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 April 4, 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
of incorporation or organization) Identification No.)
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 May 4,
1998 was: 22,549,456.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
April 4, 1998 July 5, 1997
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash $ 1,164 $ 1,246
Accounts receivable, net 150,039 85,240
Accounts receivable from affiliates 678 14,443
Inventories:
Finished goods 68,247 57,671
Raw material and work in process 26,268 28,796
--------- --------
Total inventories 94,515 86,467
Prepaid expenses 10,017 6,119
--------- --------
Total current assets 256,413 193,515
Property, plant and equipment, (net of accumulated
depreciation of $22,830 and $17,609, respectively) 48,948 52,566
Intangibles and other assets, net 76,388 75,791
--------- --------
$ 381,749 $321,872
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility $ 125,293 $ 75,776
Current portion of long-term debt 7,868 6,751
Accounts payable and accrued liabilities 34,254 33,138
Accounts payable to affiliates 22,030 22,937
Accrued income taxes 8,309 1,795
--------- --------
Total current liabilities 197,754 140,397
--------- --------
Long-term debt 38,573 42,682
Deferred income taxes 5,071 5,085
Stockholders' equity:
Preferred Stock; $.01 par value - -
Common Stock; $.001 par value 23 23
Capital in excess of par value 161,431 160,186
Cumulative translation adjustment (943) (741)
Accumulated deficit (14,004) (23,906)
Treasury stock, at cost (6,156) (1,854)
--------- --------
Total stockholders' equity 140,351 133,708
--------- --------
$ 381,749 $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 (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
Third Quarter Ended Nine Months Ended
------------------------- --------------------------
April 4, April 5, April 4, April 5,
1998 1997 1998 1997
---- ---- ----- ----
Net revenues $ 127,935 $ 104,952 $ 237,554 $ 214,060
Cost of goods sold 74,287 58,364 138,397 129,697
--------- --------- ------- --------
Gross profit 53,648 46,588 99,157 84,363
Selling, general and administrative
expenses 27,415 25,213 71,528(a) 63,692
--------- --------- ------- --------
Income before interest and
income taxes 26,233 21,375 27,629 20,671
Interest expense 4,187 3,484 10,815 9,684
--------- --------- ------- --------
Income before provision for
income taxes 22,046 17,891 16,814 10,987
Provision for income taxes (b) 8,092 3,955 6,052 3,955
--------- --------- ------- --------
Net income $ 13,954 $ 13,936 $ 10,762 $ 7,032
========= ========= ======= ========
Net income per common share:
Basic $ 0.63 $ 0.62 $ 0.48 $ 0.31
========= ========= ======= ========
Diluted $ 0.62 $ 0.62 $ 0.48 $ 0.31
========= ========= ======= ========
Weighted average number of common
shares outstanding:
Basic 22,301,263 22,405,488 22,235,068 22,358,016
========== ========== ========== ==========
Diluted 22,615,561 22,565,456 22,435,903 22,494,331
========== ========== ========== ==========
(a)Includes non-recurring expense of $1,408,000 in the nine months ended April
4, 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 carry forward, the Company did not
record an income tax provision or benefit until the third quarter of fiscal
1997. The pro-forma tax provision at the full year rate of 36% would be
$6,440 for the third quarter of fiscal 1997.
