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________________________________________________________________________________
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 OCTOBER 3, 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 1-11202
------------------------
AUTHENTIC FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 95-4268251
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
</TABLE>
6040 BANDINI BLVD.
COMMERCE, CALIFORNIA 90040
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(213) 726-1262
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
AUTHENTIC FITNESS CORPORATION
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: GENERAL COUNSEL
------------------------
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. [x] Yes [ ] No
The number of shares of the registrant's Common Stock outstanding as of
November 10, 1998 was: 22,990,086.
________________________________________________________________________________
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 3, 1998 JULY 4, 1998
--------------- ------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 540 $ 638
Accounts receivable, net...................................................... 66,673 114,710
Accounts receivable from affiliates........................................... 2,472 7,250
Inventories:
Finished goods........................................................... 55,533 46,156
Raw material and work in process......................................... 25,504 17,754
--------------- ------------
Total inventories................................................... 81,037 63,910
Other current assets.......................................................... 11,446 8,080
--------------- ------------
Total current assets................................................ 162,168 194,588
Property, plant and equipment, (net of accumulated depreciation of $25,606 and
$23,289, respectively)........................................................... 49,767 50,417
Other assets, net.................................................................. 65,526 71,157
--------------- ------------
$ 277,461 $316,162
--------------- ------------
--------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility..................................... $ 67,001 $ 61,963
Current maturities of long-term debt.......................................... 9,218 9,324
Accounts payable and accrued liabilities...................................... 47,859 30,065
Payable to affiliates......................................................... 8,189 16,604
Accrued (prepaid) income taxes................................................ (5,100) 4,386
Deferred income taxes......................................................... 3,149 3,149
--------------- ------------
Total current liabilities........................................... 130,316 125,491
Long-term debt..................................................................... 33,126 33,178
Deferred income taxes.............................................................. 6,630 6,651
Stockholders' equity:
Preferred Stock; $.01 par value............................................... -- --
Common Stock; $.001 par value................................................. 23 23
Additional paid-in capital.................................................... 163,164 163,164
Cumulative translation adjustment............................................. (1,519) (1,173)
Accumulated deficit........................................................... (12,652) (2,286)
Treasury stock, at cost....................................................... (41,627) (8,886)
--------------- ------------
Total stockholders' equity.......................................... 107,389 150,842
--------------- ------------
$ 277,461 $316,162
--------------- ------------
--------------- ------------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
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AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
----------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues.................................................................... $ 39,619 $ 36,970
Cost of goods sold.............................................................. 25,428 23,900
--------------- ---------------
Gross profit.................................................................... 14,191 13,070
Selling, general and administrative expenses (Note 5)........................... 24,145 21,202
--------------- ---------------
Income (loss) before interest and income taxes.................................. (9,954) (8,132)
Interest expense................................................................ 2,469 3,096
--------------- ---------------
Income (loss) before income taxes............................................... (12,423) (11,228)
Provision (benefit) for income taxes............................................ (4,845) (4,379)
--------------- ---------------
Income (loss) before cumulative effect of change in accounting principle........ (7,578) (6,849)
Cumulative effect of change in accounting principle, net of tax benefit
(Note 3)..................................................................... (2,518) --
--------------- ---------------
Net income (loss)............................................................... $ (10,096) $ (6,849)
--------------- ---------------
--------------- ---------------
Basic earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle... $ (0.34) $ (0.31)
Cumulative effect of change in accounting principle........................ (0.12) --
--------------- ---------------
Basic earnings (loss) per share................................................. $ (0.46) $ (0.31)
--------------- ---------------
--------------- ---------------
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle... $ (0.34) $ (0.31)
Cumulative effect of change in accounting principle........................ (0.12) --
--------------- ---------------
Diluted earnings (loss) per share............................................... $ (0.46) $ (0.31)
--------------- ---------------
--------------- ---------------
Cash dividends per share of common stock........................................ $ 0.01 $ 0.01
