<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-47327
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GERBER CHILDRENSWEAR, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 62-1624764 2300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) CLASSIFICATION CODE NUMBER)
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7005 PELHAM ROAD
SUITE D
GREENVILLE, SC 29615
TELEPHONE: (864) 987-5200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. EDWARD KITTREDGE
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
GERBER CHILDRENSWEAR, INC.
7005 PELHAM ROAD
SUITE D
GREENVILLE, SC 29615
TELEPHONE: (864) 987-5200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
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LANCE C. BALK, ESQ. VALERIE FORD JACOB, ESQ.
KIRKLAND & ELLIS FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
153 EAST 53RD STREET ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NY 10004
TELEPHONE:(212) 446-4800 TELEPHONE: (212) 859-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
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TITLE OF EACH CLASS PROPOSED MAXIMUM
OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per
share.......................... $62,100,000 $18,319.50
=======================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to paragraph (o) of Rule 457 of the Securities Act.
(2) The registration fee was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
*Registrant's name is GCIH, Inc. and will be changed to Gerber Childrenswear,
Inc. in connection with the consummation of the Offering and other transactions
contemplated hereby including the merger of Gerber Childrens-wear, Inc. into
GCIH, Inc., the amendment and restatement of the Company's Certificate of
Incorporation and the exchange of GCIH, Inc. stock (each as described on page
59 of the Prospectus).
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 8, 1998
PROSPECTUS
GERBER LOGO
3,600,000 SHARES
GERBER CHILDRENSWEAR, INC.
COMMON STOCK
------------------------
All of the 3,600,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by Gerber Childrenswear, Inc.
(the "Company").
The Company has two classes of authorized capital stock: (i) Common Stock,
which is being offered hereby, and (ii) Class B Common Stock, which is not being
offered hereby. The two classes of capital stock are substantially identical
except that the shares of Class B Common Stock are non-voting and are
convertible at any time at the holder's option into shares of Common Stock on a
one-for-one basis. See "Description of Capital Stock."
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. It is currently estimated that the initial public offering
price will be between $13.00 and $15.00 per share. For a discussion relating to
the factors considered in determining the initial public offering price, see
"Underwriting." The Common Stock has been approved for listing on the New York
Stock Exchange under the symbol "GCW," subject to official notice of issuance.
No listing application has been made for the Class B Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 540,000 shares of Common Stock, exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about , 1998.
------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
FURMAN SELZ WASSERSTEIN PERELLA SECURITIES, INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 3
LOGOS AND PICTURES INCLUDE THE FOLLOWING
LOGOS AND PRODUCTS BEARING SUCH LOGOS: GERBER, ALWAYS BABY BY GERBER, CURITY,
BABY LOONEY TUNES, WILSON, CONVERSE, COCA-COLA AND DUNLOP. ALL OF SUCH
PRODUCTS ARE PRODUCED AND DISTRIBUTED BY THE COMPANY.
Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements (including the Notes thereto)
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
the information set forth in this Prospectus gives effect to the transactions
described herein under "Certain Relationships and Related Transactions -- The
Reorganization." References in this Prospectus to the "Company" shall, as the
context requires, refer to Gerber Childrenswear, Inc. (and its predecessor),
together with its wholly-owned direct and indirect subsidiaries. References in
this Prospectus to "Gerber" refer to Gerber Childrenswear, Inc. References in
this Prospectus to "Auburn" shall, as the context requires, collectively refer
to Auburn Holdings, Inc., Auburn Hosiery Mills, Inc., GCI Spainco., S.L. (a
Spanish corporation formed on March 24, 1998), Sport Socks Co. (UK) Limited (a
wholly-owned subsidiary of Auburn Hosiery Mills, Inc.) and Sport Socks Co.
(Ireland) Limited, each a wholly-owned direct or indirect subsidiary of Gerber
Childrenswear, Inc. Data included in this Prospectus regarding the size, growth
and factors affecting the markets for infant and toddler apparel and for
hosiery, the Company's market position, demographic trends, market share and
other similar matters are approximations based upon data from The NPD Group,
Inc. and beliefs of the Company. Such beliefs are based upon industry studies in
which the Company participates, specific studies commissioned by the Company and
management's discussions with customers, collective experience, knowledge of the
industry and attendance at industry conferences. Unless otherwise indicated, the
information set forth in this Prospectus does not give effect to the exercise of
the Underwriters' overallotment option.
THE COMPANY
Gerber Childrenswear, Inc. is a leading marketer of infant and toddler
apparel and related products, offering products under its flagship brand,
Gerber, as well as the Baby Looney Tunes and Curity brand names and the Onesies
trademark. The Gerber name and baby head logo are among the best recognized in
the infant and toddler industry. The Company believes that Gerber is the leading
provider of infant and toddler apparel and related products, based on dollar
volume and breadth of product offering, to volume retailers, which constitute
the fastest growing segment of the retail industry. The Company also distributes
products to mid-tier department stores and specialty retailers. Gerber holds a
leading market share, based on dollar volume, in its distribution channels in
the underwear, blanket sleeper and cloth diaper categories. The Company believes
that these leading positions in addition to strong consumer recognition of its
brands provide opportunities for Gerber to leverage its brands into other
product categories including sleep 'n play, bed & bath, playwear, bibs, hosiery
and gift sets where Gerber has a growing presence. See "Business -- Gerber --
Products."
In addition, in order to build upon the Company's expertise as a low-cost
supplier of branded merchandise to volume retailers, the Company acquired all of
the capital stock of Auburn in December 1997 (the "Recent Acquisition") for
approximately $40.0 million in cash. Auburn manufactures, markets and sells
branded sport socks for men, women and children under established brand names
such as Wilson, Coca-Cola and Converse in the U.S., Europe and other
international territories and under the Dunlop brand name in Europe. Auburn
markets to a diversified customer base in the U.S. and Europe, including volume
retailers, department stores, wholesale clubs and major sporting goods chains.
As a result of the Recent Acquisition, the Company markets products in over 25
countries. The Company believes that Auburn's expertise in hosiery will position
it to capitalize on growth opportunities and the Recent Acquisition will provide
opportunities to achieve certain economies of scale and efficiencies in the
areas of purchasing (e.g. yarn), data processing, and selling, general and
administrative expenses (e.g. property and casualty insurance). See "Business --
Auburn." In 1997, pro forma for the Recent Acquisition, the Company's net sales
and income from continuing operations were $270.1 million and $6.6 million,
respectively.
In January 1996, Gerber Childrenswear, Inc. was acquired from Gerber
Products Company ("GPC") by a group of investors led by Edward Kittredge, the
Company's Chairman, President and Chief Executive Officer, who assembled
Gerber's current management team (the "Original Acquisition"). Since the
Original Acquisition, GPC has not owned any capital stock of the Company, nor
have GPC and the Company shared
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<PAGE> 5
common directors, officers or employees. The new management team, under the
direction of Mr. Kittredge, developed a series of initiatives to strengthen
Gerber's financial results and improve its operations. To achieve cost
efficiencies, Gerber consolidated manufacturing facilities, established a
flexible production strategy including domestic and offshore manufacturing and
sourcing components, extended the payment terms of certain supply arrangements,
centralized finished product purchasing across all product categories and
enhanced its compensation system. See "Business -- The Company."
The U.S. retail market for infant and toddler apparel and related products
is estimated at $7.0 billion in 1997, and has grown in dollar volume at a
compound annual rate of 8.0% since 1991. The Company believes that this classic
niche market is well-insulated from major changes in fashion trends and is less
sensitive to general economic cycles due to the consistent level of infant
births in the U.S., at slightly less than 4 million annually from 1989 to 1997
(based on U.S. Census data as reported by the National Center for Health
Statistics), and the high consumption rate for apparel products as infants
experience frequent size changes. Annual apparel spending per infant increased
to $329 in 1996 from $250 in 1993 according to U.S. Census data, representing
compound annual growth of 9.6%. The Company believes the market offers continued
growth prospects due to demographic factors including (i) more women having
children at an older age and returning to work thereafter, resulting in greater
disposable income for expenditures on children; and (ii) an increasing number of
grandparents, who represent a key consumer segment for infant and toddler
products. Within the infant and toddler industry, greater emphasis on value has
shifted consumer purchases away from traditional department stores and toward
more value-conscious retail channels, including volume retailers and mid-tier
department stores. Additionally, the industry is highly fragmented and services
volume retailers who are interested in limiting their purchases to a smaller
number of well-capitalized vendors with a broad base of branded products. The
Company believes that its strong brand names, leading market positions, broad
product offerings and strong customer relationships with volume retailers and
mid-tier department stores position it to benefit from industry trends. See
"Business -- The Company."
COMPETITIVE STRENGTHS
The following factors serve as the Company's competitive strengths and
distinguishing characteristics:
STRONG BRAND NAME RECOGNITION. The Company believes that Gerber is one of
the most recognized brands in the infant and toddler apparel industry with a
reputation for consistently delivering high quality products with innovative
design features at competitive prices. The Gerber brand name was first
introduced for baby food in 1928 by GPC, which holds an approximately 65% market
share in the baby food industry. In addition, the Company believes that its
popular Baby Looney Tunes brand name (used on products at slightly higher price
points) is recognized for its use of characters, bright colors and higher
fashion content. The Company also benefits from the strong recognition of its
Onesies trademark (developed for its line of infant underwear). See
"Business -- Gerber -- Brands" and "Business -- Licensing and Trademarks."
Additionally, as a result of the Acquisition, the Company offers sport socks
under the Wilson, Converse, Coca-Cola and Dunlop brand names licensed by Auburn.
See "Business -- Auburn" and "Business -- Licensing and Trademarks."
LEADING MARKET POSITIONS IN CORE PRODUCT CATEGORIES. The Company believes
it is the leading provider of infant and toddler apparel and related products to
volume retailers, which constitute the fastest growing segment of the retail
industry. The Company also distributes products to mid-tier department stores
and specialty retailers. Gerber holds a leading market share in its distribution
channels in the underwear, blanket sleeper and cloth diaper categories.
Management's strategy is to leverage these competitive advantages to further
penetrate other product categories, whether acquired or internally developed.
See "Business -- Competitive Strengths" and "Business -- Gerber."
HIGH QUALITY, INNOVATIVE PRODUCTS. The Company believes that it has
developed a reputation for high quality and innovative products and that this
has played a critical role in its long-standing strong market positions. In
1982, Gerber designed and developed Onesies, an innovative one-piece underwear
garment, which resulted in a new category of infant apparel which Gerber
believes consumers identify with the Onesies
4
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trademark. Most recently, Gerber introduced the Swim-per, a swim diaper, and Nap
'N Go, a portable daycare mat. See "Business -- Gerber."
LOW-COST SUPPLIER. The Company actively manages the manufacturing and
sourcing of its products to optimize efficiencies. Of the products manufactured
and sourced offshore, the majority were through manufacturing operations that
are owned or dedicated exclusively to the Company's products. See
"Business -- Gerber -- Manufacturing and Sourcing -- Raw Materials Sourcing." In
addition, the Company believes that its centralized planning, purchasing and
distribution systems have enhanced its cost competitiveness through reduced
distribution costs, minimization of product delays and economies of scale.
LONG-TERM CUSTOMER RELATIONSHIPS AND EMPHASIS ON CUSTOMER SERVICE. Gerber
enjoys well-established, long-term relationships with its customers, many of
which have been maintained at multiple levels from sales to senior management.
In certain cases, members of Gerber's senior management and sales force have
maintained relationships with Gerber's customers for over 30 years. Moreover,
the Company believes its broad product offerings, emphasis on customer service
and proven reliability provide a competitive advantage as retailers consolidate
and seek a smaller number of well-capitalized vendors with a broad base of
branded products. Gerber works closely with its principal customers to assist in
the management of their inventories and has invested in warehousing and
distribution facilities and information systems development, including an
electronic data interchange ("EDI") system and a vendor managed inventory
("VMI") program. See "Business -- Management Information Systems." In addition,
Gerber's information systems enable it to provide customized merchandising and
space allocation recommendations and other category management services to its
retail customers. Gerber currently provides such customized services for
Wal-Mart Stores, Inc. ("Wal-Mart") in certain product categories. See
"Business -- Competitive Strengths," "Business -- Gerber" and
"Business -- Customers."
DEVELOPMENT OF MANAGEMENT AND OPERATING INFORMATION SYSTEMS. Gerber has
made significant investments in the development of management information
systems ("MIS") and plans to make additional capital expenditures to further
refine such systems. Gerber believes that it will continue to benefit from these
systems through its ability to effectively manage inventory, improve sales and
reduce operating costs. Gerber currently serves all major volume retailers
through its EDI system, which allows customers to send orders to Gerber more
quickly and efficiently. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
EXPERIENCED MANAGEMENT TEAM WITH A SIGNIFICANT STAKE IN THE COMPANY. The
Company's Chairman, President and Chief Executive Officer, Edward Kittredge, has
had over 35 years of diverse experience in the textile and apparel industry and
the Company's top five senior managers average more than 25 years of experience
in the apparel industry. The sales and merchandising team has been strengthened
with the recent additions of Robert P. Robertson as Senior Vice President of
Sales and Marketing and Mary-beth Boughton as Vice President of Merchandising
(focused on mid-tier department stores). After giving effect to the
Reorganization and the Offering, management will own approximately 13.0% of the
total outstanding capital stock of the Company on a diluted basis (including the
shares of Class B Common Stock issuable upon the exercise of the warrant). See
"Management."
BUSINESS STRATEGY
The key elements of the Company's business strategy to remain a low-cost
supplier of high quality, branded products to volume retailers include:
ENHANCE OFFERING OF HIGH QUALITY, INNOVATIVE PRODUCTS. The Company's
strategy is to leverage the Gerber, Baby Looney Tunes and Curity brands into
additional products, including product segments in which the Company is
under-represented. For example, the Company is under-represented in the
approximately $1.8 billion playwear market and in the approximately $600 million
fleece/outerwear market, in each case based on retail sales. In order to grow
its market share in these product lines, Gerber recently enhanced its line of
Baby Looney Tunes playwear and introduced a new line of Gerber fleecewear. The
Company believes that these categories present significant growth opportunities.
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EXPAND INTO NEW AND STRENGTHEN EXISTING DISTRIBUTION CHANNELS. The
Company's plan is to continue to leverage its strong brand names to expand into
new distribution channels in the U.S. and abroad. Gerber recently targeted the
mid-tier department store channel with product lines such as Always Baby by
Gerber. Gerber's strategy is to emphasize marketing efforts to increase product
breadth in existing distribution channels in which it believes some of its
product lines are under-represented. In addition, management believes that the
Gerber, Baby-Looney Tunes and Curity lines of products have growth opportunities
in the food and drug, variety, off-price apparel, catalog, dollar store,
wholesale club and mid-tier department store distribution channels.
FURTHER PENETRATE INTERNATIONAL MARKETS. Gerber currently has an exclusive
license to use the Gerber brand name on certain infant and toddler apparel and
textile products in the U.S., Canada and the Caribbean and a right of first
refusal to use the Gerber name in Central and South America. Gerber branded
products are currently being shipped in the U.S. and to Canada and the
Caribbean. The Company's plan is to leverage the Gerber brand name to expand its
presence in international markets in which the Gerber brand name is established
for baby food, and believes that such markets represent expansion opportunities.
MAXIMIZE OPERATING EFFICIENCIES. The Company's strategy is to continue to
improve operating efficiencies and productivity in order to offer its customers
high quality products at competitive prices. The Company's plan is to continue
to optimize product sourcing to achieve economies of scale and to eliminate
certain duplicative operations in connection with the acquisition of Auburn.
LEVERAGE EXPERTISE THROUGH SELECTIVE ACQUISITIONS. The Company intends to
grow by acquisition and, consistent with such strategy, regularly evaluates
acquisition candidates and engages in discussions from time to time regarding
potential acquisitions. The Company believes that numerous acquisition
candidates exist within the infant and toddler apparel industry. In addition,
the Company believes that other acquisition opportunities exist in similar high
volume, basic branded apparel businesses where the Company can leverage its core
competencies. The Company is neither currently negotiating nor has any current
or pending plans, arrangements, understandings or agreements with respect to any
acquisitions.
RECENT ACQUISITION
The Company acquired all of the capital stock of Auburn in December 1997
for approximately $40.0 million in cash. Auburn manufactures, markets and sells
branded sport socks for men, women and children under established brand names
such as Wilson, Coca-Cola and Converse in the U.S. and internationally and under
the Dunlop brand name in Europe. Auburn has operations in the United States and
Ireland. Auburn markets to a diversified customer base in the U.S. and Europe,
including volume retailers, department stores, wholesale clubs and major
sporting good chains. These strong brand names and Auburn's long-term reputation
for quality facilitate a multi-channel distribution strategy. Auburn competes
effectively in these distribution channels by offering its branded products at
competitive prices, acting as a low-cost producer with the ability to service
customers with quick turnaround, and maintaining strong customer relations. In
addition, with its acquisition by Gerber, Auburn has added to these core
competencies the ability to access capital for future growth and investment in
operations. For the year ended December 31, 1997, Auburn had net sales of
approximately $69.6 million. See "Business -- Auburn."
Auburn competes in the highly fragmented hosiery industry, which has
significant branded and private label components. Competition within the
industry is generally based on price, quality, service, brand recognition and
style. The Company believes that advances in technology in hosiery manufacturing
will result in a smaller number of well-capitalized hosiery manufacturers. The
Company believes that Auburn is well positioned to benefit from such
consolidation due to its strong brands, established channels of distribution,
strong customer service, low-cost manufacturing capabilities and access to
capital. The Company also believes that significant growth opportunities exist
through taking market share from private label producers, which comprise a
significant portion of the hosiery industry. In addition, the Company believes
that Auburn's European manufacturing facility allows it to be more responsive to
the European market, where the Company believes significant opportunity for
expansion exists. See "Business -- Auburn -- Manufacturing and
Sourcing -- Distribution and Inventory Management."
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The Company plans to continue to operate Auburn as a wholly-owned
subsidiary. The Company believes that the Acquisition will provide certain
economies of scale and efficiencies in the areas of purchasing (e.g. yarn), data
processing and selling, general and administrative expenses (e.g. property and
casualty insurance). In addition, the Company believes that the acquisition of
Auburn will provide Gerber with opportunities to further expand its business in
international markets through Auburn's solid customer relationships and
reputation in Europe.
REORGANIZATION
Gerber Childrenswear, Inc. was acquired by GCIH, Inc. ("GCIH") in January
1996 from GPC for approximately $61.5 million in cash (subject to purchase price
adjustments) and a $12.5 million promissory note. Since the Original
Acquisition, GPC has not owned any capital stock of the Company, nor have GPC
and the Company shared common directors, officers or employees. In connection
with such acquisition and related financing, Citicorp Venture Capital, Ltd.
("CVC"), management, directors and others purchased the equity of GCIH.
Immediately prior to and in connection with the consummation of the
Offering, GCIH and Gerber will consummate a series of transactions pursuant to
which GCIH will be recapitalized and reorganized and Gerber will be merged into
GCIH (the "Reorganization"). The principal transactions comprising the
Reorganization that will occur prior to or in connection with the consummation
of the Offering are: (i) the conversion of all of the outstanding shares of
preferred stock of GCIH into either common stock of GCIH or the right to receive
cash, (ii) the merger of Gerber into and with GCIH, with GCIH being the
surviving entity of such merger, and (iii) in connection with such merger, the
amendment of the certificate of incorporation of GCIH to provide for (a) the
reclassification and exchange of all of the outstanding shares of all classes of
common stock and warrants to purchase common stock of GCIH for shares of Common
Stock, Class B Common Stock or warrants to purchase Class B Common Stock of GCIH
and (b) a change of the corporate name of GCIH, from GCIH to "Gerber
Childrenswear, Inc." See "Certain Relationships and Related Transactions -- The
Reorganization." Consummation of the Offering is contingent on the completion of
the above-described transactions.
The Company is a Delaware corporation. The Company's principal offices are
located at 7005 Pelham Road, Suite D, Greenville, SC 29615, and its telephone
number is (864) 987-5200.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.................. 3,600,000 shares
Common Stock to be outstanding after the Offering:
Common Stock....................................... 7,647,520 shares(a)
Class B Common Stock............................... 8,787,465 shares(b)
Total........................................... 16,434,985 shares
Total Common Stock, Class B Common Stock and Class B
Common Stock issuable upon the exercise of an
outstanding warrant(c)............................. 19,393,358
Voting Rights........................................ Each share of Common Stock is entitled to one
vote per share. Shares of Class B Common Stock
are not entitled to any votes.
Use of Proceeds...................................... The net proceeds to be received by the Company
from the Offering will be used to repay
certain indebtedness of the Company and to
redeem certain shares of GCIH's preferred
stock in connection with the Reorganization.
See "Use of Proceeds."
Proposed New York Stock Exchange Symbol.............. "GCW"
</TABLE>
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(a) Based on the number of shares outstanding as of May 19, 1998. Includes
2,520,173 shares of Common Stock issued to the Company's management,
including 1,366,096 vested shares and 1,154,077 unvested shares (as of June
8, 1998). Excludes 750,000 shares reserved for issuance under the Incentive
Plan of which options to purchase up to 20,000 shares will be granted in
connection with the Offering, at the initial public offering price. Assumes
the Underwriters' over-allotment option is not exercised.
(b) Shares of Class B Common Stock are convertible at any time at the holder's
option into shares of Common Stock on a one-for-one basis. Shares of Class B
Common Stock may not be transferred to anyone other than an affiliate of the
holder, unless such Class B Common Stock is first converted by such holder
into Common Stock. See "Description of Capital Stock."
(c) Includes 2,958,510 shares of Class B Common Stock, which may be issued upon
the exercise of a warrant, net of treasury stock method of 137 shares.
RISK FACTORS
Purchasers of the Common Stock in the Offering should carefully consider
the risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
The risk factors set forth under the caption "Risk Factors" include (i)
Dependence on Material Licenses, (ii) Dependence on Sales to a Limited Number of
Large Customers, (iii) Competition, (iv) Recent Acquisition, (v) Dependence on
Key Personnel, (vi) Risks of Third Party Manufacturing and Sourcing, (vii) Costs
of Raw Materials and Supplier Relationships, (viii) Risks Associated with
Foreign Operations and Import Restrictions, (ix) Risks Associated with
Fluctuations in Foreign Currency Exchange Rates, (x) Seasonal Business, (xi)
Cost of Environmental Compliance, (xii) Control by Executive Officers and
Current Stockholders, (xiii) Shares Eligible for Future Sale; Registration
Rights, (xiv) Absence of Dividends; Restrictions on Payment of Dividends, (xv)
Certain Anti-Takeover Provisions, (xvi) Dilution, and (xvii) No Prior Public
Market; Potential Volatility of Stock Price. See "Risk Factors."
8
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents (i) summary historical consolidated financial
information of the Company's Predecessor (the "Predecessor Company") for the
year ended December 31, 1995, (ii) summary historical consolidated financial
information of the Company for the period from January 22, 1996 to December 31,
1996, the year ended December 31, 1997, the first quarter ended March 29, 1997
and the first quarter ended April 4, 1998, and (iii) summary pro forma as
adjusted information of the Company for the year ended December 31, 1997 and the
first quarter ended April 4, 1998, after giving effect to the Recent
Acquisition, the Reorganization and the Offering and the application of the
estimated net proceeds therefrom. The historical consolidated financial
information of the Predecessor Company for the year ended December 31, 1995 and
the Company for the period from January 22, 1996 to December 31, 1996 and the
year ended December 31, 1997, have been derived from the financial statements of
the Predecessor Company and the Company, respectively, which have been audited
by Ernst & Young LLP. The financial data for the three month periods ended April
4, 1998 and March 29, 1997 are derived from unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended April 4, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. The summary pro forma as adjusted information does not
purport to represent what the Company's results would have been if such events
had occurred at the date indicated, nor does such information purport to project
the results of the Company for any future period. The summary financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements and notes thereto and the Unaudited Pro Forma Condensed Consolidated
Statement of Operations and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR ----------------------------------------------------------
Company (a) PERIOD FROM
------------ JANUARY 22, FIRST QUARTER ENDED
YEAR ENDED 1996 TO YEAR ENDED ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 29, APRIL 4,
1995 1996 (B) 1997 (C) 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $197,401 $185,223 $202,037 $45,350 $64,647
Cost of sales................................. 156,434 138,608 146,294 32,654 47,212
-------- -------- -------- ------- -------
Gross margin.................................. 40,967 46,615 55,743 12,696 17,435
Selling, general and administrative
expenses.................................... 24,633 23,894 27,766 6,718 9,614
Stock compensation(d)......................... -- -- 9,465 -- --
Other......................................... -- 689 231 514 --
-------- -------- -------- ------- -------
Total operating expenses...................... 24,633 24,583 37,462 7,232 9,614
-------- -------- -------- ------- -------
Income before interest and income taxes....... 16,334 22,032 18,281 5,464 7,821
Interest expense, net......................... -- 6,308 5,798 1,326 2,262
-------- -------- -------- ------- -------
Income before income taxes and extraordinary
item, net................................... 16,334 15,724 12,483 4,138 5,559
Provision for income taxes.................... 6,270 6,244 4,764 1,614 2,139
-------- -------- -------- ------- -------
Income before extraordinary item, net......... 10,064 9,480 7,719 2,524 3,420
Extraordinary item, net(e).................... -- -- (708) -- --
Less preferred stock dividends................ -- (1,328) (1,637) (383) (452)
-------- -------- -------- ------- -------
Net income available to common shareholders... $ 10,064 $ 8,152 $ 5,374 $ 2,141 $ 2,968
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FIRST QUARTER
DECEMBER 31, ENDED
1997(F) APRIL 4, 1998(G)
------------ ----------------
<S> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS, AS ADJUSTED(h):
Net sales................................................. $270,100 $64,647
Income before interest and income taxes................... 19,960 7,821
Interest expense, net..................................... 3,921 939
Income from continuing operations......................... 9,936 4,233
Income from continuing operations per basic share......... 0.63(i) 0.27(i)
Income from continuing operations per diluted share....... 0.51(i) 0.22(i)
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 4, 1998
-----------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(J) ADJUSTED(K)
-------- -------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 68,187 $ 67,821 $ 75,187
Total assets.............................................. 178,442 178,442 178,442
Total debt................................................ 94,437 94,437 48,931
Preferred stock including accrued dividends............... 15,062 -- --
Shareholders' equity...................................... 22,237 36,933 82,805
</TABLE>
(footnotes on following page)
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<PAGE> 11
- ---------------
(footnotes to table on previous page)
(a) The Predecessor Company operated as a wholly-owned subsidiary of GPC until
being divested by GPC on January 22, 1996. The financial data for the
Predecessor Company is not entirely comparable to that of the Company due to
certain factors including the following:
(i) The Predecessor Company did not incur any royalty expense for the use
of the Gerber name and baby head logo. During the period from January 22,
1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the
royalty expense to GPC was $1.9 million and $3.5 million, respectively.
(ii) The Predecessor Company's net sales in 1995 included approximately
$8.3 million of net sales at cost to GPC that generated no gross margin.
Net sales to GPC in 1996 and 1997 of approximately $6.2 million and
approximately $4.3 million, respectively, generated gross margins in 1996
and 1997 of approximately $950,000 and $598,000, respectively.
(iii) The Predecessor Company was included in various self-insurance
programs provided by GPC, including medical, dental, workers' compensation,
comprehensive general and excess liability and property damage and business
interruption. GPC also provided management information services to the
Predecessor Company and allocated a portion of the expenses incurred to the
Predecessor Company. In addition, the Predecessor Company was allocated a
portion of legal and professional costs for services directly attributable
to the Predecessor Company. Certain services were provided by GPC's
corporate staff, for which no charge was made to the Predecessor Company.
Management believes the aggregate cost of these unallocated services was
insignificant. The Predecessor Company was charged for all outside legal
and professional expenses directly attributable to it.
(iv) In 1995, the Predecessor Company had no long term debt and was not
charged any interest expense as a subsidiary of GPC.
(v) The provision for income taxes of the Predecessor Company essentially
results from applying the Federal and state statutory rates to the
operations of a stand-alone company.
(b) Excludes the Predecessor Company's unaudited operations for the period
January 1, 1996 through January 21, 1996. See Note (b) to Selected
Consolidated Financial Data.
(c) Includes operating results for Auburn Hosiery Mills, Inc. and Sport Socks
Company (Ireland) Limited ("Sport Socks Ireland") for the period December
17, 1997 through December 31, 1997. See Note (c) to Selected Consolidated
Financial Data.
(d) Represents expense related to stock compensation incurred in connection with
the sale of capital stock to executives and management of the Company below
fair market value. See "Certain Relationships and Related Transactions --
Transactions with Management and Directors."
(e) Represents unamortized loan costs and prepayment penalty totaling $708 (net
of an income tax benefit of $452) expensed in connection with the
replacement of the Company's then existing credit facility with the Credit
Agreement (as defined herein).
(f) As adjusted for the Recent Acquisition, the Reorganization, the Offering and
the application of the estimated net proceeds therefrom, assuming completion
of such events as of January 1, 1997.
(g) As adjusted for the Reorganization, the Offering and the application of the
estimated net proceeds therefrom, assuming completion of such events as of
January 1, 1998.
