________________________________________________________________________________
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 OCTOBER 2, 1999
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)
(323) 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
November 11, 1999 was: 20,137,661.
________________________________________________________________________________
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
OCTOBER 2, 1999 JULY 3, 1999
--------------- ------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash................................................... $ 266 $ 1,216
Accounts receivable -- net............................. 77,883 123,850
Accounts receivable from affiliates.................... 1,982 5,189
Inventories:
Finished goods.................................... 62,438 50,245
Raw material and work in process.................. 32,884 22,012
-------- --------
Total inventories............................ 95,322 72,257
Other current assets................................... 11,212 7,056
-------- --------
Total current assets......................... 186,665 209,568
Property, plant and equipment, (net of accumulated
depreciation of $31,527 and $27,701, respectively)........ 51,038 50,265
Other assets, net........................................... 69,814 63,393
-------- --------
$307,517 $323,226
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility.............. $ 67,819 $ 63,019
Current maturities of long-term debt................... 11,661 11,826
Accounts payable and accrued liabilities............... 45,731 49,401
Payable to affiliates.................................. 16,075 22,299
Other accrued expenses................................. 7,653 7,603
Accrued (prepaid) income taxes......................... (3,219) 6,454
Deferred income taxes.................................. 2,325 2,325
-------- --------
Total current liabilities.................... 148,045 162,927
Long-term debt.............................................. 21,374 22,476
Deferred income taxes....................................... 6,218 6,222
Minority interest........................................... 258 --
Stockholders' equity:
Preferred Stock; $.01 par value........................ -- --
Common Stock; $.001 par value.......................... 23 23
Additional paid-in capital............................. 163,942 163,770
Accumulated other comprehensive income................. (1,175) (1,105)
Retained earnings...................................... 13,153 18,638
Treasury stock, at cost................................ (44,321) (49,725)
-------- --------
Total stockholders' equity................... 131,622 131,601
-------- --------
$307,517 $323,226
-------- --------
-------- --------
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
FIRST QUARTER ENDED
---------------------------------
OCTOBER 2, 1999 OCTOBER 3, 1998
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA)
Net revenues................................................ $ 43,859 $ 39,619
Cost of goods sold.......................................... 27,175 25,428
---------- ----------
Gross profit................................................ 16,684 14,191
Selling, general and administrative expenses (See Note 5)... 22,040 24,145
--------- ----------
Income (loss) before interest, income taxes, minority
interest and cumulative effect of change in accounting
principle................................................. (5,356) (9,954)
Interest expense............................................ 3,238 2,469
---------- ----------
Income (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle....... (8,594) (12,423)
Provision (benefit) for income taxes........................ (3,352) (4,845)
---------- ----------
Income (loss) before minority interest and cumulative effect
of change in accounting principle......................... (5,242) (7,578)
Minority interest........................................... 7 --
---------- ----------
Income (loss) before cumulative effect of change in
accounting principle...................................... (5,235) (7,578)
Cumulative effect of change in accounting principle, net of
tax benefit............................................... -- (2,518)
-------- ----------
Net income (loss)........................................... $ (5,235) $(10,096)
---------- ----------
---------- ----------
Basic earnings (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle................................. $(0.26) $(0.34)
Cumulative effect of change in accounting principle.... -- (0.12)
---------- ----------
Basic earnings (loss) per share............................. $(0.26) $(0.46)
---------- ----------
---------- ----------
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in
accounting principle................................. $(0.26) $(0.34)
Cumulative effect of change in accounting principle.... -- (0.12)
---------- ----------
Diluted earnings (loss) per share........................... $(0.26) $(0.46)
---------- ----------
---------- ----------
Cash dividends declared per share of common stock........... $ 0.01 $ 0.01
---------- ----------
---------- ----------
Weighted average number of common stock outstanding:
