<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
-------------------------
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
incorporation or organization) Identification No.)
204 WEST ROSECRANS, GARDENA, CALIFORNIA 90248
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(310) 538 - 4980
------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
AT MAY 13, 1999, 1,000 SHARES OF $.01 PAR VALUE COMMON STOCK OF THE REGISTRANT
WERE OUTSTANDING.
<PAGE> 2
APPAREL VENTURES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of March 31, 1999 (Unaudited) and
June 30, 1998. 3
Consolidated Statement of Operations and Comprehensive Income
for the Three and Nine Months ended March 31, 1999 and 1998 (Unaudited). 4
Consolidated Statement of Cash Flows for the Nine Months ended
March 31, 1999 and 1998 (Unaudited). 5
Notes to Consolidated Financial Statements (Unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION. 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
SIGNATURE 13
EXHIBIT INDEX 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APPAREL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 101,000 $ 487,000
Due from factor 29,180,000 17,324,000
Accounts receivable, net of allowance for
doubtful accounts and discounts of $598,000 and $515,000 3,883,000 3,173,000
Inventories 16,992,000 12,195,000
Deferred charges 1,882,000 2,411,000
Deferred income taxes 1,066,000 640,000
Prepaid expenses 482,000 459,000
------------ ------------
Total current assets 53,586,000 36,689,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization of
$5,458,000 and $4,625,000 6,317,000 5,867,000
OTHER ASSETS
Goodwill and organizational costs, net of accumulated
amortization of $1,606,000 and $1,356,000 11,898,000 12,158,000
Deferred loan costs, net of accumulated amortization
of $2,550,000 and $2,160,000 682,000 1,072,000
Other 704,000 722,000
------------ ------------
$ 73,187,000 $ 56,508,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ 28,401,000 $ 12,766,000
Accounts payable 4,438,000 3,084,000
Accrued interest payable 1,820,000 2,512,000
Accrued expenses 4,276,000 3,334,000
Current portion of notes payable 488,000 2,711,000
------------ ------------
Total current liabilities 39,423,000 24,407,000
------------ ------------
SENIOR NOTES PAYABLE 35,756,000 35,664,000
NOTES PAYABLE, net of current portion 1,018,000 1,001,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 170,000 170,000
STOCKHOLDER'S EQUITY
Common stock $.01 par value, 10,000 shares authorized, 1,000 shares
issued and outstanding 1,000 1,000
Additional paid - in capital 13,503,000 11,038,000
Due from parent (267,000) (253,000)
Accumulated other comprehensive income (134,000) (194,000)
Accumulated deficit (16,283,000) (15,326,000)
------------ ------------
(3,180,000) (4,734,000)
------------ ------------
$ 73,187,000 $ 56,508,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 53,755,000 $ 52,063,000 $ 35,037,000 $ 34,266,000
COST OF SALES 32,581,000 31,001,000 21,132,000 20,287,000
------------ ------------ ------------ ------------
Gross profit 21,174,000 21,062,000 13,905,000 13,979,000
OPERATING EXPENSES
Design 2,322,000 2,449,000 528,000 587,000
Selling 5,774,000 5,795,000 2,874,000 2,947,000
Shipping 1,769,000 1,535,000 878,000 780,000
General and administrative 6,942,000 6,857,000 2,464,000 2,364,000
------------ ------------ ------------ ------------
16,807,000 16,636,000 6,744,000 6,678,000
------------ ------------ ------------ ------------
Income from operations 4,367,000 4,426,000 7,161,000 7,301,000
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME
Interest expense (5,188,000) (4,672,000) (1,908,000) (1,802,000)
Interest income 5,000 15,000 5,000 5,000
Royalty income 90,000 169,000 30,000 83,000
Royalty expense (630,000) (507,000) (428,000) (373,000)
Miscellaneous 9,000 26,000 4,000 15,000
------------ ------------ ------------ ------------
(5,714,000) (4,969,000) (2,297,000) (2,072,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,347,000) (543,000) 4,864,000 5,229,000
INCOME TAX BENEFIT (PROVISION) 390,000 173,000 (1,559,000) (1,674,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (957,000) $ (370,000) $ 3,305,000 $ 3,555,000
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation 59,000 (64,000) (3,000) (38,000)
adjustment
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) (898,000) (434,000) 3,302,000 3,517,000
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (957,000) $ (370,000)
Depreciation and amortization 1,511,000 1,320,000
Other 41,000 (28,000)
Changes in assets and liabilities
Due from factor (11,856,000) (13,681,000)
Accounts receivable, net (710,000) (1,197,000)
Inventories (4,797,000) (12,442,000)
Deferred charges and other assets 529,000 500,000
Deferred income tax benefits (426,000) (178,000)
Prepaid expenses and other assets (23,000) (604,000)
Accounts payable 1,354,000 3,641,000
Accrued interest and other expenses 250,000 302,000
------------ ------------
Net cash used in operating activities (15,084,000) (22,737,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (1,282,000) (712,000)
------------ ------------
Net cash used in investing activities (1,282,000) (712,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under line of credit 15,635,000 22,889,000
Advances to Parent (14,000) (253,000)
Contribution of capital from an officer of AVE 144,000
Borrowing under senior notes payable 92,000 82,000
Borrowing under (repayment of) notes payable (2,198,000) 294,000
Additional capital infusion 2,465,000
------------ ------------
Net cash provided by financing activities 15,980,000 23,156,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (386,000) (293,000)
CASH, BEGINNING OF PERIOD 487,000 476,000
------------ ------------
CASH, END OF PERIOD $ 101,000 $ 183,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments (consisting of normal
recurring adjustments) which are necessary for a fair presentation of the
changes in financial position, results of operations and cash flows for the
interim periods reported.
