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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 APRIL 3, 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 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)
(323) 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
May 6, 1999 was: 23,003,286.
________________________________________________________________________________
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 3, 1999 JULY 4, 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 751 $ 638
Accounts receivable, net......................................................... 145,976 114,710
Accounts receivable from affiliates.............................................. 7,088 7,250
Inventories:
Finished goods.............................................................. 63,858 46,156
Raw material and work in process............................................ 33,766 17,754
------------- ------------
Total inventories...................................................... 97,624 63,910
Other current assets............................................................. 10,877 8,080
------------- ------------
Total current assets................................................... 262,316 194,588
Property, plant and equipment, (net of accumulated depreciation of $29,329 and
$23,289, respectively).............................................................. 50,187 50,417
Other assets, net..................................................................... 63,964 71,157
------------- ------------
$ 376,467 $316,162
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility........................................ $ 116,130 $ 61,963
Current maturities of long-term debt............................................. 10,297 9,324
Accounts payable and accrued liabilities......................................... 65,489 30,065
Payable to affiliates............................................................ 22,964 16,604
Accrued income taxes............................................................. 6,197 4,386
Deferred income taxes............................................................ 3,149 3,149
------------- ------------
Total current liabilities.............................................. 224,226 125,491
Long-term debt........................................................................ 28,018 33,178
Deferred income taxes................................................................. 6,643 6,651
Stockholders' equity:
Preferred stock; $.01 par value.................................................. -- --
Common stock; $.001 par value.................................................... 23 23
Additional paid-in capital....................................................... 163,347 163,164
Cumulative translation adjustment................................................ (1,285) (1,173)
Retained earnings (deficit)...................................................... 5,220 (2,286)
Treasury stock, at cost.......................................................... (49,725) (8,886)
------------- ------------
Total stockholders' equity............................................. 117,580 150,842
------------- ------------
$ 376,467 $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
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
APRIL 3, 1999 APRIL 4, 1998 APRIL 3, 1999 APRIL 4, 1998
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues........................................... $ 144,293 $ 127,935 $ 261,949 $ 237,554
Cost of goods sold..................................... 86,531 74,287 156,661 138,397
------------- ------------- ------------- -------------
Gross profit........................................... 57,762 53,648 105,288 99,157
Selling, general and administrative expenses (See Note
5)................................................... 30,588 27,415 77,882 71,528
------------- ------------- ------------- -------------
Income before interest and income taxes................ 27,174 26,233 27,406 27,629
Interest expense....................................... 4,196 4,187 10,134 10,815
------------- ------------- ------------- -------------
Income before provision for income taxes............... 22,978 22,046 17,272 16,814
Provision for income taxes............................. 8,962 8,092 6,736 6,052
------------- ------------- ------------- -------------
Income before cumulative effect of change in accounting
principle............................................ 14,016 13,954 10,536 10,762
Cumulative effect of change in accounting principle,
net of tax benefit (See Note 3)...................... -- -- (2,518) --
------------- ------------- ------------- -------------
Net income............................................. $ 14,016 $ 13,954 $ 8,018 $ 10,762
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic earnings per share:
Income before cumulative effect of change in
accounting principle............................ $0.71 $0.63 $0.51 $0.48
Cumulative effect of change in accounting
principle....................................... -- -- (0.12) --
Basic earnings per share............................... $0.71 $0.63 $0.39 $0.48
----- ----- ----- -----
----- ----- ----- -----
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle............................ $0.69 $0.62 $0.51 $0.48
Cumulative effect of change in accounting
principle....................................... -- -- (0.12) --
----- ----- ----- -----
Diluted earnings per share............................. $0.69 $0.62 $0.39 $0.48
----- ----- ----- -----
----- ----- ----- -----
Cash dividends per share of common stock............... $0.01 $0.01 $0.04 $0.04
----- ----- ----- -----
----- ----- ----- -----
Weighted average number of shares of common stock
outstanding:
Basic............................................. 19,699,662 22,301,263 20,568,466 22,235,068
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted........................................... 20,188,732 22,615,561 20,829,780 22,435,903
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Related party transactions included in the Consolidated Condensed Statements of Operations:
Product sales..................................... $ 7,252 $ 186 $ 13,794 $ 1,784
Purchases of goods and services................... 7,150 3,539 15,001 6,001
Royalties paid or accrued......................... 3,119 1,986 5,966 4,435
Interest expense.................................. 1,451 1,489 3,429 3,908
Rent.............................................. 149 127 426 416
</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
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