Basic.................................................. 19,892,790 22,071,483
---------- ----------
---------- ----------
Diluted................................................ 19,892,790 22,071,483
---------- ----------
---------- ----------
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
3
AUTHENTIC FITNESS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FIRST QUARTER ENDED
---------------------------------
OCTOBER 2, 1999 OCTOBER 3, 1998
--------------- ---------------
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
Cash flows from operating activities:
Net income (loss)...................................... $ (5,235) $(10,096)
Non-cash items included in net income (loss):
Depreciation and amortization..................... 3,167 2,638
Other............................................. 668 1,090
Facility consolidations........................... -- 3,074
Cumulative effect of change in accounting
principle....................................... -- 4,128
Income taxes........................................... (9,673) (9,486)
Other changes in operating accounts.................... 10,622 30,648
-------- --------
Net cash provided by (used in) operating
activities...................................... (451) 21,996
-------- --------
Cash flows from investing activities:
Purchase of equipment and other long-term assets....... (2,360) (2,155)
Payments for acquisition, net of cash acquired......... (3,258) --
Other, net............................................. 528 (1,138)
-------- --------
Net cash used in investing activities............. (5,090) (3,293)
-------- --------
Cash flows from financing activities:
Net borrowing (repayments) under revolving credit
facility............................................. 4,800 5,038
Net proceeds from the sale of common stock and exercise
of stock options..................................... 172 2
Repayments of debt..................................... (134) (158)
Purchase of treasury stock............................. -- (23,382)
Dividends paid......................................... (247) (271)
Payment of deferred financing fees..................... -- (30)
-------- --------
Net cash provided by (used in) financing
activities...................................... 4,591 (18,801)
-------- --------
Decrease in cash............................................ (950) (98)
Cash at beginning of period................................. 1,216 638
-------- --------
Cash at end of period....................................... $ 266 $ 540
-------- --------
-------- --------
Other changes in operating accounts:
Accounts receivable.................................... $ 49,406 $ 52,815
Inventories............................................ (23,010) (17,824)
Other current assets................................... (4,145) (3,366)
Accounts payable and accrued liabilities............... (11,629) (977)
-------- --------
$ 10,622 $ 30,648
-------- --------
-------- --------
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 -- BASIS OF PRESENTATION
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 management, 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 October 2, 1999 as well as its results
of operations and cash flows for the periods ended October 2, 1999 and October
3, 1998. Operating results for interim periods may not be indicative of results
for the full fiscal year. The consolidated condensed balance sheet as of July 3,
1999 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 3, 1999. Certain amounts for prior periods have been reclassified to
be comparable with the current period presentation.
Start-Up Costs: In April 1998, the Financial Accounting Standards Board
('FASB') approved the Statement of Position ('SOP') 98-5 'Reporting on the Costs
of Start-Up Activities'. The Company adopted SOP 98-5 effective beginning fiscal
1999. The SOP requires that start-up costs, as defined, be expensed as incurred.
It had been the Company's consistent accounting policy to capitalize such costs
for amortization over appropriate periods from 12 to 36 months. The Company
recorded a cumulative charge of approximately $2.5 million, net of income taxes
(or $0.12 per diluted share) in the first quarter of fiscal 1999.
2 -- ACQUISITION OF UBERTECH TEXAS, INC.
On July 21, 1999, the Company entered into a Stock Purchase Agreement with
the owners of Ubertech Texas, Inc., a Texas corporation. Ubertech Texas, Inc.
specializes in the application of silicone-based graphics to apparel products.
The Stock Purchase Agreement calls for the Company to purchase 70% of the Common
Stock of Ubertech Texas, Inc., with an option to purchase the remaining 30% of
the Common Stock at a later date. The aggregate purchase price was $8.7 million,
of which $3.3 million was paid in cash and approximately 0.3 million shares of
the Company's Common Stock was issued from treasury. The excess cost over net
assets acquired as a result of this transaction was approximately $8.5 million,
which is being amortized on a straight-line basis over 10 years. Pro forma
financial information is not presented as the acquisition is not considered a
significant business combination.