The results of operations for the three and nine months ended March 31,
1999 are not necessarily indicative of the results to be expected for the full
year.
The accompanying consolidated financial statements should be read with
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations " contained herein and the Notes to consolidated financial
statements, as set forth in the Company's Form 10-K filing for the fiscal year
ended June 30, 1998.
COMPANY BACKGROUND AND NATURE OF BUSINESS - Apparel Ventures, Inc. ( the
"Company") is a wholly owned subsidiary of AVI Holdings, Inc. The Company was
incorporated in Delaware on April 20, 1994 and 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 its subsidiary, throughout Europe.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its 79% - owned Portuguese subsidiary, Apparel
Ventures Europa - Textil, LDA ("AVE"), and wholly owned Mexican 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.
TRANSLATION OF FOREIGN CURRENCIES - Cumulative translation adjustments, which
arise from consolidating Portuguese operations, are included in stockholder's
equity.
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.
ADVERTISING COSTS - Advertising costs are expensed in the period incurred.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Piece goods and trim $ 4,500,000 $ 3,457,000
Work - in - process 2,502,000 1,700,000
Finished goods 9,990,000 7,038,000
----------- -----------
$16,992,000 $12,195,000
=========== ===========
</TABLE>
6
<PAGE> 7
NOTE 3 - LINE OF CREDIT
The Company has a line of credit with a bank ( the "Credit Facility")
which provides for advances and commercial letters of credit of up to $32.0
million through July 31, 2000. The Credit Facility has a sublimit of $3.0
million for commercial letters of credit. Borrowings are limited to a
predetermined percentage of eligible foreign and domestic factored and non
factored accounts receivable and eligible finished goods inventory, plus a
seasonal overadvance of $2.5 million during September increasing to $4.5 million
from October 1 to March 15, of each year the amount of which is tied to backlog.
The Credit Facility also provides for an overadvance against owned real estate
of $1.75 million from September 1998 through February 28, 1999 decreasing to
$1.4 million from March 1, 1999 through March 31, 1999 and $.8 million from
April 1, 1999 through April 30, 1999 and zero thereafter. Interest on base
borrowings is charged at the bank's prime rate plus 1/2%; however borrowings may
be fixed, at management's discretion for periods of 30 to 180 days on which
interest is charged at LIBOR plus 2.75%. Interest on seasonal overadvances is
charged at the bank's prime rate plus 1 1/2%; however borrowings may be fixed,
at management's discretion, for periods of 30 to 180 days on which interest is
charged at LIBOR plus 3.75%. The Credit Facility is collateralized by
receivables, finished goods inventories, real estate and general intangibles.
On January 4, 1999 the Company entered into an additional amendment to
the Credit Facility which provided for a "special advance" of $1.0 million which
was guaranteed by the Company's President. On February 1, 1999 the Company fully
repaid the "special advance".
The Credit Facility contains covenants requiring the maintenance of
minimum tangible net worth, EBITDA, Fixed Charge Coverage ratios and other
matters. For the period ended March 31, 1999 the Company failed to satisfy the
EBITDA and Fixed Charge Coverage Ratio covenants. These covenant violations have
been waived by the lender.