(h) Includes $9.5 million of stock compensation expense ($5.8 million after-tax)
in the year ended December 31, 1997. See Note (d) above. If further adjusted
to exclude such expense, income before interest and income taxes would have
been $29,425, income from continuing operations would have been $15,785, and
income from continuing operations per basic and diluted shares would have
been $1.00 and $0.81 respectively, in each case for the year ended December
31, 1997.
(i) Weighted average shares outstanding used for the computation of income from
continuing operations per basic share and for the computation of income from
continuing operations per diluted share was (i) 15,800,723 and 19,413,462
shares, respectively, for the year ended December 31, 1997, and (ii)
15,719,791 and 19,278,671 shares, respectively, for the quarter ended April
4, 1998.
(j) As adjusted for the Reorganization, assuming completion thereof as of April
4, 1998.
(k) As adjusted for the Reorganization and the Offering and the application of
the estimated net proceeds therefrom, assuming completion of both as of
April 4, 1998.
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<PAGE> 12
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as those discussed elsewhere in this
Prospectus.
DEPENDENCE ON MATERIAL LICENSES
The Company is largely dependent on the use of the Gerber name. In 1997,
approximately 70% of Gerber's products were sold under the Gerber brand name.
The Gerber name and trademark are exclusively licensed to the Company from GPC
for use on certain clothing and textile products in the infant and toddler
apparel market sold in the United States, Canada and the Caribbean. The product
categories covered by the Gerber license include infant and toddler shoes,
underwear, sleepwear (including blanket sleepers, pajamas and sleep 'n play),
playwear, bed and bath products, reusable cloth diapers and diaper liners, bibs,
hosiery, swimwear and gift sets and layette incorporating the above articles, in
each case targeted to infants and toddlers of specific sizes. The terms and
conditions for use of the Gerber name for other product categories and
geographic areas must be negotiated by the Company on an individual basis. The
Gerber license extends through 2006, after which there are two five-year renewal
periods. See "Business -- Licensing and Trademarks." The loss or limitation of
the right to use the Gerber name would have a material adverse effect on the
Company's results of operations. GPC retains the rights under the license to
produce, distribute, advertise and sell, and to authorize others to produce,
distribute, advertise and sell, products under the Gerber name other than
clothing and textile products. Negative publicity related to the Gerber name
caused by actions not related to the Company or the Company's products could
have a material adverse effect on the Company's results of operations. The
Company is not required to pay royalty fees to GPC until 2002 (although the
Company is recording royalty expense to reflect such fees). The initiation of
such royalty payments may adversely affect the Company's cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company also licenses the Baby Looney Tunes brand name from the Warner
Brothers division of Time-Warner, Inc. ("Warner Brothers") and the Curity brand
name from The Kendall Company. In 1997, approximately 16% and 2% of Gerber's
products were sold under the Baby Looney Tunes and Curity brand names,
respectively. The Company is licensed to use the Baby Looney Tunes brand name in
the U.S. and the Curity brand name in the U.S. and internationally. The Baby
Looney Tunes and Curity licenses are limited to certain product categories,
including, in the case of Baby Looney Tunes, bath products, bedding, sleepwear,
underwear, footwear, socks, layettes and infant and toddler playwear, and in the
case of Curity, cloth diapers and diaper liners, underwear, hosiery, sleepwear
(including blanket sleepers and sleep 'n play), linens, bedding and certain
other products (such as infant car seat covers), in each case to be worn or used
for infants and toddlers. The Curity license automatically renews for periods of
ten years. The Baby Looney Tunes license has recently been renewed and extends
through December 31, 2000. The Company owns the Onesies trademark. The loss or
limitation of the right to use either of these names could have a material
adverse effect on the Company's financial condition and results of operations.
Auburn also licenses properties from different companies for its products.
The license from Wilson Sporting Goods Co. ("Wilson") expires in 2002 with a
five year renewal period if certain sales targets are exceeded. Auburn has held
this license since 1982. The license from Wilson can be terminated by Wilson if
the employment of either Kevin K. Angliss or Donald J. Murphy with Auburn
terminates. The license from Converse Inc. ("Converse") expires on December 31,
2001 with an obligation to enter into good faith discussions in 2001 with
respect to a new three year contract. This license can be terminated by Converse
if Kevin K. Angliss and Timothy Graham are no longer the principal managers of
Auburn's Converse-brand product line. Messrs. Angliss, Murphy and Graham have
not entered into employment agreements with Auburn. The Coca-Cola Company
("Coca-Cola") license expires on December 31, 1998 (with a three-year renewal
period). The license from Dunlop Slazenger International Ltd. ("Dunlop") expires
in 2001 (with a
11
<PAGE> 13
five year renewal period if certain sales targets are exceeded). All of these
licenses have particular geographic and other limitations, and the Company
negotiates the terms and conditions for the use of such trademarks outside such
limitations on an individual basis. The products covered by the licenses include
(i) sport socks in the case of Wilson, (ii) men's, women's and youth's hosiery
in all color combinations and styles in the case of Converse, (iii) athletic and
casual socks in the case of Coca-Cola, and (iv) sport and casual socks in the
case of Dunlop. In 1997, sales of Wilson-brand products accounted for 83% of
Auburn's total sales. The loss or limitation of the right to use the Wilson
license would have a material adverse effect on the Company's financial
condition and results of operations. The loss or limitation of the right to use
any of the Coca-Cola, Converse or Dunlop names could have an adverse effect on
the Company's financial condition and results of operations.
There are risks associated with the financial condition of the Company's
licensors which are beyond the control of the Company. In the event that a case
under the Federal bankruptcy laws is commenced by or against any licensor in the
future, the trustee in the bankruptcy case or the licensor, as
debtor-in-possession, may have the right to reject such licensor's license
agreement. While the Company is not aware of any facts which would make such
termination or rejection reasonably likely to occur, in the event of any such
termination or rejection, the Company would lose its right to use the licensed
intellectual property, which loss would have an adverse effect on the Company's
financial condition and results of operations.
The Company believes that its trademarks and other proprietary rights are
material to its success and its competitive position. Accordingly, the Company
and its licensors devote substantial resources to the establishment and
protection of their trademarks on a worldwide basis. There can be no assurance
that the actions taken by the Company and its licensors to establish and protect
their trademarks and other proprietary rights will be adequate to protect the
Company's intellectual property or to prevent imitation of its products by
others. Moreover, no assurance can be given that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of the Company or
that the Company will be able to successfully resolve such conflicts. In
addition, the laws of certain foreign countries may not protect proprietary
rights to the same extent as do the laws of the United States. The Company has
not experienced any proprietary license infringements or legal actions that have
had a material impact on its financial condition or results of operations. See
"Business -- Licensing and Trademarks."
DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE CUSTOMERS
Certain of the Company's volume retailer and mid-tier department store
customers account for significant portions of the Company's net sales. Gerber
directly services approximately 1,100 retail accounts, with the Company's top 10
customers representing approximately 83% of total 1997 sales. Sales to Wal-Mart,
which accounted for a significant percentage of the net sales of infant and
toddler apparel in the U.S. in 1997, constituted approximately 44% of Gerber's
sales during 1997. Sales to Wal-Mart constituted approximately 48% of Auburn's
sales during 1997 (including sales after the Recent Acquisition). No other
customer accounted for more than 10% of the Company's 1997 sales on a pro forma
basis. A decision by any significant customer or group of stores, whether
motivated by competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from the Company, or to change its
manner of doing business, could have a material adverse effect on the Company's
financial condition and results of operations. See "Business -- Customers."
The Company generally does not enter into long-term or other purchase
agreements with its customers. Customer orders are received by the Company
through one of two methods. With the exception of fashion-oriented and seasonal
products, most customer orders are tied to a planogram, which is established by
customers for setting up displays within their stores. Generally planograms are
revised annually in these merchandise categories. The Company's customers, based
on sales data captured at cash registers, generate orders for replenishment
goods which are transmitted to the Company through its EDI systems.
Replenishment orders for planogram merchandise are generally filled within three
days. Under the second program, customer orders for fashion-oriented and
seasonal products (e.g., blanket sleepers) are received on a purchase order
basis and such orders are filled without an in-season reorder expectation.
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<PAGE> 14
In recent years, the retail industry has experienced consolidation and
other ownership changes. In addition, some of the Company's customers have
operated and currently operate under the protection of the federal bankruptcy
laws. In the future, retailers in the U.S. and in foreign markets may
consolidate, undergo restructurings or reorganizations, or realign their
affiliations, any of which could decrease the number of stores that carry the
Company's products or increase the ownership concentration within the retail
industry. While such changes in the retail industry to date have not had a
material adverse effect on the Company's business or financial condition, there
can be no assurance as to the future effect of such changes.
COMPETITION
The infant and toddler apparel market is highly competitive. Both branded
and private label manufacturers compete in the infant and toddler apparel
markets. Competition generally is based upon product quality, brand name
recognition, price, selection, service and convenience. Gerber's primary
competitors include Fruit of the Loom, Inc. ("Fruit of the Loom"), the Hanes
subsidiary of the Sara Lee Corporation ("Hanes"), The William Carter Company
("Carter's"), licensed products and firms using character licenses from Walt
Disney Company, Inc. ("Disney") and others. Gerber also competes with certain
retailers, including several which are customers of the Company, which have
significant private label products offerings. Certain of Gerber's competitors
have greater financial resources than the Company. Gerber's ability to compete
depends, in substantial part, on the continued high regard for the Gerber brand
name and the ability of Gerber to continue to offer high-quality garments at
competitive prices.
The hosiery industry is highly fragmented and has significant branded and
private label components. Competition is generally in terms of price, quality,
service, brand recognition and style. Auburn's primary competitors include
Hanes, which has the largest share of the market, Renfro Corporation ("Renfro"),
Neuville Industries, Inc. ("Neuville") and the Russell Corporation ("Russell").
Auburn also competes with certain retailers, including several which are
customers of the Company, which have significant private label product
offerings. In addition, Auburn competes with private label manufacturers,
including small, local manufacturers and large, public companies that have
greater financial resources than the Company and larger customer bases. See
"Business -- Competition."
RECENT ACQUISITION
The Company acquired the capital stock of Auburn in December 1997. The
ability of the Company to achieve its objectives in connection with the Recent
Acquisition are, as with any acquisition, subject to certain risks including,
among others, the possible inability to retain certain Auburn personnel,
potential negative effects of diverting management resources and the possible
failure to retain Auburn's customers. None of Auburn's executive officers have
entered or are expected to enter into employment agreements with the Company. In
connection with the Offering, however, these executives shall receive stock
options which shall be subject to vesting and forfeiture provisions. Moreover,
under the terms of Auburn's license with Wilson, Auburn and Gerber are not
permitted to consolidate their top management team, sales force, distributors,
customer service and manufacturing functions and are not permitted to commingle
product lines. As a result, there can be no assurance that the expected benefits
from the Auburn acquisition will be achieved on a timely basis or at all. The
Company believes, however, that because (i) it acquired Auburn to be a separate,
stand-alone business through which it could leverage management expertise to
create increased revenues and earnings, (ii) it did not expect the acquisition
to create substantial economies or efficiency of scale, and (iii) it does not
intend to integrate Auburn with Gerber (in fact, the Wilson license prohibits
full integration), the failure to integrate Auburn with Gerber will not
adversely effect the Company's financial condition or operating results. See
"Business."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent to a large extent on its ability to attract,
motivate and retain an adequate labor force, including management, sales,
design, art, manufacturing, merchandising and other personnel. The Company is
also dependent to a significant extent upon the continued efforts of its senior
management team, including its Chairman, President and Chief Executive Officer,
Edward Kittredge, its Senior Vice President,
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<PAGE> 15
Richard L. Solar and its Vice President of Finance, Secretary and Treasurer,
David E. Uren. The Company has entered into employment agreements with the
above-named executive officers which expire in 2001. If, for any reason, such
executives do not continue to be active in management, the Company's operations
could be materially adversely affected. The Company does not maintain key-man
life insurance policies on any of its executive officers or key employees. After
the consummation of the Offering, the Company's management will own 13.0% of the
total outstanding capital stock of the Company on a diluted basis (including
shares of Class B Common Stock issuable upon the exercise of an outstanding
warrant). See "Management" and "Principal Stockholders."
RISKS OF THIRD PARTY MANUFACTURING AND SOURCING
The Company manufactures its products both in the U.S. and abroad and also
purchases certain products manufactured by independent manufacturers. In 1997,
approximately 60% of Gerber's products, based on total product cost, were
manufactured or sourced outside of the United States. The Dominican Republic,
Guatemala and Estonia accounted for approximately 42%, 22% and 11% of offshore
production, respectively, with Mexico, Taiwan, Hong Kong, Thailand, Russia,
China and South Korea accounting for the balance. None of such other countries
accounted for 10% or more of offshore production. During 1997, pro forma for the
Acquisition, approximately 30% of Gerber's products, based on cost, were
manufactured by third party independent manufacturers (including some
manufacturers located outside of the United States). The Company generally has
no long-term contracts with its independent manufacturing sources and competes
with other companies for production facilities and import quota capacity. Such
third party manufacturing is typically done on a purchase order basis, pursuant
to Contract Service Agreements, which outline responsibilities of the parties.
The Company has entered into production agreements with certain independent
manufacturers in the United States, Estonia, Guatemala and Mexico, the material
terms of which are believed by management, based on discussions with suppliers
and management's experience, to be consistent with industry standards. These
agreements are generally for terms of one year, payment is due within 30 days,
the contractors must provide labor and conduct hiring practices consistent with
certain U.S. laws, and pricing terms are negotiated on an item by item basis. No
single independent manufacturer engaged by the Company accounted for more than
5% of the Company's pro forma total production in 1997. Although the Company
believes that it has established close relationships with its principal
manufacturing sources, the Company's future success will depend in some measure
on its ability to maintain such relationships. The inability of an independent
manufacturer to ship orders of the Company's products in a timely manner or to
meet the Company's quality standards could cause the Company to miss the
delivery date requirements of its customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a reduction in
purchase prices, any of which could have a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Gerber -- Manufacturing and Sourcing."
The Company requires its independent manufacturers to operate in compliance
with applicable laws and regulations, including laws and regulations governing
the fire retardancy of certain of the Company's products. The Company monitors
the independent manufacturers' compliance with the Company's quality assurance
guidelines and other applicable regulations through both internal and external
quality assurance inspectors. Additionally, all of the Company's licensors have
the right to, and may from time to time, perform independent inspections of
facilities utilized by the Company. While the Company's purchasing guidelines
promote ethical business practices, the Company does not control such
manufacturers or their labor practices. The violation of labor or other laws by
an independent manufacturer of the Company, or the divergence of an independent
manufacturer's labor practices from those generally accepted as ethical in the
United States, could have a material adverse effect on the Company. See
"Business -- Gerber -- Manufacturing and Sourcing."
COSTS OF RAW MATERIALS AND SUPPLIER RELATIONSHIPS
The Company depends on certain raw materials such as yarn for the
manufacturing of its products. In order to hedge against price increases of
yarn, the Company actively manages its cost through contracts with its yarn
suppliers with terms of up to one year. This practice generally has enabled the
Company to
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<PAGE> 16
successfully manage the effect of price fluctuations; however, no assurance can
be given that the Company will continue to be successful in managing such price
fluctuations or that future price fluctuations in yarn and other raw materials
will not have a material adverse effect on the Company. With the exception of
suppliers located in Ireland, the United Kingdom, Spain, Italy and Germany which
provide yarn to the Company's Irish subsidiary, all of the Company's yarn
suppliers are located in the U.S. None of such foreign suppliers, either
individually or in the aggregate, provide material quantities of yarn to the
Company. The Company's primary yarn supplier provides approximately 29.5% of the
Company's yarn. Two other suppliers each provide slightly more than 10% of the
Company's yarn. Management believes, however, that none of these suppliers are
material and that there are many alternate sources from which yarn may be
readily obtained. Although the Company has not experienced any difficulty in
obtaining yarn and other raw materials, there can be no assurance that any of
such supplier relationships will not be terminated in the future. Any sustained
interruption in the Company's receipt of adequate supplies could have a material
adverse effect on the Company.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND IMPORT RESTRICTIONS
A significant percentage of the Company's products are manufactured outside
of the United States, both by the Company in the Dominican Republic and Ireland
and by independent manufacturers in a number of other foreign countries,
including the Dominican Republic, Guatemala, Estonia, Mexico, Taiwan, Hong Kong,
Thailand, Russia, China and South Korea. The Company is therefore subject to the
risks generally associated with manufacturing or purchasing products in foreign
countries, such as foreign governmental regulations, changes in existing tax
laws, social, political or economic instability, currency and exchange risks,
disruptions or delays in shipments, restrictions on the transfer of funds and
changes in economic conditions in countries in which the Company's manufacturing
sources are located, including any risks associated with the loss of China's
most favored nation status.
In addition, the Company depends on exporters to obtain certain raw
materials and products. Many of these exporters finance their working capital by
obtaining "packing" loans which are backed by letters of credit. As a result of
the recent financial and economic instability in Southeast Asia, some exporters
have experienced difficulty obtaining such loans and, consequently, have been
forced to discontinue operations. None of the Company's exporters have ceased
operations at this time. Although the Company's operations could be disrupted if
one or more of the Company's larger exporters are forced to terminate their
exporting activities, management believes that the Company's flexible sourcing
capability would prevent such disruption from materially impacting the Company's
results of operations and financial condition. See "Business --
Gerber -- Manufacturing and Sourcing."
The Company is subject to United States regulations and the risk of the
imposition of additional regulatory burdens relating to apparel imports,
including quotas on the amounts and types of merchandise which may be imported
into the United States from other countries, duties or taxes and other charges
on imports. Any of such duties, taxes and other charges are, and will continue
to be, reflected in the Company's costs. In addition, although the Company does
not know of any currently pending regulatory changes that would have a harmful
effect on its business, it is possible that future regulatory changes could have
an adverse effect on the Company's financial condition and results of
operations. Although management believes that the Company is currently in
compliance with these regulations, failure to comply in the future with these
regulations could result in a delay in clearing shipments through customs, which
could have an adverse effect on the Company's operations. A failure to comply
with such regulations could result in penalties, fines and processing delays in
the future. The Company has adopted procedures designed to ensure compliance
with customs regulations and has retained an outside consultant to regularly
review such procedures and the Company's customs filings for accuracy and
completeness. See "Business -- Gerber -- Manufacturing and Sourcing -- Quality
Control."
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated bilaterally either under
the framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and
15
<PAGE> 17
types of merchandise which may be imported into the United States from these
countries. These agreements also allow the signatories to adjust the quantity of
imports for categories of merchandise that, under the terms of the agreements,
are not currently subject to specific limits. The Company's imported products
are also subject to United States customs duties which comprise a meaningful
portion of the cost of the merchandise.
The Company, through its Irish subsidiary, is implementing new systems
necessary to offer its products for sale in both national currencies and the new
European currency. The promulgation of a single currency will reduce trade
barriers and could subject the Company to increased competition. Some of these
competitors may have greater financial resources than the Company. Although the
eventual effects of the single European currency are not currently known, the
introduction of a single currency could adversely effect the Company. See
"Business -- Management Information Systems."
RISK OF FLUCTUATION IN FOREIGN CURRENCY EXCHANGE RATES
Gerber generally conducts transactions in U.S. dollars. However, a portion
of Auburn's sales and costs are transacted in British pounds, French francs,
German marks, Irish pounds and Belgian francs. As such, the sales and costs of
these products may be affected by changes in the value of the relevant foreign
currencies. During 1997, on a pro forma basis, approximately 7% of the Company's
revenues and 8% of the Company's expenses were denominated in currencies other
than U.S. dollars. The Company's exposure to changes in foreign currency
exchange rates results from the operations of and investment in Auburn's Irish
subsidiary. With respect to such subsidiary, changes in currency exchange rates
may also affect the relative prices at which the Irish subsidiary and foreign
competitors sell their products in the same market. Following the Acquisition,
the Company adopted a foreign exchange policy which will be implemented in
Auburn's Irish subsidiary for the purpose of managing its day-to-day exposure.
The policy mandates a short-term hedging program for its existing and potential
exposures to changes in foreign currency exchange rates. There are currently
foreign exchange contracts in place covering amounts in excess of the Company's
policy, which the Company expects will be reduced to current policy levels by
the end of the second quarter of 1998. There can be no assurance that foreign
currency fluctuations will not have a material adverse effect on Auburn's
financial condition and results of operations, which, in turn, could have a
material adverse effect on the Company. The Company views its investment in the
Irish subsidiary as long term and, therefore, has not hedged against either its
investment or future earnings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Fluctuation of Foreign Currency
Exchange Rates."
SEASONAL BUSINESS
In Gerber's segments of the apparel industry, sales are typically somewhat
higher in the third and fourth quarters due to the seasonal nature of some of
its products (such as blanket sleepers). With the acquisition of Auburn, which
experiences higher sales in the second quarter, the Company will continue to
experience seasonality, with the third quarter expected to represent the highest
volume shipping quarter for the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Selected Quarterly
Results of Operations" and "Business -- Backlog and Seasonality."
COST OF ENVIRONMENTAL COMPLIANCE
The Company's manufacturing facilities and operations are subject to
certain federal, state, local and foreign laws and regulations relating to
environmental protection and occupational health and safety, including those
governing wastewater discharges, air emissions, the management and disposal of
solid and hazardous wastes, and the remediation of contamination associated with
the release of hazardous substances. Prior to the Recent Acquisition, Auburn was
cited for discharging contaminants (dyes and solids) into the sewer system from
its facility in Auburn, Kentucky in excess of the amounts allowed under its
permits. The condition underlying such violations was fully remediated at an
immaterial cost. Gerber and, other than the above, Auburn have never been cited,
fined or otherwise held liable for violations of environmental statutes or
regulations. In addition, the Company believes that it is in substantial
compliance with such requirements, and does not currently anticipate any
material capital expenditures for environmental control facilities for the
current or succeeding fiscal year. Nonetheless, there can be no assurance that
such requirements will not
16
<PAGE> 18
become more stringent or be interpreted and applied more stringently. Such
future changes or interpretations or the identification of adverse environmental
conditions previously unknown to the Company could result in additional
compliance costs or in remediation costs to the Company. The Company's older
facilities contain asbestos materials and lead-based paint in inactive areas
utilized for the storage of records, machine parts and obsolete supplies, where
the potential for worker exposure to such materials is minimal. If the Company
were to elect to utilize such areas as active manufacturing or distribution
facilities such that the potential for worker exposure would be increased, as a
matter of policy the Company would undertake to remediate or encapsulate such
materials. The cost of removing or encapsulating such materials in the Company's
Pelzer, South Carolina facilities would be a material expenditure. See
"Business -- Environmental and Other Regulatory Matters."
CONTROL BY EXECUTIVE OFFICERS AND CURRENT STOCKHOLDERS
Following consummation of the Offering and the Reorganization, management
will hold approximately 13.0% of the outstanding capital stock on a diluted
basis. CVC and its affiliates will hold approximately 19% of the outstanding
shares of Common Stock. CVC and its affiliates will also hold shares of Class B
Common Stock (including a currently exercisable warrant to purchase such stock)
convertible at the holder's option into shares of Common Stock, which, if
converted into Common Stock, would result in an increase in CVC's and its
affiliates' beneficial ownership on a diluted basis by an additional 49% of the
outstanding Common Stock. As a result, if CVC and its affiliates convert their
shares of Class B Common Stock into shares of Common Stock, CVC and its
affiliates will have sufficient voting power to elect the Company's board of
directors and determine the results of other matters submitted to a vote of
stockholders. Due to certain regulatory limitations affecting CVC, CVC may not
own 20% or more of the voting securities of the Company without meeting certain
regulatory requirements. Accordingly, the Company believes, based on discussions
with CVC, that CVC will maintain most of its equity interest in the Company in
Class B Common Stock and will not convert such stock in the foreseeable future.
See "Description of Capital Stock -- Class B Common Stock."
In addition, Mr. Kittredge's employment agreement provides that he will be
the Chairman of the Board and Chief Executive Officer of the Company. The
concentration of ownership may have the effect of delaying or preventing a
change of control of the Company. In addition, there can be no assurance that in
any transfer of a controlling interest in the Company any other holders of
Common Stock will be allowed to participate in any such transaction or will
realize any premium with respect to their shares. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public
market or the perception that such sales could occur could adversely affect
prevailing market prices for the Common Stock. Upon completion of the Offering,
the Company will have 7,647,520 shares of Common Stock outstanding and 8,787,465
shares of Class B Common Stock outstanding, and 2,958,510 shares of Class B
Common Stock will be subject to issuance upon the exercise of a warrant. Of such
shares, the 3,600,000 shares of Common Stock being sold in the Offering
(together with any shares sold upon exercise of the Underwriters' over-allotment
option) will be immediately eligible for sale in the public market without
restriction, except for shares purchased by or issued to any affiliate of the
Company. CVC and its affiliates have certain demand registration rights with
respect to the Common Stock and Class B Common Stock of the Company held by
them. All stockholders of the Company immediately prior to the Offering have
piggyback rights with respect to sales of stock by the Company, and in the case
of holders other than CVC and its affiliates, piggyback rights with respect to
sales by CVC or its affiliates.
In connection with the Offering, the Company's executive officers and
directors and CVC and all of the Company's shareholders have agreed not to
dispose of any shares of Common Stock for a period of 180 days from the date of
this Prospectus, or to make any demand for or exercise any right with respect to
the registration of the shares for such 180 day period, and the Company has
agreed not to dispose of any shares (other than issuances by the Company of
certain employee stock options and shares covered thereby) for a period of 180
days from the date of this Prospectus, without the prior written consent of
Merrill Lynch, Pierce,
17
<PAGE> 19
Fenner & Smith Incorporated, on behalf of the Underwriters. All existing
stockholders have also waived all rights to register securities owned by them in
connection with the Offering.
Upon expiration of the 180-day lockup period, 4,047,520 shares of Common
Stock will be eligible for sale subject to certain volume and other limitations
imposed by Rule 144 under the Securities Act. In addition, 8,787,465 shares of
Class B Common Stock will be outstanding and convertible at the holder's option
into shares of Common Stock, and 2,958,510 shares of Class B Common Stock will
be subject to issuance upon the exercise of a warrant. The sale of a substantial
number of shares held by the existing stockholders, whether pursuant to a
subsequent public offering or otherwise, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock and could
materially impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale,"
"Description of Capital Stock" and "Underwriting."
ABSENCE OF DIVIDENDS; RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not expect to pay dividends for the foreseeable future.
The Company's Credit Agreement restricts the ability of the Company to pay
dividends on the Common Stock. See "Dividend Policy" and "Description of Certain
Indebtedness."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's certificate of incorporation and bylaws contain certain
provisions that could make more difficult the acquisition of the Company by
means of tender offer, a proxy contest or otherwise. The Company's charter
establishes an advance notice procedure for stockholder nominations of persons
for election to the board of directors in advance of an annual meeting of
stockholders of the Company. Stockholders at an annual meeting may only consider
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the board of directors, or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting, and who has given to the Company's Secretary timely written
notice, in proper form, of the stockholder's intention to make such nomination
before the annual meeting. An amendment to this provision would require approval
by an affirmative vote of holders of 66 2/3% of the shares of voting stock of
the Company. The Company's charter provides for cumulative voting in the
election of directors. See "Description of Capital Stock -- Certain Provisions
of the Company's Amended and Restated Certificate of Incorporation."
DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock will therefore incur immediate and substantial dilution. See
"Dilution."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the New York
Stock Exchange subject to official notice of issuance, there can be no assurance
that an active trading market for the Common Stock will develop or be sustained
following the Offering or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
between the Company and the Underwriters and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon a
number of factors, including, but not limited to, the Company's historical and
anticipated quarterly and annual operating results, variations between such
results and analyst and investor expectations, investor perceptions of the
Company and comparable public companies, changes in the industries in which the
Company operates or in the industries of the Company's significant customers,
and general market and economic conditions, some of which factors are beyond the
Company's control. The stock market has from time to time experienced extreme
price and volume fluctuations. See "Underwriting."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be $45.9
million, assuming an initial public offering price of $14.00 per share (based on
the midpoint of the price range as set forth on the cover of the Prospectus),
after deducting the estimated underwriting discount and offering expenses
payable by the Company ($52.9 million if the Underwriters' over-allotment option
is exercised in full). The Company intends to use such net proceeds: (i) to
repay a senior subordinated note in the aggregate principal amount of $22.5
million held by Citicorp Mezzanine Partners, L.P. ("CMP") (the "CMP Senior
Note"), (ii) to repay a junior subordinated note (the "GPC Junior Note") in the
aggregate principal amount of $11.0 million held by GPC (the "GPC Junior Note"),
(iii) to repay certain of the term loan portion of the Credit Agreement of the
Company in the aggregate principal amount of $12.0 million and (iv) to redeem
certain shares of GCIH's preferred stock in connection with the Reorganization
in the aggregate amount of $366,000. See "Description of Certain Indebtedness"
and "Certain Relationships and Related Transactions -- The Reorganization --
Exchange of GCIH Stock." The Company will use any net proceeds received upon the
exercise of the Underwriters' over-allotment option for general corporate
purposes, which may include the repayment of additional indebtedness.
