________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 1-11202
------------------------
AUTHENTIC FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 95-4268251
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
6040 BANDINI BLVD.
COMMERCE, CALIFORNIA 90040
(ADDRESS OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
(213) 726-1262
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
COPIES OF ALL COMMUNICATIONS TO:
AUTHENTIC FITNESS CORPORATION
90 PARK AVENUE
NEW YORK, NEW YORK 10016
ATTENTION: GENERAL COUNSEL
------------------------
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. [x] Yes [ ] No
The number of shares of the registrant's Common Stock outstanding as of
February 13, 1998 was: 22,131,196.
________________________________________________________________________________
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
JANUARY 3, 1998 JULY 5, 1997
--------------- ------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash.......................................................................... $ 1,985 $ 1,246
Accounts receivable -- net.................................................... 89,850 85,240
Accounts receivable from affiliates........................................... 1,344 14,443
Inventories:
Finished goods........................................................... 91,420 57,671
Raw material and work in process......................................... 36,683 28,796
--------------- ------------
Total inventories................................................... 128,103 86,467
Prepaid expenses.............................................................. 10,833 6,119
--------------- ------------
Total current assets................................................ 232,115 193,515
--------------- ------------
Property, plant and equipment, (net of accumulated depreciation of $21,026 and
$17,609, respectively)........................................................... 50,356 52,566
Intangibles and other assets -- net................................................ 73,446 75,791
--------------- ------------
$ 355,917 $321,872
--------------- ------------
--------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility..................................... $ 113,872 $ 75,776
Current portion of long-term debt............................................. 7,914 6,751
Accounts payable and accrued liabilities...................................... 48,403 33,138
Accounts payable to affiliates................................................ 16,701 22,937
Accrued (prepaid) income taxes................................................ (1,716) 1,795
--------------- ------------
Total current liabilities........................................... 185,174 140,397
--------------- ------------
Long-term debt..................................................................... 38,696 42,682
Deferred income taxes.............................................................. 5,069 5,085
Stockholders' equity:
Preferred Stock; $.01 par value............................................... -- --
Common Stock; $.001 par value................................................. 23 23
Capital in excess of par value................................................ 160,522 160,186
Cumulative translation adjustment............................................. (967) (741)
Treasury stock, at cost....................................................... (4,929) (1,854)
Accumulated deficit........................................................... (27,671) (23,906)
--------------- ------------
Total stockholders' equity.......................................... 126,978 133,708
--------------- ------------
$ 355,917 $321,872
--------------- ------------
--------------- ------------
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
2
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------- -------------------------
JANUARY 3, JANUARY 4, JANUARY 3, JANUARY 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
(UNAUDITED)
Net revenues.......................................... $ 72,652 $ 70,443 $ 109,620 $ 109,108
Cost of goods sold.................................... 40,211 43,871 64,110 71,333
---------- ---------- ---------- ----------
Gross profit.......................................... 32,441 26,572 45,510 37,775
Selling, general and administrative expenses(a)....... 22,909 18,467 44,112 38,479
---------- ---------- ---------- ----------
Income (loss) before interest and income taxes........ 9,532 8,105 1,398 (704)
Interest expense...................................... 3,532 3,468 6,628 6,200
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes....... 6,000 4,637 (5,230) (6,904)
Provision (benefit) for income taxes(b)............... 2,340 -- (2,039) --
---------- ---------- ---------- ----------
Net income (loss)..................................... $ 3,660 $ 4,637 $ (3,191) $ (6,904)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per common share:
Basic............................................ $ 0.17 $ 0.21 $ (0.14) $ (0.31)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted.......................................... $ 0.16 $ 0.21 $ (0.14) $ (0.31)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding:
Basic............................................ 22,160,939 22,334,829 22,201,971 22,334,279
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted.......................................... 22,808,151 22,415,574 22,201,971 22,334,279
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------
(a) Includes non-recurring expense of $1,408,000 in the six months ended
January 3, 1998, related to the write-off of certain assets and other costs
associated with the closing of the Company's twenty retail stores located
in Bally's Fitness Centers and the consolidation of the Company's three
California manufacturing facilities into two facilities.