--------------- ---------------
--------------- ---------------
Weighted average number of shares of common stock outstanding:
Basic...................................................................... 22,071,483 22,243,001
--------------- ---------------
--------------- ---------------
Diluted.................................................................... 22,071,483 22,243,001
--------------- ---------------
--------------- ---------------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
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AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
----------------------------------
OCTOBER 3, 1998 OCTOBER 4, 1997
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ (10,096) $ (6,849)
Non-cash items included in net income (loss):
Depreciation and amortization......................................... 2,638 2,584
Other................................................................. 1,090 (1,138)
Non-recurring item.................................................... 3,074 1,408
Cumulative effect of change in accounting principle................... 4,128 --
Income taxes............................................................... (9,486) (5,812)
Other changes in operating accounts........................................ 30,648 (14,154)
--------------- ---------------
Net cash provided by (used in) operating activities................... 21,996 (23,961)
--------------- ---------------
Cash flows from investing activities:
Purchase of equipment and other long-term assets........................... (2,155) (1,416)
Other, net................................................................. (1,138) (272)
--------------- ---------------
Net cash used in investing activities................................. (3,293) (1,688)
--------------- ---------------
Cash flows from financing activities:
Net borrowing (repayments) under revolving credit facility................. 5,038 27,877
Net proceeds from the sale of common stock and exercise of stock options... 2 96
Repayments of debt......................................................... (158) (158)
Purchase of treasury stock................................................. (23,382) (2,254)
Dividends paid............................................................. (271) (280)
Payment of deferred financing fees......................................... (30) (21)
--------------- ---------------
Net cash provided by (used in) financing activities................... (18,801) 25,260
--------------- ---------------
Decrease in cash................................................................ (98) (389)
Cash at beginning of period..................................................... 638 1,246
--------------- ---------------
Cash at end of period........................................................... $ 540 $ 857
--------------- ---------------
--------------- ---------------
Other changes in operating accounts:
Accounts receivable........................................................ $ 52,815 $ 15,855
Inventories................................................................ (17,824) (20,066)
Other current assets....................................................... (3,366) (2,845)
Accounts payable and accrued liabilities................................... (977) (7,098)
--------------- ---------------
$ 30,648 $ (14,154)
--------------- ---------------
--------------- ---------------
</TABLE>
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
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AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 -- BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all of the adjustments (all
of which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of October 3, 1998 as well as its results
of operations and cash flows for the periods ended October 3, 1998 and October
4, 1997. Operating results for interim periods may not be indicative of results
for the full fiscal year. The consolidated condensed balance sheet as of July 4,
1998 is derived from the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year then ended. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 4, 1998. Certain amounts for prior periods have been reclassified to
be comparable with the current period presentation.
2 -- CAPITAL STOCK
On August 20, 1998, the Company's Board of Directors declared a quarterly
cash dividend of $0.0125 per share to be paid on October 8, 1998 to shareholders
of record as of September 3, 1998. In 1997, the Company's Board of Directors
authorized a stock repurchase program which currently allows the Company to buy
up to $50.0 million of its outstanding Common Stock. As of October 3, 1998, the
Company had purchased approximately 2.9 million shares of its Common Stock for
an aggregate purchase price of approximately $41.6 million. During the first
quarter of fiscal 1999, the Company repurchased approximately 174,500 shares
under equity option arrangements at a cost of approximately $3.5 million. In
addition, the Company has options outstanding on approximately 419,000 shares
for a total value of approximately $8.1 million. These equity option
arrangements expire during November and December 1998.
3 -- NEW ACCOUNTING STANDARDS
In April 1998, the Financial Accounting Standards Board ('FASB') approved
the Statement of Position ('SOP') 98-5 'Reporting on the Costs of Start-Up
Activities'. The Company adopted SOP 98-5 effective beginning fiscal 1999. The
SOP requires that start-up costs, as defined, be expensed as incurred. It had
been the Company's consistent accounting policy to capitalize such costs for
amortization over appropriate periods from 12 to 36 months. The Company recorded
a cumulative charge of approximately $2.5 million (or $0.12 per diluted share),
net of income tax benefits. The effect of adopting SOP 98-5 had an immaterial
effect on income (loss) before the cumulative effect of change in accounting
principle in the first quarter of fiscal 1999.
The Company adopted Statement of Accounting Standards No. 130, 'Reporting
Comprehensive Income' ('SFAS 130') effective with the beginning of fiscal 1999.