The CMP Senior Note bears interest at a rate of 12.00% payable
semi-annually on January 15 and July 15, matures in equal installments on
January 22, 2003 and January 22, 2004 and was originally issued in connection
with the Original Acquisition. The GPC Note bears interest at a rate of 12.00%
payable annually in arrears, matures on January 22, 2006 and was originally
issued in connection with the Original Acquisition. Dividends on the Preferred
Stock accrue at a rate of 12.00% per annum of the "Liquidation Value." For such
purposes, "Liquidation Value" is equal to $100 plus any accrued and unpaid
dividends thereon. The preferred stock is redeemable by the Company on January
31, 2007 or any time prior thereto, in whole or in part, at a price per share
equal to the Liquidation Value plus accrued and unpaid dividends thereon. The
term loan portion of the Credit Agreement bears interest at a rate equal to
either (a) the Base Rate plus the Applicable Percentage or (b) the Eurodollar
Rate plus the Applicable Percentage (each such term as defined in the Credit
Agreement). The rate used is determined by the Borrower and was 7.19% as of
April 4, 1998. The term loan portion of the Credit Agreement matures on
September 30, 2002 and was originally incurred in connection with the
Acquisition.
DIVIDEND POLICY
The Company has not paid any dividends with respect to the Common Stock.
The Company presently intends to retain future earnings to finance its growth
and development and therefore does not expect to pay any cash dividends in the
foreseeable future. In addition, the Credit Agreement restricts the payment of
cash dividends by the Company (subject to certain limited exceptions), and the
Company may in the future enter into loan or other agreements or issue debt
securities or preferred stock that restrict the payment of dividends. The
declaration and payment of dividends by the Company are subject to the
discretion of the Board of Directors of the Company (the "Board"). Any future
determination to pay dividends will depend on the Company's results of
operations, financial condition, capital requirements, contractual restrictions
and other factors deemed appropriate by the Board.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 4, 1998 (i) as adjusted to give effect to the Reorganization and (ii) as
further adjusted to reflect the Offering and the application of the estimated
net proceeds therefrom, assuming an initial public offering price of $14.00 per
share (based on the midpoint of the price range as set forth on the cover of the
Prospectus), and as described in "Use of Proceeds." This table should be read in
conjunction with the "Selected Financial Information," the Unaudited Pro Forma
Condensed Consolidated Statement of Operations and the audited consolidated
financial statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT APRIL 4, 1998
------------------------------------
ADJUSTED FOR PRO FORMA
REORGANIZATION(A) ADJUSTED(B)
--------------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current debt:
Revolving credit loans (c)................................ $ 18,840 $ 18,840
Current portion of long-term debt......................... 8,075 1,075
-------- --------
Total current debt................................ 26,915 19,915
======== ========
Long-term debt, net of current portion:
Term loan portion of Credit Agreement..................... 30,000 24,994
Senior subordinated note payable.......................... 22,500 --
Junior subordinated note payable.......................... 11,000 --
Other long-term debt...................................... 4,022 4,022
-------- --------
Total long-term debt.............................. 67,522 29,016
Shareholder's equity:
Common Stock, par value $.01 per share, 20,684 shares
authorized; 4,048 shares outstanding, as adjusted for
Reorganization; 7,648 shares outstanding pro forma
adjusted............................................... 40 76
Common Stock, Class B, par value $.01 per share, 11,752
shares authorized; 8,787 shares outstanding, as
adjusted for Reorganization; 8,787 shares outstanding
pro forma adjusted..................................... 88 88
Detachable stock warrants................................... 189 189
Additional paid-in-capital.................................. 21,030 66,866
Retained earnings........................................... 16,306 16,306
-------- --------
Less unearned compensation under restricted stock plan...... (720) (720)
-------- --------
Total shareholders' equity................................ 36,933 82,805
-------- --------
Total capitalization.............................. $104,455 $111,821
======== ========
</TABLE>
- ---------------
(a) See "Certain Relationships and Related Transactions -- The Reorganization."
(b) Additionally, $366 of net proceeds of the Offering will be used to redeem
certain shares of GCIH's preferred stock in connection with the
Reorganization. See "Certain Relationships and Related
Transactions -- Transactions with Management and Directors."
(c) The Company had approximately $30,200 outstanding under the revolving credit
portion of the Credit Agreement at April 4, 1998, of which $11,400
represented letters of credit, for both the purchase of inventory and credit
support, and of which $18,840 were revolving credit loans.
20
<PAGE> 22
DILUTION
As of April 4, 1998, the Company had a pro forma net tangible book value of
approximately $13,256, or $1.03 per share of Common Stock. Pro forma net
tangible book value per share of Common Stock represents the difference between
the net tangible assets and the liabilities of the Company, on a consolidated
basis, divided by the total number of shares of Common Stock outstanding (on a
pro forma basis after giving effect to the Reorganization). Without taking into
account any changes in the net tangible book value after April 4, 1998, other
than to give effect to the Offering and the application of the estimated net
proceeds therefrom, assuming an initial public offering price of $14.00 (based
on the midpoint of the price range as set forth on the cover of the Prospectus),
the pro forma net tangible book value of the Company at April 4, 1998 after the
Offering would have been approximately $59,128, or $3.60 per share. This
represents an immediate increase in net tangible book value of $2.57 per share
of Common Stock to existing stockholders and an immediate dilution of $10.40 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share before the
Offering............................................... $ 1.03
Increase in net tangible book value per share attributable
to the Offering........................................ 2.57
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.60
------
Immediate dilution per share to new investors in the
Offering.................................................. $10.40(a)(b)
======
</TABLE>
- ---------------
(a) If the Underwriters' over-allotment option is exercised in full, dilution to
new investors will be $10.10 per share.
(b) The foregoing computations assume no exercise of stock options and warrants
after April 4, 1998. As of April 4, 1998, there was an outstanding warrant
to purchase an aggregate of 2,958,510 shares of Common Stock at a weighted
average exercise price of approximately $0.0006 per share. If all of the
foregoing warrants had been exercised at April 4, 1998, pro forma net
tangible book value per share would have been $3.05, representing an
immediate dilution to new investors of $10.95 per share and an immediate
increase in net tangible book value of $2.02 per share attributable to the
Offering.
The following table summarizes, on a pro forma basis as of April 4, 1998,
the number of shares of Common Stock purchased from the Company, the estimated
value of the total consideration or value paid or deemed attributable thereto
and the average price per share paid by or attributable to existing stockholders
and the new investors purchasing shares in the Offering.
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES TOTAL CONSIDERATION PER SHARE OF
--------------------- ---------------------- COMMON
NUMBER PERCENT AMOUNT PERCENT STOCK
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Current stockholders....... 12,811,854(a) 78.1% $15,402,417 23.4% $ 1.20
New investors.............. 3,600,000 21.9 50,400,000 76.6 14.00
---------- ----- ----------- -----
Total(b)......... 16,411,854 100.0% 65,802,417 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(a) Excludes 2,958,510 shares of Class B Common Stock which may be issued upon
the exercise of a warrant which was issued in connection with the Original
Acquisition.
(b) Excludes 750,000 shares of Common Stock reserved for issuance under the
Incentive Plan.
21
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents (i) selected historical consolidated financial
data of the Predecessor Company as of and for the year ended March 31, 1994, as
of and for the nine months ended December 31, 1994 and as of and for the year
ended December 31, 1995 and (ii) selected historical consolidated financial
information of the Company at December 31, 1996 and for the period from January
22, 1996 to December 31, 1996, as of and for the year ended December 31, 1997,
the first quarter ended March 29, 1997, the first quarter ended April 4, 1998
and at April 4, 1998. The selected consolidated financial data of the
Predecessor have been derived from the financial statements of the Predecessor
for the year ended December 31, 1995, and the selected financial data of the
Company for the period from January 22, 1996 to December 31, 1996 and the year
ended December 31, 1997 have been derived from the financial statements of the
Company, each of which have been audited by Ernst & Young LLP. The selected
consolidated financial data as of and for the year ended March 31, 1994, as of
and for the nine months ended December 31, 1994, and the three month periods
ended April 4, 1998 and March 29, 1997, are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company and the Predecessor
Company considered necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the three
months ended April 4, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
COMPANY ---------------------------------------------------------
------------------------------------------ PERIOD FROM
NINE MONTHS JANUARY 22, FIRST QUARTER ENDED
YEAR ENDED ENDED YEAR ENDED 1996 TO YEAR ENDED ---------------------------
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 29, APRIL 4,
1994 1994 1995(A) 1996 (B) 1997 (C) 1997 1998
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $170,750 $144,130 $197,401 $185,223 $202,037 $ 45,350 $ 64,647
Cost of sales........... 136,075 113,116 156,434 138,608 146,294 32,654 47,212
-------- -------- -------- -------- -------- -------- --------
Gross margin............ 34,675 31,014 40,967 46,615 55,743 12,696 17,435
Selling, general and
administrative
expenses.............. 22,734 19,149 24,633 23,894 27,766 6,718 9,614
Stock compensation(d)... -- -- -- -- 9,465 -- --
Other................... (674) 500 -- 689 231 514 --
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 22,060 19,649 24,633 24,583 37,462 7,232 9,614
-------- -------- -------- -------- -------- -------- --------
Income before interest
and income taxes...... 12,615 11,365 16,334 22,032 18,281 5,464 7,821
Interest expense, net... 1,085 684 -- 6,308 5,798 1,326 2,262
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and
extraordinary item,
net................... 11,530 10,681 16,334 15,724 12,483 4,138 5,559
Provision for income
taxes................. 4,385 4,140 6,270 6,244 4,764 1,614 2,139
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary item,
net................... 7,145 6,541 10,064 9,480 7,719 2,524 3,420
Extraordinary item,
net(e)................ -- -- -- -- (708) -- --
Less preferred stock
dividends............. -- -- -- (1,328) (1,637) (383) (452)
-------- -------- -------- -------- -------- -------- --------
Net income available to
common shareholders... $ 7,145 $ 6,541 $ 10,064 $ 8,152 $ 5,374 $ 2,141 $ 2,968
======== ======== ======== ======== ======== ======== ========
Earnings per common
share................. 11.11 7.48 2.93 4.18
Earnings per common
share -- assuming
dilution.............. 8.15 5.65 2.20 3.16
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31, AT APRIL 4,
------------ --------------------------------------------------------- ------------
1994 1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...... $ 77,122 $ 63,262 $ 69,591 $ 56,205 $ 65,877 $ 68,187
Total assets......... 122,070 110,258 103,196 106,060 163,891 178,442
Total debt........... 80 -- -- 43,436 77,010 94,437
Preferred stock
including accrued
dividends.......... -- -- -- 13,068 14,610 15,062
Investment by GPC.... 100,778 81,570 79,129 -- -- --
Shareholders'
equity............. -- -- -- 9,101 19,419 22,237
</TABLE>
(footnotes on following page)
22
<PAGE> 24
- ---------------
(footnotes to table on previous page)
(a) The Predecessor Company operated as a wholly-owned subsidiary of GPC until
being divested by GPC on January 22, 1996. The financial data for the
Predecessor Company is not entirely comparable to that of the Company due to
certain factors including the following:
(i) The Predecessor Company did not incur any royalty expense for the use
of the Gerber name and baby head logo. During the period from January 22,
1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the
royalty expense to GPC was $1.9 million and $3.5 million, respectively.
(ii) The Predecessor Company's net sales in 1995 included approximately
$8.3 million of net sales at cost to GPC that generated no gross margin.
Net sales to GPC in 1996 and 1997 of approximately $6.2 million and
approximately $4.3 million, respectively, generated gross margins in 1996
and 1997 of approximately $950,000 and $598,000, respectively.
(iii) The Predecessor Company was included in various self-insurance
programs provided by GPC, including medical, dental, workers' compensation,
comprehensive general and excess liability and property damage and business
interruption. GPC also provided management information services to the
Predecessor Company and allocated a portion of the expenses incurred to the
Predecessor Company. In addition, the Predecessor Company was allocated a
portion of legal and professional costs for services directly attributable
to the Predecessor Company. Certain services were provided by GPC's
corporate staff, for which no charge was made to the Predecessor Company.
Management believes the aggregate cost of these unallocated services was
insignificant. The Predecessor Company was charged for all outside legal
and professional expenses directly attributable to it.
(iv) In 1995, the Predecessor Company had no long term debt and was not
charged any interest expense as a subsidiary of GPC.
(v) The provision for income taxes of the Predecessor Company essentially
results from applying the Federal and state statutory rates to the
operations of a stand-alone company.
(b) Excludes the Predecessor Company's unaudited operations summarized below for
the period January 1, 1996 through January 21, 1996.
<TABLE>
<S> <C>
Net sales..................................... $6,657
Gross margin.................................. 1,070
SG&A expenses................................. 1,386
Loss before interest and income taxes......... (316)
Net loss...................................... (196)
</TABLE>
(c) Includes the following operating results for Auburn and Sport Socks Ireland
for the period December 17, 1997 through December 31, 1997.
<TABLE>
<S> <C>
Net sales..................................... $1,511
Gross margin.................................. 184
SG&A expenses................................. 225
Loss before interest and income taxes......... (41)
Net loss...................................... (28)
</TABLE>
(d) Represents expense related to stock compensation incurred in connection with
the sale of capital stock to executives and management of the Company below
fair market value. See "Certain Relationships and Related Transactions --
Transactions with Management and Directors."
(e) Represents unamortized loan costs and prepayment penalty totaling $708,000
(net of an income tax benefit of $452,000) expensed in connection with the
replacement of the Company's then-existing credit facility with the Credit
Agreement.
23
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997 gives effect to (a) the Acquisition which
occurred as of December 17, 1997 and (b) the Reorganization and the Offering, as
if such events had occurred on January 1, 1997.
The unaudited pro forma consolidated financial information is based upon
the historical consolidated financial statements of each of the Company, Auburn
Hosiery Mills, Inc. (which includes the results of its consolidated subsidiary,
Sport Socks Co. (UK) Limited, for all periods hereunder) and Sport Socks Ireland
and should be read in conjunction with the financial statements and the related
notes thereto included elsewhere in this Prospectus. The historical financial
information of Auburn and Sport Socks Ireland set forth below covers the period
from January 1, 1997 through December 16, 1997. The historical financial
information of Sport Socks Ireland has been adjusted for inclusion in the
Unaudited Pro Forma Condensed Consolidated Financial Information to conform to
U.S. generally accepted accounting principles and has been translated into U.S.
dollars based upon the average exchange rate of U.S. dollars/Irish pounds for
the period January 1, 1997 through December 16, 1997 of U.S. $1.52 to L1.00. The
Company's historical results of operations for the year ended December 31, 1997
include the results of operations of Auburn Hosiery Mills, Inc. and Sport Socks
Ireland since December 17, 1997, the effective date of the Acquisition.
The pro forma financial information presented does not purport to be
indicative of the financial position or operating results which would have been
achieved had the transactions described above taken place at the dates indicated
and are not necessarily indicative of the Company's financial position or
results of operations for any future date or period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
HISTORICAL
--------------------------------
AUBURN ACQUISI- REORGANIZATION
HOSIERY SPORT TION PRO AND PRO FORMA
MILLS, SOCKS ADJUST- FORMA OFFERING AS
GERBER INC. IRELAND MENTS COMBINED ADJUSTMENTS ADJUSTED
-------- ------- ------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $202,037 $49,033 $19,030 $270,100 $ 270,100
Cost of sales................. 146,294 39,019 13,974 (a) (90) (b) 199,197 199,197
-------- ------- ------- ------- -------- ------- -----------
Gross margin.................. 55,743 10,014 5,056 90 70,903 70,903
Operating expenses:
Selling, general and
administrative
expenses.................. 27,997 7,393 4,024 (a) 1,022 (c) 40,436 40,436
Foreign exchange loss
(d)....................... -- -- 1,042 1,042 1,042
Stock compensation (e)...... 9,465 -- -- 9,465 9,465
-------- ------- ------- ------- -------- ------- -----------
Total operating
expenses................ 37,462 7,393 5,066 1,022 50,943 50,943
-------- ------- ------- ------- -------- ------- -----------
Income (loss) before interest
and income taxes............ 18,281 2,621 (10) (932) 19,960 19,960
Interest expense.............. 5,798 151 71 3,022 (f) 9,219 (5,298)(g) 3,921
177 (h) --
-------- ------- ------- ------- -------- ------- -----------
Income (loss) before income
taxes....................... 12,483 2,470 (81) (4,131) 10,741 5,298 16,039
Provision (benefit) for income
taxes....................... 4,764 939 (38) (1,549) (i) 4,116 1,987(i) 6,103
-------- ------- ------- ------- -------- ------- -----------
Income (loss) from continuing
operations (j).............. $ 7,719 $ 1,531 $ (43) $(2,582) $ 6,625 $ 3,311 $ 9,936
======== ======= ======= ======= ======== ======= ===========
Income from continuing
operations per basic
share....................... $ 0.63 (k)
===========
Income from continuing
operations per diluted
share....................... $ 0.51 (k)
===========
Weighted average shares
outstanding - basic......... 15,800,723
===========
Weighted average shares
outstanding - diluted....... 19,413,462
===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
24
<PAGE> 26
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(a) Reflects reclassification of royalty expense from selling, general and
administrative expenses to cost of sales in conformity with the Company's
reporting practices.
(b) Reflects a reduction in the cost of goods sold arising from a reduction in
depreciation expense related to net adjustments to net carrying value of
certain fixed assets of the acquired companies.
(c) Reflects the amortization of goodwill resulting from the Acquisition based
upon a 20 year estimated period of benefit. The goodwill was derived as
follows:
<TABLE>
<S> <C>
Purchase price..................................... $40,000
Assets acquired.................................... (35,870)
Liabilities assumed................................ 15,895
Acquisition costs.................................. 417
-------
Total Goodwill..................................... $20,442
=======
</TABLE>
(d) In connection with the acquisition of Sport Socks Ireland, the Company
adopted an accounting policy to mark to market forward foreign exchange
contracts which do not qualify for hedge transactions. This adoption was
required to conform Irish GAAP to U.S. GAAP and resulted in a $46
adjustment to Sport Socks Ireland's statement of operations. The $1,088
loss was the result of unrealized losses in respect of forward foreign
currency contracts relating to future transactions. See the Company's
consolidated financial statements and the notes thereto.
(e) Represents expense related to stock compensation incurred in connection
with the sale of capital stock to executives and management of the Company
below fair market value. See "Certain Relationships and Related
Transactions -- Transactions with Management and Directors."
(f) Reflects interest adjustments in connection with the Acquisition detailed
as follows:
<TABLE>
<S> <C>
Interest expense related to deferred financing cost
amortization associated with the new Credit Agreement..... $ 208
Interest expense resulting from $40.0 million term loan
under the Credit Agreement assuming scheduled quarterly
principal amortization of $1.5 million with a rate of
7.5%...................................................... 2,814
------
Adjustment............................................. $3,022
======
</TABLE>
(g) Reflects adjustments to interest expense as a result of the Offering:
<TABLE>
<S> <C>
Interest on the $22.5 million Senior Subordinated Note
Payable, one-half of the principal due January 2003 and
balance due January 2004 at an interest rate of 12.00%.... $2,738
Interest on the $11.0 million Junior Subordinated Note
Payable, due January 2006 at an interest rate of 12.00%... 1,338
Interest on $12.1 million outstanding under the Credit
Agreement at an estimated interest rate of 8.75%.......... 1,077
Amortization of deferred financing costs on the retired
debt...................................................... 113
Amortization of discount on the $22.5 million Senior
Subordinated Note Payable................................. 32
------
Adjustment............................................. $5,298
======
</TABLE>
(h) Reflects adjustment to decrease interest income by $177, in connection with
the settlement of certain intercompany receivables with the previous owner.
(i) Reflects adjustment for Federal and state income taxes based on statutory
rates adjusted for permanent differences such as non-deductible expenses.
25
<PAGE> 27
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(CONTINUED)
(IN THOUSANDS)
(j) Excludes extraordinary item related to unamortized loan costs and
prepayment penalty totaling $708 (net of an income tax benefit of $452)
expensed in connection with the prepayment of the Company's then-existing
credit facility with the Credit Agreement.
(k) Calculated using the weighted average number of shares of Common Stock
outstanding during the period assuming that (i) a 15.4693 to 1 stock split
will occur prior to or contemporaneously with the Offering, (ii) the
majority of the preferred stock issued and outstanding will be converted
into Class B Common Stock at the per share offering price, minus
underwriters' discount, with the remainder being converted into the right
to receive cash equal to $366 in the aggregate, and (iii) the Offering will
generate estimated net proceeds of approximately $45,872 as a result of the
sale of 3,600,000 shares of Common Stock issued upon consummation of the
Offering (as if such shares were outstanding as of the beginning of the
period), which proceeds shall be used as described above in "Use of
Proceeds."
In connection with the Offering, the deferred financing costs associated
with the subordinated debt to be repaid with the Offering proceeds will be
written off along with the unamortized discount associated with such debt
as an extraordinary item in 1998. This extraordinary item is estimated to
be approximately $309 (net of a tax benefit of $185), and is excluded from
the pro forma, as adjusted income from continuing operations.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's consolidated financial
statements and notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
In January 1996, Gerber Childrenswear, Inc. was acquired from GPC by a
group of investors led by Edward Kittredge, the Company's Chairman, President
and Chief Executive Officer, who assembled the Company's current management
team. Since the Original Acquisition, GPC has not owned any capital stock of the
Company, nor have GPC and the Company shared common directors, officers or
employees. The new management team, under the direction of Mr. Kittredge,
developed a series of initiatives to strengthen the Company's financial
operations and improve its operations. To achieve cost efficiencies, Gerber
consolidated manufacturing facilities, established a flexible production
strategy including domestic and offshore manufacturing and sourcing components
and centralized finished product purchasing across all categories. In addition,
Gerber has extended the payment terms of the majority of its yarn supply
arrangements from 30 to 60 days, and the Company is seeking to extend Auburn's
payment terms as well. See "Business." Furthermore, Gerber renewed its emphasis
on production quality, reducing the percentage of irregular products produced in
certain of the Company's principal factories to approximately 3% from
approximately 7%. Gerber also encouraged a more entrepreneurial culture by
enhancing its incentive-based compensation program for executive, managerial and
professional employees and by installing an equity ownership program for
employees. As a result, management believes that the Company is well positioned
to implement its strategy to remain a low cost producer of high quality branded
products to volume retailers.
In addition, in order to build upon the Company's expertise as a low-cost
supplier of branded merchandise to volume retailers, the Company acquired all of
the outstanding capital stock of Auburn in December 1997 for approximately $40.0
million in cash. Auburn manufactures, markets and sells branded sport socks for
men, women and children under established brand names such as Wilson, Coca-Cola
and Converse in the U.S. and internationally and under the Dunlop brand name in
Europe. Auburn markets to a diversified customer base in the U.S. and Europe,
including volume retailers, department stores, wholesale clubs and major
sporting good chains. As a result of the Recent Acquisition, the Company markets
products in over 25 countries. The Company believes that Auburn's expertise in
hosiery will position it to capitalize on growth opportunities and the Recent
Acquisition will provide opportunities to achieve certain economies of scale and
efficiencies in the areas of purchasing (e.g. yarn), data processing and
selling, general and administrative expenses (e.g. property and casualty
insurance). In 1997, pro forma for the Recent Acquisition, the Company's net
sales and income from continuing operations were $270.1 million and $6.6
million, respectively.
RESULTS OF OPERATIONS
The following discussion and analysis compares the operations of the
Predecessor Company for 1995, a shortened period of the Company for 1996
(January 22, 1996 through December 31, 1996), and a full year of the Company for
1997 (including the operations of two acquired companies for the period December
17, 1997 to December 31, 1997). The operations of the Company for 1996 and 1997
reflect the accrual by the Company of a portion of future licensing royalty fees
that will become payable to GPC in years 2002 through 2005. The Company is
recording charges against earnings for the straight line effect of the
anticipated total royalty expense expected to be incurred over the initial ten
year term of the licensing agreement
27
<PAGE> 29
with GPC. No licensing fees are required to be paid during the first six years
of the agreement. The amount of such licensing royalty fees accrued in 1996 and
1997 were $1.9 million and $3.5 million, respectively.
The Predecessor Company operated as a wholly-owned subsidiary of GPC until
being divested by GPC on January 22, 1996. The financial data for the
Predecessor Company is not entirely comparable to that of the Company due to
certain factors including the following:
(i) The Predecessor Company did not incur any royalty expense for the use
of the Gerber name and baby head logo. During the period from January 22,
1996 to December 31, 1996, and for fiscal year ended December 31, 1997, the
royalty expense to GPC was $1.9 million and $3.5 million, respectively.
(ii) The Predecessor Company's net sales in 1995 included approximately
$8.3 million of net sales at cost to GPC that generated no gross margin.
Net sales to GPC in 1996 and 1997 of approximately $6.2 million and
approximately $4.3 million, respectively, generated gross margins in 1996
and 1997 of approximately $950,000 and $598,000, respectively.
(iii) The Predecessor Company was included in various self-insurance
programs provided by GPC, including medical, dental, workers' compensation,
comprehensive general and excess liability and property damage and business
interruption. GPC also provided management information services to the
Predecessor Company and allocated a portion of the expenses incurred to the
Predecessor Company. In addition, the Predecessor Company was allocated a
portion of legal and professional costs for services directly attributable
to the Predecessor Company. Certain services were provided by GPC's
corporate staff, for which no charge was made to the Predecessor Company.
Management believes the aggregate cost of these unallocated services was
insignificant. The Predecessor Company was charged for all outside legal
and professional expenses directly attributable to it.
(iv) In 1995, the Predecessor Company had no long-term debt and was not
charged any interest expense as a subsidiary of GPC.
(v) The provision for income taxes of the Predecessor Company essentially
results from applying the Federal and state statutory rates to the
operations of a stand-alone company.
The increase in the 1997 net inventory over 1996 net inventory included
$8.5 million associated with the purchase of Auburn. Excluding Auburn in 1997,
the inventory turnover rates in 1997 and 1996 were 2.6 times and 2.7 times,
respectively.
28
<PAGE> 30
The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue. Any trends reflected by the following
table may not be indicative of future results.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------------------------------------------
PREDECESSOR COMPANY COMPANY
------------------- ------------------------------------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 22, 1996 YEAR ENDED FIRST QUARTER FIRST QUARTER
DECEMBER 31, TO DECEMBER 31, DECEMBER 31, ENDED MARCH 29, ENDED APRIL 4,
1995 1996 1997 1997 1998
------------------- ---------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......... 79.3 74.8 72.4 72.0 73.0
----- ----- ----- ----- -----
Gross margin........... 20.7 25.2 27.6 28.0 27.0
Selling, general &
administrative
expenses............. 12.4 12.9 13.7 14.8 14.9
Stock compensation..... -- -- 4.7 -- --
Other.................. -- 0.4 0.1 1.2 --
----- ----- ----- ----- -----
Income before interest
and income taxes..... 8.3 11.9 9.1 12.0 12.1
Interest expense,
net.................. -- 3.4 2.9 2.9 3.5
----- ----- ----- ----- -----
Income before income
taxes and
extraordinary item,
net.................. 8.3 8.5 6.2 9.1 8.6
Provision for income
taxes................ 3.2 3.4 2.4 3.6 3.3
----- ----- ----- ----- -----
Income before
extraordinary item,
net.................. 5.1 5.1 3.8 5.5 5.3
Extraordinary item,
net.................. -- -- (0.3) -- --
----- ----- ----- ----- -----
Net income............. 5.1% 5.1% 3.5% 5.5% 5.3%
===== ===== ===== ===== =====
</TABLE>
FIRST QUARTER ENDED APRIL 4, 1998 COMPARED TO FIRST QUARTER ENDED MARCH 29, 1997
The Company's first three quarters always end on the Saturday closest to
the quarter end. The fourth quarter ends on December 31 of the applicable year.
The Company believes that these cutoffs have no significant impact on the
Company's financial results.
Net sales. Net sales were $64.6 million for the first quarter ended April
4, 1998, an increase of $19.3 million or 42.6% over net sales of $45.3 million
for the first quarter of 1997. Of this increase, $14.5 million represented net
sales by Auburn, which was acquired on December 17, 1997. Excluding the Auburn
acquisition, net sales increased $4.8 million or 10.6% over first quarter 1997
due to increased unit sales to existing customers in core categories. Because of
the introduction of a new program to Auburn's major customer in the first
quarter of 1997, as well as the deterioration of the Irish currency compared to
the U.S. dollar in 1998, Auburn's net sales for the first quarter of 1997 were
higher than its net sales for the first quarter of 1998.
Gross margin. Gross margin as a percentage of net sales declined from
28.0% in the first quarter of 1997 to 27.0% in the first quarter of 1998. The
decrease in margin was due to the inclusion of Auburn sales, which typically
have lower gross margins than Gerber, offset in part by improved margins on
Gerber sales driven by a more favorable product mix.
Selling general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased slightly to 14.9%
in the first quarter of 1998, from 14.8% in the first quarter of 1997. The
increase is primarily related to increased selling and administrative expenses
associated with Auburn, and is somewhat offset by a reduction in advertising
expense as a percentage of net sales.
Other. Other represents the cost of closing and realignment of facilities
aggregating $0.5 million in 1997.
29
<PAGE> 31
Income before interest and income taxes. Income before interest and income
taxes as a percentage of net sales was 12.1% in the first quarter of 1998 versus
12.0% in the first quarter of 1997.
Interest expense, net. Interest expense was $2.3 million in the first
quarter of 1998 versus $1.3 million in the first quarter of 1997. The increase
in interest expense reflects the higher debt levels associated with the
borrowings incurred to pay the purchase price of Auburn.