APRIL 3, 1999 APRIL 4, 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 8,018 $ 10,762
Non-cash items included in net income:
Depreciation and amortization.............................................. 7,871 7,754
Other...................................................................... 2,376 1,612
Non-recurring item (See Note 5)............................................ 3,074 1,408
Cumulative effect of change in accounting principle........................ 4,128 --
Income taxes.................................................................... 1,811 6,514
Other changes in operating accounts............................................. (26,835) (62,771)
------------- -------------
Net cash provided by (used in) operating activities........................ 443 (34,721)
------------- -------------
Cash flows from investing activities:
Purchase of equipment and other long-term assets................................ (7,202) (3,328)
Other, net...................................................................... (706) 117
------------- -------------
Net cash used in investing activities...................................... (7,908) (3,211)
------------- -------------
Cash flows from financing activities:
Net borrowing under revolving credit facility................................... 54,167 49,517
Net proceeds (payments) from the sale of common stock and exercise of stock
options........................................................................ 185 (2,965)
Repayments of debt.............................................................. (4,187) (2,992)
Purchase of treasury stock...................................................... (40,839) (4,302)
Dividends paid.................................................................. (801) (839)
Payment of deferred financing fees.............................................. (947) (569)
------------- -------------
Net cash provided by financing activities.................................. 7,578 37,850
------------- -------------
Increase (decrease) in cash.......................................................... 113 (82)
Cash at beginning of period.......................................................... 638 1,246
------------- -------------
Cash at end of period................................................................ $ 751 $ 1,164
------------- -------------
------------- -------------
Other changes in operating accounts:
Accounts receivable............................................................. $ (31,104) $ (51,034)
Inventories..................................................................... (34,411) (8,048)
Other current assets............................................................ (2,797) (3,898)
Accounts payable and accrued liabilities........................................ 41,477 209
------------- -------------
$ (26,835) $ (62,771)
------------- -------------
------------- -------------
</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
NOTE 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 April 3, 1999 as well as its results of
operations and cash flows for the periods ended April 3, 1999 and April 4, 1998.
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.
NOTE 2 -- CAPITAL STOCK
On March 1, 1999, the Company's Board of Directors declared a quarterly
cash dividend of $0.0125 per share to be paid on April 8, 1999 to shareholders
of record as of March 11, 1999. In 1997, the Company's Board of Directors
authorized a stock repurchase program which permitted the Company to buy up to
$50.0 million of its outstanding Common Stock. As of January 2, 1999, the
Company had purchased approximately 3.3 million shares of its Common Stock at an
aggregate cost of approximately $49.7 million.
NOTE 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 early adopted SOP 98-5 effective with the beginning of
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, net of
income tax benefits (or $0.12 per diluted share). The effect of adopting SOP
98-5 has had an immaterial effect on income before the cumulative effect of
change in accounting principle in fiscal 1999.
The Company adopted Statement of Financial 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
stockholders' 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 was approximately $7.9 million and $10.6 million for the
nine month periods ended April 3, 1999 and April 4, 1998, respectively.
NOTE 4 -- DEBT
In March 1998, the Company entered into a restated credit agreement
(increasing the facility by $15 million) with GE Capital, The Bank of Nova
Scotia, Societe Generale, Union Bank of California and such other lenders as
identified in the agreement (the 'Restated Credit Agreement'). In September
1998, the Company amended the Restated Credit Agreement (the 'Credit Agreement')
such that the Company's ability to purchase its own Common Stock was increased
to $50 million. The terms of the
5
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AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Company's 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 in the amount of $45 million and a revolving loan facility in
the amount of $165 million. 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.
On December 23, 1998, the Company entered into a $50 million credit
agreement ('Trade Credit Facility') with certain lenders under the Company's
Credit Agreement for the issuance of letters of credit and trade financing. The
trade financing portion of the Trade Credit Facility has a $40 million limit and
accrues interest at the lender's base rate plus 0.50% or at LIBOR plus 1.50% on
the unpaid principal. The Trade Credit Facility expires in December 1999. In
conjunction with entering into the Trade Credit Facility, the Company also
amended certain portions of its Credit Agreement to facilitate such Trade Credit
Facility.
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 interest rate. Borrowings under the
Swap Agreement are currently fixed at 6.66% until maturity in September 2003.
The variable LIBOR rate under the Swap Agreement is approximately 5.00% as of
April 3, 1999. Differences between the fixed interest rate and the variable
interest rate are settled quarterly and resulted in increased interest expense
of approximately $0.4 million for the nine month period ended April 3, 1999.
NOTE 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 was 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 pre-tax charges of $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 nine months 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 Center stores, as well as a
consolidation of the Company's manufacturing facilities.
