<PAGE>
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 March 31, 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
--- ---
27,852,788 shares of common stock, $.01 par value, were outstanding as of May
1, 1997.
<PAGE>
INDEX
STARTER CORPORATION
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART 1 Financial Information
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated balance sheets--March 31, 1997, December
31, 1996 and March 31, 1996 3-4
Consolidated statements of operations--Three months
ended March 31, 1997 and March 31, 1996 5
Consolidated statements of cash flows--Three months
ended March 31, 1997 and March 31, 1996 6
Notes to consolidated financial statements - March
31, 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 Reports on Form 8-K 13
Signature 14
</TABLE>
2
<PAGE>
STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
-------------- ----------------- --------------
(UNAUDITED) (NOTE) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 330 $ 2,995 $ 2,940
Accounts receivable--trade, less allowance for doubtful
accounts of $3,600 at March 31, 1997, $3,800 at December 31,
1996 and March 31, 1996 38,052 55,910 38,450
Inventories 70,555 76,964 61,404
Prepaid expenses and other assets 9,180 8,539 15,539
Current deferred income taxes 8,565 8,565 9,629
---------- ----------- ---------
Total current assets 126,682 152,973 127,962
Plant and equipment 36,286 36,034 32,636
Less accumulated depreciation (8,382) (8,095) (6,734)
---------- ----------- ---------
Plant and equipment, net 27,904 27,939 25,902
Other assets
Other assets (primarily intangibles) 8,518 5,053 2,622
Non-current deferred income taxes 1,568 1,568 523
Other investments 1,362 1,362 1,362
---------- ----------- ---------
Total other assets 11,448 7,983 4,507
---------- ----------- ---------
Total assets $ 166,034 $ 188,895 $ 158,371
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
3
<PAGE>
STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
-------------- ----------------- --------------
(UNAUDITED) (NOTE) (UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 34,547 $ 34,666 $ 21,765
Accounts payable 7,245 14,218 8,490
Accrued commissions 1,120 3,007 2,044
Accrued licensing fees 3,366 6,166 6,358
Accrued expenses 6,905 12,053 13,036
Accrued advertising 4,921 7,381 4,591
Current portion of long-term debt 1,851 2,299 1,749
---------- ----------- ---------
Total current liabilities 59,955 79,790 58,033
Long-term debt, less current portion 4,959 5,852 7,442
---------- ----------- ---------
Total liabilities 64,914 85,642 65,475
Stockholders' equity
Convertible Preferred stock (par value $.01) 5,000,000
authorized shares
Common Stock (par value $.01) 50,000,000 shares authorized;
issued 27,849,902 at March 31, 1997, 27,708,146 at December
31, 1996 and 26,838,707 at March 31, 1996 278 277 268
Additional paid in capital 82,685 81,657 75,162
Retained earnings 18,157 21,319 17,466
---------- ----------- ---------
Total stockholders' equity 101,120 103,253 92,896
---------- ----------- ---------
Total liabilities and stockholders' equity $ 166,034 $ 188,895 $ 158,371
---------- ----------- ---------
---------- ----------- ---------
</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
<PAGE>
STARTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales......................................................... $ 61,716 $ 59,295
Cost of sales..................................................... 42,545 41,109
------------ ------------
Gross profit...................................................... 19,171 18,186
Royalty income.................................................... 559 622
Selling, general & administrative expenses........................ 23,993 21,471
------------ ------------
Loss from operations.............................................. (4,263) (2,663)
Other income...................................................... 9 98
------------ ------------
Loss before interest expense and income taxes..................... (4,254) (2,565)
Interest expense.................................................. 1,016 679
------------ ------------
Loss before income tax benefit.................................... (5,270) (3,244)
Income tax benefit................................................ (2,108) (1,268)
------------ ------------
Net loss.......................................................... ($ 3,162) ($ 1,976)
------------ ------------
------------ ------------
Loss per share.................................................... $ ( .11) $ (.07)
------------ ------------
------------ ------------
Average common and common equivalent shares....................... 27,807,094 26,836,256
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
5
<PAGE>
STARTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss................................................................. ($ 3,162) ($ 1,976)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization.......................................... 997 718
Provision for bad debts................................................ 22 24
Changes in operating assets and liabilities:
Accounts receivable.................................................... 18,912 6,090
Inventories............................................................ 6,886 56
Prepaid expenses and other assets...................................... (641) 1,143
Accounts payable and accrued expenses.................................. (23,183) (7,018)
--------- ---------
Net cash used by operating activities.................................... (169) (963)