(b) Due to the Company's net operating loss carryforward, the Company did not
record an income tax provision or benefit until the third quarter of fiscal
1997.
------------------------
Related party transactions included in the Consolidated Condensed Statements of
Operations:
Product sales..................................... $ 1,316 $ 7,952 $ 1,598 $ 12,904
Purchases of goods and services................... 1,636 1,129 2,461 2,223
Royalties paid or accrued......................... 1,867 1,287 2,826 2,135
Interest expense.................................. 1,334 1,453 2,419 1,862
Rent.............................................. 144 143 289 356
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
SIX MONTHS ENDED
----------------------------------
JANUARY 3, 1998 JANUARY 4, 1997
--------------- ---------------
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).......................................................... $ (3,191) $ (6,904)
Non cash items included in net income (loss):
Depreciation and amortization......................................... 5,159 4,276
Other................................................................. 575 1,601
Non-recurring item.................................................... 1,408 --
Income taxes............................................................... (3,527) 6,690
Other changes in operating accounts........................................ (28,832) (16,530)
--------------- ---------------
Net cash used in operating activities................................. (28,408) (10,867)
--------------- ---------------
Cash flows from investing activities:
Purchase of equipment and other long-term assets........................... (2,910) (12,197)
Other...................................................................... 604 (1,940)
--------------- ---------------
Net cash used in investing activities................................. (2,306) (14,137)
--------------- ---------------
Cash flows from financing activities:
Borrowing (repayments) under revolving credit facility..................... 38,096 (19,782)
Net proceeds from the sale of common stock and exercise of stock options... 336 5
Repayments of debt......................................................... (2,823) (266)
Proceeds from issuance of long-term debt................................... -- 50,274
Purchase of treasury stock................................................. (3,075) --
Dividends paid............................................................. (560) (559)
Increase in deferred financing costs....................................... (521) (5,219)
--------------- ---------------
Net cash provided from financing activities........................... 31,453 24,453
--------------- ---------------
Increase (decrease) in cash..................................................... 739 (551)
Cash at beginning of period..................................................... 1,246 1,499
--------------- ---------------
Cash at end of period........................................................... $ 1,985 $ 948
--------------- ---------------
--------------- ---------------
Other changes in operating accounts:
Accounts receivable........................................................ $ 8,489 $ (10,188)
Inventories................................................................ (41,636) (19,223)
Other current assets....................................................... (4,714) 1,183
Accounts payable and accrued liabilities................................... 9,029 11,698
--------------- ---------------
$ (28,832) $ (16,530)
--------------- ---------------
--------------- ---------------
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
4
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all of the adjustments (all
of which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of January 3, 1998 as well as its results
of operations and cash flows for the periods ended January 3, 1998 and January
4, 1997. Operating results for interim periods may not be indicative of results
for the full fiscal year. The consolidated condensed balance sheet as of July 5,
1997 is derived from the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year then ended. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 5, 1997.
2. 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 January 3, 1998,
the Company had purchased 317,200 shares of its Common Stock at an average price
of $15.54 per share for an aggregate purchase price of $4,929,000.
3. During the first quarter of fiscal 1998 the Company closed its twenty
Authentic Fitness'r' Retail Stores located in Bally's Fitness Centers and
consolidated its three California manufacturing facilities into two facilities.
The total costs associated with these actions was $1,408,000 ($859,000 net of
income tax benefits of $549,000) and has been included in selling, general and
administrative expenses in the first six months of fiscal 1998.
4. On December 12, 1997, the Company amended its $200 Million Credit
Agreement such that the Company's ability under the terms of the $200 Million
Credit facility to purchase its own Common Stock was immediately increased from
$10,000,000 to $20,000,000 and will further increase to $30,000,000 when the
Company achieves $60,000,000 in EBITDA and an EBITDA to debt ratio of 2.75 to 1.
5. In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, 'Earnings per Share' ('FAS 128').
Accordingly, all periods have been restated to present basic and diluted income
per share.
