________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
-- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 5, 1997
OR
-- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM__________ TO_________
COMMISSION FILE NUMBER: 1-11202
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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
------------------------------
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 17, 1997 was approximately $203,429,000.
The number of shares of Common Stock outstanding as of September 17, 1997
was 22,419,730.
Documents incorporated by reference: The definitive Proxy Statement of
Authentic Fitness Corporation, relating to the 1997 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 activewear and swimwear under the White Stag'r' brand
name. In addition, the Company operates 138 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'
Divisions accounted for 53%, 28%, 15% and 4%, respectively, of net revenues in
fiscal 1997.
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 $323.1 million in fiscal 1997 from $85.5
million in fiscal 1991, a compound annual growth rate of 24.8%.
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 been approximately $45 million or more than two times
the net cash purchase cost in less than four 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 fiscal 1997 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 water sports 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 and Summer Sanders as well as 1996 Olympic beach
volleyball gold medalist Karch Kiraly and Sinjin Smith. At the 1997 United
States Swimming National championships held in Nashville, Tennessee, swimmers
wearing Speedo'r' suits won 94% of the women's medals and 89% of the men's
medals. In addition, 89% of all teams represented wore Speedo'r' swimwear. 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 is
also an official sponsor of USA Triathlon. The Company has extended these
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,
Australia. 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
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Company's other Speedo'r' swimwear and accessories, as well as the Speedo'r'
Authentic Fitness'r' line of active fitness 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'r' 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 $36.7 million
in fiscal 1997 from $19.9 million in fiscal 1991, a compound annual growth rate
of 10.7%.
ACTIVE FITNESS
The active fitness line includes both fitness swimwear for women and the
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
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-
2
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 and triathletes. The
Company has promotional contracts with Karch Kiraly who 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 WPVA tour and Linda Hanley, currently the No. 3 ranked
player on the WPVA tour. The Company also has a promotional contract with
Spencer Smith, a world champion triathlete.
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 generating net
revenues of $18.2 million in fiscal 1997, an increase of more than 49% from
fiscal 1996. In September 1996, the Company's 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 and related lines increased to $12.2
million in fiscal 1997 from $1.5 million in fiscal 1991, a compound annual
growth rate of 42.0%. Net revenues for the Speedo'r' Authentic Fitness'r' and
related lines increased over 34% in fiscal 1997 compared to fiscal 1996.
MEN'S SWIMWEAR
The Company's Speedo'r' brand watershorts were introduced in 1984 and are
one of the leading brands of men's and boy's branded swimwear in department and
specialty stores commanding a 16% market share for the 1997 selling season. 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 has also developed garments for use for a wide variety of
fitness activities which range from aerobics and running to triathlon and
cycling including shorts, pants and tops primarily made of cotton and nylon
knitted fabrics.
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 a key item in Speedo'r's activewear collection. The Company
has recently introduced a line of men's watershorts and tops under the Duke
Kahanamoku'r' brand name targeted toward surfers which generated approximately
$1 million of sales in fiscal 1997.
3
The Company's Speedo'r' brand watershorts and T-shirts are sold primarily
through department, sporting goods and specialty stores and catalogs. The
Company purchases T-shirt blanks and prints them domestically. The watershorts
are sourced principally from a variety of international sources. The buying
agent for products that are sourced from the Far East 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.
Net revenues for men's swimwear, primarily watershorts and T-shirts
increased to $21.1 million in fiscal 1997 from $15.7 million in fiscal 1991.
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, swimming caps, nose clips,
masks, snorkels, ear plugs, kickboards, floatation devices, and aquatic exercise
gear including 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' and Beachers'r' 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 vision 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 $28.5 million in fiscal
1997 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', WHITE STAG'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', White
Stag'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' and White Stag'r' brands target 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 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 1997 selling season three of the Company's designer brand names
were top ten best sellers at retail. Anne Cole'r' was the fourth best selling
missy swimwear brand, Cole of California'r' was the eighth best selling missy
swimwear brand and Sunset Beach'r' was the third best selling junior swimwear
4
brand. All of these brands experienced significant growth in market share in the
1997 selling season compared to 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 1997, net revenues from this agreement under the Catalina'r' brand were
$26.8 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., a related party ('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
$0.4 million of royalty income associated with this agreement in fiscal 1997.
See Note 11 of Notes to Consolidated Financial Statements.
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 1997,
the Company shipped approximately $4.8 million of men's and women's activewear
and swimwear under the White Stag'r' brand to Wal-Mart.
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 and girls' 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 211% to $89.3
million since the Company purchased the designer brands from Taren in October
1993. Net revenues for the Designer Swimwear Division increased 10.6% to $89.3
million in fiscal 1997 from the $80.7 million recorded in fiscal 1996.
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 137
additional stores (through September 17, 1997) in major metropolitan areas of
the United States and Canada to bring the total number of stores open to 138.
During fiscal 1997 the Company opened 52 new stores. The average capital
expenditure for a new store was approximately $200,000 and each new store
employs approximately five full and part-time employees. 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 approximately 20 additional stores per year over the
next several years.
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 25.3% to $47.8 million in
fiscal 1997 from $38.1 million in fiscal 1996.
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
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Anne Cole'r' products are sold 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 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
$12.8 million of the Company's net revenues for fiscal 1997. 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.
IMPORTS AND IMPORT RESTRICTIONS
Although the Company imported approximately 55.6% of its finished products
in fiscal 1997, substantially all of its competition swimwear is sourced
domestically or manufactured in the Company's facilities in the U.S. The
Company's fashion swimwear for women is manufactured in the Company's facilities
or is sourced from domestic and Mexican contractors. 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 periods of 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 1,211 employees at
July 5, 1997, 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 1996, Wal-Mart accounted for 11% of the Company's net revenues.
In fiscal 1995 and fiscal 1997, no customer accounted for more than 10% of the
Company's net revenues.
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.
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TRADEMARKS AND LICENSING AGREEMENTS
The Company has license agreements in perpetuity with Speedo Holdings B.V.
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 against future 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.
In December 1996, the Company entered into a license agreement with Rampage
Clothing Company, which grants the Company the exclusive right to manufacture,
source and sell women's and girls' swimwear and accessories under the licensed
RAMPAGE'r' trademark. The RAMPAGE'r' license covers an initial term through June
30, 2000, and is extendable at the Company's option for a further three year
period, provided that the Company meets certain requirements at the time it
seeks to exercise its option. The recent filings in the bankruptcy court in
California by Rampage Clothing Company has had no effect on the continued rights
and performance of the Company under the RAMPAGE'r' license.
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
7
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', White Stag'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 licenses were approximately $0.5 million
in fiscal 1997, $0.1 million in fiscal 1996 and $0.7 million in fiscal 1995. 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
sold 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, $0.8 million and $1.4 million (including a $1 million license fee
received from Warnaco) from these agreements in fiscal 1997, 1996 and 1995,
respectively (See Note 11 of Notes to Consolidated Financial Statements).
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 17, 1997, the
Company's backlog was $76.5 million, an increase of over 50% compared to the
prior year. 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 Blvd. properties are occupied on month to month leases from Warnaco.
The Company has 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 December 1997 to November 2003.
8
The Company leases 138 retail store locations 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.
The Company is not a party to any 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.
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................................... 51 Director, Chairman of the Board and Chief Executive
Officer
Christopher G. Staff............................... 55 President and Chief Operating Officer
Susan Guensch...................................... 37 President Speedo'r' Division
Wallis H. Brooks................................... 42 Senior Vice President and Chief Financial Officer
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 The Travelers Group Inc., Applied Graphics Technologies, Inc.
and New York Stock Exchange, Inc.
Mr. Christopher G. Staff has been President and Chief Operating Officer of
the Company since February 1997. Mr. Staff served as President of the Speedo'r'
and White Stag'r'/Skiwear Divisions and Chief Operating Officer of the Company
from April 1992 until September 1994 and as President of the Company from May
1990 until April 1992. Mr. Staff also served as a Director of the Company from
May 1990 until September 1994. Mr. Staff served as President and Chief Executive
Officer of Van's, Inc. from September 1994 until June 1995 and as a consultant
to the apparel and sportswear industry from June 1995 until November 1996. Mr.
Staff rejoined the Company in November 1996.
9
Ms. Susan 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.
Mr. Wallis H. Brooks has been the Senior Vice President and Chief Financial
Officer of the Company since February 1997. Mr. Brooks served as Senior Vice
President and Chief Financial Officer of the Company from October 1993 until
April 1995. Mr. Brooks served in various financial and accounting positions with
Warnaco from November 1988 until October 1993 and served as Vice President and
Corporate Controller of Warnaco from May 1995 until February 1997. From 1984 to
1988 Mr. Brooks was associated with a predecessor to the international
accounting and auditing firm Ernst & Young LLP.
