________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JULY 6, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-11202
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AUTHENTIC FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4268251
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6040 BANDINI BOULEVARD
COMMERCE, CALIFORNIA 90040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 726-1262
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------------ ------------------------
Common Stock, par value $.001 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 24, 1996 was approximately $161,772,000.
The number of shares of Common Stock outstanding as of September 24, 1996
was 22,333,900.
Documents incorporated by reference: The definitive Proxy Statement of
Authentic Fitness Corporation, relating to the 1996 Annual Meeting of
Stockholders is incorporated by reference in Part III hereof.
________________________________________________________________________________
PART I
ITEM 1. BUSINESS.
Authentic Fitness Corporation (the 'Company') designs, manufactures and
markets swimwear, swim accessories and active fitness apparel under the
Speedo'r', Speedo'r' Authentic Fitness'r', Catalina'r', Anne Cole'r', Cole of
California'r', Oscar de la Renta'r', Sunset Beach'r', Sandcastle'r' and Sporting
Life'r' brand names; and outerwear, activewear and swimwear under the White
Stag'r' brand name. In addition, the Company operates over 100 Authentic
Fitness'r' retail stores which sell active fitness apparel in major metropolitan
areas of the United States and Canada. The Speedo'r', Designer Swimwear, Retail
and White Stag'r'/Skiwear Divisions accounted for 52.3%, 26.1%, 12.3% and 9.3%,
respectively, of net revenues in fiscal 1996.
The Company has leveraged the strength of its brand names and reputation
for quality to (i) continue to develop its core business, (ii) expand its
product offerings into new categories and (iii) enter new channels of
distribution. Due to the successful implementation of these strategies, the
Company's net revenues increased to $309.6 million in fiscal 1996 from $85.5
million in fiscal 1991, a compound annual growth rate of 29.4%.
As part of the Company's strategy to expand its product lines and enter new
channels of distribution, the Company acquired substantially all of the assets
of Taren Holdings, Inc. ('Taren'), a manufacturer and distributor of swimwear
and sportswear under a variety of brand names including Catalina'r', Anne
Cole'r', Cole of California'r', Sporting Life'r' and Sandcastle'r' (the
'Catalina/Cole Acquisition') in October 1993. The purchase price for the
acquired assets was approximately $42.6 million. After reflecting proceeds from
the (i) sale of the Colonial Division of Taren, (ii) sale of various surplus
fixed assets, (iii) cash collected from accounts receivable and (iv) proceeds
from the sale of certain acquired inventories, the net cash required for the
purchase was approximately $22 million. Cumulative earnings from this investment
since October 1993 have exceeded the net cash purchase cost in less than three
years of operations.
SPEEDO'r' DIVISION
The Speedo'r' brand name is preeminent in the competition swimwear market
with over a 60% market share in 1996 and is widely recognized for product
innovation, quality and performance. The Speedo'r' Division's product line
consists of women's and men's competition swimwear and swim accessories, men's
swimwear and coordinating T-shirts, women's fitness swimwear, Speedo'r'
Authentic Fitness'r' activewear and children's swimwear, all of which are
marketed under the Speedo'r' brand name.
The Company's strategy for the Speedo'r' Division is to attract new
customers to its core competition swimwear lines, and to expand its dominance in
competition swimwear to other markets for fitness apparel such as aerobics,
recreational watersports and volleyball; thereby targeting customers for whom
performance, quality and authenticity are important product attributes and to
open new channels of distribution, including its rapidly growing chain of
Speedo'r' Authentic Fitness'r' retail stores.
Speedo'r' swimwear has been associated with swimming and diving champions
since the 1950s, when it was first worn by the Australian Olympic Swim Team. In
the 1996 Summer Olympics in Atlanta, 24 out of 26 of the U.S. swimming medals
were won by athletes wearing Speedo'r' suits. The Company has promotional
contracts with Olympic medalists and world champions Amy Van Dyken, Angel
Martino, Jenny Thompson, Josh Davis, Gary Hall, Greg Louganis, Janet Evans, Mark
Lenzi, Mary Ellen Clark, Anita Nall and Summer Sanders as well as 1996 Olympic
beach volleyball gold medalist Karch Kiraly. Since 1985, the Company has been an
official sponsor of the U.S. National Swim Federation, U.S. Diving Federation
and, since 1993, the U.S. Water Polo Federation as well as the corresponding
Canadian federations. The Company has extended the swimming federation
sponsorships and expects to extend the diving and water polo sponsorships
through the year 2000 ensuring that Speedo'r' competitive swimwear and Speedo'r'
apparel will be worn through the 2000 Summer Olympics in Sydney. Management
believes these athletes and the U.S. and Canadian federations provide exposure
and publicity prior to and during the Olympic Games and other national and
international swim meets that benefits not only the Company's competition
swimwear but also the Company's other Speedo'r' swimwear and accessories, as
well as the Speedo'r' Authentic Fitness'r' line of active fitness apparel. In
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addition to sponsoring these federations, for the first time the Company was an
official licensee for the 1996 Summer Olympics which granted the Company the
right to market products bearing the Olympic logo, including swimwear and
related accessories on an exclusive basis and warm-ups on a non-exclusive basis
which further enhanced the brand image and preeminent status of Speedo'r'
competitive swimwear and apparel.
The Company has an exclusive license in perpetuity to the Speedo'r' brand
name for use on swimwear, activewear and related accessories in the United
States, its territories and possessions, Canada, Mexico and the Caribbean
Islands pursuant to a licensing agreement with Speedo Holdings B.V., the
worldwide licensor of the Speedo'r' brand name.
COMPETITION SWIMWEAR
The Speedo'r' brand first established its reputation for high performance
in competition swimwear and Speedo'r' continues to be the dominant brand in
competition swimwear with over 60% market share in the United States and Canada.
The Company believes that it has achieved such preeminence by focusing on
technological advances which provide superior performance. Although the
competition swimwear line includes a wide variety of styles and designs, the
majority of its sales represent repeat business in a relatively constant core
group of basic body styles.
The Company's competition swimsuits are manufactured to provide outstanding
fit, thus reducing water drag and enhancing freedom of movement. The fabric used
in these swimsuits also resists degradation from the sun and pool chemicals
enabling Speedo'r' competition swimsuits to last longer and to maintain their
fit better than suits made with other Lycra'r' types. The Company has
consistently worked to develop technologically advanced fabrics to provide
superior performance, such as the S-2000 suit developed for the 1992 Summer
Olympic Games and the revolutionary Speedo'r' Aquablade'tm' fabric which creates
less water drag than exposed skin. Speedo'r' Aquablade'tm' suits and briefs were
worn in the 1996 Summer Olympics by 12 of 16 gold medal winners and 33 of 48
overall medal winners in women's swimming events including gold medal winners
Amy Van Dyken, Angel Martino and Jenny Thompson. Speedo'r' Aquablade'tm' briefs
were worn by gold medal winners Josh Davis and Gary Hall. Two of the four world
records set at the 1996 Summer Olympics were set by swimmers wearing Speedo'r'
Aquablade'tm' suits.
The competition swimwear line is sold primarily through sporting goods
stores and approximately 300 independent team dealers who interact with coaches
and managers of competitive and recreational swim programs.
The Company contracts domestically for the manufacture of all products in
its competition swimwear line. Nylon, nylon Lycra'r' and cotton Lycra'r', the
principal raw materials for the competition swimwear line, as well as the
fitness swimwear line and certain Speedo'r' Authentic Fitness'r' products, are
sourced from and printed by a variety of domestic mills and converters. The
Company considers its relationships with its present fabric sources and
manufacturers to be good.
Net revenues for the competition swimwear line increased to $38.1 million
in fiscal 1996 from $19.9 million in fiscal 1991, a compound annual growth rate
of 13.9%.
ACTIVE FITNESS
The active fitness line includes both fitness swimwear for women and its
Speedo'r' Authentic Fitness'r' line of active fitness apparel for men and women.
The Company believes that the Speedo'r' brand's reputation for performance,
quality and authenticity provides a natural base from which to build into the
fitness apparel market.
The fitness line of swimsuits is designed for the growing number of women
who participate in swimming or water aerobics as part of their regular exercise
program. The sale of fitness swimsuits is complemented by the Company's complete
line of accessories designed for aquatic exercise.
The Company launched its highly successful Speedo'r' Authentic Fitness'r'
line of active fitness apparel in the fall of 1991. Currently, the line consists
primarily of cotton Lycra'r' products for women, such as leotards, unitards and
tights all made with the same emphasis on styling and performance as the
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Company's other Speedo'r' products. In addition, the Company sells coordinated
sportswear, including fleece and nylon warm-ups, jackets, shorts and pants for
men and women under the Speedo'r' Authentic Fitness'r' label. The Speedo'r'
Authentic Fitness'r' line is designed to be both functional for fitness work-
outs and fashionable enough for everyday wear. Styles are coordinated to mix and
match and are available in a variety of updated colors. Speedo'r' Authentic
Fitness'r' products function for a wide variety of fitness activities which
range from aerobics and running to volleyball and for a wide variety of fitness
participants from once-a-week health club members to triathletes.
The Company has benefited from increased awareness of the Speedo'r'
Authentic Fitness'r' line as a result of its promotional contracts with several
of the medalists who wore Speedo'r' swimwear products in the 1996 Summer
Olympics and a number of professional volleyball players. The Company has
promotional contracts with Karch Kiraly who has been the top ranked professional
Beach Volleyball player for over 70 consecutive tournaments and was a gold medal
winner at the 1996 Summer Olympics, Sinjin Smith, professional beach
volleyball's winningest player with 139 tournament victories, Holly McPeak,
currently the No.1 ranked player on the WVPA tour and Linda Hanley, currently
the No.3 ranked player on the WVPA tour.
The increased awareness of the Speedo'r' and Speedo'r' Authentic Fitness'r'
brands has allowed the Company to further expand its product line. In fiscal
1993 the Company introduced a line of swimwear, T-shirts and sportswear for
children. The Speedo'r' kids line has been highly successful, selling out at
retail and generating net revenues of over $11 million in fiscal 1996, more than
double the amount from fiscal 1995. In September 1996, the Company was notified
that its Speedo'r' kids line was the winner of the prestigious Earnie award
presented by Earnshaw Publications for 'Excellence in Design -- Swimwear'. The
Company expects that this business will continue to grow significantly in future
years.
The Company's fitness swimwear is sold primarily through department,
sporting goods and specialty stores. The Speedo'r' Authentic Fitness'r' line of
active fitness apparel is currently sold primarily through the Company's
Speedo'r' Authentic Fitness'r' retail stores.
The fitness swimwear and Speedo'r' Authentic Fitness'r' lines are currently
sourced from and printed and manufactured by the same mills, converters and
sub-contractors as the competition swimwear line. Certain Speedo'r' Authentic
Fitness'r' styles are manufactured in Company owned manufacturing facilities.
The Company acquires the cotton, fleece and nylon used in some of its Speedo'r'
Authentic Fitness'r' products from a variety of domestic and international
sources and uses a variety of domestic sewing sub-contractors to produce them.
The Company considers its relationship with these suppliers and sub-contractors
to be good.
Net revenues for the fitness swimwear line and related lines increased to
$9.3 million in fiscal 1996 from $1.5 million in fiscal 1991, a compound annual
growth rate of 44.0%. The Speedo'r' Authentic Fitness'r' and related lines
produced over $22.1 million of net revenues in fiscal 1996, an increase of 69.3%
compared to fiscal 1995.
MEN'S SWIMWEAR
The men's swimwear line has experienced significant growth in recent
seasons due to product line extensions beyond the traditional Speedo'r' Lycra'r'
racing swimwear. The line includes watershorts and coordinated T-shirts. The
Company's Speedo'r' brand watershorts were introduced in 1984 and are the number
one selling brand of men's and boys branded swimwear in department and specialty
stores commanding a 17% market share for the July 1996 period. The Company's
watershorts are designed for men who participate in active sports and recreation
in and out of the water. The watershorts are made of cotton or nylon fabric and
come in a wide variety of color combinations, designs and lengths.
Since 1990 the Company has offered a collection of colorful Speedo'r'
T-shirts with bold graphics that coordinate with the color schemes and designs
used in Speedo'r' swimwear to provide an important complement to the swimwear
and Speedo'r' Authentic Fitness'r' lines. Stores which previously sold only
Speedo'r' swimwear may now display Speedo'r' T-shirts with such swimwear and
thus provide the consumer with the opportunity to purchase coordinated tops and
bottoms. The Company's net revenues from sales of T-shirts increased over 30% in
fiscal 1996 compared to fiscal 1995.
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The Company's successful extensions of the men's swimwear line include the
introduction of the Speedo'r' Surf Runner'tm' nylon cross training watershorts,
which have become one key item in Speedo'r's activewear collection. The Company
has recently introduced a line of men's watershorts and tops under the Duke
Kahanamouku'r' brand name targeted toward surfers. Additional swimwear line
extensions to the big and tall mens' as well as the boys' markets have also met
strong retail acceptance.
The Company's Speedo'r' brand watershorts and T-shirts are sold primarily
through department, sporting goods and specialty stores and catalogs. The
watershorts are sourced principally from a variety of international sources. To
the extent that products are sourced from the Far East, the buying agent is
either ASCO International Sourcing Limited or Soaring Force Limited
(collectively, 'ASCO'). ASCO sources the manufacture of such products, inspects
finished goods prior to shipment, facilitates the shipment of goods from foreign
ports and arranges for the issuance of letters of credit to manufacturers for
finished products. ASCO is an affiliate of Pentland Ventures Ltd ('Pentland'),
one of the Company's principal stockholders. The Company purchases T-shirt
blanks and prints them domestically.
Net revenues for men's swimwear, primarily watershorts and T-shirts,
increased to $40.6 million in fiscal 1996 from $15.7 million in fiscal 1991, a
compound annual growth rate of 20.9%.
ACCESSORIES
Speedo'r' accessories represent a major and growing product classification
for the Company complementing the competition swimwear, aquatic fitness and
recreational watersports lines. The Company's Speedo'r' accessories include a
diverse range of products including swim goggles, the water resistant Surf
Runner'tm' radio, swimming caps, nose clips, masks, snorkels, ear plugs,
kickboards, floatation devices, aquatic exercise steps and the Speedo'r' Aquatic
Cross-Training Mitt'tm' which provides a more effective and efficient full body
workout while swimming. Accessories which can be used by fitness participants
out of the pool include duffle bags, athletic bags, sandals and Speedo'r' Surf
Walker'tm' footwear, for use by the pool or at the beach.
The Company continues to develop innovative and functional accessories to
support the growing number of fitness swimmers participating in water aerobics
and lap swimming.
The mainstay of the Speedo'r' accessories line is swim goggles. Made from
polycarbonate plastic, the goggles come in varied shapes and tints and include
anti-fog, hypo-allergenic and prescription strength models. Management believes
that Speedo'r' is the number one brand of swim goggles sold in sporting goods
stores.
The swim goggle line is primarily manufactured by the Company to provide
more control over the manufacturing process and 'quick response' to the needs of
the Company's customers. Latex and silicone swimming caps are sourced from the
Far East from manufacturers using specially-designed molds that the Company
either owns or has exclusive rights to use. Other products in the Speedo'r'
accessories line are sourced from a variety of domestic and international
sources. Swim goggles and other accessories are available in most department,
sporting goods and specialty stores which carry other Speedo'r' products.
Net revenues of the accessories line increased to $25.1 million in fiscal
1996 from $19.5 million in fiscal 1991.