SFAS 130 establishes standards for reporting and display of changes in equity
from nonowner sources in the financial statements, however, the adoption of
SFAS 130 has no impact on the Company's net earnings or stockholder's equity.
SFAS 130 requires, among other things, foreign currency translation adjustments,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Total comprehensive income (loss) was
approximately $(10.4) million and $(6.8) million for the three month periods
ended October 3, 1998 and October 4, 1997, respectively.
5
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AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIALSTATEMENTS -- (CONTINUED)
4 -- DEBT
In March 1998, the Company entered into a restated credit agreement with GE
Capital, The Bank of Nova Scotia, Societe Generale and Union Bank of California
(the 'Restated Credit Agreement'). In September 1998, the Company amended the
Restated Credit Agreement (the 'Amended Credit Agreement') such that the
Company's ability to purchase its own Common Stock was immediately increased
to $50 million. The terms of the Company's Amended Credit Agreement are the
same as those of the Restated Credit Agreement. Borrowings under the Company's
Restated Credit Agreement bear interest at LIBOR plus 1.00%. The rate of
interest payable on outstanding borrowings will be automatically reduced, to
as low as LIBOR plus 0.75%, as the Company's EBITDA to debt ratio improves
to 2.5 to 1. The Restated Credit Agreement matures on September 1, 2001.
In June 1998, the Company entered into an interest rate swap agreement (the
'Swap Agreement') with a bank that is a lender in the Restated Credit Agreement.
The Swap Agreement allows the Company to convert variable rate borrowings with a
notional amount of $75 million to a fixed rate interest rate. Borrowings under
the Swap Agreement are fixed at 4.99% through September 18, 1998 and 6.66%
thereafter until maturity in September 2003. The variable rate under the Swap
Agreement of LIBOR is approximately 5.5% as of October 3, 1998. Differences
between the fixed interest rate and the variable interest rate are settled
quarterly and resulted in a reduction of interest expense of approximately $0.1
million for the three months ended October 3, 1998.
5 -- NON-RECURRING EXPENSES
On October 2, 1998, the Company announced plans to discontinue sourcing
from KT West, Inc. from the Company's owned Checotah, Oklahoma facility and to
consolidate sourcing from the Company's leased Montebello, California facility
into the Company's Commerce, California facility. This decision is part of the
Company's continued strategy to secure the most efficient sourcing of its
products. The Company recorded a charge of approximately $2.0 million net of
income tax benefits (or $0.09 per diluted share) in the first quarter of fiscal
1999 primarily related to the above, including $2.2 million in non-cash asset
write-offs, $0.6 million in connection with contractual obligations to KT West,
Inc. and $0.5 million in other costs.
The first quarter of fiscal 1998 includes a non-recurring expense of
approximately $0.9 million net of income tax benefits (or $0.04 per diluted
share) related to the write-off of certain assets and other costs associated
with closing the Company's Bally's Fitness Centers stores, as well as a
consolidation of the Company's manufacturing facilities.
6 -- EARNINGS (LOSS) PER SHARE
Options to purchase approximately 4.6 million shares of common stock were
not included in the computation of diluted earnings per share as the impact
would be antidilutive.
6
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
------------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---------- ----------
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Net revenues............................................................................. $ 39.6 $ 37.0
Cost of goods sold....................................................................... 25.4 23.9
---------- ----------
Gross profit............................................................................. 14.2 13.1
% of net revenues...................................................................... 35.8% 35.4%
Selling, general and administrative expenses............................................. 20.8 19.8
Non-recurring item....................................................................... 3.3 1.4
---------- ----------
Income (loss) before interest and income taxes........................................... (9.9) (8.1)
Interest expense......................................................................... 2.5 3.1
Income tax (benefit)..................................................................... (4.8) (4.4)
---------- ----------
Income (loss) before cumulative effect of change in accounting principle................. (7.6) (6.8)
Cumulative effect of change in accounting principle...................................... (2.5) --
---------- ----------
Net income (loss)........................................................................ $(10.1) $ (6.8)
---------- ----------
---------- ----------
</TABLE>
------------------------
Net revenues for the first quarter of fiscal 1999 increased 7.2% to $39.6
million compared to $37.0 million in the first quarter of fiscal 1998. Speedo'r'
Division net revenues increased 5.0% to $22.3 million in the first quarter of
fiscal 1999 from $21.2 million in the first quarter of fiscal 1998. The
Speedo'r' division sales mix improved as regular price shipments increased
approximately 9% compared to last year. Goggles were up approximately 73% over
last year and men's swimwear increased approximately 29%. Speedo'r' Authentic
Fitness'r' Retail Division net revenues increased 7.4% to $14.8 million in the
first quarter of fiscal 1999 from $13.8 million in the first quarter of fiscal
1998. Same store sales for the first quarter of fiscal 1999 increased 6.1% over
the year earlier period. The Designer Swimwear Division net revenues increased
29.4% to $2.5 million from $1.9 million last year.
