SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
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 1-11812
STARTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-0872266
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
370 James Street, New Haven, Connecticut 06513
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(203) 781-4000
--------------
(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 |_|
27,866,536 shares of common stock, $.01 par value, were outstanding as of
November 1, 1997.
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INDEX
STARTER CORPORATION
Page Number
-----------
PART I Financial Information
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated balance sheets - September 30, 1997,
December 31, 1996 and September 30, 1996 3-4
Consolidated statements of operations - Three and
nine month periods ended September 30, 1997 and
September 30, 1996 5
Consolidated statements of cash flows - Nine months
ended September 30, 1997 and September 30, 1996 6
Notes to consolidated financial statements -
September 30, 1997 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II Other Information
ITEM 6 Exhibits and Report on Form 8-K 14
Signature 15
2
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STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
------------------ ----------------- ------------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,824 $ 2,995 $ 3,233
Accounts receivable - trade, less allowance
for doubtful accounts of $3,500 at September
30, 1997, $3,800 at December 31, 1996
and $3,600 at September 30, 1996 96,032 55,910 106,207
Inventories 95,227 76,964 105,627
Prepaid expenses and other assets 12,626 8,539 8,283
Deferred income taxes 6,470 8,565 10,214
--------- --------- ---------
Total current assets 214,179 152,973 233,564
Plant and equipment 36,675 36,034 35,157
Less accumulated depreciation (9,535) (8,095) (8,058)
--------- --------- ---------
Plant and equipment, net 27,140 27,939 27,099
Other assets:
Other assets (primarily intangibles) 10,487 5,053 4,139
Non-current deferred income taxes 1,742 1,568 1,466
Other investments 1,362 1,362 1,362
--------- --------- ---------
Total other assets 13,591 7,983 6,967
--------- --------- ---------
Total assets $ 254,910 $ 188,895 $ 267,630
========= ========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data )
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
------------------ ----------------- ------------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 92,163 $ 34,666 $ 94,081
Accounts payable 18,641 14,218 13,847
Accrued commissions 3,051 3,007 2,070
Accrued licensing fees 11,578 6,166 14,712
Accrued expenses 15,586 12,053 19,964
Accrued advertising 6,332 7,381 6,709
Current portion of long-term debt 351 2,299 1,749
-------- -------- --------
Total current liabilities 147,702 79,790 153,132
Long-term debt, less current portion 5,128 5,852 7,486
-------- -------- --------
Total liabilities 152,830 85,642 160,618
Stockholders' equity:
Convertible Preferred stock (par value $.01)
5,000,000 authorized shares
Common Stock (par value $.01)
50,000,000 shares authorized 279 277 277
Additional paid in capital 82,743 81,657 81,621
Retained earnings 19,058 21,319 25,114
-------- -------- --------
Total stockholders' equity 102,080 103,253 107,012
-------- -------- --------
Total liabilities and stockholders' equity $254,910 $188,895 $267,630
======== ======== ========
</TABLE>
Note: The consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See accompanying notes.
4
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STARTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 149,381 $ 170,598 $ 269,401 $ 292,658
Cost of sales 96,671 110,728 179,943 194,753
----------- ----------- ------------ -----------
52,710 59,870 89,458 97,905
Royalty income 755 1,128 2,809 2,318
Selling, general & administrative expenses 42,314 40,725 91,674 87,012
----------- ----------- ------------ -----------
Income from operations 11,151 20,273 593 13,211
Other income 279 119 303 327
----------- ----------- ------------ -----------
Income before interest expense
and income taxes 11,430 20,392 896 13,538
Interest expense 2,050 2,259 4,543 4,021
----------- ----------- ------------ -----------
Income (loss) before income taxes 9,380 18,133 (3,647) 9,517
Income taxes (benefit) 3,824 7,262 (1,386) 3,845
----------- ----------- ------------ -----------
Net income (loss) $ 5,556 $ 10,871 ($ 2,261) $ 5,672
=========== =========== ============ ===========
Net income (loss) per share $ .20 $ .40 ($ .08) $ .21
=========== =========== ============ ===========
Average common and common
equivalent shares 27,859,842 27,417,379 27,840,065 27,031,537
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
STARTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (2,261) $ 5,672
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 3,113 2,375
Provision for bad debts (74) 1,810
Deferred income taxes 1,921 442
Changes in operating assets and liabilities:
Accounts receivable (38,972) (60,981)
Inventories (17,786) (27,005)
Prepaid expenses and other assets (4,087) 9,035
Accounts payable and accrued expenses 8,448 9,442
-------- --------
Net cash used by operating activities (49,698) (59,210)
Cash flows from investing activities
Purchase of property, plant and equipment (1,398) (542)
Other, net (2,988) (395)
-------- --------
Net cash used by investing activities (4,386) (937)
Cash flows from financing activities
Repayment of long-term borrowings (2,672) (342)
Net borrowings on credit arrangements 57,497 59,119
Net proceeds from sale of common stock 88 97
-------- --------
Net cash provided by financing activities 54,913 58,874
-------- --------
Net increase (decrease) in cash and cash equivalents 829 (1,273)
Cash and cash equivalents - beginning of period 2,995 4,506