DESIGNER SWIMWEAR DIVISION: CATALINA'r', ANNE COLE'r', COLE OF CALIFORNIA'r',
OSCAR DE LA RENTA'r', SANDCASTLE'r', SUNSET BEACH'r' AND SPORTING LIFE'r'
The Designer Swimwear Division's product line consists of women's swimwear
under the nationally recognized brand names: Catalina'r', Anne Cole'r', Cole of
California'r', Oscar de la Renta'r', Sandcastle'r', Sunset Beach'r' and Sporting
Life'r'. Each of the brands targets a specific consumer and price point. Anne
Cole'r' and Oscar de la Renta'r' are designer brands, Cole of California'r',
Sandcastle'r' and Sporting Life'r' are missy brands and Sunset Beach'r' is a
junior brand, all of which target the department and specialty store market. The
Catalina'r' brand targets the mass merchandise market. These brands have allowed
the Company to expand its distribution in department and specialty stores and to
add new channels of distribution, including mass merchandisers. Prior to the
Catalina/Cole Acquisition, the Company
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estimates that less than 10% of the Company's total women's Speedo'r' swimwear
sales were through department and specialty stores. The Company seeks to grow
its Designer Swimwear Division by expanding the number of stores that carry its
brands and increasing the presence of its brands within each store location.
For the 1996 selling season two of the Company's designer brand names were
top ten best sellers at retail. Anne Cole'r' was the sixth best selling missy
swimwear brand and Sunset Beach'r' was the ninth best selling junior swimwear
brand.
The Designer Swimwear Division also operated eight retail outlet stores
that sold excess and out-of-season merchandise. Consistent with the Company's
goal of reducing operating expenses and focusing its efforts on high growth
swimwear and Authentic Fitness'r' Retail Store businesses, in May 1996 the
Company made a strategic decision to close its closeout outlet stores. The
outlet stores represented less than 4% of the Company's net revenues and had not
been profitable for the last two years. The difficulty has been trying to sell
excess swimwear year round which wasted manufacturing efficiency. The loss of
approximately $12.4 million in fiscal 1996 related to the outlet stores includes
operating losses incurred during fiscal 1996 and the write down of the outlet
stores assets to net realizable value, including intangible assets. The Company
closed four of the eight outlet stores and the remaining four leases were
assigned to Warnaco. Inventory related to the outlet stores was sold to Warnaco
for approximately $2.4 million on August 1, 1996.
During fiscal 1994, the Company capitalized on the high level of consumer
recognition and mass appeal of the Catalina'r' brand by repositioning it to a
line of swimwear and active apparel for the mass merchandise market. The Company
entered into a license agreement with Wal-Mart Stores, Inc. ('Wal-Mart')
pursuant to which Wal-Mart has the right, on a non-exclusive basis, to source,
distribute and sell swimwear and activewear under the Catalina'r' brand name. In
fiscal 1996, net revenues from this agreement under the Catalina'r' brand were
$25.4 million. In addition, the Company entered into an exclusive license
agreement for a period of ten years with an option to renew for an additional
ten years with The Warnaco Group, Inc. ('Warnaco') pursuant to which Warnaco has
the right to manufacture and distribute men's and women's sportswear under the
Catalina'r' brand name. The Company recorded approximately $0.6 million of
royalty income associated with this agreement in fiscal 1996.
In September 1993, the Company entered into a worldwide licensing agreement
with Oscar de la Renta Licensing Corporation for the design, manufacture and
marketing of women's swimwear and activewear under the Oscar de la Renta'r'
brand name. The agreement with Oscar de la Renta Licensing Corporation provides
the Company with an internationally recognized brand name synonymous with
fashion, which the Company believes will both increase its penetration of the
department store market and afford it greater access to international markets.
The Oscar de la Renta'r' line targets the designer swimwear customer in the
better department store market and is targeted to the upscale, fashion forward
consumer.
The Designer Swimwear Division's net revenues have increased 181% to $80.6
million since the Company purchased the designer brands from Taren in October
1993. Net revenues for the Designer Swimwear Division increased 17.7% to $80.7
million from the $68.6 million recorded in fiscal 1995.
AUTHENTIC FITNESS'r' RETAIL STORES DIVISION
Authentic Fitness'r' retail stores are designed to appeal to participants
in water and land-based fitness activities, and to offer a complete line of
Speedo'r' and Speedo'r' Authentic Fitness'r' products that sell throughout the
year. The stores are a model for innovative retailing of the Company's products
and a proving ground for new products and marketing and merchandising
techniques. In November 1992 the Company opened its first Speedo'r' Authentic
Fitness'r' retail store in Los Angeles; since then the Company has opened 113
additional stores (through September 1996) in major metropolitan areas of the
United States and Canada to bring the total number of stores open to 114. The
stores have achieved annualized gross revenues in excess of $435 per square
foot. Same store sales for the 1996 fiscal year increased 6.9% over fiscal 1995.
The Company believes that the success of the retail stores to date evidences
substantial consumer interest in new innovative channels of distribution for
fitness apparel. The Company expects to open 200 additional stores over the next
six years.
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The stores average approximately 1,100 square feet in size. Capital
expenditures for each new store of average size are expected to be approximately
$200,000 and will require approximately $50,000 of working capital.
Net revenues of the Retail Division increased 86.8% to $38.1 million in
fiscal 1996 from $20.4 million in fiscal 1995.
SKIWEAR DIVISION
Consistent with the Company's goal of focusing its efforts on growth
businesses with high gross margins, in May 1996 the Company made a strategic
decision to exit the skiwear business. The skiwear industry is extremely
volatile, very promotional and highly dependent on the weather and the overall
economy with many of its retail outlets small and undercapitalized. The
Company's skiwear business was largely dependent on one major customer,
Herman's, which announced its liquidation in May 1996. In addition, the skiwear
business is highly seasonal and requires substantial amounts of working capital
that the Company believes can be more effectively utilized in its rapidly
growing Speedo'r', Designer Swimwear and Authentic Fitness'r' Retail Store
divisions. The Company's skiwear business accounted for approximately $13.8
million of net revenues in fiscal 1996. Losses related to the skiwear business
of approximately $15.5 million in fiscal 1996 include operating losses incurred
during fiscal 1996 and the write down of skiwear related assets, including
intangible assets and goodwill, to net realizable value.
WHITE STAG'r'
The White Stag'r' brand name, over 100 years old, is one of the most
recognized brand names in the United States. In 1992, the Company made a
strategic decision to capitalize on the awareness and potential mass appeal of
the White Stag'r' brand name by redirecting it to a line of activewear,
outerwear, swimwear and goggles for the mass merchandise market. In fiscal 1996,
the Company shipped approximately $13.8 million of men's and women's outerwear,
activewear and swimwear under the White Stag'r' brand to Wal-Mart.
The Company's White Stag products are developed and designed by the
Company's merchandise and design group and are manufactured both in the
Company's manufacturing facilities and sourced from domestic and international
suppliers.
Net revenues for White Stag'r' in fiscal 1996 increased 32.7% to $13.8
million from $10.4 million in fiscal 1995.
INTERNATIONAL OPERATIONS
The Catalina/Cole Acquisition and the signing of the Oscar de la Renta'r'
license are strategically intended to increase the Company's access to
international markets. Catalina'r', Cole of California'r' and Anne Cole'r'
products were sold both directly to department and specialty stores and through
various license agreements throughout the world. Although historically a small
portion of the Company's business was international, the Company believes that
the strength of the Company's Designer Swimwear brand names will create an
opportunity to increase its international presence over the next several years.
The Company's licensing agreements with Speedo Holdings B.V. geographically
restrict the Company's international use of the Speedo'r' and other brand names
to the United States, its territories and possessions, Canada, Mexico and the
Caribbean Islands.
The Company has a Canadian subsidiary which engages in manufacturing, sales
and marketing activities. Net revenues of such Canadian operations contributed
$13.4 million of the Company's net revenues for fiscal 1996 compared to $14.6
million in fiscal 1995. The decrease is a result of lower goggle sales to
Speedo'r' international licensees. With the exception of the fluctuation of
local currencies against the U.S. dollar, the Company does not believe that the
Canadian operations are subject to risks which are significantly different from
domestic operations.
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IMPORTS AND IMPORT RESTRICTIONS
Although the Company imported approximately 30% of its finished products in
fiscal 1996, substantially all of its competition swimwear and fashion swimwear
for women is sourced domestically or manufactured in the Company's facilities in
the U.S. Imports from certain countries are subject to the constraints imposed
by bilateral agreements between the United States and substantially all of the
countries from which the Company imports goods. These agreements impose quotas
that limit the quantity of certain types of goods, including many of those
imported by the Company, which can be imported into the United States from those
countries. Such agreements also allow the United States to impose, under certain
conditions, restraints on the importation of categories of merchandise that,
under the terms of the agreements, are not subject to specified limits. The
bilateral agreements through which quotas are imposed have been negotiated under
the framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Arrangement. Many quota and tariff
restrictions negotiated under the Multifiber Arrangement are being phased out
over period up to ten years under the World Trade Organization.
The Company's continued ability to source products that it imports may be
adversely affected by additional bilateral agreements, unilateral trade
restrictions, significant decreases in import quotas, the disruption of trade
from exporting countries as a result of political instability or the imposition
of additional duties, taxes and other charges on imports.
EMPLOYEES
The Company and its subsidiaries employed approximately 2,008 employees at
July 6, 1996, less than 1% of whom were represented by a labor union. The
Company considers its relationship with employees to be good and has not
experienced interruptions of operations due to labor disagreements.
CUSTOMERS
In fiscal 1994 and 1996, Wal-Mart accounted for 11% of the Company's net
revenues. In fiscal 1995, no customer accounted for more than 10% of the
Company's net revenues. Herman's Sporting Goods, Inc. ('Herman's') filed for
bankruptcy on April 26, 1996 and on May 2, 1996 announced their liquidation. As
a result, the Company recorded a special bad debt loss of $11,642,000 related to
the write-off of uncollectible accounts receivable and the write-down in the
value of Herman's common stock received as a distribution to creditors as part
of the settlement from Herman's March 1993 bankruptcy. The special bad debt loss
is net of gross recoveries from the Company's credit insurance policy of
approximately $4,600,000.
COMPETITION
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, some of which have substantially
greater resources than the Company.
The Company believes that it has a significant competitive advantage
because of high consumer recognition and acceptance of its brand names and its
strong presence and strong share of the market in the major sporting goods,
department and specialty store chains.
TRADEMARKS AND LICENSING AGREEMENTS
The Company has license agreements with Speedo Holdings B.V. in perpetuity
which permit the Company to design, manufacture and market certain men's,
women's and children's apparel including swimwear, sportswear and a wide variety
of other products using the Speedo'r' trademark and certain other trademarks
including Speedo'r' Surf Walkers'tm' and Speedo'r' Authentic Fitness'r'. The
Company's license to use the Speedo'r' trademark and such other trademarks was
granted in perpetuity subject to certain conditions and is exclusive in the
United States, its territories and possessions, Canada, Mexico and the Caribbean
Islands. Speedo Holdings B.V. retains the right to use or license such brand
names in other jurisdictions, and actively uses or licenses such brand names
throughout the world outside of the Company's licensed areas. The agreements
provide for minimum royalty payments to be credited
7
against royalty payments based on a percentage of net sales. Speedo Holdings
B.V. has the right to approve any designs bearing the licensed trademark as
defined in the license agreements. The license agreements may be terminated,
with respect to a particular territory only in the event the Company does not
pay royalties for, or abandons, the trademark in such territory or in the event
the Company manufactures or is controlled by a company that manufactures
Racing/Competitive swimwear, swimwear caps or swimwear accessories, as
specifically defined in the license agreements, under a different trademark.
Speedo Holdings B.V. is an affiliate of Pentland. In addition, the Company has
certain rights to sublicense the Speedo'r' trademark within the geographic
regions covered by the licenses.
In 1992, the Company entered into an agreement with Speedo Holdings B.V.
granting certain irrevocable rights to the Company relating to the use of the
Authentic Fitness'r' name and service mark, which rights are in addition to the
rights under the license agreements with Speedo Holdings B.V.
In September 1993, the Company entered into a worldwide license agreement
with Oscar de la Renta Licensing Corporation for the design, manufacture and
marketing of women's and girls' swimwear and activewear under the Oscar de la
Renta'r' brand name. The agreement granting the exclusive right to use the Oscar
de la Renta'r' trademark is valid for a term up to and including March 31, 1999,
and provides for the payment of certain minimum royalty payments to be credited
against earned royalty payments for each agreement year.
Oscar de la Renta Licensing Corporation has the right to approve design
specifications of products bearing the licensed trademark, and also to approve
packaging and business materials to be used in connection therewith. The
agreement may be terminated if the licensee defaults, as defined in the
agreement, and such default is not remedied within thirty days, and as otherwise
expressly provided in the agreement.
In October 1993, the Company entered into a worldwide license agreement
with Anne Cole and Anne Cole Design Studio Ltd. Under the worldwide licensing
agreement, the Company obtained the exclusive right in perpetuity to use the
Anne Cole'r' trademark for women's swimwear, activewear, sportswear and
beachwear, and children's swimwear, subject to certain terms and conditions.
Under the license, the licensee is required to pay certain minimum guaranteed
annual royalties, to be credited against earned royalties, based on a percentage
of net sales. The licensor has the right to approve products bearing the
licensed trademark as defined in the agreement.
The Company owns other trademarks, the most important of which are White
Stag'r', Catalina'r', Sunset Beach'r', Sporting Life'r', Sandcastle'r' and Cole
of California'r'.
The Company licenses the White Stag'r' brand name to Warnaco in perpetuity
for women's and children's non-athletic sportswear pursuant to a licensing
agreement which is royalty free for so long as Warnaco is the licensee. In 1992,
the Company entered into a non-exclusive license agreement with Wal-Mart
pursuant to which Wal-Mart has the right to source, distribute and sell men's,
women's and children's activewear, skiwear and fashion swimwear under the White
Stag'r' brand name. The Company designs and develops products for Wal-Mart in
connection with this license agreement.
The Company licenses the Catalina'r' and Cole of California'r' brand names
to several international licensees for a variety of products. These agreements
generally require the licensee to pay royalties and fees to the Company based on
a percentage of the licensee's net sales. The Company monitors product design,
development, quality and merchandising of its licensees and meets with
individual licensees from time to time to assure compliance with the Company's
overall marketing, merchandising and design strategies. Royalties derived from
such licensing were approximately $0.1 million in fiscal 1996, $0.7 million in
fiscal 1995 and $0.7 million in fiscal 1994. In 1994, the Company entered into
an exclusive license agreement with Warnaco pursuant to which Warnaco has the
right to manufacture and distribute men's and women's sportswear under the
Catalina'r' brand name. In fiscal 1995 the Company granted to Warnaco a
sub-license to manufacture and market women's intimate apparel under the
Speedo'r' name. The Company recognized royalty income of approximately $0.8
million and $1.4 million (including a $1 million license fee received from
Warnaco) from these agreements in fiscal 1996 and 1995, respectively (none in
fiscal 1994) (See Note 12 of Notes to Consolidated Financial Statements).
8
The Company believes that only the trademarks mentioned herein are material
to the business of the Company.
BACKLOG
Backlog represents booked orders which, although terminable without
penalty, are believed by the Company to be firm. Because of the seasonality of
the Company's business, the Company's backlog varies over the course of the
year. Backlog usually peaks in November for swimwear. At September 30, 1996, the
Company's backlog was $48.3 million. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Seasonality.'
ITEM 2. PROPERTIES.
The principal executive offices of the Company are located at 6040 Bandini
Boulevard, Commerce, California 90040 and are occupied pursuant to a lease which
expires in 1999. The Company also maintains executive offices at 90 Park Ave.,
New York, New York 10016 and 11111 Santa Monica Blvd., Los Angeles, CA 90025.