Cash flows from investing activities
Purchase of property, plant and equipment.............................. (530) (157)
Other, net............................................................. (535) (125)
--------- ---------
Net cash used by investing activities.................................... (1,065) (282)
Cash flows from financing activities
Repayment of long-term borrowings...................................... (1,341) (386)
Net borrowings (repayments) on credit arrangements..................... (119) 36
Net proceeds from sale of common stock................................. 29 29
--------- ---------
Net cash used by financing activities.................................... (1,431) (321)
--------- ---------
Net decrease in cash and cash equivalents.............................. (2,665) (1,566)
Cash and cash equivalents--beginning of period........................... 2,995 4,506
--------- ---------
Cash and cash equivalents--end of period................................. $ 330 $ 2,940
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
6
<PAGE>
STARTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 operating results 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 footnotes 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):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1997 1996 1996
----------- ------------ -----------
<S> <C> <C> <C>
Raw materials..................... $ 14,609 $ 16,580 $ 13,169
Finished goods.................... 55,946 60,384 48,235
----------- ------------ -----------
$ 70,555 $ 76,964 $ 61,404
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
3) Credit Facility
On May 13, 1997 the Company entered into an amended and restated three year
$125 million secured revolving credit facility ("the credit facility"), which
replaces the previously existing facility. 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
7
<PAGE>
ratios including debt to net worth and EBIT (earnings before interest and
taxes) to interest, 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 2.125 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) Commitments and Contingencies
The Company is a party to various lawsuits incidental to its business which
management believes will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
5) 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. The operating results of Galt from the date of
acquisition have been included in the consolidated statements of operations
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 period presented and
include pro forma adjustments to exclude costs associated with the
elimination of certain outlet stores and costs associated with the closure of
a duplicate facility. In addition, the pro forma information includes
adjustments to reflect amortization of goodwill and revised financing
arrangements.
8
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, 1996
--------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Net sales................................................. $64,083
Net loss.................................................. ($3,035)
Net loss per share........................................ (.11)
</TABLE>
These results are not necessarily indicative of the results of operations of
the combined companies had the acquisition occurred at the beginning of the
period presented, nor are they necessarily indicative of future operating
results.
6) Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods
if necessary. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of primary and fully diluted earnings per
share for the quarters ended March 31, 1997 and 1996 is not expected 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 licensees 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 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, quotas 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 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.
10
<PAGE>
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 quarter ended March 31, 1997 and 1996
(including the results of Galt's operations since August 9, 1996).
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Net Sales.................................................................... 100.0% 100.0%
Cost of sales................................................................ (68.9) (69.3)
--------- ---------
Gross profit................................................................. 31.1 30.7
Royalty income............................................................... .9 1.0
Selling, general & administrative expenses................................... (38.9) (36.2)
--------- ---------
Loss from operations......................................................... (6.9) (4.5)
Other income--net............................................................ -- .1
Interest expense............................................................. (1.6) (1.1)
--------- ---------
Loss before income taxes..................................................... (8.5) (5.5)
Income tax benefit........................................................... (3.4) (2.2)
--------- ---------
Net loss..................................................................... (5.1%) (3.3%)
--------- ---------
--------- ---------
</TABLE>
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Net sales for the quarter ended March 31, 1997 were $61.7 million as compared
to $59.3 million for the quarter ended March 31, 1996, a 4.1% increase
primarily as a result of increased printable volume partially mitigated by
decreased accessory volume.