Based upon information currently available, it does not appear that the
Company will be in compliance with the EBITDA, Fixed Charge Coverage Ratio or
Tangible Net Worth covenants in the Credit Agreement for the fiscal year ending
June 30, 1999. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
NOTE 4 - SENIOR NOTES PAYABLE
On May 23, 1994, the Company issued $40 million principal amount of
Series A Senior Notes. The Senior Notes are due December 30, 2000 and bear
interest of 12 1/4%, payable July 1 and January 1 each year. The Senior Notes
were issued at a discount of $800,000, which is being amortized over the term of
the Senior Notes to yield a constant interest rate of 12.7%. As of March 31,
1999 there is $36.0 million principal amount of bonds outstanding net of
$244,000 in unamortized discount.
The Company may redeem the Senior Notes, subject to a premium for
redemption, after December 31, 1998. The Senior Notes contain certain
restrictions requiring the Company to offer to redeem the Senior Notes including
a premium for redemption, in the event of a change in control of the Company.
The Indenture governing the Senior Notes contains customary covenants
regarding maintaining specified ratios of earnings to fixed charges,
restrictions on transactions with officers and affiliates, and other matters.
For the year ended June 30, 1998 the Company failed to meet the fixed charge
coverage ratio covenant required by the indenture. This violation was waived and
an amendment modifying the indenture was approved by the bondholders. In
connection with such waiver and amendment the Company paid $360,000 to the
bondholders.
Based upon information currently available, it does not appear that the
Company will be in compliance with the fixed charge coverage ratio covenant in
the indenture for the fiscal year ending June 30, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
NOTE 5 - COMMITMENT - PARENT COMPANY CAPITAL STRUCTURE
In connection with the acquisition of the Company, AVI Holdings, Inc.
(the "Parent") issued $10 million of Subordinated Senior Notes, $3.8 million of
Subordinated Junior Notes, $300,000 of common stock, $1.7 million of Class A
Preferred Stock, $1.7 million of Class B Preferred Stock and $1.0 million of
Class C Preferred Stock. A Subordinated Junior Note in the amount of $650,000
was immediately repaid in full for $350,000. Since the Company is a wholly-owned
subsidiary of the Parent and is the sole operating unit of the consolidated
entity, the Company is the sole source of any cash to be paid by the parent on
such securities in the form of interest, dividends or principal repayments. The
cash required by the Parent to make these payments will be provided by dividends
or cash advances
7
<PAGE> 8
by the Company. While the Parent company's debt service requirements will be
funded by the Company, the debt of the Parent is not reflected in the balance
sheet of the company since the Company has not guaranteed, pledged assets as
security for, or have plans, intentions, or a requirement to directly assume or
repay the Parent company's organizational obligations.
On December 5, 1995, in order for the Company to obtain waivers of
certain defaults from the Senior Note holders, the Parent authorized the
issuance of 6,450 shares of Class D Preferred Stock and issued to certain
subscribers 4,000 shares of Class D Preferred Stock for cash consideration of
$4.0 million. Such proceeds were then contributed by the Parent to the Company.
On September 24, 1998 the Parent company issued 2,450 shares of Class D
Preferred Stock to the Company's President in exchange for a $2,450,000 cash
contribution. The proceeds were then contributed by the Parent to the Company.
The $10.0 million Senior Subordinated Notes issued by the Parent bear
interest at 12% and require semi-annual interest payments on April 30 and
October 31 each year. 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. In the aggregate, 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 Indenture for the Company's Senior Notes prohibits the Company from
making distributions to the Parent for the payment of interest on the Senior
Subordinated Notes unless the Company satisfies a fixed charge coverage ratio
requirement. The Company has not satisfied this requirement and has not made any
advances to the Parent for the payment of interest. However, the Parent has
satisfied this payment obligation 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.
COMPUTER SYSTEMS
The Company has completely retrofitted the Management Information
System used to run its operations. The inventory management, order entry,
billing and credit and collections systems have been rendered Y2K compliant. The
Company is presently using these retrofitted programs to manage the information
flow. The system has undergone independent third party testing, in conjunction
with our customers, and has been certified Y2K compliant. The Company expects to
have the financial package Y2K compliant by late in the 4th quarter of the
current fiscal year.
NOTE 6 - FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standard No. 107 "Disclosures About
Fair Value of Financial Instruments" (SFAS 107) requires the disclosure of the
fair market value of financial instruments for which it is practicable to
estimate fair value. The Company 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.
8
<PAGE> 9
The current fair value of the 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
should realize in a current market exchange.