Provision for income taxes. Provision for income taxes was $2.1 million in
the first quarter of 1998, compared to $1.6 million in the first quarter of
1997. The effective tax rate was 38.5% for 1998 as compared to 39.0% for 1997.
Net income. As a result of the above, first quarter net income was $3.4
million in 1998, a 35.5% increase over the $2.5 million in the first quarter of
1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM JANUARY 22, 1996 TO
DECEMBER 31, 1996
Net sales. Net sales were $202.0 million in 1997, an increase of $16.8
million, or 9.1%, from net sales of $185.2 million for the period January 22,
1996 to December 31, 1996. The revenue in 1997 included three weeks of
additional results compared to 1996 and also included $1.5 million relating to
Auburn sales following its acquisition on December 17, 1997. Excluding Auburn
results in 1997 and including the Predecessor Company's results for the period
January 1, 1996 through January 21, 1996, the increase in net sales was $9.0
million, primarily resulting from increases in unit sales to existing customers
in core categories. The growth in unit sales was primarily due to a greater
emphasis on developing new product categories and the introduction of new
displays offering promotional buying advantages for the consumer.
Gross margin. Gross margin as a percentage of net sales increased to 27.6%
in 1997 from 25.2% in 1996. Gross margin is determined after accruing royalty
expense under the Gerber license agreement of $3.5 million in 1997 versus $1.9
million in 1996. The principal reasons for the improved gross margin as a
percentage of net sales were lower manufacturing costs resulting from improved
operating efficiency, increased production in owned facilities and a greater
percentage of products made offshore.
Selling, general & administrative expenses, excluding stock
compensation. Selling, general and administrative expenses (excluding stock
compensation) as a percentage of net sales were 13.7% in 1997, versus 12.9% in
1996. The increase was principally due to expanding the Company's merchandising
and selling efforts to support sales growth, plus the cost in 1997 to relocate
central distribution activities into a lower cost facility in another state.
Stock compensation. In 1997, stock compensation of $9.5 million was
incurred in connection with the sale of stock to certain executives and managers
of the Company below its fair market value.
Other. Other represents the cost of closing and realignment of certain
facilities in the amount of $0.2 million in 1997 and $0.7 million in 1996.
Income before interest and income taxes. Income before interest and income
taxes was $18.3 million in 1997, compared to $22.0 million in 1996. Excluding
stock compensation, 1997 income before interest and income taxes would have been
$27.7 million, or 13.7% of net sales compared to 11.9% in 1996. The improvement
resulted from the increased sales and improved gross margin percentage.
Interest expense, net. Interest expense, net, was $5.8 million for 1997
compared to $6.3 million for 1996. This decrease was primarily due to decreased
average debt outstanding and a more favorable rate structure for 1997 as
compared to 1996.
Provision for income taxes. Provision for income taxes was $4.8 million in
1997, compared to $6.2 million in 1996. The effective tax rate was 38.2% for
1997 as compared to 39.7% for 1996. The higher effective tax rate in 1996 was
primarily due to permanent non-deductible items associated with GCIH's
acquisition of the Company.
Extraordinary item. In connection with the Acquisition, the senior credit
facility was replaced. The deferred financing costs associated with this old
facility were written off and charged to operations in 1997. This expense, along
with the associated prepayment penalties, was approximately $0.7 million (net of
a tax benefit of $0.5 million) in 1997.
30
<PAGE> 32
Net income. As a result of the above, net income was $7.0 million for 1997
and $9.5 million for 1996. Excluding the impact of the stock compensation, net
income for 1997 would have been $12.9 million, a 36% increase over 1996.
PERIOD FROM JANUARY 22, 1996 TO DECEMBER 31, 1996 OF THE COMPANY COMPARED TO
YEAR ENDED DECEMBER 31, 1995 OF THE PREDECESSOR COMPANY
Net sales. Net sales in 1996 were $185.2 million for the period from
January 22, 1996 to December 31, 1996, compared to 1995's net sales of $197.4
million. Including the $6.7 million of net sales of the Predecessor Company for
the period January 1, 1996 to January 21, 1996 in the Company's 1996 period, net
sales declined 2.8% or $5.5 million compared to 1995. The Company believes the
decline was primarily due to the Predecessor Company management's focus in 1995
on the sale of Gerber which resulted in less resources being directed towards
developing new products for sale in 1996.
Gross margin. Gross margin as a percentage of net sales increased to 25.2%
in 1996 from 20.7% in 1995. The increase in gross margin was due to (i) reduced
cost of sales due to greater offshore sourcing and offshore manufacturing by the
Company, (ii) a more favorable product mix, (iii) margin enhancement in 1996 as
compared to 1995 on sales of products to GPC, resulting in an approximately 0.4%
margin increase, offset in part by (iv) an accrual of $1.9 million in 1996 for
Gerber licensing royalty expense (which charge was not borne by the Predecessor
Company).
Selling, general & administrative expenses. Selling, general and
administrative expenses were $23.9 million, or 12.9% of net sales in 1996, a
decrease of $739,000 from $24.6 million, or 12.4% of net sales, in 1995. While
the dollar amount of expense declined, the increase in such expense as a
percentage of net sales was due to (i) a one-time severance charge incurred in
1996, (ii) enhancement of the management incentive program, (iii) an increase in
insurance costs associated with a stand-alone entity, offset in part by (iv)
reductions in distribution expense and employee benefit costs.
Other. Other represents the cost of closing and realignment of facilities
aggregating $0.7 million in 1996.
Income before interest and income taxes. As a result of the foregoing, the
Company had income before interest and income taxes of $22.0 million in 1996
compared to $16.3 million in 1995. The income before interest and income taxes
as a percentage of net sales was 11.9% in 1996 versus 8.3% in 1995.
Interest expense, net. Interest expense, net was $6.3 million for 1996,
resulting from the debt incurred to acquire the Company and to support working
capital needs. In 1995, the Predecessor Company had no long-term debt and was
not charged any interest expense as a subsidiary of GPC.
Provision for income taxes. Provision for income taxes was $6.2 million
for 1996, compared to $6.3 million for 1995. The Company's effective tax rate
was 39.7% for 1996, compared to 38.4% for 1995. The higher effective tax rate in
1996 was primarily due to non-recurring non-deductible items associated with
GCIH's acquisition of the Company. The provision for income taxes of the
Predecessor Company essentially resulted from applying the Federal and state
statutory rates to the operations of a stand-alone company.
Net income. As a result of the above, net income was $9.5 million for 1996
and $10.1 million for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital, capital expenditures,
and debt service. The Company has financed its working capital, capital
expenditures and debt service requirements primarily through internally
generated cash flow, in addition to funds borrowed under the Company's Credit
Agreement. The Company intends to use the net proceeds from the Offering to
repay subordinated notes payable of $33.5 million, to repay certain other
indebtedness of the Company and to redeem certain shares of GCIH's Preferred
Stock in connection with the Reorganization in the aggregate amount of $366,000.
Upon consummation of the Reorganization and the Offering, the Company's cash
flow requirements for debt service will be substantially reduced. See
"Description of Certain Indebtedness" and "Unaudited Pro Forma Condensed
Consolidated Statement of Operations."
Net cash used in operating activities for the first quarters ending April
4, 1998 and March 29, 1997 was $15.4 million and $11.9 million, respectively.
The primary components of cash used in operating activities in the first
quarters of 1998 and 1997 were increases in accounts receivable ($6.3 million
and $7.6 million,
31
<PAGE> 33
respectively) and inventories ($10.4 million and $5.4 million, respectively).
The increase in accounts receivable in the first quarters of 1998 and 1997 is
due to differences in the timing of shipments and receipts between the first and
fourth quarters. Shipments in the first quarter traditionally occur later during
the quarter, compared to the fourth quarter when shipment times can vary,
resulting in higher accounts receivable balances at the end of the fourth
quarter. The increase in inventory for the first quarters of 1998 and 1997
reflects the seasonality of the Company's business. To support the third and
fourth quarter sales volumes of certain seasonal products (such as blanket
sleepers), the Company builds inventory in the first six months of each year.
The decrease in cash used for other assets and liabilities, net for the first
quarter ending April 4, 1998 compared to the first quarter ending March 29,
1997, is due to the Company overpaying its 1997 taxes resulting in a $4.2
million income tax receivable at December 31, 1997. This receivable was
subsequently collected and/or applied to the estimated payment for the first
quarter ending April 4, 1998.
Capital expenditures were $0.7 million and $0.8 million for the first
quarters ending April 4, 1998 and March 29, 1997, respectively. These
expenditures consisted primarily of normal replacement of manufacturing
equipment, purchases of office equipment and upgrades of information systems. In
addition, for the first quarter ending March 29, 1997, the Company sold its
Maine facility for approximately $0.4 million.
The net cash provided by financing activities for the first quarter ending
April 4, 1998 was $17.2 million compared to net cash used in financing
activities of $1.1 million for the first quarter ending March 29, 1997. The
increase in cash provided by financing activities in 1998 consisted principally
of borrowings under the Company's revolving credit agreement to fund the
increased working capital needs.
Net cash used in operating activities for the year ended December 31, 1997
was $5.0 million compared to net cash provided by operating activities of $32.3
million and $13.4 million for the periods ended December 31, 1996 and December
31, 1995, respectively. The decrease in net cash provided by operating
activities from 1996 to 1997 is primarily due to (i) an increase in inventory of
$15.0 million, primarily representing higher levels of safety stocks maintained
on hand in 1997 to minimize delivery time and properly service customers in the
first quarter of 1998 to limit disruptions to customers during the transition to
a new warehouse in 1997, and as a result of the need to keep more inventory on
hand due to increased reliance on offshore sourcing, (ii) an increase in
accounts receivable of $8.5 million, primarily due to the timing of collections
and (iii) a decrease in income tax payable of $10.2 million, primarily related
to differences in the timing of payments between 1996 and 1997, due in part to
the tax impact of stock compensation late in 1997. The increase in accounts
receivable at December 31, 1997 compared to December 31, 1996 was due to (i)
shipments being made earlier in the fourth quarter of 1996, as compared to later
in the fourth quarter of 1997, (ii) the inclusion of $7.5 million of accounts
receivable by Auburn at December 31, 1997 due to the December 1997 acquisition
of Auburn and (iii) the shipping by the Company of certain orders later in
December 1997 than typical, and increased shipments during December 1997,
resulting in higher receivables balances at December 31, 1997. The increase in
net cash provided by operating activities from January 22, 1996 to December 31,
1996 is primarily due to (i) a $10.5 million decrease in inventory due to a
corporate focus on decreasing slow moving inventories, (ii) an increase of $11.3
million in 1996 in accrued expenses and accounts payable, and (iii) a $6.0
million decrease in 1996 in income tax payable.
For Gerber, working capital requirements vary throughout the year. Working
capital increases during the first half of the year as inventory, primarily
blanket sleepers, builds to support peak shipping periods. The Auburn business
is less seasonal, and as such, while working capital tends to increase slightly
during the second half of the year, the variation is small. See "Description of
Certain Indebtedness."
Under the terms of a ten-year license agreement between the Company and
GPC, the initial term of which expires in 2006, the Company is not required to
pay royalty fees to GPC until the year 2002. Commencing in 2002, the Company is
required to pay an escalating royalty fee as a percentage of net sales of
Gerber-licensed products throughout the term of the license agreement and in
each year of the two consecutive five-year renewal terms if such renewal terms
are negotiated. The Company is recording charges against earnings in accordance
with generally accepted accounting principles in order to ensure a straight-line
effect of the total royalty expense expected to be incurred over the initial ten
year license term. The charges recorded prior to 2002 represent non-current
liabilities that will begin to be paid to GPC in 2002. The initiation of such
royalty payments in year 2002 may adversely affect the Company's cash flow. See
"Risk
32
<PAGE> 34
Factors -- Dependence on Gerber License and Other Intellectual Property" and
"Business -- Licenses and Trademarks."
In connection with the Offering, the deferred financing costs associated
with the subordinated debt to be repaid with the Offering proceeds will be
written off along with the unamortized discount associated with such debt as an
extraordinary item in 1998. This extraordinary item is estimated to be
approximately $309 (net of a tax benefit of $185).
In connection with the acquisition of Auburn, the Company's then-existing
senior credit facility was refinanced. Indebtedness under the Credit Agreement
consists of a $40.0 million term loan to finance the Acquisition and a $60.0
million revolving facility to fund current working capital requirements. The
term loan portion of the Credit Agreement will mature on September 30, 2002 and
requires quarterly principal payments totaling $1.5 million in 1997, $6.5
million in 1998, $8.1 million in 1999, $8.5 million in 2000, $8.6 million in
2001 and $6.8 million in 2002. The revolving credit portion of the Credit
Agreement will mature on October 31, 2002 and has no scheduled interim
amortization but does require mandatory principal prepayments annually based on
excess cash flow commencing December 31, 1998. The Company also incurred debt
issuance costs of $1.0 million in 1997. The Company had approximately $30.2
million outstanding under the revolving credit portion of the Credit Agreement
at April 4, 1998. In connection with the consummation of the Offering, the
Company is seeking certain amendments to its Credit Agreement. Consummation of
the Offering is dependent on obtaining such amendments. The Credit Agreement
subjects the Company to standard covenants and events of default. As of April 4,
1998, the Company was in compliance with all such covenants and was not in
default. See "Description of Certain Indebtedness."
In connection with the Acquisition, the Company assumed approximately $2.6
million of Auburn's indebtedness. Auburn's Irish subsidiary maintains a IRL3.0
million loan facility (U.S. $4.1 million as of April 4, 1998) with the National
Irish Bank consisting of a combined term loan, overdraft, guarantee and foreign
exchange line. This facility is subject to annual review. The overdraft facility
and foreign exchange line are available at the Company's discretion with each
term loan draw down subject to the National Irish Bank's approval. At present,
the Irish subsidiary has drawn down two term loans under the available loan
facility and has drawn down on the foreign exchange line. The term loans had an
aggregate balance of IRL516,553 (U.S. $701,737 as of April 4, 1998) outstanding
as of April 4, 1998 and are repayable in quarterly installments of interest and
principal, the final payment for which is due in September 1999. The Irish
subsidiary is not currently using its overdraft facility. In addition, the Irish
subsidiary has received capital and employment grants from the Industrial
Development Authority (the "IDA") which could become repayable to the IDA in the
aggregate amount of up to IRL1,815,799 (U.S. $2,466,763) as of April 4, 1998.
Repayment of the capital grants would be triggered if the Company (i) relocates
its Irish Facility, (ii) liquidates or (iii) ceases to use the assets purchased
with proceeds from such capital grants. Repayment of the employment grants would
be triggered in each of cases (i) and (ii) above or if the Company eliminated
jobs created with proceeds from such employment grants. The Company believes
that none of such repayment events will occur in the foreseeable future. In
addition, the Company's repayment obligations under the IDA grants terminate on
various dates beginning in March 2000 and ending in April 2011. Auburn is a
party to two loan agreements with the County of Logan, Kentucky related to the
issuance in 1989 of two series of industrial revenue bonds of which
approximately $2.3 million remained outstanding at April 4, 1998. Auburn's two
principal Kentucky facilities are mortgaged in connection with such financing.
See "Description of Certain Indebtedness."
The Company invested $4.2 million, $1.0 million and $1.5 million in capital
expenditures during 1997, 1996 and 1995, respectively. These expenditures
consisted primarily of normal replacement of manufacturing equipment, purchases
of office equipment and upgrades to information systems. In addition, the
Company relocated its distribution center in 1997 resulting in a one-time
capital expenditure of $2.0 million. The Company is budgeting an aggregate of
$5.7 million for capital expenditures in 1998 including $3.0 million to replace
or upgrade manufacturing equipment, $2.0 million to upgrade MIS systems and $0.3
million for building improvements. Gerber's portion, $3.9 million, includes
approximately $1.7 million for MIS systems upgrades which the Company believes,
if fully implemented, could provide efficiencies in the areas of product
development, forecasting and planning. Management believes that except for as
described above, there will be no other material capital commitments for the
next twelve months. The Company will continue to make
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<PAGE> 35
capital expenditures as required to facilitate the growth of each of its
businesses. The amounts allocated to Gerber and Auburn will vary from year to
year based upon a number of factors including expected return on investment,
legal compliance needs and the specific needs of each business. The Company does
not allocate its capital expenditure budget between Gerber and Auburn based upon
a constant percentage allocation.
The Company believes that cash generated from operations, together with
amounts available under the Credit Agreement and the Irish subsidiary's loan
facility with the National Irish Bank, will be adequate to meet its working
capital, capital expenditures, and debt service requirements for the next 12
months.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the period from January 22, 1996 to December 31, 1996, for
fiscal year ended December 31, 1997 and for the first quarter ended April 4,
1998 as well as such data expressed as a percentage of the Company's net sales
for the period indicated. This data has been derived from unaudited financial
statements that, in the opinion of the Company, include all adjustments
necessary for fair presentation of such information when read in conjunction
with the Company's financial statements and notes thereto. Income before
interest and income taxes in 1997 has been adjusted to exclude the stock
compensation charge (dollars in millions).
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
---------- ---------- ---------- --------- --------- --------- ----------
1996 1997
------------------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $36.6 $39.0 $58.3 $51.2 $45.3 $40.2 $60.3
Gross margin............... 9.4 10.6 15.5 11.1 12.7 12.1 16.8
Income before interest and
income taxes............. 3.8 3.4 9.0 5.8 5.7 4.9 9.6
PERCENTAGE OF NET SALES
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin............... 25.7 27.2 26.6 21.6 28.0 30.1 27.9
Income before interest and
income taxes............. 10.4 8.7 15.4 11.3 12.6 12.2 15.8
<CAPTION>
QUARTER ENDED
-------------------
DEC. 31 APRIL 4
--------- -------
1997 1998
--------- -------
<S> <C> <C>
Net sales.................. $56.2 $64.6
Gross margin............... 14.1 17.4
Income before interest and
income taxes............. 7.6 7.8
PERCENTAGE OF NET SALES
Net sales.................. 100.0% 100.0%
Gross margin............... 25.1 27.0
Income before interest and
income taxes............. 13.5 12.1
</TABLE>
In Gerber's segments of the apparel industry, sales are typically higher in
the third and fourth quarters due to the seasonal nature of some of its
products. With the acquisition of Auburn, which experiences higher sales in the
second quarter, the Company will continue to experience seasonality, with the
third quarter expected to represent the highest volume shipping quarter for the
Company. See "Business -- Backlog and Seasonality."
FLUCTUATION OF FOREIGN CURRENCY EXCHANGE RATES
Inventory purchases from contract manufacturers in the Far East are
primarily denominated in U.S. dollars; however, purchase prices for the
Company's products may be affected by fluctuations in the exchange rate between
the U.S. dollar and the local currencies of the contract manufacturers, which
may have the effect of increasing the Company's cost of goods sold in the
future. During the last two fiscal years, exchange rate fluctuations have not
had a material effect on the Company's inventory cost.
Following the Acquisition, the Company adopted a foreign exchange policy
which has been implemented in Auburn's Irish subsidiary for the purpose of
managing its day-to-day exposure. There are currently foreign exchange contracts
in place covering amounts in excess of the Company's policy, which the Company
expects will be reduced to current policy levels by the end of the second
quarter of 1998. During 1997, Auburn's Irish subsidiary recorded a charge of
approximately $1.1 million related to its foreign currency exposure prior to its
acquisition by the Company. During the first three months of 1998, the Company
recorded an additional charge of approximately $0.4 million related to this
foreign currency exposure. There can be no assurance that the Company will not
incur additional losses in the second quarter. See "Risk Factors -- Risk of
Fluctuation in Foreign Currency Exchange Rates."
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<PAGE> 36
ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. With respect to the Company, this Statement will be effective in
fiscal 1998 upon the establishment of the Company's Long-Term Incentive Plan.
See "Management -- Long-Term Incentive Plan." The Company will adopt only the
disclosure provision of SFAS No. 123 and account for stock based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded.
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for financial statements
for fiscal years ending after December 31, 1997. This standard establishes
standards for the reporting and display of comprehensive income which is defined
under SFAS No. 130 as "the change in equity (net assets) during a period from
transactions and other events and circumstances from nonowner sources." Under
SFAS No. 130, the Company has several choices in the disclosure of the
components of other comprehensive income. The Company implemented SFAS No. 130
in the first quarter of fiscal year 1998.
In June 1997, the FASB released Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
shareholders. FAS 131 is effective for fiscal years beginning after December 15,
1997. The Company has evaluated the impact of the application of the new rules
on the Company's consolidated financial statements and does not expect the new
rules to change the way it presently presents its segments.
INFLATION
Results of operations have not been significantly affected by inflation.
The Company, in the normal course of business, has been able to offset the
impact of increased costs through operating efficiencies and selected price
increases.
FORWARD LOOKING STATEMENTS
This Prospectus includes forward-looking statements, including statements
regarding, among other items, (i) the Company's anticipated growth strategies
and intention to consider future acquisitions, (ii) the Company's intention to
introduce new products, introduce product line extensions, and enter new
distribution channels, (iii) anticipated trends in the Company's businesses,
(iv) future expenditures for capital projects (including MIS expenditures) and
any benefits expected to be derived therefrom, (v) the Company's ability to
reduce its interest expenses and debt service obligations and (vi) the Company's
ability to continue to control costs and maintain quality. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, certain of which are beyond the Company's
control. Actual results could differ materially from these forward-looking
statements as a result of the factors described in "Risk Factors" including,
among others, (i) changes in the competitive marketplace, including the
introduction of new products, technologies or pricing changes by the Company's
competitors, and (ii) changes in the trends in the market for infant and toddler
apparel and related products. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Prospectus will in fact transpire.
35
<PAGE> 37
BUSINESS
THE COMPANY
Gerber Childrenswear, Inc. is a leading marketer of infant and toddler
apparel and related products, offering products under its flagship brand,
Gerber, as well as the Baby Looney Tunes and Curity brand names and the Onesies
trademark. The Gerber name and baby head logo are among the best recognized in
the infant and toddler industry. The Company believes Gerber is the leading
provider of infant and toddler apparel and related products, based on dollar
volume and breadth of product offering, to volume retailers, which constitute
the fastest growing segment of the retail industry. The Company also distributes
products to mid-tier department stores and specialty retailers. Gerber holds a
leading market share, based on dollar volume, in its distribution channels in
the underwear, blanket sleeper and cloth diaper categories. The Company believes
that these leading positions in addition to strong consumer recognition of its
brands provide opportunities for Gerber to leverage its brands into other
product categories including sleep 'n play, bed & bath, playwear, bibs, hosiery
and gift sets where Gerber has a growing presence. See
"Business -- Gerber -- Products."
In addition, in order to build upon the Company's expertise as a low-cost
supplier of branded merchandise to volume retailers, the Company acquired all of
the capital stock of Auburn in December 1997 for approximately $40.0 million in
cash. Auburn manufactures, markets and sells branded sport socks for men, women
and children under established brand names such as Wilson, Coca-Cola and
Converse in the U.S., Europe and other international territories and under the
Dunlop brand name in Europe. Auburn markets to a diversified customer base in
the U.S. and Europe, including volume retailers, department stores, wholesale
clubs and major sporting good chains. As a result of the Recent Acquisition, the
Company markets products in over 25 countries. The Company believes that
Auburn's expertise in hosiery will position it to capitalize on growth
opportunities and the Recent Acquisition will provide opportunities to achieve
certain economies of scale and efficiencies in the areas of purchasing (e.g.
yarn), data processing and selling, general and administrative expenses (e.g.
property and casualty insurance). In 1997, pro forma for the Recent Acquisition,
the Company's net sales and income from continuing operations were $270.1
million and $6.6 million, respectively.
In January 1996, Gerber Childrenswear, Inc. was acquired from GPC by a
group of investors led by Edward Kittredge, the Company's Chairman, President
and Chief Executive Officer, who assembled Gerber's current management team.
Since the Original Acquisition, GPC has not owned any capital stock of the
Company, nor have GPC and the Company shared common directors, officers or
employees. The new management team, under the direction of Mr. Kittredge,
developed a series of initiatives to strengthen Gerber's financial results and
improve its operations. To achieve cost efficiencies, Gerber consolidated
manufacturing facilities, established a flexible production strategy including
domestic and offshore manufacturing and sourcing components, centralized
finished product purchasing across all product categories and enhanced its
compensation system. In addition, Gerber extended the payment terms of the
majority of its yarn supply arrangements from 30 to 60 days, and the Company is
seeking to extend Auburn's payment terms as well. Such extensions have the
effect of increasing accounts payable, reducing the need for short-term
borrowing and improving liquidity.
The U.S. retail market for infant and toddler apparel and related products
is estimated at $7.0 billion in 1997, and has grown in dollar volume at a
compound annual rate of 8.0% since 1991. The Company believes that this classic
niche market is well-insulated from major changes in fashion trends and is less
sensitive to general economic cycles due to the consistent level of infant
births in the U.S., at slightly less than 4 million annually from 1989 to 1997
(based on U.S. Census data as reported by the National Center for Health
Statistics), and the high consumption rate for apparel products as infants
experience frequent size changes. Annual apparel spending per infant increased
to $329 in 1996 from $250 in 1993 according to U.S. Census data, representing
compound annual growth of 9.6%. The Company believes the market offers continued
growth prospects due to demographic factors including (i) more women having
children at an older age and returning to work thereafter, resulting in greater
disposable income for expenditures on children; and (ii) an increasing number of
grandparents, who represent a key consumer segment for infant and toddler
products. Within the infant and toddler industry, greater emphasis on value has
shifted consumer purchases away from
36
<PAGE> 38
traditional department stores and toward more value-conscious retail channels,
including volume retailers and mid-tier department stores. Additionally, the
industry is highly fragmented and services volume retailers who are interested
in limiting their purchases to a smaller number of well-capitalized vendors with
a broad base of branded products. The Company believes that its strong brand
names, leading market positions, broad product offerings and strong customer
relationships with volume retailers and mid-tier department stores position it
to benefit from industry trends.
COMPETITIVE STRENGTHS
The Company's business philosophy is to pursue growth and profitability by
maintaining and enhancing its strong brand name recognition and reputation for
quality while continuing to strengthen its customer relationships. The following
factors serve as the Company's competitive strengths and distinguishing
characteristics:
STRONG BRAND NAME RECOGNITION. The Company believes that Gerber is one of
the most recognized brands in the infant and toddler apparel industry with a
reputation for consistently delivering high quality products with innovative
design features at competitive prices. The Gerber brand name was first
introduced for baby food in 1928 by GPC, which holds an approximately 65% market
share in the baby food industry. The Company markets and sells infant and
toddler's apparel and related products using the well established Gerber brand
name and baby head logo. In 1997, the Company sold over 80 million items under
the Gerber brand name. In addition, the Company believes that its popular Baby
Looney Tunes brand name (used on products at slightly higher price points) is
recognized for its use of characters, bright colors and higher fashion content.
The Company also benefits from the strong recognition of its Onesies trademark
(developed for its line of infant underwear) and the Curity brand name (used on
products which are targeted towards more value-conscious consumers). See
"Business -- Gerber -- Brands." Additionally, as a result of the Recent
Acquisition, the Company offers sport socks under the Wilson, Converse,
Coca-Cola and Dunlop brand names licensed by Auburn.
LEADING MARKET POSITIONS IN CORE PRODUCT CATEGORIES. The Company believes
it is the leading provider of infant and toddler apparel and related products to
volume retailers, which constitute the fastest growing segment of the retail
industry. The Company also distributes products to mid-tier department stores
and specialty retailers. Gerber holds a leading market share in its distribution
channels in the underwear, blanket sleeper and cloth diaper categories. The
Company believes that its leading market shares provide significant competitive
advantages in serving its customers, through production and purchasing
efficiencies and greater product development and marketing resources.
Management's strategy is to leverage these competitive advantages to further
penetrate other product categories, whether acquired or internally developed.
HIGH QUALITY, INNOVATIVE PRODUCTS. The Company believes that it has
developed a reputation for high quality and innovative products and that this
has played a critical role in its long-standing strong market positions. In
1982, Gerber designed and developed Onesies, an innovative one-piece underwear
garment, which resulted in a new category of infant apparel which Gerber
believes consumers identify with the Onesies trademark. Most recently, Gerber
introduced the Swim-per, a swim diaper, and Nap 'N Go, a portable daycare mat.
LOW-COST SUPPLIER. The Company believes that its reputation for providing
high quality products at attractive prices has established it as one of the top
infant and toddler's apparel suppliers among value-conscious volume retailers.
The Company actively manages the manufacturing and sourcing of its products to
optimize efficiencies. Of the products manufactured and sourced offshore, the
majority were through manufacturing operations that are owned or dedicated
exclusively to the Company's products. The Company believes that such
diversification has enabled it to enhance operating efficiencies through
production flexibility and expanded capacity without significant capital
investment, while at the same time enabling it to control more efficiently the
delivery and quality of its products. All of these factors have helped the
Company to become a low-cost supplier. See "Business -- Gerber -- Manufacturing
and Sourcing." In addition, the Company believes that its centralized purchasing
and distribution systems have enhanced its cost competitiveness through reduced
distribution costs, minimization of product delays and economies of scale.
37
<PAGE> 39
LONG-TERM CUSTOMER RELATIONSHIPS AND EMPHASIS ON CUSTOMER SERVICE. Gerber
enjoys well-established, long-term relationships with its customers, many of
which have been maintained at multiple levels from sales to senior management.