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.
PERIOD HIGH(1) LOW(1)
- -------------------------------------------------------------------------------- ------- ------
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.............................................................. 18 7/8 11
Second quarter............................................................. 12 1/8 10 3/8
Third quarter.............................................................. 16 1/8 11 1/2
Fourth quarter............................................................. 16 12 3/8
Fiscal 1998:
First quarter through September 17, 1997................................... 15 3/4 11
- ------------------
(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 Common Stock as reported on the
New York Stock Exchange Composite Tape was 15 1/8 on September 17, 1997. On
September 17, 1997 there were 141 holders of 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 1/4[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 eight successive
quarterly cash dividends of 1 1/4[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 July 3, 1993, July 2, 1994, July 1, 1995 and the
selected consolidated financial data for the fiscal
10
years ended July 3, 1993 and July 2, 1994 are derived from audited consolidated
financial statements not included herein. The selected consolidated financial
data for the Company for the fiscal years ended July 1, 1995, July 6, 1996 and
July 5, 1997 and as of July 6, 1996 and July 5, 1997 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.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED
------------------------------------------------------------
JULY 3, JULY 2, JULY 1, JULY 6, JULY 5,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenues.............................. $132,944 $178,567 $266,133 $309,609 $323,088
Gross profit.............................. 47,419 63,710 97,696 75,398 132,296
Selling, general and administrative
expenses................................ 25,168 32,902 52,578 91,723 76,456
Non-recurring items....................... -- 5,658(a) -- 13,642(b) 3,354(c)
Depreciation and amortization............. 2,778 4,338 6,549 15,462 9,824
-------- -------- -------- -------- --------
Income (loss) before interest, income
taxes and extraordinary items........... 19,473 20,812 38,569 (45,429) 42,662
Interest expense.......................... 4,253 4,400 6,977 11,547 13,554
-------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items..................... 15,220 16,412 31,592 (56,976) 29,108
Income taxes (benefit).................... 5,444 6,831 12,118 (17,623) (10,073)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items................................... 9,776 9,581 19,474 (39,353) 19,035
Extraordinary items....................... -- (1,591)(d) -- (1,497)(e) --
-------- -------- -------- -------- --------
Net income (loss)......................... $ 9,776 $ 7,990 $ 19,474 $(40,850) $ 19,035
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per share:
Income (loss) per share before
extraordinary items..................... $ 0.56 $ 0.49 $ 0.90 $ (2.00) $ 0.85
Extraordinary items....................... -- (0.08)(d) -- (0.08)(e) --
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per share............... $ 0.56 $ 0.41 $ 0.90 $ (2.08) $ 0.85
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of shares of
common stock outstanding................ 17,488 19,724 21,712 19,607(f) 22,514
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Product line summary:
Net revenues:
Speedo'r'............................. $102,898 $113,138 $143,991 $161,920 $171,856
Designer Swimwear..................... -- 28,739 68,572 80,695 89,258
Authentic Fitness'r' Retail........... 426 4,620 20,418 38,135 47,786
White Stag'r'/Skiwear................. 29,620 32,070 33,152 28,859 14,188
-------- -------- -------- -------- --------
$132,944 $178,567 $266,133 $309,609 $323,088
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Percentage of net revenues:
Speedo'r'............................. 77.4 % 63.3% 54.1% 52.3% 53.2%
Designer Swimwear..................... -- 16.1% 25.8% 26.1% 27.6%
Authentic Fitness'r' Retail........... 0.3 % 2.6% 7.7% 12.3% 14.8%
White Stag'r'/Skiwear................. 22.3 % 18.0% 12.4% 9.3% 4.4%
-------- -------- -------- -------- --------
100.0 % 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital....................... $27,370 $ 54,580 $ 66,051 $ 50,373 $ 53,118
Total assets.......................... 118,122 197,602 278,239 281,466 321,872
Long-term debt (excluding current
maturities)......................... 21,500 19,191 32,446 49,432 42,682
Stockholders' equity.................. 56,978 121,690 141,908 116,723 133,708
- ------------
(a) Non-recurring expenses include bonuses paid to senior executives in
connection with the acquisition of Catalina/Cole 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.
(footnotes continued on next page)
11
(footnotes continued from previous page)
(b) Includes a special bad debt loss of $11.6 million 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. Includes $2.0 million
of expenses incurred by the Company in the fourth quarter of fiscal 1996
related to the terminated merger with Warnaco. See Note 10 of Notes to
Consolidated Financial Statements.
(c) Reflects excess distribution costs, not covered by insurance, as a result
of the flood at the Company's Sparks, Nevada facility in January 1997. See
Note 10 of Notes to Consolidated Financial Statements.
(d) 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.
(e) 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 14 of Notes to Consolidated Financial Statements.
(f) Does not include the 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 entering
new channels of distribution and expanding 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 four 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, (iii) the opening
of 138 Company-owned Speedo'r' Authentic Fitness'r' retail stores through
September 17, 1997, 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 $323.1 million in fiscal 1997 from $85.5
million in fiscal 1991, a compound annual growth rate of 24.8%.
RESULTS OF OPERATIONS
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 exiting the
skiwear and the outlet store businesses, the special bad debt loss 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 statements and notes thereto provided elsewhere herein. The Company
has also separately identified the impact of certain incremental inventory and
accounts receivable reserves on the results of operations for fiscal 1996.
12
STATEMENT OF OPERATIONS
(SELECTED DATA)
FISCAL YEAR ENDED
----------------------------------------------------------------------------
JULY 1, % OF NET JULY 6, % OF NET JULY 5, % OF NET
1995 REVENUES 1996 REVENUES 1997 REVENUES
------- ------------------- ------- ------------------- ------- ---------
(IN MILLIONS)
Net revenues........................................ $ 266.1 100.0% $ 309.6 100.0% $ 323.1 100.0%
Gross profit -- as adjusted for items below......... 97.7 36.7% 97.3 31.4% 132.3 40.9%
Selling, administrative and general expenses -- as
adjusted for items below.......................... 52.6 19.8% 83.6 27.0% 76.5 23.7%
Depreciation and amortization....................... 6.5 7.3 9.8
Income before extraordinary items -- as adjusted for
items below....................................... 19.4 2.2 21.2
Other items:
Excess distribution costs related to the flood not
covered by insurance.............................. -- -- 2.2
Special 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 and accounts receivable and other
reserves.......................................... -- 18.7 --
Net income (loss)................................... $ 8.0 $ (40.8) $ 19.0
------- ------- -------
------- ------- -------
COMPARISON OF FISCAL 1997 TO FISCAL 1996
On January 1, 1997, one of the Company's three distribution centers,
located in Sparks, Nevada, was flooded, destroying certain inventory owned by
the Company. The Company is insured for such losses as well as for profits
lost due to business interruption. As of July 5, 1997, the Company had recorded
a $25.0 million claim receivable from the insurance company representing the
cost of inventory damaged in the flood, lost profit on orders that were not
shipped due to the flood and other covered expenses. In addition, in the
fourth quarter of fiscal 1997, the Company incurred $3.4 million of distribution
and other expenses in excess of amounts covered by insurance which have been
identified as a non-recurring expense. As of July 5, 1997, the Company had
received $15.5 million from the insurance company against its insurance claim.
Net revenues increased 4.4% in fiscal 1997 to $323.1 million from $309.6
million in fiscal 1996. This increase was accomplished despite revenues lost in
the second half of fiscal 1997 due to the previously discussed Sparks flood as
well as the loss of revenues generated by the discontinued skiwear and outlet
store businesses (See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of Fiscal 1996 to Fiscal
1995). Adjusting for the impact of these items, the Company estimates that net
revenues would have increased approximately 20% over fiscal 1996. The increase
in net revenues reflects an increase in Speedo'r' net revenues of 6.1%, an
increase in Designer Swimwear net revenues of 10.6% and an increase in Authentic
Fitness'r' Retail Division net revenues of 25.3%. White Stag'r'/Skiwear net
revenues decreased over $14 million primarily due the Company's strategic
decision to discontinue its skiwear business in May 1996. The increase in
Speedo'r' net revenues primarily reflects an increase in accessories,
including Speedo'r' kids accessories, of 69%, goggles of 16% and fitness
swimwear of 32%. The increase in Designer Swimwear net revenues reflects
increases in Sunset Beach'r' of 19.7%, Cole of California'r' of 75.9%, Anne
Cole'r' of 8.6%. Catalina'r' shipments to Wal-mart increased 5.5%. Authentic
Fitness'r' Retail Division net revenues increased 25.3% reflecting the opening
of 52 stores during fiscal 1997.
