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 June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________________ to ________________.
Commission file number 1-11812
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 |_|
27,896,998 shares of common stock, $.01 par value, were outstanding as of August
1, 1998.
<PAGE>
INDEX
STARTER CORPORATION
Page Number
-----------
PART I Financial Information
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated balance sheets - June 30, 1998,
December 31, 1997 and June 30, 1997 3-4
Consolidated statements of operations - Three and
six months ended June 30, 1998 and June 30, 1997 5
Consolidated statements of cash flows - Six
months ended June 30, 1998 and June 30, 1997 6
Notes to consolidated financial statements -
June 30, 1998 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II Other Information
ITEM 1 Legal Proceedings 17
ITEM 4 Submission of Matters to a Vote of Security Holders 17
ITEM 6 Exhibits and Report on Form 8-K 18
Signature 19
2
<PAGE>
STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
------------- ----------------- -------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 931 $ 149 $ 3,489
Accounts receivable - trade, less
allowance for doubtful accounts
of $3,700 at June 30, 1998,
$3,800 at December 31, 1997
and $3,000 at June 30, 1997 47,046 38,424 45,341
Inventories 106,391 71,940 90,396
Prepaid expenses and other assets 6,404 11,888 12,368
Current deferred income taxes -- 8,565
--------- --------- ---------
Total current assets 160,772 122,401 160,159
Plant and equipment 35,631 36,197 35,270
Less accumulated depreciation (10,999) (9,691) (8,235)
--------- --------- ---------
Plant and equipment, net 24,632 26,506 27,035
Other assets 17,423 11,614 12,202
--------- --------- ---------
Total assets $ 202,827 $ 160,521 $ 199,396
========= ========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data )
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
------------ ----------------- -------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 83,296 $ 41,624 $ 62,855
Accounts payable 17,299 16,600 13,621
Accrued commissions 2,566 1,830 1,846
Accrued licensing fees 14,488 4,788 4,923
Accrued expenses 20,639 14,482 10,759
Accrued advertising 6,073 8,181 4,718
Current portion of long-term debt 939 939 351
--------- --------- --------
Total current liabilities 145,298 88,444 99,075
Long-term debt, less current portion 5,441 4,642 3,825
--------- --------- --------
Total liabilities 150,740 93,086 102,900
Stockholders' equity:
Convertible Preferred Stock (par value $.01)
5,000,000 authorized shares -- -- --
Common Stock (par value $.01)
50,000,000 shares authorized; issued
27,894,160 at June 30, 1998,
27,872,232 at December 31, 1997
and 27,856,615 at June 30, 1997 279 279 278
Additional paid in capital 82,839 82,774 82,716
Retained earnings (deficit) (31,033) (15,618) 13,502
--------- --------- --------
Total stockholders' equity 52,087 67,435 96,496
--------- --------- --------
Total liabilities and stockholders' equity $ 202,827 $ 160,521 $199,396
========= ========= ========
</TABLE>
Note: The consolidated balance sheet at December 31, 1997 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 Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 57,979 $ 58,309 $ 117,014 $ 120,033
Cost of sales 41,177 42,542 83,674 86,294
------------ ------------ ------------ ------------
Gross profit 16,801 15,767 33,340 33,739
Royalty income 709 1,299 1,663 1,858
Selling, general and administrative expenses 23,459 23,350 46,851 46,144
------------ ------------ ------------ ------------
Loss from operations (5,948) (6,285) (11,847) (10,548)
Other income (expense) - net (62) (1) 360 8
------------ ------------ ------------ ------------
Loss before interest expense
and income taxes (6,010) (6,286) (11,487) (10,541)
Interest expense 2,285 1,470 3,677 2,486
------------ ------------ ------------ ------------
Loss before income taxes (8,295) (7,757) (15,165) (13,027)
Income taxes (benefit) 125 (3,102) 250 (5,210)
------------ ------------ ------------ ------------
Net loss ($8,420) ($4,655) ($15,415) ($7,817)
============ ============ ============ ============
Basic and diluted loss per share ($.30) ($.17) ($.55) ($.19)
============ ============ ============ ============
Weighted - average common shares 27,890,105 27,853,258 27,884,623 26,838,528
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
STARTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
Cash flows from operating activities
Net loss ($15,415) ($ 7,817)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 2,189 2,064
Loss on sale of property, plant & equipment 64
Provision for bad debts 300 (500)
Changes in operating assets and liabilities:
Accounts receivable (8,922) 12,169
Inventories (34,451) (12,955)
Prepaid expenses and other assets 5,485 (3,853)
Accounts payable and accrued expenses 14,643 (13,694)
-------- --------
Net cash used by operating activities (36,108) (24,586)
Cash flows from investing activities
Purchase of property, plant and equipment (185) (1,041)
Proceeds from sale of property,
plant and equipment 430
Other, net (1,708) (977)
-------- --------
Net cash used by investing activities (1,463) (2,018)
Cash flows from financing activities
Repayment of long-term borrowings (41) (3,975)
Net borrowings on credit arrangements 41,672 31,013
Net proceeds from sale of common stock 65 60
Loan refinancing costs (3,342)
-------- --------
Net cash provided by financing activities 38,353 27,098
-------- --------
Net increase in cash 782 494
Cash and cash equivalents -
beginning of period 149 2,995
-------- --------
Cash and cash equivalents -
end of period $ 931 $ 3,489
======== ========
See accompanying notes.