3 -- CAPITAL STOCK
On August 19, 1999, the Company's Board of Directors declared a quarterly
cash dividend of $0.0125 per share to be paid on October 7, 1999 to shareholders
of record as of September 2, 1999. In 1997, the Company's Board of Directors
authorized a stock repurchase program which currently allows the Company to buy
up to $50.0 million of its outstanding Common Stock. As of October 2, 1999, the
Company had purchased approximately 3.3 million shares of its Common Stock for
an aggregate purchase price of approximately $49.7 million. In the first quarter
of fiscal 2000, the Company issued approximately 0.3 million shares of its
Common Stock from treasury valued at approximately $5.4 million in connection
with the acquisition of Ubertech Texas, Inc.
On August 19, 1999, the Board of Directors of the Company adopted a
Rights Agreement (the "Agreement"). Under the terms of the Agreement, as
amended, the Company declared a dividend distribution of one Right for each
outstanding share of common stock of the Company to stockholders of record on
August 31, 1999. Each Right entitles the holder to purchase from the Company
a unit consisting of one one-thousandth of a Series A Junior Participating
Preferred Stock, par value $.01 per share at a purchase price of $100 per
unit. The Rights only become exercisable, if not redeemed, ten days after
a person or group has acquired 15% or more of the Company's common stock or
the announcement of a tender offer that would result in a person or group
acquiring 15% or more of the Company's common stock. The Agreement expires
on August 31, 2009, unless earlier redeemed or extended by the Company.
4 -- DEBT
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 provided for a term loan (the
'Term Loan') in the amount of $50 million and a revolving loan facility (the
'Revolving
5
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Loan') in the amount of $150 million. 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 to $165 million while maintaining the Company's outstanding
balance of $45 million on its Term Loan. Borrowing under the $200 Million Credit
Agreement accrued interest at LIBOR plus 1.0% beginning in the first quarter of
fiscal 1998. The rate of interest payable on outstanding borrowing automatically
decreased to LIBOR plus 0.75%, as the Company's EBITDA to debt ratio improved.
In June 1998, the Company entered into an interest rate swap agreement (the
'Swap Agreement') with a bank that is a lender in the $200 Million Credit
Agreement. The Swap Agreement allows the Company to convert variable rate
borrowings with a notional amount of $75 million to a fixed rate interest rate.
Borrowings under the Swap Agreement are currently fixed at 6.66% until maturity
in September 2003. The variable rate under the Swap Agreement of LIBOR was
approximately 6.1% as of October 2, 1999. Differences between the fixed interest
rate and the variable interest rate are settled quarterly and resulted in
additional interest expense of approximately $0.3 million for the three months
ended October 2, 1999.
On December 23, 1998, the Company entered into a $50 million credit
agreement ('Trade Credit Facility') with certain lenders under the Company's
$200 Million Credit Agreement for the issuance of letters of credit and trade
financing. The trade financing portion of the Trade Credit Facility has a $40
million limit and accrues interest at the lender's base rate plus 0.50% or at
LIBOR plus 1.50% on the unpaid principal. The Trade Credit Facility expires in
December 1999. In conjunction with entering into the Trade Credit Facility, the
Company also amended certain portions of its $200 Million Credit Agreement to
facilitate such Trade Credit Facility.
5 -- FACILITY CONSOLIDATIONS
On October 2, 1998, the Company announced plans to discontinue sourcing
from KT West, Inc. from the Company's owned Checotah, Oklahoma facility and to
consolidate sourcing from the Company's leased Montebello, California facility
into the Company's Commerce, California facility. This decision was part of the
Company's continued strategy to secure the most efficient sourcing of its
products. The Company recorded a charge of approximately $3.3 million ($2.0
million net of income tax benefits)(or $0.09 per diluted share) in the first
quarter of fiscal 1999 primarily related to the above, including pretax charges
of $2.2 million in non-cash asset write-offs, $0.6 million in connection with
contractual obligations to KT West, Inc. and $0.5 million in other costs.