In certain cases, members of Gerber's senior management and sales force have
maintained relationships with Gerber's customers for over 30 years. Moreover,
the Company believes its broad product offerings, emphasis on customer service
and proven reliability provide a competitive advantage as retailers consolidate
and seek a smaller number of well-capitalized vendors with a broad base of
branded products. Gerber works closely with its principal customers to assist in
the management of their inventories and has invested in warehousing and
distribution facilities and information systems development, including an EDI
system and a VMI program. In addition, Gerber's information systems enable it to
provide customized merchandising and space allocation recommendations and other
category management services to its retail customers. Gerber currently provides
such customized services for Wal-Mart in certain product categories. Gerber has
been recognized for its accomplishments by many retailers and in 1997 received
the "Supplier Performance Award by Retail Category" from Discount Store News on
behalf of discounters, the highest award a company can receive from such
retailers (the "Suppliers Performance Award"). As the first place winner for
infant and toddler softlines, the Company was selected to receive the Suppliers
Performance Award by buyers and merchandise managers from the top 100 volume
retailers in the U.S. based on advertising support, distribution flexibility and
on-time delivery record. In addition, the Company has received a number of
awards from its customers, including the 1995 Vendor/Partner Award and the 3rd
Quarter of 1996 Vendor/ Partner Award of Excellence from Wal-Mart, the 1996
Platinum Circle Award from Sears, the 1996 Rainbow Award (Top Volume Clothing)
from Baby Superstore (currently the "Babies "R" Us" division of Toys "R" Us) and
the 1996 Vendor of the Year Award from Toys "R" Us, which marked the first time
Toys "R" Us ever presented such award to a non-toy vendor.
DEVELOPMENT OF MANAGEMENT AND OPERATING INFORMATION SYSTEMS. Gerber has
made significant investments in the development of MIS and plans to make
additional capital expenditures to further refine such systems. Gerber believes
that it will continue to benefit from these systems through its ability to
effectively manage inventory, improve sales and reduce operating costs. The
Company currently serves all major domestic volume retailers through its EDI
system, which allows customers to send orders to the Company more quickly and
efficiently. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
EXPERIENCED MANAGEMENT TEAM WITH A SIGNIFICANT STAKE IN THE COMPANY. The
Company's Chairman, President and Chief Executive Officer, Edward Kittredge, has
had over 35 years of diverse experience in the textile and apparel industry and
the Company's top five senior managers average more than 25 years of experience
in the apparel industry. The sales and merchandising team has been strengthened
with the recent additions of Robert P. Robertson as Senior Vice President of
Sales and Marketing and Mary-beth Boughton as Vice President of Merchandising
(focused on mid-tier department stores). After giving effect to the
Reorganization and the Offering, management will own approximately 13.0% of the
total outstanding capital stock of the Company on a diluted basis (including
shares of Class B Common Stock issuable upon the exercise of an outstanding
warrant). See "Management."
BUSINESS STRATEGY
The key elements of the Company's business strategy to remain a low-cost
supplier of high quality, branded products to volume retailers include:
ENHANCE OFFERING OF HIGH QUALITY, INNOVATIVE PRODUCTS. The Company intends
to continue to enhance its product offerings through new product initiatives and
product extensions. The Company's strategy is to leverage the Gerber, Baby
Looney Tunes and Curity brands into additional products, including product
segments in which the Company is under-represented. For example, the Company is
under-represented in the approximately $1.8 billion playwear market and in the
approximately $600 million fleece/outerwear market, in each case based on retail
sales. In order to grow its market share in these product lines, Gerber recently
enhanced the Baby Looney Tunes playwear offering and introduced a new line of
Gerber fleecewear. The Company believes that these categories present
significant growth opportunities.
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<PAGE> 40
EXPAND INTO NEW AND STRENGTHEN EXISTING DISTRIBUTION CHANNELS. The
Company's plan is to continue to leverage its strong brand names to expand into
new distribution channels in the U.S. and abroad. Gerber recently targeted the
midtier department store channel with product lines such as Always Baby by
Gerber, which are specially designed, packaged and priced for mid-tier
department store customers. Gerber's strategy is to emphasize marketing efforts
to increase product breadth in existing distribution channels in which it
believes some of its product lines are under-represented. In addition,
management believes that the Gerber, Baby-Looney Tunes and Curity lines of
products have growth opportunities in the food and drug, variety, off-price
apparel, catalog, dollar store, wholesale club and mid-tier department store
distribution channels.
FURTHER PENETRATE INTERNATIONAL MARKETS. Gerber currently has an exclusive
license to use the Gerber brand name on certain infant and toddler apparel and
textile products in the U.S., Canada and the Caribbean and a right of first
refusal to use the Gerber name in Central and South America. Gerber branded
products are currently being shipped in the U.S. and to Canada and the
Caribbean. The Company believes that its offshore manufacturing and sourcing
capabilities give it a competitive advantage to further increase its presence in
the international markets. Gerber plans to increase the distribution of its
Gerber line of products in Canada by offering a broader product mix in such
market. The Company's plan is to leverage the Gerber brand name to expand its
presence in international markets in which the Gerber brand name is established
for baby food, and believes that such markets represent expansion opportunities.
MAXIMIZE OPERATING EFFICIENCIES. The Company's strategy is to continue to
improve operating efficiencies and productivity in order to offer its customers
high quality products at competitive prices. The Company's plan is to continue
to optimize product sourcing to achieve economies of scale and to eliminate
certain duplicative operations in connection with the acquisition of Auburn.
LEVERAGE EXPERTISE THROUGH SELECTIVE ACQUISITIONS. The Company intends to
grow by acquisition and, consistent with such strategy, regularly evaluates
acquisition candidates and engages in discussions from time to time regarding
potential acquisitions. Future strategic acquisitions may be undertaken to
broaden the Company's product lines, increase sourcing diversity and strengthen
its presence within various channels of distribution. The Company believes that
numerous acquisition candidates exist within the infant and toddler apparel
industry. In addition, the Company believes that other acquisition opportunities
exist in similar high volume, basic branded apparel businesses where the Company
can leverage its core competencies. The Company is neither currently negotiating
nor has any current or pending plans, arrangements, understandings or agreements
with respect to any acquisitions.
GERBER
BRANDS
The Company, through Gerber, offers infant and toddler apparel and related
products under the key brands of Gerber, Baby Looney Tunes and Curity and under
its Onesies trademark, as well as under private labels. In 1997, approximately
70% of Gerber's products were sold under the Gerber brand name, and
approximately 16% of Gerber's products were sold under the Baby Looney Tunes
brand name. The Curity brand name and private label sales accounted for
approximately 2% and 12% of Gerber's total sales, respectively. Products sold
under the Gerber and Curity brand names and private labels are produced in both
basic styles and more design oriented styles. Products sold under the Baby
Looney Tunes brand name are primarily design oriented. The Onesies trademark was
created and developed by Gerber, which resulted in a new category of infant
apparel which the Company believes consumers identify with the Onesies
trademark.
GERBER. The Company's primary brand, Gerber, was first introduced in 1928
by GPC, and has been long associated with infant and toddler care products. The
Company believes that many consumers today associate the "Gerber baby" as "every
baby." Gerber infant and toddler apparel was first introduced in 1963 with a
line of cloth diapers, and the Company currently offers products under the
Gerber name in all of its nine principal product categories. Gerber products are
distributed primarily through volume retailers and mid-tier department stores.
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BABY LOONEY TUNES. Gerber markets higher-end, more fashion oriented
products such as playwear and bibs under the Baby Looney Tunes brand name. The
Baby Looney Tunes characters include Baby Tweety, Baby Bugs Bunny, Baby
Tasmanian Devil, Baby Daffy Duck, Baby Wile E. Coyote, Baby Road Runner and Baby
Sylvester on infant and toddler bath products, bedding, sleepwear, underwear,
footwear, socks, layettes, and infant and toddler playwear. The adult characters
of Bugs Bunny, Wile E. Coyote, Marvin the Martian, Foghorn Leghorn, Porky Pig,
Elmer Fudd, Tweety and Sylvester Jr. are also applied to infant and toddler
bedding. Baby Looney Tunes products are distributed through volume retailers,
mid-tier department stores, and food and drug stores.
CURITY. The Curity brand was reintroduced by Gerber in 1994 to provide an
opening price point to Gerber's portfolio of brands. Products under this brand
are targeted towards more value oriented consumers. Curity brand products are
currently limited to the categories of underwear, cloth diapers, blanket
sleepers and certain other products and are distributed almost exclusively
through volume retailers.
PRIVATE LABEL. Gerber's private label products are generally for large
volume retailers and mid-tier department stores and include products in the
underwear, cloth diaper and sleep n' play categories.
PRODUCTS
Within Gerber's nine product categories, Gerber offers an extensive number
of SKUs in order to provide large volume retailers with a full product line. Of
its nine product categories, its most well-developed categories are underwear,
blanket sleepers and cloth diapers. The Company expects growth in these
categories and the remaining six categories in which it is placing an increasing
emphasis. Apparel product sizes range from newborn through size 4T which are
generally for children up to three years of age. The majority of Gerber's sales
are in the newborn and infant size ranges which are typically for children up to
two years of age.
The following table summarizes Gerber's nine principal product categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRINCIPAL BRANDS RETAIL PRICE RANGE
- ---------------- ---------------- -------------------
<S> <C> <C>
Underwear Gerber, Curity, Baby Looney Tunes, Private $2-11
label
Blanket Sleepers Gerber, Curity, Baby Looney Tunes, Private $4-12
label
Cloth Diapers Gerber, Curity, Private label $5-10/pack
Sleep 'N Play Gerber, Curity, Private label $5-12
Bed & Bath Gerber, Baby Looney Tunes $3-100 (Bed)
$1-8 (Bath)
Playwear Gerber, Baby Looney Tunes $7-15
Bibs Gerber, Baby Looney Tunes $1-3
Hosiery Gerber, Baby Looney Tunes $1-2
Gift Sets Gerber, Baby Looney Tunes $10-30
</TABLE>
UNDERWEAR. Gerber's products in the underwear category are led by the
Company-owned trademark Onesies (an underpant and T-shirt combination garment
for infants) and also include unionsuits, shirts and training pants. Created,
designed and developed by Gerber, the Onesies product line has resulted in a new
category of infant apparel with the distinguishing feature of a seamless garment
body, which Gerber believes makes the product more comfortable for babies. The
Gerber brand is Gerber's main brand in this product category. The Company
believes it has achieved a leading market position in the underwear category,
estimating that Gerber's products constitute over 50% market share of
distribution to volume retailers. Gerber currently is the primary supplier of
infant underwear to many of its customers, including Gerber, Baby Looney Tunes
and Curity products. Management believes that growth in this product category
will occur as a result of further gains in market share, in part due to
consolidation of suppliers to volume retailers.
BLANKET SLEEPERS. Blanket sleepers are one-piece, footed garments in which
infants sleep during the winter months. Gerber's key brand in this product
category is Gerber. The Company believes that Gerber is the market leader in
blanket sleepers with over 50% market share of distribution to volume retailers.
The
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Company believes that growth in this product category will occur as a result of
further gains in market share, in part due to consolidation of suppliers.
CLOTH DIAPERS. The cloth diaper category includes both traditional cloth
diapers, used as diapers, lap pads and burp cloths, and other products including
vinyl pants and the recently introduced Swim-per, a swim diaper. The Gerber
brand of cloth diaper is marketed to both volume retailers and mid-tier
department stores. Although cloth diaper sales have decreased over the last
several years, management believes that cloth diaper sales have stabilized as
consumers increasingly have come to rely on them for a wide range of uses
including use as a burp cloth, to clean up spills in the nursery, or to wipe a
child's face. The Company expects growth within the cloth diaper category to
come with the development of new, innovative products such as the Swim-per.
SLEEP 'N PLAY. Sleep 'N Play products include both pajamas and one piece
outfits called "stretchies." The key brands in this product category include the
Gerber brand and private label, which are distributed primarily to volume
retailers. The Company's strategy is to achieve growth in this product category
through (i) increased offerings of new designs, (ii) increased distribution to
mid-tier department stores including products under the Always Baby by Gerber
brand, and (iii) the introduction of 100% cotton sleepwear for infants up to 9
months old, products now permitted under amended Federal regulations.
BED & BATH. Bed products include quilted products (such as comforters and
bumpers), crib skirts, sheets, and waterproof products such as mattress and
changing table protectors. Bath products include washcloths and towels and
products such as Lil' Hoodlums, which are hooded towels in the shape of animals.
The Gerber and Baby Looney Tunes brands are the key brands within this product
category. Gerber distributes bed and bath products to volume retailers and
mid-tier department stores, and believes the mid-tier distribution channel
represents a strong area for growth.
PLAYWEAR. Gerber is placing a greater emphasis on "Playwear", a category
whose products include coordinated sets, jumpers, overalls and fleece products.
Gerber offers both fall and spring lines of playwear and provides a variety of
styles for each season. The Company believes the playwear category is more
design oriented than underwear or sleepwear. In 1997, Gerber offered its entire
playwear line exclusively under the Baby Looney Tunes brand. In 1998, Gerber
intends to continue its playwear line under the Baby Looney Tunes brand and also
introduce a basic line under the Gerber brand. Management believes that the
playwear market, estimated at $1.8 billion at retail, represents a significant
area of potential growth.
BIBS. Gerber sells bibs under the Gerber and Baby Looney Tunes brands
through volume retailers and food and drug stores. Historically, GPC's Baby Care
Division was responsible for distribution of bibs, among other products, in the
food and drug store distribution channel. As of January 1, 1998, Gerber assumed
the marketing function for bibs to this channel and believes it to be an area
for growth.
HOSIERY. Gerber's hosiery products include crew socks, tights, ankle
socks, booties, bootie sets and bobby socks. The infant and toddler hosiery
market is estimated to be over $500 million at retail, based on dollar volume,
and management believes it can grow the category through offering its hosiery in
an expanded number of distribution channels. Additionally, Gerber expects to
gain further expertise in the hosiery market as a result of its acquisition of
Auburn.
GIFT SETS. Gerber recently introduced a line of gift sets, which includes
selected Company products under the Gerber and Baby Looney Tunes brands, as well
as other accessories acquired from other manufacturers (i.e. diaper baskets).
Gift sets are generally comprised of items relating to common themes such as new
baby, nursery products and infant "sports" themes, and are often packaged in
decorative baskets and other unique packaging which can serve additional
purposes. Gift sets represent the most recent example of Gerber's ability to
leverage its strong brand names to develop a presence in new product categories.
SALES
Gerber's sales force is comprised of approximately 15 sales representatives
and four telemarketers. The Company believes that Gerber's sales force
distinguishes itself through its extensive experience in the infant and toddler
apparel industry, long tenure and thorough understanding of its retail accounts.
Gerber's sales
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strategy is to have highly qualified personnel handling all product lines for a
small number of retail accounts, which it believes efficiently serves existing
customers and attracts new ones. Gerber's sales representatives work closely
with customers to develop marketing plans, including merchandise space
allocation and other merchandising strategies. The four-person telemarketing
sales organization is based at Gerber's headquarters in Greenville, South
Carolina and handles marketing efforts directed towards smaller stores and in
connection with Gerber's sales to diaper services. In addition, the Company
believes that Gerber's senior management team has established strong
relationships with the senior management of its customers which has resulted in
solid customer relationships.
In fiscal 1997, $4.3 million of Gerber's products, or 2.1% of Gerber's net
sales, were sold through GPC's Baby Care Division to food and drug channels in
the U.S. and to volume retailers in Canada. Beginning in 1998, Gerber commenced
distribution to food and drug channels in the U.S. directly rather than through
GPC. Additionally, the Company is working with GPC in Canada to broaden the
Company's distribution to Canadian retailers.
DESIGN AND MERCHANDISING
The Company believes that Gerber has developed a reputation for
consistently delivering high-quality, value-priced products, largely due to its
strong merchandising team. Gerber's merchandisers are experienced and have a
proven ability to interpret fashion direction and convert design ideas into both
basic and fashion-oriented products with a value image. Each product category
has its own experienced merchandising group. Merchandisers oversee and manage
the entire design and merchandising process for each product line from the
initial market research to final delivery of the product. The Company believes
that this integrated process has allowed Gerber to become a leading producer of
high quality, basic products while also enabling it to market fashion-enriched
products at several price points.
The Company has developed an extensive network of information and design
idea sources, which it believes maintains a healthy flow of ideas to its
merchandising, design and art teams to help keep products fresh. The key
merchandising personnel responsible for line direction routinely travel to
several international markets for design and product innovations. After
analyzing market trends and obtaining input from key buyers in the field
regarding design and fashion movements, the merchandising design and artist
teams develop a coherent merchandising strategy that will unify that season's
individual line components. Samples are then produced for presentations to
select major accounts. This interaction with "barometer accounts" provides the
Company with additional input as to final line content and an initial indication
of demand which is used to adjust earlier production estimates. The Company's
licensors also review each new design and product at various stages of
production pursuant to their licensing arrangements. The sales force uses sample
lines and supporting story boards to make presentations and complete bookings.
Throughout the year, the merchandising, design and art teams create fresh
product designs for basic and fashion lines.
MANUFACTURING AND SOURCING
MANUFACTURING OPERATIONS. Gerber actively manages the manufacturing and
sourcing of its products to optimize efficiencies, and in 1997, manufactured and
sourced approximately 60% of its products offshore based on total product cost.
The Dominican Republic, Guatemala and Estonia accounted for approximately 42%,
22% and 11% of offshore production, respectively, with other countries including
Guatemala, Mexico, Taiwan, Hong Kong, Thailand, Russia, China and South Korea
accounting for the balance. None of such the other countries accounted for 10%
or more of offshore production. Gerber has seven manufacturing operations,
including one in each of South Carolina and Texas, two locations in North
Carolina and three "9802" facilities in the Dominican Republic. In "9802"
facilities, U.S. components are shipped abroad, assembled, packaged and
re-imported with duty charges assessed only on the value added abroad. In
addition, the Company utilizes third party manufacturers (both domestically and
offshore), and has entered into production agreements with certain contractors
in the United States, Estonia, Guatemala and Mexico, the material terms of which
are believed by management, based on discussions with suppliers and management's
experience, to be consistent with industry standards. These agreements are
generally for terms of one year, payment is due within 30 days, the contractors
must provide labor and conduct hiring practices consistent with certain U.S.
laws, and pricing
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terms are negotiated on an item by item basis. See "Risk Factors -- Risk of
Third Party Manufacturing and Sourcing."
Through its own and third party manufacturing operations, Gerber is able to
control the knitting, cutting, sewing, embroidering and packaging of its
products. Over the last several years, Gerber has focused its operations on its
manufacturing strengths such as knitting, cutting and sewing, and has
discontinued its inefficient manufacturing operations such as spinning yarn and
dyeing fabric. The Company believes that the combination of domestic and foreign
production helps Gerber maintain competitive pricing by keeping costs low while
fulfilling customer demand for fast turnaround on orders.
The Company believes that Gerber's integrated use of domestic and foreign
production provides tangible competitive advantages and cost benefits by
securing more predictable timing in the production process which facilitates the
achievement of the Company's high standards with respect to product quality,
timely deliveries and customer service. The ability to accurately forecast the
completion of production allows the Company to offer narrow and dependable
delivery windows to retailers. As retail buyers continue to consolidate
suppliers, the Company believes that they favor those resources which offer
quality products along with reliable and timely deliveries. By increasing the
service demands on suppliers, retailers can minimize inventory levels, limit
markdowns and utilize their open-to-buy dollars most efficiently.
RAW MATERIALS SOURCING. Gerber buys yarn from proven, reliable sources
with which it has good relationships and generally enters into contracts for
terms of up to one year with its yarn suppliers. Management believes, based upon
the Company's regular working relationships with its suppliers and management's
experience, that the material terms of such contracts are consistent with
industry standards. To date, Gerber has not experienced any difficulty in
obtaining yarn. See "Risk Factors -- Costs of Raw Materials and Supplier
Relationships." The Company intends to look for opportunities to consolidate
buying between Gerber and Auburn to ensure efficiencies in purchasing (to the
extent permitted under current contractual arrangements).
QUALITY CONTROL. Gerber maintains quality control processes in a variety
of ways. On an internal level, its domestic and offshore production in
Gerber-controlled facilities is under the direction of a senior officer and the
management of each plant is trained and held responsible for the quality of its
own production. Gerber's director of quality control periodically visits each
plant to train management personnel and inspect for quality. Representatives of
the Company's merchandising and engineering staffs also visit the facilities
from time-to-time to inspect for quality. In addition, in the Far East,
employees and agents of the Company visit contractors' facilities to ensure
compliance with specifications on-line including qualitative tests and an
independent testing service is utilized to ensure compliance of garments with
U.S. government regulations. On an external level, all of Gerber's licensors
have the right to, and may from time to time, perform inspections of facilities
utilized by the company. In addition, Gerber's customers perform third-party
quality inspections either through unscheduled visits to Gerber facilities or
through their own internal inspection of delivered final merchandise. The
Company (and its competitors) are also required to provide the U.S. Consumer
Products Safety Commission a continuing guarantee that products conform to U.S.
flammability standards.
DISTRIBUTION AND INVENTORY MANAGEMENT. Gerber currently distributes the
majority of its products through distribution facilities located in Evergreen,
Alabama. Gerber's Bed & Bath products are warehoused at its Pelzer, South
Carolina facility and its blanket sleeper products are primarily warehoused and
shipped from its Ballinger, Texas facility. In December 1997, Gerber relocated
its distribution operations to the Alabama facility, which is approximately
255,000 square feet and is adequate for Gerber's current needs with
opportunities for expansion in capacity. The Company anticipates that the
relocation will create cost savings during the 1998 fiscal year.
Under the Company's inventory management program, Gerber offers retailers
the ability to reorder certain of its products for immediate shipment. Gerber
keeps an inventory of products covered by the program and accepts replenishment
orders through its EDI system. See "Business -- Management Information Systems."
The Company can typically fill such orders within 72 hours of receipt. While the
program requires
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an increased investment in inventories, the Company believes that its ability to
offer this service to its customers is a significant competitive advantage.
AUBURN
Auburn manufactures, markets and sells branded sport socks for men, women
and children under established brand names such as Wilson, Coca-Cola and
Converse in the U.S. and internationally and under the Dunlop brand name in
Europe. Auburn has operations in the United States and Ireland. Auburn markets
to a diversified customer base in the U.S. and Europe, including volume
retailers, department stores, wholesale clubs, major sporting good chains and
food and drug stores. The strong brand name recognition and a long term
reputation for quality facilitate a multi-channel distribution strategy. Auburn
competes effectively in these distribution channels by offering its branded
products at competitive prices, acting as a low-cost producer with the ability
to service customers with quick turnaround, and maintaining strong customer
relations. In addition, with its acquisition by Gerber, Auburn has added to
these core competencies the ability to access capital for future growth and
investment in operations. For the year ended December 31, 1997, Auburn had sales
of approximately $69.6 million.
Auburn competes in the highly fragmented hosiery industry, which has
significant branded, control brand and private label components. Competition
within the industry is generally based on price, quality, service, brand
recognition and style. The Company believes that advances in technology in
hosiery manufacturing will result in a smaller number of well-capitalized
hosiery manufacturers. The Company believes that Auburn is well positioned to
benefit from such consolidation due to its strong brands, established channels
of distribution, strong customer service, low cost manufacturing capabilities
and access to capital. The Company believes that significant growth
opportunities exist through taking market share from private label producers,
which comprise a substantial portion of the hosiery industry. In addition,
management believes that Auburn's European manufacturing facility allows it to
be more responsive to the European market, where management believes significant
opportunity for expansion exists.
BRANDS
The Company believes, based on discussions with Wilson, that Auburn is the
second largest licensee of the Wilson brand name in the U.S. and the third
largest in the world, in each case based on royalty income. Sales of
Wilson-branded products accounted for approximately 83% of Auburn's business in
1997. The Wilson brand name enjoys strong customer recognition, and a quality
reputation with its end consumers. Auburn also produces sports socks under the
Coca-Cola and Converse brands domestically and internationally and under the
Dunlop brand name in Europe.
PRODUCTS
Auburn offers a variety of product features and packaging designed to serve
its varied distribution channels. Although Auburn's primary products are white
sports socks for men, women and children, which represent a substantial portion
of Auburn's net sales, Auburn has tailored its product mix to meet consumer
tastes and demands, such as the European demand for darker colors. Auburn's
products vary based on sole cushion, length of sock, foot size, color, placement
of logo and thread content. Auburn also offers a line of high performance sports
socks featuring performance fibers such as Duraspun and Coolmax. The Company
believes that Auburn, driven by technologically advanced knitting and sewing
machinery, has established itself as a market innovator through design
innovations such as the welted-top.
The European market has shown an interest in sport socks in dark colors,
including heather grey, black and navy. The Company believes that the darker
colors have increased end usage in Europe, because many customers tend to wear
sport socks for dress wear as well as sport uses due to the low price and the
high comfort factor of a sport sock. This trend is beginning in the United
States and the Company is well positioned to take advantage of it.
Auburn has developed a strong reputation for packaging flexibility and can
deliver packaged products to suit and meet its customers' individual needs. The
Company believes that the ability to service its customers'
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individual packaging and merchandising needs give Auburn a competitive advantage
over many of its competitors.
MANUFACTURING AND SOURCING
MANUFACTURING OPERATIONS. The hosiery business utilizes a capital
intensive manufacturing process through which the sock is knit in the greige,
the toe is closed, the sock is bleached or dyed and then packaged for
distribution. In the U.S., Auburn conducts knitting and toe closing operations
out of its manufacturing facility in Adairville, Kentucky. From time to time,
Auburn also employs outside contractors to knit socks on a purchase order basis.
The amount of socks knitted by such outside contractors is not material. The
Adairville facility houses technologically advanced knitting and sewing
equipment. The oldest knitting machines are four years old. Auburn is
implementing a computerized monitoring system of this machinery which increases
efficiency, usage rates and productivity. Auburn's bleaching, dying, packaging
and shipping operations are conducted out of its distribution facility in
Auburn, Kentucky. Technological advances and other control mechanisms at both
the Adairville and Auburn facilities allow Auburn to maximize productivity. The
Company intends to invest in further technological advances as they become
available.
Outside the U.S., Auburn operates a facility in Cahirciveen, County Kerry,
Ireland which conducts knitting, sewing, bleaching, packaging and shipping
functions using machinery, processes and technology identical to those of the
U.S. facilities. The Ireland facility primarily supplies the European market
(including Western Europe and Eastern Europe west of Russia) with the same
branded American-style sports socks. In addition, the Company has recently
installed in the Ireland facility a computerized monitoring system similar to
that which Auburn is currently implementing in its Adairville facility. Now
fully operational in Ireland, the system has significantly increased efficiency
and productivity at that facility. The Company believes that Auburn's ability to
offer high quality, branded socks at competitive prices has been recognized by
value-conscious Europeans, and that the low levels of similar product offerings
at this time offer an opportunity to develop brand recognition in these markets.
See "Business -- Auburn -- Distribution and Inventory Management."
QUALITY CONTROL. Auburn maintains quality control processes in a variety
of ways. Internally, quality control inspectors monitor work in progress at each
step of the manufacturing process. A record of each operator's performance is
recorded and updated regularly. On an external level, all of Auburn's licensors
have the right to, and may from time-to-time, perform inspections of Auburn's
facilities. Customers also perform third-party quality inspections either
through unscheduled visits to the Auburn facility, or through their own internal
inspection of delivered final merchandise.
DISTRIBUTION AND INVENTORY MANAGEMENT. In the U.S., Auburn distributes its
products through the volume retailers, mid-tier department stores, wholesale
clubs, major sporting good chains and food and drug store distribution channels
from its facility in Auburn, Kentucky. In Europe, Auburn distributes its
products to volume retailers, mid-tier department stores, supermarkets,
wholesale clubs, major sporting goods chains and specialty retailers within the
sporting goods category from its facility in Ireland. Both facilities are able
to ship orders within 72 hours of their receipt. Management believes that this
ability provides a significant competitive advantage over many of Auburn's U.S.
competitors who lack fully-integrated European facilities and, therefore, are
unable to respond quickly to European customers' individual demands. Management
also believes that this ability coupled with Auburn's strong brand names has
made Auburn a leading producer.
MANAGEMENT INFORMATION SYSTEMS
Gerber's MIS system provides, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
manufacturing, importing and distributing functions of Gerber's business. Gerber
has purchased and implemented a software program that enables Gerber to track,
among other things, orders, manufacturing schedules, inventory, sales and
mark-downs of its products. Gerber's MIS staff, based in Greenville, South
Carolina, supports all computer systems and programs used to run Gerber's
business. Gerber believes that its programmers play a critical role at Gerber in
supporting these systems and in developing programs to maximize product flow
through the different
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manufacturing functions at each facility and correctly staffing each function.
Gerber continuously upgrades its MIS system to attempt to optimize inventory
management and provide management with more timely information. In addition,
Gerber has made expenditures with respect to the millennium problem and expects
to be year 2000 compliant by the end of 1998. The Company believes that future
expenditures related to year 2000 issues will not be material. In addition, to
support Gerber's replenishment program, Gerber maintains and fully utilizes its
EDI and VMI capabilities. Gerber has made significant investments in the
development of such MIS systems and plans to make additional capital
expenditures to improve such systems, including the development of a fully
integrated production system.