6
<PAGE>
STARTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
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, 1997 included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
2) Inventories
Inventories were as follows (in thousands):
June 30 December 31 June 30
1998 1997 1997
---- ---- ----
Raw materials $ 18,188 $18,627 $20,772
Finished goods 88,203 53,313 69,624
-------- ------- -------
$106,391 $71,940 $90,396
======== ======= =======
7
<PAGE>
3) Other Assets
Other assets are as follows (in thousands):
June 30 December 31 June 30
1998 1997 1997
---- ---- ----
Goodwill $ 5,351 $ 5,552 $ 5,865
Trademarks 1,691 1,789 1,876
Capitalized Software 5,850 2,712 --
Deferred income taxes -- -- 1,567
Capitalized loan costs 3,138 -- 914
Other 1,393 1,561 1,980
------- ------- -------
$17,423 $11,614 $12,202
======= ======= =======
4) Credit Facility
At June 30, 1998, $83,296,000 is outstanding under the Company's three year
secured revolving credit facility ("the credit facility"). Additionally,
$41,000,000 has been committed under the credit facility for letters of credit
related to vendor orders for which the Company will become liable at the time
these orders are shipped and $18,730,000 is available for additional borrowing
under the credit facility.
5) Income taxes
The Company's income tax expense for the three and six month periods ended June
30, 1998 consists primarily of minimum state taxes. At December 31, 1997, the
Company recorded a deferred tax asset valuation allowance against deferred tax
assets previously recorded, as the Company believed it is more likely than not
that such deferred tax assets will not be utilized in the near term.
6) Contingencies
TH Corporation ("TH") operated as a sourcing agent for the Company pursuant to
an agency agreement. In February 1998, TH was notified of the termination of the
agreement. In June of 1998, TH filed a petition seeking arbitration of claims
arising out of its transactions with the Company. TH is seeking to collect
approximately $2,000,000 in commission and manufacturing fees. In addition, TH
is seeking reimbursement of approximately $3,100,000 it advanced to the Company
to cover certain duties and potential penalties assessed by the U.S. Customs
Service on products sourced by TH. These products failed to meet standards
required to obtain a claimed duty rate. In June 1998, TH filed a motion in the
Superior Court
8
<PAGE>
of the State of Connecticut requesting that the court order the Company to
proceed with arbitration. The Company opposed the motion and believes that the
situation should be resolved in a court of law. Certain vendors of the Company
selected by TH or their assignees have notified the Company of claims by them
that are now being asserted by TH as part of its claims. None of these vendors
or other parties has commenced legal or arbitration proceedings against the
Company.
Although the outcome of litigation or arbitration cannot be predicted with
certainty, it is the opinion of the Company that it has strong defenses to the
claims asserted by TH. The Company also has grounds for asserting claims against
TH for breaches of the agency agreement with the Company and for breaches of the
fiduciary duties owed the Company as a result of that relationship. It is
anticipated that the amounts sought by the Company in connection with its
claims, if asserted, will substantially exceed the amounts sought by TH.
In addition, the Company is a party to various lawsuits incidental to its
business. Management believes the TH claim and other various lawsuits will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
7) Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
8) Recent Accounting Pronouncements
The Company adopted Financial Accounting Standard Board (FASB) Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" as of December 31,
1997. The adoption of this standard had no impact on the previously reported
loss per share for second quarter of 1997.
On January 1, 1998, the Company adopted FASB Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". There were no differences
between comprehensive loss and net loss for the three and six month periods
ended June 30, 1998 and 1997.
