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, 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 |_|
27,908,509 shares of common stock, $.01 par value, were outstanding as of
November 2, 1998.
<PAGE>
INDEX
STARTER CORPORATION
Page Number
-----------
PART I Financial Information
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated balance sheets - September 30, 1998,
December 31, 1997 and September 30, 1997 3-4
Consolidated statements of operations - Three and
nine months ended September 30, 1998 and
September 30, 1997 5
Consolidated statements of cash flows - Nine
months ended September 30, 1998 and September 30, 1997 6
Notes to consolidated financial statements -
September 30, 1998 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II Other Information
ITEM 6 Exhibits and Reports on Form 8-K 18
Signature 19
2
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STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,612 $ 149 $ 3,824
Accounts receivable - trade, less allowance
for doubtful accounts of $4,000 at September
30, 1998, $3,800 at December 31, 1997
and $3,500 at September 30, 1997 82,439 38,424 96,056
Inventories 99,401 71,940 95,227
Prepaid expenses and other assets 7,669 11,888 12,603
Current deferred income taxes 6,470
--------- --------- ---------
Total current assets 193,121 122,401 214,180
Plant and equipment 35,029 36,197 35,607
Less accumulated depreciation (11,189) (9,691) (8,979)
--------- --------- ---------
Plant and equipment, net 23,840 26,506 26,628
Other assets, net 18,927 11,614 14,102
--------- --------- ---------
Total assets $ 235,888 $ 160,521 $ 254,910
========= ========= =========
</TABLE>
See accompanying notes.
3
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STARTER CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data )
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
(unaudited) (note) (unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 115,633 $ 41,624 $ 82,470
Accounts payable 15,548 16,600 18,641
Accrued commissions 3,103 1,830 3,052
Accrued licensing fees 12,383 4,788 11,579
Accrued expenses 21,127 14,482 25,215
Accrued advertising 4,019 8,181 6,394
Current portion of long-term debt 912 939 351
--------- --------- ---------
Total current liabilities 172,725 88,444 147,702
Long-term debt, less current portion 5,194 4,642 5,128
--------- --------- ---------
Total liabilities $ 177,919 $ 93,086 $ 152,830
Stockholders' equity:
Convertible Preferred Stock (par value $.01)
5,000,000 authorized shares -- -- --
Common Stock (par value $.01)
50,000,000 shares authorized; issued
27,904,878 at September 30, 1998,
27,872,232 at December 31, 1997 and
27,863,070 at September 30, 1997 279 279 279
Additional paid in capital 82,861 82,774 82,743
Retained earnings (deficit) (25,171) (15,618) 19,058
--------- --------- ---------
Total stockholders' equity 57,969 67,435 102,080
--------- --------- ---------
Total liabilities and stockholders' equity $ 235,888 $ 160,521 $ 254,910
========= ========= =========
</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
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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
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 128,112 $ 149,384 $ 245,126 $ 269,416
Cost of sales 86,481 98,250 170,154 184,544
------------ ------------ ------------ ------------
Gross profit 41,631 51,134 74,972 84,872
Royalty income 1,081 792 2,744 2,649
Selling, general and
administrative expenses 33,542 40,726 80,393 86,869
------------ ------------ ------------ ------------
Income (loss) from operations 9,170 11,200 (2,677) 652
Other income (expense) - net (57) 12 303 19
------------ ------------ ------------ ------------
Income (loss) before interest expense
and income taxes 9,113 11,212 (2,374) 671
Interest expense 3,115 1,832 6,793 4,318
------------ ------------ ------------ ------------
Income (loss) before income taxes 5,998 9,380 (9,167) (3,647)
Income taxes (benefit) 136 3,824 386 (1,386)
------------ ------------ ------------ ------------
Net income (loss) $ 5,862 $ 5,556 ($ 9,553) ($ 2,261)
============ ============ ============ ============
Basic and diluted income
(loss) per share $ .21 $ .20 ($ .34) ($ .08)
============ ============ ============ ============
Weighted - average common shares 27,899,519 27,859,842 27,889,588 27,840,065
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
STARTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net loss ($9,553) ($2,261)
Adjustments to reconcile net loss
to cash used by operating activities:
Depreciation and amortization 3,367 3,113
Loss on sale of property, plant & equipment 39
Gain on sale of investment (401)
Provision for bad debts 450 (74)
Deferred income taxes 1,921
Changes in operating assets and liabilities:
Accounts receivable (44,465) (38,972)
Inventories (27,461) (17,786)
Prepaid expenses and other assets 4,219 (4,087)
Accounts payable and accrued expenses 10,299 8,448
------ ------
Net cash used by operating activities (63,506) (49,698)
Cash flows from investing activities
Purchase of property, plant and equipment (95) (1,398)
Proceeds from sale of property, plant
& equipment 455
Other, net, including capitalized software (3,512) (2,988)
------ ------
Net cash used by investing activities (3,152) (4,386)
Cash flows from financing activities
Repayment of long-term borrowings (516) (2,672)
Net borrowings on credit arrangements 74,009 57,497
Net proceeds from sale of common stock 87 88
Loan refinancing costs (3,459)
------ ------
Net cash provided by financing activities 70,121 54,913
Net increase in cash 3,463 829
Cash and cash equivalents - beginning of period 149 2,995
------ ------
Cash and cash equivalents - end of period $3,612 $3,824
====== ======
</TABLE>
See accompanying notes.