6
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AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
APRIL 3, APRIL 4, APRIL 3, APRIL 4,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share --
Income before cumulative effect of change in accounting
principle...................................................... $ 14,016 $ 13,954 $ 10,536 $ 10,762
-------- -------- -------- --------
-------- -------- -------- --------
Denominator for basic earnings per share --
Weighted average shares.......................................... 19,700 22,301 20,568 22,235
Effect of dilutive securities:
Employee stock options........................................... 489 315 262 201
-------- -------- -------- --------
Denominator for diluted earnings per share --
Weighted average adjusted shares................................. 20,189 22,616 20,830 22,436
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share before cumulative effect of change in
accounting principle............................................. $0.71 $0.63 $0.51 $0.48
----- ----- ----- -----
----- ----- ----- -----
Diluted earnings per share before cumulative effect of change in
accounting principle............................................. $0.69 $0.62 $0.51 $0.48
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Options to purchase 2,387,650 shares of common stock at prices ranging from
$15.25 to $20.88 per share were outstanding during the first nine months of
fiscal 1999 but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares. The options, which expire from August 2004 through
May 2008, were still outstanding as of April 3, 1999.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
(AMOUNTS IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
--------------------- ---------------------
APRIL 3, APRIL 4, APRIL 3, APRIL 4,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues........................................................ $144.3 $127.9 $261.9 $237.6
Cost of goods sold.................................................. 86.5 74.3 156.7 138.4
-------- -------- -------- --------
Gross profit........................................................ 57.8 53.6 105.3 99.2
% of net revenues................................................. 40.0% 41.9% 40.2% 41.7%
Selling, general and administrative expenses........................ 30.6 27.4 74.6 70.1
Non-recurring item.................................................. -- -- 3.3 1.4
-------- -------- -------- --------
Income before interest and income taxes............................. 27.2 26.2 27.4 27.6
Interest expense.................................................... 4.2 4.2 10.1 10.8
Provision for income taxes.......................................... 9.0 8.1 6.7 6.1
-------- -------- -------- --------
Income before cumulative effect of change in accounting principle... 14.0 13.9 10.5 10.8
Cumulative effect of change in accounting principle................. -- -- (2.5) --
-------- -------- -------- --------
Net income.......................................................... $ 14.0 $ 13.9 $ 8.0 $ 10.8
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Net revenue for the third quarter of fiscal 1999 increased 12.8% to $144.3
million compared to $127.9 million in the third quarter of fiscal 1998.
Speedo'r' Division net revenues for the third quarter of fiscal 1999 increased
24.1% to $81.1 million from $65.4 million in the third quarter of fiscal 1998.
Men's swim increased 31.1% over last year, while core racing increased 30.4% and
kids were up 20.3%. Speedo'r' Authentic Fitness'r' Retail Division net revenue
increased 13.7% to $13.7 million in the third quarter of fiscal 1999 from $12.0
million in the third quarter of fiscal 1998, with same store sales increasing
11.2% over the year earlier period. At May 6, 1999 the Company had 138 stores
open. The Designer Swimwear Division's net revenue increased 11.6% to $49.5
million in the third quarter of fiscal 1999 from $44.3 million last year,
primarily due to the success of the newly introduced Ralph Lauren'r', Polo Sport
Ralph Lauren'r' and Polo Sport-RLX'r' brand swimwear for women and girls.
Designer division net revenues for the third quarter of fiscal 1998 includes
$7.0 million of insurance proceeds related to the Company's warehouse fire in
Los Angeles, CA.
Net revenue for the first nine months of fiscal 1999 increased 10.3% to
$261.9 million compared to $237.6 million in the first nine months of fiscal
1998. Speedo'r' Division net revenues for the first nine months of fiscal 1999
increased 18.7% to $144.1 million compared to $121.4 million in the first nine
months of fiscal 1998. Kid's swim increased 18.3% over last year, while men's
swim was up 16.1%. Speedo'r' Authentic Fitness'r' Retail Division net revenues
for the first nine months of fiscal 1999 increased 8.3% to $44.5 million
compared to $41.1 million in the first nine months of fiscal 1998, with same
store sales increasing 7.6% over the year earlier period. Designer swimwear net
revenues for the first nine months of fiscal 1999 increased 6.5% to $73.3
million compared to $68.9 million in the first nine months of fiscal 1998.
