<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 DECEMBER 31, 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
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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 FEBRUARY 16, 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>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1998 (Unaudited)
and June 30, 1998 3
Consolidated Statement of Operations and Comprehensive Income
Three and Six Months ended December 31, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Cash Flows for the Six Months ended
December 31, 1998 and 1997 (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 13
SIGNATURE 13
EXHIBIT INDEX 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
APPAREL VENTURES, INC.
CONSOLIDATED BALANCE SHEET
A S S E T S
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 166,000 $ 487,000
Due from factor 14,786,000 17,324,000
Accounts receivable, net of allowance for
doubtful accounts and discounts of $600,000 and $442,000 2,945,000 3,173,000
Inventories 25,844,000 12,195,000
Deferred charges 1,607,000 2,411,000
Deferred income taxes 2,624,000 640,000
Prepaid expenses 470,000 459,000
------------ ------------
Total current assets 48,442,000 36,689,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization of
$5,175,000 and $4,625,000 6,059,000 5,867,000
OTHER ASSETS
Goodwill and organizational costs, net of accumulated
amortization of $1,523,000 and $1,356,000 11,986,000 12,158,000
Deferred loan costs, net of accumulated amortization
of $2,420,000 and $2,160,000 812,000 1,072,000
Other 723,000 722,000
------------ ------------
$ 68,022,000 $ 56,508,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit $ 24,654,000 $ 12,766,000
Accounts payable 6,745,000 3,084,000
Accrued interest payable 2,664,000 2,512,000
Accrued expenses 3,033,000 3,334,000
Current portion of notes payable 430,000 2,711,000
------------ ------------
Total current liabilities 37,526,000 24,407,000
------------ ------------
SENIOR NOTES PAYABLE 35,726,000 35,664,000
NOTES PAYABLE, net of current portion 1,084,000 1,001,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 170,000 170,000
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 13,503,000 11,038,000
Due from parent (268,000) (253,000)
Accumulated other comprehensive income (132,000) (194,000)
Accumulated deficit (19,588,000) (15,326,000)
------------ ------------
(6,484,000) (4,734,000)
------------ ------------
$ 68,022,000 $ 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>
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 18,718,000 $ 17,797,000 $ 14,626,000 $ 15,087,000
COST OF SALES 11,449,000 10,714,000 8,620,000 8,986,000
------------ ------------ ------------ ------------
Gross profit 7,269,000 7,083,000 6,006,000 6,101,000
OPERATING EXPENSES
Design 1,793,000 1,862,000 1,163,000 1,132,000
Selling 2,900,000 2,848,000 1,836,000 1,705,000
Shipping 891,000 755,000 534,000 452,000
General and administrative 4,478,000 4,494,000 2,304,000 2,429,000
------------ ------------ ------------ ------------
10,062,000 9,959,000 5,837,000 5,718,000
------------ ------------ ------------ ------------
Income (loss) from operations (2,793,000) (2,876,000) 169,000 383,000
------------ ------------ ------------ ------------
OTHER (EXPENSE) INCOME
Interest expense (3,253,000) (2,870,000) (1,665,000) (1,495,000)
Interest income 12,000 10,000 5,000 5,000
Royalty income 60,000 85,000 30,000 43,000
Miscellaneous (236,000) (122,000) (152,000) (107,000)
------------ ------------ ------------ ------------
(3,417,000) (2,897,000) (1,782,000) (1,554,000)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (6,210,000) (5,773,000) (1,613,000) (1,171,000)
INCOME TAX BENEFIT 1,949,000 1,848,000 477,000 375,000
------------ ------------ ------------ ------------
NET LOSS ($ 4,261,000) ($ 3,925,000) ($ 1,136,000) ($ 796,000)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustment 62,000 (26,000) 16,000 10,000
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) (4,199,000) (3,951,000) (1,120,000) (786,000)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
APPAREL VENTURES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($ 4,261,000) ($ 3,925,000)
Depreciation and amortization 977,000 862,000
Other 29,000 (18,000)
Changes in assets and liabilities
Due from factor 2,538,000 (330,000)
Accounts receivable, net 228,000 108,000
Inventories (13,649,000) (13,950,000)
Deferred income tax benefits (1,984,000) (1,851,000)
Prepaid expenses and other assets 792,000 448,000
Accounts payable 3,661,000 4,731,000
Accrued interest and other expenses (149,000) (45,000)
------------ ------------
Net cash used by operating activities (11,818,000) (13,970,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment (705,000) (473,000)
------------ ------------
Net cash used by investing activities (705,000) (473,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under line of credit 11,888,000 14,269,000
Borrowing under senior notes payable 62,000 54,000
Borrowing under (repayment of) notes payable (2,198,000) 149,000
Additional capital infusion 2,450,000
------------ ------------
Net cash provided by financing activities 12,202,000 14,472,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (321,000) 29,000
CASH, BEGINNING OF PERIOD 487,000 476,000
------------ ------------
CASH, END OF PERIOD $ 166,000 $ 505,000
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
APPAREL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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 six months ended December
31, 1998 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.