The Company formerly occupied certain administrative offices at 7911 Haskell
Ave., Van Nuys, CA 91410, which were sub-leased from Warnaco. The Company
vacated the Van Nuys facility in September 1996 and the Company and Warnaco
cancelled the outstanding sub-lease agreement. The 90 Park Ave. and 11111 Santa
Monica properties are occupied on month to month leases from Warnaco.
The Company has seven manufacturing, distribution and administrative
facilities located in Sparks, Nevada (distribution facility), Los Angeles,
California, (one warehouse, administrative and manufacturing facility and two
manufacturing facilities), in Checotah, Oklahoma, (manufacturing facility),
Vancouver, British Columbia, Canada (manufacturing and distribution facility)
and Montreal, Quebec, Canada (distribution facility). Certain of the Company's
manufacturing and warehouse facilities are also used for administrative
functions. All of the Company's facilities are leased except the Checotah,
Oklahoma facility, which the Company owns. Lease terms expire from January 1997
to November 2003.
The Company leases 114 retail store locations including retail selling
space in 20 Bally's Health and Fitness Centers in various cities in the United
States and Canada. The leases expire from 1997 to 2007.
All of the Company's production and warehouse facilities are located in
appropriately designed buildings which are kept in good repair. All such
facilities have well maintained equipment and sufficient capacity to handle
present volumes. No significant facility is materially under utilized.
ITEM 3. LEGAL PROCEEDINGS.
On June 6, 1996, Warnaco and the Company announced that they were proposing
a merger in which the Company's common stock would be converted into Warnaco
common stock. Shortly thereafter, three purported class action lawsuits were
filed in Delaware Chancery Court against the Company and certain of its
directors challenging the proposed transaction. The complaints claimed that the
directors violated their fiduciary duties and sought injunctive relief enjoining
the proposed transaction and damages. On July 12, 1996, Warnaco and the Company
executed an Agreement and Plan of Merger.
On July 25, 1996, Warnaco and the Company terminated such Agreement. The
defendants were subsequently granted an indefinite extension of time to respond
to the complaints, and the Company is not aware of any other action taken by the
plaintiffs since the termination of the Agreement and Plan of Merger. The
Company believes that the complaints are without merit and, in light of the
termination of the proposed transaction, moot.
The Company is not a party to any other litigation, other than routine
litigation incidental to the business of the Company, which is individually or
in the aggregate material to the business of the Company other than the items
noted above.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages and their positions are
set forth below.
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
Linda J. Wachner................................... 50 Director, Chairman of the Board and Chief Executive
Officer
Susan Guensch...................................... 36 President Speedo'r' Division
Nicolette Sohl..................................... 46 Senior Vice President and Chief Financial Officer
William W. Chan.................................... 47 Vice President and Secretary
Mrs. Linda J. Wachner has been a Director, Chairman of the Board and Chief
Executive Officer of the Company since its inception in May 1990. Mrs. Wachner
concurrently serves as and has been a Director, President and Chief Executive
Officer of The Warnaco Group, Inc. ('Warnaco') since August 1987, and the
Chairman of the Board of Warnaco since August 1991. Mrs. Wachner was a Director
and President of Warnaco from March 1986 to August 1987. Mrs. Wachner held
various positions, including President and Chief Executive Officer, with Max
Factor and Company from December 1978 to October 1984. Mrs. Wachner also serves
as a Director of Travelers Group Inc. and Applied Graphics Technologies, Inc.
Ms. Guensch has been President of the Speedo'r' Division since July 1996.
Ms. Guensch joined the Company in June 1984 as Assistant Merchandiser for the
Speedo'r' Division and since that time has served in various positions of
increasing responsibility with the Company and its Predecessor.
Ms. Sohl has been the Senior Vice President and Chief Financial Officer of
the Company since April 1995 (except for the period from May 1996 until
September 1996 when Ms. Sohl served as Vice President and Controller of the
Company). Prior to that, Ms. Sohl served as the Senior Vice President and Chief
Financial Officer of the Olga Division of Warnaco from 1979 until April 1995.
From 1975 to 1979 Ms. Sohl was an internal auditor with Informatics, Inc. Prior
to that she was an auditor with Gold, Eisenberg, CPA's.
Mr. Chan has served as Vice President Finance and Secretary since November
1992, Senior Vice President and Chief Financial Officer of the Company from July
1993 to November 1993 and as Secretary of the Company since May 1992. Mr. Chan
served as Vice President of Finance of the Company from May 1990 to July 1993.
Prior to that, Mr. Chan was Vice President of Finance and Chief Financial
Officer of the Activewear Division of Warnaco. Mr. Chan has been with the
Company and its predecessors and has held various positions since 1971.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the New York Stock Exchange under
the symbol 'ASM'. The table below sets forth, for the periods indicated, the
high and low sales prices of the Company's common stock, as reported on the New
York Stock Exchange Composite Tape.
10
PERIOD HIGH(1) LOW(1)
- ---------------------------------------------------------------------------------- ------- ------
Fiscal 1994:
First quarter................................................................ 14 1/16 8 5/8
Second quarter............................................................... 16 12 1/2
Third quarter................................................................ 14 10 7/8
Fourth quarter............................................................... 16 12 5/8
Fiscal 1995:
First quarter................................................................ 15 3/4 13
Second quarter............................................................... 15 5/8 12
Third quarter................................................................ 16 1/8 11 7/8
Fourth quarter............................................................... 17 1/8 13 3/4
Fiscal 1996:
First quarter................................................................ 23 3/8 16 1/8
Second quarter............................................................... 23 1/8 18 1/8
Third quarter................................................................ 29 21
Fourth quarter............................................................... 28 17
Fiscal 1997:
First quarter through September 24, 1996..................................... 18 7/8 12
- ------------------
(1) All prices have been adjusted for the two for one stock split effective
February 10, 1994.
A recent last sales price for the shares of the Company's common stock as
reported on the New York Stock Exchange Composite Tape was 12 1/4 on September
24, 1996. On September 24, 1996 there were 162 holders of the Company's common
stock, based upon the number of holders of record and the number of individual
participants in certain security position listings.
The Company declared its initial quarterly cash dividend of 1.25[c] per
share on August 17, 1995, payable on October 2, 1995 to shareholders of record
on August 30, 1995. Since that time the Company has declared four successive
quarterly cash dividends of 1.25[c] per share.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated selected
consolidated financial data for Authentic Fitness Corporation. This information
should be read in conjunction with the consolidated financial statements
included elsewhere herein and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' The selected consolidated balance sheet
data for the Company as of June 28, 1992, July 3, 1993 and July 2, 1994 and the
selected consolidated financial data for the fiscal years ended June 28, 1992
and July 3, 1993 are derived from audited consolidated financial statements not
included herein. The selected consolidated financial data for the Company for
the fiscal years ended July 2, 1994, July 1, 1995 and July 6, 1996 and as of
July 1, 1995 and July 6, 1996 are derived from audited consolidated financial
statements included elsewhere herein. The fiscal years ended July 3, 1993 and
July 6, 1996 included 53 weeks of operations. The additional week of operations
is not considered material to the results of operations of the Company.
11
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
------------------------------------------------------------
JUNE 28, JULY 3, JULY 2, JULY 1, JULY 6,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $101,497 $132,944 $178,567 $266,133 $309,609
Gross profit.............................. 38,402 47,419 63,710 97,696 75,398
Selling, general and administrative
expenses................................ 18,519 25,168 32,902 52,578 91,723
Non-recurring items....................... 7,220 (a) -- 5,658(b) -- --
Herman's special bad debt loss............ -- -- -- -- 11,642(c)
Merger termination costs.................. -- -- -- -- 2,000(c)
Depreciation and amortization............. 2,735 2,778 4,338 6,549 15,462
-------- -------- -------- -------- --------
Income (loss) before interest and income
taxes................................... 9,928 19,473 20,812 38,569 (45,429)
Interest expense.......................... 9,624 4,253 4,400 6,977 11,547
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 304 15,220 16,412 31,592 (56,976)
Income taxes (benefit).................... 769 5,444 6,831 12,118 (17,623)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items................................... (465 ) 9,776 9,581 19,474 (39,353)
Extraordinary items....................... (3,892 )(d) -- (1,591)(e) -- (1,497)(f)
-------- -------- -------- -------- --------
Net income (loss)......................... $(4,357 ) $ 9,776 $ 7,990 $ 19,474 $(40,850)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per share:
Income (loss) per share before
extraordinary items..................... $ (0.04 ) $ 0.56 $ (0.49) $ 0.90 $ (2.00)
Extraordinary items....................... (0.34 )(d) -- (0.08)(e) -- (0.08)(f)
-------- -------- -------- -------- --------
Net income (loss) per share............... $ (0.38 ) $ 0.56 $ (0.41) $ 0.90 $ (2.08)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of shares of
common stock outstanding................ 11,494 17,488 19,724 21,712 19,607(g)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Divisional summary:
Net revenues:
Speedo'r'............................. $87,354 $102,898 $113,138 $143,991 $161,920
Designer Swimwear..................... -- -- 28,739 68,572 80,695
Authentic Fitness'r' Retail........... -- 426 4,620 20,418 38,135
White Stag'r'/Skiwear................. 14,143 29,620 32,070 33,152 28,859
-------- -------- -------- -------- --------
$101,497 $132,944 $178,567 $266,133 $309,609
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Percentage of net revenues:
Speedo'r'............................. 86.1 % 77.4% 63.3% 54.1% 52.3%
Designer Swimwear..................... -- -- 16.1 25.8 26.1
Authentic Fitness'r' Retail........... -- 0.3 2.6 7.7 12.3
White Stag'r'/Skiwear................. 13.9 22.3 18.0 12.4 9.3
-------- -------- -------- -------- --------
100.0 % 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working Capital....................... $20,685 $ 27,370 $ 54,580 $ 66,051 $ 50,373
Total assets.......................... 137,073 118,122 197,602 278,239 281,466
Long-term debt (excluding current
maturities)......................... 26,000 21,500 19,191 32,446 49,432
Stockholders' equity.................. 47,764 56,978 121,690 141,908 116,723
- ------------------
(a) Includes $6.7 million of non-recurring compensation expense paid upon the
closing of the Company's initial public offering and $0.5 million of
accrued costs associated with the relocation of two Canadian facilities.
(footnotes continued on next page)
12
(footnotes continued from previous page)
(b) Non-recurring expenses include bonuses paid to senior executives in
connection with the acquisition of Catalina/Cole (See Note 2 of Notes to
Consolidated Financial Statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations) and the disposition of
certain assets of $2.8 million, expenses and bonus related to the
modifications and extension of the Chairman's employment agreement of $1.2
million and the write-off of certain new product development and retail
division start-up costs of $1.7 million.
(c) Includes a special bad debt loss of $11,642,000 related to the write-off of
uncollectable accounts receivable and the write-down in the value of
Herman's common stock received as a distribution to creditors as part of
the settlement from Herman's March 1993 bankruptcy. Includes $2,000,000 of
expenses incurred by the Company in the fourth quarter of fiscal 1996
related to the terminated merger with Warnaco. See Note 11 of Notes to
Consolidated Financial Statements.
(d) Reflects the write-off of deferred financing costs and original issue
discount related to certain indebtedness repaid with the proceeds of the
Company's initial public offering.
(e) Reflects the write-off of deferred financing costs related to certain
indebtedness repaid with the proceeds of the Company's public offering in
December 1993 and the refinancing of the Company's revolving and term debt
in April 1994. See Note 6 of Notes to Consolidated Financial Statements.
(f) Reflects the write-off of deferred financing costs related to certain
indebtedness and the refinancing of the Company's credit agreement in March
1996. See Note 6 of Notes to Consolidated Financial Statements.
(g) Does not include effect of common stock equivalents (options and warrants)
as the effect on net loss per share is anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's strategy is to leverage its leading brand names by expanding
its channels of distribution and extending its product lines. Key elements of
this strategy include opening Company-owned Authentic Fitness'r' retail stores,
expanding its product offerings through mass merchandisers and entering
international markets. The Company's accomplishments over the past three years
include (i) the successful transition of the Speedo'r' brand through line
extensions from a highly focused competitive swimwear brand to a complete active
fitness brand, (ii) the repositioning of White Stag'r' as an activewear,
outerwear and swimwear brand for the mass merchandise market and (iii) the
opening of 114 Company-owned Speedo'r' Authentic Fitness'r' retail stores
through September 24, 1996, which has resulted in a new channel of distribution
for Speedo'r' and Speedo'r' Authentic Fitness'r' products, (iv) the acquisition
of the Catalina'r', Cole of California'r' and Anne Cole'r' swimwear brands and
(v) the signing of a licensing agreement to manufacture and distribute Oscar de
la Renta'r' swimwear and activewear worldwide.
Due primarily to the successful implementation of its business strategies,
the Company increased net revenues to $309.6 million in fiscal 1996 from $85.5
million in fiscal 1991, a compound annual growth rate of 29.4%.
RESULTS OF OPERATIONS
Consistent with the Company's goal of reducing operating expenses and
focusing its efforts on its core, high-growth swimwear and Authentic Fitness'r'
Retail Store businesses, in May 1996 the Company made a strategic decision to
close its closeout outlet stores ('Outlet Stores'). The Outlet Stores
represented less than 4% of the Company's net revenues in fiscal 1996 and have
not been profitable for the last two years. The difficulty has been trying to
sell excess swimwear year round which wasted manufacturing efficiency. Losses
related to the operations of the Outlet Stores of approximately $12.4 million in
fiscal 1996 include operating losses, inventory losses and the write down of
assets related to the Outlet Stores' to net realizable value.
In addition, in May 1996, the Company made a strategic decision to exit the
skiwear business. The skiwear industry is extremely volatile, very promotional
and highly dependent on the weather and the overall economy with many of its
retail outlets small and undercapitalized. The Company's skiwear
13
business was largely dependent on one major customer, Herman's, which announced
its liquidation in May 1996. In addition, the skiwear business is highly
seasonal and requires substantial amounts of working capital that the Company
believes can be more effectively utilized in its rapidly growing Speedo'r',
Designer Swimwear and Authentic Fitness'r' Retail Store divisions. The Company's
skiwear business accounted for approximately $13.8 million of net revenues in
fiscal 1996. Losses related to skiwear business of approximately $15.5 million
in fiscal 1996 include operating losses incurred during fiscal 1996, inventory
losses and the write down of assets related to the skiwear business including
intangible assets and goodwill, to net realizable value.
Herman's Sporting Goods, Inc. ('Herman's') filed for bankruptcy on April
26, 1996 and on May 2, 1996 announced their liquidation. As a result, the
Company recorded a special bad debt loss of $11,642,000 related to the write-off
of uncollectible accounts receivable and the write down in the value of Herman's
common stock received as a distribution to creditors as part of the settlement
from Herman's March 1993 bankruptcy. The special bad debt loss is net of gross
recoveries from the Company's credit insurance policy of approximately
$4,600,000.
On June 6, 1996, Warnaco and the Company announced that they were proposing
a merger in which the Company's common stock would be converted into Warnaco
common stock ('Proposed Merger'). On July 12, 1996 Warnaco and the Company
executed an Agreement and Plan of Merger. On July 25, 1996 Warnaco and the
Company terminated the Proposed Merger. The Company incurred certain investment
banking, legal and other fees in connection with the proposed merger amounting
to approximately $2.0 million.
The Company has experienced extraordinary growth in its operations over the
last several years due in large part to the successful implementation of the
Company's business strategies, the acquisition of Catalina/Cole and the
expansion of the Company's fashion swimwear lines and the highly successful
expansion of the Company's Authentic Fitness'r' Retail Stores. However, the
bankruptcy of Herman's, one of the Company's largest customers, has caused
significant and severe dislocation and disruption in the markets in which the
Company operates.
