude targeted at affluent customers who identify with
designer merchandise. The second direction is athletic attitude, featuring color
blocking and clear suits with piping and binding features. Retail prices range
from $40 to $100. Nautica separates were introduced in the summer of 1998 and
have been very attractive at retail. Nautica is distributed through a selective
group of department, swim and specialty stores.
LA BLANCA GROUP
The La Blanca Group, focusing on the Missy market (ages 25 and over),
the Junior market (ages 14 to 25) and the children and pre-teen market (ages 7
to 13) is comprised of the following product lines:
LA BLANCA. Introduced in 1981, La Blanca is AVI's largest selling line and is a
leader in the Missy market. La Blanca offers approximately 100 styles between
swimwear and cover-ups and is particularly well known for its innovative styling
and excellent fit. Priced at retail between $65 and $100, management believes La
Blanca's high quality fabrics and suit construction provide a price/value
relationship which is superior to any of La Blanca's competitors. La Blanca's
sales of two piece suits is approximately 40% of its total net sales. This has
lead to developing a La Blanca separates line introduced for Cruise 1999 season.
The most innovative addition is La Blanca Curva, introduced in August 1998,
offering bra sized swimwear which management believes will increase the sales as
the consumer is responding to fit enhancement. La Blanca is distributed
primarily through department stores, national chains and specialty stores.
STUDIO LA BLANCA. Introduced for the 1995 Cruise Season, Studio La Blanca is a
fashion leader in the "contemporary Junior" market, appealing to the
sophisticated junior as well as the missy customer with a young attitude. Retail
prices range from $40 to $80. Primarily a two piece business, Studio addresses
the demand from the younger market for separates and the ability to buy a
different size top than bottom. Studio is distributed through department stores,
national chains and specialty stores.
ELISABETH STEWART. AVI acquired the Elisabeth Stewart Label in April, 1994. This
line gives the Company a presence in the market niche serving the more mature
customer. The merchandising approach is typically more conservative and features
"figure control" design with matching cover-ups. Retail prices $60 to $90 are
similar to other branded products.
OCEAN PACIFIC. AVI acquired the Ocean Pacific or OP label through a licensing
agreement signed in February 1997. OP produces swimwear and beachwear for the
junior and kids market. Ocean Pacific is designed with the California beach
style in mind. The line has been upgraded from past offerings by using textured
fabrics and print fabrications that give the product a more "rich" feeling. The
fit is conservative and will appeal to the junior customer who wants a clean
covered look. The children's fit has remained consistent from years past and
focuses on the customer who is in and out of the water all day long. It is
distributed primarily through department stores, national chain stores and
specialty stores.
PRIVATE LABEL. The Company sells specially designed and manufactured products
for retail customers such as as Montgomery Ward, Wal*Mart, JC Penney, Sears,
Target and others. Entry into this segment of the market provides the Company
with balance to its heavy focus on the branded business.
3
<PAGE> 4
FOREIGN OPERATIONS - APPAREL VENTURES EUROPA AND AVI DE MEXICO
In 1992, in order to have the ability to manufacture and sell product in
the European Economic Community ("EEC"), the Company purchased 79% of the
capital stock of a small manufacturing operation in Portugal, which it renamed
Apparel Ventures Europa - Textil, LDA ("AVE"). Management of AVE owns the
remaining 21% of AVE's stock. Upon acquiring AVE, management of the Company
realized that the implementation of a comprehensive strategy required for
creative development, manufacturing and sales for the EEC would take three to
five years. AVE currently manufactures the product lines "Citrus" and "Too Hot
Brazil" for the European market. AVE also sells specially designed and
manufactured products for Marks & Spencer. AVE accounted for $4.2 million
(excluding intercompany sales) of net sales for the fiscal year ended June 30,
1998.
During fiscal 1997, the Company established an operating company in
Cuernavaca, Mexico. The wholly-owned subsidiary's name is AVI De Mexico, S.A. De
C.V. This Mexican sewing plant will begin full production in fiscal 1999. See
section "Design and Manufacturing" below for more information about the Mexican
subsidiary.
GROUP NET SALES AND GROSS PROFIT
The table below illustrates a breakdown of the net sales and gross
profit for each of the Company's three U.S. Division/Groups and AVE for each of
the last three fiscal years.
<TABLE>
<CAPTION>
NET SALES GROSS PROFIT
--------------------------------- ---------------------------------
FISCAL YEAR ENDED JUNE 30, FISCAL YEAR ENDED JUNE 30,
--------------------------------- ---------------------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
($ in Millions)
<S> <C> <C> <C> <C> <C> <C>
Sassafras Group ....................... $ 40.0 $ 27.3 $ 28.1 $ 13.9 $ 10.9 $ 7.7
La Blanca Group ....................... 32.4 35.6 44.0 8.5 12.3 15.7
Import Group .......................... 0.5 0.1 0.0 -0.2 0.0 0.0
AVE ................................... 2.5 3.3 4.2 1.0 1.4 1.7
--------------------------------- ---------------------------------
Total $ 75.4 $ 66.3 $ 76.3 $ 23.2 $ 24.6 $ 25.1
================================= =================================
</TABLE>
- ----------
DESIGN AND MANUFACTURING
The Company's product lines have been well-received in the marketplace
due to AVI's innovative combinations of color, fabric, style and pattern, as
well as heavy emphasis on proper fit. Input into the design process is obtained
from close contact with department and specialty store buyers as well as
customer responses to designs offered in "Early Cruise" lines two to three
months before the major selling season. AVI schedules its design process to
ensure that it has a full complement available for the "Early Cruise" season, as
this season affords AVI with an opportunity to revise its production schedule
depending on the success of each particular style.
AVI purchases the majority of its textile inputs from American
manufacturers of nylon Lycra spandex - based knitted fabric. The Company's major
suppliers include Guilford Mills, Inc. and Lida Stretch Fabrics, Inc. The
Company does not believe it is reliant on any one supplier.
AVI is able to maintain control over the manufacturing process while
achieving a degree of flexibility to respond to market changes. All of AVI's
cutting is performed in-house at its Gardena, California facility. Three Company
operated facilities in South Gate, Norwalk and Oxnard, California fulfill
approximately 25% of AVI's sewing requirements These plants manufacture the
Company's labels and products exclusively. AVI currently subcontracts outside
contractors the remaining 75% of its sewing requirements, of which approximately
75% is subcontracted to local Los Angeles area contractors and 25% to Mexico
contractors (including AVI De Mexico). AVI maintains control over the quality of
the garments at all sewing facilities through its quality control staff who
approve all cuts at the sewing site and re-check garments at the Company's
distribution centers. All plants have been moved to an 11-month production cycle
to minimize the impact of seasonality. This is achieved through various cut-up
and Private Label programs help absorb the fixed overhead during otherwise non
productive periods.
4
<PAGE> 5
The Company believes that long term it must increase its lower cost
Mexican production capacity. During fiscal 1997 the Company established a
Maquiladora plant in Cuernavaca, Mexico. At June 30, 1998 the Company had 94
operators. On August 31, 1998 the Company entered into an agreement to purchase
Trajes de Bano, a Maquiladora plant also located in the Cuernavaca industrial
park, out of bankruptcy. Trajes de Bano was the Maquiladora of Apparel America,
which produced constructed missy swimwear. The Trajes de Bano Maquiladora had
approximately 100 operators and 200 sewing machines. The Company acquired the
stock and other operating assets of Trajes de Bano in a transaction accounted
for as purchase. This acquisition should double the capacity of the Company's
Mexican subsidiary's facility in Cuernavaca, Mexico. The Company estimates that
with this purchase of Trajes de Bano it will be able to meet its year two of
operation target of 260 employees. The Company also executed a capital lease
with the option to purchase the 35,000 square feet building in Cuernavaca.
DISTRIBUTION AND SALES
AVI sells its products through all major distribution channels. AVI's
brands are sold through prestige department stores such as Saks, Bloomingdales,
Lord & Taylor and Nordstrom, and traditional department stores such as Dillards,
Macy's and Robinson May and specialty stores such as Everything But Water and
California Sunshine. AVI sells branded close - out merchandise to MARMAXX Group
and Ross. AVI sells Private Label products to Wal*Mart, JC Penney and Sears.
AVI's top ten customers accounted for approximately 42% of gross sales and no
single customer for more than 10% of AVI's gross sales in fiscal 1998.
Although AVI's design process targets the ultimate consumer, in order
to optimize the distribution of AVI's products, the Company's marketing process
targets the specific buyer characteristics of each distribution channel. In
particular, department store buyers and national chain store buyers tend to
focus on items such as pricing and product availability. As a result, AVI
provides these buyers with significant guidance in style selection. Conversely,
local specialty store buyers tend to be much more design conscious, and AVI must
instead concentrate its marketing efforts on coordinating product delivery and
payment schedules.
Because of the seasonal nature of the swimwear industry, significant
functions in the design and selling process typically occur on a well - defined
time schedule. The following schedule illustrates this pattern for the product
lines developed for a Cruise Season.
<TABLE>
<CAPTION>
Function Time Frame
----------------------- ------------------
<S> <C>
Line Development November to July
Marketing July to May
Manufacturing and Sales August to June
</TABLE>
These time parameters reflect the peak activity for a given function.
Based on the results of the nationwide Early Cruise Season, during which buyers
make their selections for the season from the full range of product lines
offered by the industry, swimsuit manufacturers modify production schedules in
order to accommodate the expected demand for their products during Cruise.
Manufacturing occurs between August and May and peak shipping occurs between
November and June.
In order to optimize its product offerings, AVI takes full advantage of
the "Early Cruise" season by providing test product lines and working closely
with buyers to obtain feedback for the Cruise season. AVI encourages early
ordering by specialty stores, offering dating programs that allow up to 102 days
for payment at the start of the season. AVI offers an exchange program where AVI
takes back slow moving products in exchange for more popular selling products.
During the past three years, returns and allowances have averaged 7.6% of gross
sales.
AVI maintains national showrooms in Los Angeles and New York which are
staffed by a total of four clerical and eight employed salespeople. AVI covers
other major markets by utilizing independent sales representatives from 14
different organizations. These independent sales representatives are paid a
commission based on a fixed percentage of net sales, with lower rates
established for off - price or promotional sales. In addition, two officers of
the Company and two sales principals of each brand Group play an active role in
developing customer relationships and managing certain house accounts. The most
extensive marketing effort occurs at tradeshows, where the Company's products
are showcased along with competitors' merchandise. Major tradeshows occur in
Florida, New York and Los Angeles, usually from July through October.
5
<PAGE> 6
FACTORING
The Company currently factors substantially all of its accounts
receivable with Republic Business Credit Corporation ("Republic"). Under the
factoring agreement, the factor purchases substantially all of the Company's
accounts receivable and assumes substantially all credit risks with respect to
such accounts for a factoring charge negotiated as a percentage of the invoice
amount assigned. The Company is currently in process of negotiating a new
factoring agreement with the CIT Group. The Company believes this new
relationship will increase the factor approved credit for its customers and give
the Company the trade credit for its major vendor partners necessary for the
upcoming season. The Company employs eight employees who are responsible for
following up on adjustments claimed by customers on chargebacks prepared by the
factor. Subject to restrictions under the Company's Credit Facility, the Company
can draw advances from the factor if desired based on a pre-determined
percentage of accounts receivable sold.
COMPETITION
The women's swimwear segment of the apparel industry is highly
competitive and fragmented. The Company must remain competitive in the areas of
style, quality, brand recognition, price and customer service. The Company
competes with numerous apparel manufacturers, including companies marketing
predominantly swimwear, companies marketing a full line of apparel and others
which, unlike the Company, have become vertically integrated by expanding into
retail distribution. Many of the Company's competitors have greater financial
resources than the Company.
In general the branded women's swimwear business is dominated by AVI,
Jantzen (a division of VF Corp.), Beach Patrol (a privately held company),
Sirena Apparel Group, Inc. and Authentic Fitness, Inc. The balance of the
industry is characterized by small companies with sales of less than $10
million.
Foreign competition has not historically been a significant factor in
swimsuit manufacturing for three major reasons: (i) material, rather than labor,
is the highest cost component in swimsuits, (ii) foreign producers have
historically been unable to fit the consumer as well as domestic producers who
retain control over the manufacturing process and (iii) domestic manufacturers
can provide shorter delivery and reorder lead times.
EMPLOYEES
During the peak season from July through April, the production
headcount increases from approximately 125 to 575. None of the Company's
workforce is unionized, and employee relations are considered to be good. The
employee count as of June 30, 1998 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
EMPLOYEES
---------
<S> <C>
Executive Management 4
Administrative 45
Design and sample makers 50
Production 288
Marketing and Showroom 13
Shipping and Distribution 33
---
433
===
</TABLE>
TRADEMARKS AND LICENSING AGREEMENTS
Company owned brands are protected by trademark registration or similar
protection in the United States and most other markets where the related
products are sold. These trademark rights are enforced and protected by
litigation against infringement as necessary. The Company has also granted
licenses to other parties to manufacture products under the Company's trademarks
in product categories and/or geographic areas in which the Company does not
operate.
In February 1997, the Company entered into a license agreement with
Ocean Pacific Apparel Corp. for the design, manufacture and marketing of
children's, pre-teen and junior's swimwear and related cover-ups, special
make-up goods and tee-shirts under the "Ocean Pacific" and "OP" brand names. The
agreement covers the U.S. and its territories and is valid for a term up to and
including June 30, 2000 and provides for the payment of certain minimum royalty
and advertising payments based on net sales for each agreement year. Ocean
Pacific Apparel Corp. has the right to approve design specification of products
bearing the licensed trademark.