ADVERTISING COSTS - Advertising costs are expensed in the period incurred.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
Piece goods and trim $ 4,788,000 $ 3,457,000
Work - in - process 6,184,000 1,700,000
Finished goods 14,872,000 7,038,000
----------- -----------
$25,844,000 $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, fixed charge coverage ratios and other matters. The
Company was in compliance with these covenants for the quarter ended December
31, 1998.
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 December 31,
1998 there is $36.0 million principal amount of bonds outstanding net of
$275,000 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.
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 Junior 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 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.
7
<PAGE> 8
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 collection 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 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 62,000 62,000
======== ========
Balance, beginning of period (194,000)
--------
Balance, end of period (132,000)
========
</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
PART I - FINANCIAL INFORMATION
APPAREL VENTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results during the periods included in the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS
The following tables set forth information with respect to the
percentage relationship of net sales of certain items of the consolidated
statement of operations of the Company for the three and six months ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 % 1997 %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 14,626,000 100.0% $ 15,087,000 100.0%
COST OF SALES 8,620,000 58.9% 8,986,000 61.4%
------------ ------------
Gross profit 6,006,000 41.1% 6,101,000 41.7%
OPERATING EXPENSES
Design 1,163,000 1,132,000
Selling 1,836,000 1,706,000
Shipping 534,000 452,000
General and administrative 2,304,000 2,428,000
------------ ------------
5,837,000 39.9% 5,718,000 39.1%
------------ ------------
Income (loss) from operations 169,000 1.2% 383,000 2.6%
OTHER (EXPENSE) INCOME
Interest expense (1,665,000) (1,495,000)
Interest income 5,000 5,000
Royalty income 30,000 43,000
Miscellaneous (152,000) (107,000)
------------ ------------
(1,782,000) -12.2% (1,554,000) -10.6%
------------ ------------
LOSS BEFORE INCOME TAXES (1,613,000) -11.0% (1,171,000) -8.0%
INCOME TAX BENEFIT 477,000 3.3% 375,000 2.6%
------------ ------------
NET LOSS ($ 1,136,000) -7.8% ($ 796,000) -5.4%
============ ============
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 % 1997 %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 18,718,000 100.0% $ 17,797,000 100.0%
COST OF SALES 11,449,000 61.2% 10,714,000 60.2%
------------ ------------
Gross profit 7,269,000 38.8% 7,083,000 39.8%
OPERATING EXPENSES
Design 1,793,000 1,862,000
Selling 2,900,000 2,848,000
Shipping 891,000 755,000
General and administrative 4,478,000 4,494,000
------------ ------------
10,062,000 53.8% 9,959,000 56.0%
------------ ------------
Loss from operations (2,793,000) -14.9% (2,876,000) -16.2%
OTHER (EXPENSE) INCOME
Interest expense (3,253,000) (2,870,000)
Interest income 12,000 10,000
Royalty income 60,000 85,000
Miscellaneous (236,000) (122,000)
------------ ------------
(3,417,000) -18.3% (2,897,000) -16.3%
------------ ------------
LOSS BEFORE INCOME TAXES (6,210,000) -33.2% (5,773,000) -32.4%
INCOME TAX BENEFIT 1,949,000 10.4% 1,848,000 10.4%
------------ ------------
NET LOSS ($ 4,261,000) -22.8% ($ 3,925,000) -22.1%
============ ============
</TABLE>
NET SALES
Net sales for the first six months of fiscal 1999 increased by $.9
million or 5.2% as compared to the same period of fiscal 1998. This increase was
due primarily to the increase of current season branded sales of $1.7 million,
increased prior season sales of $.5 million which were offset by increased
returns and allowances of $1.3 million. The increase in sales of current season
branded merchandise was primarily in the Sassafras Group where current season
sales increased $2.9 million of which $1.9 million was Nautica and $1.0 million
was Sessa. AV Europe also increased current season sales by $.4 million. These
gains were offset by reductions in current season sales for the La Blanca Group
whose current season sales were reduced $1.4 million, primarily in the Studio
line.