Gross profit for the third quarter of fiscal 1999 increased to $57.8
million from $53.6 million in the third quarter of fiscal 1998. The increase in
gross profit reflects increased Speedo'r' division and Speedo'r' Authentic
Fitness'r' Retail Division sales. Gross profit as a percentage of net revenue
was 40.0% in the third quarter of fiscal 1999 compared to 41.9% (or 38.6% in the
third quarter of fiscal 1998 after adjusting for the insurance proceeds noted
above). Gross profit for the first nine months of fiscal 1999 increased to
$105.3 million, an increase of 6.2% compared to $99.2 million in the first nine
months of fiscal 1998. The increase in gross profit for the first nine months of
fiscal 1999 reflects improved Speedo'r' sales mix and higher Speedo'r' division
and Speedo'r' Authentic Fitness'r' Retail Division sales, as noted
8
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above. Gross profit as a percentage of net revenues was 40.2% in the first nine
months of fiscal 1999 versus 41.7% (or 40.0% in the first nine months of fiscal
1998 after adjusting for the insurance proceeds noted above). The increase in
gross profit as a percentage of net revenues for both the third quarter and
first nine months of fiscal 1999 is due to the Company's decision to consolidate
manufacturing facilities, improved sales mix in the Speedo'r' Division 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 were $30.6 million in the
third quarter of fiscal 1999 compared to $27.4 million in the third quarter of
fiscal 1998. S,G&A as a percentage of net revenues decreased to 21.2% in the
third quarter of fiscal 1999 compared to 21.4% in the third quarter of fiscal
1998. Selling, general and administrative expenses for the first nine months of
fiscal 1999 were $74.6 million compared to $70.1 million in the first nine
months of fiscal 1998. S,G&A as a percentage of net revenues decreased to 28.5%
for the first nine months of fiscal 1999 compared to 29.5% for the first nine
months of fiscal 1998. The decrease in S,G&A as a percentage of net revenues in
both the third quarter and first nine months of fiscal 1999 resulted from higher
sales volume and expense control.
Interest expense was $4.2 million in the third quarter of fiscal 1999,
equal to that of the third quarter of fiscal 1998. Interest expense for the
first nine months of fiscal 1999 was $10.1 million compared to $10.8 million in
the first nine months of fiscal 1998. The decrease in interest expense was
achieved through strong cash flow in the first nine months of fiscal 1999 versus
the prior year as a result of improved accounts receivable collections and an
increase in accounts payable, partially offset by the completion of the
Company's $50 million stock buyback program.
The Company's effective income tax rate for the third quarter and first
nine months of fiscal 1999 was 39% versus 37% and 36% in the corresponding
fiscal 1998 periods, respectively. The provision for income taxes reflects the
expense required to record the full year tax rate in the income tax provision
for the nine month year-to-date period.
In the first quarter of fiscal 1999, the Company recorded a cumulative
charge of approximately $2.5 million, net of income tax benefits (or $0.12 per
diluted share) to reflect the early adoption of SOP 98-5 'Reporting on the Costs
of Start-Up Activities'. The Company adopted SOP 98-5 effective with the
beginning of 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 has had an immaterial effect on income
before the cumulative effect of change in accounting principle in fiscal 1999.
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.
Net income for the third quarter of fiscal 1999 was $14.0 million compared
to $13.9 million in the third quarter of fiscal 1998. Net income before charges
increased 8.1% to $12.6 million in the first nine months of fiscal 1999 compared
to $11.6 million in the first nine months of fiscal 1998. Net income after
charges for the first nine months of fiscal 1999 was $8.0 million compared to
$10.8 million recorded in the first nine months of fiscal 1998.
CAPITAL RESOURCES AND LIQUIDITY
On March 18, 1998, the Company entered into a restated credit agreement
(increasing the facility by $15 million) with GE Capital, The Bank of Nova
Scotia, Societe Generale, Union Bank of California and such other lenders as
identified in the agreement (the 'Restated Credit Agreement'). On September 14,
1998, the Company amended the Restated Credit Agreement (the 'Credit Agreement')
such that the Company's ability to purchase its own Common Stock was increased
to $50 million. The terms of the Company's 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
9
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<PAGE>
or 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.
On December 23, 1998, the Company entered into a $50 million credit
agreement ('Trade Credit Facility') with certain lenders under the Company's
Credit Agreement for the issuance of letters of credit and trade financing. The
trade financing portion of the Trade Credit Facility has a $40 million limit and
accrues interest at the lender's base rate plus 0.50% or at LIBOR plus 1.50% on
the unpaid principal. The Trade Credit Facility expires in December 1999. In
conjunction with entering into the Trade Credit Facility, the Company also
amended certain portions of its Credit Agreement to facilitate such Trade Credit
Facility.
In 1997, the Company's Board of Directors authorized a stock repurchase
program which allowed the Company to buy up to $50.0 million of its outstanding
Common Stock. As of January 2, 1999, the Company had purchased approximately 3.3
million shares of its Common Stock at an aggregate cost of approximately $49.7
million.