6
<PAGE> 7
In June 1996, the Company entered into a license agreement with Nautica
Apparel, Inc. for the design, manufacture and marketing of women's swimwear and
related cover-ups under the "Nautica" brand name. The agreement covers the U.S.
and its territories and is valid for a term up to and including June 30, 2000
and provides for the payment of certain minimum royalty and advertising payments
based on net sales for each agreement year. Nautica Apparel, Inc. has the right
to approve design specifications of products bearing the licensed trademark.
Minimum annual royalty payments under these licensing agreements are
approximately $361,000 and $397,000 for the years ending June 30, 1999 and 2,000
respectively.
Management believes that loss of any license would not have a material
adverse effect on the Company.
BACKLOG
Backlog represents booked unshipped customer orders which, although
terminable without penalty, are believed by the Company to be firm. Because of
the seasonality of the Company's business, the Company's backlog varies over
the course of the year. Backlog usually peaks in December and January. At
January 31, 1998 the Company's backlog was approximately $35.9 million. The
backlog at September 18, 1998 was $19.7 million compared to $17.1 million at
September 19, 1997. See also "Seasonality" below.
SEASONALITY
The Company's business is highly seasonal. In fiscal 1998,
approximately 76% 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 lead 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.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements included in Item 1 - "Business", Item 3 - "Legal
Proceedings" and Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are "forward-looking statements" within
the meaning of the federal securities laws. This includes any statements
concerning plans and objectives of management relating to the Company's
operations or economic performance, and assumptions related thereto.
These forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and
therefore involve a number of risks and uncertainties. Management cautions that
forward-looking statements are not guarantees and that actual results could
differ materially from those expressed or implied in the forward looking
statements.
Important factors that could cause the actual results of operations or
financial condition of the Company to differ include, but are not necessarily
limited to, the overall level of consumer spending for swimwear; changes in
trends in the swimwear industry market in which the Company competes; actions of
competitors that may impact the Company's business; and the impact of unforeseen
economic changes in the markets where the Company competes, such as changes in
interest rates, currency exchange rates, recession and other external economic
and political factors which the Company has no control.
7
<PAGE> 8
ITEM 2. PROPERTIES
The following is a summary of all Company operated facilities:
<TABLE>
<CAPTION>
SQUARE LEASED OR
FACILITY LOCATION FOOTAGE OWNED
-------- -------- ------- -----
<S> <C> <C> <C>
Corporate Headquarters and 204 W. Rosecrans Ave.
Finished Goods Warehouse Gardena, CA. 63,000 Owned
Fabric & Trim Warehouse and 230 W. Rosecrans Ave.
Cutting Operations Gardena, CA. 63,600 Leased
Shipping Department and 312 E. Rosecrans Ave.
Finished Goods Warehouse Gardena, CA. 48,964 Leased
AVI Sewing Plant 11101 Palmer Ave.
South Gate, CA. 17,000 Leased
AVI Sewing Plant 14010 Shoemaker Ave.
Norwalk, CA. 24,468 Leased
AVI Sewing Plant (*) 12228 Barringer St.
El Monte, CA. 13,350 Leased
AVI Sewing Plant 1701 Fiske Place
Oxnard, CA. 20,480 Leased
Eastern Showroom 1411 Broadway #3111
New York, NY. 5,175 Leased
Western Showroom 110 E. 9th St. #C1117
Los Angeles, CA. 2,805 Leased
Offices, Cutting Operations and Finished Bairro Campo da Bola
Goods Warehouse - Portugal Albarraque
2735 Rio de Mouro, PORTUGAL 10,753 Leased
Sewing Plant - Portugal Estrada de Alvide, 603
Abuxarda
2750 Cascais, PORTUGAL 6,451 Leased
Sewing Plant - Mexico Parque Industrial "Ciudad de la Confeccion"
Camino Temixco Emiliano Zapata Km.3, Lote 6
Col. Palo Escrito, C.P. 62760
Municipio de Emiliano Zapata, Morelos Leased/
Emiliano Zapata, Morelos, MEXICO 35,628 Option to buy
------
Total 311,674
=======
</TABLE>
The Company believes that the existing facilities are in good condition
and adequate to meet its current and reasonably foreseeable manufacturing
requirements.
The Company owns substantially all of the equipment used in all of its
facilities.
- -----------------
(*) The El Monte Plant was closed as of August 31, 1998, due to
inefficiencies and high cost of operation. The cost involved for closing
the facility was not material.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation. No
litigation in which the Company is presently involved is material to its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year ended June 30, 1998.
8
<PAGE> 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock. AVI Holdings, Inc. owns 100% of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
( $ IN MILLIONS)
The following table presents selected consolidated historical financial
data of the Company and the Predecessor:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $26.7 $19.5 $19.2 $19.1 $12.3
Total assets 52.2 66.0 52.0 50.4 56.5
Long-term debt 39.3 39.3 38.0 38.0 36.7
Stockholder's equity (deficit) 8.1 2.6 3.8 2.8 (4.7)
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
AND THE THE COMPANY
PREDECESSOR ----------------------------------------------------
------------
COMBINED
52 WEEKS
ENDED YEAR ENDED JUNE 30,
JUNE 30, ----------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- ------- ------ -----
OPERATING DATA: (AS RESTATED)
(6)
<S> <C> <C> <C> <C> <C>
Net sales $69.0 $76.5 $75.4 $66.3 $76.3
Gross profit 26.6 22.8 23.1 24.6 25.1
Operating expenses 18.4 22.3 19.7 19.4 22.0
Depreciation & amortization 0.8 2.1 2.5 1.9 1.9
Income (loss) before income taxes 7.0 (6.1) (4.1) (1.2) (4.2)
Net income (loss) 6.9 (4.2) (2.8) (0.9) (7.2)
Unaudited pro forma:
Provision (benefit) for income taxes $ 2.8(1) ($1.9) ($1.3) ($0.3) $ 3.0
Net income (loss) 4.2 (4.2) (2.8) (0.9) (7.2)
Capital Expenditures 3.9 1.7(2) 0.6 0.8 2.2(10)
Ratio of earnings to fixed charges (3) 5.6x 0.1x 0.4x 0.8x 0.3x
OTHER FINANCIAL DATA: (4)
EBITDA $ 9.8 $ 2.5 $5.0 (7) $6.1 (8) $ 3.8(9)
EBITA 9.0 1.2 3.9 5.1 2.8
Net sales growth -4.4% 10.9% -1.5% -12.1% 15.2%
Gross margin 38.5% 29.8% 30.6% 37.1% 32.9%
EBITDA margin 14.2% 3.3% 6.6% 9.2% 5.0%
EBITDA / Net interest expense 1.8x(5) 0.4x 0.7x 1.1x 0.6x
EBITA / Net interest expense 1.7x(5) 0.2x 0.6x 0.9x 0.5x
CASH FLOW INFORMATION:
Operating activities $ 6.1 ($10.3) $ 8.3 $ 4.5 ($10.7)
Investing activities (39.8) (1.9) (0.8) (0.9) (0.9)
Financing activities 32.9 12.3 (8.0) (3.4) 11.6
</TABLE>
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<PAGE> 10
(1) For historical periods presented through May 23, 1994, the Company was
an "S" corporation and, accordingly, was not subject to corporate income
taxes, except in certain states. The pro forma income tax information
has been computed as if the Company had been subject to corporate income
taxes based on the tax laws in effect during the period.
(2) This includes the cost of certain real estate acquired pursuant to the
acquisition of the Company's business in (the "Acquisition") and the
allocation of excess purchase price in the Acquisition to equipment.
(3) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent income before income taxes plus fixed charges, and
"fixed charges" consist of interest expense. For fiscal 1997 and 1998
earnings were inadequate to cover fixed charges by $2.1 million and $5.0
million respectively.
(4) The Company has included information concerning EBITDA and EBITA because
it understands that such information is used by certain investors as
measures of the Company's operating performance. EBITDA and EBITA should
not be considered as alternatives to, or more meaningful than, income
from operations or cash flow (as determined in accordance with generally
accepted accounting principles) as measures of the Company's operating
performance. EBITDA and EBITA do not necessarily indicate whether cash
flows have been or will be sufficient to fund cash needs. Furthermore,
EBITDA and EBITA presented herein may not be comparable to similarly
titled measures of other companies because of variations of the
"adjustments" that might exist in the computations.
<TABLE>
<CAPTION>
THE COMPANY
AND THE
PREDECESSOR THE COMPANY
----------- -----------------------------------------------
COMBINED
52 WEEKS
ENDED YEAR ENDED JUNE 30,
JUNE 30, -----------------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net income (loss) $6.9 ($4.2) ($2.8) ($0.9) ($7.2)
Add:
Interest expense, net of interest income
and amortization of debt issue costs 1.4 6.5 6.7 5.5 6.2
Provision (benefit) for income taxes 0.1 (1.9) (1.3) (0.3) 3.0
Amortization of goodwill and
organization costs -- 0.3 0.4 0.3 0.3
Amortization of debt issue costs -- 0.5 0.6 0.5 0.5
Miscellaneous (*) 0.6 -- 0.3 --
---- ---- ---- ---- ----
EBITA 9.0 1.2 3.9 5.1 2.8
Depreciation 0.8 1.3 1.1 1.0 1.0
---- ---- ---- ---- ----
EBITDA 9.8 2.5 5.0(**) 6.1(***) 3.8(****)
</TABLE>
Other measures of performance, including the Net Sales Growth, Gross
Margin, and EBITDA and EBITA margins and ratios to net interest expense, are
presented as additional information which management considers relevant to the
performance of the Company. The measures of Sales Growth and Gross Margin are
customarily considered key indicators of performance within the apparel
industry, and the EBITDA and EBITA margins and ratios are relevant to investors
in debt instruments. Management believes this additional information is relevant
to an investor's understanding of the Company's performance since it is believed
such information is used to measure performance of other companies in the
apparel industry and those which are significantly debt financed.
(*) Amounts are adjusted to exclude lease expenses of $0.3 for the Combined
52 weeks ended June 30, 1994, to give effect to the acquisition of
certain real estate assets and $0.3 to adjust for one-time bonus
compensation. In fiscal 1996, the Company recorded an extraordinary item
of $0.3 million related to the write-off of deferred debt issue costs
and bond discount due to the repurchase of $4.0 million of Senior Notes.
(**) See Note 7 below.
(***) See Note 8 below.
(****) See Note 9 below.
(5) Coverages are based on pro forma net cash interest expense of $5.3
million, consisting of $4.9 million on the Senior Notes and $0.4 million
on the revolver debt.
10
<PAGE> 11
(6) During the course of attempting to reconcile book to physical inventory
differences as of June 30, 1995, the Company discovered that inventory
as of June 30, 1994 had been overstated by $1,331,000. This
overstatement pertained to two items of inventory for which the quantity
had been recorded incorrectly into the inventory costing program after a
physical count. As a result, gross profit and net income of the Company
for the five weeks ended June 30, 1994 would have been reduced by
approximately $93,000 and $56,000, respectively, and gross profit and
net income of the Predecessor for the forty-seven weeks ended May 22,
1994 would have been reduced by approximately $1,238,000 and $1,201,000,
respectively.
The financial statements have been adjusted to correct for this error
for the combined 52 weeks ended June 30, 1994. The effect of this
adjustment on various amounts in the June 30, 1994 balance sheet are as
follows:
<TABLE>
<S> <C>
Decrease additional paid-in-capital $ 492,000
Increase goodwill 709,000
Increase deferred tax assets 74,000
Decrease retained earnings 56,000
----------
Decrease inventory $1,331,000
==========
</TABLE>
The Company had processes in place which were intended to detect such
instances of overstated inventory at the time the error was made, however, the
process failed to detect and correct the problem. As a result, the Company
implemented additional inventory controls to prevent the recurrence of such a
situation. In addition, the Company examined its entire inventory management and
control processes and implemented changes to enhance the effectiveness of
overall inventory management. Such additional processes and controls include
enhancements to data processing systems, routine and regular inventory variance
analysis, purchasing controls, and others. Management believes the existing
system of inventory control is functioning effectively.
(7) Certain charges were incurred in fiscal 1996, totaling $1.6 million,
affecting EBITDA that were not expected to recur in fiscal 1997. These
charges include: $1.2 million in additional markdowns on prior season
raw material and finished goods inventory, due to decline in value of
merchandise; $0.2 million in bad debt write-offs; and $0.2 million of
other miscellaneous charges to operations. Had these charges not
occurred, the adjusted EBITDA would have been $6.6 million.
(8) Certain charges were incurred in fiscal 1997, totaling $0.9 million,
affecting EBITDA that are not expected to recur in fiscal 1998. These
charges include: $0.4 million (including legal fees) in connection with
a legal settlement; $0.3 million executive severance pay accrual; and
$0.2 million in miscellaneous charges to operations. Had these charges
not occurred, the adjusted EBITDA would have been $7.0 million.
(9) Certain charges were incurred in fiscal 1998, totaling $1.0 million,
affecting EBITDA that are not expected to recur in fiscal 1999. These
charges include: $0.5 million in AVI De Mexico start-up costs; $0.2
million in connection with year 2000 related system conversion costs;
$0.2 million in legal settlement and legal fees; and $0.1 million in bad
debt provision for notes receivable from sales representatives. Had
these charges not occurred, the adjusted EBITDA would have been $4.8
million.