6
<PAGE>
STARTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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):
September 30 December 31 September 30
1998 1997 1997
---- ---- ----
Raw materials $15,605 $18,627 $21,798
Finished goods 83,796 53,313 73,429
------- ------- -------
$99,401 $71,940 $95,227
======= ======= =======
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3) Other Assets
Other asset, net of related amortization, were as follows (in thousands):
September 30 December 31 September 30
1998 1997 1997
---- ---- ----
Goodwill $ 5,261 $ 5,552 $ 5,857
Trademarks 1,641 1,789 1,840
Capitalized software 7,738 2,712 1,895
Deferred income taxes - - - - - - 1,742
Capitalized loan costs 2,889 - - - 1,096
Other 1,398 1,561 1,672
------- ------- -------
$18,927 $11,614 $14,102
======= ======= =======
4) Credit Facility
At September 30, 1998, advances of $115,633,000 were outstanding under the
Company's three-year secured revolving credit facility (the "Credit Facility").
Additionally, $6,931,000 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 a balance of $20,051,000 is
available for additional borrowing under the credit facility. The credit
facility provides for permitted over-advances of $22,000,000 to fund seasonal
working capital requirements from January to October 15 each year. From October
15, 1998 to December 31, 1998 the permitted over-advance decreases to
$7,500,000. As of November 6, 1998 availability under the credit facility was
$14,100,000.
5) Income taxes
The Company's income tax expense for the three and nine-month periods ended
September 30, 1998 consisted primarily of minimum state taxes. The Company's
income tax expense for the three months ended September 30, 1997 and income tax
benefit for the nine months ended September 30, 1997 reflected the Company's
estimated effective tax rate. 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
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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.
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 third 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 income or loss and net income or loss for the three and
nine-month periods ended September 30, 1998 and 1997.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
related information," in June 1997. The statement establishes standards for the
way public business
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enterprises report information and operating segments in annual financial
statements and requires reporting of selected information in interim financial
reports. The required disclosures for SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997, will be included in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998.
10
<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 Credit Facility. The amount outstanding under the 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 including the present NBA
lockout, (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.
The current NBA lockout is expected to have a negative impact on net sales and
operating results for the foreseeable future. The Company may be exposed to
excess NBA-related inventory should the lockout continue. However, the timing of
the ultimate NBA settlement, and its impact on the resumption of NBA sales and
inventory exposure can not be estimated at this time.
The Company recently announced it would no longer sell authentic and replica NHL
jerseys after the Company's current contract expires, because the financial
requirements in the proposed new contract did not provide an adequate return on
capital. As a result, the Company's NHL sales and related operating income for
the second half of 1999 are expected to decline.
A substantial portion of the Company's products are manufactured through
arrangements with independent contractors located in foreign countries. In
addition, the Company's
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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.
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 second
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 be realized in the second half of 1998.
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For the nine-month period ended September 30, 1998, the Company was not
profitable and is not expected to be profitable for the year. While the cost
containment initiatives have resulted in reduced costs, continued consolidation
at retail, contraction of the licensed apparel market and above average
temperatures in 1998 have led to decreased sales and increased margin
deterioration. The Company is continuing to evaluate strategic and financial
alternatives to enhance its operations, ensure it has adequate working capital
and to return the Company to profitability. However, there can be no assurance
that these strategic alternatives and cost containment initiatives will result
in the Company's return to profitability. .
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Gross profit margin 32.5 34.2 30.6 31.5
Royalty income .8 .5 1.1 1.0
Selling, general and
Administrative expenses 26.2 27.3 32.8 32.2
Income (loss) from operations 7.2 7.5 (1.1) .2
Interest expense 2.4 1.2 2.8 1.6
Net income (loss) 4.6 3.7 (3.9) (.8)
</TABLE>
Net sales for the three and nine month periods ended September 30, 1998
decreased approximately 14.2%, or $21.3 million, and 9% or $24.3 million,
respectively, as compared to the three and nine month periods ended September
30, 1997. The decreased sales are primarily attributable to reduced consumer
demand for licensed apparel products, primarily insulated outerwear. Also
contributing to the sales decline for the three month period ended September 30,
1998 were decreased NBA sales due in part to the ongoing NBA lockout. These
decreases were partially mitigated by improved performance and printable sales.
The gross profit margin as a percentage of net sales for the three and nine
month periods ended September 30, 1998 decreased to 32.5% and 30.6%
respectively, as compared to 34.2% and 31.5% for the three and nine month
periods ended September 30, 1997. The decreased gross margin as a percentage of
net sales was primarily attributed to reduced volume and lower wholesale prices
for insulated outerwear. The decreased volume resulted in the lower absorption
of overhead costs for
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the three and nine month period ended September 30, 1998.