6 -- EARNINGS (LOSS) PER SHARE
Options to purchase approximately 4.8 million shares of Common Stock were
not included in the computation of diluted earnings (loss) per share as the
impact would be antidilutive.
7 -- BUSINESS SEGMENTS
The Company designs, manufactures and markets apparel within the Speedo'r'
Division, Designer Swimwear Division and Speedo'r' Authentic Fitness'r' Retail
Stores Division.
The Speedo'r' Division designs, manufactures, imports and markets a product
line consisting 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 Designer Swimwear Division designs, manufactures, imports and markets a
product line consisting of women's swimwear under nationally recognized brand
names: Ralph Lauren'r', Polo Sport Ralph Lauren'r', Polo Sport-RLX'r', Anne
Cole'r', Catalina'r', Cole of California'r', Oscar de la Renta'r', Sunset
Beach'r', Sandcastle'r', Sporting Life'r' and White Stag'r'.
6
AUTHENTIC FITNESS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Speedo'r' Authentic Fitness'r' retail stores sell the Company's Speedo'r'
and Speedo'r' Authentic Fitness'r' products to the general public through 141
retail stores, including its E-commerce site -- Speedo.com. The 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 Company designs, manufactures and
imports the product lines.
Information by business segment is set forth below (in thousands):
SPEEDO'r'
AUTHENTIC
FITNESS'r'
DESIGNER RETAIL
SPEEDO'r' SWIMWEAR STORES OTHER TOTAL
-------- -------- ------ ----- -----
Three months ended October 2, 1999:
Net Revenues............................ $20,998 $ 5,669 $16,606 $ 586 $43,859
Adjusted EBITDA......................... (1,465) (2,381) 1,857 (31) (2,020)
Three months ended October 3, 1998:
Net Revenues............................ 22,279 2,504 14,836 39,619
Adjusted EBITDA......................... (1,523) (3,269) 1,067 (3,725)
A reconciliation of total segment Adjusted EBITDA to total consolidated
income before income taxes, minority interest and cumulative effect of change in
accounting principle for the three months ended October 2, 1999 and October 3,
1998, respectively, is as follows:
FIRST QUARTER ENDED
---------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---- ----
(IN THOUSANDS OF DOLLARS)
Total Adjusted EBITDA for reportable segments............... $(2,020) $ (3,725)
General corporate expenses not allocated.................... 169 267
Facility consolidations..................................... -- 3,324
Depreciation and amortization............................... 3,167 2,638
Interest Expense............................................ 3,238 2,469
------- --------
Income (loss) before income taxes, minority interest and
cumulative effect of change in accounting principle....... $(8,594) $(12,423)
------- --------
------- --------
8 -- COMPREHENSIVE INCOME
FIRST QUARTER ENDED
---------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
---- ----
(IN THOUSANDS OF DOLLARS)
Net income (loss)........................................... $(5,235) $(10,096)
Other comprehensive income (loss):
Foreign currency translation adjustments............... (70) (346)
------- --------
Comprehensive income (loss)................................. $(5,305) $(10,442)
------- --------
------- --------
9 -- SUBSEQUENT EVENT
On October 10, 1999, the Company received notification from The Warnaco
Group, Inc. ('Warnaco') of Warnaco's offer to acquire all of the outstanding
Common Stock of the Company in a negotiated transaction for $20.50 per share
in cash plus the assumption of the Company's debt. The Company formed a special
committee of the independent members of the Board of Directors ('Special
Committee'), which retained legal and financial advisors to evaluate Warnaco's
proposal. On November 15, 1999, Warnaco and the Company entered into a
definitive merger agreement for Warnaco's acquisition, subject to certain
conditions, of all of the Common Stock of the Company for $20.80 per share
in cash, plus the assumption of the Company's debt.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
STATEMENT OF OPERATIONS (SELECTED DATA)
FIRST QUARTER ENDED
---------------------------------
OCTOBER 2, 1999 OCTOBER 3, 1998
--------------- ---------------
(IN MILLIONS OF DOLLARS)
Net revenues................................................ $43.9 $ 39.6
Cost of goods sold.......................................... 27.2 25.4
----- ------
Gross profit................................................ 16.7 14.2
% to net revenue............................................ 38.0% 35.8%
Selling, general and administrative expenses................ 22.0 20.8
Facility consolidations..................................... -- 3.3
----- ------
Income (loss) before interest, income taxes, minority
interest and cumulative effect of change in accounting
principle................................................. (5.3) (9.9)
Interest expense............................................ 3.2 2.5
Income tax (benefit)........................................ (3.3) (4.8)
----- ------
Income before cumulative effect of change in accounting
principle................................................. (5.2) (7.6)
Cumulative effect of change in accounting principle......... -- (2.5)
----- ------
Net income (loss)........................................... $(5.2) $(10.1)
----- ------
----- ------
------------------------
Net revenues for the first quarter of fiscal 2000 increased $4.2 million or
10.7% to $43.9 million in fiscal 2000 compared with $39.6 million in fiscal
1999.