-------- --------
Cash and cash equivalents - end of period $ 3,824 $ 3,233
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
STARTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
1) Basis of Presentation
The accompanying unaudited consolidated financial statements of STARTER
Corporation (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The Company has experienced, and expects to continue to experience, variability
in net sales and net income (loss) from quarter to quarter. Therefore, the
results of the interim periods presented herein are not necessarily indicative
of the results to be expected for any other interim period or the full year.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1996 included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
2) Inventories
Inventories were as follows (in thousands):
September 30 December 31 September 30
1997 1996 1996
---- ---- ----
Raw materials $ 21,798 $ 16,580 $ 25,749
Finished goods 73,429 60,384 79,878
-------- -------- --------
$ 95,227 $ 76,964 $105,627
======== ======== ========
7
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3) Credit Arrangement
On September 24, 1997, the Company's three year $125 million secured revolving
credit facility ("the credit facility"), was amended to provide, among other
items, an increase in seasonal overadvances and a relaxation of certain
financial covenants. The credit facility provides for a seasonal increase to
$160 million from April 15 to October 15 each year. Borrowings under the credit
facility are subject to various limitations based upon eligible receivables and
inventory, as defined, of the Company and its subsidiaries. The credit facility,
which expires on May 31, 2000, contains covenants requiring certain defined
ratios, including debt to net worth, EBIT (earnings before interest and taxes)
to interest, and net income (loss), among others, and places restrictions on
capital expenditures and capital lease obligations, payment of dividends,
distributions, mergers and consolidations. Amounts outstanding under the credit
facility accrue interest at either the bank's base lending rate or a rate which
can range from 1.0 to 2.375 percentage points per annum, as defined, above
LIBOR, at the Company's option. The Company is required to pay an annual fee
which can range from .25 to .50 percentage points, as defined, on the credit
facility. The credit facility is secured by substantially all of the Company's
assets.
4) Acquisition of Galt Sand Company and Subsidiaries
On August 9, 1996, Starter Galt, Inc., a wholly-owned subsidiary of the Company,
purchased substantially all of the assets and assumed all recorded liabilities
of Galt Sand Company and its wholly-owned subsidiaries, Galt Shop Company,
Danaggers Company and Galt Sand Canada, Inc. (collectively, "Galt"), for
approximately $7,000,000. Galt was engaged in the wholesale apparel business and
operated 18 factory outlet stores. The Company accounted for the acquisition as
a purchase and, accordingly, the purchase price has been allocated to the
acquired assets and liabilities based on their fair values. The fair values of
the acquired assets and assumed liabilities were $23,496,000 and $19,627,000,
respectively. The excess of cost over fair value of net assets acquired is being
amortized over 15 years. The purchase price, which was subject to certain
adjustments as defined in the asset purchase and sale agreement, was paid
through the issuance of 933,333.33 shares of the Company's common stock, based
upon the closing price ($7.50) of the Company's stock on July 25, 1996.
8
<PAGE>
The operating results of Galt from the date of acquisition have been included in
the consolidated statements of income from the date of acquisition. The
following pro forma unaudited consolidated operating results of the Company and
Galt have been prepared as if the acquisition had been made at the beginning of
the periods presented and include pro forma adjustments to reflect the
elimination of certain outlet stores, closure of a duplicate facility,
amortization of goodwill and revised financing arrangements, as well as the
income tax effect of these items.
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
(in thousands, except per share data)
Net sales $174,455 $306,212
Net income 9,808 2,306
Net income per share $ .35 $ .08
The results are not necessarily indicative of the results of operations of the
combined companies that would have occurred had the acquisition occurred at the
beginning of the periods presented, nor are they necessarily indicative of
future operating results.
5) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. The statement requires the presentation of basic and
diluted earnings per share ("EPS"). Basic EPS excludes common stock equivalents,
such as stock options, and is computed by dividing net earnings by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if common stock equivalents, such as
stock options, were exercised. The Company will adopt this statement in the
first quarter of fiscal 1998 and expects the effect on EPS not to be material.
9
<PAGE>
ITEM 2
STARTER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's business is seasonal with higher sales reported in the second half
of the year due to the higher price points of a significant portion of the
Company's products which are sold during the fall and holiday seasons. The
seasonality of the Company's business also affects borrowings under the
Company's revolving credit agreement. The amount outstanding under the revolving
credit agreement fluctuates as a result of seasonal demands for the Company's
products. Traditional quarterly fluctuations in the Company's business may vary
in the future depending upon, among other things, changes in order cycles and
product mix.