Gross profit for the first quarter of fiscal 1999 increased to $14.2
million from $13.1 million in the first quarter of fiscal 1998. The increase in
gross profit reflects the better Speedo'r' division sales mix, as noted above,
and the increase in Speedo'r' Authentic Fitness'r' Retail Division sales. Gross
profit as a percentage of net revenues was 35.8% in the first quarter of fiscal
1999 compared to 35.4% in the first quarter of fiscal 1998. The increase in
gross profit as a percentage of net revenues reflects the better regular price
sales mix in the Speedo'r' division, as noted above and the higher level of
Speedo'r' Authentic Fitness'r' Retail Division sales which generate a higher
gross profit margin than the wholesale divisions.
Selling, general and administrative expenses increased to $20.8 million in
the first quarter of fiscal 1999 from $19.8 million in the first quarter of
fiscal 1998. The increase in selling, general and administrative expenses
reflects increased marketing and advertising expenses and higher retail division
selling costs, partially offset by decreased warehousing and shipping costs.
The Company recorded a non-recurring expense of $2.0 million net of income
tax benefits (or $0.09 per diluted share) in the first quarter of fiscal 1999
related to the Company's decision to discontinue sourcing from KT West, Inc.
from the Company's owned Checotah, Oklahoma facility and to consolidate sourcing
from the Company's leased Montebello, California facility into the Company's
Commerce, California facility.
Interest expense was $2.5 million in the first quarter of fiscal 1999
compared to $3.1 million in the first quarter of fiscal 1998. The decrease of
approximately $0.6 million in interest expense is primarily a result of lowered
borrowing due to a $25.5 million reduction in inventory, the effect of improved
7
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<PAGE>
inventory controls, as well as a significant increase in account receivable
collections versus the prior year.
The Company's effective income tax rate was 39% for the first quarter of
fiscal 1999 and the first quarter of fiscal 1998.
The Company recorded a cumulative charge of approximately $2.5 million (or
$0.12 per diluted share), net of income tax benefits in the first quarter of
fiscal 1999 to reflect the adoption of SOP 98-5 'Reporting on the Costs of
Start-Up Activities'. The Company adopted SOP 98-5 effective beginning fiscal
1999. The SOP requires that start-up costs, as defined, be expensed as incurred.
It had been the Company's consistent accounting policy to capitalize such costs
for amortization over appropriate periods from 12 to 36 months. The effect of
adopting SOP 98-5 had an immaterial effect on income (loss) before the
cumulative effect of change in accounting principle in the first quarter of
fiscal 1999.
Net loss for the first quarter of fiscal 1999 was $(10.1) million compared
to a net loss of $(6.8) million in the first quarter of fiscal 1998. The
increase in net loss reflects the impact of the Company's decision to
consolidate sourcing and the adoption of the SOP regarding the costs of start-up
activities, partially offset by the increase in gross profit and decrease in
interest expense, as noted above.