Basic income per share is computed by dividing earnings available to common
shareholders by the average number of common shares outstanding during each
period. Earnings available to common shareholders represent reported net income
less preferred and preference stock dividend requirements, if applicable.
Diluted income per commmon share is computed by dividing diluted earnings
available for common shareholders by the weighted average number of common and
common equivalent shares outstanding during each period. Weighted average share
computations assume the exercise of dilutive stock options and warrants, net of
assumed treasury share repurchases at average market prices and conversion of
dilutive preferred and preference stock. Diluted earnings available to common
shareholders represent earnings available to common shareholders plus preferred
and preference stock dividend requirements, if applicable, and interest savings
resulting from the assumed conversions of dilutive securities.
5
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average number of shares of common stock outstanding is
summarized as follows:
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
JANUARY 3, JANUARY 4, JANUARY 3, JANUARY 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Shares outstanding -- beginning of period...... 22,419,730 22,333,730 22,419,730 22,333,730
Shares issued.................................. 21,816 1,099 13,084 549
Treasury shares purchased...................... (280,607) -- (230,843) --
---------- ---------- ---------- ----------
Weighted average shares outstanding -- basic... 22,160,939 22,334,829 22,201,971 22,334,279
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common stock equivalents -- using the treasury
stock method(a).............................. 647,212 80,745 -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding --
diluted...................................... 22,808,151 22,415,574 22,201,971 22,334,279
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------
(a) Common stock equivalents are excluded from the weighted average shares
outstanding in the six month periods ended January 3, 1998 and January 4,
1997 because they are anti-dilutive.
6. On January 18, 1998 a fire damaged or destroyed certain inventory stored
in one of the Company's six warehouses which is located in Los Angeles,
California. The Company is fully insured for any inventory lost as well as
profits lost due to business interruption. The Company does not expect the fire
to have any material impact on its results of operations or financial position.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
JANUARY 3, JANUARY 4, JANUARY 3, JANUARY 4,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(AMOUNTS IN MILLIONS OF DOLLARS)
Net revenues..................................................... $ 72.6 $ 70.4 $109.6 $109.1
Cost of goods sold............................................... 40.2 43.8 64.1 71.3
---------- ---------- ---------- ----------
Gross profit..................................................... 32.4 26.6 45.5 37.8
% to net revenue............................................... 44.7% 37.7% 41.6% 34.6%
Selling, general and administrative expenses..................... 22.9 18.5 42.7 38.5
Non-recurring items.............................................. -- -- 1.4 --
---------- ---------- ---------- ----------
Income (loss) before interest and income taxes................... 9.5 8.1 1.4 (0.7)
Interest expense................................................. 3.5 3.5 6.6 6.2
Income tax (benefit)............................................. 2.3 -- (2.0) --
---------- ---------- ---------- ----------
Net income (loss)................................................ 3.7 4.6 (3.2) (6.9)
Pro-forma income tax (benefit)(a)................................ -- 1.7 -- (2.5)
---------- ---------- ---------- ----------
Pro-forma net income (loss)(b)................................... $ 3.7 $ 2.9 $ (3.2) $ (4.4)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------
(a) Reflects pro-forma income tax (benefit) at 36%, which was the Company's
effective income tax rate for the 1997 fiscal year.
(b) Net income (loss) per share for the second quarter and six month periods
ended January 4, 1997, including the pro-forma income tax provision
(benefit), would have been $0.13 and $(0.20), respectively.