The Company's business is vulnerable to a number of factors beyond its control.
These include: (1) player strikes, (2) owner lockouts, (3) work stoppages, (4)
the granting of additional licenses to competitors, some of which have greater
financial resources and manufacturing capabilities than the Company, and (5)
changes in consumer tastes and enthusiasm for spectator sports. The Company's
business can also be affected by other matters which impact the retail
marketplace, including increased credit and inventory exposure, consolidation
and resulting decline in the number of retailers and other cyclical economic
factors. The Company seeks to minimize inventory exposure by encouraging
retailers to place orders five to six months in advance of the date products are
scheduled to be delivered. This provides the Company with better information to
purchase product for its reorder business.
A substantial portion of the Company's products are manufactured through
arrangements with independent contractors located in Korea and, to a lesser
extent, other foreign countries. In addition, the Company's import operations
are subject to constraints imposed by bilateral textile agreements between the
United States and a number of foreign countries. The agreements impose quotas on
the amount and type of goods which can be imported into the United States from
these countries. The Company's operations may be adversely affected by political
instability resulting in the disruption of trade from foreign countries in which
the Company's contractors and suppliers are located, the imposition of
additional regulations relating to imports, or duties and taxes and other
charges on imports. The Company is unable to predict whether any additional
regulations, duties, taxes, quotas or other charges may be imposed on the
importation of its products. The assessment of any of these items could result
in increases in the cost of such imports and affect the sales or profitability
of the Company. In addition, the failure of one or more manufacturers to ship
some or all of the Company's
10
<PAGE>
orders could impact the Company's ability to deliver products to its customers
on time. Delays in delivery could result in missing certain retailing seasons
with respect to some or all of the Company's products or could otherwise
adversely affect the Company.
Results of Operations
On August 9, 1996, Starter Galt, Inc., a wholly-owned subsidiary of the Company,
purchased substantially all of the assets and assumed all recorded liabilities
of Galt Sand Company and its subsidiaries ("Galt"). Galt was engaged in the
wholesale apparel business and operated 18 factory outlet stores. The discussion
below relates to the results of operations of the Company on a historical basis
for the three and nine month periods ended September 30, 1997 and 1996
(including the results of Galt's operations since August 9, 1996).
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales 100% 100% 100% 100%
Gross Margin 35.3 35.1 33.2 33.5
Royalty income .5 .7 1.0 .8
Selling, general &
administrative expenses 28.3 23.9 34.0 29.7
Other income .2 -- .1 .1
Interest expense 1.4 1.3 1.7 1.4
Net income (loss) 3.7 6.4 (.8) 1.9
Net sales for the three and nine month periods ended September 30, 1997
decreased approximately 12.4% and 7.9%, respectively, as compared to the three
and nine month periods ended September 30, 1996. The decreases are primarily
attributable to the reduced consumer apparel demand for licensed products,
primarily outerwear. Also contributing to the licensed sales declines were the
lack of Olympic licensed product sales in 1997 which accounted for 3% and 6% of
total sales for the three and nine month periods ended September 30, 1996,
respectively.
11
<PAGE>
Gross profit for the three and nine month periods ended September 30, 1997 was
$52.7 million and $89.5 million, respectively, as compared to $59.9 and $97.9
million for the three and nine month periods ended September 30, 1996,
respectively. The gross profit margin as a percentage of sales increased
slightly during the third quarter of 1997 to 35.3% as compared to 35.1% for the
third quarter of 1996. For the nine months ended September 30, 1997 the gross
margin as a percent of sales decreased to 33.2% as compared to 33.5% for the
nine months ended September 30, 1996. The decrease is primarily attributable to
retail pressures associated with increased competition and continued slowdown of
licensed product at the retail level.
Royalty income for the three months ended September 30, 1997 decreased $.3
million as compared to the three months ended September 30, 1996. However, for
the nine months ended September 30, 1997 royalty income increased $.5 million,
primarily as a result of the addition of new domestic licensees.
Selling, general and administrative expenses increased to $42.3 million or 28.3%
of net sales and $91.7 million or 34.0% of net sales for the three and nine
months ended September 30, 1997, respectively, as compared to $40.7 million or
23.9% and $87.0 million or 29.7% for the three and nine months ended September
30, 1996, respectively. The increases are primarily attributable to increased
employee compensation and outlet store expenses associated with the Galt
acquisition. Additionally, higher marketing costs resulted from the accelerated
timing of certain advertising programs this year as compared to the prior year
periods.