SPEEDO'r' DIVISION. Net revenues decreased $1.3 million or 5.7% to $21.0
million in the first quarter of fiscal 2000 compared with $22.3 million
in first quarter of fiscal 1999. The decrease in Speedo'r' net revenues
is due to lower off-price sales in the first quarter of fiscal 2000.
DESIGNER SWIMWEAR DIVISION. Net revenues increased $3.2 million or
126.3% to $5.7 million in the first quarter of fiscal 2000 compared with
$2.5 million in the first quarter of fiscal 1999. The increase in
Designer Swimwear net revenues was driven by the Ralph Lauren'r', Polo
Sport Ralph Lauren'r', Polo Sport-RLX'r' and Anne Cole'r' brands.
SPEEDO'r' AUTHENTIC FITNESS'r' RETAIL STORES DIVISION. Net revenues
increased $1.8 million or 11.9% to $16.6 million in the first quarter of
fiscal 2000 compared with $14.8 million in the first quarter of fiscal
1999. Comparable store sales increased by 12.3% in the first quarter of
fiscal 2000. The Company opened two new stores during the first quarter
of fiscal 2000.
Gross profit in the first quarter of fiscal 2000 increased $2.5 million to
$16.7 million from $14.2 million in the first quarter of fiscal 1999. Gross
profit as a percentage of net revenues was 38.0% in the first quarter of fiscal
2000 compared to 35.8% in the first quarter of fiscal 1999. The improvement in
gross profit is a result of purchase savings and lower costs of off-shore
production, along with increased margins at the Speedo'r' Authentic Fitness'r'
Retail Stores division and Designer Swimwear division due to increased net
revenues.
Selling, general and administrative expenses for the first quarter of
fiscal 2000 increased to $22.0 million from $20.8 million in the first quarter
of fiscal 1999. Selling, general and administrative expenses as a percentage of
net revenues decreased 2.3% in the first quarter of fiscal 2000 compared to the
first quarter of fiscal 1999. The decrease in selling, general and
administrative expenses as a percentage of net revenues is attributable to
decreased sales promotional expense in the first quarter of fiscal 2000 versus
the prior year period.
The Company recorded a charge of $2.0 million, net of income tax benefits
(or $0.09 per diluted share) in the first quarter of fiscal 1999 related to
discontinued sourcing from KT West, Inc. from the
8
Company's owned Checotah, Oklahoma facility and to consolidate sourcing from the
Company's leased Montebello, California facility into the Company's Commerce,
California facility.
Interest expense increased to $3.2 million in the first quarter of fiscal
2000 from $2.5 million in the first quarter of fiscal 1999. The increase in
interest expense in the first quarter of fiscal 2000 is primarily the result of
the Company's stock repurchase program, through which $40.8 million of the
Company's Common Stock was repurchased in fiscal 1999.