In view of the above described growth and market conditions, the Company
completed an extensive review and evaluation of its accounts receivable,
inventory and other accounts and, as a result, the Company provided additional
reserves of $18.7 million which relate to and will be reflected in the Company's
fiscal 1996 second and third quarter results.
The adjustments are summarized below (in thousands):
COST OF SELLING, GENERAL AND
GOODS SOLD ADMINISTRATIVE EXPENSES TOTAL
---------- ----------------------- -------
Accounts receivable and other provisions............... $ -- $ 5,509 $ 5,509
Inventory reserves..................................... 13,227 -- 13,227
---------- ------- -------
$ 13,227 $ 5,509 $18,736
---------- ------- -------
---------- ------- -------
See Note 17 of Notes to Consolidated Financial Statements for the impact of
these items on the Company's interim financial results for fiscal 1996.
The table below summarizes certain operating information for the Company
for each of the last three fiscal years. The operating results for fiscal 1996
have been adjusted to segregate losses and expenses associated with skiwear, the
Outlet Stores, Herman's and the terminated merger with Warnaco from the other
operations of the Company. This supplemental information should be read in
conjunction with the Consolidated Financial Statement and Notes thereto provided
elsewhere herein. The Company has also separately identified the impact of the
incremental inventory and accounts receivable reserves on the results of
operations for fiscal 1996.
14
STATEMENT OF OPERATIONS
(SELECTED DATA)
FISCAL YEAR ENDED
-----------------------------------------------------------------
JULY 2, % OF NET JULY 1, % OF NET JULY 6, % OF NET
1994 REVENUES 1995 REVENUES 1996 REVENUES
------- -------- ------- -------- ------- --------
(IN MILLIONS)
Net revenues....................................... $ 178.6 100.0% $ 266.1 100.0% $ 309.6 100.0%
Gross profit -- as adjusted for items below........ 63.7 35.7% 97.7 36.7% 97.3 31.4%
Selling, administrative and general expenses -- as
adjusted for items below......................... 32.9 18.4% 52.6 19.8% 83.6 27.0%
Depreciation and amortization...................... 4.4 6.5 7.3
Income before extraordinary items -- as adjusted
for items below.................................. 13.2 19.4 2.2
Other items:
Non-recurring items................................ 5.6 -- --
Herman's bad debt loss............................. -- -- 11.6
Merger costs....................................... -- -- 2.0
Exit costs related to skiwear...................... -- -- 15.5
Exit costs related to Outlet Stores................ -- -- 12.4
Inventory, accounts receivable and other reserve
adjustments...................................... -- -- 18.7
Net income loss.................................... $ 8.0 $ 19.4 $ (40.8)
------- ------- -------
------- ------- -------
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Net revenues increased 16.3% in fiscal 1996 to $309.6 million from $266.1
million in fiscal 1995. The increase in net revenues is a result of an increase
in Speedo'r' Division net revenues of 12.5%, Designer Swimwear Division net
revenues of 17.7%, and Retail Division net revenues of 86.8%. White
Stag'r'/Skiwear Division net revenues decreased 12.9% due to a decrease in
skiwear net revenues of $8.0 million (36.7%) partially offset by an increase in
shipments of White Stag'r' products to Wal-Mart. The increase in Speedo'r' net
revenues is primarily a result of increases in Fitness swimwear of 46%,
Speedo'r' kids of over 100% and men's swimwear of 29.8% partially offset by a
decrease in accessories. The increase in Designer Swimwear Division net revenues
reflects increases in Catalina'r' shipments to Wal-Mart of over 100%, an
increase in Cole of California'r' of 28.6% and Anne Cole'r' of 15.1%. The
increase in Retail Division sales reflects the increase in the number of stores
from 68 at the end of fiscal 1995 to 104 at the end of fiscal 1996. In
addition, Retail Division same store sales increased approximately 6.9% in
fiscal 1996 compared to fiscal 1995. The decrease in skiwear net
revenues primarily reflects decreased shipments to Herman's which
accounted for approximately 33% of shipments of skiwear products in
fiscal 1995.
Gross profit in fiscal 1996 decreased to $75.4 million from the $97.7
million in fiscal 1995. Gross profit as a percentage of net revenues was 24.4%
in fiscal 1996 compared to 36.7% in fiscal 1995. Gross profit for fiscal 1996
includes approximately $21.9 million of gross profit losses attributable to
skiwear, outlet stores and the incremental inventory reserve adjustments. Fiscal
1996 gross profit before the impact of these items was $97.3 million or 31.4% of
net revenues. The decrease in gross profit as a percentage of net revenues in
1996 compared to 1995 reflects the significant and severe dislocation and
disruption of the Company's markets caused by the Herman's bankruptcy and
liquidation of Speedo'r' inventory at distressed prices which resulted in a 21%
deterioration in gross margin in the fourth quarter of fiscal 1996 and early
markdowns taken in the Designer Swimwear Division.
Selling, general and administrative expenses for fiscal 1996 increased to
$91.7 million (29.6% of net revenues) from $52.6 million (19.7% of net revenues)
in fiscal 1995. The increase in selling, general and administrative expenses for
fiscal 1996 includes $8.1 million related to the decision to exit the skiwear
and outlet store businesses and the impact of the accounts receivable and other
allowances recorded by the Company in fiscal 1996. Selling, general and
administrative expenses before the impact of these items
15
for fiscal 1996 was $83.6 million (27.0% of net revenue). The increase in
selling, general and administrative expenses in 1996 compared to fiscal 1995
reflects higher variable expenses related to the higher sales volume, primarily
from the Authentic Fitness'r' Retail Division and an increase of over $6 million
in marketing expenses leading to the 1996 Olympics in Atlanta and the Inner City
Games. The increase in selling, general and administrative expenses as a
percentage of net revenues reflects higher Authentic Fitness'r' Retail Division
sales which require a higher level of selling expenses than the wholesale
divisions increased marketing expenses as noted above and excess distribution
costs due to shipping inefficiencies in the fourth quarter.
Depreciation and amortization expense increased to $15.5 million in fiscal
1996 from $6.5 million in fiscal 1995. The increase in depreciation and
amortization expenses reflects the amortization of and write-off of goodwill and
intangible assets related to the skiwear and outlet store businesses of $8.2
million. The remaining increase in depreciation and amortization expenses of
$0.7 million primarily reflects amortization of leasehold assets attributable to
the increased number of Authentic Fitness'r' Retail Stores compared to fiscal
1995. Depreciation and amortization expense in fiscal 1996 before the impact of
the skiwear and outlet store businesses was $7.3 million.
Interest expense increased to $11.5 million in fiscal 1996 from $7.0
million in fiscal 1995. Interest expense includes approximately $1.0 million
related to the carrying cost of working capital for the skiwear and outlet store
operations. Interest expense before the $1.0 million related to skiwear and the
outlet stores was $10.5 million. The Company expects that the strategic decision
to exit these businesses will release working capital to be invested in the
Company's core swimwear and Authentic Fitness'r' Retail Stores divisions. The
increase in interest expense reflects higher working capital requirements to
support the 16.5% increase in net revenue in fiscal 1996 compared to fiscal 1995
and an increase in the Company's borrowing rate from LIBOR plus .75% to LIBOR
plus 1.75% related to the Bridge Loan. See Note 6 of Notes to Consolidated
Financial Statements.
The Company's effective income tax benefit rate for fiscal 1996 was
approximately 31% compared to a provision of 38.4% in fiscal 1995. The Company's
effective tax rate for 1996 reflects the recognition of tax benefits available
to the Company from the carry back of the Company's net operating loss for
fiscal 1996 to prior years and a reduction in previously provided deferred
taxes. The Company recorded a deferred income tax asset related to the future
benefit of net operating loss carryforwards of approximately $3.5 million in
fiscal 1996. The deferred tax asset has been fully reserved by a valuation
allowance. Future benefits associated with the Company's net operating loss
carryforward will be realized as the Company realizes taxable income.
Income before extraordinary and other items was $2.2 million in fiscal 1996
compared to $19.4 million in fiscal 1995. The decrease reflects the higher
selling general and administrative expense and interest expense, as noted
above.
In the third quarter of fiscal 1996, the Company recorded an extraordinary
item of $1.5 million (net of income tax benefit of $0.7 million) related to the
write off of deferred financing costs due to the early extinguishment of debt.
The net loss of $(40.8) million for fiscal 1996 includes losses related to
the skiwear and outlet store businesses, the write-off of expenses related to
the proposed merger, the Herman's bad debt loss and the incremental inventory
and accounts receivable reserves.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Net revenues increased 49.0% to $266.1 million from $178.6 million in
fiscal 1994. The increase in net revenues is a result of increases in Speedo'r'
Division net revenues of 27.3%, Designer Swimwear Division net revenues of
138.6%, Retail Division net revenues of $15.8 million and a slight increase in
White Stag'r'/Skiwear Division net revenues. The increase in Speedo'r' net
revenues reflects increases in all categories. Speedo'r' is the dominant
competitive swimwear brand with a nearly a 60% market share in 1995 compared to
48% last year and continues to be the number one brand in men's swimwear with a
25% market share, nearly twice its nearest competitor. The increase in Designer
Swimwear net revenues reflects the full booking and shipping season in fiscal
1995 compared to nine months in fiscal 1994, as well as strong selling of our
brands at retail where two of our brands were top ten sellers. The increase in
Retail Division net revenues reflects the increase in the number of stores from
sixteen at the end of fiscal 1994 to sixty-eight at the end of fiscal 1995.
White Stag'r'/Skiwear Division net revenues increased despite the weak ski
season and our decision to reduce certain lower margin businesses compared to
16
last year. The Company expects that the Designer Swimwear and Retail Stores
Divisions will contribute a higher percentage of the Company's net revenues in
future periods.
Gross profit for the fiscal year increased 53.3% to $97.7 million from the
$63.7 million reported in fiscal 1994. Gross profit as a percentage of net
revenues was 36.7% in fiscal 1995 an improvement of 100 basis points over the
35.7% in fiscal 1994. The increase in gross profit primarily reflects the higher
sales volume noted above. The increase in gross profit as a percentage of net
revenues reflects the increased level of Retail Division sales which generate a
higher gross profit margin than the wholesale divisions.
Selling, administrative and general expenses increased to $52.6 million
(19.7% of net revenues) in fiscal 1995 from $32.9 million (18.4% of net
revenues) in fiscal 1994. The increase in selling, general and administrative
expenses primarily reflect the higher sales volume noted above. The increase in
selling, general and administrative expenses as a percentage of net revenues
reflects higher Retail Division sales which require a higher level of selling
expenses as a percentage of net revenues than the wholesale divisions.
Depreciation and amortization expense of $6.5 million increased $2.2
million from the $4.3 million reported in fiscal 1994. The increase in
depreciation and amortization expense reflects the amortization of goodwill and
intangible assets attributable to the Catalina/Cole Acquisition for a full year
in fiscal 1995 compared to nine months in fiscal 1994 and an increase in
depreciation expense associated with the investment in fixed assets for the
Retail Division.
Interest expense increased to $7.0 million in fiscal 1995 compared to $4.4
million in fiscal 1994. The increase in interest expenses reflects a 200 basis
point increase in interest rates in fiscal 1995 compared to fiscal 1994, the
roll-out of the Retail Division and higher working capital requirements to
support the net revenue increase of 49.0% and EBITDA increase of 46.5% in fiscal
1995 compared to fiscal 1994.
In the second quarter of fiscal 1994 (last fiscal year) the Company
recorded non-recurring items totalling $5.7 million (before income tax benefits)
related to the Catalina Cole Acquisition, the write-off of certain start-up
costs related to the Retail Division and certain costs related to the
development of a new product for the fitness market place.
The provision for income taxes increased to $12.1 million in fiscal 1995
from $6.8 million in fiscal 1994. The Company's effective tax rate for fiscal
1995 was 38.4% in fiscal 1995 compared to the U.S. statutory rate of 35%. The
difference between the statutory rate and the Company's annual effective rate
primarily reflects the impact of state income taxes.
Net income increased to $19.5 million ($.90 per share) in fiscal 1995
compared to income before non-recurring and extraordinary items of $13.2 million
($0.67 per share) in fiscal 1994. The increase in net income in fiscal 1995
compared to the fiscal 1994 reflects increased operating income of $12.1 million
partially offset by higher interest expense and income taxes.
CAPITAL RESOURCES AND LIQUIDITY
On September 6, 1996, the Company entered into a $200 million Credit
Agreement (the '$200 Million Credit Agreement'), which replaced the Company's
previous $250 million Credit Agreement. The decrease in the total amount of the
credit agreement reflects the Company's intent not to exercise their option to
repurchase the remaining portion of the Series A Warrant from GE Capital
representing 1.8 million shares at $24 per share. The option expires in March
1997. The $200 Million Credit Agreement is for a term of five years and provides
for a term loan (the 'Term Loan') in the amount of $50 million and a revolving
loan facility (the 'Revolving Loan') in the amount of $150 million. Borrowing
under the $200 Million Credit Agreement accrues interest at the lenders base
rate or at LIBOR plus 1.5%. The rate of interest payable on outstanding
borrowing will be automatically reduced, after June 30, 1997 to as low as LIBOR
plus .75%, as the Company's EBITDA to Debt ratio improves to prior year levels.
In addition the agreement allows the Company to repurchase up to $10 million
of its own Common Stock after March 31, 1997, under certain conditions.
On September 13, 1995 the Company purchased from General Electric Capital
Corporation ('GE Capital') one-half of a warrant to acquire 3,618,358 shares of
the Company's common stock at $.005 per share (the 'Series A Warrant') for
$36,183,580 or $20 per share (representing 1,809,179 shares). The purchase of
the Series A Warrant was funded with the proceeds of a five-year bridge loan
(the'Bridge Loan') provided under the Company's Credit Agreement which was
subsequently repaid from the proceeds of the Company's sale of common stock in
October 1995. (See Notes 6, 7 and 8 of Notes to Consolidated Financial
Statements). In the first quarter of fiscal 1997 GE Capital exercised the Series
A Warrant and the Company issued 1,809,179 shares of common stock.
17
On October 17, 1995 the Company sold 2,500,000 shares of common stock in an
underwritten public offering at a sales price of $21.625 per share. Net proceeds
from the offering were approximately $50,805,000 (after underwriting discounts
and expenses of $3,258,000). Proceeds from the offering were used to repay the
amounts outstanding under the Bridge Loan and to repay amounts outstanding under
the Company's term loan.
On August 16, 1995 the Company's Board of Directors declared the Company's
initial cash dividend, payable on October 2, 1995 to shareholders of record on
August 30, 1995 of 1 1/4[c] per share, equivalent to an annual rate of 5[c] per
share. The Company expects that the initiation of a regular quarterly cash
dividend will help broaden the Company's shareholder base.
The Company believes that the repurchase of one half of the Series A
Warrant and the initiation of a regular cash dividend demonstrate the Company's
ongoing commitment to increase shareholder value.
The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional retail stores. The Company currently has
114 stores open, including 20 stores in Bally's Health and Fitness Centers
('Bally's'), and expects to open approximately 200 additional stores over the
next six years. The cost of leasehold improvements, fixtures and the additional
working capital associated with the opening of an average new store is expected
to be approximately $250,000.
The Company's liquidity requirements have historically arisen primarily
from its debt service requirements and the funding of the Company's working
capital needs, primarily inventory and accounts receivable. The Company's
borrowing requirements are seasonal, with peak working capital needs generally
arising at the end of the third quarter and the beginning of the fourth quarter
of the fiscal year. The Company typically generates nearly all of its operating
cash flow in the fourth quarter of the fiscal year reflecting third and fourth
quarter shipments and the sale of inventory built during the first half of the
fiscal year. The acquisition of Catalina/Cole has impacted this seasonal trend.