Related party transactions included in the Consolidated Condensed Statements of
Operations:
Third Quarter Ended Nine Months Ended
------------------- -----------------
April 4, April 5, April 4, April 5,
1998 1997 1998 1997
------- ------- ------- -------
Product sales $ 186 $ 2,648 $ 1,784 $15,552
Purchases of goods and services 3,539 1,303 6,001 3,526
Royalties paid or accrued 1,986 1,951 4,435 4,086
Interest expense 1,489 3,025 3,908 4,887
Rent 127 144 416 500
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 (UNAUDITED)
INCREASE (DECREASE) IN CASH
(IN THOUSANDS OF DOLLARS)
Nine Months Ended
---------------------------------
April 4, 1998 April 5,1997
------------- ------------
Cash flows from operating activities:
Net income $ 10,762 $ 7,032
Non cash items included in net income:
Depreciation and amortization 7,754 6,557
Other 3,020 2,597
Other changes in operating accounts (56,257) (28,759)
-------- --------
Net cash used in operating activities (34,721) (12,573)
-------- --------
Cash flows from investing activities:
Purchase of equipment and other long-term assets (3,328) (18,803)
Other 117 (2,773)
-------- --------
Net cash used in investing activities (3,211) (21,576)
-------- --------
Cash flows from financing activities:
Borrowing (repayments) under revolving credit facility 49,517 (10,411)
Net proceeds (payments) from the sale of common stock and
the exercise of stock options (2,965) 773
Repayments of debt (2,992) (427)
Proceeds from the issuance of long-term debt -- 50,274
Purchase of treasury stock (4,302) --
Dividends paid (839) (861)
Increase in deferred financing costs (569) (5,663)
-------- --------
Net cash provided from financing activities 37,850 33,685
-------- --------
Decrease in cash (82) (464)
Cash at beginning of period 1,246 1,499
-------- --------
Cash at end of period $ 1,164 $ 1,035
======== ========
Other changes in operating accounts:
Accounts receivable $(51,034) $(31,065)
Inventories (8,048) (28,277)
Other current assets (3,898) 2,910
Accounts payable and accrued liabilities 209 15,840
Accrued income taxes 6,514 11,833
-------- --------
$(56,257) $(28,759)
======== ========
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 April 4, 1998 as well as its results of operations and cash flows
for the periods ended April 4, 1998 and April 5, 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. In February 1998, the
Board of Directors authorized the Company to increase the amount of its
purchase of common stock from $10,000,000 to $20,000,000. As of April 4,
1998, the Company had purchased 385,700 shares of its Common Stock at an
average price of $15.96 per share for an aggregate purchase price of
$6,156,000.
As part of the Company's repurchase program the Company has entered into
equity option arrangements to purchase Authentic Fitness Corporation
Common Stock. At April 4, 1998 the Company had options outstanding on
approximately 441,000 shares at an average forward price of $20.21 per
share for a total value of $8,913,000. If these arrangements were settled
on a net cash basis at their expiration dates, based upon the April 3,
1998 market price for the Company's common stock of $19.00, the Company
would be obligated to pay $532,085.
5
AUTHENTIC FITNESS CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
3. During the first quarter of fiscal 1998 the Company closed its twenty
Authentic Fitness Retail Stores located in Bally's Fitness Centers and
consolidated its three California manufacturing facilities into two
facilities. The total cost associated with these actions was $1,408,000
($859,000 net of income tax benefits of $549,000) and was included in
selling, general and administrative expenses in the first quarter 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. On March 18, 1998, after a
syndication of the Company's $200 million credit facility was
oversubscribed, the Company and its banks agreed to increase the amount
of credit available under the Company's revolving loan from $150 million
to $165 million ("Restated Credit Agreement") while maintaining the
Company's outstanding balance of $45 million on its term loan. The terms
of the Company's Restated Credit Agreement are the same as those of the
$200 Million Credit Agreement.
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, as applicable.
Diluted income per common 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.
6
AUTHENTIC FITNESS CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
The weighted average number of shares of common stock outstanding is
summarized as follows:
Third Quarter Ended Nine Months Ended
-------------------------- --------------------------
April 4, April 5, April 4, April 5,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Shares outstanding -
begining of period 22,131,196 22,393,686 22,294,730 22,330,730
Shares issued 215,397 11,802 90,077 27,286
Treasury shares purchased (45,330) -- (149,739) --
----------- ----------- ----------- -----------
Weighted average shares
outstanding - basic 22,301,263 22,405,488 22,235,068 22,358,016
=========== =========== =========== ===========
Common stock equivalents
- using the treasury stock
method (a) 314,298 159,968 200,835 136,315
----------- ----------- ----------- -----------
Weighted average shares
outstanding - diluted 22,615,561 22,565,456 22,435,903 22,494,331
=========== =========== =========== ===========
6. On January 17, 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. The Company has recorded approximately $13.2 million in income
representing estimated insurance claim recovery in excess of the cost of
the inventory lost as of April 4, 1998. The Company has received
approximately $16.7 million in insurance proceeds against inventory
value through May 15, 1998.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS.