The Company's effective income tax rate was 39% for the first quarter of
fiscal 2000 and the first quarter of fiscal 1999.
Net loss for the first quarter of fiscal 2000 was $(5.2) million compared
to a net loss of $(10.1) million in the first quarter of fiscal 1999. The
decreased net loss reflects the impact of the Company's decision to consolidate
sourcing and the adoption of the SOP regarding the costs of start-up activities
in the first quarter of fiscal 1999 and increased net revenues and gross profit
in the first quarter of fiscal 2000, partially offset by an increase in interest
expense, 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 provided 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. 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 to $165 million while maintaining the
Company's outstanding balance of $45 million on its Term Loan. Borrowing under
the $200 Million Credit Agreement accrued interest at LIBOR plus 1.0% beginning
in the first quarter of fiscal 1998. The rate of interest payable on outstanding
borrowing automatically decreased to LIBOR plus 0.75%, as the Company's EBITDA
to debt ratio improved.
The $200 Million Credit Agreement as amended, allows the Company to
purchase up to $50 million of its Common Stock. The Company's Board of Directors
has authorized a stock repurchase program which currently allows the Company to
buy up to $50 million of its outstanding Common Stock. As of October 2, 1999,
the Company had purchased approximately 3.3 million shares of the Company's
Common Stock at an aggregate cost of approximately $49.7 million.
On December 23, 1998, the Company entered into a $50 million credit
agreement ('Trade Credit Facility') with certain lenders under the Company's
$200 Million Credit Agreement for the issuance of letters of credit and trade
financing. The trade financing portion of the Trade Credit Facility has a $40
million limit and accrues interest at the lender's base rate plus 0.50% or at
LIBOR plus 1.50% on the unpaid principal. The Trade Credit Facility expires in
December 1999. In conjunction with entering into the Trade Credit Facility, the
Company also amended certain portions of its $200 Million Credit Agreement to
facilitate such Trade Credit Facility.
On August 16, 1995, consistent with the Company's goal of providing
increased shareholder value, the Company declared its first quarterly cash
dividend of $0.0125 per share, equivalent of an annual rate of $0.05 per share.
The Company has since declared seventeen successive quarterly cash dividends of
$0.0125 per share. The Company believes that its stock repurchase program as
well as the regular quarterly cash dividend demonstrates the Company's ongoing
commitment to increase stockholder value.
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 141 stores open, including its E-commerce site
and expects to open a total of ten stores during fiscal 2000. 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
9
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 line of credit.
Cash used in operating activities for the first quarter of fiscal 2000 was
$(0.5) million compared to cash provided of $22.0 million in the first quarter
of fiscal 1999. The increase in cash used in operating activities in the first
quarter of fiscal 2000 is primarily due to an increase in inventory and
decreased accounts payable versus the prior year. Cash used in investing
activities was $(5.1) million in the first quarter of fiscal 2000 compared to
$(3.3) million in the first quarter of fiscal 1999. The increase in cash used in
investing activities primarily reflects the acquisition of Ubertech Texas, Inc.
during the first quarter of fiscal 2000. Cash provided by financing activities
was $4.6 million in the first quarter of fiscal 2000 compared to a use of
$(18.8) million in the first quarter of fiscal 1999. The increase in cash
provided by financing activities primarily reflects the repurchase of $23.4
million of the Company's Common Stock in the first quarter of fiscal 1999. The
Company's Revolving Loan balance was $67.8 million at the end of the first
quarter of fiscal 2000. At November 11, 1999, the Company had approximately
$75.4 million of additional credit available under its Revolving Loan.
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
Speedo'r' Authentic Fitness'r' Retail Division for at least the next twelve
months. Although the Company believes that its current credit agreement and cash
flow to be generated from future operations will also be sufficient for its
long-term operations (periods beyond the next twelve months) circumstances may
arise that would require the Company to seek additional financing. In those
circumstances the Company expects to evaluate potential additional sources of
funds, for example, sales of additional common stock and expanded or additional
bank credit facilities.