Interest expense for the nine months ended September 30, 1997 increased 11.5% as
compared to the comparable period in 1996 primarily due to increased interest
rates and increased average borrowings needed to finance operations, due in
part, to the Galt acquisition.
The Company's effective tax rate for the nine months ended September 30, 1997
was approximately 38%. While management believes it is more likely than not that
the deferred tax assets recorded at September 30, 1997 are recoverable, there
are no assurances that management's ongoing assessment of recoverability will
not result in recording valuation allowances in the future. The continued
recognition of all, or a portion, of the deferred tax assets will depend, in
part, on the Company's ability to generate sufficient future taxable income.
Liquidity and Capital Resources
The Company's working capital at September 30, 1997 was $66.5 million as
compared to $73.2 million at December 31, 1996 and $80.4 million at September
12
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30, 1996. The decrease from December 31 is primarily attribute to the loss for
the nine months ended September 30, 1997. Cash used by operations for the first
nine months of 1997 was $49.7 million compared to $59.2 million for the
comparable 1996 period.
On September 24, 1997, the Company's three year $125 million secured revolving
credit facility ("the credit facility"), was amended to provide for, among
others, an increase in seasonal overadvances and relaxation of certain financial
covenants. Compliance with the amended agreement will be dependent upon the
Company's ability to achieve the necessary profitability. Management believes
that if it doesn't achieve the necessary profitability, that it will be able to
maintain adequate financing. The credit facility provides for a seasonal
increase to $160 million from April 15 to October 15 each year. Borrowings under
the credit facility are subject to various limitations based upon eligible
receivables and inventory, as defined, of the Company and its subsidiaries. The
credit facility, which expires on May 31, 2000, contains covenants requiring
certain defined ratios, including debt to net worth, EBIT (earnings before
interest and taxes) to interest, and net income, among others, and places
restrictions on capital expenditures and capital lease obligations, payment of
dividends, distributions, mergers and consolidations. Amounts outstanding under
the credit facility accrue interest at either the bank's base lending rate or a
rate which can range from 1.0 to 2.375 percentage points per annum, as defined,
above LIBOR, at the Company's option. The Company is required to pay an annual
fee which can range from .25 to .50 percentage points, as defined, on the credit
facility. The credit facility is secured by substantially all of the Company's
assets.
Cash generated by operations, together with funds expected to be available under
the credit facility are expected, under current conditions, to be sufficient to
finance the Company's planned operations for the foreseeable future.
This discussion contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those set forth in such statements due to various factors. Such
factors include product demand and market acceptance risks, the effect of
changing economic conditions, the impact of competitive products and pricing
risks associated with product development and the effect of the Company's
accounting policies and other risk factors detailed above.
13
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Part II - Other Information
Item 6: Exhibits and reports on Form 8-K
(a) Exhibits
10.34 Second Amendment Agreement dated September 24, 1997
11 Computation of net loss per share for the three and nine month
periods ended September 30, 1997 and September 30, 1996
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended
September 30, 1997.
14
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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.
STARTER CORPORATION
DATE: November 13, 1997 /s/ Lawrence C. Longo, Jr.
-----------------------------
Lawrence C. Longo, Jr.
Chief Financial Officer and
Chief Accounting Officer
15
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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.
STARTER CORPORATION
DATE: November 13, 1997 ----------------------------------
Lawrence C. Longo, Jr.
Chief Financial Officer and Chief
Accounting Officer
16
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EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
10.34 Second Amendment Agreement
dated September 24, 1997
11 Computation of net loss, etc.
27 Financial Data Schedule
17
SECOND AMENDMENT AGREEMENT
SECOND AMENDMENT AGREEMENT (this "Agreement") dated as of September 24,
1997 by and among (1) Starter Corporation ("Starter"), (2) Starter Galt, Inc.
("Starter Galt"), (3) Bank of Boston Connecticut ("BankBoston"), CoreStates
Bank, N.A. ("CoreStates"), People's Bank, National Bank of Canada, Sanwa
Business Credit Corporation, KeyBank National Association, BTM Capital
Corporation, Firstrust Savings Bank and PNC Bank, N.A. as lenders (collectively,
the "Lenders" and individually, a "Lender"), (4) BankBoston as administrative
agent (the "Administrative Agent") for the Lenders and (5) CoreStates as
syndication agent (the "Syndication Agent") for the Lenders, with respect to a
certain Second Amended and Restated Credit Agreement dated as of May 13, 1997 by
and among the Borrowers, the Lenders and the Agents, as amended by a certain
First Amendment Agreement dated as of July 16, 1997 (as amended, the "Credit
Agreement").