Auburn's MIS system provides a full range of functions. Auburn's domestic
EDI system is available for all customers and is completely integrated with
Auburn's manufacturing, production, order entry, shipping, accounting and
packaging functions. The system links all three of Auburn's domestic facilities
and can interface with Gerber's financial functions. Management expects that
Auburn's domestic EDI system will be year 2000 compliant by the end of 1998. The
Company believes that future expenditures related to year 2000 issues impacting
Auburn's systems will not be material. The MIS system in the Ireland facility,
which includes EDI capability, is a fully-integrated, real-time system and is
able to interface with Auburn's New York sales office. The MIS system in the
Ireland facility is currently year 2000 compliant.
Auburn maintains EDI systems in both its domestic and Ireland facilities.
In addition, to prepare for the integration of a single European currency by
European Union member states, Auburn is implementing the systems necessary to
offer its products for sale in both national currencies and the new European
currency. The systems provider has committed that such systems will be fully
implemented by January 1, 1999. Auburn's systems are expected to include (i)
dual bar coding on all products sold in Europe, (ii) dual billing, and (iii)
multi-level currency conversion to allow for simplified billing and collection.
Management believes that the promulgation of one European currency could
materially affect the Company by providing potential new sources of revenue. It
can also increase competition in the market. See "Risk Factors -- Risk
Associated with Foreign Operations and Import Restrictions."
CUSTOMERS
Gerber directly services approximately 1,100 retail accounts, with the
Company's top 10 customers representing approximately 83% of total 1997 sales.
Sales to Wal-Mart, which accounted for a significant percentage of the net sales
of infant and toddler apparel in the U.S. in 1997, constituted approximately 44%
of Gerber's sales during 1997. Sales to Wal-Mart constituted approximately 48%
of Auburn's sales during 1997 (including sales after the Recent Acquisition). No
other customer accounted for more than 10% of the Company's 1997 sales on a pro
forma basis.
Gerber enjoys well-established, long-term relationships with its customers,
many of which have been maintained at multiple levels from sales to senior
management. In certain cases, members of Gerber's senior management and sales
force have maintained relationships with Gerber's customers for over 30 years.
Approximately 90% of Gerber's customer orders, including all orders from volume
retailers, currently come through the EDI system. This allows Gerber's customers
to receive the quick order turnaround of approximately 72 hours. Gerber has also
implemented a VMI program. Gerber's information systems enable it to provide
customized merchandising and space allocation recommendations and other category
management services to its retail customers. Gerber currently provides such
customized services for Wal-Mart in certain product categories. Gerber has been
recognized for its accomplishments by many retailers and in 1997 received the
Supplier Performance Award from Discount Store News on behalf of discounters,
the highest award a company can receive from such retailers. In addition, the
Company has received a number of awards from its customers, including the 1995
Vendor/Partner of the Year Award and the 3rd Quarter of 1996 Vendor/Partner
Award of Excellence from Wal-Mart, the 1996 Platinum Award from Sears, the 1996
Rainbow Award (Top Volume Clothing) from Baby Superstore (currently the "Babies
"R" Us" division of Toys "R" Us) and the 1996 Vendor of the Year Award from Toys
"R" Us, which marked the first time Toys "R" Us ever presented such award to a
non-toy vendor.
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BACKLOG AND SEASONALITY
The Company delivers products throughout the year and generally experiences
busy cycles during the first and third quarters. The EDI system and VMI programs
have significantly reduced the average order period, which effectively reduces
backlog. At December 31, 1997, the Company's backlog of orders for its products,
all of which were expected to be shipped during fiscal 1998, was approximately
$20.2 million, as compared to approximately $18.2 million at December 31, 1996
(including Auburn's backlog in 1996). Backlog as of any given date may not be
indicative of backlog at a subsequent date. Therefore, a comparison of backlog
from period to period is not necessarily an accurate indicator of eventual
shipments.
In Gerber's segments of the apparel industry, sales are typically higher in
the third and fourth quarters. The Company believes that there are three main
reasons for this trend in the third quarter: (i) sales of blanket sleepwear
occur mostly during this period, (ii) a portion of the Company's underwear
business is seasonal in that a product line for the fall season incorporates
seasonal designs, prints, colors and fabric weight, and (iii) sales in general
rise as retailers prepare for events such as back-to-school season (as consumers
visit stores to buy clothing for older children) and retailer-initiated
promotions of baby apparel. In the fourth quarter, such trend is primarily due
to greater sales of blanket sleepers in the early fourth quarter and increased
sales of playwear in the late fourth quarter.
Auburn's business is generally non-seasonal but experiences somewhat higher
sales in the second and third quarters as a result of the seasonal use of the
product and back to school sales. Auburn's business is also influenced by
promotions instituted by its customers.
COMPETITION
The infant and toddler apparel market is highly competitive. Both branded
and private label manufacturers compete in the infant and toddler apparel
markets. Competition generally is based upon product quality, brand name
recognition, price, selection, service and convenience. Gerber's primary
competitors include Fruit of the Loom, Hanes, Carter's, licensed products and
firms using character licenses from Disney and others. Gerber also competes with
certain retailers, including several which are customers of the Company, which
have significant private label products offerings. Certain of Gerber's
competitors have greater financial resources than the Company. Gerber's ability
to compete depends, in substantial part, on the continued high regard for the
Gerber brand name and the ability of Gerber to continue to offer high-quality
garments at competitive prices.
The hosiery industry is highly fragmented and has significant branded,
control brand and private label components. Competition is generally in terms of
price, quality, service, brand recognition and style. Auburn's primary
competitors include Hanes, which has the largest share of the market, Renfro,
Neuville and Russell. Auburn also competes with certain retailers, including
several which are customers of the Company, which have significant private label
products offerings. In addition, Auburn competes with private label
manufacturers, including small, local manufacturers and large, public companies
that have greater financial resources than the Company and larger customer
bases.
LICENSING AND TRADEMARKS
GERBER LICENSE. GPC has granted Gerber a ten year license that expires in
January 2006 (with two five year renewal periods) to use the Gerber brand name
in the United States, Canada and the Caribbean. The five-year renewal periods
are each subject to Gerber's meeting certain minimum target sales amounts, which
amounts management believes to be consistent with industry standards. Royalties
are not payable under the license until 2002. However, the Company accrues for
the projected average royalties to be paid pursuant to the license arrangement.
Management believes that the amount of such royalties is consistent with
industry standards, in which royalties typically range from 2-14% of sales and
are determined by factors such as the trademark licensed, the relationship
between the licensee and licensor, and the extent and nature of the advertising
supporting the brand. The Company's knowledge of industry standards with respect
to royalties is based on management's knowledge of royalty rates offered by
other manufacturers and experience with other
47
<PAGE> 49
apparel companies and selected public disclosures. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Liquidity and
Capital Resources."
The license permits use of the Gerber name for infant and toddler shoes,
underwear, sleepwear (including blanket sleepers, pajamas and sleep 'n play),
playwear, bed and bath products typically used in a nursery to decorate or
coordinate the nursery or bedding or to bathe a child, reusable cloth diapers
and diapering apparel products, bibs, hosiery, swimwear and gift sets and
layettes incorporating the above articles, in each case, targeted to infants and
toddlers of certain specific sizes. In the event that the licensor desires to
license the Gerber name for the sale of licensed articles in any other country
in Central or South America, Gerber has the right of first refusal to obtain
such license on the same terms and conditions as the existing license. The
licensor has granted a third party the right to use the Gerber name for products
which fall into the same general product category as one or more of the licensed
articles and which may be similar to but not the same as one or more of the
licensed articles in terms of use, function or otherwise. Gerber is allowed to
use the Gerber name in its corporate or business name during the term of the
license. Under the terms of the license, Gerber is required to maintain certain
levels of insurance.
Products which utilize the Gerber name may not deviate from the quality,
design, material, construction, details, fabric, weight, workmanship and finish
of the licensed articles approved by the licensor. Any new or altered products
or advertising which use the Gerber name must be submitted to the licensor prior
to their use. The licensor can disapprove any proposed product or advertising
which, in its sole view, would impair the value or goodwill associated with the
Gerber name. The licensor can terminate the license if Gerber materially
breaches the license agreement, fails to maintain required levels of insurance
or sells products which were not approved by the licensor, or if certain
bankruptcy events occur. The Company believes that it is currently in compliance
with all provisions of the Gerber license in all material respects and has no
reason to believe that any events are likely to occur that would result in the
early termination of such license. In the event that either party seeks
termination of the license at any time prior to January 22, 2016, such party
must give 2-years' notice to the non-terminating party. In the event such notice
is delivered by GPC, the royalty rate will be decreased by approximately 2% for
the remainder of the term, and in the event that Gerber delivers notice to
terminate the license, the royalty rate will be increased by approximately 2%
for the remainder of such term. The Company may not sell, manufacture or
distribute any item for use in association with licensed articles that compete
in any area with any item, sold or manufactured by the licensor.
BABY LOONEY TUNES LICENSE. Gerber currently holds a license to use the
Baby Looney Tunes name from Warner Brothers. The license was renewed on March
12, 1998 and extends until December 31, 2000. Management believes the negotiated
royalty terms are consistent with industry standards. The license permits Gerber
to use the characters Baby Tweety, Baby Bugs Bunny, Baby Tasmanian Devil, Baby
Daffy Duck, Baby Wile E. Coyote, Baby Road Runner and Baby Sylvester on infant
bath products, bedding, sleepwear, underwear, footwear, socks, layettes, and
infant and toddler playwear. The license also permits Gerber to use the adult
characters Bugs Bunny, Wile E. Coyote, Marvin the Martian, Foghorn Leghorn,
Porky Pig, Elmer Fudd, Tweety and Sylvester Jr. for toddler bedding. The license
is limited to the U.S. and its territories and possessions. The licensor is
permitted to grant rights in the characters to (i) other parties for products
other than those covered by the license; (ii) other parties for products covered
by the license for sale through catalogues produced by or on behalf of the
licensor, for sale or distribution in any movie theaters, retail stores operated
by the licensor, or in any theme park operated by the licensor; and (iii) Six
Flags Corporation for sale of similar products as Gerber's in its theme parks.
Use of the characters is subject to review and approval by the licensor. The
license may be terminated by the licensor (i) upon a material default under the
license by Gerber; (ii) if Gerber fails to maintain certain insurance; (iii) if
any government body finds that Gerber's products are harmful or defective in any
way, manner or form, or are being sold or made in violation of the law; (iv) if
Gerber fails to make and sell at least 25 different products; (v) if Gerber
manufactures, sells or distributes licensed products without approval by the
licensor; or (vi) if Gerber sells licensed products outside the U.S. and its
possessions.
CURITY LICENSE. The Kendall Company granted Gerber an exclusive,
royalty-free license to use the Curity brand name until July 2006 with automatic
renewals for additional ten year terms. The license permits use of the Curity
name for cloth diapers and diaper liners, underwear, hosiery, sleepwear
(including blanket
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<PAGE> 50
sleepers and sleep 'n play sets), linens, bedding and certain other products
(such as infant car seat covers), in each case to be worn by or used for infants
and toddlers. The license permits such products to be sold in the U.S. and in
more than 40 countries worldwide (and in more than 70 additional countries if
the licensor verifies that the licensed trademarks may be licensable for the
licensed products therein). The licensor must approve any product and all
advertising which utilizes the Curity name. All products using the Curity name
must be made pursuant to quality standards approved by the licensor. The
licensor can cancel the license if during any five year period only token sales
of products using the Curity name are made. The licensor can terminate the
agreement upon an uncured breach of the license or upon the occurrence of
certain bankruptcy events involving Gerber. In January 1996, Gerber returned to
the licensor the worldwide rights to use the Curity name in outerwear and
playwear and agreed that the licensor could retain the rights to the Curity
trademark in hosiery, linens, bedding and certain other products if Gerber
failed to "use in commerce" the Curity name on any licensed products for a
period of six consecutive months.
WILSON LICENSE. Since 1982, Auburn has held an exclusive license to use
the Wilson brand name for its sport socks in the fifty United States. Since
1988, this license has allowed Auburn to use the Wilson name in Europe, as well.
During this long term relationship, the Company believes that Auburn has become
the second biggest Wilson licensee in the U.S. and the third biggest worldwide.
The current license expires on December 31, 2002 and is renewable for a five
year term if Auburn meets certain sales targets for years 1998 through 2001. In
1997, Auburn's sales greatly exceeded the targets set for each of the four years
comprising such period.
Under the current arrangement, Auburn and Gerber are not permitted to
consolidate their top management team, sales force, distributors, customer
service and manufacturing and are not permitted to commingle product lines.
Auburn is not permitted to sell or distribute products which compete with
Wilson's products, and Wilson can terminate its license if Auburn's operation
under the Wilson license is not wholly separate and distinct from the operations
of any affiliated entity which makes or distributes socks or other sporting
goods under a sports brand name, subject to certain exceptions. Wilson's
distributors in a particular country in Europe may sell Wilson sport socks
manufactured by parties other than Auburn if Auburn has not sold socks in such
country in the prior year. Auburn is required to maintain a certain percentage
of its sales in the sporting goods store trade channel. Wilson must approve
Auburn's use of the Wilson logo on particular products prior to the sale of such
products. Royalty payments to Wilson are calculated as a percentage of net sales
value and minimum royalties are set for each year. Management believes the
royalties payable under the Wilson license are consistent with industry
standards. Wilson has the option to terminate the license if: (i) Auburn fails
to meet its annual minimum sales goal (calculated both by volume and geographic
area) in any given year or three-year period; (ii) a material change occurs in
the overall management or ownership of Auburn, or the employment by Auburn of
Kevin K. Angliss or Donald J. Murphy terminates; (iii) Auburn defaults on its
obligations under the license; or (iv) Auburn is insolvent. Wilson consented to
the sale of Auburn to the Company. In the event of its termination due to
Auburn's failure to meet its annual minimum sales goals (for which notice from
Wilson must be received within 60 days of receipt of financial statements
evidencing such failure), Auburn would be required to pay to Wilson Guaranteed
Royalties (as defined in the license agreement) which range from $1.4 million to
$1.9 million, depending on the year of termination. This sum would be payable
over a period of nine months following such termination.
CONVERSE LICENSE. Converse granted Auburn an exclusive license to use the
Converse brand name for its men's, women's and youth's hosiery in the U.S., its
possessions or territories, and in Europe until December 31, 2001. Converse and
Auburn also agreed to enter into good faith discussions with respect to a new
three-year contract beginning in 2002. Converse may remove Europe from the
coverage of the license if Auburn does not achieve certain net sales minimum
amounts in Europe during any contract year. The licensor must approve Auburn's
use of the licensed trademarks on products or advertising material prior to use
or sale. Royalty payments to the licensor are calculated as a percentage of net
sales and minimum royalties are set for each year. The license may be terminated
by Converse in the event that Kevin Angliss and/or Tim Graham are not, at all
times, the principal managers of the Converse-brand product line at Auburn.
Converse can also terminate the license in the event of one or more of the
following: (i) liquidation or discontinuance of the active operation of the
enterprise of Auburn; (ii) default by Auburn on payments under the Converse
license;
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<PAGE> 51
(iii) failure by Auburn to make timely periodic or minimum royalty payments;
(iv) failure by Auburn to submit a marketing plan in accordance with the
Converse license; and (v) default in the performance of any other obligation
continuing for more than 30 days. Converse consented to the sale of Auburn to
the Company. Management believes that the royalties payable under the Converse
license are consistent with industry standards.
COCA-COLA LICENSE. Coca-Cola granted Auburn exclusive licenses to use the
Coca-Cola brand name for its sport and casual socks in the U.S. and its
possessions and Europe for a three year term until December 31, 1998. Auburn has
the option to extend the term of the license for three years commencing January
1, 1999. The licensor may revoke Auburn's right in any country and declare the
license to be nonexclusive if Auburn fails to maintain a bona fide commercial
sales presence in any country within the territory for the licensed articles. In
addition, Coca-Cola is permitted to continue standard soft-drink promotional
activities in the territory covered by the license, which may include the sale
of goods identical to or similar to licensed articles, and the licensor's retail
stores may purchase goods from any source regardless of whether they are
identical or similar to Auburn's products. Auburn is not permitted to deal in
any merchandise which is identical or similar to any licensed article and which
bears the trademarks of any non-alcoholic beverage product produced by any of
Coca-Cola's competitors. Royalty payments to Coca-Cola are calculated as a
percentage of net sales and minimum royalties are set for each year. Management
believes that the royalties payable under the Coca-Cola license are consistent
with industry standards. Coca-Cola may terminate the license at any time: (i) if
Auburn fails for a consecutive period in excess of six months to continue the
bona fide distribution and sale of the licensed articles; (ii) Auburn fails to
adequately advertise, promote or merchandise the licensed articles at a level
consistent with accepted standards in Auburn's industry; (iii) if Auburn fails
to make any payments due under the license agreement for more than 30 days; (iv)
if Auburn is unable to pay its obligations when due or is adjudicated bankrupt
or insolvent; (v) if Auburn intentionally understates any royalty report; or
(vi) if the quality of the licensed articles becomes materially lower on a
consistent basis than those submitted for approval. Coca-Cola consented to the
sale of Auburn to the Company.
DUNLOP LICENSE. Dunlop granted Auburn a license to use the Dunlop brand
name for its sport and casual socks in Europe (including Eastern Europe west of
Russia) for a five year term until December 31, 2001. If the royalty amount in
the year 2000 is in excess of the minimum guaranteed royalty for the year 2000,
the license automatically will be renewed for five years commencing January 1,
2002 and ending December 31, 2006. The licensor must approve Auburn's use of the
licensed trademarks on products or advertising material prior to use or sale.
Royalty payments to the licensor are calculated as a percentage of net sales and
minimum royalties are set for each year. Management believes that the royalties
payable under the Dunlop license are consistent with industry standards. Dunlop
or Auburn may terminate this license if either commits a breach of this license
or if either is unable to pay its debts or enters into voluntary or compulsory
liquidation. Dunlop may terminate this license: (i) if any moneys payable by
Auburn remain unpaid for more than 45 days; (ii) if the ultimate equity share
voting control in Auburn changes; or (iii) if Auburn exercises its rights to
seek a declaration or other order from a court that, by reason of acts or
omissions, the registration of Dunlop registered trademarks is invalid. Dunlop
consented to the sale of Auburn to the Company.
OTHER. Gerber is the owner of the Onesies trademark in the United States.
Gerber also licenses certain patent rights related to its cloth diaper products
from a third party. The Company regards the licenses of trademarks and its other
proprietary rights in and to the trademarks as valuable assets in the marketing
of its products and, on a worldwide basis, seeks to protect them against
infringement.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,300 employees,
including approximately 2,000 in the United States and approximately 1,300 in
foreign countries. None of the Company's employees are members of unions or are
otherwise party to a collective bargaining agreement. Certain of the Company's
employees in Ireland are subject to the national wage agreement in Ireland. The
Company considers its relations with its employees to be good.
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<PAGE> 52
PROPERTIES
The following table sets forth the principal real property owned or leased
by the Company and used as production, distribution, warehouse, manufacturing or
other facilities as of December 31, 1997:
<TABLE>
<CAPTION>
OWNED
OR APPROXIMATE FLOOR
USE LEASED SPACE (SQ. FT.)
LOCATION --- ------ -----------------
<S> <C> <C> <C>
Ballinger, TX............. Manufacturing Owned 85,000
Ballinger, TX............. Warehouse, Distribution Leased 70,000
Evergreen, AL............. Warehouse, Distribution Leased 255,000
Dominican Republic (3
facilities)............ Production Leased 90,000
Lumberton, NC (2
facilities)............ Manufacturing Owned 183,000
Pelzer, SC (2
facilities)............ Manufacturing, Distribution Owned 804,000
Adairville, KY............ Manufacturing Owned 72,000
Auburn, KY................ Manufacturing, Distribution Owned 160,000
and Administration
Cahirciveen, Ireland (2
facilities)............ Manufacturing, Distribution Leased 62,000
and Administration
</TABLE>
In addition to the facilities described above, the Company leases 48,000
square feet for its headquarters in Greenville, South Carolina and approximately
16,000 square feet for its executive offices and showroom in New York, New York.
From time-to-time, the Company also uses storage space in a warehouse in
Franklin, Kentucky. The Company holds a purchase option for the Evergreen,
Alabama warehouse which is exercisable at any time during its 15 year term at a
price of two dollars.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's manufacturing facilities and operations are subject to
certain federal, state, local and foreign laws and regulations relating to
environmental protection and occupational health and safety, including those
governing wastewater discharges, air emissions, the management and disposal of
solid and hazardous wastes, and the remediation of contamination associated with
the release of hazardous substances. Prior to the Recent Acquisition, Auburn was
cited for discharging contaminants (dyes and solids) into the sewer system from
its facility in Auburn, Kentucky in excess of the amounts allowed under its
permits. The condition underlying such violations was fully remediated at an
immaterial cost. Gerber and, other than the above, Auburn have never been cited,
fined or otherwise held liable for violations of environmental statutes or
regulations. In addition, the Company is not aware of any noncompliance with
such laws and regulations. The Company has incurred, and will continue to incur,
capital expenditures and operating expenses to comply with such requirements.
However, the Company does not currently anticipate any material capital
expenditures for environmental control facilities for the current or succeeding
fiscal year. Nonetheless, there can be no assurance that such laws will not
become more stringent or be interpreted and applied more stringently. Such
future changes or interpretations or the identification of adverse environmental
conditions previously unknown to the Company could result in additional
compliance costs or in remediation costs to the Company.
The Company's older facilities contain asbestos materials and lead-based
paint in inactive areas utilized for the storage of records, machine parts and
obsolete supplies, where the potential for worker exposure to such materials is
minimal. If the Company were to elect to utilize such areas as active
manufacturing or distribution facilities such that the potential for worker
exposure would be increased, as a matter of policy the Company would undertake
to remediate or encapsulate such materials. The cost of removing or
encapsulating such materials from the Company's Pelzer, South Carolina
facilities would be a material expenditure.
In connection with both the Original Acquisition and the Acquisition, the
Company obtained from the former owners of the businesses, indemnification for
certain potential environmental liabilities. Most of the indemnities are subject
to limitations, including an indemnification period ending December 17, 1998 and
a
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<PAGE> 53
$1.0 million limit. To date, the Company has not made any claim under these
indemnities, and there is no assurance that the former owners will have the
ability to fulfill their indemnification obligations if called upon to do so by
the Company. See "Risk Factors -- Cost of Environmental Compliance."
LEGAL PROCEEDINGS
The Company is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. The Company has been active
in pursuing actions against counterfeiters and diverters of its products. In the
opinion of the Company's management, the resolution of such matters will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Executive officers, directors and key employees of the Company and their
ages as of February 24, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Edward Kittredge.................... 60 Chairman of the Board, President, Chief Executive
Officer
Richard L. Solar.................... 58 Senior Vice President and Director
David E. Uren....................... 54 Vice President of Finance, Secretary and Treasurer
Lee M. Schaeffer.................... 51 Senior Vice President of Operations of Gerber
Robert P. Robertson................. 51 Senior Vice President of Sales and Marketing of Gerber
Raymond R. McManus.................. 54 Vice President of Human Resources of Gerber
Kevin K. Angliss.................... 46 President of Auburn
Donald J. Murphy.................... 58 Senior Vice President of International Sales and
Marketing of Auburn
W. Timothy Graham................... 45 Vice President of Sales of Auburn
Richard M. Cashin, Jr............... 45 Director
Joseph Medalie...................... 75 Director
John D. Weber....................... 34 Director
Lawrence R. Glenn................... 59 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
EDWARD KITTREDGE led a group of investors in the purchase of Gerber
Childrenswear, Inc. from GPC in January 1996 and has served as Chairman of the
Board, President and Chief Executive Officer of the Company since that time. Mr.
Kittredge served as Chairman and Chief Executive Officer of Denton Mills,
manufacturer of Dr. Denton children's pajamas, from 1984 to 1990. From 1980 to
1984, he was President of Royal Manufacturing Company, a privately owned men's
underwear and active sportswear company. Prior to that, he served in a variety
of senior sales and marketing management positions at Union Underwear Company
(Fruit of the Loom), including national director of all Branded and Private
Label Sales and as head of its BVD Division.
RICHARD L. SOLAR has been Senior Vice President of the Company and a
director since January 1996. Prior to joining the Company, Mr. Solar held
various positions at Bankers Trust Company, including managing director
positions. From 1971 to 1975, Mr. Solar also served as Treasurer of Val D'Or
Industries Inc., a publicly held apparel company, and Diamondhead Corporation, a
publicly held real estate development company. He is also a director of Concord
Fabrics, Inc.
DAVID E. UREN has been Vice President of Finance of the Company or its
predecessor since 1987. He has been Secretary and Treasurer of the same since
1990. Prior to joining the Company, he was Chief Financial Officer of Borg
Textile Corporation and held various senior financial positions at Buster Brown
Apparel, Inc. between 1972 and 1987. Mr. Uren also served at Ernst & Young from
1967 to 1971, including as a certified public accountant from 1969 to 1971.
LEE M. SCHAEFFER has been Senior Vice President of Operations of Gerber or
its predecessor since September 1997 and was Vice President of Operations from
1993 to 1997. He joined the Company in 1990 as Vice President of Marketing
Services. Prior to joining the Company, he held various management positions
with Milliken and Co., and Williamson-Dickie Manufacturing Co.
ROBERT P. ROBERTSON has been Senior Vice President of Sales and Marketing
of Gerber since August 1997. Prior to joining the Company, he held various
senior management positions with Sara Lee Knit Products (Hanes and Hanes Her
Way), Stedman Corporation and Pannill Knitting Company, Inc.
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<PAGE> 55
RAYMOND R. MCMANUS has been Vice President of Human Resources of Gerber or
its predecessor since April 1995. Prior to joining the Company in 1986, Mr.
McManus held various management positions at Boston Whalers, Inc., Acushnet
Company, and Converse.
RICHARD M. CASHIN, JR. has been a director since January 1996. Mr. Cashin
has been president of CVC since 1994. Prior to being appointed president, Mr.
Cashin served as a Managing Director of CVC for more than four years. Mr. Cashin
is also a director of Levitz Furniture Inc., Delco Remy International, Inc.,
LifeStyle Furnishings International Ltd., Fairchild Semiconductor Corporation,
FFC Holdings, Inc., Cable Systems International, Euramax International, Plc.,
Titan Wheel International, Inc., Hoover Group Inc., Thermal Engineering, JAC
Holding Corporation, GVC Holdings, Ballantrae Corporation and Delta Commodities,
Inc.
JOSEPH MEDALIE has been a director since February 1997. Mr. Medalie is a
director of the Convention Center Corporation, a retired director and vice
chairman of Fruit of the Loom and a retired director of Transfinancial Bank and
Commonwealth Health Corporation.
JOHN D. WEBER has been a director since January 1996. Mr. Weber has been a
Vice President at CVC since 1994. Previously, Mr. Weber worked at Putnam
Investments from 1992 through 1994. Mr. Weber is a director of Advanced Cast
Products, Inc., Anvil Knitwear, Inc., Electrocal Designs, Inc., FFC Holding,
Inc., Graphic Design Technologies, Marine Optical, Inc., Neenah Foundry Company,
Plainwell Paper Company, Sleepmaster, LLC, and Smith Alarm.
LAWRENCE R. GLENN has been a director since January 1996. Mr. Glenn was a
Senior Corporate Officer of Citicorp from 1963 until 1995. Currently Mr. Glenn
is the Chairman of J.W. Goddard & Co., a private investment bank.
KEY EMPLOYEES
KEVIN K. ANGLISS has been President of Auburn since 1997 and the officer
responsible for the day-to-day operations of Auburn (while employed by J.P.
Manning, Inc., an affiliate of Auburn) since 1986. Prior to joining Auburn in
1983, he held a senior sales management position at Champion Products and was
employed in various positions by J.C. Penney in the buying/merchandising
departments.
DONALD J. MURPHY has been Senior Vice President of International Sales and
Marketing at Auburn since 1997. From 1995 to 1997, Mr. Murphy held such position
at J.P. Manning, Inc., an affiliate of Auburn. Prior to joining Auburn in 1990,
he held several merchandising positions with J.C. Penney and a senior sales
position at Pannill Knitting Company.
W. TIMOTHY GRAHAM has been Vice President of Sales of Auburn since 1997.
From 1986 to 1997, Mr. Graham held such position at J.P. Manning, Inc., an
affiliate of Auburn. Prior to joining Auburn in 1983, he held a senior sales
position at The Bibb Company and Judy Bond, Inc.
BOARD COMMITTEES
AUDIT COMMITTEE. In 1996, the Board established an audit committee, whose
members are directors who may also be employees of the Company. The audit
committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls. Messrs.
Weber, Glenn and Solar currently serve on the audit committee.
COMPENSATION COMMITTEE. In 1996, the Board established a compensation
committee, whose members are directors who may also be employees of the Company.
The compensation committee approves the salaries and other benefits of the
executive officers of the Company and administers certain compensation plans of
the Company. In addition, the compensation committee consults with the Company's
management regarding pension and other benefit plans and compensation policies
and practices of the Company. Messrs. Kittredge, Cashin and Medalie currently
serve on the compensation committee.