YEAR 2000 COMPLIANCE
The Company has assessed and modified its computer systems and business
processes to provide for their continued functionality with the arrival of the
Year 2000 and is also assessing the readiness of third parties with which it
interacts.
In the third quarter of fiscal 1999, the Company successfully completed all
of the required modifications and internal testing with regards to its Year 2000
readiness. The Company incurred approximately $6.0 million in capital
expenditures for enhanced hardware and software applications and to achieve Year
2000 compliance. The Company also incurred approximately $0.5 million of pre-tax
costs associated with the required modifications, which were expensed as
incurred.
Attention continues to be focused on compliance attainment efforts of
vendors and other third parties, including key system interfaces with customers
and suppliers. The failure of key third parties who do business with the Company
or governmental agencies to timely remediate their Year 2000 issues could cause
system failures or errors and business interruptions. The Company has contacted
key suppliers and vendors in order to determine the status of such third party
Year 2000 remediation plans. The Company recognizes the need for Year 2000
contingency plans in the event that the remediation efforts of its vendors,
suppliers and governmental and regulatory agencies are not timely completed.
Evaluation of suppliers' and vendors' readiness is ongoing and includes
identification of alternate suppliers and vendors whose systems are Year 2000
compliant.
Management believes that the broad-base of manufacturing capacity and
capability available to the Company mitigates the possibility of significant
interruption in its operations.
SUBSEQUENT EVENT
On October 10, 1999, the Company received notification from The Warnaco
Group, Inc. ('Warnaco') of Warnaco's offer to acquire all of the outstanding
Common Stock of the Company in a negotiated transaction for $20.50 per share
in cash plus the assumption of the Company's debt. The Company formed a
special committee of
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the independent members of the Board of Directors ('Special Committee'), which
retained legal and financial advisors to evaluate Warnaco's proposal. On
November 15, 1999, Warnaco and the Company entered into a definitive merger
agreement for Warnaco's acquisition, subject to certain conditions, of all of
the Common Stock of the Company for $20.80 per share in cash, plus the
assumption of the Company's debt.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, 'Accounting for
Derivative Instruments and Hedging Activities'. SFAS No. 133 was originally
effective for fiscal years beginning after June 15, 1999. However, in June 1999,
the FASB issued SFAS 137 'Deferral of the effective date of FASB Statement No.
133' delaying the effective date of SFAS 133 until fiscal years beginning after
June 15, 2000. The Company is studying the application of the new statement to
evaluate disclosure requirements and the impact on the Company's consolidated
financial position, liquidity, cash flows and results of operations.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This Report includes 'forward-looking statements' within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this quarterly report, including,
without limitation, the statements under 'Management's Discussion and Analysis
of Financial Condition', are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable; it can give no assurance that such expectations will prove to have
been correct.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or trading purposes. The Company has entered into an interest rate
swap agreement to reduce the impact of interest rate fluctuations on cash flow
and interest expense. As of October 2, 1999, approximately $75 million of
interest-rate sensitive obligations were swapped to achieve a fixed rate of
6.66%, limiting the Company's risk to any future shift in interest rates. As of
October 2, 1999, the net fair value liability of all financial instruments
(primarily interest rate swap agreements) with an exposure to interest rate risk
was approximately $0.7 million. The potential decrease in fair value resulting
from a hypothetical 10% shift in interest rates would be approximately $1.5
million.
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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
21.1 -- Subsidiaries of the Registrant.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K
A Report on Form 8-K was filed on August 19, 1999 in connection with
the execution of the Rights Agreement, as amended, between the
Registrant and The Bank of New York, as Rights Agent.
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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: November 16, 1999 By: /s/ CHRISTOPHER G. STAFF
...................................
CHRISTOPHER G. STAFF
PRESIDENT AND CHIEF OPERATING
OFFICER
Date: November 16, 1999 By: /s/ MICHAEL P. MC HUGH
...................................
MICHAEL P. MC HUGH
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
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STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as......................'r'