STATEMENT OF OPERATIONS (SELECTED DATA)
(amounts in millions of dollars)
Third quarter ended Nine months ended
------------------- -------------------
April 4, April 5, April 4, April 5,
1998 1997 1998 1997
------- ------- ------- -------
Net revenues $ 127.9 $ 105.0 $ 237.6 $ 214.1
Cost of goods sold 74.3 58.4 138.4 129.7
------- ------- ------- --------
Gross profit 53.6 46.6 99.2 84.4
% to net revenue 41.9% 44.4% 41.7% 39.4%
Selling, general and administrative
expenses 27.4 25.2 70.1 63.7
Non-recurring items -- -- 1.4 --
------- ------- ------- -------
Income before interest and
income taxes 26.2 21.4 27.7 20.7
Interest expense 4.1 3.5 10.8 9.7
Income tax 8.1 4.0 6.1 4.0
------- ------- ------- -------
Net income 14.0 13.9 10.8 7.0
Pro-forma income tax (a) -- 2.4 -- --
------- ------- ------- -------
Pro-forma net income $ 14.0 $ 11.5 $ 10.8(b) $ 7.0
======= ======= ======= =======
Pro-forma net income per
common share
Basic $ 0.63 $ 0.51 $ 0.48(c) $0.31
======= ======= ======= =======
Diluted $ 0.62 $ 0.51 $ 0.48(c) $0.31
======= ======= ======= =======
(a) Reflects adjustment to reflect a pro-forma income tax provision of 36%,
which was the Company's effective income tax rate for the 1997 fiscal year.
(b) Net income before non-recurring items was $11.6 million.
(c) Earnings per share before non-recurring items was $0.52.
Net revenues for the third quarter of fiscal 1998 increased 21.9% to $127.9
million from $105.0 million in the third quarter of fiscal 1997. Speedo'r'
Division net revenues increased 16.1% to $65.4 million in the third quarter of
fiscal 1998 from $56.3 million in the third quarter of fiscal 1997. Sales of
core racing and fitness swimwear increased 16.5% over last year.
The Designer Swimwear Division's net revenues for the third quarter of
fiscal 1998 increased 15.8% to $39.7 million from $34.3 million in the third
quarter of fiscal 1997. Net revenues for the Designer Swimwear Division for the
third quarter of fiscal 1998 include $7.0 million in proceeds from the Company's
insurance carrier for sales orders not shipped, which were being prepared for
shipment, related to the Company's warehouse fire in Los Angeles. Authentic
Fitness'r' Retail Division net revenues for the third quarter of fiscal 1998
increased 14.4% to $12.0 million from $10.5 million in the third quarter of
fiscal 1997. At May 5, 1998 the Company had 139 stores open. Same store sales
for the third quarter of fiscal 1998 increased 11.0% over the year earlier
period. Net revenues for the third quarter of fiscal 1998 also include
$6.2 million of other revenue related to retail inventory destroyed in the
Company's warehouse fire in Los Angeles.
Net revenues for the first nine months of fiscal 1998 increased 11.0% to
$237.6 million from $214.1 million in the first nine months of fiscal 1997.
Net revenues for the
8
first nine months of fiscal 1997 included $8.5 million from the discontinued
skiwear business. Excluding the discontinued skiwear business, net revenues
increased 15.5% in the first nine months of fiscal 1998 compared to the first
nine months of fiscal 1997. Speedo'r' Division net revenues increased 7.0%
compared to last year, however regular price sales increased 11.7% while
off-price sales decreased 9.9%, Designer Swimwear Division net revenues
increased 18.8% and Authentic Fitness'r' Retail Division net revenues increased
19.1%.