Net sales for the quarter ended December 31, 1998 decreased by $.5
million or 3.1% as compared to the same period of fiscal 1998. This decrease was
due primarily to a $1.0 million decrease in Studio sales, $.7 million decrease
in private label sales, $.7 million increased returns offset by increased
current season sales in the Sassafras Group of $1.9 million which was primarily
in the Nautica Label.
GROSS PROFIT
Gross profit for the first six months of fiscal 1999 increased by $.2
million or 2.6%, but decreased as a percent of net sales from 39.8% to 38.8%.
This decrease in percent was primarily due to the effect of the increase in
prior season sales. Current season merchandise gross profit as a percent of
sales increased one full percentage point.
Gross profit for the quarter ended December 31, 1998 decreased
$.1 million or 1.6%, and decreased as a percent of net sales from 41.7% to
41.1%. This decrease in gross profit was primarily due to the decrease in net
sales.
11
<PAGE> 12
OPERATING EXPENSES
Operating expenses for the first six months of fiscal 1999 decreased as
a percent of net sales from 56.0% to 53.8% but increased by $0.1 million due
primarily to increased warehouse and distribution expense. This increase in
distribution expense is due to a $6.0 million gross increase in finished goods
inventory resulting in increased handling cost and the effect of the 12%
increase in the minimum wage experienced at the end of the 1998 fiscal year.
Operating expenses for the quarter ended December 31, 1998 increased as
a percent of net sales from 39.1% to 39.3% and increased $0.1 million due
primarily to increased sample costs of $.1 million, increased distribution cost
of $.1 million relating to temporary labor, and decreased general and
administrative cost of $.1 million relating primarily to reduced travel costs.
OTHER EXPENSES
Other expenses for the first six months of fiscal 1999 increased by $0.5
million due primarily to an increase in interest expense of $.4 million and
increased royalty expense of $.1 million. The increased interest expense is the
result of the loss in fiscal year 1998, and increased inventory and accounts
receivable levels. The increase in inventory was planned in order to ship orders
on the start ship date rather than closer to the cancel date. This should have
the effect of improving margins and reducing clearance merchandise sales at the
end of the season.
Other expenses for the quarter ended December 31, 1998 increased $0.2
million due to increased interest expense on the working capital loan as
explained above.
INCOME TAX BENEFIT AND NET LOSS
Net loss before income tax benefit for the six months of fiscal 1999 was
($6.2) million compared to ($5.8) for the same period of fiscal 1998. The
increase in net loss reflects (i) increased gross profit of $.2 million, (ii)
increased operating expense of $.1 million and (iii) increased other expense of
$.5 million.
Net loss before income tax benefit was ($1.6) million for the quarter
ended December 31, 1998, compared to ($1.2) million for the same quarter in
fiscal 1998. The increase in net loss reflects decreased gross profit of $.1
million, increased operating expenses of $0.1 million and increase in other
expenses of $0.2 million.
The income tax benefit 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.
The Company does not have any mandatory long-term debt principal
payment requirements until 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 December 31, 1998, the net collateral availability under the line of
credit was approximately $2,500,000.