Gross profit in fiscal 1997 increased to $132.3 million from $75.4 million
in fiscal 1996. Gross profit as a percentage of net revenues was 40.9% in fiscal
1997 compared to 24.4% in fiscal 1996. Gross profit for fiscal 1996 includes the
impact of gross profit losses attributable to the discontinued skiwear and
outlet store businesses and certain 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 increase in gross profit
13
in fiscal 1997 compared to fiscal 1996 reflects a more favorable sales mix, the
Company's strategic decision to move production of approximately 5 million
swimsuits off-shore and the higher mix of Authentic Fitness'r' Retail Division
sales which produce a higher gross profit margin than the wholesale divisions.
The increase in gross profit as a percentage of net revenues in fiscal 1997
compared to fiscal 1996 reflects the favorable impact of discontinuing the
outlet and skiwear operations, more favorable sales mix and favorable variances
associated with off-shore sourcing, as noted above. Gross profit as a percentage
of net revenues for fiscal 1997 also reflects the benefit of $8.7 million of
reimbursements from the Company's insurance carrier related to losses from the
Sparks, Nevada flood without the offsetting cost of goods sold. Adjusting for
this item, gross profit as a percentage of net revenues was 39.3% for fiscal
1997.
Selling, general and administrative expenses for fiscal 1997 decreased to
$76.5 million (23.7% of net revenues) from $91.7 million in fiscal 1996.
Selling, general and administrative expenses for fiscal 1996 include the impact
of the decision to exit the skiwear and outlet store businesses and certain
incremental accounts receivable and other allowances recorded by the Company in
fiscal 1996. Selling, general and administrative expenses, before the impact of
these items was $83.6 million (27.0% of net revenues). The decrease in selling,
general and administrative expenses in fiscal 1997 compared to fiscal 1996
primarily reflects cost saving measures implemented by the Company in the first
quarter of fiscal 1997 and a gain of approximately $3 million related to the
sale of certain barter credits in the second quarter of fiscal 1997.
Depreciation and amortization expenses decreased to $9.8 million in fiscal
1997 from $15.5 million in fiscal 1996. Depreciation and amortization expense
for fiscal 1996 includes the write-off of goodwill and intangible assets related
to the discontinued skiwear and outlet store businesses. Depreciation and
amortization expense was $7.3 million before the write-off. The increase in
depreciation and amortization expense primarily reflects the amortization of
leasehold improvements related to the increase in the number of Authentic
Fitness'r' retail stores compared to fiscal 1996.
Interest expense increased to $13.6 million in fiscal 1997 compared to
$11.5 million in fiscal 1996. The increase in interest expense in fiscal 1997
compared to fiscal 1996 primarily reflects the borrowing to fund the expansion
of the Company's Authentic Fitness'r' retail stores and the related increase in
working capital. The Company's borrowing rate for fiscal 1998 automatically
decreased to LIBOR plus 1% from LIBOR plus 1.5% at the end of fiscal 1997
pursuant to the terms of the Company's credit agreement.
The Company's effective income tax rate for fiscal 1997 was 34.6% compared
to 31% in fiscal 1996. The difference between the Company's effective income tax
rate and the statutory income tax rate of 35% reflects the impact of state
income taxes offset by the benefit of reversing the valuation allowance recorded
by the Company in fiscal 1996 related to net operating loss carryforwards.
Net income in fiscal 1997 was $19.0 million compared to a net loss of
$(40.8) million in fiscal 1996. The increase in net income of over $59 million
reflects the increase in gross profit and lower selling, general and
administrative expenses partially offset by the higher interest expense and
income taxes, all as noted above. The net loss in fiscal 1996 reflects the
impact of the special bad debt loss, terminated merger costs, losses related to
discontinuing the skiwear and outlet store businesses and additional reserves
and adjustments, as discussed below.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
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 had
not been profitable for the prior two years. The difficulty had 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 the
Outlet Stores' assets to net realizable value.
14
In addition, in May 1996, the Company made a strategic decision to exit the
skiwear business. The skiwear industry is extremely volatile, very promotional,
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 customer, Herman's Sporting Goods, Inc. ('Herman's'), which
announced its liquidation in May 1996. 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, inventory
losses and the write down of assets related to the skiwear business, including
intangible assets and goodwill, to net realizable value.
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 $11.6 million 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 $4.6 million.
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, 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 evaluation of its accounts receivable, inventory and
other accounts at the end of fiscal 1996, and as a result, the Company provided
additional reserves of $18.7 million which related to and were reflected in the
Company's fiscal 1996 second and third quarter interim results.
The adjustments are summarized below (in thousands):
SELLING, GENERAL AND
COST OF ADMINISTRATIVE
GOODS SOLD 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 16 of Notes to Consolidated Financial Statements for the impact of
these items on the Company's interim financial results for fiscal 1996.
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 Authentic Fitness'r' 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
15.1%. The increase in Authentic Fitness'r' 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, Authentic Fitness'r' 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 incremental accounts
receivable and other allowances recorded by the Company in fiscal 1996. Selling,
general and administrative expenses before the impact of these items 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 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 increased amortization of leasehold assets
attributable to the increased number of Authentic Fitness'r' Retail Stores
compared to fiscal 1995. Depreciation and amortization expense 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 5 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 was fully reserved by a valuation allowance
at the end of fiscal 1996. The valuation allowance was reversed in the third
quarter of fiscal 1997.
16
Income before extraordinary and other items was $2.2 million in fiscal
1996, compared to $19.4 million in fiscal 1995. The decrease primarily reflects
the higher selling, general and administrative expense and interest expense, as
noted above.
Income (loss) before interest and income taxes was $(45.4) million in
fiscal 1996 compared to $38.6 million in fiscal 1995. The decrease in income
before interest and income taxes reflects the (i) impact of the special bad
debt loss, (ii) terminated merger costs, (iii) write-off of certain intangible
assets associated with the decision to exit the skiwear and outlet store
businesses, (iv) increased selling, general and administrative expenses mainly
due to the decision to exit the skiwear and outlet store businesses and
increases in accounts receivable and other allowances, and (v) lower gross
profit due primarily to the decision to exit the skiwear and outlet store
businesses, incremental inventory reserves and the severe disruption of the
Company's markets caused by the Herman's bankruptcy, all 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 special bad debt loss and the incremental inventory and
accounts receivable reserves.
CAPITAL RESOURCES AND LIQUIDITY
On September 6, 1996, the Company entered into a $200 million Credit
Agreement with GE Capital, The Bank of Nova Scotia, Societe Generale and Union
Bank of California (the '$200 Million Credit Agreement'). 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 accrued interest at the lenders' base rate or at LIBOR
plus 1.5-2.0% during fiscal 1997 but decreased to LIBOR plus 1.0% in the first
quarter of fiscal 1998. The rate of interest payable on outstanding borrowing
will be automatically reduced, to as low as LIBOR plus .75%, as the Company's
EBITDA to Debt ratio improves.
In addition, the $200 Million Credit Agreement allows the Company to
purchase up to $10 million of its Common Stock after March 31, 1997, under
certain conditions. In May 1997, the Company's Board of Directors approved a
stock repurchase program which allows the Company to buy up to $10 million of
its outstanding Common Stock. As of September 17, 1997, the Company had
purchased 272,200 shares of the Company's Common Stock at an average price of
$15.09 per share for an aggregate cost of approximately $4.1 million.
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 has declared eight successive quarterly cash dividends. The
Company believes that its stock repurchase program as well as the initiation of
a regular quarterly cash dividend demonstrates 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
138 stores open and expects to open approximately 20 additional stores each year
over the next five 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
17
fiscal year reflecting third and fourth quarter shipments and the sale of
inventory built during the first half 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 roll out of
the Company's Authentic Fitness'r' Retail Stores.