WITNESSETH:
WHEREAS, the Borrowers have requested that the Lenders and the Agents
amend certain provisions of the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ss.1. Definitions. Capitalized terms used herein without definition that
are defined in the Credit Agreement shall have the same meanings herein as
therein.
ss.2. Ratification of Existing Agreements. All of the Borrowers'
obligations and liabilities to the Lenders and the Agents as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right of
set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
ss.3. Representations and Warranties. All of the representations and
warranties made by the Borrowers in the Credit Agreement, the Notes and the
other Loan Documents are true and correct on the date hereof as if made on and
<PAGE>
-2-
as of the date hereof, except to the extent that any of such representations and
warranties relate by their terms to a prior date.
ss.4. Amendments to the Credit Agreement
(a) Addition of Exhibit F to the Credit Agreement. The Credit
Agreement is hereby amended by adding a new Exhibit F thereto to read as set
forth on Exhibit F attached hereto and made a part hereof.
(b) Amendment to Schedule 1 of the Credit Agreement. Schedule 1 of
the Credit Agreement is hereby amended in its entirety as set forth on Schedule
1 attached hereto and made a part hereof.
(c) Amendments to Schedule 2 of the Credit Agreement.
(i) The chart set forth in the definition of "Applicable
Margin" appearing in Schedule 2 of the Credit Agreement is hereby amended
in its entirety to read as follows:
LIBOR Facility Fee
"Level Interest Coverage Ratio Applicable Margin Rate
------ ----------------------- ----------------- ----
Greater Than But Less
Or Equal To Than
Level 1 4.00:1 - 1.000% 0.250%
Level 2 3.25:1 4.00:1 1.375% 0.250%
Level 3 2.50:1 3.25:1 1.625% 0.375%
Level 4 2.00:1 2.50:1 2.000% 0.375%
Level 5 l.50:1 2.00:1 2.125% 0.500%
Level 6 - 1.50:1 2.375% 0.50O%
(ii) The definition of "Obligations" appearing in Schedule 2
of the Credit Agreement is hereby amended by inserting the following
sentence at the end of such definition:
"Notwithstanding anything to the contrary in the foregoing,
the term "Obligations" shall in no event include any indebtedness,
obligations or liabilities of the Borrowers or their respective
Subsidiaries to BankBoston, N.A. arising or incurred under that certain
Letter of Credit Reimbursement and Security Agreement dated as of
September 24, 1997 between BankBoston, N.A. and Starter Corporation (the
"Letter of Credit Agreement"), which Letter of Credit Agreement was
entered into in connection with the $6,400,000 (original principal amount)
City of New Haven Facility Variable Rate Demand Revenue Bonds (Starter
Sportswear Project - 1986 Series), or any other agreement, instrument or
document executed and/or delivered solely in connection with the Letter of
Credit Agreement."
<PAGE>
-3-
(iii) The definition of "Permitted Acquisition" appearing in
Schedule 2 of the Credit Agreement is hereby amended in its entirety to
read as follows:
"Permitted Acquisition. Shall mean any acquisition of all or
substantially all the assets of, or shares or other equity interests in, a
Person or division or line of business of a Person (including, without
limitation, by way of merger) if (a) prior to giving effect thereto, the
ratio of Earnings Before Interest and Taxes to Consolidated Total Interest
Expense for the period of four (4) fully completed consecutive fiscal
quarters of the Borrowers ending immediately prior to such acquisition is
greater than 1.50 to 1 and (b) immediately after giving effect thereto:
(i) no Default or Event of Default shall have occurred and be continuing
or would result therefrom, (ii) all transactions related thereto shall be
consummated in accordance in all material respects with applicable laws,
(iii) the assets, shares or other equity interests or division or line of
business acquired shall be in the same or similar line of business of the
Borrowers, (iv) the Administrative Agent shall have received evidence that
the board of directors (or Persons performing similar functions) of such
Person shall have approved such acquisition, such evidence of approval to
be in form and substance reasonably satisfactory to the Administrative
Agent in all respects, (v) the payment of the total consideration for such
acquisition shall not exceed $5,000,000, (vi) one hundred percent (100%)
of the capital stock or other equity interests of any acquired or newly
formed corporation, partnership, association or other business entity is
owned directly by either Borrower or a Subsidiary of either Borrower and
all actions shall have been taken with respect to such acquired or newly
formed Subsidiary to cause such Subsidiary to execute and deliver to the
Administrative Agent a guaranty of the Obligations and to take all such
action as may be required to grant to the Administrative Agent, for the
benefit of the Lenders, a first priority perfected security interest in
all of the assets of such Subsidiary and (vii)(A) the Borrowers and their
Subsidiaries shall be in compliance, on a pro forma basis after giving
effect to such acquisition or formation, with the covenants contained in
ss.10 recomputed as at the last day of each relevant period for testing
such compliance, and the Borrowers shall have delivered to the
Administrative Agent an officer's certificate to such effect, together
with all relevant financial information for such Subsidiary or assets, and
(B) any acquired or newly formed Subsidiary shall not be liable for any
Indebtedness (except for Indebtedness permitted by ss.9.1 hereof)."