NOTE 7 - OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Pre-Tax Tax After Tax
Amount Effect Amount
--------- -------- ---------
<S> <C> <C> <C>
Foreign Currency Translation $59,000 -- $59,000
======= =======
Balance, beginning of period (194,000)
---------
Balance, end of period $(135,000)
=========
</TABLE>
CAUTIONARY STATEMENT ON FORWARD - LOOKING STATEMENTS
Various forward-looking statements, within the meaning of the federal
securities laws, have been made in this Form 10-Q. 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 the external economic and
political factors which the Company has no control.
9
<PAGE> 10
APPAREL VENTURES, INC.
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS
The following tables set forth information with respect to the
percentage relationship of net sales of certain items of the consolidated
statement of operations of the Company for the three and nine months ended March
31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
1999 % 1998 %
----------- -------- ----------- -------
<S> <C> <C> <C> <C>
NET SALES $35,037,000 100.0% $34,266,000 100.0%
COST OF SALES 21,132,000 60.3% 20,287,000 59.2%
----------- -----------
Gross profit 13,905,000 39.7% 13,979,000 40.8%
OPERATING EXPENSES
Design 528,000 587,000
Selling 2,874,000 2,947,000
Shipping 878,000 780,000
General and administrative 2,464,000 2,364,000
----------- -----------
6,744,000 19.2% 6,678,000 19.5%
----------- ----------
Income from operations 7,161,000 20.4% 7,301,000 21.3%
OTHER (EXPENSE) INCOME
Interest expense (1,908,000) (1,802,000)
Interest income 5,000 5,000
Royalty income 30,000 83,000
Royalty expense (428,000) (373,000)
Miscellaneous 4,000 15,000
----------- -----------
(2,297,000) -6.6% (2,072,000) -6.0%
----------- ----------
INCOME BEFORE INCOME TAXES 4,864,000 13.9% 5,229,000 15.3%
INCOME TAX PROVISION (1,559,000) -4.4% (1,674,000) -4.9%
----------- ----------
NET INCOME $ 3,305,000 9.4% $ 3,555,000 10.4%
=========== ==========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------
1999 % 1998 %
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET SALES $53,755,000 100.0% $52,063,000 100.0%
COST OF SALES 32,581,000 60.6% 31,001,000 59.5%
----------- -----------
Gross profit 21,174,000 39.4% 21,062,000 40.5%
OPERATING EXPENSES
Design 2,322,000 2,449,000
Selling 5,774,000 5,795,000
Shipping 1,769,000 1,535,000
General and administrative 6,942,000 6,857,000
----------- -----------
16,807,000 31.3% 16,636,000 32.0%
----------- -----------
Income from operations 4,367,000 8.1% 4,426,000 8.5%
OTHER (EXPENSE) INCOME
Interest expense (5,183,000) (4,672,000)
Interest income 17,000 15,000
Royalty income 90,000 169,000
Royalty expense (630,000) (507,000)
Miscellaneous (8,000) 26,000
----------- -----------
(5,714,000) -10.6% (4,969,000) -9.5%
----------- -----------
LOSS BEFORE INCOME TAXES (1,347,000) -2.5% (543,000) -1.0%
INCOME TAX BENEFIT 390,000 0.7% 173,000 0.3%
----------- -----------
NET LOSS $ (957,000) -1.8% $ (370,000) -0.7%
=========== ===========
</TABLE>
NET SALES
Net sales for the nine months of fiscal 1999 increased by $1.7 million
or 3.2%, as compared to the same period of fiscal 1998. This increase was due
primarily to increased Nautica sales of $3.9 million, increased Sessa sales of
$.8 million, increased private label sales of $1.7 million and increased AV
Europe sales of $1.1 million. These sales increases were offset with decreased
sales in Studio of $3.2 million, Ocean Pacific of $.5 million, Sassafras of $1.7
million and Citrus of $.4 million.
Net sales for the quarter ended March 31, 1999 increased by $.8 million
or 2.3%, as compared to the same period of fiscal 1998. This increase was due
primarily to a $2.0 million increase in Nautica sales, a $2.2 million increase
in private label sales and a $.7 million increase in AV Europe sales offset by
decreased sales in Sassafras of $1.1 million, Citrus $.5 million, La Blanca $.4
million, Studio of $1.7 million, and Ocean Pacific of $.4 million.