CAPITAL RESOURCES AND LIQUIDITY
On March 18, 1998, the Company entered into a restated credit agreement
with GE Capital, The Bank of Nova Scotia, Societe Generale and Union Bank of
California (the 'Restated Credit Agreement'). On September 14, 1998, the Company
amended the Restated Credit Agreement (the 'Amended Credit Agreement') such that
the Company's ability to purchase its own Common Stock was immediately increased
to $50 million. The terms of the Company's Amended Credit Agreement are the same
as those of the Restated Credit Agreement. The Restated Credit Agreement expires
in September 2001 and provides for a term loan ('Term Loan') in the amount of
$45 million and a revolving loan facility ('Revolving Loan') in the amount of
$165 million. Borrowings under the Restated Credit Agreement accrue interest at
the lenders' base rate or at LIBOR plus 1.00%. The rate of interest payable on
outstanding borrowing will be automatically reduced to as low as LIBOR plus
0.75%, as the Company's EBITDA to debt ratio improves to 2.5 to 1.
In 1997, the Company's Board of Directors authorized a stock repurchase
program which currently allows the Company to buy up to $50.0 million of its
outstanding Common Stock. As of November 10, 1998, the Company had purchased
approximately 3.0 million shares of its Common Stock at an aggregate cost of
approximately $43.3 million.
On August 16, 1995, consistent with the Company's goal of providing
increased shareholder value, the Company declared its first quarterly cash
dividend of 1.25[c] per share, equivalent of an annual rate of 5[c] per share.
The Company has since declared thirteen successive quarterly cash dividends of
1.25[c] per share. The Company believes that its stock repurchase program as
well as the regular quarterly cash dividend demonstrates the Company's ongoing
commitment to increase stockholder value.
The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional Speedo'r' Authentic Fitness'r' retail
stores. The Company currently has 139 stores open and expects to open five to
ten additional stores during fiscal 1999. The cost of leasehold improvements,
fixtures and the additional working capital associated with the opening of an
average new store is expected to be approximately $250,000.
The Company's liquidity requirements have historically arisen primarily
from its debt service requirements and the funding of the Company's working
capital needs, primarily inventory and accounts receivable. The Company's
borrowing requirements are seasonal, with peak working capital needs arising at
the end of the third quarter and beginning of the fourth quarter of the fiscal
year. The Company typically generates nearly all of its operating cash flow in
the fourth quarter of the fiscal year reflecting third and fourth quarter
shipments and the sale of inventory built during the first half of the fiscal
year. The Company meets its seasonal working capital needs by utilizing amounts
available under its revolving line of credit.
8
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Cash provided by operating activities for the first quarter of fiscal 1999
was $22.0 million compared to cash used of $(24.0) million in the first quarter
of fiscal 1998. The increase in cash provided by operating activities in the
first quarter of fiscal 1999 is primarily due to a decrease in accounts
receivable of $52.8 million, partially offset by an increase in inventory of
$17.8 million versus prior year-end. Cash used in investing activities was
$(3.3) million in the first quarter of fiscal 1999 compared to $(1.7) million in
the first quarter of fiscal 1998. The increase in cash used in investing
activities reflects increased capital expenditures. Cash used in financing
activities was $(18.8) million in the first quarter of fiscal 1999 compared to
an amount provided of $25.3 million in the first quarter of fiscal 1998. The
increase in cash used in financing activities primarily reflects the repurchase
of $23.4 million of the Company's Common Stock along with decreased borrowing
under the Company's Revolving Loan of $22.8 million versus the first quarter of
fiscal 1998. The Company's revolving loan balance was $67.0 million at the end
of the first quarter of fiscal 1999. At November 10, 1998, the Company had
approximately $66 million of additional credit available under its Revolving
Loan.
The Company believes that funds available under its Restated Credit
Agreement, as noted above, combined with cash flow to be generated from future
operations will be sufficient for the operations of the Company, including debt
service, dividend payments and costs associated with the expansion of its
Speedo'r' Authentic Fitness'r' Retail Division for at least the next twelve
months. Although the Company believes that its current credit agreement and cash
flow to be generated from future operations will also be sufficient for its
long-term operations (periods beyond the next twelve months) circumstances may
arise that would require the Company to seek additional financing. In those
circumstances the Company expects to evaluate additional sources of funds, for
example, sales of additional common stock and expanded or additional bank credit
facilities.