12
<PAGE> 13
The days sales outstanding (DSO) in accounts receivable increased from
91 days at December 31, 1997 to 99 days at December 31, 1998. This increase in
DSO is due to increased branded sales and the change in Factors the Company made
in November, 1998. Shipments made to specialty retailers and others during the
second quarter are typically given extended dating to May 10th of the following
year. Accordingly, with current season year to date branded sales up by $1.3
million, this has unfavorably impacted the calculation. Further, payments have
been delayed due to the change in Factor and the additional effort required to
reconcile and follow up on the accounts.
The days inventory on hand has increased from 100 at December 31, 1997
to 105 at December 31, 1998. This increase in days 'inventory on hand is the
direct result of our strategy to ship to the customer closer to the start date
thereby increasing sales and improving profitability.
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 backlog
was $30.2 million at December 31, 1998 as compared to $32.6 million at December
31, 1997. The decrease in backlog reflects a general soft market for Junior
Swimwear.
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 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.
February 16, 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>
10.1 Amendment No. 10 to Loan and Security Agreement
dated January 7, 1999 by and between Apparel
Ventures, Inc. and Fleet Capital Corporation 15
27 Financial Data Schedule
</TABLE>
14
<PAGE> 1
AMENDMENT NO. 10
TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 10 ("Amendment") is entered into as of January
4, 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 1.1 of the Loan Agreement is hereby amended as
follows:
(i) the following defined terms are hereby added in their
appropriate alphabetical order:
"Limited Guaranty" - that certain Limited Guaranty dated as of
January 4, 1999 executed by Marvin L. Goodman and Melinda K. Goodman in favor of
Lender.
"Special Advance Amount" - $1,000,000 solely during the period
commencing January 4, 1999 and ending on the earlier of (a) February 26, 1999
and (b) any earlier date as set forth in a notice from Borrower to Lender and $0
at all times thereafter.
<PAGE> 2
(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;
PLUS
(e) the Real Estate Advance Amount;
PLUS
(f) the Special Advance Amount;
PLUS
<PAGE> 3
(g) solely during the Seasonal Advance Period, the
Seasonal Advance Amount;
MINUS
(subtract from the sum of
clauses (a), (b), (c), (d), (e) (f) and (g) above)
(h) 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.
(b) Section 9.1 of the Loan Agreement is hereby amended by adding
a new clause (U) to provide as follows:
"(U) Termination or Breach of Limited Guaranty. There shall occur
any termination or breach of the Limited Guaranty, or if Marvin L. Goodman or
Melinda K. Goodman shall attempt to terminate, or challenge the validity of, or
his or her liability under, the Limited Guaranty so long as there are existing
outstanding Revolving Credit Loans in reliance upon clause (f) of the definition
of Borrowing Base."
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) four (4) copies of the Limited Guaranty executed by Marvin L.
Goodman and Melinda K. Goodman and (iii) 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.
<PAGE> 4
(d) Borrower has no defense, counterclaim or offset with respect
to the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended herein, the Loan Agreement,
and all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy of Lender, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
7. Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
8. Counterparts. This Amendment may be executed by the parties
hereto in one or more counterparts, each of which shall be deemed an original
and all of which taken together shall constitute one and the same agreement.
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 FINANCIAL
STATEMENTS OF APPAREL VENTURES, INC. FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 166,000
<SECURITIES> 0
<RECEIVABLES> 18,331,000
<ALLOWANCES> 600,000
<INVENTORY> 25,844,000
<CURRENT-ASSETS> 48,442,000
<PP&E> 11,234,000
<DEPRECIATION> 5,175,000
<TOTAL-ASSETS> 68,022,000
<CURRENT-LIABILITIES> 37,526,000
<BONDS> 36,810,000
0
0
<COMMON> 1,000
<OTHER-SE> (6,485,000)
<TOTAL-LIABILITY-AND-EQUITY> 68,022,000
<SALES> 18,718,000
<TOTAL-REVENUES> 18,718,000
<CGS> 11,449,000
<TOTAL-COSTS> 11,449,000
<OTHER-EXPENSES> 10,226,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,253,000
<INCOME-PRETAX> (6,210,000)
<INCOME-TAX> (1,949,000)
<INCOME-CONTINUING> (4,261,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,261,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