Cash provided by (used in) operating activities was $17.8 million,
$(40.2) million and $(15.8) million in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. The increase in cash flow from operating activities in fiscal 1997
compared to fiscal 1996 of $58.0 million primarily reflects the increase of over
$59 million in net income in fiscal 1997 compared to fiscal 1996 and income tax
refunds received in fiscal 1997 from the carryback of the Company's fiscal 1996
net loss. Inventory increased $21.7 million in fiscal 1997 primarily related to
the expansion of the Company's Authentic Fitness'r' Retail Stores Division and
an increase in raw material and work in process to support expected sales
increases in fiscal 1998. Accounts receivable increased primarily reflecting the
insurance claim receivable of $9.5 million and higher sales in the last month of
fiscal 1997 compared to fiscal 1996. Accounts payable and accrued liabilities
increased by $14.8 million reflecting the purchase of raw material, as noted
above. The increase in cash used in operating activities for fiscal 1996
compared to fiscal 1995 of $24.5 million reflects the decrease in net income of
approximately $60 million, income taxes payable of $5.7 million and the net
effect of other non-cash items of $2.5 million, partially offset by an
improvement in overall working capital usage of $43.7 million. Accounts
receivable usage decreased $16.2 million in fiscal 1996 compared to fiscal 1995.
Total inventory decreased by $8.2 million, an improvement of $42.8 million from
fiscal 1995. The decrease in inventory for fiscal 1996 primarily reflects the
Company's decision to exit the skiwear and outlet store businesses.
Cash used in investing activities was $15.1 million, $16.4 million and
$31.3 million for fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Cash
used in investing activities for fiscal 1997 primarily reflects capital
expenditures of $16.9 million, primarily related to leasehold improvements and
other costs associated with the opening of 52 Authentic Fitness'r' retail stores
and an increase in intangible and other assets partially offset by the proceeds
from the sale of other assets of $8.5 million. Cash used in investing activities
in fiscal 1996 primarily reflects capital expenditures and increases in other
assets, primarily related to the expansion of the Company's Authentic Fitness'r'
retail stores. Cash used in investing activities for fiscal 1995 includes $19.3
million of capital expenditures, primarily relating to the expansion of the
Company's Authentic Fitness'r' retail stores and enhancements to the Company's
computer systems to support growth in the Company's business. Fiscal 1995 also
reflects the purchase of certain intangible assets for approximately $6.6
million (see Note 11 of Notes to Consolidated Financial Statements) and the
payment of $2.2 million of acquisition accruals from the Catalina/Cole
acquisition.
Cash provided by (used in) financing activities was $(3.0) million, $57.4
million and $46.8 million for fiscal 1997, fiscal 1996 and fiscal 1995,
respectively. Cash flow from financing activities for fiscal 1997 primarily
reflects the proceeds from the Term Loan offset by repayments of debt (including
the pay down of the Revolving Loan), repurchase of the Series A Warrant,
dividend payments and the payment of deferred debt issue costs. In fiscal 1996
the Company sold 2.5 million shares of its Common Stock in an underwritten
public offering which generated $50.8 million of cash flow from financing
activities. In fiscal 1996 the Company purchased one-half of a warrant
representing 1,809,179 shares of Common Stock from GE Capital, the funds for
which were provided by an increase in long-term debt. In addition, the Company
repaid certain debt obligations by borrowing amounts available under its
revolving credit agreement. In fiscal 1995 cash flow from financing activities
primarily reflected an increase in the Company's total debt of approximately
$51.4 million.
The Company's Revolving Loan balance was approximately $102.0 million as of
September 17, 1997. The Company's Term Loan balance was $47.5 million on
September 17, 1997.
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 stores for at least the next twelve
months. Although the Company believes that its current credit agreement and cash
flow to be generated from future
18
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.
OTHER
In fiscal 1996, the Company discussed with its auditors certain weaknesses
in the Company's internal accounting and control procedures primarily related to
the timely analysis of balance sheet and income statement accounts in connection
with the preparation of interim financial statements and specifically the
valuation and adjustment of inventory and other account balances. These items
involved the allocation of overhead costs to inventory, the valuation of certain
prior and current season inventory, certain book to physical inventory
adjustments and the interim analysis of certain accrual, prepaid and reserve
accounts.
Commencing in fiscal 1997, the Company effected improvements in its
internal accounting controls and procedures by improving its inventory
monitoring systems and controls, including the development of a cycle count
program for its raw material and trim inventory, implementing supplemental
procedures to review and adjust interim balance sheets and income statements and
by appointing additional financial and accounting personnel. In addition, the
Company has effected certain structural changes in its business and operations
which the Company believes eliminate certain inventory control issues, including
subcontracting substantially all of its production control and manufacturing
functions, closing its Company-owned outlet stores and exiting the skiwear
business. The Company believes that the systems improvements, personnel changes
and structural changes have significantly enhanced the Company's internal
control structure and operations.
SEASONALITY
The Company's operations are seasonal. In fiscal 1997, approximately 66% 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.
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
----------------------------------------------------------------------------------
OCT 1, DEC 31, MAR 31, JULY 6, OCT 4, JAN 4, APRIL 5, JULY 5,
1995 1995 1996 1996 1996 1997 1997 1997
------ ------- ------- ------- ------ ------ -------- -------
(IN MILLIONS)
Net revenues............................ $ 42.9 $77.3 $98.9 $90.5 $ 38.7 $ 70.4 $105.0 $ 109.0
The Speedo'r' Division produces a variety of products during the year and
is seasonal in nature with 67% of net revenues realized in the second half of
fiscal 1997. The Designer Swimwear Division is seasonal in nature, most
customers' orders are placed in the July through December period and product is
shipped to customers starting in November. In fiscal 1997, 79% of net revenues
for the Designer Swimwear Division were realized in the second half of the year.
The Company's Authentic Fitness'r' Retail Stores Division is somewhat seasonal.
For the 84 stores open for the full 12 months of fiscal 1997, 45% 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.
19
IMPACT OF NEW ACCOUNTING STANDARDS
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 establishes market value accounting and
reporting standards for stock based employee compensation plans. Companies may
elect to continue to account for stock-based compensation using the intrinsic
value approach under APB Opinion No. 25. The Company was required to adopt FAS
123 for its 1997 fiscal year. The Company's accounting for its stock-based
compensation plans will continue to follow APB Opinion No. 25. The pro-forma
disclosure required by FAS 123 is included in Note 8 of Notes to Consolidated
Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, 'Earnings per Share' which revises
the manner in which earnings per share is calculated. The statement is effective
for the reporting period ending January 3, 1998 and is not expected to have a
significant impact on the Company's earnings per share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, 'Reporting Comprehensive Income' and
Statement No. 131, 'Disclosures about Segments of an Enterprise and Related
Information'. These statements, which are effective for the Company's 1999
fiscal year, expand or modify disclosures and, accordingly, will have no impact
on the Company's reported financial position, results of operations or cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not required for fiscal 1997 because the Company's market capitalization
was less than $2.5 billion as of January 28, 1997.
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 pages 9-10 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.
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.
20
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 Accountants, Price Waterhouse LLP.
Report of Independent Auditors, Ernst & Young LLP.
Consolidated Balance Sheets as of July 6, 1996 and July 5, 1997.
Consolidated Statements of Operations for the Years Ended July 1, 1995, July 6, 1996 and July 5,
1997.
Consolidated Statement of Stockholders' Equity for the Years Ended July 1, 1995, July 6, 1996 and
July 5, 1997.
Consolidated Statements of Cash Flows for the Years ended July 1, 1995, July 6, 1996 and July 5,
1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission which
are not included with this additional financial data have been 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, as amended.
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.
21
10.14* 1990 Key Management Stock Option Plan.
10.15`D'`D' 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`D'`D'`D' $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.
10.19** 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.
11.1 Calculation of Income (Loss) per common share.
21.1*** Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Price Waterhouse LLP.
27.1 Financial Data Schedule.
- ------------
* 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.
`D'`D' Incorporated herein by reference to the Company's Annual report on Form
10-K for the fiscal year ended July 1, 1995.
`D'`D'`D' Incorporated herein by reference to the Company's Annual report on
From 10-K for the fiscal year ended July 6, 1996.
`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 1997, not previously reported.
22
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 2nd day of
October 1997.
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 2, 1997
- ------------------------------------------ Executive Officer (Principal Executive
(LINDA J. WACHNER) Officer)
/s/ WALLIS H. BROOKS Senior Vice President and Chief Financial October 2, 1997
- ------------------------------------------ Officer (Principal Financial and Accounting
(WALLIS H. BROOKS) Officer)
/s/ STANLEY S. ARKIN Director October 2, 1997
- ------------------------------------------
(STANLEY S. ARKIN)
/s/ STUART D. BUCHALTER Director October 2, 1997
- ------------------------------------------
(STUART D. BUCHALTER)
/s/ JOSEPH A. CALIFANO, JR. Director October 2, 1997
- ------------------------------------------
(JOSEPH A. CALIFANO, JR.)