Net revenue for the second quarter of fiscal 1998 was $72.7 million
compared to $70.4 million in the second quarter of fiscal 1997. Net revenue for
the second quarter of fiscal 1997 included $3.9 million of net revenues related
to the discontinued skiwear operations and $4.2 million of insurance proceeds
related to the December 1996 flood in Northwestern Nevada including the
Company's Sparks Nevada distribution center. Excluding discontinued skiwear
operations and the insurance proceeds, net revenue increased 16.4%. Speedo'r'
Division net revenue was $34.8 million in the second quarter of fiscal 1998
compared to $36.6 million in the second quarter of fiscal 1997. Speedo'r' net
revenues for the second quarter of fiscal 1997 includes $4.2 million of
insurance proceeds, as noted above. Excluding the insurance proceeds Speedo'r'
net revenues increased 7.5% compared to last year. The Speedo'r' sales mix
improved dramatically as regular price shipments increased 18.3% compared to
last year and off-price shipments decreased 18.9%. Racing and fitness swimwear
increased 14% over last year, goggles and accessories were up 24% and sportswear
and kids were up 45%. The Designer Swimwear Division's net revenue increased
22.6% to $21.2 million in the second quarter of fiscal 1998 from $17.3 million
last year. Authentic Fitness'r' Retail Division net revenue increased 20.5% to
$15.3 million in the second quarter of fiscal 1998 from $12.7 million in the
second quarter of fiscal 1997. At February 10, 1998 the Company had 138 stores
open. Same store sales for the first six months of fiscal 1998 increased 3.7%
over the year earlier period. Net revenue for the first six months of fiscal
1998 was $109.6 million compared to $109.1 million in the first six months of
fiscal 1997. The first six months of fiscal 1997 included $9.3 million of net
revenue from the discontinued skiwear business and $4.2 million of insurance
proceeds, as noted above. Excluding these items, net revenues increased 14.7% in
the first six months of fiscal 1998 compared to the first six months of fiscal
1997. Speedo'r' net revenues, not including insurance proceeds, increased 5.8%
compared to last year, however regular price sales increased 10.1% while
off-price sales decreased 28.8%. Designer swimwear net revenues increased 24.2%
and Authentic Fitness'r' Retail Division net revenues increased 29.1%.
Gross profit for the second quarter of fiscal 1998 increased to $32.4
million from $26.6 million in the second quarter of fiscal 1997. The increase in
gross profit reflects the favorable manufacturing variances due to our strategic
decision to move additional production to Mexico, an improved regular
7
price sales mix in the Speedo'r' division and higher Authentic Fitness'r' Retail
Division sales. Gross profit as a percentage of net revenue was 44.7% in the
second quarter of fiscal 1998 compared to 37.7% in the second quarter of fiscal
1997. Gross profit for the second quarter of fiscal 1997 includes $4.2 million
from the flood insurance proceeds. Adjusting for the impact of the insurance
proceeds, gross profit as a percentage of net revenues would have been 33.8% in
the second quarter of fiscal 1997. The increase in gross profit as a percentage
of net revenue reflects the favorable manufacturing variances, improved regular
price sales mix in the Speedo'r' Division and the higher level of Authentic
Fitness'r' Retail Division sales which generate a higher gross profit margin
than the wholesale divisions. Gross profit for the first six months of fiscal
1998 increased to $45.5 million, an increase of 20.4% compared to $37.8 million
in the first six months of fiscal 1997. Gross profit as a percentage of net
revenues was 41.6% in the first six months of fiscal 1998 an increase of 700
basis points over 34.6% recorded in the first half of fiscal 1997. The increase
in gross profit and gross profit as a percentage of net revenues reflects
favorable manufacturing variances, improved Speedo sales mix and higher
Authentic Fitness'r' Retail Division sales, all as noted above.
Selling, general and administrative expenses were $22.9 million in the
second quarter of fiscal 1998 compared to $18.5 million in the second quarter of
fiscal 1997. The increase in selling, general and administrative expenses
results primarily from higher selling costs related to the increased Authentic
Fitness'r' Retail Division sales as well as increased depreciation and
amortization expense and higher variable selling expense related to the higher
net revenues. Selling, general and administrative expenses for the first six
months of fiscal 1998 were $42.7 million compared to $38.5 million in the first
six months of fiscal 1997. The increase in S,G&A expenses reflects increased
selling costs and increased depreciation and amortization expenses, as noted
above.
The Company recorded $1.4 million ($0.9 million net of income tax benefits
of $0.5 million) of non-recurring expenses in the first quarter of fiscal 1998.