GROSS PROFIT
Gross profit for the nine months of fiscal 1999 increased $.1 million
or .5% but decreased as a percent of net sales from 40.5% to 39.4%. Gross profit
on branded merchandise decreased from 43.9% of net sales in fiscal 1998 to 42.3%
of net sales in fiscal 1999. This decrease in gross profit, as a percent of net
sales is due to increased sales of prior season merchandise of $.7 million and
significant erosion of gross profit in the Studio line which is not retailing.
Gross profit for the quarter ended March 31, 1999 decreased $.1 million
or .4%, and decreased as a percent of net sales, from 40.8% to 39.7%, due
primarily to the decrease in gross margin for the Studio and Ocean Pacific
brands and the effect on margin of the significant increase in private label
sales for the quarter. Private label sales have a significantly lower gross
margin than branded sales.
11
<PAGE> 12
OPERATING EXPENSES
Operating expenses for the first nine months of fiscal 1999 increased
$.2 million or 1.0% and decreased as a percent of net sales from 32.0% to 31.3%.
This increase in operating expenses is primarily due to increased distribution
expense of $0.2 million and increased general and administrative expense of $.1
million offset by decreased design expense of $.1 million. The increase in
distribution expense is due to increased labor costs attributable to increased
minimum wage and additional labor required to make merchandise "floor ready" for
the retailer. The increase in general and administrative expense is primarily
due to increased MIS expense related to the Y2K retrofit program.
Operating expense for the quarter ended March 31, 1999 increased $.1
million but decreased as a percent of net sales from 19.5% to 19.2%, due
primarily to increased general and administrative expense of $.1 million,
increased distribution expense of $.1 million offset by reduced design and
selling expense of $.1 million.
OTHER EXPENSES
Other expenses for the first nine months of fiscal 1999 increased $0.7
million due primarily to an increase in interest expense of $0.5 million, in
order to fund the higher average year to date inventory and accounts receivable
levels, increased royalty expense of $0.1 million for the licensed product sales
of Nautica and Ocean Pacific and reduced royalty income of $.1 million.
Other expenses for the quarter ended March 31, 1999 increased $0.2
million due primarily to increased interest expense of $0.1 million and
increased royalty expense of $0.1 million.
INCOME TAX BENEFIT AND NET LOSS
Net loss before income tax benefit for the nine months of fiscal 1999
was ($1.3) million compared to ($0.5) for the same period of fiscal 1998. The
increase in net loss is due to increased other expense of $.7 million relating
primarily to increased interest expense.
Net income before income tax provision was $4.9 million for the quarter
ended March 31, 1999, compared to $5.2 million for the same quarter in fiscal
1998. The decrease in net income is the result of nominally higher costs in all
areas.
The income tax benefit (provision) is estimated at a 32% effective tax
rate, consistent with the prior year. The Company has recorded a deferred tax
asset to the extent it expects to utilize net operating loss carry forwards in
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are seasonal, with peak
needs arising near the end of the third quarter and the beginning of the fourth
quarter of the fiscal year, primarily as a result of building inventories in the
first and second quarters of the fiscal year to supply third and fourth quarter
demand and the financing of accounts receivable in the fourth quarter of the
fiscal year.
Although the Company has sufficient liquidity in the near term, the
Company expects that it will be unable to continue to meet its debt service
obligations on the Senior Notes. The Company's operational cash flow will be
insufficient to make its July 1, 1999 interest payment of $2.2 million, make any
interest payments due thereafter and ultimately fund the maturity of the Senior
Notes in December 2000. As a result, the Company believes that a significant
financial restructuring of its current capital structure is required to improve
the Company's ability to conduct its operations. Accordingly, the Company is
beginning discussions with the Senior Note holders regarding such financial
restructuring. The Company expects to conclude these discussions by Mid-June
1999 with a feasible plan of restructuring in place.
At March 31, 1999, the net collateral availability under the line of
credit was approximately $3,114,000.
12
<PAGE> 13
The days sales outstanding (DSO) in accounts receivable increased from
74 days at March 31, 1998 to 80 days at March 31, 1999. This increase in DSO is
due to increased branded sale dating and the adjustment by the retailers to our
factor change which occurred in November, 1998. Inventory decreased $3.8 million
at March 31, 1999 as compared to March 31, 1998 however the days sales in
inventory increased from 130 days at March 31, 1998 to 189 days at March 31,
1999 due primarily to the forward method of calculating the number of days which
is based on our sales forecast for the next six months. It should be noted that
purchases for the fourth quarter will be significantly less than fiscal 1998.
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. The Company's
backlog at March 31, 1999 increased by $3.1 million or 21.57% over March 31,
1998. The backlog was $17.5 million at March 31, 1999 as compared to $14.4
million at March 31, 1998. This increase in backlog is primarily attributable to
the Nautica line.