/s/ WILLIAM S. FINKELSTEIN Director October 2, 1997
- ------------------------------------------
(WILLIAM S. FINKELSTEIN)
/s/ ROBERT D. WALTER Director October 2, 1997
- ------------------------------------------
(ROBERT D. WALTER)
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Authentic Fitness Corporation
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)1 and 2 on page 21 present fairly, in all
material respects, the financial position of Authentic Fitness Corporation and
its subsidiaries at July 5, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. The consolidated financial
statements of Authentic Fitness Corporation and its subsidiaries for each of the
fiscal years ended July 1, 1995 and July 6, 1996 were audited by other
independent accountants whose report dated October 2, 1996 expressed an
unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Los Angeles, California
August 20, 1997
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Authentic Fitness Corporation
We have audited the accompanying consolidated balance sheet of Authentic
Fitness Corporation as of July 6, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended July 1,
1995 and July 6, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14(a) for the years ended July 1, 1995 and July 6,
1996. 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 6, 1996, and the consolidated results of
its operations and its cash flows for the years ended 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, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
October 2, 1996
F-2
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
JULY 6, JULY 5,
1996 1997
-------- --------
ASSETS
Current assets:
Cash................................................................................. $ 1,499 $ 1,246
Accounts receivable -- net of allowances of $9,361 -- 1996 and $6,871 -- 1997
(includes insurance claim receivable of $9,500 -- 1997)............................. 75,274 85,240
Accounts receivable from affiliates.................................................. 4,004 14,443
Inventories.......................................................................... 64,777 86,467
Other current assets................................................................. 10,154 6,119
Income tax refunds receivable........................................................ 9,556 --
-------- --------
Total current assets............................................................ 165,264 193,515
Property, plant and equipment, net of accumulated depreciation of $11,062 -- 1996 and
$17,609 -- 1997......................................................................... 42,786 52,566
Deferred financing costs, net of accumulated amortization of $3,001 -- 1996 and
$4,209 -- 1997.......................................................................... 994 5,455
Licenses, trademarks and other assets, net of accumulated amortization of $20,022 -- 1996
and $23,793 -- 1997..................................................................... 41,699 40,480
Excess of cost over net assets acquired, net of accumulated amortization of $9,558 -- 1996
and $10,426 -- 1997..................................................................... 30,723 29,856
-------- --------
$281,466 $321,872
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Borrowing under revolving credit facility............................................ $ 68,214 $ 75,776
Current maturities of long-term debt................................................. 2,844 6,751
Accounts payable..................................................................... 21,550 27,227
Payable to affiliates................................................................ 14,132 22,937
Other accrued expenses............................................................... 8,151 5,911
Accrued income taxes................................................................. -- 1,795
-------- --------
Total current liabilities....................................................... 114,891 140,397
Long-term debt............................................................................ 49,432 42,682
Deferred income taxes..................................................................... 420 5,085
Commitments and contingencies (Note 9)
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
20,524,721 -- 1996 and 22,419,730 -- 1997........................................... 21 23
Additional paid-in capital........................................................... 159,239 160,186
Cumulative translation adjustment.................................................... (723) (741)
Retained earnings (deficit).......................................................... (41,814) (23,906)
Treasury stock, at cost.............................................................. -- (1,854)
-------- --------
Total stockholders' equity...................................................... 116,723 133,708
-------- --------
$281,466 $321,872
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements.
F-3
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
FOR THE FISCAL YEARS ENDED
----------------------------------
JULY 1, JULY 6, JULY 5,
1995 1996 1997
-------- -------- --------
Net revenues.............................................................. $266,133 $309,609 $323,088
Cost of goods sold........................................................ 168,437 234,211 190,792
-------- -------- --------
Gross profit.............................................................. 97,696 75,398 132,296
Selling, general and administrative expenses.............................. 52,578 91,723 76,456
Excess distribution costs................................................. -- -- 3,354
Herman's special bad debt loss............................................ -- 11,642 --
Merger termination costs.................................................. -- 2,000 --
Depreciation and amortization............................................. 6,549 15,462 9,824
-------- -------- --------
Income (loss) before interest and income taxes............................ 38,569 (45,429) 42,662
Interest expense.......................................................... 6,977 11,547 13,554
-------- -------- --------
Income (loss) before income taxes......................................... 31,592 (56,976) 29,108
Provision (benefit) for income taxes...................................... 12,118 (17,623) 10,073
-------- -------- --------
Income (loss) before extraordinary items.................................. 19,474 (39,353) 19,035
Extraordinary item, net of income tax benefit of $705 -- 1996............. -- (1,497) --
-------- -------- --------
Net income (loss)......................................................... $ 19,474 $(40,850) $ 19,035
-------- -------- --------
-------- -------- --------
Net income (loss) per share:
Income (loss) before extraordinary items............................. $0.90 $(2.00) $0.85
Extraordinary items.................................................. -- (0.08) --
-------- -------- --------
Net income (loss)......................................................... $0.90 $(2.08) $0.85
-------- -------- --------
-------- -------- --------
Weighted average number of shares of common stock outstanding............. 21,711,629 19,607,410 22,513,513
========== ========== ==========
Related party transactions included in the Consolidated Statements of
Operations
Product sales............................................................. $ 8,921 $ 5,553 $ 29,299
Purchases of goods and services........................................... 3,066 4,284 8,428
Royalty expense........................................................... 4,883 6,177 5,705
Interest expense.......................................................... 807 928 4,526
Rent expense.............................................................. 880 979 726
The accompanying notes are an integral part of these financial statements.
F-4
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
SHARES OF ADDITIONAL CUMULATIVE RETAINED TREASURY TOTAL
COMMON COMMON PAID IN TRANSLATION EARNINGS STOCK, STOCKHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT (DEFICIT) AT COST EQUITY
---------- ------ ---------- ----------- --------- --------- -------------
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 )
Cash dividends.............. (964) (964 )
Change in cumulative
translation adjustment.... 17 17
Net income (loss)........... (40,850) (40,850 )
---------- ------ ---------- ----------- --------- --------- -------------
Balance at July 6, 1996..... 20,524,721 21 159,239 (723 ) (41,814) -- 116,723
Exercise of options......... 86,000 -- 949 949
Cash dividends.............. (1,127) (1,127 )
Exercise of Series A
Warrant................... 1,809,009 2 (2 ) --
Change in cumulative
translation adjustment.... (18 ) (18 )
Purchase of 125,000 shares
of treasury stock......... -- -- (1,854) (1,854 )
Net income.................. 19,035 19,035
---------- ------ ---------- ----------- --------- --------- -------------
Balance at July 5, 1997..... 22,419,730 $ 23 $ 160,186 $ (741 ) $ (23,906) $ (1,854) $ 133,708
---------- ------ ---------- ----------- --------- --------- -------------
---------- ------ ---------- ----------- --------- --------- -------------
The accompanying notes are an integral part of these financial statements.
F-5
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
FOR THE YEARS ENDED
--------------------------------
JULY 1, JULY 6, JULY 5,
1995 1996 1997
-------- -------- --------
Cash flows from operating activities:
Net income (loss)........................................................... $ 19,474 $(40,850) $ 19,035
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for uncollectible accounts receivable.......................... 17,726 26,368 20,135
Depreciation and amortization............................................ 6,549 15,462 9,824
Gain on disposal of other assets, net.................................... -- -- (2,439)
Non-cash interest........................................................ 392 359 1,208
Income taxes............................................................. 1,535 (18,328) --
Extraordinary item....................................................... -- 2,202 --
Accounts receivable........................................................... (40,714) (24,549) (40,540)
Inventories................................................................... (34,600) 8,226 (21,690)
Other current assets.......................................................... (3,048) (2,518) 4,035
Income taxes.................................................................. -- (5,724) 16,017
Accounts payable.............................................................. 7,657 (4,175) 14,482
Other accrued expenses........................................................ 7,185 3,209 (2,240)
Other......................................................................... 2,077 69 --
-------- -------- --------
Net cash provided by (used in) operating activities........................... (15,767) (40,249) 17,827
Cash flows from investing activities:
Proceeds from the sale of other assets................................... -- -- 8,500
Payment of acquisition accruals.......................................... (2,185) -- --
Purchases of fixed assets................................................ (19,278) (12,668) (16,901)
Purchase of intangible assets and other assets........................... (6,567) -- (7,154)
Other, net............................................................... (3,289) (3,739) 451
-------- -------- --------
Net cash used in investing activities......................................... (31,319) (16,407) (15,104)
Cash flows from financing activities :
Net borrowing (repayments) under revolving credit facility............... 31,359 81,427 (42,438)
Net proceeds from the sale of Common Stock and exercise of options....... 707 53,102 955
Issuances of long-term debt.............................................. 20,000 38,500 50,274
Payment of deferred financing fees....................................... (526) (2,139) (5,669)
Repayments of debt....................................................... (4,763) (76,059) (3,117)
Dividends................................................................ -- (964) (1,127)
Purchase of treasury stock............................................... -- -- (1,854)
Purchase of Series A Warrant............................................. -- (36,484) --
-------- -------- --------
Net cash provided by (used in) financing activities........................... 46,777 57,383 (2,976)
-------- -------- --------
Net increase (decrease) in cash............................................... (309) 727 (253)
Cash -- beginning of year..................................................... 1,081 772 1,499
-------- -------- --------
Cash -- end of year........................................................... $ 772 $ 1,499 $ 1,246
-------- -------- --------
-------- -------- --------
Supplemental disclosures of cash flow information:
Cash paid for interest................................................... $ 6,585 $ 11,850 $ 12,239
Cash paid (refunds received) for income taxes, net....................... $ 3,128 $ 7,458 $ (6,163)
The accompanying notes are an integral part of these financial statements.