Gross profit for the third quarter of fiscal 1998 increased 15.2% to $53.6
million from $46.6 million in the third quarter of fiscal 1997. The increase in
gross profit reflects the higher net revenues, as noted above. Gross profit as a
percentage of net revenues was 41.9% in the third quarter of fiscal 1998
compared to 44.4% in the third quarter of fiscal 1997. Gross profit for the
third quarter of fiscal 1998 and the third quarter of fiscal 1997 includes $13.2
million and $4.5 million of insurance proceeds, respectively. Gross profit as a
percentage of net revenues for the third quarter of fiscal 1998 includes the
impact of markdowns related to the Company's strategic decision to sell certain
slow moving inventory ahead of the market. Gross profit for the first nine
months of fiscal 1998 increased 17.5% to $99.2 million compared to $84.4
million in the first nine months of fiscal 1997. Gross profit as a percentage of
net revenues was 41.7% in the first nine months of fiscal 1998, an increase of
230 basis points over the 39.4% recorded in the first nine months of fiscal
1997. The increase in gross profit and gross profit as a percentage of net
revenues reflects favorable manufacturing variances, improved Speedo'r' sales
mix and higher Authentic Fitness'r' Retail Division sales.
Selling, general and administrative expenses were $27.4 million (21.4%
of net revenues) in the third quarter of fiscal 1998 compared to $25.2 million
(24.0% of net revenues) in the third quarter of fiscal 1997. The increase in
selling, general and administrative expenses in the third quarter of fiscal
1998 compared to fiscal 1997 results primarily from higher variable selling
expense related to the higher net revenues. Selling, general and administrative
expenses for the first nine months of fiscal 1998 were $70.1 million (29.5% of
net revenues) compared to $63.7 million (29.8% of net revenues) in the first
nine months of fiscal 1997. The increase in selling, general and administrative
expenses primarily reflects increased variable selling costs and increased
depreciation and amortization expenses.
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 $4.2 million in the third quarter of fiscal 1998
compared to $3.5 million in the third quarter of fiscal 1997. Interest expense
for the first nine months of fiscal 1998 was $10.8 million compared to $9.7
million in the first nine months of fiscal
9
1997. The increase in interest expense for both the third quarter and first nine
months of fiscal 1998 compared to fiscal 1997 reflects higher seasonal borrowing
requirements for incremental higher working capital necessary to support the
higher sales volume.
The Company's effective income tax rate for the 1998 fiscal year is 36%,
equal to the effective income tax rate for fiscal 1997. The provision for income
taxes for the third quarter of both fiscal 1998 and fiscal 1997 reflects the
expense required to reflect the expected full year tax rate in the income tax
provision for the nine month year-to-date period. The Company did not record an
income tax provision or benefit in the second quarter or first six months of
fiscal 1997 due to the impact of the Company's net operating loss carry-forward.
Net income for the third quarter of fiscal 1998 was $14.0 million compared to
net income of $13.9 million in the third quarter of fiscal 1997. Net income for
the third quarter of fiscal 1997, adjusted to reflect a pro-forma income tax
provision of 36% (equal to the effective income tax rate for fiscal 1997 and
fiscal 1998) was $11.5 million. The increase in net income for the third quarter
of fiscal 1998 compared to fiscal 1997 reflects the higher gross profit and
operating income, as noted above. Net income for the first nine months of fiscal
1998 was $10.8 million, an increase of 53% over the $7.0 million recorded in the
first nine months of fiscal 1997. The increase in net income in the first nine
months of fiscal 1998 compared to the first nine months of fiscal 1997 reflects
the higher 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. On March 18, 1998, after a syndication of the Company's $200
million credit facility was oversubscribed, the Company and
its banks agreed to increase the amount of credit available under the Company's
revolving loan from $150 million to $165 million ("Restated Credit Agreement").