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<PAGE> 56
BOARD OF DIRECTORS
There are currently six members of the Board. Directors are elected at the
annual meeting of stockholders. The Company expects to name two additional
outside directors in the next year. The Company's Amended and Restated
Certificate of Incorporation provides for cumulative voting in the election of
directors. See "Description of Capital Stock -- Certain Provisions of the
Company's Amended and Restated Certificate of Incorporation."
DIRECTOR COMPENSATION
Messrs. Medalie and Glenn are the only members of the Board who receive
compensation for their services as directors. Both Messrs. Medalie and Glenn are
entitled to receive $2,500 for each Board meeting attended and reimbursement for
their reasonable out-of-pocket expenses incurred in connection with Board
meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summarizes the principal components of compensation of the
Company's Chairman and Chief Executive Officer and the four most highly
compensated executive officers of the Company other than the Chief Executive
Officer as of December 31, 1997 for services rendered in all capacities to the
Company during fiscal 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ---------------- ALL OTHER
OTHER ANNUAL RESTRICTED STOCK COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) ($)(A)
- --------------------------- ---- ---------- --------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Edward Kittredge, Chairman,
President and CEO........ 1997 225,000 776,100 14,405(b) 0 6,379,468
Richard L. Solar, Senior
Vice President........... 1997 150,000 455,286 4,750(c) 0 2,392,301
David E. Uren, Vice
President of Finance,
Secretary and
Treasurer................ 1997 150,450 158,614 10,750(c) 0 0
Lee M. Schaeffer, Senior
Vice President,
Operations............... 1997 136,335 75,000 2,850(c) 0 73,048
Robert P. Robertson, Senior
Vice President, Sales and
Marketing................ 1997 65,048 25,000 0 0 292,191
</TABLE>
- ---------------
(a) Reflects stock compensation. See "Certain Relationships and Related
Transactions -- Transactions with Management and Directors."
(b) Company-paid 401(k) matching contributions ($4,750) and Company-paid
premiums on a private life insurance contract ($9,655).
(c) Other annual compensation reflects Company-paid 401(k) matching
contributions and, in the case of Mr. Uren, a car allowance.
EMPLOYMENT AGREEMENTS
In connection with the Original Acquisition, the Company, GCIH and CVC
entered into employment agreements with each of Edward Kittredge, Richard Solar
and David E. Uren (collectively, the "Executive Agreements") pursuant to which
the Company employs Messrs. Kittredge, Solar and Uren as Chairman/
President/Chief Executive Officer, Senior Vice President, and Vice President of
Finance, respectively, through January 22, 2001. See "Management -- Executive
Officers and Directors" and "Certain Relationships and Related
Transactions -- Transactions with Management and Directors." Mr. Uren is also
party to a severance agreement dated as of March 18, 1995 between Mr. Uren, GPC
and the Company (the "Uren Severance Agreement").
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<PAGE> 57
The Executive Agreements currently provide Messrs. Kittredge, Solar and
Uren with annual base salaries of $225,000, $150,000, and $150,450,
respectively, plus annual incentive bonuses based upon the achievement of
pre-determined objectives tied to the performance of the Company, including
criteria related to growth and profitability. In the event that the Company
terminates the employment of either of Messrs. Kittredge or Solar for cause,
such executive shall not be entitled to any further compensation. In the event
of either of Messrs. Kittredge or Solar's death, disability, or termination
without cause, he shall be entitled to receive his base salary for eighteen
months thereafter (the "Severance Payments"), and a pro rata portion of his
bonus for the number of days employed during the termination year, and shall be
restricted from competing with the Company or soliciting any of its employees
for the eighteen-month period during which the Severance Payments are received.
In the event that the Company terminates the employment of Mr. Uren without
cause on or prior to January 22, 1999, the Uren Severance Agreement provides
that Mr. Uren shall receive his base salary and benefits for eighteen months,
and professional out placement assistance, in addition to a pro rata portion of
his bonus for the number of days employed during the termination year to which
Mr. Uren shall be entitled regardless of the reason for his termination. In the
event that the Company terminates the employment of Mr. Uren after January 22,
1999, Mr. Uren's Executive Agreement contains the same terms and conditions as
those of Messrs. Kittredge and Solar. Upon termination of any of the executives,
the Executive Agreements also provide that the capital stock of GCIH is subject
to repurchase by the Company and CVC. See also "Certain Relationships and
Related Transactions -- Transactions with Management and Directors."
LONG-TERM INCENTIVE PLAN
In connection with the Offering, the Company has adopted the Long-Term
Equity Incentive Plan (the "Incentive Plan"), designed to provide incentives to
present and future executive, managerial, marketing, technical and other key
employees, and consultants and advisors of the Company and its subsidiaries
("Participants") as may be selected in the sole discretion of the Company's
Board of Directors. The Incentive Plan provides for the granting to Participants
of the following types of incentive awards: stock options, stock appreciation
rights ("SARs"), restricted stock, performance units, performance grants and
other types of awards that the Compensation Committee of the Board (the
"Committee") deems to be consistent with the purposes of the Incentive Plan. An
aggregate of 750,000 shares of Common Stock have been reserved for issuance
under the Incentive Plan. However, no more than 25,000 of such shares may be
issued to any single participant in the plan in any calendar year. The Incentive
Plan affords the Company latitude in tailoring incentive compensation for the
retention of key personnel, to support corporate and business objectives, and to
anticipate and respond to a changing business environment and competitive
compensation practices.
The Committee will have exclusive discretion to select the Participants and
to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all other
determinations which it deems necessary or desirable in the interpretation and
administration of the Incentive Plan. The Incentive Plan is scheduled to
terminate ten years from the date that the Incentive Plan was initially approved
and adopted by the stockholders of the Company, unless extended for up to an
additional five years by action of the Board of Directors. With limited
exceptions, including termination of employment as a result of death, disability
or retirement, or except as otherwise determined by the Committee, rights to
these forms of contingent compensation are forfeited if a recipient's employment
or performance of services terminates within a specified period following the
award. Generally, a Participant's rights and interest under the Incentive Plan
will not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock at
a price fixed by the Committee. The option price may be less than, equal to or
greater than the fair market value of the underlying shares of Common Stock, but
in no event shall the exercise price of an incentive stock option be less than
the fair market value on the date of grant. Options generally will expire not
later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Committee shall
determine. Payment of the
56
<PAGE> 58
option price must be made in full at the time of exercise in such form
(including, but not limited to, cash or Common Stock of the Company) as the
Committee may determine.
An SAR may be granted alone, or in connection with the grant of an option,
either at the time of grant of the related option or by amendment thereafter to
an outstanding option. SARs granted in connection with options shall be
exercisable only when, to the extent and on the condition that any related
option is exercisable. The exercise of an option shall result in an immediate
forfeiture of any related SAR to the extent the option is exercised, and the
exercise of an SAR shall cause an immediate forfeiture of any related option to
the extent the SAR is exercised.
Upon the exercise of an SAR, the Participant shall be entitled to a
distribution in an amount equal to the difference between the fair market value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of shares of Common Stock as to
which the SAR is exercised. The Committee shall decide whether such distribution
shall be in cash, in shares of Common Stock having a fair market value equal to
such amount, in other securities having a fair market value equal to such amount
or in a combination thereof.
A restricted stock award is an award of a given number of shares of Common
Stock which are subject to a restriction against transfer and to a risk of
forfeiture during a period set by the Committee. During the restriction period,
the Participant generally has the right to vote and receive dividends on the
shares. Dividends received while under restriction are treated as compensation.
Performance awards are those whose final value, if any, is determined by
the degree to which specified performance objectives have been achieved during
an award period set by the Committee, subject to such adjustments as the
Committee may approve based on relevant factors. Performance objectives are
based on measures of Company, unit or Participant performance, or any
combination of these and other factors, as the Committee may determine. The
Committee may make such adjustments in the computation of any performance
measure as it deems appropriate. The Committee shall determine the portion of
each performance award that is earned by a participant on the basis of the
Company's performance over the performance cycle in relation to the performance
goals for such cycle. The earned portion of a performance award may be paid out
in shares of Common Stock, cash, other securities of the Company, or any
combination thereof, as the Committee may determine.
Upon the liquidation or dissolution of the Company, all outstanding awards
under the Incentive Plan shall terminate immediately prior to the consummation
of such liquidation or dissolution, unless otherwise provided by the Committee.
In the event of a reorganization, recapitalization, stock split, stock dividend,
combination of shares, merger, consolidation, distribution of assets, or any
other change in the corporate structure or shares of the Company, the Committee
shall make such adjustment as it deems appropriate in the number and kind of
shares or other property reserved for issuance under the Incentive Plan, in the
number and kind of shares or other property covered by grants previously made
under the Incentive Plan, and in the exercise price of outstanding options and
SARs. In the event of any merger, consolidation or other reorganization in which
the Company is not the surviving or continuing entity or in which a change in
control is to occur, all of the Company's obligations regarding options, SARs
performance awards, and restricted stock that were granted hereunder and that
are outstanding on the date of such event shall, on such terms as may be
approved by the Committee prior to such event, be assumed by the surviving or
continuing entity or canceled in exchange for property (including cash).
57
<PAGE> 59
PENSION PLAN
The following table represents monthly amounts estimated to be paid to
employees eligible for the Company's pension plan based upon years of service as
set forth below.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION YEARS OF SERVICE
------------ ---------------------------------------------------------
15 20 25 30 35
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$125,000.................................. $2,096.70 $2,795.60 $3,494.50 $4,193.40 $4,892.30
150,000.................................. 2,565.45 3,420.60 4,275.75 5,130.90 5,986.05
175,000.................................. 3,034.20 4,045.60 5,057.00 6,068.40 7,079.80
200,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
225,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
250,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
300,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
400,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
450,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
500,000.................................. 3,502.95 4,670.60 5,838.25 7,005.90 8,173.55
</TABLE>
ESTIMATED CREDITED YEARS OF SERVICE
FOR NAMED EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
NAME (YEARS OF PARTICIPATION)
---- -------------------------
<S> <C>
Edward Kittredge............................................ 2 years (2 years)
Richard L. Solar............................................ 2 years (2 years)
David E. Uren............................................... 11 years (11 years)
Lee M. Schaeffer............................................ 7 years (7 years)
Robert P. Robertson......................................... 0 years (0 year)
</TABLE>
The Retirement Plan for Salaried Employees of Gerber Childrenswear, Inc.
(the "Retirement Plan") is a defined benefit pension plan qualified pursuant to
Section 401(a) of the Internal Revenue Code. The Retirement Plan is administered
by the Company Benefits Plans Committee (the "Committee"), the members of which
are appointed by the Board of Directors of the Company. All determinations of
the Committee are made in accordance with the provisions of the Retirement Plan
in a uniform and nondiscriminatory manner. The Retirement Plan covers
substantially all salaried employees of the Company. Benefits under the
Retirement Plan are administered through a trust arrangement providing benefits
in the form of monthly payments.
Generally, a participant in the Retirement Plan is eligible to receive
benefits upon such participant's Normal Retirement Age, which is the later of
the Social Security retirement age or the fifth anniversary of the date the
participant commenced participation in the Retirement Plan. A participant may
elect an early retirement benefit when such participant reaches Early Retirement
Age, which is the later of ten years prior to such participant's Social Security
retirement age and the fifth anniversary of the date the participant commenced
participation in the Retirement Plan. Early retirement benefits are reduced for
those participants who retire more than three years prior to their Normal
Retirement Age according to a formula established in the Retirement Plan based
upon each full month that the participant's age is less than the Normal
Retirement Age. If a participant who is vested terminates employment, such
participant is entitled to a deferred, unreduced benefit payable within three
years of such participant's Normal Retirement Age, or a reduced benefit, if
requested earlier.
The amount of a participant's Retirement Plan benefit is based upon such
participant's Final Average Pay (as defined below) and on his/her Years of
Participation (as defined below). The annual amount of the participant's normal
retirement benefit is derived, subject to certain limitations, by multiplying
(i) and (ii), where (i) = 0.9% of Final Average Pay plus 0.6% of Final Average
Pay in excess of Covered Compensation (as defined below); and (ii) = Years of
Participation up to a maximum of 35 years. A participant's benefits may be
offset by the amount of any workers' compensation or similar benefits payable
because of an
58
<PAGE> 60
employment-related injury or illness. The normal retirement benefit formula
produces an annual benefit which is paid to the participant in equal monthly
installments. The standard form of payment for a single participant is a monthly
benefit payable for the participant's life only. The standard form of payment
for a married participant is a 50% joint and survivor benefit, which provides a
reduced monthly benefit to the participant during his/her lifetime, and 50% of
that benefit to the participant's spouse for his/her lifetime in the event of
the participant's death. Other optional forms of payment are also provided,
including a 100% survivorship annuity, a 50% survivorship annuity and a life and
period certain annuity option, but they require participant election. In
addition, the Committee may elect to pay the benefit equivalent of a benefit
payable at Normal Retirement Age in the form of a lump sum payment, if the lump
sum payment does not exceed $3,500.
"Final Average Pay" is defined as the average of a participant's annual
compensation during the highest-paid five complete consecutive plan years within
the last ten years before such participant's retirement. For purposes of the
Retirement Plan, compensation includes total earnings received for personal
services to the Company. For the 1995 and 1996 calendar years, the total
compensation that can be considered for any purpose under the Retirement Plan is
limited to $150,000, and for 1997, the limit is $160,000, pursuant to
requirements imposed by the Internal Revenue Code. The Internal Revenue Code
also places certain other limitations on the annual benefits that may be paid
under the Plan. "Covered Compensation" is an average of the Social Security
Taxable wage bases for the 35 calendar years ending with the year a participant
reaches the Social Security retirement age. Any participant who is credited with
1,000 or more hours of service in a calendar year receives a "Year of Service",
while any participant who is credited with 1,950 or more hours of service in a
calendar year receives a "Year of Participation". Years of Service determine a
participant's eligibility for benefits under the Retirement Plan, and the
percentage vested in those benefits. Participants in any superseded plan earn
Years of Service and Years of Participation pursuant to slightly different
criteria for plan years beginning prior to January 1, 1989.
The Retirement Plan is funded entirely by Company contributions that are
held by a trustee for the exclusive benefit of the participants. The Company
voluntarily agreed to contribute the amounts necessary to provide the assets
required to meet the future benefits payable to Retirement Plan participants.
Under the Retirement Plan, contributions are not specifically allocated to
individual participants. Although the Company intends to continue the Retirement
Plan indefinitely, it can terminate the plan at any time, upon which event all
participants will become 100% vested in any benefit accrued to the extent funds
are available in trust. In this circumstance, assets will be allocated to
benefit categories in the order specified in the Retirement Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1997, Edward Kittredge, Richard M. Cashin, Jr. and Joseph Medalie served
as members of the Board's compensation committee. During the same period, Mr.
Kittredge also served as the Company's Chairman, President and Chief Executive
Officer. In addition, pursuant to an Executive Stock Purchase Agreement, dated
January 22, 1996, by and among GCIH, the Company, CVC and Edward Kittredge, Mr.
Kittredge purchased 26,161.9 shares of GCIH Class B Common at a price of $1.00
per share, 50,000 shares of GCIH Class B Common for $.02 per share and 1,188.4
shares of Series A Preferred Stock of GCIH at a price of $100.00 per share. Of
such shares, 20,000 shares of GCIH Class B Common (the "Kittredge Vesting
Stock") are subject to vesting at 20% per year over a five-year period. The
Kittredge Vesting Stock is subject to repurchase by the Company and, if not
repurchased by the Company, CVC, should Mr. Kittredge's employment with the
Company terminate for any reason. The purchase price for unvested shares is
$1.00 per share; the purchase price for vested shares (the "Kittredge Vested
Shares") is book value, unless the executive is terminated for cause in which
case the purchase price for the Kittredge Vested Shares is $1.00 per share.
Further, on November 24, 1997, Mr. Kittredge purchased an additional 20,000
shares of GCIH Class B Common at a price of $1.00 per share, which were fully
vested upon purchase, but which are subject to repurchase on the terms described
above for the Kittredge Vested Shares, should Mr. Kittredge's employment with
the Company terminate for any reason.
Pursuant to a Director Stock Purchase Agreement by and between Joseph
Medalie and GCIH, dated as of February 11, 1997, Mr. Medalie purchased from the
Company 2,500 shares of GCIH Class B Common at a purchase price of $1.00 per
share. Such stock is subject to repurchase by the Company at any time at its
book value. See "Certain Relationships and Related Transactions -- Transactions
with Management and Directors."
59
<PAGE> 61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE REORGANIZATION
Immediately prior to and in connection with the consummation of the
Offering, the Company will consummate a series of transactions pursuant to which
GCIH will be reorganized and recapitalized and Gerber will be merged into GCIH.
The principal transactions comprising the Reorganization are the following:
MERGER. Prior to the consummation of the Offering, Gerber will be merged
into GCIH, with GCIH as the surviving entity (the "Merger"). The Merger is
intended to be treated as a tax-free liquidation of Gerber.
AMENDMENT AND RESTATEMENT OF CERTIFICATE OF INCORPORATION. Under GCIH's
certificate of incorporation there are (i) four classes of common stock: (a)
Class A Common Stock, par value $0.01 per share (which stock is held by CVC and
its affiliates) (the "GCIH Class A Common"), (b) Class B Common Stock, par value
$0.01 per share (which stock is held by members of the Company's management)
(the "GCIH Class B Common"), (c) Class C Common Stock, par value $0.01 per share
(which stock is held by a director of GCIH) (the "GCIH Class C Common"), and (d)
Class D Common Stock, par value $0.01 per share (none of which shares are
outstanding, but which shares are purchasable pursuant to the exercise of
warrants held by Citicorp Mezzanine Partners, L.P.) (the "GCIH Class D Common"),
and (ii) Series A Preferred Stock, par value $0.01 per share, (held by CVC, its
affiliates, and members of management) (the "GCIH Series A Preferred"). In
connection with the Merger and prior to the consummation of the Offering, GCIH's
certificate of incorporation will be amended and restated to provide for, among
other things, the reclassification of its authorized common stock into two
classes of common stock with different voting rights, with each share of Common
Stock having one vote per share and each share of Class B Common Stock having no
voting rights (the "Recapitalization"). The certificate will further provide
that (a) each share of Class B Common Stock will be convertible at the option of
the holder at any time into one share of Common Stock and (b) each share of
Common Stock held by a holder of Class B Common Stock will be convertible at the
option of the holder at any time into one share of Class B Common Stock. CVC and
its affiliates will be the only holders of the Class B Common Stock (including a
currently exercisable warrant to purchase such stock) which, if converted into
Common Stock, would result in an increase in CVC's and its affiliates'
beneficial ownership on a diluted basis by an additional 49% of the outstanding
Common Stock. The amendment of GCIH's certificate of incorporation will further
provide for the change of GCIH's corporate name to "Gerber Childrenswear, Inc."
EXCHANGE OF GCIH STOCK. Upon consummation of the Merger and in the
following sequence, (i) 113,623.6 shares of GCIH Series A Preferred Stock (held
by CVC and its affiliates) will be converted into 1,151,893 shares of Common
Stock, assuming an initial public offering price of $14 per share (based on the
midpoint of the price range set forth on the cover page of this Prospectus), and
2,828.4 shares of GCIH Series A Preferred (held by members of management) will
be converted into the right to receive cash equal to a liquidation value per
share at the time of the Merger (including accrued and unpaid dividends) of
$129.34 per share, or $366,000, in the aggregate (with $153,708.43 payable to
Mr. Kittredge, $153,708.43 payable to Mr. Solar, and $58,410.44 payable to Mr.
Uren), (ii) all of the outstanding shares of GCIH Class A Common and GCIH Class
C Common will be exchanged for shares of Class B Common Stock pursuant to a
15.4693 to 1 stock split, (iii) all of the outstanding shares of GCIH Class B
Common will be exchanged for shares of Common Stock, and (iv) all of the
outstanding warrants to purchase shares of GCIH Class D Common will be exchanged
into a warrant to purchase 2,958,510 shares of the Class B Common Stock. In
addition, upon consummation of the Merger, the ten shares of common stock of the
Company held by GCIH prior to the Merger will be canceled.
After giving effect to the foregoing transactions, as part of the
Reorganization in connection with the consummation of the Offering, CVC and its
affiliates will convert shares of Class B Common Stock into shares of Common
Stock, representing approximately 19% of the combined voting power of the
Company's outstanding capital stock. See "Risk Factors -- Control by Executive
Officers and Current Stockholders." After giving effect to the Reorganization
and the Offering (i) CVC and its affiliates will own shares of
60
<PAGE> 62
Common Stock representing approximately 19% of the outstanding Common Stock, and
shares of Class B Common Stock (including warrants to purchase such stock)
convertible into shares of Common Stock representing, in the aggregate, an
additional 49% of the outstanding Common Stock, (ii) Messrs. Kittredge, Solar
and Uren will own shares of Common Stock representing 7.7%, 2.5% and 1.2% of the
outstanding Common Stock, and (iii) Messrs. Glenn, Medalie and other members of
the Company's management, as a whole, will own shares of Common Stock
representing 0.2%, 0.2% and 1.7% of the outstanding Common Stock, in each of
cases (i)-(iii) assuming that all Class B Common Stock is converted into Common
Stock pursuant to the terms thereof. See "-- Transactions with Management and
Directors," "-- Transactions with CVC and its Affiliates" and "-- Transactions
with Citicorp Mezzanine Partners, L.P."
TRANSACTIONS WITH MANAGEMENT AND DIRECTORS
Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996,
by and among GCIH, the Company, CVC and Edward Kittredge (as amended), Mr.
Kittredge purchased 26,161.9 shares of GCIH Class B Common at a price of $1.00
per share, 50,000 shares of GCIH Class B Common for $.02 per share and 1,188.4
shares of Series A Preferred Stock of GCIH at a price of $100.00 per share. Of
such shares, 20,000 shares of GCIH Class B Common (the "Kittredge Vesting
Stock") are subject to vesting at 20% per year over a five-year period. The
Kittredge Vesting Stock is subject to repurchase by the Company and, if not
repurchased by the Company, CVC, should Mr. Kittredge's employment with the
Company terminate for any reason. The purchase price for unvested shares is
$1.00 per share; the purchase price for vested shares (the "Kittredge Vested
Shares") is fair market value, unless the executive is terminated for cause in
which case the purchase price for the Kittredge Vested Shares is $1.00 per
share. In addition, on November 24, 1997, Mr. Kittredge purchased an additional
20,000 shares of GCIH Class B Common at a price of $1.00 per share, which were
fully vested upon purchase but which are subject to repurchase on the terms
described above for the Kittredge Vested Shares, should Mr. Kittredge's
employment with the Company terminate for any reason.
Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996
by and among GCIH, the Company, CVC and Richard Solar (as amended), Mr. Solar
purchased 23,661.9 shares of GCIH Class B Common at a price of $1.00 per share
and 1,188.4 shares of Series A Preferred Stock of GCIH at a price of $100.00 per
share. Of such shares, 17,500 shares of GCIH Class B Common (the "Solar Vesting
Stock") are subject to vesting at 20% per year over a five-year period. The
Solar Vesting Stock is subject to repurchase by the Company and, if not
repurchased by the Company, CVC, should Mr. Solar's employment with the Company
terminate for any reason. The purchase price for unvested shares is $1.00 per
share; the purchase price for the vested shares (the "Solar Vested Shares") is
fair market value, unless the executive is terminated for cause in which case
the purchase price for the Solar Vested Shares is $1.00 per share. In addition,
on September 30, 1997, Mr. Solar purchased an additional 7,500 shares of GCIH
Class B Common at a price of $1.00 per share, which were fully vested upon
purchase, but which are subject to repurchase on the terms described above for
the Solar Vested Shares, should Mr. Solar's employment with the Company
terminate for any reason.
Pursuant to an Executive Stock Purchase Agreement, dated January 22, 1996
by and among GCIH, the Company, CVC and David Uren (as amended), Mr. Uren
purchased 14,841.5 shares of GCIH Class B Common at a price of $1.00 per share
and 451.6 shares of Series A Preferred of GCIH at a price of $100.00 per share.
Of such shares, 12,500 shares of Class B Common (the "Uren Vesting Stock") are
subject to vesting at 20% per year over a five-year period. The Uren Vesting
Stock is subject to repurchase by the Company and, if not repurchased by the
Company, CVC, should Mr. Uren's employment with the Company terminate for any
reason. The purchase price for unvested shares is $1.00 per share; the purchase
price for vested shares (the "Uren Vested Shares") is fair market value, unless
the executive is terminated for cause in which case the purchase price for
vested shares is $1.00 per share.
Pursuant to an Investor Stock Purchase Agreement, dated as of January 22,
1996 by and between GCIH and Lawrence R. Glenn, Mr. Glenn purchased 2,500 shares
of GCIH Class C Common for a purchase price of $1.00 per share. Such stock is
subject to repurchase by the Company at any time at its book value.
61
<PAGE> 63
Pursuant to a Director Stock Purchase Agreement by and between Joseph
Medalie and GCIH, dated as of February 11, 1997, Mr. Medalie purchased from the
Company 2,500 shares of GCIH Class B Common at a purchase price of $1.00 per
share. Such stock is subject to repurchase by the Company at any time at its
book value.
Pursuant to certain Manager Securities Purchase Agreements, by and among
GCIH, CVC and certain members of management of the Company (other than Messrs.
Solar, Kittredge, and Uren, described above), dated as of February 28, 1997,
July 25, 1997 and November 25, 1997, certain members of management of the
Company purchased, in the aggregate, 23,250 shares of GCIH Class B Common for a
purchase price of $1.00 per share. Among such members of management are Mr. Lee
M. Schaeffer who purchased 1,500 shares on February 28, 1997, Mr. Raymond R.
McManus, who purchased 750 shares on February 28, 1997, and 250 shares on July
25, 1997 and Mr. Robert P. Robertson, who purchased 1,000 shares on November 26,
1997. In all cases, such stock is subject to vesting at 20% per year over a
five-year period. Such stock is subject to repurchase by the Company (and, if
the Company elects not to purchase, CVC) should any of such employees'
employment with the Company terminate for any reason. The purchase price for
unvested shares is $1.00 per share; the purchase price for vested shares is book
value, unless the executive is terminated for cause in which case the purchase
price for vested shares is $1.00 per share.
During 1997, certain executives and managers of the Company acquired stock
in the Company below its fair market value. The difference between the fair
market value and the purchase consideration for the stock is reported as noncash
compensation to the affected executives and managers. The Company has
"grossed-up" this noncash compensation to provide for the payment by the Company
of a significant portion of the related income and other payroll taxes
associated with the transactions. These taxes ($4,446,000) are included in the
amount identified as stock compensation of $9,465,000 in 1997.
TRANSACTIONS WITH CVC AND ITS AFFILIATES
Pursuant to a CVC Securities Purchase Agreement dated as of January 22,
1996 by and between GCIH and CVC, CVC purchased (a) 86,974.5 shares of Series A
Preferred Stock of GCIH at a purchase price of $100.00 per share, and (b)
523,476.0 shares of GCIH Class A Common at a purchase price of $0.01 per share.
On February 28, 1997 and September 30, 1997, the Company repurchased, in the
aggregate, 74,326.8 shares of GCIH Class A Common at a purchase price of $1.00
for issuance (in the form of GCIH Class B Common) to members of management.
Pursuant to a Securities Purchase Agreement by and between GCIH and the
affiliates of CVC listed as purchasers on the signature pages thereto, dated as
of January 22, 1996, such purchasers acquired, in the aggregate, 26,649.1 shares
of GCIH Series A Preferred for $100 per share and 138,179.1 shares of GCIH Class
A Common for $1.00 per share.
TRANSACTIONS WITH CITICORP MEZZANINE PARTNERS, L.P.
In order to finance the Original Acquisition, the Company obtained $22.5
million in senior subordinated financing from Citicorp Mezzanine Partners, L.P.,
whose general partner is an affiliate of CVC. The agreement governing this
indebtedness was amended and restated in December 1997. A portion of the
proceeds of the Offering will be used to repay such indebtedness to CMP. In
connection therewith, the Company sold a warrant to purchase 191,250 shares of
GCIH Class D Common to CMP for $189,338. CMP may, at its option, exercise such
warrant at any time on or before January 22, 2006 for a nominal exercise price.
Upon consummation of the Reorganization, such warrant will be exercisable for
2,958,510 shares of Class B Common Stock.
62
<PAGE> 64
PRINCIPAL STOCKHOLDERS
The table below sets forth certain information regarding ownership of
Common Stock and Class B Common Stock as of May 19, 1998, and as adjusted to
reflect the Reorganization, assuming exercise of options or warrants exercisable
within sixty days of such date by (i) each person or entity who owns of record
or beneficially 5% or more of any class of the Company's voting securities, (ii)
each director and named executive officer and (iii) all executive officers and
directors as a group. Except as indicated, each of such stockholders is assumed
to have sole voting and dispositive power as to the shares shown.
<TABLE>
<CAPTION>
PERCENTAGE OF
NON-VOTING
CLASS B
PERCENTAGE OF NON-VOTING COMMON
COMMON STOCK CLASS B COMMON STOCK
COMMON STOCK OUTSTANDING(A) STOCK OUTSTANDING
------------ ---------------------- -------------- BEFORE AND
BENEFICIALLY BEFORE AFTER BENEFICIALLY AFTER THE
NAME OWNED(A) OFFERING OFFERING OWNED(A)(B) OFFERING
---- ------------ -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Citicorp Venture Capital, Ltd.................. 1,108,982 27.4% 14.5% 6,720,790 76.5%
399 Park Avenue
New York, NY 10022
CCT III, L.P................................... 196,409 4.9 2.6 1,190,301 13.6
399 Park Avenue
New York, NY 10022
Citicorp Mezzanine Partners, L.P.(b)........... -- -- -- 2,958,510 25.2
399 Park Avenue
New York, NY 10022
Edward Kittredge............................... 1,487,560 36.8 19.5 -- --
c/o 7005 Pelham Rd.