(iv) The definition of "Permitted Overadvance Amount"
appearing in Schedule 2 of the Credit Agreement is hereby amended in its
entirety to read as follows:
<PAGE>
-4-
"Permitted Overadvance Amount. For the periods set forth below, an
amount (in addition to the amount permitted under the Borrowing Base)
equal to the lesser of (a) the dollar amounts set forth opposite such
period set forth below and (b) an amount equal to the applicable advance
rate set forth in the table below multiplied by the sum of (i) the face
amount of the issued and undrawn documentary Letters of Credit
specifically supporting the production of the applicable inventory of the
Borrowers and (ii) the net book value (determined on a first-in first-out
basis at lower of cost or market) of all Eligible Inventory, both as set
forth below for the relevant time of reference thereto as more
particularly set forth in Exhibit F attached hereto and made a part
hereof.
Period Advance Rate Amount
------ ------------ ------
8/1/97 - 8/31/97 30% $37,500,000
9/1/97 - 9/30/97 25% $30,000,000
10/1/97 - 10/31/97 25% $25,000,000
11/1/97 - 11/15/97 20% $20,000,000
11/16/97 - 11/30/97 15% $15,000,000
12/1/97 - 4/14/98 0% $0.00
4/15/98 - 4/30/98 15% $15,000,000
5/1/98 - 6/15/98 25% $30,000,000
6/16/98 - 8/31/98 30% $37,500,000
9/1/98 - 9/30/98 25% $30,000,000
10/1/98 - 10/31/98 25% $25,000,000
11/1/98 - 11/15/98 20% $20,000,000
11/16/98 - 11/30/98 15% $15,000,000
12/1/98 - 4/14/99 0% $0.00
4/15/99 - 4/30/99 15% $15,000,000
5/1/99 - 6/15/99 25% $30,000,000
6/16/99 - 8/31/99 30% $37,500,000
9/1/99 - 9/30/99 25% $30,000,000
10/1/99 - 10/31/99 25% $25,000,000
11/1/99 - 11/16/99 20% $20,000,000
11/16/99 - 11/30/99 15% $15,000,000
12/1/99 - Maturity 0% $0.00"
Date
<PAGE>
-5-
(d) Amendment to Section 2.5(a). Section 2.5(a) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(a) Each Base Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of
each Interest Period with respect thereof at the rate of one-quarter of
one percent (0.25%) per annum above the Base Rate from time to time in
effect."
(e) Amendment to Section 3.3. Section 3.3 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"ss.3.3 Optional Repayments of Loans. The Borrowers shall have the
right, at their election, to repay the outstanding amount of the Loans, as
a whole or in part, at any time, subject to the premium set forth below,
provided that any full or partial prepayment of the outstanding amount of
any LIBOR Rate Loans pursuant to this ss.3.3 may be made only on the last
day of the Interest Period relating thereto unless, contemporaneously with
such prepayment, the Borrowers shall have paid to the Administrative Agent
all amounts due under ss.5.9 hereof. The Borrowers shall give the
Administrative Agent, no later than 10:00 a.m., Hartford time, not less
than one (1) and not more than five (5) Business Days' prior written
notice of any proposed prepayment pursuant to this ss.3.3 of Base Rate
Loans, and not less than three (3) and not more than five (5) LIBOR
Business Days' notice of any proposed prepayment pursuant to this ss.3.3
of LIBOR Rate Loans, in each case specifying the proposed date of
prepayment of Loans and the principal amount to be prepaid. Each such
partial prepayment of the Loans shall be in an integral multiple of
$1,000,000, shall be accompanied by the payment of accrued interest on the
principal prepaid to the date of prepayment and shall be applied, in the
absence of instruction by the Borrowers, first to the principal of Base
Rate Loans and then to the principal of LIBOR Rate Loans. Each partial
prepayment shall be allocated among the Lenders, in proportion, as nearly
as practicable, to the respective unpaid principal amount of each Lender's
Note, with adjustments to the extent practicable to equalize any prior
repayments not exactly in proportion. If the Borrowers terminate the Total
Commitment, whether in one transaction or a series of transactions, the
Borrowers shall pay a premium with respect to such termination in an
amount determined in accordance with the percentages set forth in the
following table opposite the period during which the termination occurs:
<PAGE>
-6-
Period Terminated Amount Due
- ----------------- ----------
Effective Date through
first anniversary thereof 3% of the Total Commitment
First anniversary of Effective
Date through second
anniversary of Effective Date 2% of the Total Commitment
Second anniversary of Effective
Date through Maturity Date 1% of the Total Commitment
Notwithstanding the foregoing, the premium set forth in the table
above shall not be due and payable if the Total Commitment is terminated and the
outstanding principal amount of the Obligations are paid with the proceeds of
financing pursuant to which Bank of Boston Connecticut is the administrative
agent and the interests of the financial institutions participating in such
financing constitute more than 50% of the then holders of the Total Commitment
at the time of such termination.