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 facility. The amount outstanding under the revolving
credit facility 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 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 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>
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.
Results of Operations
The Company had a net loss of $36.9 million for the year ended December 31, 1997
as a result of rapid unexpected deterioration in the athletic apparel industry
during 1997 and the resulting decreases in sales levels and margins. These
decreases resulted in the inability of the Company to recover its fixed selling,
general and administrative expenses which had increased significantly in 1997
due to investments made in anticipation of growth in sales. In 1996 and 1997,
the Company made investments and built an infrastructure to support a business
that had experienced growth in the past and was expected to continue to grow. In
addition to anticipated general growth arising from the industry as a whole, the
Company believed that its acquisitions provided a vehicle to support further
increases in its market share. The market place began to soften in the last half
of 1997 and, at that time, the Company began a plan to reduce selling, general
and administrative expenses. Several changes were made in the management team,
including the elimination of several positions. The cost containment initiatives
are expected to result in reduced costs during 1998 via reductions in the
Company's workforce, reductions in unprofitable outlet store operations, more
cost effective marketing initiatives and other spending reductions. The majority
of these cost reductions will not be realized until the second half of 1998.
However, there can be no assurance such cost containment initiatives will result
in the Company's return to profitability.
11
<PAGE>
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 Six Months
Ended June 30 Ended June 30
1998 1997 1998 1997
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales (71.0) (73.0) (71.5) (71.9)
Gross profit 29.0 27.0 28.5 28.1
Royalty income 1.2 2.2 1.4 1.6
Selling, general and
administrative expenses (40.5) (40.0) (40.0) (38.4)
Loss from operations (10.3) (10.8) (10.1) (8.8)
Other income - (expense) net (0.1) -- 0.3 --
Interest expense (3.9) (2.5) (3.1) (2.1)
----- ---- ----- ----
Loss before income taxes (14.3) (13.3) (13.0) (10.9)
Income taxes (benefit) 0.2 (5.3) 0.2 (4.3)
Net loss (14.5%) (8.0%) (13.2%) (6.5%)
===== ==== ===== ====
Net sales for the three months ended June 30, 1998 were approximately $58.0
million as compared to $58.3 million for the three months ended June 30, 1997.
Net sales for the six months ended June 30, 1998 decreased slightly to $117.0
million from $120.0 million for the six months ended June 30, 1997 primarily as
a result of reduced outerwear and activewear volume.
Gross profit for the three months ended June 30, 1998 was $16.8 million as
compared to $15.8 million for the three months ended June 30, 1997. Gross profit
for the six months ended June 30, 1998 was $33.3 million as compared to $33.7
million for the six months ended June 30, 1997. Gross profit margin for the
three months ended June 30, 1998 was 29.0% as compared to 27.0% for the three
months ended June 30, 1997. Gross profit margin for the six months ended June
30, 1998 was 28.5%, as compared to 28.1% for the six months ended June 30, 1997.
The increases are primarily attributed to reduced overhead costs, primarily
distribution.
Royalty income decreased to $0.7 million and $1.7 million for the three and six
months ended June 30, 1998, respectively, as compared to $1.3 million and $1.9
million for the three and six months ended June 30, 1997, respectively,
primarily as a result of decreases in international licensees.
12
<PAGE>
Selling, general and administrative expenses increased to $23.5 million or 40.5%
of net sales and $46.9 million or 40.0% of net sales for the three and six
months ended June 30, 1998, respectively, as compared to $23.4 million or 40.0%
of net sales and $46.1 million or 38.4% of net sales for the comparable prior
year period. The increases resulted primarily from increased royalties
associated with increased licensed sales for the three and six months period
ended June 30, 1998. All other selling, general and administrative expenses
declined $1.2 million or 6.6%, and $1.4 million or 3.8%, for the three and six
month periods ended June 30, 1998, respectively as compared to the three and six
month periods ended June 30, 1997. These decreases are primarily related to
decreased marketing costs and, for the three months ended June 30, 1998, the
realization of certain cost containment initiatives such as reduced salaries and
benefits.
Other income of $0.4 million for the six months ended June 30, 1998 relates
primarily to gains associated with the disposition of certain investments.
Interest expense for the three and six months ended June 30, 1998 was $2.3
million and $3.7 million respectively, up from $1.5 million and $2.5 million for
the comparable prior periods, primarily due to increased interest rates and
increased average borrowings needed to finance operations.