The non-recurring expenses primarily result from the write-off of fixed and
other assets related to the closing of the Company's twenty Authentic Fitness'r'
retail stores in Bally's Fitness Centers and to record costs incurred in the
consolidation of its three California manufacturing facilities into two
facilities.
Interest expense was $3.5 million in the second quarter of fiscal 1998,
equal to the second quarter of fiscal 1997. Interest expense for the first six
months of fiscal 1998 was $6.6 million compared to $6.2 million in the first six
months of fiscal 1997. The increase in interest expense reflects higher seasonal
borrowing requirements to support higher working capital requirements.
The Company's effective income tax rate for the second quarter and first
six months of fiscal 1998 was 39%. The Company did not record an income tax
provision or benefit in the second quarter or first six months of fiscal 1997.
Net income for the second quarter of fiscal 1998 was $3.7 million compared
to net income of $4.6 million in the second quarter of fiscal 1997. Net income
(loss) for the second quarter and first half of fiscal 1997, adjusted to reflect
a pro-forma income tax provision (benefit) of 36% was $2.9 million and $(4.4)
million, respectively. The increase in net income for both the second quarter
and six months of fiscal 1998 compared to fiscal 1997 reflect the higher gross
profit and operating income, as noted above.
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 ('Term
Loan') in the amount of $50 million and a revolving loan facility ('Revolving
Loan') in the amount of $150 million. Borrowing under the $200 Million Credit
Agreement accrues interest at the lenders' base rate or at LIBOR plus 1.0%. The
rate of interest payable on outstanding borrowings will be automatically reduced
to as low as LIBOR plus 0.75% based upon improvements in the Company's EBITDA to
debt ratio. On December 12, 1997, the Company amended the $200 Million Credit
Agreement allowing the Company to immediately increase the amount of its stock
repurchase program to $20 million and to increase the program to $30 million
upon the Company's attaining annual EBITDA of $60 million and an EBITDA to debt
ratio of 2.75 to 1.
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 February 10,
8
1998, the Company had purchased 366,700 shares of its Common Stock at an average
price of $15.91 per share. The aggregate cost of the shares was $5.8 million.
On August 16, 1995, consistent with the Company's goal of providing
increased shareholder value, the Company declared its first quarterly cash
dividend of 1.25[c] per share, equivalent of an annual rate of 5[c] per share.
The Company has since declared nine successive quarterly cash dividends of
1.25[c] per share. The Company believes that the payment of a regular quarterly
cash dividend helps broaden the Company's shareholder base.
The Company plans to expand its channels of distribution and provide growth
in its operations by opening additional Speedo'r' Authentic Fitness'r' retail
stores. The Company currently has 138 stores open. 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 arise 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 arising at the end of the third
quarter and beginning of the fourth quarter of the fiscal year. The Company
typically generates nearly all of its operating cash flow in the fourth quarter
of the fiscal year reflecting third and fourth quarter shipments and the sale of
inventory built during the first half of the fiscal year. The Company meets its
seasonal working capital needs by utilizing amounts available under its
Revolving Loan.
Cash used in operating activities for the first six months of fiscal 1998
was $(28.4) million compared to $(10.9) million in the first six months of
fiscal 1997. The increase in cash used in operating activities in the first six
months of fiscal 1998 compared to the first six months of fiscal 1997 primarily
reflects a lower net loss offset by higher working capital usage. Inventory
increased $41.6 million in the first six months of fiscal 1998 from year-end
reflecting the seasonal increase in inventory necessary to support second and
third quarter shipping. The seasonal increase in inventory for the first six
months of fiscal 1997 reflects the loss of $10 million of inventory due to the
flood in the Company's Sparks Nevada warehouse in December 1997. The seasonal
increase in inventory in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997, as adjusted for the flood, is consistent with
the increase in the Company's order backlog for the same period. Accounts
receivable decreased $8.5 million in the first six months of fiscal 1998
compared to an increase of $10.2 million in the first six months of fiscal 1997.