YEAR 2000 COMPLIANCE
Comprehensive plans for achieving Year 2000 compliance were finalized
during fiscal 1998 and implementation work is well under way as of the end of
the first quarter of fiscal 1999. All required systems modifications are
expected to be completed by the end of fiscal 1999. Also during fiscal 1999,
attention has been and will continue to be focused on compliance attainment
efforts of vendors and others, including key system interfaces with customers
and suppliers. Notwithstanding the efforts described above, the Company could
potentially experience disruptions to some aspects of its various activities and
operations as a result of non-compliant systems utilized by unrelated business
entities. Contingency plans are therefore under development to mitigate the
extent of such potential disruption to business operations. The total estimated
cost to the Company for enhanced hardware and software applications and achieve
Year 2000 compliant systems is expected to require expenditures, primarily
capital, of approximately $9.0 million.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This Report includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines,
possible Year 2000 disruption and financial difficulties encountered by
customers. All statements other than statements of historical facts included in
this quarterly report, including, without limitation, the statements under
'Management's Discussion and Analysis of Financial Condition', are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable; it can give no
assurance that such expectations will prove to have been correct.
9
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or trading purposes. The Company has an interest rate swap agreement
with a financial institution to limit exposure to interest rate volatility. The
value of market risk sensitive instruments is subject to change as a result of
movements in market rates and prices. Based on a hypothetical (one-percentage
point) increase in interest rates, the potential losses in future earnings, fair
value and cash flows are immaterial.
10
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<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K.
(a) Exhibits
<TABLE>
<S> <C>
10.1 -- Amendment No. 1, dated as of September 14, 1998, to the Restated Credit Agreement dated as of
March 18, 1998, among Authentic Fitness Products, Inc., as Borrower, and Authentic Fitness
Corporation, The Financial Institutions named as Lenders and The Bank of Nova Scotia and General
Electric Capital Corporation as Agents, and The Bank of Nova Scotia as Administrative Agent,
Paying Agent, Swing Line Bank and Fronting Bank, and General Electric Capital Corporation as
Documentation Agent and Collateral Agent and Societe Generale as Co-Agent.
27.1 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
11
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SIGNATURES
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.
AUTHENTIC FITNESS CORPORATION
Date: November 17, 1998 By: /S/ CHRISTOPHER G. STAFF
...................................
CHRISTOPHER G. STAFF
PRESIDENT AND CHIEF OPERATING
OFFICER
Date: November 17, 1998 By: /S/ MICHAEL P. MC HUGH
...................................
MICHAEL P. MC HUGH
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
12
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as ................ 'r'
The cent sign shall be expressed as .................................. [c]
<PAGE>
<PAGE>
FIRST AMENDMENT TO THE CREDIT AGREEMENT
FIRST AMENDMENT, dated as of September 14, 1998, among AUTHENTIC FITNESS
PRODUCTS INC. (the 'Borrower'), AUTHENTIC FITNESS CORPORATION ('Parent'), the
Lenders party to the Credit Agreement referred to below, THE BANK OF NOVA SCOTIA
('Scotiabank') and GENERAL ELECTRIC CAPITAL CORPORATION ('GE Capital'), as
Agents (the 'Agents') for the Lenders thereunder, SCOTIABANK, as Administrative
Agent and Paying Agent for the Lenders thereunder and as Swing Line Bank and the
Fronting Bank thereunder, GE CAPITAL, as Documentation Agent and Collateral
Agent for the Lenders thereunder, and SOCIETE GENERALE, as Co-Agent for the
Lenders thereunder.