The women's fashion swimwear business is seasonal as merchandise is manufactured
in the summer and fall months for shipment to department and specialty stores on
regular 30 day terms in the period from November to mid-April. This
manufacturing and shipping pattern has increased the Company's investment in
working capital, primarily inventory and accounts receivable during the
Company's first and second fiscal quarters, nearly all the cash flow from the
designer swimwear business is generated in the fourth quarter of the fiscal
year.
The Company meets its seasonal working capital needs by utilizing amounts
available under its revolving line of credit. The Company has amended and
increased its lines of credit several times in the last two years, primarily to
support the growth of its swimwear divisions and to fund the rapid rollout of
the retail stores.
Cash used by operating activities in fiscal 1996 was $(40.2) million
compared to cash used in operations of $(15.8) million in fiscal 1995. The
increase in cash used by operating activities in fiscal 1996 reflects the
Company's net loss of $(40.8) million in fiscal 1996.
The Company believes that funds available under its current $200 Million
Credit Agreement, as noted above, combined with cash flow to be generated from
future operations will be sufficient for the operations of the Company,
including debt service, dividend payments and costs associated with the
expansion of its Authentic Fitness'r' Retail Division for at least the next
twelve months. Although the Company believes that its current credit agreement
and cash flow to be generated from future operations will also be sufficient for
its long-term operations (periods beyond the next twelve months) circumstances
may arise that would require the Company to seek additional financing. In those
circumstances the Company expects to evaluate potential additional sources of
funds, for example, sales of additional common stock and expanded or additional
bank credit facilities.
SEASONALITY
The Company's operations are seasonal. In fiscal 1996, approximately 61% of
the Company's net revenues were generated in the second half of the fiscal year
and substantially all of the Company's cash flow from operating activities is
generated in the fourth quarter of the fiscal year.
18
The following table summarizes the net revenues of the Company for each of
the quarters in the last two fiscal years.
THREE MONTHS ENDED ON
------------------------------------------------------------------------------------
(IN MILLIONS)
OCT 2, JAN 1, APRIL 1, JULY 1, OCT 1, DEC 31, MARCH 31, JULY 6,
1994 1995 1995 1995 1995 1995 1996 1996
------ ------ -------- ------- ------ ------- --------- -------
Net revenue............................ $ 37.6 $ 56.3 $ 74.8 $97.4 $ 42.9 $77.3 $98.9 $90.5
The Speedo'r' Division produces a variety of products during the year and
is seasonal in nature with 60% of net revenues realized in the second half of
fiscal 1996. The Designer Swimwear Division is seasonal in nature, most
customers orders are placed in the July through December period and the product
is shipped to customers starting in November. In fiscal 1996, 70% of net
revenues for the Designer Swimwear Division were realized in the second half of
the year. The Company's Retail Stores Division is somewhat seasonal. For the 68
stores open for the full 12 months of fiscal 1996, 47% of those stores' sales
were realized in the second half of the fiscal year.
INFLATION
The Company does not believe that the relatively moderate levels of
inflation which have been experienced in the United States and Canada have had a
significant effect on its net revenues or its profitability. In the past, the
Company has been able to offset such effects by increasing prices or by
instituting improvements in efficiency.
IMPACT OF NEW ACCOUNTING STANDARDS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, 'Accounting for Stock Issued to Employees,' and intends to
continue to do so. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, 'Accounting for
Stock Based Compensation' ('FAS 123'). FAS 123 established a fair value-based
method of accounting for compensation cost related to stock options and other
forms of stock-based compensation awards. However, FAS 123 allows an entity to
continue to measure compensation costs using the principles of APB 25 if certain
pro forma disclosures are made. FAS 123 is effective for fiscal years beginning
after December 15, 1995 (the Company's 1997 fiscal year). The Company intends to
disclose the information required by FAS 123 beginning with its 1997 fiscal
year.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company will adopt FAS 121 effective
with its 1997 fiscal year. The Company does not believe that the adoption of FAS
121 will have a material impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is herein incorporated by reference
from page 10 of Part I included herein and the Proxy Statement of the Company.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is herein incorporated by reference
from the Proxy Statement of the Company.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements of Authentic Fitness Corporation
Report of Independent Auditors
Consolidated Balance Sheets as of July 1, 1995 and July 6, 1996
Consolidated Statements of Operations for the Years Ended July 2, 1994, July 1, 1995 and July 6,
1996
Consolidated Statement of Stockholders' Equity for the Years Ended July 2, 1994, July 1, 1995 and
July 6, 1996
Consolidated Statements of Cash Flows for the Years ended July 2, 1994, July 1, 1995 and July 6,
1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other financial statement schedules are omitted because they are
not applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
3(a). Exhibits:
3.1** Restated Certificate of Incorporation of the Registrant.
3.2** Bylaws of the Registrant.
10.1* Management Stock Subscription Agreement dated May 11, 1990 among the registrant and the
Management Participants listed therein.
10.2** Amendment to Management Stock Subscription Agreement dated as of June 1, 1992 among the
registrant and the Management Participants listed therein.
10.3* Registration Rights Agreement dated as of May 14, 1990 among the registrant and the
Management Participants listed therein.
10.4** Amendment to Registration Rights Agreement dated as of June 1, 1992 among the registrant,
Warnaco Inc., Pentland Ventures Ltd. and the Management Participants listed therein.
10.5* Series A Warrant for 633,200 shares of Class A Common Stock of the Registrant (1,809,179
shares of Class A Common Stock as adjusted for the 2.8572-for-1 stock split) issued to
General Electric Capital Corporation.
10.6** Amendment to Series A Warrant dated as of June 1, 1992 between the registrant and General
Electric Capital Corporation.
10.7*`D' License Agreement dated May 10, 1990 among Speedo International Limited, Speedo
International B.V., Warnaco Inc. and Warnaco International Inc. and related assignments to
Authentic Fitness Products, Inc. (formerly S Acquisition Corp.) (United States, its
territories and possessions, and Canada).
10.8*`D' License Agreement dated May 10, 1990 among Speedo Knitting Mills Pty. Limited, Warnaco Inc.
and Warnaco International Inc. and related assignments to Authentic Fitness Products, Inc.
(formerly S Acquisition Corp.) (Mexico and the Caribbean Islands).
10.9* Buying Agency Agreement dated as of May 14, 1990 among Authentic Fitness Products, Inc.
(formerly S Acquisition Corp.), 171173 Canada Inc., Asco International Sourcing Limited and
Soaring Force Limited.
20
10.10* Amendment to Buying Agency Agreement dated as of June 1, 1992 among Authentic Fitness
Products, Inc. (formerly S Acquisition Corp.), 171173 Canada Inc., Asco International
Sourcing Limited and Soaring Force Limited.
10.11** Employment Agreement ('Employment Agreement') dated as of July 2, 1992 between the
registrant and Linda J. Wachner.
10.12*** First Amendment to Employment Agreement.
10.13* Incentive Compensation Plan.
10.14* 1990 Key Management Stock Option Plan.
10.15****** 1992 Long Term Stock Incentive Plan.
10.16***** 1993 Stock Option Plan for Non-Employee Directors.
10.17* Form of Indemnification Agreements between the Registrant and its directors and executive
officers.
10.18 $200,000,000 Credit Agreement Dated as of September 6, 1996 among Authentic Fitness
Products, Inc., as Borrower, and Authentic Fitness Corporation and The Bank of Nova Scotia
and General Electric Capital Corporation as Agents, and The Bank of Nova Scotia, as
Administrative Agent, Swing Line Bank and Fronting Bank, and General Electric Capital
Corporation as Documentation Agent and Collateral Agent.
11.1 Calculation of Income (Loss) per common share.
21.1***** Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
28.1** Amended and Restated Stockholders Agreement dated as of June 1, 1992 among the registrant,
Pentland Ventures Ltd., General Electric Capital Corporation, Warnaco Inc. and the
Management Participants listed therein.
* Incorporated herein by reference to the Company's Registration Statement
on Form S-1, No. 33-47907.
** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended July 3, 1993.
*** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended July 2, 1994.
**** Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the period ended April 2, 1994.
**** Incorporated herein by reference to the Company's Registration Statement
on Form S-3 No. 33-71540.
****** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended July 1, 1995.
`D' Confidential treatment granted.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant in the last quarter of
fiscal 1996.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 4th day of
October, 1996.
AUTHENTIC FITNESS CORPORATION
By: /S/ LINDA J. WACHNER
_______________________________
Linda J. Wachner
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
/s/ LINDA J. WACHNER Chairman of the Board of Directors; Chief October 4, 1996
- ------------------------------------------ Executive Officer (Principal Executive
(LINDA J. WACHNER) Officer)
/s/ NICOLETTE SOHL Senior Vice President and Chief Financial October 4, 1996
- ------------------------------------------ Officer (Principal Financial and Accounting
(NICOLETTE SOHL) Officer)
/s/ STANLEY S. ARKIN Director October 4, 1996
- ------------------------------------------
(STANLEY S. ARKIN)
/s/ STUART D. BUCHALTER Director October 4, 1996
- ------------------------------------------
(STUART D. BUCHALTER)
/s/ JOSEPH A. CALIFANO, JR. Director October 4, 1996
- ------------------------------------------
(JOSEPH A. CALIFANO, JR.)
/s/ WILLIAM S. FINKELSTEIN Director October 4, 1996
- ------------------------------------------
(WILLIAM S. FINKELSTEIN)
/s/ ROBERT D. WALTER Director October 4, 1996
- ------------------------------------------
(ROBERT D. WALTER)
22
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Authentic Fitness Corporation
We have audited the accompanying consolidated balance sheets of the
Authentic Fitness Corporation as of July 1, 1995 and July 6, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended July 2, 1994, July 1, 1995 and July 6, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Authentic Fitness Corporation at July 1, 1995 and July 6, 1996, and the
consolidated results of its operations and its cash flows for the years ended
July 2, 1994, July 1, 1995 and July 6, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
October 2, 1996
F-1
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
JULY 1, JULY 6,
1995 1996
-------- --------
ASSETS
Current assets:
Cash................................................................................. $ 772 $ 1,499
Account receivable -- net of allowances of $4,119 -- 1995 and $9,361 -- 1996......... 71,410 75,274
Accounts receivable from affiliates.................................................. 9,687 4,004
Inventories.......................................................................... 73,003 64,777
Prepaid expenses..................................................................... 7,636 10,154
Income tax refunds receivable........................................................ -- 9,556
-------- --------
Total current assets............................................................ 162,508 165,264
Property, plant and equipment, net of accumulated depreciation of $5,891 -- 1995 and
$11,062 -- 1996......................................................................... 35,185 42,786
Deferred financing costs, net of accumulated amortization of $440 -- 1995 and
$3,001 -- 1996.......................................................................... 1,416 994
Licenses, trademarks and other assets, net of accumulated amortization of $13,355 -- 1995
and $20,022 -- 1996..................................................................... 42,465 41,699
Excess of cost over net assets acquired, net of accumulated amortization of $3,617 -- 1995
and $9,558 -- 1996...................................................................... 36,665 30,723
-------- --------
$278,239 $281,466
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Borrowing under revolving credit facility............................................ $ 36,787 $ 68,214
Current maturities of long-term debt................................................. 7,388 2,844
Accounts payable..................................................................... 26,957 21,550
Payable to affiliates................................................................ 12,899 14,132
Other accrued expenses............................................................... 4,937 8,151
Accrued income taxes................................................................. 7,489 --
-------- --------
Total current liabilities....................................................... 96,457 114,891
Long-term debt............................................................................ 32,446 49,432
Deferred income taxes..................................................................... 7,428 420
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 15,000,000 shares authorized -- none outstanding
Common stock, $.001 par value, shares authorized 60,000,000; outstanding
17,789,104 -- 1995 and 20,524,721 -- 1996........................................... 18 21
Additional paid-in capital........................................................... 112,078 159,239
Cumulative translation adjustment.................................................... (740) (723)
Retained earnings (deficit).......................................................... 30,552 (41,814)
-------- --------
Total stockholders' equity...................................................... 141,908 116,723
-------- --------
$278,239 $281,466
-------- --------
-------- --------
See accompanying notes.
F-2
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
FOR THE FISCAL YEARS ENDED
----------------------------------
JULY 2, JULY 1, JULY 6,
1994 1995 1996
-------- -------- --------
Net revenues.............................................................. $178,567 $266,133 $309,609
Cost of goods sold........................................................ 114,857 168,437 234,211
-------- -------- --------
Gross profit.............................................................. 63,710 97,696 75,398
Selling, general and administrative expenses.............................. 32,902 52,578 91,723
Non-recurring items....................................................... 5,658 -- --
Herman's special bad debt loss............................................ -- -- 11,642
Merger termination costs.................................................. -- -- 2,000
Depreciation and amortization............................................. 4,338 6,549 15,462
-------- -------- --------
Income (loss) before interest and income taxes............................ 20,812 38,569 (45,429)
Interest expense.......................................................... 4,400 6,977 11,547
-------- -------- --------
Income (loss) before income taxes......................................... 16,412 31,592 (56,976)
Provision (benefit) for income taxes...................................... 6,831 12,118 (17,623)
-------- -------- --------
Income (loss) before extraordinary items.................................. 9,581 19,474 (39,353)
Extraordinary items, net of income tax benefits of $926 -- 1994 and
$705 -- 1996............................................................ (1,591) -- (1,497)
-------- -------- --------
Net income (loss)......................................................... $ 7,990 $ 19,474 $(40,850)
-------- -------- --------
-------- -------- --------
Net income (loss) per share:
Income (loss) before extraordinary items............................. $0.49 $0.90 $(2.00)
Extraordinary items.................................................. (0.08) -- (0.08)
-------- -------- --------
Net income (loss)......................................................... $0.41 $0.90 $(2.08)
-------- -------- --------
-------- -------- --------
Weighted average number of shares of common stock
outstanding............................................................. 19,723,812 21,711,629 19,607,410
-------- -------- --------
-------- -------- --------
Related party transactions included in the Consolidated Statements of
Operations
Product sales............................................................. $5,432 $8,921 $5,553
Purchases of goods and services........................................... 4,942 3,066 4,284
Royalty expense........................................................... 4,148 4,883 6,177
Interest expense.......................................................... 3,603 807 928
Rent expense.............................................................. 653 880 979
See accompanying notes.
F-3
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
SHARES OF ADDITIONAL CUMULATIVE RETAINED TOTAL
COMMON COMMON PAID IN TRANSLATION EARNINGS STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT (DEFICIT) EQUITY
---------- ------ ---------- ----------- --------- -------------
Balance at July 3, 1993:.... 13,660,284 $14 $ 54,244 $(368) $ 3,088 $56,978
Sale of common stock, net of
expenses of $5,142........ 4,000,000 4 57,104 57,108
Exercise of options......... 18,000 -- 211 211
Management options, net of
income tax benefits of
$513...................... 46,154 -- (188) (188)
Change in cumulative
translation adjustment.... (409) (409)
Net income.................. 7,990 7,990
---------- ------ ---------- ----------- --------- -------------
Balance at July 2, 1994..... 17,724,438 18 111,371 (777) 11,078 121,690
Exercise of options......... 64,666 -- 707 707
Change in cumulative
translation adjustment.... 37 37
Net income.................. 19,474 19,474
---------- ------ ---------- ----------- --------- -------------
Balance at July 1, 1995..... 17,789,104 18 112,078 (740) 30,552 141,908
Exercise of options......... 235,617 -- 2,291 2,291
Sale of common stock, net of
expenses of $3,258........ 2,500,000 3 50,802 50,805
Repurchase of portion of
Series A Warrant.......... -- -- (5,932) (30,552) (36,484)
Dividends................... (964) (964)
Change in cumulative
translation adjustment.... 17 17
Net loss.................... (40,850) (40,850)
---------- ------ ---------- ----------- --------- -------------
Balance at July 6, 1996..... 20,524,721 $21 $159,239 $(723) (41,814) $116,723
---------- ------ ---------- ----------- --------- -------------
---------- ------ ---------- ----------- --------- -------------
See accompanying notes.