The favorable change in accounts receivable includes the impact of discontinuing
the skiwear business and improved collection efforts. Accounts payable and
accrued liabilities increased $9.0 million in the first six months of fiscal
1998 from year-end compared to an increase of $11.7 million in the first six
months of fiscal 1997. The increase in accounts payable and accrued liabilities
in both fiscal 1998 and fiscal 1997 reflects the seasonal increase in trade
accounts payable, primarily related to inventory.
Cash used in investing activities was $(2.3) million in the first six
months of fiscal 1998 compared to $(14.1) million in the first six months of
fiscal 1997. The decrease in cash used in investing activities reflects lower
capital expenditures of $9.3 million. Capital expenditures for the first six
months of fiscal 1997 primarily reflect the opening of approximately 50
Authentic Fitness'r' retail stores in the first half of fiscal 1997. Capital
expenditures in the first half of fiscal 1998 primarily reflect capital
expenditures related to the opening of new Authentic Fitness'r' retail stores
and ongoing capital expenditures related to existing systems and facilities.
Cash provided from financing activities was $31.5 million in the first six
months of fiscal 1998 compared to $24.5 million in the first six months of
fiscal 1997. Cash provided from financing activities in the first six months of
fiscal 1998 primarily reflects seasonal borrowing under the Company's Revolving
Loan partially offset by the repurchase of $3.1 million of the Company's Common
Stock and the repayment of $2.8 million of debt. Cash provided from financing
activities in the first six months of fiscal 1997 primarily reflects the
refinancing of the Company's debt agreements and the payment of related debt
issue costs.
The Company's revolving loan balance was $113.9 million at the end of the
second quarter of fiscal 1998. At quarter end the Company had approximately $30
million of additional credit available under its Revolving Loan.
9
The Company believes that funds available under its $200 Million Credit
Agreement, as noted above, combined with cash flow to be generated from future
operations will be sufficient for the operations of the Company, including debt
service, dividend payments and costs associated with the expansion of its
Authentic Fitness'r' Retail Division for at least the next twelve months.
Although the Company believes that its current credit agreement and cash flow to
be generated from future operations will also be sufficient for its long-term
operations (periods beyond the next twelve months) circumstances may arise that
would require the Company to seek additional financing. In those circumstances
the Company expects to evaluate additional sources of funds, for example, sales
of additional common stock and expanded or additional bank credit facilities.
YEAR 2000 COMPLIANCE
Following a comprehensive study of the Company's current systems and future
system requirements, the Company will initiate a program to update or replace
existing systems with enhanced hardware and software applications. The
objectives of the new program are to achieve competitive benefits for the
Company, as well as assuring that all systems are 'Year 2000' compliant.
Implementation of this program is expected to require expenditures, primarily
capital, of approximately $12 million over the next three years. Funding
requirements have been incorporated into the Company's capital and operating
expenditure plans and are not expected to have a material adverse impact on the
Company's financial condition, results of operations or liquidity.
10
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of shareholders was held on November 20, 1997.
The following matters were voted upon by the shareholders:
(1) Election of Directors
(a) Mr. Stuart D. Buchalter was re-elected to the Board of
Directors to serve a three-year term expiring at the 2000 Annual Meeting
of Stockholders. 15,596,704 votes were cast for the election of Mr.
Buchalter and 338,400 votes were withheld, abstained or were broker non
votes.
(b) Mr. William S. Finkelstein was re-elected to the Board of
Directors to serve a three-year term expiring at the 2000 Annual Meeting
of Stockholders. 15,601,194 votes were cast for the election of Mr.
Finkelstein and 333,910 votes were withheld, abstained or were broker
non votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.20 -- Third Amendment to the $200,000,000 Credit Agreement, dated as of December 12, 1997, among
Authentic Fitness Products, Inc. as Borrower, 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.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUTHENTIC FITNESS CORPORATION
Date: February 17, 1998 By: /s/ CHRISTOPHER G. STAFF
........................................................
CHRISTOPHER G. STAFF
PRESIDENT AND CHIEF OPERATING OFFICER
Date: February 17, 1998 By: /s/ WALLIS H. BROOKS
........................................................
WALLIS H. BROOKS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
12
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as............. 'r'