(10) Capital expenditures includes $1,310,000 in capitalized building cost
under capital lease obligation (AVI De Mexico).
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables also set forth information with respect to the percentage
relationship to net sales of certain items of the consolidated statements of
operations of the Company for the years ended June 30, 1996, 1997 & 1998.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
1996 % 1997 % 1998 %
------------ ----- ------------ ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 75,389,000 100.0% $ 66,262,000 100.0% $ 76,328,000 100.0%
COST OF SALES 52,252,000 69.3% 41,673,000 62.9% 51,210,000 67.1%
------------ ------------ ------------
Gross profit 23,137,000 30.7% 24,589,000 37.1% 25,118,000 32.9%
OPERATING EXPENSES
Design 2,310,000 2,510,000 3,032,000
Selling 6,612,000 6,112,000 7,900,000
Shipping 1,940,000 1,923,000 2,527,000
General and administrative 8,877,000 8,877,000 8,575,000
------------ ------------ ------------
19,739,000 26.2% 19,422,000 29.3% 22,034,000 28.9%
------------ ------------ ------------
Income from operations 3,398,000 4.5% 5,167,000 7.8% 3,084,000 4.0%
OTHER (EXPENSE) INCOME
Interest expense (7,351,000) (5,946,000) (6,744,000)
Royalty income 278,000 214,000 205,000
Royalty expense 0 0 (799,000)
Other (402,000) (599,000) 24,000
------------ ------------ ------------
(7,475,000) -9.9% (6,331,000) -9.6% (7,314,000) -9.6%
------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (4,077,000) -5.4% (1,164,000) -1.8% (4,230,000) -5.5%
INCOME TAX PROVISION (BENEFIT) (1,309,000) -1.7% (264,000) -0.4% 3,006,000 3.9%
------------ ------------ ------------
NET LOSS ($2,768,000) -3.7% ($900,000) -1.4% ($7,236,000) -9.5%
============ ============ ============
</TABLE>
FISCAL 1998 VS. 1997
NET SALES
The Company's net sales for fiscal 1998 increased by $10.1 million or
15.2% as compared to fiscal 1997. This increase was due primarily to the
increase in the sale of licensed merchandise totaling $12.1 million, increased
private label sales for mass merchants of $4.1 million, increased La Blanca and
Studio La Blanca sales of $3.6 million, increased AVE sales of $0.9 million,
offset by a decrease in the Sassafras Group branded merchandise sales of $7.3
million and a decrease in prior season and other merchandise sales of $3.3
million. The increase in net sales for the La Blanca labels was due to improved
designs, improved product performance at retail, as a result of improved
marketing and sales efforts. The decrease in net sales for the Sassafras Group
was due primarily to the late start in product development for the cruise 1998
season which resulted in late production and delivery to the customer.
GROSS PROFIT
Gross profit for fiscal 1998 increased $0.5 million or 2.2%, but
decreased as a percent of net sales, from 37.1% to 32.9% in fiscal 1998. Gross
profit on branded merchandise decreased from 39.0% of net sales in fiscal 1997
to 34.9% of net sales in fiscal 1998. This decrease in gross profit, as a
percent of net sales was totally in the Sassafras Group, where the gross margin
decreased from 39.8% in fiscal 1997 to 27.0% in fiscal 1998. This deterioration
was due primarily to the late delivery and poor reception of the Sassafras,
Sessa, Citrus and Too Hot brands which resulted in larger discounts being given
to move merchandise. The gross profit for the branded lines in the La Blanca
Group increased from 37.8% in in fiscal 1997 to 39.1% in fiscal 1998.
12
<PAGE> 13
OPERATING EXPENSES
Operating expenses for fiscal 1998 increased $2.6 million or 13.4%,
but decreased as a percent of net sales from 29.3% in fiscal 1997 to 28.9% in
fiscal 1998. This increase in operating expenses is primarily due to: increased
design expense of $0.5 million; increased selling expense of $1.8 million;
increased distribution expense of $0.5 million, offset by decreased general and
administrative expense of $0.3 million. The increase in design expense is
primarily due to increased design wages of $0.2 million and increased
amortization of fiscal 1998 design expenses of $0.3 million. The increase in
selling expense is primarily due to increased commissions of $0.2 million,
increased advertising expense of $0.4 million, relating to payments on licensed
products, increased co-op advertising expense on branded merchandise of $0.5
million and increased amortization expense of fiscal 1998 sample cost deferred
in the prior year. The decrease in general and administrative expense is
attributable primarily to reduced bonus accrual of $0.4 million, Jordan
consulting fees of $0.2 million waived for fiscal 1998, offset by increased
management information system expense of $0.2 relating to Year 2000 compliance
and increased factor fees of $0.1 million due to increased sales.
OTHER INCOME (EXPENSE)
Other expenses for fiscal 1998 were $1.0 million higher than in fiscal
1997 due primarily to increased interest expense on the working capital loan of
$0.4 million and increased royalty expense for the newly acquired Nautica and
Ocean Pacific licenses of $0.7 million and bondholder consent fee of $0.4
million, offset by reduced litigation settlement expense of $0.4 million and
reduced foreign exchange loss of $0.1 million.
INCOME TAX PROVISION (BENEFIT) AND NET LOSS
Net loss before income taxes was $(4.2) million in fiscal 1998
compared to $(1.2) million in fiscal 1997. The $3.0 million increase in net loss
reflects the (i) increase in operating expenses of $2.6 million, (ii) increased
other expenses of $0.9 million (mainly due to royalty expense and increased
interest expense), offset by an increase in gross profit of $0.5 million.
The Company's effective income tax provision rate for fiscal 1998 was
71.1% compared to income tax benefit rate of (32.1)% in fiscal 1997. In fiscal
1998 the Company recorded a valuation allowance of $4,359,000 to account for
uncertainties related to the Company's possible decreased use of deferred tax
assets to shelter future income, resulting in additional income tax expense for
the fiscal year. Management periodically reviews the factors and may change the
amount of valuation allowance as facts and circumstances dictate. The Federal
and state net operating loss carryforwards amount to approximately $13,400,000
and $6,400,00 respectively, as of June 30, 1998. Unused net operating loss
carryforwards expire between fiscal 2009 and 2013.
FISCAL 1997 VS. 1996
NET SALES
The Company's net sales in fiscal 1997 decreased $9.1 million or
12.1%. This decrease was due primarily to the decrease in sales of prior season
merchandise of $6.0 million and a $9.5 million decrease in current season
merchandise sales in the Sassafras Group, offset by a $5.6 million increase in
current season merchandise sales in the La Blanca Group and a $0.8 million
increase in sales for Apparel Ventures, Europe. The decrease in sales in the
Sassafras Group was due to a poor reception in the marketplace of the Group's
design, style and color direction. During the last quarter of fiscal 1997, the
President, design team and sales management for the Sassafras Group were
replaced.
GROSS PROFIT
The gross profit increased $1.5 million or 6.3% from 30.7% of net
sales in 1996 to 37.1% of net sales in 1997. This increase in gross profit
occurred despite a $9.1 million decrease in net sales. The increase was
primarily due to a general improvement in profitability on current season
branded merchandise; a 19% increase in the Private Label margins due to improved
selling prices; a $6.0 million decrease in prior season merchandise sales, with
little or no margin; and reduced markdowns on inventory due to better inventory
management.
OPERATING EXPENSES
Operating expenses decreased $0.3 million from $19.7 million in fiscal
1996 to $19.4 million in fiscal 1997. Operating expenses increased as a percent
of net sales from 26.2% in fiscal 1996 to 29.3% in fiscal 1997. This percentage
increase is due primarily to the marked decrease in net sales and the fact that
much of the operating expenses are fixed at this level of operation. Design
expenses increased $0.2 million due to increased print screen development costs.
Selling expense decreased $0.5 million due to reduced net commissions on lower
sales of $0.4 million and reduced advertising of $0.6 million offset by
increased sample expenses of $0.5 million. Distribution and general and
administrative expenses basically remained unchanged but increased as a percent
of net sales.
13
<PAGE> 14
OTHER INCOME (EXPENSE)
Other expense decreased $1.1 million (net) or 15.3% from $7.5 million
(net) or 9.9% of net sales in fiscal 1996 to $6.3 million (net) in fiscal 1997
due primarily to reduced interest expense of $1.4 million, offset by additional
other expense related to a legal settlement and reduced royalty revenue due to
the conversion of an international license agreement from a license to a
distribution agreement.
INCOME TAX BENEFIT AND NET LOSS
Net loss before income tax benefit was $(1.2) million in fiscal 1997
compared to $(4.1) million in fiscal 1996. The $2.9 million decrease in net loss
reflects the (i) improved gross profit margin of $1.5 million, (ii) reduced
operating expenses of $0.3 million, and (iii) reduced other expenses of $1.1
million (mainly due to decrease in interest expense).
The Company's effective income tax benefit rate for fiscal 1997 was
(22.6)% compared to (32.1)% in fiscal 1996. The Federal and state net operating
loss carryforwards amount to approximately $10,109,000 and $4,704,000
respectively, as of June 30, 1997.
CAPITAL RESOURCES AND LIQUIDITY
The Company's working capital decreased from $19.1 million in fiscal
1997 to $12.3 million in fiscal 1998. Included in the $6.8 million decrease in
working capital is the $2.5 million reclassification of the term loan due May
1999, which was subsequently paid. The cash used by operations was ($10.7)
million in 1998, compared with cash provided by operations of $4.5 million in
fiscal 1997. The decrease in cash provided from operations in fiscal 1998
compared to fiscal 1997 was primarily due to the net loss and higher inventory
and accounts receivable levels.
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 (see Note 6 accompanying the financial statements, incorporated herein
by reference). The Company has renegotiated the Credit Facility with its bank
and in addition to the terms previously disclosed has extended the Credit
Facility from May 23, 1999 to July 31, 2000. Additionally the agreement has been
amended to allow for advances against selected customer receivable accounts not
purchased by the factor, increased the eligibility base on licensed finished
goods inventory, increased the eligibility on selected foreign accounts and
provided additional availability up to $1.75 million which is secured by real
estate owned by the Company. The credit agreement with the bank also includes a
$2,450,000 term loan due May 23, 1999. The Credit Facility, which includes the
line of credit and the term loan, is collateralized by receivables, finished
goods inventories and general intangibles of the Company. In addition the term
loan is collateralized by certain personal assets pledged by the Company's
President. On September 24, 1998 the Company repaid the term loan of $2,450,000
with funds contributed by the Parent. The Parent obtained the funds from cash
contribution by the Company's President to the Parent in exchange for additional
Class D Preferred Stock.
The line of credit contains covenants requiring the maintenance of
minimum tangible net worth, fixed charge coverage ratios and other matters. For
the year ended June 30, 1998 the Company failed to meet the minimum tangible net
worth and fixed charge coverage ratio requirement as required by the credit
agreement. The covenant violations were waived by the lender for fiscal 1998.
For the year ended June 30, 1997 the Company failed to meet the fixed
charge coverage ratio requirement under the indenture governing the Senior
Notes. This violation was waived by the bondholders.
For the year ended June 30, 1998 the Company failed to meet the fixed
charge coverage ratio requirement under the indenture governing the Senior
Notes. This violation was waived and an amendment modifying the indenture was
approved by the bondholders. In connection with such waiver and amendment, the
Company agreed to pay $360,000 to the Bondholders. This amount was accrued as of
June 30, 1998, and is included in interest expense.
14
<PAGE> 15
AVI has formed an operating company in Cuernavaca, Mexico. To support
this Mexican operation, AVI will invest approximately $1.3 million in a factory
building through a five year lease and approximately $1.5 million in equipment
through fiscal year 2000.
In addition to the term note payment noted above, the Company does not
have any other mandatory long-term debt principal payment requirement until July
and December, 2000. The Company recognizes that operational cash flow will not
likely be sufficient to fund the maturity of Senior Notes payable in December
2000. The Company has not yet established a specific plan to address this
matter, although several possible courses of action are currently being
considered. The Company expects to thoroughly explore all viable options and
within the next year, expects to have a definitive, viable plan in place.
On the other hand, based upon current levels of operations and
anticipated growth, 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 fiscal year
ending June 30, 1999.
At June 30, 1998, the net collateral availability under the line of
credit was approximately $5,200,000.
PARENT COMPANY CAPITAL STRUCTURE
The capital structure of the Parent company to Apparel Ventures, Inc.
is described in detail in Note 14 in the accompanying financial statements. The
Parent company's capital structure includes debt, common stock, and preferred
stock. Since Apparel Ventures, Inc. is a wholly owned subsidiary of the Parent
and the sole operating unit of the consolidated entity, the Company is the sole
source of operating cash to be paid by the Parent on such securities in the form
of interest, dividends, principal repayments, or redemptions which may occur.
The cash required by the Parent for such purposes will be provided by dividends
or cash advances by the Company if and when such payments are required. Cash
payments by the Company to the Parent in the form of advances or dividends is
precluded or restricted in certain circumstances by the indenture governing the
Senior Notes. Management does not anticipate making significant advances of cash
or distributions of dividends in the near future.