F-4
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
FOR THE YEARS ENDED
-------------------------------
JULY 2, JULY 1, JULY 6,
1994 1995 1996
-------- ------- --------
Cash flows from operating activities:
Net income (loss)............................................................ $ 7,990 $19,474 $(40,850)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for uncollectible accounts receivable........................... 10,396 17,726 26,368
Depreciation and amortization............................................. 4,338 6,549 15,462
Non-cash interest......................................................... 226 392 359
Income taxes.............................................................. 5,021 1,535 (18,328)
Extraordinary item........................................................ 2,517 -- 2,202
Accounts receivable............................................................ (26,111) (40,714) (24,549)
Inventories.................................................................... (14,027) (34,600) 8,226
Prepaid expenses............................................................... (648) (3,048) (2,518)
Income taxes................................................................... -- -- (5,724)
Accounts payable............................................................... 3,572 7,657 (4,175)
Other accrued expenses......................................................... (640) 7,185 3,209
Other.......................................................................... 560 2,077 69
-------- ------- --------
Net cash used in operating activities.......................................... (6,806) (15,767) (40,249)
-------- ------- --------
Cash flows from investing activities:
Payment of acquisition accruals........................................... (420) (2,185) --
Purchases of fixed assets................................................. (13,934) (19,278) (12,668)
Purchases of intangible assets............................................ -- (6,567) --
Acquisition of Catalina/Cole assets, net of proceeds from the sale of
assets.................................................................. (29,924) -- --
Other, net................................................................ (4,059) (3,289) (3,739)
-------- ------- --------
Net cash used in investing activities.......................................... (48,337) (31,319) (16,407)
-------- ------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility............................ 3,625 31,359 81,427
Net proceeds from the sale of common stock and exercise of options........ 57,131 707 53,102
Issuances of long-term debt............................................... 26,013 20,000 38,500
Payment of deferred financing fees........................................ (2,625) (526) (2,139)
Repayments of debt........................................................ (28,061) (4,763) (76,059)
Dividends................................................................. -- -- (964)
Repurchase of a portion of Series A Warrant............................... -- -- (36,484)
-------- ------- --------
Net cash provided by financing activities...................................... 56,083 46,777 57,383
-------- ------- --------
Net increase (decrease) in cash................................................ 940 (309) 727
Cash -- beginning of year...................................................... 141 1,081 772
-------- ------- --------
Cash -- end of year............................................................ $ 1,081 $ 772 $ 1,499
-------- ------- --------
-------- ------- --------
Supplemental disclosures of cash flow information (in thousands):
Cash paid for interest.................................................... $ 4,136 $ 6,585 $ 11,850
Cash paid for income taxes................................................ 3,471 3,128 7,458
F-5
Supplemental disclosures of non-cash operating, investing and financing
activities:
During the years ended July 2, 1994, July 1, 1995 and July 6, 1996, the
Company capitalized approximately $256,000, $268,000, and $146,000 of interest
costs related to the construction of certain fixed assets and certain acquired
assets held for sale.
During the year ended July 1, 1995, the Company received Common Stock in
consideration of an account receivable in the amount of $1,195,000.
During the years ended July 1, 1995 and July 6, 1996, the Company entered
into capital leases for new equipment and recorded capital lease obligations for
the cost of the new equipment of $645,000 and $600,000, respectively.
See accompanying notes.
F-6
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Authentic Fitness Corporation (the 'Company') was
incorporated in Delaware on April 25, 1990. On May 14, 1990 the Company acquired
substantially all of the assets and liabilities of the Activewear Division of
Warnaco Inc. ('Activewear') for a purchase price of $85 million and the
assumption of approximately $4 million in debt. The Company designs, sources and
markets swimwear, swim accessories and active fitness apparel under the
Speedo'r', Catalina'r', Cole of California'r', Anne Cole'r', Oscar de la
Renta'r', White Stag'r' and Speedo'r' Authentic Fitness'r' brand names. The
Company operates in one business segment, the manufacture and sale of apparel.
Basis of Consolidation and Presentation: The accompanying consolidated
financial statements include the accounts of the Company and all subsidiaries
for the fiscal years ended July 2, 1994, July 1, 1995 and July 6, 1996. The 1996
fiscal year included 53 weeks of operations, the additional week of operations
is not considered material to the operations of the Company. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to conform to the current period presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Translation of Foreign Currencies: Cumulative translation adjustments arise
from consolidating Canadian operations and are included in stockholders' equity.
Inventories: Inventories are stated at the lower of cost, determined on a
first-in first-out basis, or market.
Advertising Expenses: Advertising costs, primarily print advertising, are
expensed when first shown. At July 1, 1995 and July 6, 1996 there were no
advertising costs capitalized. Advertising expense for the years ended July 2,
1994, July 1, 1995 and July 6, 1996 were approximately $7,253,000, $13,150,000
and $18,885,000 respectively.
Prepaid Expenses: Design, sample and certain selling costs (primarily
product books) for the upcoming season are deferred and amortized using the
straight line method over the season to which they pertain.
Pre-opening costs: The Company defers certain costs associated with the
opening of new retail stores. Pre-opening costs associated with new retail
stores are amortized using the straight line method over 12 to 18 months.
Capitalized Leases: The Company has financed the purchase of certain
machinery and equipment using capitalized leases. Assets related to capitalized
leases are classified with fixed assets and the related capitalized lease
obligations are classified with long-term debt.
Depreciation: Depreciation of property, plant and equipment is provided
using the straight-line method over the assets' estimated useful lives, ranging
from 5 to 20 years.
Intangible Assets: Amortization of licenses and trademarks is provided
using the straight line method over the economic lives of the assets, which is
principally 20 years. Excess of cost over net assets acquired is amortized over
40 years. The carrying value of excess of cost over net assets acquired is
reviewed annually and adjusted if the facts and circumstances suggest that it
may be impaired. If this review indicates that the excess of cost over net
assets acquired will not be recoverable, as determined based on the undiscounted
cash flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the excess of cost over net assets acquired will be
reduced by the estimated
F-7
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shortfall of cash flows. Deferred financing costs are amortized over the life of
the related debt using the interest method.
Income Taxes: The Company utilizes that the liability method to determine
the provision for income taxes, whereby deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Concentration of Credit Risk: The Company sells its products to department
stores, sporting goods stores, mass merchandisers and specialty outlets. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations, except that Herman's Sporting Goods, Inc.
('Herman's') filed for bankruptcy on April 26, 1996 and on May 2, 1996 announced
their liquidation. As a result, the Company recorded a special bad debt loss of
$11,642,000 ($8,033,000 net of income tax benefits) related to the write-off of
uncollectible accounts receivable and the write down in the value of Herman's
common stock received as a distribution to creditors as part of the settlement
from Herman's March 1993 bankruptcy. The special bad debt loss is net of gross
recoveries from the Company's credit insurance policy of approximately
$4,600,000. For the years ended July 2, 1994 and July 6, 1996, Wal-Mart Stores,
Inc. accounted for 11% of the Company's net revenues. No customer accounted for
more than 10% of the Company's net revenues for the year ended July 1, 1995.
Stock Based Compensation: The Company accounts for its stock compensation
arrangements under the provisions of APB 25, 'Accounting for Stock Issued to
Employees,' and intends to continue to do so. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, 'Accounting for Stock Based Compensation' ('FAS 123'). FAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other stock-based compensation awards. However, FAS
123 allows an entity to continue to measure compensation costs using the
principles of APB 25 if certain pro forma disclosures are made. FAS 123 is
effective for fiscal years beginning after December 15, 1995 (the Company's 1997
fiscal year). The Company intends to disclose the information required by FAS
123 beginning with its 1997 fiscal year.
Net Income Per Common Share: Net income per common share is based on the
weighted average common shares outstanding and common share equivalents (options
and warrants) for the years ended July 2, 1994 and July 1, 1995. For the year
ended July 6, 1996, the net loss per common share is based on the weighted
average number of shares of common stock outstanding as the impact of common
share equivalents is anti-dilutive.
2 - ACQUISITION
On October 7, 1993, the Company purchased substantially all of the assets
of Taren Holdings, Inc. ('Catalina/Cole Acquisition'), a manufacturer and
marketer of women's swimwear and sportswear under the Catalina'r', Cole of
California'r', Anne Cole'r' and Sandcastle'r' brand names and private label
men's sportswear and women's sportswear. The purchase price for the assets was
approximately $42.6 million which included the fees and expenses and certain
letter of credit obligations assumed by the Company.
The Company subsequently sold certain assets relating to the private label
men's and women's sportswear manufacturer acquired from Taren ('the Colonial
Division') and certain other assets. Net proceeds from the sale of the assets
were approximately $12.7 million and have been recorded as a decrease in the net
purchase price of the Catalina/Cole assets. The acquisition was accounted for
under the purchase method of accounting, accordingly, the accompanying financial
statements include the
F-8
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 - ACQUISITION (CONTINUED)
results of operations for Catalina/Cole, excluding the Colonial Division,
commencing October 7, 1993. The excess of cost over net assets acquired was
$18.1 million.
The net purchase price was allocated to the fair value of assets acquired
and liabilities assumed as summarized below (in millions):
Intangible and other assets net of acquisition accruals..................... $21.0
Property and equipment...................................................... 1.2
-----
22.2
Accounts receivable......................................................... 4.4
Inventories................................................................. 3.3
-----
29.9
Assets held for sale................................................... 12.7
-----
Total purchase price................................................... $42.6
-----
-----
3 - INVENTORIES
Inventories consist of the following (in thousands):
JULY 1, JULY 6,
1995 1996
------- --------
Raw materials and work in process...................................... $19,045 $ 18,817
Finished goods......................................................... 53,958 45,960
------- --------
$73,003 64,777
------- --------
------- --------
4 - PREPAID EXPENSES AND OTHER ASSETS
Prepaid design, sample and certain selling costs (primarily product books)
relating to the upcoming seasons which are included in prepaid expenses amounted
to $4,087,000 and $3,264,000 at July 1, 1995 and July 6, 1996, respectively.
Pre-opening costs, net of accumulated amortization associated with the
Company's retail division and stores were $2,219,000 and $1,672,000 at July 1,
1995 and July 6, 1996. Amortization expense related to the deferred costs was
$143,000, $1,127,000 and $937,000 for the years ended July 2, 1994, July 1, 1995
and July 6, 1996, respectively. In December 1993 the Company wrote off certain
costs associated with the start up of its retail division, including costs
previously deferred, see Note 11 of Notes to Consolidated Financial Statements.
F-9
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in
thousands):
JULY 1, JULY 6,
1995 1996
------- --------
Land................................................................... $ 238 $ 238
Buildings and improvements............................................. 1,038 1,038
Machinery and equipment................................................ 16,397 17,852
Leasehold improvements................................................. 16,155 22,307
Furniture and fixtures................................................. 7,248 12,413
------- --------
41,076 53,848
Accumulated depreciation............................................... (5,891) (11,062)
------- --------
$35,185 $ 42,786
------- --------
------- --------
6 - DEBT
On September 6, 1996, the Company entered a $200 Million Credit Agreement
(the '$200 Million Credit Agreement'), which replaced the $250 Million Credit
Agreement. The decrease in the total amount of the loan commitment reflects the
Company's decision not to exercise its option to purchase the remaining portion
of the Series A Warrant representing 1,809,179 shares at $24 per share. The $200
Million Credit Agreement is for a term of five years and provides for a term
loan (the 'Term Loan') in the amount of $50 million and a revolving loan
facility (the 'Revolving Loan') in the amount of $150 million. Borrowing under
the $200 Million Credit Agreement accrues interest at the lenders base rate or
at LIBOR plus 1.5% (approximately 7.2% at September 30, 1996). The Company is
also required to pay a commitment fee on the unused portion of the Revolving
Loan equal to .50% per annum on the average daily unused revolving loan
commitment. In addition the agreement allows the Company to repurchase up to $10
million of its own Common Stock after March 31, 1997, under certain conditions.
The rate of interest payable on outstanding borrowing under the $200
Million Credit Agreement will be automatically reduced as the Company's debt to
EBITDA ratio improves and can be reduced to as low as LIBOR plus .75% after June
30, 1997. The commitment fee payable on the unused revolving loan commitment
will also be automatically reduced as the Company's debt to EBITDA ratio
improves to prior year levels and can be reduced to as low as .25% per annum
after June 30, 1997.
The Term Loan is payable in nine semi-annual installments commencing on
June 30, 1997 with a final installment of $7,500,000 due on September 1, 2001.
The current portion of the Term Loan as of July 6, 1996 is $2,500,000. The
Company has classified $47,500,000 as long term at July 6, 1996, consistent with
the terms of the Company's $200 Million Credit Agreement.
Borrowing under the $200 Million Credit Agreement is secured by
substantially all of the assets of the Company. The collateral will be
automatically released when the Company achieves an investment grade implied
senior debt rating, as determined by certain credit rating agencies. In
addition, the $200 Million Credit Agreement contains various restrictions and
covenants and requires the Company maintain certain financial ratios relating to
interest and lease coverage, minimum adjusted net worth, maximum total debt to
EBITDA and minimum EBITDA and limits the amount of capital expenditures the
Company may incur in any one fiscal year.
A summary of the terms of the Company's previous credit agreements follows.
All of the Company's previous credit agreements were secured by substantially
all of the Company's assets and required the Company to meet certain financial
tests and ratios and contained various restrictions and covenants.
F-10
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - DEBT (CONTINUED)
In conjunction with the purchase of Catalina/Cole in October 1993, the
Company amended its existing Loan Agreement with General Electric Capital
Corporation ('GE Capital') to provide $25 million of additional credit under its
revolving loan and $22 million of additional term borrowing. The additional term
loan was payable in two installments of $11 million each in 1999 and 2000 and
accrued interest at LIBOR plus 2 3/4%. The revolving loan was due in 1997 and
bore interest at LIBOR plus 2 1/2%. The additional term loan and amounts
outstanding under the Company's revolving loan were repaid in December 1993 from
the proceeds of the sale of 4,000,000 shares of Common Stock.
On April 28, 1994 the Company entered into a new Credit Agreement with The
Bank of Nova Scotia, Citicorp USA, Inc., Chemical Bank and The Bank of New York,
which replaced its Loan Agreement with GE Capital. The new Credit Agreement,
provided a term loan of $25 million and a revolving loan facility of $75 million
and covered a term of five years ending on December 31, 1998. In February 1995,
the Company amended its Credit Agreement to increase the amount outstanding
under its term loan from $21 million to $41 million and to increase the amount
available under the revolving loan facility from $75 million to $105 million
(subsequently increased to $141 million in January 1996). Borrowing under the
new Credit Agreement accrued interest at LIBOR plus .75% (reduced from LIBOR
plus 1%) or at the managing agent's base rate.
On September 13, 1995, the Company amended its Credit Agreement ('Amended
Credit Agreement'). The Amended Credit Agreement provided for an additional term
loan ('Bridge Loan') of $75 million. The Company borrowed $36,183,580 of the
amount available under the Bridge Loan and repurchased a portion of the Series A
Warrant (See Note 8 of Notes to Consolidated Financial Statements). Borrowing
under the Amended Credit Agreement accrued interest at LIBOR plus 1.75% or at
the managing agent's base rate plus .75%. Amounts outstanding under the Bridge
Loan were repaid in full from the proceeds of the Company's public offering of
Common Stock which was completed in October 1995 (See Note 7 of Notes to
Consolidated Financial Statements).