W I T N E S S E T H :
WHEREAS, the parties hereto have entered into that certain Restated Credit
Agreement, dated as of March 18, 1998 (such Agreement, as amended, supplemented
or otherwise modified from time to time, being hereinafter referred to as the
'Credit Agreement,' and capitalized terms defined therein and not otherwise
defined herein being used herein as therein defined); and
WHEREAS, the Borrower desires to have the Lenders amend certain provisions
of the Credit Agreement; and
WHEREAS, the Lenders have agreed to such amendment upon the terms and
subject to the conditions provided herein;
NOW, THEREFORE, in consideration of the premises, covenants and agreements
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
SECTION 1. Amendments. The Lenders, the Agents, the Borrower and Parent
hereby agree to the following amendments to the Credit Agreement:
(a) Section 5.02(g)(ii)(C) of the Credit Agreement is hereby amended to
read as follows:
'(C) repurchase shares of its common stock and make cash payments
under the Stock Repurchase Program in an aggregate amount not to
exceed $50,000,000 plus the amount of cash payments made by
Citibank, N.A. to Parent under the Stock Repurchase Program;'
<PAGE>
<PAGE>
(b) Section 5.04(c) of the Credit Agreement is hereby amended to read as
follows:
'(c) Maximum Total Debt to EBITDA Ratio. Maintain, as of the end of
each fiscal month, a ratio of Total Debt to Consolidated EBITDA of
Parent and its Subsidiaries for the period of twelve fiscal months
ending at the end of each such fiscal month of not greater than the
amount set forth below for each fiscal month ending during the
period set forth below:
<TABLE>
<CAPTION>
TWELVE FISCAL MONTH PERIOD
ENDING ON OR ABOUT RATIO
- - --------------------------------------------- ---------
<S> <C>
June 30, 1997 - August 31, 1997 3.25:1.00
September 30, 1997 - May 31, 1999 3.00:1.00
June 30, 1999 and thereafter 2.75:1.00
</TABLE>
SECTION 2. Conditions to Effectiveness. This Amendment shall become
effective as of the date hereof when, and only when, the Agents shall have
received (a) counterparts of this Amendment executed by Parent, the Borrower and
a Supermajority of Lenders or, as to the Lenders, advice satisfactory to the
Agents that such Lenders have executed this Amendment, (b) a copy of the annexed
Consent of Guarantors executed by the parties thereto and (c) the fee referred
to in the first sentence of Section 5 hereof.
SECTION 3. Representations and Warranties. Parent and the Borrower hereby
jointly and severally represent and warrant to the Lenders and the Agents as
follows:
(a) After giving effect to this Amendment, each of the representations and
warranties in Article IV of the Credit Agreement and in the other Loan Documents
are correct on and as of the date hereof as though made on and as of such date,
except to the extent any such representation or warranty expressly relates to an
earlier date.
(b) After giving effect to this Amendment, no Default or Event of Default
has occurred and is continuing as of the date hereof.
(c) The execution, delivery and performance by Parent and the Borrower of
this Amendment have been duly authorized by all necessary or proper corporate
action and do not require the consent or approval of any Person which has not
been obtained.
(d) This Amendment has been duly executed an delivered by the Borrower and
Parent and each of this Amendment and the Credit Agreement as amended hereby
constitutes the legal, valid and binding obligation of the Borrower and Parent,
enforceable against them in accordance with its terms.
2
<PAGE>
<PAGE>
SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon the
effectiveness of this Amendment, on and after the date hereof, each reference in
the Credit Agreement and the other Loan Documents to 'this Agreement,'
'hereunder,' 'hereof,' 'herein,' or words of like import, shall mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except to the extent waived or amended herein, the provisions of the
Credit Agreement and all of the other Loan Documents 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 herein, operate as a waiver of any right, power or
remedy of the Lenders or the Agents under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. Fees, Costs and Expenses. Parent and the Borrower agree to pay
to the Administrative Agent for the benefit of the Lenders, based on their Pro
Rata Shares, a fee in the amount of $215,000. Parent and the Borrower further
agree to pay on demand (i) all costs, fees and expenses of the Agents in
connection with the preparation, execution and delivery of this Amendment and
the other instruments and documents to be delivered pursuant hereto, including
the reasonable fees and out-of-pocket expenses of counsel for the Agents with
respect thereto.
SECTION 6. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
SECTION 7. Governing Law. This Amendment shall be governed by and construed
and interpreted in accordance with the laws of the State of New York applicable
to contracts made and performed in such state, without regard to the principles
thereof regarding conflict of laws.
3
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as
of the date first above written.
AUTHENTIC FITNESS PRODUCTS INC.