F-6
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
Supplemental disclosures of non-cash operating, investing and financing
activities:
During the years ended July 1, 1995, July 6, 1996 and July 5, 1997 the
Company capitalized approximately $268,000, $146,000 and $177,000 of interest
costs related to the construction of certain fixed assets.
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, July 6, 1996 and July 5, 1997 the
Company entered into capital leases for new equipment and recorded capital lease
obligations for the cost of the new equipment of $645,000, $600,000 and
$274,000, respectively.
The accompanying notes are an integral part of these financial statements.
F-7
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 1, 1995, July 6, 1996 and July 5, 1997. 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 amounts
have been reclassified to conform to the current year 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 the net assets and liabilities of the Company's Canadian
operations at current rates of exchange as of the respective balance sheet date
and are applied directly to 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 the advertisement is first shown. At July 6, 1996 and July 5, 1997
there were no advertising costs capitalized. Advertising expense for the years
ended July 1, 1995, July 6, 1996 and July 5, 1997 were approximately
$13,150,000, $18,885,000 and $20,432,000, 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 and start-up costs. The Company defers certain start-up costs
and pre-operating costs associated with new manufacturing facilities, certain
new businesses and certain costs associated with the opening of new retail
stores. Start-up costs associated with new manufacturing facilities and new
businesses are amortized using the straight line method over 36 months.
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 stated at cost and are classified with fixed assets, the related
capitalized lease obligations are classified with long-term debt.
Depreciation. Depreciation of property, plant and equipment (including
capital lease assets) is provided using the straight-line method over the
assets' estimated useful lives, ranging from 3 to 20 years.
Intangible assets. The Company adopted 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') effective with its 1997 fiscal
year. The adoption of FAS 121 did not have a material impact on the Company.
Amortization of licenses and trademarks is provided using the straight line
method
F-8
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the economic lives of the assets, which is principally 20 years. Excess of
cost over net assets acquired is amortized using the straight line method over
40 years. The carrying value of all long term assets including the 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
carrying value of long term assets including the excess of cost over net assets
acquired will not be recoverable, as determined based on the undiscounted cash
flows of the entity or asset acquired over the remaining amortization period,
the Company's carrying value of the assets will be reduced by the estimated
shortfall of cash flows.
Deferred financing costs. Deferred financing costs are amortized over the
life of the related debt using the interest method.
Income taxes. Income taxes payable are determined in accordance with
Statement of Financial Accounting Standards No. 109 'Accounting for Income
Taxes'.
Revenue recognition. Revenue is recognized when goods are shipped or sold
to customers. Returns and allowances are provided for at the time of sale.
Concentration of credit risk. The Company sells its products to department
stores, sporting goods stores, mass merchandisers and specialty outlets
primarily in the United States and Canada. 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 with respect to Herman's Sporting Goods, Inc. ('Herman's') which filed for
bankruptcy on April 26, 1996 and on May 2, 1996 announced their liquidation.
(See Note 10 of Notes to Consolidated Financial Statements). Wal-Mart Stores
accounted for 11% of the Company's net revenues for the fiscal year ended
July 6, 1996. No customer accounted for more than 10% of the Company's net
revenues in the fiscal years ended July 1, 1995 and July 5, 1997.
Stock Based Compensation. 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 establishes
market value accounting and reporting standards for stock based employee
compensation plans. Companies may elect to continue to account for stock-based
compensation using the intrinsic value approach under APB Opinion No. 25. The
Company was required to adopt FAS 123 for its 1997 fiscal year. The Company's
accounting for its stock-based compensation plans will continue to follow APB
Opinion No. 25. The pro-forma disclosure required by FAS 123 is included in Note
8 of Notes to Consolidated Financial Statements.
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 1, 1995 and July 5, 1997. 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 (options and warrants) is anti-dilutive.
2 - INVENTORIES
Inventories consist of the following (in thousands):
JULY 6, JULY 5,
1996 1997
------- --------
Raw materials and work in process...................................... $18,817 $ 28,796
Finished goods......................................................... 45,960 57,671
------- --------
$64,777 $ 86,467
------- --------
------- --------
F-9
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 - 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 $3,264,000 and $3,193,000 at July 6, 1996 and July 5, 1997, respectively.
Pre-opening costs, net of accumulated amortization, associated with the
Company's retail stores were $1,672,000 and $2,081,000 at July 6, 1996 and July
5, 1997. Amortization expense related to pre-opening costs was $1,127,000,
$937,000 and $617,000 for the years ended July 1, 1995, July 6, 1996 and July 5,
1997, respectively.
Start-up costs associated with opening new manufacturing facilities and new
product lines were $3,789,000 at July 5, 1997.
4 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following (in
thousands):
JULY 6, JULY 5,
1996 1997
------- -------
Land.................................................................... $ 238 $ 238
Buildings and improvements.............................................. 1,038 1,038
Machinery and equipment................................................. 15,267 16,648
Leasehold improvements.................................................. 22,307 34,447
Furniture and fixtures.................................................. 14,998 17,804
------- -------
53,848 70,175
Accumulated depreciation (11,062) (17,609)
------- -------
$42,786 $52,566
------- -------
------- -------
5 - DEBT
On September 6, 1996, the Company entered into a $200 Million Credit
Agreement (the '$200 Million Credit Agreement'), with GE Capital, The Bank of
Nova Scotia, Societe Generale and Union Bank of California, which replaced the
Company's previous $250 million Credit Agreement. The decrease in the loan
commitment reflected the Company's decision not to exercise its option to
purchase the remaining portion of the Series A Warrant representing 1,809,179
shares of Common Stock (see Note 7 of Notes to Consolidated Financial
Statements). The $200 Million Credit Agreement is for a term of five years
expiring September 1, 2001 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. During the fiscal year ended July 5, 1997, borrowing
under the $200 Million Credit Agreement accrued interest at the lenders base
rate or at LIBOR plus 1.5-2.0% (approximately 7.7% at July 5, 1997). In
September 1997 the Company's interest rate on outstanding borrowing under the
$200 million Credit Agreement was automatically reduced to LIBOR plus 1.00%. The
Company is also required to pay a commitment fee on the unused portion of the
Revolving Loan equal to .50% per annum (reduced to .375% in September 1997) on
the average daily unused revolving loan commitment. Commitment fees are included
in interest expense and amounted to $155,000, $282,000 and $283,000 for the
years ended July 1, 1995, July 6, 1996 and July 5, 1997, respectively.
In addition, the $200 Million Credit Agreement allows the Company to
purchase up to $10 million of its outstanding Common Stock after March 31, 1997,
under certain conditions. See Note 6 of Notes to Consolidated Financial
Statements.
F-10
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 - DEBT (CONTINUED)
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%. The
commitment fee payable on the unused revolving loan commitment will also be
automatically reduced as the Company's debt to EBITDA ratio improves and can be
reduced to as low as .25% per annum.
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. The Company was in compliance with all
its covenants at July 5, 1997.
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.
On April 28, 1994, the Company entered into a new credit agreement ('Credit
Agreement') with The Bank of Nova Scotia, Citicorp USA, Inc., Chemical Bank and
The Bank of New York, which replaced its previous loan agreement with GE
Capital. The 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 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 7 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 6 of Notes to
Consolidated Financial Statements.
On March 26, 1996, the Company entered into 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 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 1, 1995, July 6, 1996
and July 5, 1997 was approximately 7.6%, 7.7% and 8.3%, respectively.