On March 26, 1996, the Company entered a $250 million Amended and Restated
Credit Agreement (the '$250 Million Credit Agreement'). The $250 Million Credit
Agreement provided the Company with a $250 million revolving line of credit and
replaced the Amended Bank Credit Agreement. Amounts outstanding under the $250
Million Credit Agreement accrued interest at the Bank's base rate or at LIBOR
plus .75% (approximately 6.4% at July 6, 1996). Borrowing under the $250 Million
Credit Agreement was secured by substantially all of the assets of the Company.
The $250 Million Credit Agreement required that the Company meet certain
financial tests and ratios including, (i) interest and lease coverage ratio,
(ii) minimum adjusted net worth, (iii) maximum total debt to EBITDA ratio, (iv)
minimum EBITDA and (v) maximum capital expenditures.
The average interest rate for borrowing under the revolving loan portion of
the Company's credit agreements for the years ended July 2, 1994, July 1, 1995
and July 6, 1996 was approximately 5.6%, 7.6% and 7.7%, respectively.
The Company has entered various lease agreements to finance the purchase of
certain computer and other equipment. The leases are generally payable in 60
equal monthly installments, mature from September 1998 through August 2000 and
bear interest at rates ranging from approximately 7% to 11% per annum. The
leases are secured by the financed equipment. The outstanding principal amount
of the leases at July 1, 1995 and July 6, 1996 was $1,281,000 and $2,247,000,
respectively.
The Company has classified $47,500,000 of the $250 Million Credit Agreement
as long term at July 6, 1996, consistent with the terms of the Company's $200
Million Credit Agreement.
F-11
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - DEBT (CONTINUED)
Maturities of the term loan at September 30, 1996 after giving effect to the
$200 Million Credit Agreement are as follows (in thousands):
FISCAL YEAR AMOUNT
- ----------- --------
1997 ................................................................. $ 2,500
1998 ................................................................. 6,250
1999 ................................................................. 8,750
2000 ................................................................. 11,250
2001 ................................................................. 13,750
Thereafter................................................................... 7,500
The Company believes that the fair market value of its outstanding variable
rate debt is approximately equal to the outstanding principal amount thereof as
(i) substantially all of the Company's debt bears interest at floating rates
(market) and (ii) there are no prepayment premiums required by any of the
Company's material debt agreements.
In April 1995, the Company entered an agreement ('Collar Agreement') with a
bank. The terms of the Collar Agreement provided that the Company's interest
rate on $40,000,000 of debt would not fall below 6.25% or rise above 7.25%
unless the prevailing LIBOR rate rose above 9% in which case the Company's
interest rate will be equal to the market rate plus .75% (1.50% under the $200
Million Credit Agreement, as noted above). The cost to the Company of entering
the agreement was $116,000 and is being amortized over the life of the agreement
using the straight line method. The additional interest cost to the Company for
the year ended July 6, 1996 related to the Collar Agreement was approximately
$175,000. The estimated additional interest cost to the Company of the Collar
Agreement for fiscal 1997 assuming 3 month LIBOR rates remain at the current
rate of 5.65% would be approximately $160,000. Interest payments/receipts on the
Collar Agreement are made quarterly.
Costs incurred to secure debt financing of the Company have been classified
as deferred financing costs. These costs are amortized over the life of the
related debt instrument using the interest method. Amortization of deferred
financing costs amounted to $226,000, $392,000 and $359,000 for the years ended
July 2, 1994, July 1, 1995 and July 6, 1996, respectively.
The Company's lender issues stand-by and commercial letters of credit
guaranteeing the Company's performance under certain trade purchase agreements.
The letters of credit are issued under the terms of the Company's credit
facility. Total letters of credit outstanding were $2,835,000 and $1,123,000 at
July 1, 1995 and July 6, 1996 respectively.
In connection with the repayment of amounts outstanding under its prior
Loan Agreement, the Company recognized an extraordinary loss on the write off of
deferred financing costs due to the early extinguishment of debt of $1,591,000,
net of income tax benefit of $926,000, in the second quarter of fiscal 1994. In
connection with the refinancing of the Company's credit Agreement in March 1996,
the Company recognized an extraordinary loss on the write off of deferred
financing costs due to the early extinguishment of debt of $1,497,000, net of
income tax benefits of $705,000 in the third quarter of fiscal 1996.
7 - CAPITAL STOCK
On January 7, 1994, the Company's Board of Directors authorized a two for
one stock split for stockholders of record on January 20, 1994, and effective
February 10, 1994. The split increased the number of outstanding shares of
common stock, outstanding options and outstanding warrants by 100%. Exercise
prices for outstanding options and warrants were adjusted to reflect the split.
All outstanding share and per share information has been adjusted to reflect the
split as if it had occurred at the beginning of each period presented. In
connection with the purchase of the assets of the Activewear
F-12
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - CAPITAL STOCK (CONTINUED)
Division of Warnaco and the initial capitalization of the Company, the Company
granted to a major stockholder the option to purchase Class A common stock of
the Company should the investor's ownership of issued and outstanding common
stock fall below 50%. The investor was entitled to purchase unissued common
stock of the Company (at fair value) sufficient to increase the investor's
ownership of common stock of the Company to more than 50% of all issued and
outstanding common stock. The Company and the major stockholder revised, upon
the closing of the Initial Public Offering of the Company's common stock
('IPO'), the option agreement, which had allowed the major stockholder to
purchase shares to maintain its 50% interest at all times, to an option, for as
long as the major stockholder owns 20% or more of the outstanding common stock
of the Company to maintain its percentage interest in the outstanding common
stock of the Company in the event of certain issuances of common stock by the
Company.
On December 16, 1993, the Company completed the sale of 4,000,000 shares of
its common stock in an underwritten public offering at a sales price of $15.56
per share. Net proceeds from the offering were approximately $57,104,000 (after
underwriting discounts and expenses of $5,142,000). Proceeds from the Offering
were used to reduce the amount outstanding under the Company's term loan to
$25,000,000 and to repay amounts outstanding under the Company's revolving loan.
On October 17, 1995 the Company sold 2,500,000 shares of common stock in an
underwritten public offering at a sales price of $21.625 per share. Net proceeds
from the offering were approximately $50,805,000 (after underwriting discounts
and expenses of $3,258,000). Proceeds from the offering were used to repay the
amounts outstanding under the Bridge Loan and to repay amounts outstanding under
the Company's term loan.
8 - WARRANTS
At May 14, 1990, the Company issued a warrant for the purchase of 3,618,358
shares (Series A Warrant) of its common stock for a nominal exercise price per
share. The Series A Warrant is exercisable in whole or in part at any time after
July 1, 1990 and expires May 14, 2000. The Series A Warrant was issued in
conjunction with the original credit agreement between the Company and the
lender in May 1990 and was valued at $2,525,000. On September 13, 1995, the
Company purchased from General Electric Capital Corporation ('GE Capital')
one-half of the shares available for purchase under the Series A Warrant for
36,183,580 or $20 per share (representing 1,809,179 shares). This purchase was
funded from the proceeds of the Bridge Loan.
During the first quarter of fiscal 1997, GE Capital exercised the Series A
Warrant and acquired 1,809,179 shares of the Company's common stock.
9 - STOCK OPTIONS
The 1990 Key Management stock Purchase Option Plan provides for the
granting of options to key employees to purchase the Company's common stock at
an exercise price of $.00875 per share. Options to purchase 286,668 shares of
common stock were granted prior to the acquisition of the assets of the
Activewear Division of Warnaco. During fiscal 1993, the terms of the outstanding
Key Management Options were amended to provide (i) option holders with the right
to satisfy income tax withholding requirements by having the Company withhold a
portion of the shares of common stock issuable under the option grants and (ii)
deferred vesting of up to 50% of the outstanding options. On July 2, 1993
options to purchase 175,624 shares of common stock were exercised and 136,614
shares of common stock were issued (after giving effect to the withholding of
39,010 shares of common stock to satisfy income tax withholding requirements).
On July 2, 1994 options to purchase 94,888 shares of common
F-13
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 - STOCK OPTIONS (CONTINUED)
stock were exercised and 46,154 shares were issued (after giving effect to the
withholding of 48,734 shares to satisfy income tax withholding requirements).
The exercise of the Key Management Options resulted in a reduction of
income taxes payable which was accounted for as an increase in paid in capital
of $524,000 and $513,000 in fiscal 1993 and fiscal 1994, respectively. At July
6, 1996 options to purchase 16,150 shares were outstanding which are
exercisable. The Company has 16,150 shares of common stock reserved for future
issuance for the exercise of Key Management Options.
The 1992 Long Term Incentive Plan (the 'Stock Plan') was adopted by the
Board of Directors on May 7, 1992. In November 1994, the stockholders approved
an amendment to the Stock Plan whereby the number of options available for grant
under the Stock Plan increases by an amount equal to 3% of the outstanding
shares of common stock of the Company on the first day of each fiscal year. As a
result, [622,636] options were available for grant under the Stock Plan as of
July 7, 1996.
Options issued, canceled, exercised and outstanding under the Stock Plan at
July 6, 1996 are summarized below:
NUMBER EXERCISE EXPIRATION EXERCISABLE AT
ISSUE DATE(a) ISSUED CANCELLED EXERCISED OUTSTANDING PRICE DATE JULY 1, 1995
- ---------------------- --------- --------- --------- ----------- -------- ---------- --------------
7/2/1992.............. 100,000 -- 100,000 -- $ 7.00 7/2/2002 --
8/14/1992............. 380,000 44,000 99,332 236,668 $ 8.00 8/14/2002 236,668
11/19/1992............ 50,000 50,000 -- -- $11.00 11/19/2002 --
5/20/1993............. 90,000 70,000 20,000 -- $11.75 5/10/2003 --
8/19/1993............. 324,000(b) 20,014 23,986 280,000 $10.88 8/19/2003 253,333
9/9/1993.............. 100,000 -- -- 100,000 $11.25 9/9/2003 66,667
11/10/1993............ 30,000 -- -- 30,000 $15.13 11/10/2003 20,000
1/7/1994.............. 30,000 -- -- 30,000 $13.88 1/7/2004 20,000
8/16/1994............. 615,000(c) 40,017 19,983 555,000 $15.25 8/16/2004 361,666
11/10/1994............ 20,000 -- 3,333 16,667 $14.50 11/10/2004 5,556
12/22/1994............ 8,000 -- -- 8,000 $13.75 12/22/2004 2,667
2/23/1995............. 90,000 -- 23,316 66,684 $14.25 2/23/2005 22,228
5/11/1995............. 85,000 16,667 8,333 60,000 $15.50 5/11/2005 20,000
8/11/1995............. 1,085,000(d) 35,000 -- 1,050,000 $20.88 8/11/2005 500,000
3/11/1996............. 50,000 -- -- 50,000 $28.38 3/11/2006 --
5/8/1996.............. 50,000 -- -- 50,000 $19.75 5/8/2006 --
- ------------------
(a) Options vest one third on each anniversary date starting one year after the
issue date.
(b) 200,000 of such options are fully vested
(c) 250,000 of such options are fully vested.
(d) 500,000 of such options are fully vested.
At July 6, 1996 the Company had 2,533,019 shares of common stock reserved
for the exercise of options granted and to be granted under the Stock Plan.
At September 24, 1996, 40,000 of the above options had been canceled.
In November 1993, the stockholders approved and the Company adopted the
1993 Stock Option Plan for Non-Employee Directors ('Directors Plan'). The
Directors Plan provides for awards of non qualified stock options to Directors
of the Company who are not employees of the Company or its affiliates and who
have not, within one year, received any other award under any plan of the
Company or its affiliates. Options granted under the Directors Plan shall be
exercisable in whole or in part at all
F-14
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 - STOCK OPTIONS (CONTINUED)
times during the period beginning on the date of grant until the earlier of (i)
ten years from the date of grant or (ii) one year from the date on which an
optionee ceases to be an eligible Director.
The exercise price per share of Common Stock shall be 100% of the fair
market value on the date the option is granted. In addition, the Directors Plan
provides for granting of options to purchase 15,000 shares of Common Stock upon
a non employee Director's election or appointment to the Board of Directors of
the Company. Immediately following each Annual Shareholders Meeting, commencing
with the meeting following the close of the 1994 fiscal year, each eligible
Director will be granted an option to purchase 5,000 shares of Common Stock. As
of July 6, 1996 options to purchase 75,000, 15,000, 25,000, 15,000 and 40,000
shares of Common Stock had been granted at exercise prices of $11.22, $14.1875,
$14.625, $14.187 and $19.375 per share, 20,000 of which had been exercised and
15,000 of which had been cancelled. At July 6, 1996 the Company had 200,000
shares of Common Stock reserved for future issuance for the exercise of options
granted under the Directors Plan.
10 - COMMITMENTS AND CONTINGENCIES
Leases: Rent expense including rent paid to Warnaco was $3,698,000,
$6,099,000 and $10,200,000 for the years ended July 2, 1994, July 1, 1995 and
July 6, 1996, respectively. Rent paid to Warnaco was $653,000, $880,000 and
$979,000 for the years ended July 2, 1994, July 1, 1995 and July 6, 1996,
respectively.
In September 1996, Warnaco agreed to release the Company from future
obligations under their sub-lease agreement, therefore the Company has no future
non-cancelable leases obligation related to Warnaco.
Future minimum lease payments, required under non-cancelable operating
leases with terms in excess of one year are as follows (in thousands):
FISCAL
YEAR TOTAL
-------
1997........................................................... $ 7,687
1998........................................................... 7,411
1999........................................................... 6,633
2000........................................................... 6,529
2001........................................................... 6,533
Thereafter..................................................... 23,870
Pending Litigation: On June 6, 1996, Warnaco and the Company announced that
they were proposing a merger in which the Company's common stock would be
converted into Warnaco common stock ('Proposed Merger'). Shortly thereafter,
three purported class action lawsuits were filed in Delaware Chancery Court
against the Company and certain of its directors challanging the Proposed
Merger. On July 12, 1996, Warnaco and the Company executed an Agreement and Plan
of Merger. On July 25, 1996, Warnaco and the Company terminated the Proposed
Merger. The defendants were subsequently granted an indefinite extension of time
to respond to the complaints, and the Company is not aware of any other action
taken by the plaintiffs since the termination of the Agreement and Plan of
Merger. The Company believes that the lawsuits are without merit and, in light
of the termination of the Proposed Merger, moot.
Contingency: On May 14, 1990, the Company agreed to indemnify certain
investors for the uncertainty related to the tax consequences of certain
transactions. The maximum amount of the tax indemnity would be $1,200,000.
Management does not expect this liability to arise.
F-15
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Proposed Merger the Company engaged an investment
banking firm to evaluate and advise the Company with respect to the Proposed
Merger. The investment banking firm was entitled to receive certain fees for its
services a portion of which were payable upon the completion of certain
documents and a portion of which became payable upon the consumation of the
Proposed Merger. In certain circumstances the Company may be required to pay
fees to the investment banking firm of $750,000. Management does not expect this
liability to arise.
11 - DEFERRED COMPENSATION AWARDS AND NON-RECURRING EXPENSES
In December 1993, the Company paid bonuses to certain senior executives in
recognition of their strategic accomplishments in completing the Catalina/Cole
Acquisition and in the timely disposition of certain surplus assets including
the Colonial Division. Such bonuses amounted to $2,800,000 and were recorded as
non-recurring expenses in the second quarter of fiscal 1994.
In November 1993, the Company and its Chairman amended the Chairman's
employment agreement. The agreement was extended through October 3, 1998, with
automatic one year extensions thereafter and increased the Chairman's base
salary. In connection with the completion of the agreement the Company recorded
a non-recurring expense of $1,200,000 (including a signing bonus of $800,000).