Income tax expense for the three and six months ended June 30, 1998 consist
primarily of minimum state taxes. At December 31, 1997, the Company recorded
deferred tax asset valuation allowances for certain tax benefits, including
those tax benefits previously recorded during the three and six months ended
June 30, 1997.
Liquidity and Capital Resources
The Company's working capital at June 30, 1998 was $15.5 million as compared to
$34.0 million at December 31, 1997 and $61.1 million at June 30, 1997. The
decrease from December 31, 1997 levels are primarily attributed to the loss for
the six months ended June 30, 1998. Cash used by operations for the first six
months of 1998 was $36.9 million, primarily due to the operating loss of $15.4
million and an increase in inventory of $34.5 million. This was financed in part
by increased borrowings on credit arrangements of $41.7 million and increases in
accounts payable of $13.8 million. Inventory increased by $16 million from June
30, 1997 levels as a result of the earlier receipt of goods from vendors based
upon the Company's initiatives to secure production and transportation in
anticipation of the Fall selling season.
On March 31, 1998 the Company's three year secured revolving credit facility
(the "credit facility") was amended to provide for, among other items, an
increase in permitted overadvances, increased advance rates and the elimination
of certain financial covenants. The $130,000,000 credit facility provides for a
seasonal increase up to a maximum $160,000,000 from
13
<PAGE>
April 1 through January 15 of each year; however, obligations outstanding under
the credit facility can not exceed $85,000,000 for a period of 30 days during
the first quarter of each year. Borrowings under the credit facility are subject
to various limitations based upon eligible receivables and inventory, as defined
in the credit facility, of the Company and its subsidiaries. Additionally, the
credit facility provides for permitted overadvances of $22,000,000 to fund
seasonal working capital requirements from January 1 to October 15 of each year.
From October 15, 1998 to December 31, 1998 the permitted overadvance decreases
to $7,500,000. Under terms of the credit facility, the Chairman and Chief
Executive Officer of the Company (the "guarantor"), who is also the majority
stockholder of the Company, has guaranteed up to $22,000,000 of the credit
facility. The guarantee may be terminated upon written notice to the banks by
the guarantor. However, it is not the intent of the guarantor to terminate the
guarantee during 1998. Any reduction in the guarantee will simultaneously reduce
dollar for dollar the amount of any permitted overadvance. The credit facility,
which expires on March 31, 2001, contains a covenant requiring minimum net worth
of $45 million plus 50% of the Company's cumulative net income, if any, for each
fiscal year ending on or after December 31, 1998. The covenant is to be tested
annually at the end of each fiscal year of the Company. The credit facility
further places restrictions on distributions, mergers and asset acquisitions, as
defined in the credit facility, and requires the Company to enter into interest
rate protection arrangements satisfactory to the banks for a notional amount of
$35,000,000. The credit facility also contains customary events of default, as
defined in the credit facility. The termination of the guarantee by the
guarantor is an event of default under the credit facility.
Management expects that the Company will be able to comply with the terms of the
credit facility throughout 1998. In 1997 the Company began a plan to reduce
selling, general and administrative expenses. Cost containment initiatives under
the plan are expected to result in reduced costs during 1998 via reductions in
the Company's workforce, reduction in unprofitable outlet operations, more cost
effective marketing initiatives and other spending reductions.
Amounts outstanding under the credit facility accrue interest at either the
bank's base rate plus 1% or at LIBOR plus 3%, at the Company's option. The
Company is required to pay a 2% fee on the face amount of each letter of credit
issued under the credit facility and an annual fee, which can range from .375 to
.5 percentage points, as defined in the credit facility, on the credit facility.
In addition, the Company was required to pay a transaction fee of 2% on the
maximum available credit facility to the banks in connection with the amended
agreement. The credit facility is secured by substantially all of the Company's
assets.
At June 30, 1998, $83,296,000 is outstanding under this facility. Additionally,
$41,000,000 has been committed under the credit facility for letters of credit
related to vendors' orders for which the Company will become liable at the time
these orders are shipped and $18,730,000 is available for additional borrowing.
14
<PAGE>
Cash generated from operations, together with the Company's existing revolving
credit agreement, is expected, under current conditions, to be sufficient to
finance the Company's planned operations in 1998.
15
<PAGE>
Year 2000 Conversion
The Company recognizes the need to ensure that its systems, applications and
hardware will recognize and process transactions for the year 2000 and beyond.