COMPUTER SYSTEMS
The Company's management has initiated a program to prepare the
Company's computer systems and applications for the year 2000. The Company has
incurred and expects to continue to incur internal staff costs as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the year 2000. Testing and
conversion of system applications is expected to cost approximately $250,000
over the next year. A significant proportion of these costs are not likely to be
incremental costs to the Company, but rather will represent the redeployment of
existing information technology resources. Certain internal applications have
already been modified and testing has began. The Company is also continuing to
assess its vendors, customers and other third parties as to their 2000
compliance.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements and the report of
Independent Auditors thereon and the Financial Statement Schedule listed in the
accompanying Index to Financial Statements are hereby incorporated by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
<PAGE> 16
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each of the
Company's directors and executive officers. Each of the persons named below is
elected to their respective office or offices annually.
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
WITH THE COMPANY OTHER DIRECTORSHIPS; BUSINESS EXPERIENCE
- ---------------------------------- ------------------------------------------------------
<S> <C>
MARVIN L. GOODMAN, 65 Mr. Goodman has been the President and Chairman of the
President, Board and a Director of the Company since May, 1994. He
Director, held similar positions with the Predecessor which he
Chairman of the Board of Directors founded in 1976 after selling Maro Manufacturing Co. (dba
High Tide Swimwear), a company which he founded in 1961,
to Warnaco in 1974. Mr. Goodman holds a Bachelor of
Science Degree from the University of California at
Berkeley, a Masters of Business Administration from the
University of Pennsylvania's Wharton School of Business
and an Advanced Management Program Certificate from the
Harvard School of Business.
WILLIAM F. SINGLETARY, 50 Mr. Singletary has been Chief Financial Officer of the
Chief Financial Officer Company since June, 1995. For more than five years he was
the controller for Catalina / Cole of California (a
division of Taren Holdings), which was bought by
Authentic Fitness Corp. (a designer, manufacturer and
marketer of swimwear, swim accessories and active fitness
apparel) where Mr. Singletary was Vice President of
Finance. Mr. Singletary holds a Bachelor of Arts Degree in
Economics and a Masters of Business Administration from
Rutgers University.
ANNE HANSON, 35 Ms. Hanson joined AVI in 1994 as President of the Private
President, La Blanca Group Label Division, and in July 1995 she became President of
the La Blanca Group. Before joining AVI, she had been with
Sirena for approximately six years as Sales and
Merchandising Manager for the Anne Klein and Private Label
lines. Ms. Hanson was also an Assistant Buyer with
Robinsons Department Stores in Los Angeles, California.
Ms. Hanson graduated from the University of Denver in
1985.
JEFF POFSKY, 35 Mr. Pofsky joined AVI as National Sales Manager of Private
President, Sassafras Group Label and Elisabeth Stewart in April 1994. He held various
positions in the La Blanca Group and was promoted to
President of the Sassafras Group in December 1997. Prior
to joining AVI he had been with Club Sportswear as
Director of Sales, and Macys California as buyer of men's
activewear and outerwear. Mr. Pofsky graduated from
Colgate University in 1985 with honors.
JOHN R. LOWDEN, 41 Mr. Lowden has been a Vice President and Director of the
Director Company since April, 1994. Mr. Lowden has been a Managing
Director in The Jordan Company, a private merchant banking
firm since 1985 . He serves on the Board of Directors of
American Safety Razor Company as well as numerous private
companies.
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION PRINCIPAL OCCUPATION FOR PAST FIVE YEARS;
WITH THE COMPANY OTHER DIRECTORSHIPS; BUSINESS EXPERIENCE
- ---------------------------------- ------------------------------------------------------
<S> <C>
JOHN W. JORDAN II, 50 Mr. Jordan has served as a Director of the Company since
Director May 1994. Mr. Jordan is a Managing Director of The Jordan
Company, a private merchant banking firm which he founded
in 1982. Mr. Jordan is also a Director of Jordan
Industries, Leucadia National Corporation, American Safety
Razor Company, AmeriKing, Inc., Carmike Cinemas, Inc.,
RockShox, Inc., Motors and Gears, Inc., GFSI Holdings,
Inc. and Jordan Telecommunication Products, Inc. as well
as other privately held companies.
DAVID W. ZALAZNICK, 44 Mr. Zalaznick has served as a Director of the Company
Director since May 1994. Since 1982, Mr. Zalaznick has been a
Managing Director of The Jordan Company, a private
merchant banking firm. Mr. Zalaznick is also a Director of
Jordan Industries, Carmike Cinemas, Inc., AmeriKing, Inc.,
American Safety Razor Company, Marisa Christina, Inc.,
Motors and Gears, Inc., GFSI Holdings, Inc. and Jordan
Telecommunication Products, Inc as well as other privately
held companies.
MICHAEL LERNER, 54 Mr. Lerner has been a Director of the Company since May
Director 1994. Mr. Lerner is the President /CEO and a Director of
Marisa Christina, Inc., a designer and a manufacturer of
women's and children's apparel and one of the companies
affiliated with The Jordan Company.
</TABLE>
ITEM 11- EXECUTIVE COMPENSATION
Summary Compensation Table
The following table discloses aggregate compensation paid or accrued by
the Company for the past three fiscal years to the Company's chief executive
officer and to the other four most highly compensated executive officers serving
in such capacities at the end of the 1998 fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------------
Name and All Other
Principal Position Year Salary Bonus Compensation
- -------------------------------------------- ----- --------- ------------- ------------
<S> <C> <C> <C> <C>
MARVIN L. GOODMAN, 1998 $272,709 $ 82,231(***) $ 0
President and Chairman of the Board 1997 $271,148 $ 45,400(**) $ 0
1996 $262,181 $ 7,500(*) $ 0
WILLIAM F. SINGLETARY, 1998 $192,307 $ 37,100(***) $ 0
Chief Financial Officer 1997 $180,000 $ 0 $ 0
1996 $120,000 $ 0 $ 0
ANNE HANSON 1998 $187,692 $100,000(***) $ 0
President, La Blanca Group 1997 $156,000 $ 25,000(**) $ 0
1996 $154,000 $ 61,000(*) $ 11,296(1)
JEFF POFSKY 1998 151,290 34,215(***) $ 0
President, Sassafras Group
(Promoted to President in December 1997)
TERESA DEBRUNO 1998 $243,425(2) $ 84,600(***) $ 0
President, Sassafras Group 1997 $270,472 $163,000(**) $ 0
(Terminated in May 1997) 1996 $267,303 $197,000(*) $ 0
</TABLE>
(*) Amount reflects bonus for fiscal 1995 paid in fiscal 1996.
(**) Amount reflects bonus for fiscal 1996 paid in fiscal 1997.
(***) Amount reflects bonus for fiscal 1997 paid in fiscal 1998. There will
be no bonus for fiscal 1998.
- ------------
(1) Represents vacation paid.
(2) Amount reflects severance pay, which was fully accrued for as of June
30, 1997.
17
<PAGE> 18
EMPLOYMENT AGREEMENTS
In connection with the Acquisition, the Company entered into employment
agreements with Mr. Goodman and Ms. DeBruno (collectively, the "Employment
Agreements"). The Employment Agreements provide that the employees will be
employed for a term of five years, although the Company has the right to
terminate any Employment Agreement at any time upon payment of a severance
amount equal to the employee's fixed annual compensation for a period of twelve
months or eighteen months, depending upon when such termination occurs. Ms.
DeBruno was terminated May , 1997. In addition, Mr. Goodman's Employment
Agreement will terminate upon the death or permanent disability of the employee;
however, the Company will be obligated to pay the employee's fixed annual
compensation for a period of 30 days plus all or a portion of such employee's
incentive compensation for the year in which such death or permanent disability
occurs.
Mr. Goodman's Employment Agreement provides that he will receive fixed
annual compensation plus performance-based incentive compensation. The fixed
annual compensation for Mr. Goodman will be $260,000, and will be adjusted
annually in direct proportion to increases in the consumer price index. Mr.
Goodman's incentive compensation will be two percent (2%) of the Company's pre-
tax profits for the year in question (not to exceed the average pre-tax
profits of the Company for the past three years) plus three percent (3%) of the
Company's pre-tax profits for the year in question in excess of such
three-year average.
Mr. Goodman's Employment Agreement defines "pre-tax profits" of the
Company as actual operating income of the Company plus (i) amortization of
transaction expenses and goodwill, (ii) interest expense on the Senior Notes,
(iii) management fees and reimbursable expenses payable to Jordan or its
affiliates, (iv) directors' fees and expenses and (v) depreciation attributable
to certain real estate assets, minus (x) interest income and (y) rent savings
attributable to the purchase of certain real estate assets, net of property
taxes.
Mr. Goodman executed and delivered a Noncompetition Agreement that
prohibits the employee from competing with the Company or revealing confidential
information about the Company for a period equal to the lesser of (i) five years
from the date of the Acquisition or (ii) one year following termination of
employment.
COMPENSATION OF DIRECTORS
Directors receive annual fees in the amount of $8,000, plus
reimbursement for out-of-pocket expenses incurred in connection with the
attendance at meetings. For fiscal 1998 no fees were accrued or paid, as such
fees were waived by the Directors.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership Class
- -------------- ------------------- ----------- -------
<S> <C> <C> <C>
Common Stock AVI Holdings, Inc. 1,000 100%
</TABLE>
18
<PAGE> 19
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT. In connection with the consummation of the
Acquisition and the issuance of the Series A Notes, the Company and TJC
Management Corporation ("TJC"), an affiliate of Jordan, entered into an
agreement (the "Management Agreement") pursuant to which TJC or its designee
provides management services to the Company upon consideration of the payment of
certain fees, not to exceed $250,000 per annum, and reasonable out of pocket
expenses. The fees for fiscal 1998 were waived by TJC.
TAX SHARING AGREEMENT. In connection with the consummation of the
Acquisition, the Company and AVI Holdings entered into an agreement pursuant to
which the Company pays to AVI Holdings certain payments related to taxes. The
payments generally equal the amount of taxes or estimated taxes that the Company
would have to pay if any, if it filed a separate return or a consolidated return
that included only the Company and its subsidiaries.
MARVIN GOODMAN TRANSACTIONS. On July 3, 1995, Marvin Goodman, the
Company's President, made an advance to the Company for working capital purposes
in the amount of $2.45 million. The advance was evidenced by a promissory note
bearing interest at 12% per annum. On December 5, 1995 Mr. Goodman assigned this
promissory note to AVI Holdings which contributed the promissory note to the
capital of the Company, thereby canceling the promissory note. The Company
accrued (but did not pay) the interest payable to Mr. Goodman on this advance in
the aggregate amount of $129,000 as at June 30, 1996, 1997 and 1998. Also on
December 5, 1995, Mr. Goodman pledged to Fleet Capital, as security for a term
loan made by Fleet Capital to the Company, a trust account holding municipal
bonds with a market value of at least $2.89 million. On September 24, 1998 the
term loan was paid-off with funds received from the Parent. Mr. Goodman
contributed these funds to the Parent for additional Class D Preferred Stock.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) (1) FINANCIAL STATEMENTS. PAGE
----
<S> <C>
See " Index to Financial Statements " F-1
(a) (2) FINANCIAL STATEMENTS SCHEDULES.
Report of Independent Accountants on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts. S-2
(a) (3) EXHIBITS.
See " Index to Exhibits " 21
</TABLE>
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during the
fourth quarter of the fiscal year ended June 30, 1998.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The Company has not sent to its security holders any annual report or
proxy materials with respect to its 1998 fiscal year or with respect to any
annual meeting of its security holders.
19
<PAGE> 20
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.
APPAREL VENTURES, INC.
/ s / MARVIN L. GOODMAN
----------------------------------------
By: Marvin L. Goodman
President and Chairman of the Board
Date: September 28, 1998
----------------------------------------
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 / MARVIN L. GOODMAN President and Chairman of the Board September 28, 1998
- ------------------------------ and Director
Marvin L. Goodman (Principal Executive Officer)
/ s / WILLIAM F. SINGLETARY Chief Financial Officer September 28, 1998
- ------------------------------ (Principal Financial and
William F. Singletary Accounting Officer)
/ s / JOHN W. JORDAN Director September 28, 1998
- ------------------------------
John W. Jordan II
/ s / JOHN R. LOWDEN Director September 28, 1998
- ------------------------------
John R. Lowden
/ s / DAVID W. ZALAZNICK Director September 28, 1998
- ------------------------------
David W. Zalaznick
/ s / MICHAEL LERNER Director September 28, 1998
- -------------------------------
Michael Lerner
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
The exhibits listed on this Exhibit Index are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* Certificate of Incorporation of Apparel Ventures, Inc. (formerly
AVI Acquisition Co.), as amended.
3.2* Bylaws of Apparel Ventures, Inc.
4.1* Indenture dated as of May 23, 1994 between Apparel Ventures,
Inc. and American National Bank Trust Company, as Trustee,
relating to $40,000,000 12.25% Senior Notes due December 31,
2000, Series A and Series B.
4.2* Form of Series A Notes (included in Exhibit No. 4.1)
4.3* Form of Series B Notes (included in Exhibit No. 4.1)
4.4* Registration Rights Agreement dated as of May 23, 1994 between
Apparel Ventures, Inc. and Jefferies & Company, Inc.
4.5 First Supplement Indenture between Apparel Ventures, Inc. and
American National Bank and Trust Company, as trustee.
4.6 Second Supplement Indenture between Apparel Ventures, Inc. and
American National Bank and Trust Company, as trustee.
10.1* Agreement for Purchase and Sale of Stock dated May 4, 1994 by
and among AVI Acquisition Co., AVI Holdings, Inc. and all of the
Stockholders of Apparel Ventures, Inc.