F-11
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 - DEBT (CONTINUED)
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 5, 1997 is $6,250,000.
Maturities of the Term Loan at July 5, 1997 are as follows (in thousands):
FISCAL YEAR AMOUNT
- ----------- --------
1998 ................................................................. 6,250
1999 ................................................................. 8,750
2000 ................................................................. 11,250
2001 ................................................................. 13,750
2002 ................................................................. 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.
The Company has entered into various lease agreements to finance the
purchase of certain computer and other equipment. The leases are generally
payable in 36-60 monthly installments, mature from September 1998 through
December 2002 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 6, 1996 and July 5, 1997 was $2,247,000
and $1,933,000, respectively.
In April 1995, the Company entered into 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 would have been LIBOR plus 1.50% as defined under the $200 Million
Credit Agreement, as noted above. The cost to the Company of entering the
agreement was $116,000 and was amortized over the life of the agreement using
the straight line method. The additional interest expense to the Company for the
years ended July 6, 1996 and July 5, 1997 related to the Collar Agreement was
approximately $175,000 and $46,000, respectively. The Collar Agreement matured
on February 24, 1997. Interest payments/receipts on the Collar Agreement were
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 $392,000, $359,000 and $1,208,000 for the years
ended July 1, 1995, July 6, 1996 and July 5, 1997, 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 $1,123,000 and $935,000 at
July 6, 1996 and July 5, 1997 respectively.
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.
6 - 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
F-12
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 - CAPITAL STOCK (CONTINUED)
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 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 October 17, 1995 the Company sold 2,500,000 shares of its 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.
In May 1997, the Company's Board of Directors approved the Company's plan
to purchase up to $10,000,000 of its Common Stock. As of July 5, 1997 the
Company had purchased 125,000 shares of its Common Stock at an average price of
$14.83 per share amounting to $1,854,000.
7 - 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 was 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 a credit agreement between the Company and the GE Capital in
May 1990 and was valued at $2,525,000. On September 13, 1995 the Company
purchased from 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 remaining
portion of the Series A Warrant and acquired 1,809,009 shares of the Company's
Common Stock.
8 - STOCK OPTIONS
The 1990 Key Management Stock Purchase Option Plan provided 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 under the plan. At July 5, 1997 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, 811,145 options were available for grant under the Stock Plan as of July
5, 1997.
F-13
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 - STOCK OPTIONS (CONTINUED)
Options issued, cancelled, exercised and outstanding under the Stock Plan
at July 5, 1997 are summarized below:
NUMBER EXERCISE EXPIRATION EXERCISABLE AT
ISSUE DATE(A) ISSUED CANCELLED EXERCISED OUTSTANDING PRICE DATE JULY 5, 1997
- -------------------- --------- --------- --------- ----------- ---------------- ---------- --------------
7/2/1992............ 100,000 -- 100,000 -- $ 7.00 7/2/2002 --
8/14/1992........... 400,000 64,000 157,332 178,668 $ 8.00 8/14/2002 178,668
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 20,014 51,986 252,000 $10.88 8/19/2003 252,000
9/9/1993............ 100,000 -- -- 100,000 $11.25 9/9/2003 100,000
11/10/1993.......... 30,000 30,000 -- -- $15.13 11/10/2003 --
1/7/1994............ 30,000 -- -- 30,000 $13.88 1/7/2004 30,000
8/16/1994........... 615,000 150,017 19,983 445,000 $15.25 8/16/2004 380,666(b)
11/10/1994.......... 20,000 6,667 3,333 10,000 $14.50 11/10/2004 6,667
12/22/1994.......... 8,000 3,000 -- 5,000 $13.75 12/22/2004 3,333
2/23/1995........... 90,000 -- 23,316 66,684 $14.25 2/23/2005 44,456
5/11/1995........... 85,000 26,667 8,333 50,000 $15.50 5/11/2005 33,333
8/11/1995........... 1,085,000 245,000 -- 840,000 $20.88 8/11/2005 613,333(c)
3/11/1996........... 50,000 50,000 -- -- $28.38 3/11/2006 --
5/8/1996............ 50,000 50,000 -- -- $19.75 5/8/2006 --
2/19/1997........... 845,000 -- -- 845,000 $13.00 2/19/2007 500,000(d)
3/1/1997............ 100,000 -- -- 100,000 $14.63 3/1/2007 --
--------- --------- --------- ----------- --------------
4,072,000 765,365 384,283 2,922,352 $ 8.00 - 20.88(e) 2,142,456
--------- --------- --------- ----------- ---------------- --------------
--------- --------- --------- ----------- ---------------- --------------
- ------------------
(a) Options vest one third on each anniversary date starting one year after the
issue date.
(b) 250,000 of such options are fully vested
(c) 500,000 of such options are fully vested.
(d) All of such options are fully vested.
(e) The weighted average price for all options outstanding under the Stock Plan
was $15.20 at July 5, 1997.
At July 5, 1997 the Company had 3,733,497 shares of Common Stock reserved
for the exercise of options granted and to be granted under the Stock Plan.
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 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 5, 1997 options to purchase 75,000,
F-14
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 - STOCK OPTIONS (CONTINUED)
15,000, 25,000, 15,000, 40,000 and 25,000 shares of Common Stock had been
granted at exercise prices of $11.22, $14.1875, $14.625, $14.187, $19.375 and
$11.375 per share, 20,000 of which had been exercised and 15,000 of which had
been cancelled. At July 5, 1997 the Company had 180,000 shares of Common Stock
reserved for future issuance for the exercise of options granted under the
Directors Plan.
The weighted average fair values of the options granted, under the plans in
effect at July 5, 1997, during the fiscal years ended July 6, 1996 and July 5,
1997 were $10.21 and $6.00, respectively. Fair value was determined using the
Black Scholes options pricing formula. For options granted in fiscal 1996, the
risk free interest rate was approximately 6%, the expected life was 4 years, the
expected volatility was approximately 53% and the expected dividend yield was
approximately 0.1%, all calculated on a weighted average basis. For options
granted in fiscal 1997, the risk free interest rate was approximately 6%, the
expected life was 4 years, the expected volatility was approximately 53% and the
expected dividend yield was 0.38%, all calculated on a weighted average basis.
On a pro-forma basis under the provision of FAS 123, net income and net
income per share would have decreased by $4,346,000 and $0.22 and $2,486,000 and
$0.11 for the years ended July 6, 1996 and July 5, 1997, respectively.
9 - COMMITMENTS AND CONTINGENCIES
Leases: Rent expense including rent paid to Warnaco was $6,099,000,
$10,200,000 and $13,341,000 for the years ended July 1, 1995, July 6, 1996 and
July 5, 1997, respectively. Rent paid to Warnaco was $880,000, $979,000 and
$726,000 for the years ended July 1, 1995, July 6, 1996 and July 5, 1997,
respectively.
In September 1996, Warnaco agreed to release the Company from future
obligations under a sub-lease agreement, therefore the Company has no future
non-cancelable lease 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
-------
1998........................................................... $10,769
1999........................................................... 9,751
2000........................................................... 9,640
2001........................................................... 9,670
2002........................................................... 9,471
Thereafter..................................................... 30,228
F-15
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10 - NON-RECURRING EXPENSES
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 a proposed merger between the Company and Warnaco which was
terminated in July 1996. 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.
On January 1, 1997, one of the Company's three distribution centers,
located in Sparks Nevada, was flooded destroying certain inventory owned by the
Company. The Company is insured for such losses as well as for profits lost due
to business interruption. As of July 5, 1997, the Company had recorded a $25
million claim receivable from the insurance company related to this claim for
the cost of inventory damaged in the flood, lost profit on orders that were lost
due to the flood and other covered expenses. As of July 5, 1997 the Company had
received $15.5 million from the insurance company against such claim receivable,
leaving an outstanding claim receivable of $9.5 million. In the fourth quarter
of fiscal 1997, the Company incurred certain flood related distribution expenses
in excess of amounts covered by insurance amounting to $3,354,000 ($2,162,000
net of income tax benefits) which have been included as a non-recurring item in
the Statement of Operations.
11 - RELATED PARTY TRANSACTIONS
The Company purchases certain services from Warnaco including contract
manufacturing, occupancy services related to leased facilities, computer
service, 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').
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.
During fiscal 1997, the Company paid interest to GE Capital for amounts
borrowed under the terms of its credit facility.