(f) Amendment to Section 10.1. Section 10.1 of the Credit Agreement
is hereby amended in its entirety to read as follows:
"ss.10.1 Liabilities to Worth Ratio. The Borrowers will not permit
the ratio of Consolidated Total Liabilities to Consolidated Tangible Net
Worth for any fiscal quarter ending during any period described in the
table set forth below to exceed the ratio set forth opposite such period
below:
Period Ratio
------ -----
April 1, 1997 through September 30, 1997 1.75 to 1
October 1, 1997 through March 31, 1998 1.05 to 1
April 1, 1998 through June 30, 1998 1.75 to 1
July 1, 1998 through September 30, 1998 1.90 to 1
October 1, 1998 through March 31, 1999 1.00 to 1
April 1, 1999 through June 30, 1999 2.10 to 1
July 1, 1999 through September 30, 1999 1.90 to 1
October 1, 1999 through March 31, 2000 1.00 to 1"
(g) Amendment to Section 10.2. Section 10.2 of the Credit Agreement
is hereby amended in its entirety to read as follows:
"ss.10.2 EBIT to Total Interest Expense Ratio. The Borrowers will
not permit the ratio of Earnings Before Interest and Taxes to
<PAGE>
-7-
Consolidated Total Interest Expense for any period of four (4) consecutive
fiscal quarters of the Borrowers ending on the dates set forth below to be
less than (or exceed in the case of a loss) the ratio set forth opposite
such date below:
Date Ratio
---- -----
September 30, 1997 (0.35) to 1
December 31, 1997 (0.75) to 1
March 31, 1998 (0.60) to 1
June 30, 1998 (0.40) to 1
September 30, 1998 1.10 to 1
December 31, 1998 1.50 to 1
Thereafter 1.75 to 1"
(h) Amendment to Section 10.4. Section 10.4 of the Credit Agreement
is hereby amended in its entirety to read as follows:
"ss.10.4 Net Income. The Borrowers will not permit Consolidated Net
Income (or loss) for the periods set forth below ending on the dates set
forth below to be less than (or exceed in the case of a loss) the amount
set forth opposite such date in the table set forth below:
Test Date Consolidated Net
--------- Income (loss)
Cumulative Year to
Date
----
Three fiscal quarters ending September 30, 1997 ($2,800,000.00)
Four fiscal quarters ending December 31, 1997 ($7,400,000.00)
One fiscal quarters ending March 31, 1998 ($3,300,000.00)
Two fiscal quarters ending June 30, 1998 ($7,500,000.00)
Three fiscal quarters ending September 30, 1998 $4,000,000.00
Four fiscal quarters ending December 31, 1998 $2,000,000.00
One fiscal quarters ending March 31, 1999 ($1,200,000.00)
Two fiscal quarters ending June 30, 1999 ($5,700,000.00)
Three fiscal quarters ending September 30, 1999 $4,000,000.00
Four fiscal quarters ending December 31, 1999 $1.00
One fiscal quarters ending March 31, 2000 $1,200,000.00"
(i) Amendment to Schedule 9.1. Schedule 9.1 of the Credit Agreement
is hereby amended in its entirety as set forth on Schedule 2 attached hereto and
made a part hereof.
(j) Amendment to Schedule 9.2. Schedule 9.2 of the Credit Agreement
is hereby amended in its entirety as set forth on Schedule 3 attached hereto and
made a part hereof.
<PAGE>
-8-
ss.5. Additional Provisions. The parties hereto additionally covenant and
agree as follows:
(a) On or before October 1, 1997, the Administrative Agent shall
receive the results of the inventory appraisal performed by Gordon Brothers
Partners, Inc. (the "Inventory Valuation"). If, in the sole discretion of the
Administrative Agent and the Lenders, the Inventory Valuation fails to support
the existing inventory advance rate, then such advance rate shall be lowered to
an amount supported by such Inventory Valuation, as determined in the
Administrative Agent's and the Lenders' sole discretion.
(b) The Borrowers shall cooperate in all respects with such
Inventory Valuation and shall pay all costs and expenses in connection with such
Inventory Valuation and any fees and expenses incurred in connection with any
required further amendment of the Loan Documents.