10.2* Purchase Agreement dated May 16, 1994 by and among AVI
Acquisition Co., AVI Holdings, Inc. and Jefferies & Company,
Inc.
10.3* Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and Marvin L. Goodman.
10.4* Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and William D. Bussiere.
10.5* Employment Agreement dated as of May 23, 1994 between Apparel
Ventures, Inc. and Teresa A. DeBruno.
10.6* Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and Marvin L. Goodman.
10.7* Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and William D. Bussiere.
10.8* Noncompetition Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and Teresa A. DeBruno.
10.9* Tax Sharing Agreement dated as of May 23, 1994 between AVI
Acquisition Co. and AVI Holdings, Inc.
10.10* Real Estate Contract dated May 23, 1994 by and among Marvin L.
Goodman, Patricia Clark and AVI Acquisition Co.
10.11* Loan and Security Agreement dated as of May 23, 1994 between
Apparel Ventures, Inc. and Barclays Business Credit, Inc.
10.12 Amendment No. 1 and No. 2 to Loan and Security Agreement between
Apparel Ventures, Inc. and Shawmut Capital Corporation -
formerly Barclays Business Credit, Inc. (Incorporated by
reference to the same number Exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995).
10.13 Employment Letter dated as of June 7, 1995 between Apparel
Ventures, Inc. and William F. Singletary (Incorporated by
reference to the same number Exhibit to the registrant's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995).
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.14 Employment Letter dated as of June 12, 1995 between Apparel
Ventures, Inc. and Anne Hanson. (Incorporated by reference to
the same number Exhibit to the registrant's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995).
10.15 Amendment No. 3 to Loan and Security Agreement between Apparel
Ventures, Inc. and Shawmut Capital Corporation - formerly
Barclays Business Credit, Inc. (Incorporated by reference to
Exhibit Number 10.2 to the Registrant's Quarterly report on Form
10-Q for the period ended December 31, 1995).
10.16 Amendment No. 4 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Barclays
Business Credit, Inc. (Incorporated by reference to Exhibit
Number 10.3 to the Registrant's Quarterly report on Form 10-Q
for the period ended March 31, 1996).
10.17 Amendment No. 5 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.4 to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1996).
10.18 Amendment No. 6 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit No.
10.5 to the Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 1997).
10.19 Amendment No. 7 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation (Incorporated by reference to Exhibit
No. 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1997).
10.20 Amendment No. 8 to Loan and Security Agreement between Apparel
Ventures, Inc. and Fleet Capital Corporation - formerly Shawmut
Capital Corporation.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1* List of Subsidiaries.
</TABLE>
- ----------
(*) Incorporated by reference to the same number Exhibit to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-80570).
22
<PAGE> 23
INDEX TO FININDEXLTOTFINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED BALANCE SHEET
as of June 30, 1997 and June 30, 1998 F-3
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years ended June 30, 1996, 1997 and 1998 F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years ended June 30, 1996, 1997 and 1998 F-5
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years ended June 30, 1996, 1997 and 1998 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 To F-19
</TABLE>
F-1
<PAGE> 24
[MOSS ADAMS LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Apparel Ventures, Inc.
We have audited the accompanying consolidated balance sheet of Apparel Ventures,
Inc., a wholly owned subsidiary of AVI Holdings, Inc., and Subsidiaries as of
June 30, 1998 and 1997 and the consolidated statements of operations,
stockholder's equity (deficit), and cash flows for each of the years in the
three year period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 audits 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 Apparel Ventures,
Inc. and Subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three year period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/ MOSS ADAMS LLP
- -----------------------------------
MOSS ADAMS LLP
Los Angeles, California
August 21, 1998 (except for Note 7,
as to which the date is September 24, 1998)
F-2
<PAGE> 25
APPAREL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1997 1998
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 476,000 $ 487,000
Due from factor 12,969,000 17,324,000
Accounts receivable, net of allowance for
doubtful accounts and discounts of $468,000 and $515,000 2,540,000 3,173,000
Inventories 8,372,000 12,195,000
Deferred charges 2,643,000 2,411,000
Deferred income taxes 1,123,000 640,000
Prepaid expenses 511,000 459,000
------------ ------------
Total current assets 28,634,000 36,689,000
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization of
$3,657,000 and $4,625,000 4,675,000 5,867,000
OTHER ASSETS
Goodwill and organizational costs, net of accumulated
amortization of $1,019,000 and $1,356,000 12,482,000 12,158,000
Deferred loan costs, net of accumulated amortization
of $1,641,000 and $2,160,000 1,591,000 1,072,000
Deferred income taxes 2,517,000 --
Other 502,000 722,000
------------ ------------
$ 50,401,000 $ 56,508,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Line of credit $ 841,000 $ 12,766,000
Accounts payable 3,299,000 3,084,000
Accrued interest payable 2,466,000 2,512,000
Accrued expenses 2,856,000 3,334,000
Current portion of note payable and
capital lease obligations 108,000 2,711,000
------------ ------------
Total current liabilities 9,570,000 24,407,000
SENIOR NOTES PAYABLE 35,555,000 35,664,000
NOTE PAYABLE, net of current portion 2,450,000 --
CAPITAL LEASE OBLIGATIONS, net of current portion 33,000 1,001,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 170,000
STOCKHOLDER'S EQUITY (DEFICIT)
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
Due from parent -- (253,000)
Cumulative translation adjustment (156,000) (194,000)
Accumulated deficit (8,090,000) (15,326,000)
------------ ------------
2,793,000 (4,734,000)
------------ ------------
$ 50,401,000 $ 56,508,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 26
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 75,389,000 $ 66,261,000 $ 76,328,000
COST OF SALES 52,252,000 41,672,000 51,210,000
------------ ------------ ------------
Gross profit 23,137,000 24,589,000 25,118,000
OPERATING EXPENSES
Design 2,310,000 2,510,000 3,032,000
Selling 6,612,000 6,112,000 7,900,000
Shipping 1,940,000 1,923,000 2,527,000
General and administrative 8,877,000 8,877,000 8,575,000
------------ ------------ ------------
19,739,000 19,422,000 22,034,000
------------ ------------ ------------
Income from operations 3,398,000 5,167,000 3,084,000
OTHER INCOME (EXPENSE)
Interest expense, including amortization
of deferred loan costs of $635,000, $519,000,
and $519,000 (7,351,000) (5,946,000) (6,744,000)
Royalty income 278,000 214,000 205,000
Royalty expense -- (122,000) (799,000)
Minority interest and other (402,000) (477,000) 24,000
------------ ------------ ------------
(7,475,000) (6,331,000) (7,314,000)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,077,000) (1,164,000) (4,230,000)
INCOME TAX PROVISION (BENEFIT) (1,309,000) (264,000) 3,006,000
------------ ------------ ------------
NET LOSS $ (2,768,000) $ (900,000) $ (7,236,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 27
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Stock Paid-in Translation Due from Accumulated Stockholder's
Shares Amount Capital Adjustment Parent Deficit Equity (Deficit)
----- -------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 1,000 $ 1,000 $ 7,053,000 $ (51,000) $ -- $ (4,422,000) $ 2,581,000
Change in cumulative
translation adjustment -- -- -- 3,000 -- -- 3,000
Dividend paid -- -- (15,000) -- -- -- (15,000)
Contribution of capital -- -- 4,000,000 -- -- -- 4,000,000
Net loss -- -- -- -- -- (2,768,000) (2,768,000)
----- -------- ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 1996 1,000 1,000 11,038,000 (48,000) -- (7,190,000) 3,801,000
Change in cumulative
translation adjustment -- -- -- (108,000) -- -- (108,000)
Net loss -- -- -- -- -- (900,000) (900,000)
----- -------- ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 1997 1,000 1,000 11,038,000 (156,000) -- (8,090,000) 2,793,000
Advance to Parent -- -- -- -- (253,000) -- (253,000)
Change in cumulative
translation adjustment -- -- -- (38,000) -- -- (38,000)
Net loss -- -- -- -- -- (7,236,000) (7,236,000)
----- -------- ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 1998 1,000 $ 1,000 $ 11,038,000 $ (194,000) $ (253,000) $(15,326,000) $ (4,734,000)
===== ======== ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 28
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,768,000) $ (900,000) $ (7,236,000)
Depreciation and amortization 2,511,000 1,903,000 1,948,000
Deferred income taxes (1,318,000) (273,000) 3,000,000
Minority interest earnings -- -- 20,000
Other (4,000) (108,000) (38,000)
Changes in assets and liabilities
Due from factor 1,672,000 2,840,000 (4,355,000)
Accounts receivable, net (23,000) (12,000) (633,000)
Inventories 12,329,000 (688,000) (3,823,000)
Prepaid expenses and other assets (123,000) (922,000) 50,000
Accounts payable (3,219,000) 1,799,000 (215,000)
Accrued interest, expenses and taxes (746,000) 863,000 525,000
------------ ------------ ------------
Net cash provided (used) by operating activities 8,311,000 4,502,000 (10,757,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (587,000) (817,000) (851,000)
Acquisition of intangibles (195,000) (55,000) (13,000)
------------ ------------ ------------
Net cash used by investing activities (782,000) (872,000) (864,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan costs deferred (254,000) -- --
Redemption of senior notes payable (4,000,000) -- --
Borrowing under (repayment of) line of credit, net (9,401,000) (3,303,000) 11,925,000
Borrowing under (repayment of) notes payable 2,555,000 (95,000) (190,000)
Advances to parent company -- -- (253,000)
Repayment of advance from officer, net (377,000) -- --
Contribution of capital 4,000,000 -- --
Minority interest capital investment in subsidiary -- -- 150,000
Dividends paid (15,000) -- --
------------ ------------ ------------
Net cash provided (used) by financing activities (7,492,000) (3,398,000) 11,632,000
------------ ------------ ------------
NET INCREASE IN CASH 37,000 232,000 11,000
CASH, beginning of year 207,000 244,000 476,000
------------ ------------ ------------
CASH, end of year $ 244,000 $ 476,000 $ 487,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $ 6,772,000 $ 5,895,000 $ 6,157,000
============ ============ ============
Income taxes $ (23,000) $ 9,000 $ 6,000
============ ============ ============
NON-CASH AND INVESTING FINANCING ACTIVITY
Building and equipment purchased under capital lease obligation $ -- $ -- $ 1,310,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 29
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 1 - OPERATIONS AND FINANCIAL CONDITION
OPERATIONS - The Company, a wholly owned subsidiary of AVI
Holdings, Inc., is headquartered in Gardena, California and designs,
manufactures and markets branded women's swimwear. The Company offers seven
proprietary lines catering to the Junior and Missy categories distributed
through major department stores and specialty retail stores nationwide and,
through a subsidiary, throughout Europe.
FINANCIAL CONDITION - The Company has experienced net losses over
the past several years and as a result has a cumulative capital deficiency of
$4,734,000 as of June 30, 1998. Despite such negative indicators, management
believes the Company is properly positioned to meet its operational obligations
for the foreseeable future for the following reasons:
1. The Company's working capital position, defined as current
assets minus current liabilities, remains strong, and adequate
bank and vendor credit facilities are in place to meet seasonal
working capital needs.
2. Operating costs have been reduced where it is feasible, and
such costs are continually monitored and controlled.
3. Certain production issues that contributed significantly to the
poor operating results in fiscal 1998 have been identified and
corrected. Although the impact of such matters in 1998 cannot
be quantified with a high degree of accuracy, management
believes they contributed significantly to reduced revenue and
gross profit in 1998. Such issues are not expected to recur in
1999.
4. The Company is negotiating a factoring agreement with CIT Group
and expects to have a facility in place soon. This new
factoring agreement will increase the factor approved credit
for the Company's customers and give the Company increased
trade credit for purchases from its major vendors for the
upcoming season.
In addition to the short term operational matters described above, the Company
recognizes that operational cash flow will not likely be sufficient to fund the
maturity of senior notes payable in December 2000 (see Note 9). The Company has
not yet established a specific plan to address this matter, although several
possible courses of action are currently being considered. The Company expects
to thoroughly explore all viable options and within the next year, expects to
have a definitive, viable plan in place.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company, its 79%-owned Portuguese subsidiary,
Apparel Ventures Europa-Textil, LDA, and its wholly owned subsidiary, AVI de
Mexico, S.A. de C.V. Significant intercompany accounts and transactions are
eliminated in consolidation.
REVENUE RECOGNITION - Revenue is recognized when shipment of
product occurs. An estimate for returns and allowances is recorded against gross
sales amounts to arrive at net sales.
INVENTORIES - Inventories are stated at the lower of cost,
determined on a first-in, first-out basis, or market.
F-7
<PAGE> 30
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of
property and equipment is provided using straight-line and accelerated methods
over estimated useful lives, ranging from 3 to 30 years. Amortization of
goodwill and organization costs is provided over 40 years on the straight-line
method. Deferred financing costs are amortized on the straight-line method over
60 to 78 months.
Long-lived assets such as property and equipment, goodwill, and
trademarks are recorded at cost, and the cost is reduced over time by
depreciation and amortization. As of June 30, 1998 management considers the
stated value of long-lived assets to be recoverable.
ADVERTISING COSTS - Advertising costs are expensed in the period
incurred.
INCOME TAXES - Income taxes are accounted for using an asset and
liability method. Under this method, deferred Federal and state income tax
assets and liabilities are provided for temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. Income taxes are further explained in Note 10.