Royalty income for the three and nine month periods ended September 30, 1998
increased to $1.1 million and $2.7 million, respectively, as compared to $.8
million and $2.6 million for the three and nine month periods ended September
30, 1997, primarily as a result of increased domestic licensees.
Selling, general and administrative expenses were $33.5 million, or 26.2%, of
net sales and $80.4 million, or 32.8%, of net sales for the three and nine month
periods ended September 30, 1998, respectively, as compared to $40.7 million, or
27.3%, of net sales and $86.9 million, or 32.2%, of net sales for the comparable
prior year periods. Royalties as a percentage of net sales increased to 10% for
the three and nine month periods ended September 30, 1998 as compared to 8.7%
and 8.3% of net sales for the three and nine month periods ended September 30,
1997, respectively. The increased royalty percentage results from increased
licensed sales as a percent of total sales and increased royalty rates
associated with certain player identified merchandise. All other selling,
general and administrative expenses declined to $20.8 million, or 16.2%, of net
sales and $56.0 million or 22.8%, of net sales for the three and nine month
periods ended September 30, 1998, respectively, as compared to $27.8 million, or
18.6%, of net sales and $64.4 million, or 23.9%, of net sales for the three and
nine month periods ended September 30, 1997, respectively. The other selling,
general and administrative decreases are primarily related to the realization of
certain containment initiatives such as reduced marketing costs and salaries.
Interest expense for the three and nine month periods ended September 30, 1998
was $3.1 million and $6.8 million, respectively, up from $1.8 million and $4.3
million for the comparable prior year periods, primarily due to increased
interest rates and increased average borrowings needed to finance operations.
Income tax expense for the three and nine month periods ended September 30, 1998
consisted 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 nine month period
ended September 30, 1997.
Liquidity and Capital Resources
The Company's working capital at September 30, 1998 was $20.4 million as
compared to $34.0 million at December 31, 1997 as a result of the net loss. Cash
used by operations for the nine month period ended September 30, 1998 increased
to $63.5 million as compared to cash used by operations of $49.7 million for the
nine month period ended September 30, 1997, primarily due to the operating loss
of $9.6 million.
On March 31, 1998 the Company's Credit Facility was amended to provide for,
among other items, an increase in permitted overadvances, increased advance
rates and the elimination of
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certain financial covenants. The $130,000,000 Credit Facility provides for a
seasonal increase up to a maximum $160,000,000 from 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 the remainder of 1998.
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 September 30, 1998, $115,633,000 is outstanding under the Credit Facility.
Additionally, $6,931,000 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 $20,051,000 is available for
additional borrowing. At November 6, 1998 availability under the Credit Facility
was $14,100,000.
Cash generated from operations, together with the Company's existing Credit
Facility, is
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expected, under current conditions, to be sufficient to finance the Company's
planned operations in 1998.
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
began in 1997 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 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, financial institutions, and other third parties with
which the Company has material relationship 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 Company is unable to predict the effect on its
results of operations, liquidity and financial condition in the event that it is
unable to address its Year 2000 concerns successfully. The conversion initiative
project is not expected to exceed $11.5 million in cost. 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, customers and other third parties. Through
September 30, 1998, the Company has incurred costs of $7,800,000 related to the
project. Funding requirements for the conversion initiative have been
incorporated into the Company's capital and operating plans, and are not
expected to have a material adverse impact, at this time, on the Company's
financial condition or liquidity.
The Company recognizes the need to develop a contingency plan in the event the
Company's conversion initiative project is not successfully implemented. In
connection therewith, the Company intends to complete a contingency plan by the
end of the second quarter of 1999 which will allow its primary business
operations to continue despite disruptions due to year 2000 problems. As the
Company continues to evaluate the year 2000 readiness of its business
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systems and facilities, products and significant suppliers, vendors, customers
and other third parties with which it has material relationships, it will modify
and adjust its contingency plan accordingly.
17
<PAGE>
Part II - Other Information
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated September 25, 1998 was filed regarding a change in the
Company's independent accountants. No financial statements were filed with
this Form 8-K.
18
<PAGE>
SIGNATURE
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, 1998 /s/ Sean T. Smith
---------------------------------------
Sean T. Smith.
Controller and Chief Accounting Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Descriptions Number
------
27 Financial Data Schedule 21
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Starter Corporation for the nine months ended September
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,612
<SECURITIES> 0
<RECEIVABLES> 82,439
<ALLOWANCES> 4,000
<INVENTORY> 99,401
<CURRENT-ASSETS> 193,121
<PP&E> 35,029
<DEPRECIATION> 11,189
<TOTAL-ASSETS> 235,888
<CURRENT-LIABILITIES> 172,725
<BONDS> 5,194
0
0
<COMMON> 279
<OTHER-SE> 57,690
<TOTAL-LIABILITY-AND-EQUITY> 235,888
<SALES> 245,126
<TOTAL-REVENUES> 247,870
<CGS> 170,154
<TOTAL-COSTS> 79,943
<OTHER-EXPENSES> (303)
<LOSS-PROVISION> 450
<INTEREST-EXPENSE> 6,793
<INCOME-PRETAX> (9,167)
<INCOME-TAX> 386
<INCOME-CONTINUING> (9,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,553)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