Gross profit for the quarter ended March 31, 1997 was $19.1 million compared
to $18.2 million for the quarter ended March 31, 1996. The Company's gross
margin improved slightly to 31.1% of net sales for the quarter ended March
31, 1997 as compared to 30.7% of net sales for the quarter ended March 31,
1996 primarily related to reduced unfavorable
11
<PAGE>
variances. The Company's gross margin continues to be negatively impacted by
the general slowdown of licensed product at the retail level.
Selling, general and administrative expenses increased to $24.0 million or
38.9% of net sales for the quarter ended March 31, 1997 as compared to $21.5
million or 36.2% of net sales for the quarter ended March 31, 1996. The
increases are primarily attributable to increased employee compensation of
$.6 million and outlet store expenses of $.5 million associated with the Galt
acquisition. Additionally, increased marketing costs of $.8 million related
to the accelerated timing of certain advertising programs as compared to the
prior year.
Interest expense increased to $1.0 million for the quarter ended March 31,
1997 from $.7 million for the quarter ended March 31, 1996, primarily
attributable to increased overall borrowings necessary to finance operations
including the Galt acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at March 31, 1997 was $66.7 million as compared
to $73.2 million at December 31, 1996 and $69.9 million at March 31, 1996.
The decrease from December 31, 1996 is primarily attributable to the loss for
the quarter as well as the repayment of $1.3 million in long term debt.
During the first quarter of 1997 cash used by operations was $.2 million as
compared to $1.0 million during the first quarter of 1996.
On May 13, 1997 the Company entered into an amended and restated three year
$125 million secured revolving credit facility ("the credit facility"), which
replaces the previously existing facility. 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 and
EBIT to interest, 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 2.125 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 the Company's revolving credit
facility is expected under current conditions to be sufficient to finance the
Company's planned operations during 1997.
12
<PAGE>
PART II--OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of net loss per share for the three months ended
March 31, 1997 and for the three months ended March 31, 1996.
22 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended March
31, 1997.
13
<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.
STARTER CORPORATION
DATE: MAY 14, 1997 /s/ Lawrence C. Longo, Jr.
----------------------------------
Lawrence C. Longo, Jr.
Chief Financial Officer and Chief Accounting Officer
14
<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.
STARTER CORPORATION
DATE: May __, 1997 -----------------------------
Lawrence C. Longo, Jr.
Chief Financial Officer and Chief Accounting Officer
14
<PAGE>
EXHIBIT 11
STARTER CORPORATION
Statement re: Computation of Net Loss Per Share
(in thousands, except per share data)
NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------- -------------------
<S> <C> <C>
Average shares outstanding......................... 27,807,094 26,836,256
------------------- -------------------
------------------- -------------------
Net loss........................................... ($ 3,162) ($ 1,976)
------------------- -------------------
------------------- -------------------
Per share amount................................... ($ .11) ($ .07)
------------------- -------------------
------------------- -------------------
</TABLE>
<PAGE>
EXHIBIT 22 - SUBSIDIARIES
Starter Europe, Ltd.
Starter Far East, Ltd.
Starter Outlet Stores, Inc.
Starter Delaware, Inc.
Starter Galt, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Starter Corporation for the quarter ended March 31,1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> $330
<SECURITIES> 0
<RECEIVABLES> 41,652
<ALLOWANCES> 3,600
<INVENTORY> 70,555
<CURRENT-ASSETS> 126,682
<PP&E> 36,286
<DEPRECIATION> (8,382)
<TOTAL-ASSETS> 166,034
<CURRENT-LIABILITIES> 59,955
<BONDS> 4,959
0
0
<COMMON> 278
<OTHER-SE> 100,842
<TOTAL-LIABILITY-AND-EQUITY> 166,034
<SALES> 61,716
<TOTAL-REVENUES> 61,725
<CGS> 42,545
<TOTAL-COSTS> 23,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,016
<INCOME-PRETAX> 5,270
<INCOME-TAX> 2,108
<INCOME-CONTINUING> 3,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,162)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