DEFERRED CHARGES - Deferred charges primarily consist of costs
incurred for the design changes of swimsuit styles to be produced and sold in
the upcoming year. The costs are deferred and are charged against the period
benefited, on the basis of unit sales to total unit sales expected for the next
season.
INTEREST EXPENSE - Interest expense includes amortization of the
related deferred loan costs over the term of the loan.
STATEMENT OF CASH FLOWS - For purposes of cash flows, all highly
liquid investments purchased with an original maturity of three months or less
are considered to be cash equivalents.
CONCENTRATION OF CREDIT RISK - The Company sells its branded
products through all major retail distribution channels, with the exception of
the mass merchandise segment. The Company currently factors substantially all of
its accounts receivable and uses the factor for credit administration and cash
collection purposes. Under its factoring agreement, the factor purchases trade
accounts receivable and assumes substantially all credit risks. The Company is
responsible for following up on adjustments claimed by customers.
Management believes there are no significant concentrations of credit risk.
There is one customer balance included in the amount due from the factor, with
recourse, totaling approximately $1.3 million.
TRANSLATION OF FOREIGN CURRENCIES - Cumulative translation
adjustments, which arise from consolidating Portuguese and Mexican operations,
are included in stockholder's equity.
F-8
<PAGE> 31
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1997, the
Financial Accounting Standards Board (FASB) issued Statement No. 130 (SFAS 130),
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. SFAS No. 130 requires classification of other
comprehensive income in a financial statement, and the display of the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital. SFAS No. 130 will be effective for the
Company in fiscal 1999. The Company believes this pronouncement will not have a
material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information." This
pronouncement establishes standards for reporting information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
will be effective for the Company in fiscal 1999. The Company believes this
pronouncement will not have a material effect on its financial statements.
NOTE 3 - SUBSIDIARIES
The Company has a 79% stock ownership in Apparel Ventures
Europa-Textil, LDA. The excess of the purchase price paid over the estimated
fair value of the net assets acquired (approximately $126,000) has been recorded
as goodwill and is being amortized over 40 years.
The Company's wholly-owned subsidiary in Mexico, AVI de Mexico,
S.A. de C.V. (AVIM), was formed in fiscal 1997 and will begin full production in
fiscal 1999.
NOTE 4 - DUE FROM FACTOR
In accordance with the Company's factoring agreement, the Company
can draw advances from the factor if desired based on a predetermined percentage
of accounts receivable sold at any time before their maturity date. The factor
charges a commission on the net sales factored and interest on advances at the
prime rate plus a negotiated margin. No advances were made during the years
ended June 30, 1997 or 1998.
F-9
<PAGE> 32
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 4 - DUE FROM FACTOR (Continued)
Due from factor consists of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
Uncollected receivables:
<S> <C> <C>
Without recourse $ 12,966,000 $ 16,876,000
With recourse 922,000 1,985,000
------------ ------------
13,888,000 18,861,000
Credits due customers (919,000) (1,537,000)
------------ ------------
$ 12,969,000 $ 17,324,000
============ ============
</TABLE>
NOTE 5 - INVENTORIES
Inventories consist of the following as of June 30:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Piece goods and trim $ 3,977,000 $ 3,457,000
Work-in-process 769,000 1,700,000
Finished goods 3,626,000 7,038,000
----------- -----------
$ 8,372,000 $12,195,000
=========== ===========
</TABLE>
F-10
<PAGE> 33
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 6 - PROPERTY AND EQUIPMENT
The components of property and equipment as of June 30 are:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Buildings $ 2,314,000 $ 3,453,000
Machinery and equipment 2,565,000 3,165,000
Furniture and equipment 172,000 240,000
Computer equipment 1,675,000 1,962,000
Automobile and other 79,000 113,000
Leasehold improvements 1,103,000 1,135,000
------------ ------------
7,908,000 10,068,000
Accumulated depreciation
and amortization (3,657,000) (4,625,000)
------------ ------------
4,251,000 5,443,000
Land 424,000 424,000
------------ ------------
$ 4,675,000 $ 5,867,000
============ ============
</TABLE>
NOTE 7 - LINE OF CREDIT AND NOTES PAYABLE
The Company has a revolving credit agreement with a bank (amended
effective September 24, 1998) which provides for advances and commercial letters
of credit of up to $32 million through July 31, 2000. The line of credit has
sublimits of $3 million for commercial letters of credit. Borrowings are limited
to a predetermined percentage of eligible factored accounts receivable, select
non-factored customer accounts receivable, eligible finished goods inventory,
and certain real estate owned by the Company, 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 and finished
goods inventory. Interest on base borrowings is charged at the bank's prime rate
plus .5%, however, borrowings may be fixed, at management's discretion, for
periods of 30 to 180 days, which are charged interest at LIBOR plus 2.75%.
Interest on seasonal overadvances is charged at the bank's prime rate plus 1.5%,
however, borrowings may be fixed, at management's discretion, for periods of 30
to 180 days, which are charged interest at LIBOR plus 3.75%.The line is
collateralized by receivables, finished goods inventories, and general
intangibles. As of June 30, 1998 the Company had $563,000 in outstanding letters
of credit. Maximum and average amounts outstanding during the year ended June
30, 1998 were $25,963,000 and $12,926,000, respectively. The weighted average
interest rate, including bank fees, during the year ended June 30, 1998 was
9.12%.
F-11
<PAGE> 34
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 7 - LINE OF CREDIT AND NOTES PAYABLE (Continued)
The credit agreement includes a $2,450,000 term loan due 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. On September 24, 1998, the Company's
President contributed $2,450,000 cash to AVI Holdings, Inc. in exchange for
class D preferred stock. Concurrently, AVI Holdings, Inc. contributed $2,450,000
to the Company which was used to retire the term loan.
The line of credit contains covenants requiring the maintenance of
a minimum tangible net worth, fixed charge coverage ratios and other matters.
For the year ended June 30, 1998 the Company failed to satisfy the fixed charge
coverage ratio and the minimum tangible net worth covenants as required by the
credit agreement. The violations have been waived by the bank for fiscal 1998.
NOTE 8 - CAPITAL LEASE OBLIGATIONS
The following comprise capital lease obligations as of June 30:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Capital lease obligation to vendor, secured
by computer equipment, due in
monthly payments of $7,000 through
November 2000 $ -- $ 197,000
Capital lease obligation to vendor, secured
by building, due in monthly
payments of $14,000 and semiannual
payments of $38,000 through November
2002, and a balloon payment of $225,000 due
November 2002 -- 1,258,000
Other 151,000 29,000
----------- -----------
151,000 1,484,000
Less: amount representing interest (10,000) (222,000)
----------- -----------
141,000 1,262,000
Less: current portion (108,000) (261,000)
----------- -----------
$ 33,000 $ 1,001,000
=========== ===========
</TABLE>
F-12
<PAGE> 35
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 8 - CAPITAL LEASE OBLIGATIONS (Continued)
Minimum payments under capital lease obligations, including
interest, for future years ending June 30 are:
<TABLE>
<S> <C>
1999 $ 352,000
2000 323,000
2001 275,000
2002 241,000
2003 293,000
------------
1,484,000
Less: amount representing interest (222,000)
------------
$ 1,262,000
============
</TABLE>
The assets under capital lease consist of a building and computer
equipment with an aggregate cost of $1,310,000 and accumulated depreciation of
$33,000 as of June 30, 1998.
NOTE 9 - SENIOR NOTES PAYABLE
Series A Senior Notes are due December 31, 2000 and bear interest
of 12.25%, payable July 1 and January 1 each year. As part of the indenture, the
bondholders received stock warrants allowing them to purchase 10% of the
outstanding shares of the Parent Company's common stock at $.01 per share. The
notes were issued at a discount of $800,000, which is being amortized over the
term of the notes to yield a constant interest rate of 12.7%. As of June 30,
1998, $36 million principal amount of bonds remain outstanding net of $336,000
unamortized discount.
The Company may redeem the notes, subject to a premium for
redemption, after December 31, 1998. The notes contain certain restrictions
requiring the Company to offer to redeem the notes, including a premium for
redemption, in the event of a change in control of the Company.
The bond indenture contains covenants requiring maintenance of
specified ratios of earnings to fixed charges, restrictions on transactions with
officers and affiliates, and other matters. For the year ended June 30, 1998 the
Company failed to satisfy the fixed charge coverage ratio required by the
indenture. In exchange for a waiver fee of 1% of the face value of the
outstanding bonds ($360,000), the bondholders agreed to waive the violation and
their right to require redemption of 10% of the bonds. This fee is included in
interest expense for the year ended June 30, 1998.
F-13
<PAGE> 36
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 10 - INCOME TAXES
Deferred income taxes reflect the tax effect of temporary
differences between the financial reporting and tax reporting bases of assets
and liabilities. The income tax expense (benefit) for the years ended June 30,
1996, 1997, and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable
Federal $ -- $ -- $ --
State 9,000 9,000 6,000
----------- ----------- -----------
9,000 9,000 6,000
----------- ----------- -----------
Deferred
Federal (1,243,000) (232,000) 2,760,000
State (75,000) (41,000) 240,000
----------- ----------- -----------
(1,318,000) (273,000) 3,000,000
----------- ----------- -----------
Expense (benefit) $(1,309,000) $ (264,000) $ 3,006,000
=========== =========== ===========
</TABLE>
The primary differences between the income tax expense (benefit)
computed at the U.S. statutory corporate income tax rate and the effective
income tax rate for the years ended June 30, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax at the U.S.
statutory rate (34.0) % (34.0) % (34.0) %
State taxes, net (3.1) (3.0) (3.1)
Increase in valuation allowance -- -- 103.2
Officers' life insurance .9 3.1 .4
Amortization of intangibles 3.3 11.5 4.9
Other .8 (.2) (.3)
----- ----- -----
Effective income tax rate (32.1) % (22.6) % 71.1 %
===== ===== =====
</TABLE>
F-14
<PAGE> 37
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 10 - INCOME TAXES (Continued)
At June 30, 1997 and 1998, net deferred tax assets (liabilities) are
comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
Current
<S> <C> <C>
Receivable reserves $ 448,000 $ 554,000
Inventory basis (capitalization
costs and reserves) 391,000 1,081,000
Accrued expenses and other 444,000 57,000
Tax effect of net operating losses 900,000 640,000
Deferred charges (1,060,000) (960,000)
----------- -----------
1,123,000 1,372,000
Valuation allowance -- (732,000)
----------- -----------
$ 1,123,000 $ 640,000
=========== ===========
Long-term
Tax effect of net operating losses $ 2,461,000 $ 3,640,000
Foreign subsidiary losses 23,000 3,000
Plant and equipment 40,000 80,000
Intangibles and other (7,000) (96,000)
----------- -----------
2,517,000 3,627,000
Valuation allowance -- (3,627,000)
----------- -----------
$2,517,000 $ --
=========== ===========
</TABLE>
During the current year, a valuation allowance of $4,359,000 was
recorded to account for uncertainties related to the use of the Company's
deferred tax assets to offset future income, resulting in additional income tax
expense in the year ended June 30, 1998. Management periodically reviews the
factors that may change the amount of valuation allowance as facts and
circumstances dictate. The deciding facts and circumstances causing management
to establish this reserve occurred during the fourth quarter of fiscal 1998.
The Federal and state net operating loss carryforwards amount to
approximately $13,400,000 and $6,400,000 respectively, as of June 30, 1998.
Unused net operating loss carryforwards expire between fiscal 2009 and 2013.
F-15
<PAGE> 38
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 11 - ROYALTIES AND LICENSE AGREEMENTS
ROYALTY INCOME - The Company licenses various trademarks to
entities for the design, manufacture, and distribution of products within the
United States and foreign territories. The agreements generally provide for the
receipt of royalties based on a percent of net sales, subject to minimum royalty
requirements. Included in accounts receivable are $77,000 and $38,000 due from
the licensees at June 30, 1997 and 1998, respectively. Royalty income recognized
under these agreements amounted to $278,000, $214,000 and $205,000 for the years
ended June 30, 1996, 1997 and 1998, respectively.
ROYALTY EXPENSE - During fiscal 1997 the Company began licensing
various trademarks from entities for the design and manufacture of branded
products within the United States. The agreements generally provide for payment
of royalties based on a percentage of net sales, subject to a minimum royalty
requirement. For the years ended June 30, 1997 and 1998, royalty expenses
related to these licensing agreements were approximately $122,000 and $799,000,
respectively. Minimum annual royalty payments are approximately $361,000, and
$397,000 for the years ending June 30, 1999, and 2000, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases its office, showrooms and warehouse
facilities under various operating leases expiring through March 2005. Rent
expense for the years ended June 30, 1996, 1997 and 1998 amounted to $996,000,
$1,003,000 and $1,070,000, respectively.
Minimum payments required under non-cancelable operating leases
with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999 $ 969,000
2000 696,000
2001 291,000
2002 266,000
2003 269,000
Thereafter 355,000
--------------
$ 2,846,000
==============
</TABLE>
F-16
<PAGE> 39
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
COMPUTER SYSTEMS - Management has initiated a program to prepare
the Company's computer systems and applications for the year 2000. The Company
has incurred and expects to continue to incur internal staff costs as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare the systems for the year 2000. Testing and
conversion of system applications is expected to cost approximately $250,000
over the next year. A significant proportion of these costs are not likely to be
incremental costs to the Company, but rather will represent the redeployment of
existing information technology resources. Certain internal applications have
already been modified and testing has begun. The Company is also continuing to
assess its vendors, customers and other third parties as to their year 2000
compliance.