Each of the Borrowers expressly acknowledges and agrees that any failure
by either Borrower to comply with the terms and conditions of this ss.5 or any
other provision contained in this Agreement shall constitute an Event of Default
under the Credit Agreement.
ss.6. Conditions Precedent. The effectiveness of the amendments
contemplated herein shall be subject to the satisfaction on or before the date
hereof of each of the following conditions precedent:
(a) All of the representations and warranties made by the Borrowers
herein, whether directly or incorporated by reference, shall be true and correct
on the date hereof, except as provided in ss.3 hereof.
(b) The Borrowers shall have paid an amendment fee in an amount
equal to $250,000 to the Administrative Agent for accounts of the Lenders in
accordance with their respective Commitment Percentages.
(c) The Administrative Agent shall have received evidence
satisfactory to the Administrative Agent that no Default or Event of Default
shall have occurred and be continuing.
ss.7. Miscellaneous Provisions.
(a) Except as otherwise expressly provided by this Agreement, all of
the respective terms, conditions and provisions of the Credit Agreement, the
Notes and the other Loan Documents shall remain the same. It is declared and
agreed by each of the parties hereto that the Credit Agreement, the Notes and
the other Loan Documents, each as amended hereby, shall continue in full force
and effect, and that this Agreement and the Credit Agreement, the Notes and the
other Loan Documents, as applicable, shall be read and construed as one
instrument.
<PAGE>
-9-
(b) This Agreement is intended to take effect under, and shall be
construed according to and governed by, the laws of the State of Connecticut.
(c) This Agreement may be executed in any number of counterparts,
but all such counterparts shall together constitute but one instrument. In
making proof of this Agreement it shall not be necessary to produce or account
for more than one counterpart signed by each party hereto by and against which
enforcement hereof is sought.
<PAGE>
-10-
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
STARTER CORPORATION
By: /s/ John C. Warfel
----------------------------
John C. Warfel
Its Senior Vice President
STARTER GALT, INC.
By: /s/ John C. Warfel
----------------------------
John C. Warfel
Its Senior Vice President
BANK OF BOSTON CONNECTICUT,
Individually and as Administrative Agent
By: /s/ [ILLEGIBLE]
----------------------------
Its Vice President
CORESTATES BANK, N.A.,
Individually and as Syndication Agent
By:
----------------------------
Its
PEOPLE'S BANK
By:
----------------------------
Its
<PAGE>
-10-
IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.
STARTER CORPORATION
By:
----------------------------
John C. Warfel
Its Senior Vice President
STARTER GALT, INC.
By:
----------------------------
John C. Warfel
Its Senior Vice President
BANK OF BOSTON CONNECTICUT,
Individually and as Administrative Agent
By:
----------------------------
Its
CORESTATES BANK, N.A.,
Individually and as Syndication Agent
By: /s/ [ILLEGIBLE]
----------------------------
Its Vice President
PEOPLE'S BANK
By:
----------------------------
Its
<PAGE>
11
NATIONAL BANK OF CANADA
By:
--------------------------------
Its
SANWA BUSINESS CREDIT CORPORATION
By:
--------------------------------
Its
KEYBANK NATIONAL ASSOCIATION
By:
--------------------------------
Its
BTM CAPITAL CORPORATION
By:
--------------------------------
Its
FIRSTRUST SAVINGS BANK
By: /s/ Richard E. Dilorenzo
--------------------------------
Its Chief Credit Policy Officer
PNC BANK, N.A.
By:
--------------------------------
Its
EXHIBIT 11
STARTER CORPORATION
Statement re: Computation of Net Income (Loss) Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Average shares outstanding 27,859,842 27,417,379 27,840,065 27,031,537
========== ========== ========== ==========
Net income (loss) $ 5,556 $ 10,871 $ (2,261) $ 5,672
========== ========== ========== ==========
Per share amount .20 .40 (.08) .21
========== ========== ========== ==========
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Starter Corporation for the quarter ended September 30,
1997, as set forth in its quarterly report on Form 10-Q for such quarter, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,824
<SECURITIES> 0
<RECEIVABLES> 99,532
<ALLOWANCES> (3,500)
<INVENTORY> 95,227
<CURRENT-ASSETS> 214,179
<PP&E> 36,675
<DEPRECIATION> (9,535)
<TOTAL-ASSETS> 254,910
<CURRENT-LIABILITIES> 147,702
<BONDS> 5,128
0
0
<COMMON> 279
<OTHER-SE> 101,801
<TOTAL-LIABILITY-AND-EQUITY> 254,910
<SALES> 269,401
<TOTAL-REVENUES> 272,513
<CGS> 179,943
<TOTAL-COSTS> 91,748
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (74)
<INTEREST-EXPENSE> 4,543
<INCOME-PRETAX> (3,647)
<INCOME-TAX> (1,386)
<INCOME-CONTINUING> (2,261)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,261)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