The Company incurred certain start up and other costs in connection with
the start up of its Retail Division and the development of a new product for the
fitness marketplace. These costs amounting to $1,700,000 have been included in
the Statement of Operations as a non recurring item in fiscal 1994.
Herman's Sporting Goods, Inc. ('Herman's') filed for bankruptcy on April
26, 1996 and on May 2, 1996 announced their liquidation. As a result, the
Company recorded a special bad debt loss of $11,642,000 ($8,033,000 net of
income tax benefits) related to the write-off of uncollectible accounts
receivable and the write down in the value of Herman's common stock received as
a distribution to creditors as part of the settlement from Herman's March 1993
bankruptcy. The special bad debt loss is net of gross recoveries from the
Company's credit insurance policy of approximately $4,600,000.
The Company incurred certain legal, investment banking and other fees in
connection with the Proposed Merger. These costs, amounting to approximately
$2,000,000 ($1,380,000 net of income tax benefits), have been included as a
non-recurring item in the Statement of Operations in fiscal 1996.
F-16
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 - RELATED PARTY TRANSACTIONS
The Company purchases certain services from Warnaco including contract
labor for production, occupancy services related to leased facilities,
laboratory testing, transportation and other services, all of which are
charged at Warnaco's cost. Additionally, the Company sells certain inventory to
Warnaco and provides certain design services to Warnaco.
The Company also has sales to subsidiaries of a major stockholder
('Subsidiaries'). An affiliate of a major stockholder of the Company
('Affiliate') acts as buying agent for certain merchandise purchased by the
Company from international suppliers and the Company pays royalties to a
subsidiary of a major stockholder ('Subsidiary').
Through April 28, 1994, the Company paid interest to GE Capital for amounts
borrowed under the terms of its credit facility.
During fiscal 1994, the Company purchased a manufacturing facility
including the related equipment and assembled workforce from Warnaco for $3.3
million. The purchase price was determined by an independent appraisal. Also
during fiscal 1994, the Company sold certain surplus equipment to Warnaco for
$1.4 million.
During fiscal 1995 the Company purchased certain trademarks from Warnaco.
The purchase price was determined by an independent appraisal and totalled $6.6
million. In addition, in fiscal 1995 the Company licensed to Warnaco the rights
to produce certain intimate apparel under the Speedo'r' brand name to Warnaco
for $1 million.
In May 1996 the Company made a strategic decision to close its closeout
outlet stores. In July 1996, the Company closed several of its closeout outlet
stores, transferred the leases on the remaining stores to Warnaco and sold the
existing store inventory to Warnaco for $2.4 million.
The following summarizes related party transactions included in the
Consolidated Statements of Operations (in thousands):
JULY 2, JULY 1, JULY 6,
1994 1995 1996
------- ------- -------
Expenses for Warnaco services (excluding rent expense)................. $ 3,534 $ 1,454 $ 2,727
Product sales to Warnaco............................................... 3,528 5,625 4,302
Product sales.......................................................... 1,904 3,296 1,251
Interest expense relating to balance owed Affiliate.................... 649 807 928
Gross purchases through Affiliate...................................... 24,951 27,171 23,457
Royalty expenses....................................................... 4,148 4,883 6,177
Fees paid to affiliate for buying agent services....................... 1,408 1,612 1,557
Interest expense related to prior credit agreement..................... 2,954 -- --
13 - BENEFIT PLAN
The Company has a 401(k) defined contribution profit sharing plan ('Plan'),
which covers all eligible, non-union domestic employees of the Company. The
Company contributes amounts equal to 15% of employee contributions on a
maximum of 6% of employees' eligible compensation. Company contributions to the
Plan were approximately $39,000, $64,000 and $114,000 for the years ended
July 2, 1994, July 1, 1995 and July 6, 1996, respectively.
F-17
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 - INCOME TAXES
The components of deferred taxes and liabilities as of July 1, 1995 and
July 6, 1996 are as follows (in thousands):
JULY 1, JULY 6,
1995 1996
------- -------
Deferred tax assets (and valuation allowances):
Inventory and accounts receivable reserves........................................ $ 1,591 $ 5,281
Amortization of trademarks and licenses........................................... 3,095 4,554
Tax credit carryforwards, primarily foreign tax credits........................... 684 1,374
Net operating loss carryforward................................................... -- 3,602
Other deferred tax assets......................................................... 750 6,339
Valuation allowances.............................................................. (2,047) (8,519)
------- -------
Deferred tax assets -- net................................................... 4,073 12,631
Deferred tax liabilities
Tax over book depreciation........................................................ (695) (3,216)
Acquisition related accruals...................................................... (2,391) (2,391)
Goodwill deductions in excess of book deductions.................................. (3,561) (2,674)
Software development costs........................................................ (1,966) (2,054)
Pre-opening costs................................................................. (915) (970)
Other deferred tax liabilities.................................................... (1,973) (1,746)
------- -------
Deferred tax liabilities..................................................... (11,501) (13,051)
Net deferred tax liability................................................... $(7,428) $ (420)
------- -------
------- -------
Valuation allowances are recorded to account for uncertainties related to
the ultimate realization of net operating loss, capital loss, contribution and
foreign tax credit carryforwards and the ultimate realization of tax deductions
for intangible amortization. The valuation allowance (decreased) increased
$(394,000) and $6,472,000 for the fiscal years ended July 1, 1995 and July 6,
1996, respectively.
The provision (benefit) for income taxes included in the Consolidated
Statements of Operations amounts to (in thousands):
FOR THE YEARS ENDED
------------------------------
JULY 2, JULY 1, JULY 6,
1994 1995 1996
------- ------- --------
Current:
U.S. Federal...................................................... $ 1,637 $ 8,110 $ (9,995)
State............................................................. 121 1,739 (1,227)
Foreign........................................................... 52 730 (99)
------- ------- --------
1,810 10,579 (11,321)
Deferred:
U.S. Federal...................................................... 4,282 1,285 (6,483)
State............................................................. 511 311 (632)
Foreign........................................................... 228 (57) 108
------- ------- --------
5,021 1,539 (7,007)
Total........................................................ $ 6,831 $12,118 $(18,328)
------- ------- --------
------- ------- --------
As of July 6, 1996, the Company had net operating loss carryforwards for
federal and state income tax purposes of $3,522,000 and $11,779,000,
respectively, which expire in 2011. In addition, the Company has capital loss
and contribution carryforwards for federal purposes of $3,016,000 which expire
in 2001. The Company has tax credit carryforwards for foreign taxes and
alternative minimum tax and reserve credits for federal purposes.
F-18
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 - INCOME TAXES (CONTINUED)
The following represents the reconciliation of the tax provision rate to
the U.S. Federal income statutory tax rate:
FOR THE YEARS ENDED
---------------------------------
JULY 2, JULY 1, JULY 6,
1994 1995 1996
------- ------- -------
Statutory rate.......................................................... 35.0% 35.0% (35.0)%
State rate.............................................................. 2.6 4.2 (1.1)
Foreign tax rate in excess of U.S. statutory rate....................... 1.0 (2.2) --
Intangible amortization................................................. 3.0 1.7 0.3
Other................................................................... -- (0.3) --
Valuation allowances.................................................... -- -- 5.2
Inventory contribution.................................................. -- -- (0.6)
------- ------- -------
Tax provision rate...................................................... 41.6% 38.4% (31.2)%
------- ------- -------
------- ------- -------
15 - EXTRAORDINARY ITEMS
Due to early extinguishment of debt the Company wrote off the deferred
financing costs of $2,517,000 related to the GE Capital credit facility in
December 1993 based on the firm commitment letter from the new lender. The
extraordinary item of $1,591,000, net of income tax benefits of $926,000 was
recorded in the second quarter of fiscal 1994.
Due to early extinguishment of debt the Company wrote off the deferred
financing costs of $2,022,000 related to the Company's credit facility in March
1996. The extraordinary item of $1,497,000, net of income tax benefits of
$705,000 was recorded in the third quarter of fiscal 1996.
16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Revolving loan. The carrying amount of the Company's outstanding balances
under its Credit Agreement approximate the fair value because the interest rate
on outstanding borrowings is variable and there are no prepayment penalties.
Interest rate collar agreement. The fair value of the Collar Agreement is
based on an estimated price quote from a financial institution.
Letters of credit. Letters of credit collateralize the Company's
obligations to third parties and have terms ranging from thirty days to one
year. The face amount of the letters of credit are a reasonable estimate of the
fair value since the value for each is fixed over its relatively short maturity.
The carrying amounts and fair value of the Company's financial instruments
are as follows (in thousands):
JULY 1, 1995 JULY 6, 1996
------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- --------
Revolving Loan........................................... $ 36,787 $36,787 $118,017 $118,017
Term Loan................................................ 38,500 38,500 -- --
Interest rate collar..................................... 110 (535) 50 (175)
Letters of credit........................................ 2,835 2,835 1,123 1,123
F-19
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the unaudited quarterly financial results of the
Company for the fiscal years ended July 1, 1995 (in thousands except share
data):
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 1, 1995 QTR QTR QTR QTR
- -------------------------------------------------- ------- ------- ------- -------
Net revenues...................................... $37,598 $56,319 $74,848 $97,368
Gross profit...................................... 13,561 21,948 28,263 33,924
Net income........................................ $ 2,065 $ 4,454 $ 5,975 $ 6,990
------- ------- ------- -------
------- ------- ------- -------
Net income per common share....................... $ 0.10 $ 0.21 $ 0.27 $ 0.32
------- ------- ------- -------
------- ------- ------- -------
In the fourth quarter of fiscal 1996 the Company recorded reserves and
adjustments of approximately $11.0 million related to the terminated merger,
inventory and accounts receivable reserves.
The Company completed an extensive evaluation of its accounts receivable,
inventory and other accounts in connection with its year end closing and, as
a result, provided additional reserves (including adjustments) of $18.7
million which relate to the Company's second and third quarters of fiscal 1996.
The unaudited quarterly financial results of operations as adjusted are
summarized below:
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 6, 1996 QTR QTR QTR QTR
- ------------------------------------------------- ------- ------- ------- --------
Net revenues..................................... $42,908 $77,298 $98,860 $ 90,543
Gross profit -- as reported...................... 17,738 30,203 37,528 3,962
Gross profit -- adjusted......................... 17,738 23,460 30,238 3,962
Net income (loss) -- as reported................. $ 2,175 $ 5,486 $ (750) $(36,299)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) -- adjusted.................... $ 2,175 $(1,164) $(5,562) $(36,299)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per common share -- as reported. $ 0.10 $ 0.25 $ (0.03) $ (1.78)
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per common share -- as
adjusted(1).................................... $ 0.10 $ (0.06) $ (0.27) $ (1.78)
------- ------- ------- --------
------- ------- ------- --------
- ------------------
(1) The weighted average number of common shares outstanding for the second,
third and fourth quarters, as adjusted, does not include common stock
equivalents as the impact on net loss per share is anti-dilutive.
F-20
SCHEDULE II
AUTHENTIC FITNESS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
BALANCE CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITE-OFFS(A) YEAR
- ------------------------------------------------- --------- ---------- ---------- ------------- ----------
Accounts receivable allowances:
Year ended July 2, 1994..................... $ 2,507 $ 10,396 $ -- $ (9,821) $3,082
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Year ended July 1, 1995..................... $ 3,082 $ 17,726 $ -- $ (16,689) $4,119
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
Year ended July 6, 1996..................... $ 4,119 $ 26,368 $ -- $ (21,126) $9,361
--------- ---------- ---------- ------------- ----------
--------- ---------- ---------- ------------- ----------
- ------------------
(a) Uncollectible accounts written-off net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.
EXHIBIT INDEX
LOCATION OF
EXHIBIT EXHIBIT IN SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT NUMBERING SYSTEM
- ---------- ------------------------------------------------------------------------------ ---------------------
3.1** Restated Certificate of Incorporation of the Registrant.
3.2** Bylaws of the Registrant.
10.1* Management Stock Subscription Agreement dated May 11, 1990 among the
registrant and the Management Participants listed therein.
10.2** Amendment to Management Stock Subscription Agreement dated as of June 1, 1992
among the registrant and the Management Participants listed therein.
10.3* Registration Rights Agreement dated as of May 14, 1990 among the registrant
and the Management Participants listed therein.
10.4** Amendment to Registration Rights Agreement dated as of June 1, 1992 among the
registrant, Warnaco Inc., Pentland Ventures Ltd. and the Management
Participants listed therein.
10.5* Series A Warrant for 633,200 shares of Class A Common Stock of the Registrant
(1,809,179 shares of Class A Common Stock as adjusted for the 2.8572-for-1
stock split) issued to General Electric Capital Corporation.
10.6** Amendment to Series A Warrant dated as of June 1, 1992 between the registrant
and General Electric Capital Corporation.
10.7*`D' License Agreement dated May 10, 1990 among Speedo International Limited,
Speedo International B.V., Warnaco Inc. and Warnaco International Inc. and
related assignments to Authentic Fitness Products, Inc. (formerly S
Acquisition Corp.) (United States, its territories and possessions, and
Canada).
10.8*`D' License Agreement dated May 10, 1990 among Speedo Knitting Mills Pty. Limited,
Warnaco Inc. and Warnaco International Inc. and related assignments to
Authentic Fitness Products, Inc. (formerly S Acquisition Corp.) (Mexico and
the Caribbean Islands).
10.9* Buying Agency Agreement dated as of May 14, 1990 among Authentic Fitness
Products, Inc. (formerly S Acquisition Corp.), 171173 Canada Inc., Asco
International Sourcing Limited and Soaring Force Limited.
10.10* Amendment to Buying Agency Agreement dated as of June 1, 1992 among Authentic
Fitness Products, Inc. (formerly S Acquisition Corp.), 171173 Canada Inc.,
Asco International Sourcing Limited and Soaring Force Limited.
10.11** Employment Agreement ('Employment Agreement') dated as of July 2, 1992 between
the registrant and Linda J. Wachner.
10.12*** First Amendment to Employment Agreement.
10.13* Incentive Compensation Plan.
10.14* 1990 Key Management Stock Option Plan.
10.15****** 1992 Long Term Stock Incentive Plan.
10.16***** 1993 Stock Option Plan for Non-Employee Directors.
10.17* Form of Indemnification Agreements between the Registrant and its directors
and executive officers.
10.18 $200,000,000 Credit Agreement Dated as of September 6, 1996 among Authentic
Fitness Products, Inc., as Borrower, and Authentic Fitness Corporation and The
Bank of Nova Scotia and General Electric Capital Corporation as Agents, and
The Bank of Nova Scotia, as Administrative Agent, Swing Line Bank and Fronting
Bank, and General Electric Capital Corporation as Documentation Agent and
Collateral Agent.
LOCATION OF
EXHIBIT EXHIBIT IN SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT NUMBERING SYSTEM
- ---------- ------------------------------------------------------------------------------ ---------------------
11.1 Calculation of Income (Loss) per common share.
21.1***** Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
28.1** Amended and Restated Stockholders Agreement dated as of June 1, 1992 among the
registrant, Pentland Ventures Ltd., General Electric Capital Corporation,
Warnaco Inc. and the Management Participants listed therein.
- ------------
* Incorporated herein by reference to the Company's Registration Statement
on Form S-1, No. 33-47907.
** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended July 3, 1993.
*** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended July 2, 1994.
**** Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the period ended April 2, 1994.
**** Incorporated herein by reference to the Company's Registration Statement
on Form S-3 No. 33-71540.
****** Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended July 1, 1995.
`D' Confidential treatment granted.
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as 'tm'
The registered trademark symbol shall be expressed as 'r'
The dagger symbol shall be expressed as `D'