NOTE 13 - LITIGATION SETTLEMENT
During fiscal 1997, the Company settled an unfair business
practices lawsuit in which it was the defendant, for $535,000, approximately
$250,000 of which is being paid by a vendor through discounted merchandise.
Included in other expenses in 1997 are $427,000 related to the litigation,
including $180,000 of legal fees incurred to negotiate the settlement.
NOTE 14 - 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, $.3 million 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 Preferred Stock. A subordinated Junior Note in the amount of
$.65 million was immediately repaid in full for $.35 million. 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 operating 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.
During fiscal 1996, 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.
F-17
<PAGE> 40
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 14 - PARENT COMPANY CAPITAL STRUCTURE (Continued)
The $10 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. 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. The notes are due in equal annual installments on
June 30, 2002, 2003 and 2004. Annual debt service requirements for each of the
next 5 years are:
<TABLE>
<S> <C>
1999 $ 1,801,000
2000 1,801,000
2001 1,801,000
2002 2,851,000
2003 2,851,000
</TABLE>
The Company has failed to meet the fixed charge ratio requirement
in its bond indenture for 1996 through 1998, and therefore has been precluded
from making advances to the Parent for payment of its obligations. 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. As of June 30, 1998, cumulative dividends in arrears amount
to $1,677,000.
During the year ended June 30, 1998 the Company advanced $253,000
to the Parent to redeem $30,000 of common stock and $100,000 of preferred stock
of a former officer of the Company, pay $23,000 of cumulative dividends on the
preferred stock, and pay a waiver fee of $100,000 to note holders.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying amount of the following
financial instruments approximates their current fair value: cash, receivables,
accounts payable, line of credit, and notes payable. The estimated fair value
amounts have been estimated by the Company considering the nature of the
instrument and applicable market information.
F-18
<PAGE> 41
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The current fair value of senior notes payable is believed by
management to be less than the carrying amount, although an estimate of the
amount is not reasonably determinable. A certain amount of these instruments
have traded in the open market, however, an active market for their exchange
does not exist. Management believes historical market transactions are not
necessarily indicative of the current fair value of these instruments.
Considerable judgment is required in interpreting various and volatile market
data to develop the estimates of fair value. Accordingly, estimates, if
determinable, are not necessarily indicative of the amount that the Company
could realize in a current market exchange.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
----------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
(in thousands)
Year ended June 30, 1998
<S> <C> <C> <C> <C> <C>
Revenues $ 2,710 $ 15,087 $ 34,266 $ 24,265 $ 76,328
Operating income (loss) (3,259) 383 7,301 (1,341) 3,084
Income (loss) before income taxes (4,602) (1,171) 5,229 (3,686) (4,230)
Net income (loss) (3,130) (796) 3,555 (6,865) (7,236)
Year ended June 30, 1997
Revenues $ 3,356 $ 10,939 $ 31,400 $ 20,566 $ 66,261
Operating income (loss) (3,406) (298) 7,596 1,275 5,167
Income (loss) before income taxes (4,910) (1,770) 5,928 (412) (1,164)
Net income (loss) (3,360) (1,182) 4,026 (384) (900)
</TABLE>
F-19
<PAGE> 42
[MOSS-ADAMS LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Apparel Ventures, Inc.
Our audits of the consolidated financial statements of Apparel Ventures, Inc.
and Subsidiaries referred to in our report dated August 21, 1998 appearing in
item 8 in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in item 14(a)(2) of Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ MOSS ADAMS LLP
MOSS ADAMS LLP
Los Angeles, California
August 21, 1998
S-1
<PAGE> 43
APPAREL VENTURES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JUNE 30, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Allowance for doubtful accounts and discounts
------------------------------------------------------------------------
Balance Additions
beginning charged to Amounts Balance at
of year cost & expense written off end of year
------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Year ended June 30,
1998 $ 468,000 $ 78,000 $ 31,000 $ 515,000
1997 445,000 104,000 81,000 468,000
1996 236,000 224,000 15,000 445,000
------------- --------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Allowance for credits due customers
----------------------------------------------------------------
Balance Additions
beginning charged to Amounts Balance at
of year cost & expense written off end of year
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 30,
1998 $ 919,000 $ 10,586,000 $ 9,968,000 $ 1,537,000
1997 1,080,000 8,066,000 8,227,000 919,000
1996 860,000 10,315,000 10,095,000 1,080,000
------------- ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Allowance for valuation of deferred tax assets
------------------------------------------------------------
Balance Additions
beginning charged to Balance at
of year cost & expense Deductions end of year
---------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended June 30,
1998 $ - $ 4,359,000 $ - $ 4,359,000
1997 - - - -
1996 - - - -
--------- ------------- ----------- ------------
</TABLE>
S-2
<PAGE> 1
EXHIBIT 4.5
FIRST SUPPLEMENTAL INDENTURE
This FIRST SUPPLEMENTAL INDENTURE, dated as of December 6,
1995, by and between APPAREL VENTURES, INC., a Delaware corporation (the
"Company"), and AMERICAN NATIONAL BANK AND TRUST COMPANY, a national banking
association, as Trustee (the "Trustee"), under an Indenture dated as of May 23,
1994 (the "Indenture"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Indenture.
WHEREAS, the Company desires to amend the Indenture as set
forth below; and
WHEREAS, Section 9.2 of the Indenture provides that the
Company and the Trustee may amend the Indenture with the written consent of the
Holders of at least 66 2/3 percent in principal amount of the then outstanding
Notes; and
WHEREAS, pursuant to a solicitation of consents by the
Company, the requisite consent of the Holders of outstanding Notes has been
received; and
WHEREAS, all other conditions precedent to the execution of
this First Supplemental Indenture have been complied with;
NOW, THEREFORE, each party for the benefit of the other
parties and for the equal and ratable benefit of the Holders of the Notes hereby
executes and delivers this First Supplemental Indenture.
SECTION 1. AMENDMENT OF INDENTURE.
(a) Section 1.1 of the Indenture is hereby amended by adding
the following defined term in the appropriate alphabetical order:
"Eligible Inventory" on any date means the finished goods inventory of
the Company on such date valued on the basis of the lower of cost or
market with the cost of finished goods calculated on a first-in,
first-out basis.
(b) Section 4.9(b) of the Indenture is hereby amended by
deleting subsection (i) thereof in its entirety and substituting in place
thereof the following subsection (i):
"(i) the incurrence by the Company of Indebtedness pursuant to
the Revolving Credit Facility and repayment obligations in respect of
letters of credit, provided that the aggregate principal amount of
Indebtedness so incurred on any date, together with all other
Indebtedness incurred pursuant to this clause (i) and outstanding on
such date, shall not exceed the greater of (A) the sum of (x) 90% of
Eligible Receivables of the Company at the close of business on the day
prior to such incurrence plus (y) 60% of Eligible Inventory of the
Company at the close of
<PAGE> 2
business on the day prior to such incurrence plus (z) $5 million, and
(B) $35 million,"
(c) Section 4.12 of the Indenture is hereby amended by
deleting clause (i) thereof in its entirety and substituting in place thereof
the following clause (i):
"(i) Liens on accounts receivable (and general intangibles that relate
solely to accounts receivable) and inventory of the Company and the
proceeds thereof securing Indebtedness pursuant to the Revolving Credit
Facility in an aggregate principal amount not to exceed $35 million at
any one time outstanding,"
SECTION 2. RATIFICATION OF INDENTURE.
As amended by this First Supplemental Indenture, the Indenture
is in all respects ratified and confirmed and shall be read, taken and construed
as one and the same instrument.
SECTION 3. THE TRUSTEE.
The Trustee shall not be responsible in any manner whatsoever
for the correctness of the recitals of fact herein, all of which are made by the
Company, and the Trustee shall not be responsible or accountable in any manner
whatsoever for or with respect to the validity or execution or sufficiency of
this First Supplemental Indenture.
SECTION 4. EFFECTIVE DATE.
This First Supplemental Indenture shall become effective and
binding upon the execution and delivery hereof by all parties hereto.
SECTION 5. GOVERNING LAW.
This First Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS.
This First Supplemental Indenture may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original, but all of which
shall together constitute but one and the same instrument.
<PAGE> 3
SECTION 7. NO DEFAULT.
The Company represents and warrants that, as of the date
hereof after giving effect to the Waiver being executed by the Trustee
concurrently herewith and the consummation of the offer to purchase Notes
described in the Company's Offer to Purchase dated October 31, 1995, no Default
or Event of Default exists or, as a result of the execution and delivery of this
First Supplemental Indenture, will exist.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed and delivered as of the date first
written above.
APPAREL VENTURES, INC.
By: /s/ John R. Lowden
Name: John R. Lowden,
Title: Vice President
AMERICAN NATIONAL BANK AND TRUST
COMPANY, TRUSTEE
By: /s/ Frank Leslie
Name: Frank Leslie
Title: Vice President
<PAGE> 1
EXHIBIT 4.6
SECOND SUPPLEMENTAL INDENTURE
This SECOND SUPPLEMENTAL INDENTURE, dated as of September 1, 1998, by
and between APPAREL VENTURES, INC., a Delaware corporation (the "Company"), and
FIRSTAR BANK OF MINNESOTA, N.A., F/K/A AMERICAN NATIONAL BANK AND TRUST COMPANY,
a national banking association, as Trustee (the "Trustee"), under an Indenture
dated as of May 23, 1994 (the "Indenture"). All capitalized terms used herein
and not otherwise defined shall have the respective meanings provided such terms
in the Indenture.
WHEREAS, the Company desires to amend the Indenture as set forth
below; and
WHEREAS, Section 9.2 of the Indenture provides that the Company and
the Trustee may amend the Indenture with the written consent of the Holders of
at least 662/3 percent in principal amount of the then outstanding Notes; and
WHEREAS, pursuant to a solicitation of consents by the Company, the
requisite consent of the Holders of outstanding Notes has been received; and
WHEREAS, all other conditions precedent to the execution of this
Second Supplemental Indenture have been complied with;
NOW, THEREFORE, each party for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Notes hereby executes
and delivers this Second Supplemental Indenture.
SECTION 1. AMENDMENT OF INDENTURE.
(a) Section 4.12 of the Indenture is hereby amended by changing the
period at the end of clause (iii) thereof to a comma and adding the following
clause (iv):
and (iv) Liens on the real property, improvements, fixtures, equipment
and other personal property of the Company located at 204 West
Rosecrans Avenue, Gardena, California, securing Indebtedness pursuant
to the Revolving Credit Facility in an aggregate principal amount not
to exceed the amount permitted by clause (i) above.
(b) Section 4.15 of the Indenture is hereby amended by deleting the
first paragraph of such Section in its entirety and substituting in place
thereof the following paragraph:
If the Company's Fixed Charge Coverage Ratio at the end of each
of any four consecutive fiscal quarters beginning after June 30, 1998
(the last day of the fourth such fiscal quarter being referred to as a
"Deficiency Date") is less than 1.25:1, then the Company shall offer
to purchase (the "Coverage Ratio
<PAGE> 2
Offer") ten percent of the principal amount of Notes originally issued
under this Indenture (or such lesser amount as may be outstanding at
the time the Coverage Ratio Offer is made) (the "Coverage Ratio Offer
Amount") at a purchase price equal to 100 percent of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to
the purchase date; provided that no such Coverage Ratio Offer shall be
required if, after the Deficiency Date but prior to the timely
delivery of the Officers' Certificate required by this Indenture,
capital is contributed or otherwise paid to the Company or its
Subsidiaries and results in the retirement or permanent reduction of
Indebtedness of the Company or its Subsidiaries in an amount that is
sufficient to increase the Company's Fixed Charge Coverage Ratio on a
pro forma basis to 1.25:1 or more. The Company's failure to meet the
minimum Fixed Charge Coverage Ratio at the end of any fiscal quarter
shall not be counted towards the making of more than one Coverage
Ratio Offer.
SECTION 2. RATIFICATION OF INDENTURE.
As amended by this Second Supplemental Indenture, the Indenture is in
all respects ratified and confirmed and shall be read, taken and construed as
one and the same instrument.
SECTION 3. THE TRUSTEE.
The Trustee shall not be responsible in any manner whatsoever for the
correctness of the recitals of fact herein, all of which are made by the
Company, and the Trustee shall not be responsible or accountable in any manner
whatsoever for or with respect to the validity or execution or sufficiency of
this Second Supplemental Indenture.
SECTION 4. EFFECTIVE DATE.
This Second Supplemental Indenture shall become effective and binding
upon the execution and delivery hereof by all parties hereto.
SECTION 5. GOVERNING LAW.
This Second Supplemental Indenture shall be governed by and construed
in accordance with the laws of the State of New York.
SECTION 6. COUNTERPARTS.
This Second Supplemental Indenture may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original, but all of which shall
together constitute but one and the same instrument.
<PAGE> 3
SECTION 7. NO DEFAULT.
The Company represents and warrants that, as of the date hereof after
giving effect to the Waiver being executed by the Trustee concurrently herewith,
no Default or Event of Default exists or, as a result of the execution and
delivery of this Second Supplemental Indenture, will exist.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed and delivered as of the date first
above written.
APPAREL VENTURES, INC.
By: /s/ Marvin L. Goodman
Name: Marvin L. Goodman
Title: President
FIRSTAR BANK OF MINNESOTA, N.A.