SEASONALITY
The Company's business is highly seasonal. In fiscal 1998,
approximately 75% of the Company's gross sales were generated in the second half
of its fiscal year. The Company expects this pattern to continue in its current
and subsequent fiscal years. This seasonality and the relatively long times
required to design and manufacture new products have led to the development of
this standard selling cycle. The Company operates with a deficit in cash flow
from operations (seasonal working capital requirements) for the first nine
months of each fiscal year.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The current employment contract of the Company's President, Mr.
Goodman, expires on May 23, 1999. Discussions regarding Mr. Goodman's employment
beyond the current fiscal year are currently underway. There can be no
assurances given, at this time, that Mr. Goodman will continue in his current
capacity beyond the term of his current contract. In addition Mr. Goodman has
tendered his resignation as Chairman of the Board of AVI Holdings, Inc. and
Apparel Ventures, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the index to Exhibits are filed as part of this
Quarterly Report on form 10-Q
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPAREL VENTURES, INC.
May 13, 1999 /s/ WILLIAM F. SINGLETARY
------------------------------------
------------------
Date
WILLIAM F. SINGLETARY
Chief Financial Officer
(Duly authorized officer and
principal financial and
accounting officer)
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibit Page No.
------------- ------------------------------------------------ -------------
<S> <C> <C>
10.5 Amendment No. 11 to Loan and Security Agreement
dated February 26, 1999 by and between Apparel
Ventures, Inc. and Fleet Capital Corporation. 15
27 Financial Data Schedule
</TABLE>
14
<PAGE> 1
EXHIBIT 10.5
AMENDMENT NO. 11
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 11 ("Amendment") is entered into as of
February 26, 1999 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 3 below, the Loan
Agreement is hereby amended as follows:
(a) Section 7.3 (A) of the Loan Agreement is hereby
amended in its entirety to provide as follows:
(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:
Month Ending Amount
------------ ------
09/30/98 ($25,000,000)
10/31/98 ($26,000,000)
11/30/98 ($27,000,000)
12/31/98 ($26,000,000)
1/31/99 ($26,000,000)
2/28/99 ($26,000,000)
3/31/99 ($23,500,000)
4/30/99 ($23,500,000)
5/31/99 ($23,000,000)
6/30/99 and at all times thereafter ($24,000,000)
<PAGE> 2
3. 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) 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.
4. Representations and Warranties. Borrower hereby
represents and warrants as follows:
(a) This Amendment and the Loan Agreement, as amended
hereby, constitute legal, valid and binding obligations of Borrower and are
enforceable against Borrower in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, Borrower
hereby reaffirms all covenants, representations and warranties made in the Loan
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 is in compliance in all material respects with
the terms contained in the Senior Debt Documentation.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each
reference in the Loan Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import shall mean and be a reference to the Loan
Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan
Agreement, and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
<PAGE> 3
(c) The execution, delivery and effectiveness of this
Amendment shall not, operate as a waiver of any right, power or remedy of
Lender, nor constitute a waiver of any provision of the Loan Agreement, or any
other documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns and shall be governed by and construed in accordance with the laws of
the State of New York.
7. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by the
parties hereto in one or more counterparts, each of which shall be deemed an
original and all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as
of the day and year first written above.
APPAREL VENTURES, INC.
By: /s/ William F. Singletary
Title: Chief Financial Officer
FLEET CAPITAL CORPORATION
By: /s/ Walter Schuppe
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPAREL VENTURES, INC. FOR THE NINE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 101,000
<SECURITIES> 0
<RECEIVABLES> 33,661,000
<ALLOWANCES> 598,000
<INVENTORY> 16,992,000
<CURRENT-ASSETS> 53,586,000
<PP&E> 11,775,000
<DEPRECIATION> 5,458,000
<TOTAL-ASSETS> 73,187,000
<CURRENT-LIABILITIES> 39,423,000
<BONDS> 36,774,000
0
0
<COMMON> 1,000
<OTHER-SE> (3,181,000)
<TOTAL-LIABILITY-AND-EQUITY> 73,187,000
<SALES> 53,755,000
<TOTAL-REVENUES> 53,755,000
<CGS> 32,581,000
<TOTAL-COSTS> 32,581,000
<OTHER-EXPENSES> 17,333,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,188,000
<INCOME-PRETAX> (1,347,000)
<INCOME-TAX> (390,000)
<INCOME-CONTINUING> (957,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (957,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