On March 1, 1999, consistent with the Company's goal of providing increased
stockholder value, the Company declared its fifteenth successive quarterly cash
dividend of 1.25[c] per share, equivalent to an annual rate of 5[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 138 stores open. 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 second half 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.
Cash provided by operating activities in the first nine months of fiscal
1999 was $0.4 million compared to a use of $(34.7) million in the first nine
months of fiscal 1998. The significant improvement in cash provided by operating
activities in the first nine months of fiscal 1999 is primarily due to an
increase in accounts receivable collections, noting a 5 day decrease in days
outstanding, and an increase in accounts payable associated with merchandise
purchases.
Cash used in investing activities increased to $(7.9) million in the first
nine months of fiscal 1999 compared to $(3.2) million in the first nine months
of fiscal 1998 primarily reflecting increased capital expenditures. Fiscal 1999
capital expenditures primarily relate to new information systems and the opening
of new Speedo'r' Authentic Fitness'r' retail stores.
Cash provided by financing activities was $7.6 million in the first nine
months of fiscal 1999 compared to $37.9 million in the first nine months of
fiscal 1998. The decrease in cash provided by financing activities primarily
reflects the repurchase of $40.8 million of the Company's Common Stock partially
offset by seasonal borrowing under the Company's revolving line of credit. The
Company's Revolving Loan balance was $124.0 million at the end of the third
quarter of fiscal 1999. At May 6, 1999, the Company had approximately $51
million of additional credit available under its Revolving Loan.
The Company believes that funds available under its 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. 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).
10
<PAGE>
<PAGE>
YEAR 2000 COMPLIANCE
The Company has assessed and modified its computer systems and business
processes to provide for their continued functionality with the arrival of the
Year 2000 and is also assessing the readiness of third parties with which it
interacts.
In the third quarter of fiscal 1999, the Company successfully completed all
of the required modifications and internal testing with regards to its Year 2000
readiness. The pre-tax costs associated with the required modifications are
expected to approximate $0.5 million, which are expensed as incurred. In
addition, the Company expects to incur approximately $6.0 million in capital
expenditures for enhanced hardware and software applications and to achieve Year
2000 compliance. Of that $6.0 million, $2.2 million was incurred during fiscal
1998, with the remainder having been incurred, or to be incurred, during fiscal
1999.
Attention continues to be focused on compliance attainment efforts of
vendors and other third parties, including key system interfaces with customers
and suppliers. The failure of key third parties who do business with the Company
or governmental agencies to timely remediate their Year 2000 issues could cause
system failures or errors and business interruptions. The Company has contacted
key suppliers and vendors in order to determine the status of such third party
Year 2000 remediation plans. The Company recognizes the need for Year 2000
contingency plans in the event that the remediation efforts of its vendors,
suppliers and governmental and regulatory agencies are not timely completed.
Evaluation of suppliers' and vendors' readiness is currently on-going. This
process will continue throughout fiscal 1999.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This quarterly 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.
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.
11
<PAGE>
<PAGE>
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal
1999.
12
<PAGE>
<PAGE>
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: May 18, 1999 By: /s/ CHRISTOPHER G. STAFF
...................................
CHRISTOPHER G. STAFF
PRESIDENT AND CHIEF OPERATING
OFFICER
Date: May 18, 1999 By: /s/ MICHAEL P. MC HUGH
...................................
MICHAEL P. MC HUGH
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
13
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as ................ 'r'
The cent sign shall be expressed as .................................. [c]
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AUTHENTIC FITNESS CORPORATION FOR THE PERIOD ENDED
APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> APR-03-1999
<CASH> 751
<SECURITIES> 0
<RECEIVABLES> 159,493
<ALLOWANCES> 6,429
<INVENTORY> 97,624
<CURRENT-ASSETS> 262,316
<PP&E> 79,516
<DEPRECIATION> 29,329
<TOTAL-ASSETS> 376,467
<CURRENT-LIABILITIES> 224,226
<BONDS> 28,018
0
0
<COMMON> 23
<OTHER-SE> 117,557
<TOTAL-LIABILITY-AND-EQUITY> 376,467
<SALES> 261,949
<TOTAL-REVENUES> 261,949
<CGS> 156,661
<TOTAL-COSTS> 156,661
<OTHER-EXPENSES> 77,882
<LOSS-PROVISION> 18,754
<INTEREST-EXPENSE> 10,134
<INCOME-PRETAX> 17,272
<INCOME-TAX> 6,736
<INCOME-CONTINUING> 10,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2,518)
<NET-INCOME> 8,018
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