By: /s/ Frank Leslie
Name: Frank Leslie
Title: Vice President
<PAGE> 1
EXHIBIT 10.20
AMENDMENT NO. 8
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 8 ("Amendment") is entered into as of September __,
1998, 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
("Lender").
BACKGROUND
Borrower and Lender are parties to a Loan and Security Agreement dated
as of May 23, 1994 (as 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 4 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:
"Eligible Specified Account" -- an Account arising in the ordinary
course of Borrower's business from the sale of goods or rendition of services to
a Specified Account Debtor which is not a purchased Factored Account and which
Lender, in its reasonable credit judgment, deems to be an Eligible Specified
Account. Without limiting the generality of the foregoing, no Account shall be
an Eligible Specified Account if: (i) it is unpaid for more than sixty (60) days
after the original due date shown on the invoice; or (ii) it is due or unpaid
more than one hundred and eighty (180) days after the original invoice date; or
(iii) fifty percent (50%)
<PAGE> 2
or more of all Accounts from Specified Account Debtor are not deemed Eligible
Specified Accounts hereunder; or (iv) the total unpaid Accounts of Specified
Account Debtor exceed fifty percent (50%) of the net amount of all Accounts, to
the extent of such excess; or (v) any covenant, representation or warranty
contained in this Agreement with respect to such Account has been breached; or
(vi) Specified Account Debtor becomes also Borrower's creditor or supplier, or
has disputed liability with respect to the Account, or has made any claim with
respect to any other Account due from Specified Account Debtor to Borrower, or
the Account otherwise is subject to any right of setoff by Specified Account
Debtor, to the extent of any offset, dispute or claim; or (vii) Specified
Account Debtor has commenced a voluntary case under the federal bankruptcy laws,
as now constituted or hereafter amended, or made an assignment for the benefit
of creditors, or a decree or order for relief has been entered by a court having
jurisdiction in respect of Specified Account Debtor in an involuntary case under
the federal bankruptcy laws, as now constituted or hereafter amended, or any
other petition or other application for relief under the federal bankruptcy laws
has been filed against Specified Account Debtor, or if Specified Account Debtor
has failed, suspended business, ceased to be Solvent, or consented to or
suffered a receiver, trustee, liquidator or custodian to be appointed for it or
for all or a significant portion of its assets or affairs; or (viii) it arises
from a sale to Specified Account Debtor outside the United States, unless the
sale is on letter of credit, guaranty or acceptance terms, in each case
acceptable to Lender in its reasonable discretion; or (ix) it arises from a sale
to Specified Account Debtor on a bill-and-hold, guaranteed sale, sale-or-return,
sale-on-approval, consignment or any other repurchase or return basis; or (x)
Specified Account Debtor is located in either the State of New Jersey or the
State of Minnesota, unless Borrower has filed a Notice of Business Activities
Report with the appropriate officials in those states for the then current year;
or (xi) the Account is subject to a Lien other than a Permitted Lien; or (xii)
the goods giving rise to such Account have not been delivered to and accepted by
Specified Account Debtor or the services giving rise to such Account have not
been performed by Borrower and accepted by Specified Account Debtor or the
Account otherwise does not represent a final sale; or (xiii) the total unpaid
Accounts of Specified Account Debtor exceed a credit limit reasonably determined
by Lender to the extent such Account exceeds such limit; or (xiv) the Account is
evidenced by chattel paper or an instrument of any kind, or has been reduced to
judgment; or (xv) Borrower has made any agreement with Specified Account Debtor
for any deduction therefrom, to the extent of such deduction, except for
discounts or allowances which are made in the ordinary course of business for
prompt payment and which discounts or allowances are reflected in the
calculation of the face value of each invoice related to such Account; or (xvi)
Borrower has made an agreement with Specified Account Debtor to extend the time
of payment thereof.
"Eligible Licensed Nautica Inventory" -- Inventory which is subject to
the Nautica License Agreement.
"Nautica License Agreement" -- that certain License Agreement between
Borrower and Nautica Apparel, Inc. dated June 1, 1996.
"Real Property Advance Amount" -- the amounts set forth below during
the periods set forth below:
<PAGE> 3
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
September __, 1998-- February 28, 1999 $1,750,000
March 1, 1999-- March 31, 1999 $1,400,000
April 1, 1999-- April 30, 1999 $875,000
May 1, 1999-- July 31, 2000 $0
</TABLE>
"Specified Account Debtor" -- an Account Debtor approved in writing by
Lender, in its sole discretion, and designated by Lender in such writing as a
Specified Account Debtor.
"Year 2000 Issue" means the material failure of computer software,
hardware and firmware systems and equipment containing embedded computer chips
to properly receive, transmit, process, manipulate, store, retrieve, re-transmit
or in any other way utilize data and information due to the occurrence of the
year 2000 or the inclusion of dates on or after January 1, 2000.
(ii) the following defined terms are hereby amended in their
entirety to provide as follows:
"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 OP Licensed Inventory
plus
(iii) the lesser of (1) $2,500,000 or (2) fifty-six percent
(56%), of the value of Eligible Nautica 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
first-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) the lesser of (1) $2,000,000 or (2) fifty percent (50%) of
the Eligible Specified Accounts outstanding at such date;
<PAGE> 4
PLUS
(e) the Real Estate Advance Amount;
PLUS
(f) solely during the Seasonal Advance Period, the Seasonal
Advance Amount;
MINUS
(subtract from the sum of
clauses (a), (b), (c), (d), (e) and (f) above)
(g) an amount equal to the sum of (i) the face amount of all
Letters of Credit outstanding at such date and (ii) any unpaid amounts
due and payable which Lender may pay pursuant to any of the Loan
Documents for the account of Borrower.
"Eligible Licensed Inventory" -- collectively, the Eligible Licensed
Nautica Inventory and the Eligible Licensed OP Inventory.
"Eligible Licensed OP Inventory" -- Inventory which is subject to (1)
the OP License Agreement and (2) the OP Consent.
(h) Section 3.2 of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"3.2. Term of Agreement. Subject to Lender's right to cease making
Loans to Borrower at any time upon or after the occurrence of a Default or Event
of Default, this Agreement shall be in effect through and including July 31,
2000. This Agreement shall automatically renew itself for one (1) year periods
thereafter (the "Renewal Terms"), unless terminated as provided in Section 3.3
hereof."
(i) Section 6.1 of the Loan Agreement is hereby amended by adding the
following proviso:
"(AG) Year 2000 Issue. (i) Borrower has reviewed the effect of the
Year 2000 Issue on the computer software, hardware and firmware systems and
equipment containing embedded microchips owned or operated by or for the
Borrower or used or relied upon in the conduct of their business (including
systems and equipment supplied by others or with which such computer systems of
the Borrower interface). The costs to the Borrower of any reprogramming required
as a result of the Year 2000 Issue to permit the proper functioning of such
systems and equipment and the proper processing of data, and the testing of such
reprogramming, and of the reasonably foreseeable consequences of the Year 2000
Issue to
<PAGE> 5
Borrower (including systems and equipment supplied by others) are not
reasonably expected to result in a Default or to have a Material Adverse
Effect."
(j) Section 7.1 of the Loan Agreement is hereby amended by adding the
following proviso:
"(R) Compliance with Year 2000. Borrower shall take all necessary
action to complete in all material respects by January 1, 1999, the
reprogramming of computer software, hardware and firmware systems and equipment
containing embedded microchips owned or operated by or for Borrower or used or
relied upon in the conduct of their business (including systems and equipment
supplied by others or with which such systems of the Borrower interface)
required as a result of the Year 2000 Issue to permit the proper functioning of
such computer systems and other equipment and the testing of such systems and
equipment, as so reprogrammed. At the request of Lender, Borrower shall provide
to the Lender reasonable assurance of its compliance with the preceding
sentence."
(k) Section 7.3 of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"7.3. Specific Financial Covenants. During the term of this Agreement,
and thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
(A) Minimum Adjusted Tangible Net Worth. Maintain an Adjusted
Tangible Net Worth, to be measured as of the end of each month, of not less than
the amount ("Net Worth Amount") shown below for the months corresponding
thereto:
<TABLE>
<CAPTION>
Month Ending Amount
------------ ------
<S> <C>
09/30/98, and for each
month ending thereafter thru 01/31/99 ($22,000,000)
02/28/99 ($20,000,000)
03/31/99 ($18,000,000)
04/30/99, and for each
month ending thereafter ($15,000,000)
</TABLE>
(B) Fixed Charge Coverage Ratio. Maintain a Fixed Charge Coverage
Ratio, to be measured as of the end of each quarter for the periods described
below, of not less than:
(i) 1.10 to 1.0 for the three consecutive fiscal quarter period
ending on March 31, 1999; and
(ii) 1.25 to 1.0 for the four consecutive fiscal quarter period
ending on June 30, 1999, and for the four consecutive fiscal quarter
period ending on each fiscal quarter thereafter.
<PAGE> 6
Notwithstanding anything contained herein to the contrary, Lender
shall not test for the fiscal quarter period ending on September 30, 1998 and
the two consecutive fiscal quarter period ending on December 31, 1998.
(C) Minimum EBITDA. Maintain EBITDA, measured as of the end of
each month, of not less than the amount shown below for the period corresponding
thereto:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
3 months ended 09/30/98 ($3,650,000)
4 months ended 10/31/98 ($4,400,000)
5 months ended 11/30/98 ($4,000,000)
6 months ended 12/31/98 ($3,000,000)
7 months ended 01/31/99 ($1,500,000)
8 months ended 02/28/99 $2,800,000
9 months ended 03/31/99 $5,900,000
10 months ended 04/30/99 $7,500,000
11 months ended 05/31/99 $8,200,000
12 months ended 06/30/99, and
for the 12 months ended each
month thereafter $8,100,000
</TABLE>
Lender acknowledges that the actual date or ending date of a period
reflected in the above tables may be different by a day or two depending upon
the specific accounting periods utilized by Borrower in the applicable fiscal
year."
3. Waiver. Subject to satisfaction of the conditions precedent set
forth in Section 4 below, Lender hereby waives as of the date of this Amendment
the following Events of Default which have occurred as a result of Borrower's
non-compliance with the following provisions of the Loan Agreement:
(a) Section 7.3(A) solely for the fiscal quarter ended as of June 30,
1998;
(b) Section 7.3(B) solely for the four consecutive fiscal quarter
period ended as of June 30, 1998; and
(c) Section 7.3(C) solely for the four consecutive fiscal quarter
period ended as of June 30, 1998.
4. Conditions of Effectiveness. This Amendment shall become effective
upon satisfaction of the following conditions precedent: Lender shall have
received (i) four (4) copies of this Amendment executed by Borrower and Lender,
(ii) four (4) copies of a deed of trust in the amount of $1,750,000 on the real
property located at 204 West Rosecrans Avenue, Gardena, California 90245
executed by Borrower in favor of Lender, (iii) the written consent to this
Amendment and the transactions contemplated herein from the required percentage
of the
<PAGE> 7
holders of the Senior Notes and (iv) such other certificates, instruments,
documents, agreements and opinions of counsel as may be required by Lender or
its counsel, each of which shall be in form and substance satisfactory to Lender
and its counsel.
5. 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
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.
(e) Borrower has obtained consent from the required holders of the
Senior Notes to the execution, delivery and performance of this Amendment and
Borrower is in compliance in all material respects with the terms contained in
the Senior Debt Documentation.
6. 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, except as expressly provided in Section 3, 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.
7. 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.
<PAGE> 8
8. 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.
9. 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.
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> 1
EXHIBIT 12.1
APPAREL VENTURES, INC.
COMPUTATION OF RATIO OF NET EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIO OF EARNINGS TO FIXED CHARGES)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------------------------------------------------
1994 * 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income (loss) before income
taxes $ 7,021 $(6,099) $(4,077) $(1,164) $(4,230)
Add fixed charges 1,516 7,001 7,351 5,946 6,384
------- ------- ------- ------- -------
Earnings before income taxes
and fixed charges 8,537 902 3,274 4,782 2,154
FIXED CHARGES
Interest expense 1,516 7,001 7,351 5,946 6,384
RATIO OF EARNINGS
TO FIXED CHARGES 5.6x .1x .4x .8x .3x
======= ======= ======= ======= =======
</TABLE>
* Results pertain to the predecessor corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 487,000
<SECURITIES> 0
<RECEIVABLES> 21,012,000
<ALLOWANCES> 515,000
<INVENTORY> 12,195,000
<CURRENT-ASSETS> 36,689,000
<PP&E> 10,492,000
<DEPRECIATION> 4,625,000
<TOTAL-ASSETS> 56,508,000
<CURRENT-LIABILITIES> 24,407,000
<BONDS> 36,835,000
0
0
<COMMON> 1,000
<OTHER-SE> (4,735,000)
<TOTAL-LIABILITY-AND-EQUITY> 56,508,000
<SALES> 76,328,000
<TOTAL-REVENUES> 76,328,000
<CGS> 51,210,000
<TOTAL-COSTS> 21,956,000
<OTHER-EXPENSES> 570,000
<LOSS-PROVISION> 78,000
<INTEREST-EXPENSE> 6,744,000<F1>
<INCOME-PRETAX> (4,230,000)
<INCOME-TAX> 3,006,000
<INCOME-CONTINUING> (7,236,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,236,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES AMORTIZATION OF THE RELATED DEFERRED LOAN COSTS OVER THE TERM OF
THE LOAN AND THE WAIVER FEE TO THE BONDHOLDERS.
</FN>
</TABLE>