During the second quarter of fiscal 1997, the Company realized a gain of
approximately $3 million from the sale of certain barter assets to the issuing
barter company. The barter assets had an original face value of $12.3 million of
which approximately $2.8 million had been utilized by the Company through
December 1996 and an adjusted net book value of approximately $5.5 million. The
Company received $8.5 million from the sale. The sale of the barter assets was
negotiated by certain officers and directors of the Company who also serve as
officers and directors of Warnaco.
F-16
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 - RELATED PARTY TRANSACTIONS (CONTINUED)
The following summarizes related party transactions included in the
Consolidated Statements of Operations (in thousands):
JULY 1, JULY 6, JULY 5,
1995 1996 1997
------- ------- -------
Expenses for Warnaco services (excluding rent expense)................. $ 1,454 $ 2,727 $ 7,110
Product sales and other income -- Warnaco(1)........................... 5,625 4,302 28,726
Product sales.......................................................... 3,296 1,251 573
Interest expense relating to balance owed to Affiliate................. 807 928 665
Gross purchases through Affiliate...................................... 27,171 23,457 21,385
Royalty expenses....................................................... 4,883 6,177 5,705
Fees paid to affiliate for buying agent services....................... 1,612 1,557 1,419
Interest expense related to credit agreement........................... -- -- 3,861
- ------------------
(1) The year ended July 5, 1997 includes revenues from the transfer of outlet
store assets including inventory of approximately $13 million.
12 - 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 up to a
maximum of 6% of employees eligible compensation. Company contributions to the
Plan were approximately $64,000, $114,000 and $91,000 for the years ended July
1, 1995, July 6, 1996 and July 5, 1997, respectively.
13 - INCOME TAXES
The components of deferred taxes and liabilities as of July 6, 1996 and
July 5, 1997 are as follows (in thousands):
JULY 6, JULY 5,
1996 1997
------- -------
Deferred tax assets (and valuation allowances):
Inventory and accounts receivable reserves........................................ $ 5,891 $ 2,876
Book amortization of trademarks, licenses and other intangible assets............. 4,554 9,435
Tax credit carryforwards.......................................................... 1,374 2,673
Net operating loss carryforward................................................... 5,205 19
Other deferred tax assets......................................................... 1,756 3,718
Valuation allowances.............................................................. (5,873) (458)
------- -------
Deferred tax assets -- net................................................... 12,907 18,263
Tax over book depreciation........................................................ (3,216) (3,659)
Acquisition related accruals...................................................... (2,391) (2,391)
Tax amortization of trademarks, licenses and other intangible assets.............. (2,513) (8,292)
Pre-opening costs................................................................. (970) (869)
Prepaid costs..................................................................... (1,128) (975)
Software development costs........................................................ (2,054) (2,174)
Other deferred tax liabilities.................................................... (1,055) (4,988)
------- -------
Deferred tax liabilities..................................................... (13,327) (23,348)
------- -------
Net deferred tax liability................................................... $ (420) $(5,085)
------- -------
------- -------
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
F-17
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13 - INCOME TAXES (CONTINUED)
realization of tax deductions for intangible amortization. The valuation
allowance increased (decreased) $3,826,000 and $(5,415,000) for the fiscal years
ended July 6, 1996 and July 5, 1997, respectively.
The provision for income taxes included in the Consolidated Statements of
Operations amounts to (in thousands):
FOR THE YEARS ENDED
------------------------------
JULY 1, JULY 6, JULY 5,
1995 1996 1997
------- -------- -------
Current:
U.S. Federal..................................................... $ 8,110 $ (9,995) $ 3,857
State............................................................ 1,739 (1,227) 1,040
Foreign.......................................................... 730 (99) 511
------- -------- -------
10,579 (11,321) 5,408
Deferred:
U.S. Federal..................................................... 1,285 (6,483) 4,541
State............................................................ 311 (632) 100
Foreign.......................................................... (57) 108 24
------- -------- -------
1,539 (7,007) 4,665
------- -------- -------
Total....................................................... $12,118 $(18,328) $10,073
------- -------- -------
------- -------- -------
As of July 5, 1997, the Company had net operating loss carryforwards for
state income tax purposes of $536,000 which expire in 2011. For federal income
tax purposes, the Company has capital loss and contribution carryforwards of
$1,308,000 and $1,497,000, respectively, which expire in 2001. In addition, the
Company has foreign tax credit carryforwards of $131,000 which expire through
2001 and federal alternative minimum tax credits of $2,133,000 which can be
carried forward indefinitely.
The following represents the reconciliation of the tax provision rate to
the U.S. Federal income statutory tax rate:
FOR THE YEARS ENDED
---------------------------------
JULY 1, JULY 6, JULY 5,
1995 1996 1997
------- ------- -------
Statutory rate.......................................................... 35.0% (35.0)% 35.0%
State rate.............................................................. 4.2 (1.1) 7.0
Foreign tax rate in excess of U.S. statutory rate....................... (2.2) -- 0.8
Intangible amortization................................................. 1.7 0.3 0.7
Other................................................................... (0.3) -- 5.0
Valuation allowances.................................................... -- 5.2 (13.2)
Inventory contribution.................................................. -- (0.6) (0.7)
------- ------- -------
Tax provision rate...................................................... 38.4% (31.2)% 34.6%
------- ------- -------
------- ------- -------
14 - EXTRAORDINARY ITEMS
Due to early extinguishment of debt the Company wrote off the deferred
financing costs of $2,202,000 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.
15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
F-18
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 6, 1996 JULY 5, 1997
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
Revolving Loan........................................... $118,017 $118,017 $ 75,776 $75,776
Term Loan................................................ -- -- 47,500 47,500
Interest rate collar..................................... 50 (175) -- --
Letters of credit........................................ 1,123 1,123 935 935
16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the unaudited quarterly financial results of the
Company for the fiscal years ended July 6, 1996 and July 5, 1997 (in thousands
except share data):
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 6, 1996 QTR QTR QTR QTR(1)
- ------------------------------------------------- ------- ------- ------- --------
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
Extraordinary item............................... -- -- (1,497) --
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) -- as adjusted(1).............. $ 0.10 $ (0.06) $ (0.27) $ (1.78)
------- ------- ------- --------
------- ------- ------- --------
FIRST SECOND THIRD FOURTH
YEAR ENDED JULY 5, 1997 QTR QTR QTR QTR
- ----------------------------------------------- -------- ------- -------- --------
Net revenues................................... $ 38,665 $70,443 $104,952 $109,028
Gross profit................................... 11,203 26,572 46,588 47,933
Net income (loss).............................. $(11,541) $ 4,637 $ 13,936 $ 12,003
-------- ------- -------- --------
-------- ------- -------- --------
Net income (loss) per common share............. $ (0.52) $ 0.21 $ 0.62 $ 0.53
-------- ------- -------- --------
-------- ------- -------- --------
- ------------------
(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-19
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 - OTHER
In fiscal 1996, the Company discussed with its auditors certain weaknesses
in the Company's internal accounting and control procedures primarily related to
the timely analysis of balance sheet and income statement accounts in connection
with the preparation of interim financial statements and specifically the
valuation and adjustment of inventory and other account balances. These items
involved the allocation of overhead costs to inventory, the valuation of certain
prior and current season inventory, certain book to physical inventory
adjustments and the interim analysis of certain accrual, prepaid and reserve
accounts.
Commencing in fiscal 1997, the Company effected improvements in its
internal accounting controls and procedures by improving its inventory
monitoring systems and controls including the development of a cycle count
program for its raw material and trim inventory, implementing supplemental
procedures to review and adjust interim balance sheets and income statements and
by appointing additional financial and accounting personnel. In addition, the
Company has effected certain structural changes in its business and operations
which the Company believes eliminate certain inventory control issues, including
subcontracting substantially all of its production control and manufacturing
functions, closing its Company-owned outlet stores and exiting the skiwear
business. The Company believes that the systems improvements, personnel changes
and structural changes have significantly enhanced the Company's internal
control structure and operations.
F-20
AUTHENTIC FITNESS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
BALANCE CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITE-OFFS(A) END OF YEAR
- ----------------------------------------------- --------- ---------- ---------- ------------- -----------
Accounts Receivable Allowances:
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
--------- ---------- ---------- ------------- -----------
--------- ---------- ---------- ------------- -----------
Year ended July 5, 1997........................ $ 9,361 $ 20,135 $-- ($22,625) $ 6,871
--------- ---------- ---------- ------------- -----------
--------- ---------- ---------- ------------- -----------
- ------------
(a) Uncollectible accounts written-off, net of recoveries and charges for
returns, allowances and cash discounts to the allowance account.
S-1
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'
The cent symbol shall be expressed as......................... [c]