The terms of the Company's Restated Credit Agreement are the same as those of
the $200 Million Credit Agreement.
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, subsequently increased to $20 million. As of May 15, 1998, the
Company had purchased 385,700 shares of its Common Stock at an average price of
$15.96 per share. The aggregate cost of the shares was $6.2 million.
10
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 eleven 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 139 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 nine months of fiscal 1998
was $34.7 million compared to $12.6 million in the first nine months of
fiscal 1997. The increase in cash used in operating activities in the first nine
months of fiscal 1998 compared to the first nine months of fiscal 1997 primarily
reflects higher net income offset by higher working capital usage. Cash required
to support the seasonal increase in inventory decreased over $20.0 million in
the first nine months of fiscal 1998 compared to the first nine months of fiscal
1997 reflecting improved inventory management. Accounts receivable increased
$51.0 million in the first nine months of fiscal 1998 compared to an increase of
$31.1 million in the first nine months of fiscal 1997. The increase in accounts
receivable reflects the overall increase in sales volume in the third quarter of
fiscal 1998 compared to fiscal 1997. Accounts payable and accrued liabilities
increased $0.2 million in the first nine months of fiscal 1998 from year-end
compared to an increase of $15.8 million in the first nine months of fiscal
1997. Cash used to reduce accounts payable and accrued liabilities reflects the
timing of certain payments, primarily to suppliers and contractors in fiscal
1998 compared to fiscal 1997. In addition, the Company received approximately
$11.8 million of net income tax refunds in fiscal 1997 compared to $6.5 million
in fiscal 1998.
Cash used in investing activities was $3.2 million in the first nine
months of fiscal 1998 compared to $21.6 million in the first nine months of
fiscal 1997. The decrease in cash used in investing activities primarily
reflects lower capital expenditures of $15.5 million. Capital expenditures for
the first nine months of fiscal 1997 primarily reflect the opening of
approximately 50 Authentic Fitness'r' retail stores in the first half of fiscal
1997.
11
Capital expenditures in the first nine months 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. Capital expenditures for the fourth quarter of fiscal 1998 and for
fiscal 1999 are expected to increase substantially to reflect the implementation
of the Company's new computer systems and to reflect an increase in the opening
of new Authentic Fitness'r' retail stores.
Cash provided from financing activities was $37.8 million in the first nine
months of fiscal 1998 compared to $33.7 million in the first nine months of
fiscal 1997. Cash provided from financing activities in the first nine months of
fiscal 1998 primarily reflects seasonal borrowing under the Company's Revolving
Loan partially offset by the repurchase of $4.3 million of the Company's Common
Stock and the repayment of $3.0 million of debt. Cash provided from financing
activities in the first nine 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 $125.3 million at the end of the
third quarter of fiscal 1998. At May 15, 1998 the Company had approximately $48
million of additional credit available under its Revolving Loan.
The Company believes that funds available under its Restated 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 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 two 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.
12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.19 Restated Credit Agreement, dated as of March 18, 1998, among
Authentic Fitness Products, Inc. as Borrower and Authentic
Fitness Corporation, The Financial Institutions named as
Lenders and The Bank of Nova Scotia and General Electric Capital
Corporation as Agents, and The Bank of Nova Scotia as
Administrative Agent, Paying Agent, Swing Line Bank and Fronting
Bank, and General Electric Capital Corporation as Documentation
Agent and Collateral Agent and Societe Generale, as Co-Agent.
27.1 Financial Data Schedule
(b) None.
13
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: May 18, 1998 By: /s/ CHRISTOPHER G. STAFF
------------------------
Christopher G. Staff
President and Chief Operating
Officer
Date: May 18, 1998 By: /s/ WALLIS H. BROOKS
--------------------
Wallis H. Brooks
Senior Vice President
and Chief Financial Officer
Principal Financial and
Accounting Officer
14
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as................. 'r'
The cent symbol shall be expressed as................................. [c]