By: Stanley P. Silverstein
__________________________________
Name: Stanley P. Silverstein
Title: Acting General Counsel
AUTHENTIC FITNESS CORPORATION
By: Stanley P. Silverstein
__________________________________
Name: Stanley P. Silverstein
Title: Acting General Counsel
THE BANK OF NOVA SCOTIA
By: John Hopmans
___________________________________
Name: John Hopmans
Title: Senior Relationship Manager
GENERAL ELECTRIC CAPITAL
CORPORATION
By: Peggy Erlenkotter
___________________________________
Name: Peggy Erlenkotter
Title: Duly Authorized Signatory
SOCIETE GENERALE
By: Robert Petersen
___________________________________
Name: Robert Petersen
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: Albert W. Kelly
___________________________________
Name: Albert W. Kelly
Title: Vice President
NATIONSBANK, N.A.
By: David H. Dinkins
___________________________________
Name: David H. Dinkins
Title: Vice President
FLEET BANK, N.A.
By: Steven R. Navarro
___________________________________
Name: Steven R. Navarro
Title: Senior Vice President
4
<PAGE>
<PAGE>
COMMERZBANK AG, New York Branch
By: Peter Doyle By: Robert Donohue
________________________________ _________________________________
Name: Peter Doyle Name: Robert Donohue
Title: Assistant Vice President Title: Vice President
FIRST UNION NATIONAL BANK
By: John P. Longhine
___________________________________
Name: John P. Longhine
Title: Senior Vice President
THE BANK OF NEW YORK
By: Eliza S. Adams
___________________________________
Name: Eliza S. Adams
Title: Vice President
BANKBOSTON, N.A.
By: Nancy E. Fuller
___________________________________
Name: Nancy E. Fuller
Title: Director
CITICORP USA, INC.
By: ___________________________________
Name:
Title:
5
<PAGE>
<PAGE>
CONSENT OF GUARANTORS
The undersigned, a party to the Subsidiary Guaranty, Security Agreement and
Trademark, Patent and Copyright Security Agreement, each dated as of September
6, 1996, as amended, hereby consents to the terms of the foregoing Amendment
dated as of September 14, 1998 (to which this Consent is annexed) and confirms
that such Subsidiary Guaranty, Security Agreement and Trademark, Patent and
Copyright Security Agreement remain in full force and effect and continue to
secure the Obligations pursuant to the terms thereof.
Dated as of September 14, 1998
AUTHENTIC FITNESS RETAIL INC.
BY: Stanley P. Silverstein
__________________________________
NAME: Stanley P. Silverstein
TITLE: Acting General Counsel
CCC ACQUISITION CORP.
BY: Stanley P. Silverstein
__________________________________
NAME: Stanley P. Silverstein
TITLE: Acting General Counsel
CCC ACQUISITION REALTY CORP.
BY: Stanley P. Silverstein
__________________________________
NAME: Stanley P. Silverstein
TITLE: Acting General Counsel
CCC TEN. CORP.
BY: Stanley P. Silverstein
__________________________________
NAME: Stanley P. Silverstein
TITLE: Acting General Counsel
CCC CAL. CORP.
BY: Stanley P. Silverstein
__________________________________
NAME: Stanley P. Silverstein
TITLE: Acting General Counsel
6
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTHENTIC FITNESS CORPORATION FOR THE QUARTER ENDED
OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> OCT-03-1998
<CASH> 540
<SECURITIES> 0
<RECEIVABLES> 74,023
<ALLOWANCES> 4,878
<INVENTORY> 81,037
<CURRENT-ASSETS> 162,168
<PP&E> 75,373
<DEPRECIATION> 25,606
<TOTAL-ASSETS> 277,461
<CURRENT-LIABILITIES> 130,316
<BONDS> 33,126
0
0
<COMMON> 23
<OTHER-SE> 107,366
<TOTAL-LIABILITY-AND-EQUITY> 277,461
<SALES> 39,619
<TOTAL-REVENUES> 39,619
<CGS> 25,428
<TOTAL-COSTS> 25,428
<OTHER-EXPENSES> 24,145
<LOSS-PROVISION> 5,034
<INTEREST-EXPENSE> 2,469
<INCOME-PRETAX> (12,423)
<INCOME-TAX> (4,845)
<INCOME-CONTINUING> (7,578)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,518)
<NET-INCOME> (10,096)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