In continuing efforts to become more productive and competitive, the Company has
begun to replace significant portions of its software and some of its hardware
so that its computer systems will function properly with respect to dates
related to the year 2000 and beyond. The Company also has initiated discussions
with its significant suppliers, customers and financial institutions to ensure
that those parties have appropriate plans to remediate Year 2000 issues when
their systems interface with the Company's systems or may otherwise impact
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to properly remediate their computer
systems.
The Company's comprehensive system conversion initiative, which encompasses the
Year 2000 issues, is being managed by a team of experienced internal and
external professionals. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers, and financial institutions are fully
supported. The initiative encompasses all business systems, including
administrative, manufacturing and distribution equipment that utilize
microprocessors. Project completion is expected by early 1999. While the Company
believes its plans are adequate to address its Year 2000 concerns, many factors
could affect its ultimate success including, but not limited to the continued
availability of outside resources and sufficient financing. The project is not
expected to exceed $11.5 million in cost, some of which has been capitalized.
Through June 30, 1998 the Company has incurred costs of $6,000,000 related to
the project. This cost range is based on management's best estimates, which were
derived utilizing assumptions about future events. The results could differ
materially from those anticipated subject to uncertainties regarding the
availability of resources and the impact of the issue on key suppliers and
customers among others.
16
<PAGE>
Part II - Other Information
Item 1: Legal Proceedings
TH Corporation ("TH") operated as a sourcing agent for the Company pursuant to
an agency agreement. In February 1998, TH was notified of the termination of the
agreement. In June of 1998, TH filed a petition seeking arbitration of claims
arising out of its transactions with the Company. TH is seeking to collect
approximately $2,000,000 in commission and manufacturing fees. In addition, TH
is seeking reimbursement of approximately $3,100,000 it advanced to the Company
to cover certain duties and potential penalties assessed by the U.S. Customs
Service on products sourced by TH. These products failed to meet standards
required to obtain a claimed duty rate. In June 1998, TH filed a motion in the
Superior Court of the State of Connecticut requesting that the court order the
Company to proceed with arbitration. The Company opposed the motion and believes
that the situation should be resolved in a court of law. Certain vendors of the
Company selected by TH or their assignees have notified the Company of claims by
them that are now being asserted by TH as part of its claims. None of these
vendors or other parties has commenced legal or arbitration proceedings against
the Company.
Although the outcome of litigation or arbitration cannot be predicted with
certainty, it is the opinion of the Company that it has strong defenses to the
claims asserted by TH. The Company also has grounds for asserting claims against
TH for breaches of the agency agreement with the Company and for breaches of the
fiduciary duties owed the Company as a result of that relationship. It is
anticipated that the amounts sought by the Company in connection with its
claims, if asserted, will substantially exceed the amounts sought by TH.
In addition, the Company is a party to various lawsuits incidental to its
business. Management believes the TH claim and other various lawsuits will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
Item 4: Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 30, 1998. At the
meeting, the following matters were voted upon:
o The election of Benjamin E. Cohen as a Class II Director
For Authority Withheld
--- ------------------
25,750,672 333,408
17
<PAGE>
o The approval of the 1998 Quality Based - Performance Goals relating to
compensation to be paid to certain executive officers.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
20,899,453 616,031 86,503 4,482,093
Item 6: Exhibits and reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the quarter ended
June 30, 1998.
18
<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: August 13, 1998 /s/ Sean T. Smith
----------------------------
Sean T. Smith.
Controller and Chief Accounting Officer
19
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Descriptions Number
- ------ ------------ ------
27 Financial Data Schedule 21
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Starter Corporation for the six months ended June 30,
1998, 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 931
<SECURITIES> 0
<RECEIVABLES> 50,738
<ALLOWANCES> (3,692)
<INVENTORY> 106,931
<CURRENT-ASSETS> 160,772
<PP&E> 35,631
<DEPRECIATION> (10,999)
<TOTAL-ASSETS> 202,827
<CURRENT-LIABILITIES> 145,298
<BONDS> 5,441
0
0
<COMMON> 279
<OTHER-SE> 51,808
<TOTAL-LIABILITY-AND-EQUITY> 202,827
<SALES> 117,014
<TOTAL-REVENUES> 118,677
<CGS> 83,674
<TOTAL-COSTS> 46,551
<OTHER-EXPENSES> (360)
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 3,677
<INCOME-PRETAX> (15,165)
<INCOME-TAX> 250
<INCOME-CONTINUING> (15,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,415)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