Suite D
Greenville, SC 29615
Richard L. Solar(c)............................ 482,052 11.9 6.3 -- --
David E. Uren.................................. 229,588 5.7 3.0 -- --
Lawrence R. Glenn.............................. 38,673 1.0 * -- --
Joseph Medalie(d).............................. 38,673 1.0 * -- --
Richard Cashin(e).............................. 1,347,972 33.3 17.6 8,169,143 93.0
John Weber(f).................................. 1,311,474 32.4 17.1 7,947,954 90.4
Lee M. Schaeffer............................... 23,204 * * *
Robert P. Robertson............................ 15,469 * * -- *
Executive officers and directors as a group (10
persons)(g).................................. 3,684,743 91.0% 48.2% 8,206,006 93.4%
</TABLE>
- ---------------
* Represents less than 1%.
(a) The number of shares of Common Stock outstanding prior to the Offering was
4,047,520 and the number of shares of Common Stock which will be outstanding
after the Offering is 7,647,520. The number of shares of Class B Common
Stock before and after the Offering is 8,787,465 (excluding a warrant (see
(b) below) to purchase 2,958,510 shares of Class B Common Stock, net of
treasury shares). Beneficial ownership is determined in accordance with
rules of the Securities and Exchange Commission (the "SEC"). In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of May 19, 1998 are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of each other person.
(b) Citicorp Mezzanine Partners, L.P. owns a warrant to purchase 2,958,510
shares of Non-Voting Class B Common Stock. Class B Common Stock is
convertible into Common Stock at the option of the holder. See "Certain
Relationships -- Transactions with Citicorp Mezzanine Partners, L.P."
(c) 46,407 of Mr. Solar's shares are held by immediate family members. Mr. Solar
disclaims beneficial ownership of such shares.
(d) All of Mr. Medalie's shares are held in a family trust.
(e) Includes 1,305,391 shares of Common Stock and 7,911,091 shares of Class B
Common Stock held by Citicorp Venture Capital, Ltd. and CCT III, L.P., in
each case, of which Mr. Cashin is an officer. Mr. Cashin disclaims
beneficial ownership of such shares.
(f) Includes 1,305,391 shares of Common Stock and 7,911,091 shares of Class B
Common Stock held by Citicorp Venture Capital, Ltd. and CCT III, L.P., in
each case, of which Mr. Weber is an officer. Mr. Weber disclaims beneficial
ownership of such shares.
(g) Includes 1,305,391 shares of Common Stock and 7,911,091 shares of Class B
Common Stock held by Citicorp Venture Capital, Ltd. and CCT III, L.P., in
each case, of which Messrs. Cashin and Weber are officers.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT AGREEMENT
In connection with the Acquisition, Gerber and Auburn entered into the
Credit Agreement by and among Gerber, Auburn, their domestic subsidiaries,
Nationsbank, N.A., and certain other lenders, dated as of December 17, 1997 (the
"Credit Agreement") to finance the Acquisition, refinance the existing senior
indebtedness incurred by the Company in connection with the Original Acquisition
and finance capital expenditures and working capital needs of the Borrowers.
The amount available to the Borrowers under the Credit Agreement is
$100,000,000, consisting of (a) the $40,000,000 Term Loan and (b) the
$60,000,000 Revolving Credit Facility. The Term Loan and Revolving Credit
Facility mature and terminate, respectively, on September 30, 2002 and October
31, 2002. The Term Loan is subject to repayment, payable in quarterly
installments, beginning on December 31, 1997, with aggregate principal amounts
of $6.5 million, $8.1 million, $8.5 million, $8.6 million, and $6.8 million due
during years 1998 through 2002, respectively. The amounts available under the
Revolving Credit Facility are available in multiple drawings from time to time,
and amounts borrowed and repaid may be reborrowed until October 31, 2002. The
amount available under the Revolving Credit Facility is subject to (a) a $5.0
million sub-limit for a swing-line facility and (b) a $20.0 million sub-limit
for the issuance of letters of credit. Up to $10.0 million is available under
the Revolving Credit Facility to finance acquisitions of businesses similar to
or which are a logical extension of the business of the Company. A portion of
the Revolving Credit Facility must be prepaid if the amount of revolving loans
outstanding together with swing line loans and letter of credit obligations
exceeds the lesser of $60 million and the borrowing base (which consists or
certain accounts receivable, inventory and documentary letters of credit). Loans
under the Credit Agreement must be prepaid with the net cash proceeds of certain
asset dispositions, debt issuances and equity issuances and with a portion of
Excess Cash Flow (as defined in the Credit Agreement) earned in the preceding
fiscal year. The proceeds of equity issuances of at least $50 million may be
used to prepay existing preferred stock rather than to prepay loans under the
Credit Agreement. As of April 4, 1998, 1998, the Company had approximately $30.2
million outstanding under the revolving credit portion of the Credit Agreement.
Each of the Term Loan and Revolving Credit Facility may be maintained from
time to time, at the Borrower's option, as (a) Base Rate Loans (as defined in
the Credit Agreement) which bear interest at the Base Rate plus the Applicable
Percentage (each as defined in the Credit Agreement) or (b) Eurodollar Loans (as
defined in the Credit Agreement) bearing interest at the Eurodollar Rate
(adjusted for reserves) as determined by the administrative agent for the
applicable interest period, plus the Applicable Percentage (as defined in the
Credit Agreement). The initial Applicable Percentage for Eurodollar loans is a
per annum rate equal to 1.5%, and the initial Applicable Percentage for Base
Rate Loans is a per annum rate equal to .25%. The Applicable Percentage will be
determined from time to time based on the Leverage Ratio (as defined in the
Credit Agreement) at the end of each fiscal quarter. As of April 4, 1998, the
interest rates applicable to the Term Loan and Revolving Credit Facility were
7.19% and 8.75%, respectively.
The Credit Agreement contains certain affirmative and negative covenants,
including without limitation, covenants that restrict, subject to specified
exceptions: (i) the incurrence of additional indebtedness and other obligations
and the granting of additional liens; (ii) mergers, acquisitions, investments
and acquisitions and dispositions of assets; (iii) the incurrence of capitalized
lease obligations; (iv) the declaration of dividends or purchase or redemption
of capital stock; (v) prepayments or repurchase of other indebtedness and
amendments to certain agreements governing indebtedness, including indebtedness
under the CMP Senior Notes and the GPC Junior Notes (each as defined below);
(vi) engaging in transactions with affiliates and formation of subsidiaries;
(vii) the creation or existence of consensual restrictions on the ability of
subsidiaries to pay dividends, make loans or transfer property to other credit
parties under the Credit Agreement; (viii) the use of proceeds of asset sales;
and (ix) changes of lines of business. The Credit Agreement also requires that
the Borrowers maintain compliance with certain specified financial covenants,
including covenants relating to minimum fixed charge coverage, maximum leverage
ratio, maximum capitalization ratio, minimum current ratio, and minimum tangible
net worth. The Company may not amend its license agreements with Gerber, Warner
Brothers, Wilson, Converse and Coca-Cola in any manner that would materially
affect the rights of
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<PAGE> 66
the lenders under the Credit Agreement or amend its charter or bylaws in any
manner that would reasonably be likely to adversely affect the rights of the
lenders under the Credit Agreement. The Company's foreign subsidiaries may not
own assets which constitute greater than 15% of the total assets of the Company
at any one time. The Credit Agreement contains standard events of default,
including a Change of Control (as defined in the Credit Agreement) of the
Company. The Credit Agreement is secured by (a) a pledge of all of the capital
stock of the Borrowers and each of the domestic subsidiaries (direct and
indirect) of the Borrowers (the "Guarantors"), and 65% of the capital stock of
each direct foreign subsidiary of the Borrowers and the Guarantors, and (b) all
other assets and properties of the Borrowers and their domestic subsidiaries.
OTHER
In connection with the Acquisition, the Company assumed approximately $2.6
million of Auburn's indebtedness. Auburn's Irish subsidiary maintains a IRL3.0
million loan facility (U.S. $4.1 million as of April 4, 1998) with the National
Irish Bank consisting of a combined term loan, overdraft, guarantee and foreign
exchange line. This facility is subject to annual review. The overdraft facility
and foreign exchange line are available at the Company's discretion with each
term loan draw down subject to the National Irish Bank's approval. At present,
the Irish subsidiary has drawn down two term loans under the available loan
facility and had drawn down on the foreign exchange line. The term loans had an
aggregate balance of IRL516,553 (U.S. $701,737 as of April 4, 1998) outstanding
as of April 4, 1998 and are repayable in quarterly installments of interest and
principal, the final payment for which is due in September 1999. The Irish
subsidiary is not currently using its overdraft facility. In addition, the Irish
subsidiary has received capital and employment grants from the IDA which could
become repayable to the IDA in the aggregate amount of up to IRL1,815,799 (US
$2,466,763) as of April 4, 1998. Repayment of the capital grants would be
triggered if the Company (i) relocates its Irish facility, (ii) liquidates or
(iii) ceases to use the assets purchased with proceeds from such capital grants.
Repayment of the employment grants would be triggered in each of cases (i) and
(ii) above or if the Company eliminated jobs created with proceeds from such
employment grants. The Company believes that none of such repayment events will
occur in the foreseeable future. In addition, the Company's repayment
obligations under the IDA grants terminate on various dates beginning in
March 2000 and ending in April 2011. Auburn is a party to two loan agreements
with the County of Logan, Kentucky related to the issuance in 1989 of two series
of industrial revenue bonds of which approximately $2.3 million remained
outstanding at April 4, 1998. Auburn's two principal Kentucky facilities are
mortgaged in connection with such financing.
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<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to the consummation of the Offering, the Company will amend its
Certificate of Incorporation to change its authorized capital stock to
20,684,000 shares of Common Stock, par value $0.01 per share, and 11,752,452
shares of Class B Common Stock, par value $0.01 per share. Upon completion of
the Offering, the Company will have outstanding 7,647,520 shares of Common Stock
(8,187,520 if the Underwriters' over-allotment option is exercised in full) and
8,787,465 shares of Class B Common Stock. As of May 19, 1998, there would be
approximately sixty holders of Common Stock, and CVC and its affiliates will own
of record all of the outstanding shares of Class B Common Stock. See "Principal
Stockholders."
COMMON STOCK
The holders of Common Stock are generally entitled to one vote for each
share held on all matters voted upon by stockholders, including without
limitation, the election of directors and any proposed amendment to the Amended
and Restated Certificate of Incorporation. The holders of the Common Stock are
entitled to such dividends as may be declared at the discretion of the Board of
Directors out of funds legally available therefor. The holders of Common Stock
are entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities. The holders of Common Stock have
no preemptive rights to purchase securities of the Company. Shares of Common
Stock are not subject to any redemption provisions. Each share of Common Stock
held by a holder of Class B Common Stock is convertible into a share of Class B
Common Stock. All outstanding shares of Common Stock are, and the shares of
Common Stock to be issued pursuant to the Offering will be upon payment
therefor, fully paid and non-assessable.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to official notice of issuance.
CLASS B COMMON STOCK
The rights of the holders of Class B Common Stock are identical and entitle
the holders thereof to the same rights, privileges, benefits and notices as the
holders of Common Stock, except that (a) the holders of such shares are not
entitled to vote on any matter voted upon by the stockholders, including,
without limitation, in the election of directors of the Company and (b) a share
of Class B Common Stock is convertible into a share of Common Stock at any time
at the sole option of the holder. All outstanding shares of Class B Common Stock
are fully paid and non-assessable. Due to certain regulatory limitations
affecting CVC, CVC may not own 20% or more of the voting securities of the
Company without meeting certain regulatory requirements. Accordingly, the
Company believes, based on discussions with CVC, that CVC will maintain most of
its equity interest in the Company in Class B Common Stock and will not convert
such stock in the foreseeable future.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
The Company and its stockholders will be parties to a registration rights
agreement, dated as of January 22, 1996, which will be amended and restated in
its entirety prior to the consummation of this Offering, and in connection with
the Reorganization (such agreement when executed by the parties, the "Amended
and Restated Registration Rights Agreement"). Capitalized terms used but not
defined herein have the meanings ascribed to such terms in the Amended and
Restated Registration Rights Agreement. The following summary description of the
Amended and Restated Registration Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the text of the
Amended and Restated Registration Rights Agreement, which is filed as an exhibit
to the registration statement of which this Prospectus is a part.
Certain parties to the Amended and Restated Registration Rights Agreement
will have demand registration rights on the following terms: (a) CVC may at any
time after the earlier of (i) January 22, 2001 or (ii) the six month anniversary
of the consummation of a Qualified Public Offering (as defined in the agreement)
make a demand for up to five long-form registrations, unlimited short-form
registrations, and one
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<PAGE> 68
registration under Section 415 of the Securities Act, in each case, of CVC
Registrable Securities, and (b) CMP may at any time after the earlier of (i)
January 22, 2001 or (ii) six months following the consummation of a Qualified
Public Offering, make a demand for one long-form and unlimited short-form
registrations of CMP Registrable Securities (such registrations referred to in
clauses (a) and (b) above, collectively, "Demand Registrations.") Such Demand
Registrations are subject to certain limitations, including: (x) no two demands
may be made within any six-month period and (y) the amount which can be sold
pursuant to any demand may be limited by the managing underwriter selected by
the makers of such demand, and approved by the Company.
In the event that the Company proposes to register its stock under the
Securities Act other than pursuant to a Demand Registration, all holders of
Registrable Securities, subject to CVC's approval in the initial primary public
offering, will have the right to include such securities in such registration
("Piggyback Registration"). The amount of shares which can be sold pursuant to a
Piggyback Registration are subject to limitation by the managing underwriter.
The Amended and Restated Registration Rights Agreement also provides that
certain holders of Registrable Securities and the Company may not effect a sale
or distribution of equity securities of the Company for a 180-day period
beginning on the effective date of any Demand Registration (other than pursuant
to Section 415) or Piggyback Registration. The Company pays all expenses of
Demand Registrations and Piggyback Registrations.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION
The Company's charter establishes an advance notice procedure for
stockholder nominations of persons for election to the board of directors in
advance of an annual meeting of stockholders of the Company. Stockholders at an
annual meeting may only consider nominations specified in the notice of meeting
or brought before the meeting by or at the direction of the board of directors,
or by a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting, and who has given to the
Company's Secretary timely written notice, in proper form, of the stockholder's
intention to make such nomination before the annual meeting. An amendment to
this provision would require approval by an affirmative vote of holders of
66 2/3% of the shares of voting stock of the Company.
In addition, the Company's charter provides for cumulative voting in the
election of directors. The above two provisions may have the effect of
discouraging or deferring a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company.
LIMITATION ON OFFICER AND DIRECTOR LIABILITY
The Amended and Restated Certificate of Incorporation limits the liability
of directors to the fullest extent permitted by the Delaware General Corporation
Law. In addition, the Amended and Restated Certificate of Incorporation provides
that the Company shall indemnify directors and officers of the Company to the
fullest extent permitted by such law. The Company agreed with GPC that until
2003 it would not amend its charter or bylaws in any manner regarding
exculpation or indemnification of former officers and directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is the American Stock
Transfer & Trust Company.
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<PAGE> 69
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-UNITED STATES
HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity other than (i) a citizen or resident of the U.S., (ii) a
corporation, partnership, limited liability company or other business entity
created or organized in the U.S. or under the laws of the U.S. or of any state
(other than any partnership treated as foreign under U.S. Treasury Regulations),
(iii) an estate whose income is includable in gross income for U.S. federal
income tax purposes regardless of source, or (iv) a trust if (a) a court within
the U.S. is able to exercise primary supervision over the administration of the
trust and (b) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
This discussion is based on the Company's understanding of the Code and
administrative interpretations as of the date hereof, all of which are subject
to change, including changes with retroactive effect. This discussion does not
address all aspects of U.S. federal income and estate taxation that may be
relevant to Non-U.S. Holders in light of their particular circumstances and does
not address any tax consequences arising under the laws of any state, local or
foreign jurisdiction. Prospective holders should consult their tax advisors with
respect to the particular tax consequences to them of owning and disposing of
Common Stock, including the consequences under the laws of any state, local or
foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends, if any, paid to a Non-U.S.
Holder of Common Stock will be subject to withholding tax at a rate of 30% of
the gross amount of the dividend or such lower rate as may be specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld , in accordance with currently applicable U.S. Treasury regulations,
the Company will presume that dividends paid to an address in a foreign country
are paid to a resident of such country absent actual knowledge to the contrary.
Under recently finalized U.S. Treasury regulations generally effective for
payments made after December 31, 1999 (the "Final Regulations"), however, a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate generally will be required to satisfy applicable certification and
other requirements. In addition, under the Final Regulations, in the case of
Common Stock held by a foreign partnership, (x) the certification requirement
will generally be applied to the partners of the partnership and (y) the
partnership will be required to provide certain information, including a U.S.
taxpayer identification number. The Final Regulations also provide look-through
rules for tiered partnerships.
Generally, there will be no withholding tax on dividends paid to a Non-U.S.
Holder if such dividends are effectively connected with the Non-U.S. Holder's
conduct of a trade or business within the U.S. or, if an income tax treaty
applies, attributable to a permanent establishment in the U.S. ("U.S. trade or
business income"), if the Non-U.S. Holder files the appropriate U.S. Internal
Revenue Service ("IRS") form with the payor (which form, under the Final
Regulations, will require the Non-U.S. Holder to provide a U.S. taxpayer
identification number). Instead, the effectively connected dividends will be
subject to regular U.S. net income tax at graduated rates, in the same manner as
if the Non-U.S. Holder were a U.S. resident. In addition to the graduated tax
described above, a non-U.S. corporation receiving effectively connected
dividends may be subject to a "branch profits tax" which is imposed, under
certain circumstances, at a rate of 30% (or such lower rate as may be specified
by an applicable treaty) of such corporation's effectively connected earnings
and profits, subject to certain adjustments.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amount withheld by filing an appropriate claim for a refund with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is
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<PAGE> 70
U.S. trade or business income (in which case, the branch profits tax described
above may also apply to a corporate Non-U.S. Holder), (ii) in the case of
certain Non-U.S. Holders who are non-resident alien individuals and hold the
Common Stock as a capital asset, such individuals are present in the U.S. for
183 or more days in the taxable year of the disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of the Code regarding the taxation of U.S. expatriates, or (iv) the
Company is or has been a "U.S. real property holding corporation" for federal
income tax purposes and the Non-U.S. Holder owned directly or indirectly more
than 5% of the Company's Common Stock (assuming the Common Stock is regularly
traded on an established securities market) at any time within the shorter of
the five-year period preceding such disposition or such holder's holding period.
Generally, a corporation is a "U.S. real property holding corporation" if the
fair market value of its "U.S. real property interest" equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. The Company is
not, and does not anticipate becoming, a "U.S. real property holding
corporation" for U.S. federal income tax purposes.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
its reports available to tax authorities in the recipient's country of
residence.
Under currently effective U.S. Treasury regulations, dividends paid to a
Non-U.S. Holder at an address within the U.S. may be subject to backup
withholding imposed at a rate of 31% if the Non-U.S. Holder fails to establish
that it is entitled to an exemption or to provide a correct taxpayer
identification number and certain other information to the Company or its paying
agent. Under the Final Regulations, a Non-U.S. Holder of Common Stock that fails
to certify its Non-U.S. Holder status in accordance with the requirements of the
Final Regulations may be subject to U.S. backup withholding at a rate of 31% on
payment of dividends.
Under current U.S. Federal income tax law, information reporting and backup
withholding imposed at a rate of 31% will apply to the proceeds of a disposition
of Common Stock paid to or through a U.S. office of a broker unless the
disposing holder certifies as to its non-U.S. status or otherwise establishes an
exemption. Generally, U.S. information reporting and backup withholding will not
apply to a payment of disposition proceeds if the payment is made outside the
U.S. through a non-U.S. office of a non-U.S. broker. However, U.S. information
reporting requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the U.S. if the payment is made through an office
outside the U.S. of a broker that is (i) a U.S. Person, (ii) a foreign person
which derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S. or (iii) a "controlled foreign
corporation" for U.S. federal income tax purposes, unless the broker maintains
documentary evidence that the holder is a Non-U.S. Holder and that certain
conditions are met, or that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the Common Stock at the time of
death will be required to include the value thereof in his gross estate for U.S.
Federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise. Such individual's estate may be subject to U.S. Federal estate tax on
the property includable in the gross estate for U.S. Federal estate tax
purposes. Estates of non-resident aliens are generally allowed a statutory
credit which has the effect of offsetting the U.S. Federal estate tax imposed on
the first $60,000 of the taxable estate.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Offering because of certain contractual and legal restrictions
on resale described below, sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
Upon completion of the Offering and the Reorganization, there will be
7,647,520 shares of Common Stock outstanding (19,393,358 shares assuming the
conversion of all outstanding shares of Class B Common Stock and exercise of the
warrant), assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options and based upon the number of shares outstanding
as of May 18, 1998. Of these shares, all of the 3,600,000 shares sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless such shares are purchased by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 15,793,358 shares of Common Stock (including any
Common Stock issued upon conversion of Class B Common Stock) will be deemed
"restricted securities" as that term is defined in Rule 144 under the Securities
Act (the "Restricted Shares") and will be eligible for resale upon expiration of
the waiting period and lock-up described below. Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act, which
rules are summarized below.
Except for the issuance by the Company of Common Stock to effectuate the
Reorganization, the Company, its executive officers, directors and all existing
stockholders have agreed not to directly or indirectly (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
with respect to the foregoing or (ii) enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
the Common Stock whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the Underwriters for a
period of 180 days after the date of this Prospectus.
The shares of the Company's Class B Common Stock are convertible into
shares of Common Stock and, in the event of conversion of such shares and
expiration of the 180 day lock-up period described above, 8,787,465 of the
aggregate shares of Common Stock issuable upon conversion of the Class B Common
Stock would be immediately eligible for sale pursuant to Rule 144. No assurance
can be given that holders of the Class B Common Stock will not decide, based
upon then prevailing market and other conditions, to convert their Class B
Common Stock to Common Stock and to dispose of all or a portion of such stock
pursuant to the provisions of Rule 144 under the Securities Act or pursuant to
the demand registration rights contained in the Registration Rights Agreement.
See "Risk Factors -- Control by Executive Officers and Current Stockholders" and
"Description of Capital Stock -- Amended and Restated Registration Rights
Agreement." In addition, upon consummation of the Offering, 2,958,510 shares of
Class B Common Stock will be issuable upon exercise of an outstanding warrant,
which shares may be converted into Common Stock at the option of the holder. All
of those shares are subject to these lock-up agreements. Upon expiration of
these lock-up agreements, 2,958,510 shares subject to such warrant will be
vested, and could be exercised and sold.
In general, under Rule 144, an Affiliate of the Company, or any person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the New York Stock Exchange
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the SEC. Sales pursuant to Rule 144 are subject to
70
<PAGE> 72
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or person whose shares
are aggregated) who is not deemed to have been an Affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least 2 years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above. The Commission is currently considering amendments to Rule 144 which
could modify among other things the volume and manner of sale requirements
described above.
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Incentive
Plan. Based on the number of options outstanding and shares reserved for
issuance under the Incentive Plan at May 19, 1998, such registration statement
would cover approximately 750,000 shares. Such registration statement is
expected to be filed and to become effective as soon as practicable after the
date of this Prospectus. Shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to Affiliates, be
available for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. See
"Management."
The holders of all shares outstanding prior to the Offering are entitled to
certain registration rights with respect to their shares. See "Description of
Capital Stock -- Amended and Restated Registration Rights Agreement."
71
<PAGE> 73
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear,
Stearns & Co. Inc., Lehman Brothers Inc., Furman Selz LLC and Wasserstein
Perella Securities, Inc. are acting as representatives (the "Representatives")
of each of the Underwriters named below (the "Underwriters"). Subject to the
terms and conditions set forth in a purchase agreement (the "Purchase
Agreement") among the Company and the Underwriters, the Company has agreed to
sell to the Underwriters, and each of the Underwriters severally and not jointly
has agreed to purchase from the Company, the number of shares of Common Stock
set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Bear, Stearns & Co. Inc.....................................
Lehman Brothers Inc.........................................
Furman Selz LLC.............................................
Wasserstein Perella Securities, Inc.........................
---------
Total.......................................... 3,600,000
=========
</TABLE>
In the Purchase Agreement the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any of the shares of
Common Stock being sold pursuant to such agreement are purchased. Under certain
circumstances, under the Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of Common Stock. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share of Common Stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
The Company has granted options to the Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
540,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The Underwriters may exercise these options solely to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that the
Underwriters exercise these options, each Underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial amount reflected in the foregoing
table.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 5% of the shares offered to be sold to
certain employees of the Company and other persons. The number of shares of
Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not orally confirmed for purchase within
72
<PAGE> 74
one day of the pricing of the Offering will be offered by the Underwriters to
the general public on the same terms as the other shares offered hereby.
The Company, the Company's executive officers and directors and all
existing stockholders have agreed, subject to certain exceptions, not to
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, without the prior written consent of Merrill Lynch on behalf
of the Underwriters for a period of 180 days after the date of this Prospectus.
See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the Representatives. The factors considered
in determining the initial public offering price, in addition to prevailing
market conditions, are price-earnings ratios of publicly traded companies that
the Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and an assessment of the Company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
and the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to the Company. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "GCW". In order to
meet the requirements for listing of the Common Stock on that exchange, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial owners.
The Underwriters do not expect sales of the Common Stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
More than ten percent of the net proceeds of the Offering may be used to
repay debt to affiliates of NASD members participating in the Offering.
Accordingly, the Offering will be conducted in accordance with NASD Conduct Rule
2710(c)(8) which requires that the public offering price of the Common Stock be
no higher than the price recommended by a Qualified Independent Underwriter
which has participated in the preparation of the Registration Statement and
performed its usual standard of due diligence with respect thereto. Merrill
Lynch has agreed to act as Qualified Independent Underwriter for this Offering
and the public offering price will be no higher than that recommended by Merrill
Lynch.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
73
<PAGE> 75
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Certain of the Representatives have provided investment banking and related
services for the Company and CVC from time to time for which they have received
customary fees.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
being offered hereby will be passed upon for the Company by Kirkland & Ellis (a
partnership which includes professional corporations), New York, New York.
Certain legal matters relating to the Offering will be passed upon for the
Underwriters by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York.
EXPERTS
The consolidated financial statements and schedule of GCIH, Inc. at
December 31, 1997 and 1996, and for the year ended December 31, 1997, and for
the period from January 22, 1996 to December 31, 1996, and the consolidated
statements of operations and cash flows and schedule for the year ended December
31, 1995 of Gerber Childrenswear, Inc. ("Predecessor Company") appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
The consolidated statements of income and cash flows for the period January
1, 1997 through December 16, 1997 of Auburn Hosiery Mills, Inc. appearing in
this Prospectus and Registration Statement, have been audited by J.C. Holland &
Co., PSC, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance on such report given upon the
authority of such firm as experts in accounting and auditing.
The profit and loss account and cash flow statement of Sport Socks Co.
(Ireland) Limited for the fifty weeks ended December 16, 1997 appearing in this
Prospectus and Registration Statement, have been audited by Price Waterhouse,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance on such report given upon the
authority of such firm as experts in accounting and auditing.
74
<PAGE> 76
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which are omitted as permitted by
the rules and regulations of the Commission. For further information pertaining
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. Statements contained in
this Prospectus regarding the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such materials can also be inspected at the offices
of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005
or on the Commission's site on the Internet at http://www.sec.gov.
75
<PAGE> 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GCIH, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Condensed Consolidated Balance Sheet at April 4, 1998
(Unaudited) and December 31, 1997......................... F-2
Condensed Consolidated Statements of Income and
Comprehensive Income for the quarter ended April 4, 1998
and March 29, 1997 (Unaudited)............................ F-3
Condensed Consolidated Statements of Cash Flows for the
quarter ended April 4, 1998 and March 29, 1997
(Unaudited)............................................... F-4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-5
Report of Independent Auditors.............................. F-8
Consolidated Balance Sheets at December 31, 1997 and 1996... F-9
Consolidated Statements of Income, Changes in Shareholders'
Equity and Cash Flows for the year ended December 31, 1997
and the period from January 22, 1996 to December 31,
1996...................................................... F-10
Notes to Consolidated Financial Statements.................. F-13
GERBER CHILDRENSWEAR, INC. ("PREDECESSOR COMPANY")
Report of Independent Auditors.............................. F-29
Consolidated Statements of Income and Cash Flows for the
year ended December 31, 1995.............................. F-30
Notes to Consolidated Financial Statements.................. F-32
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-36
Consolidated Statements of Income and Cash Flows for the
Period January 1, 1997 through December 16, 1997.......... F-37
Notes to Consolidated Financial Statements.................. F-39
SPORT SOCKS CO. (IRELAND) LIMITED
Independent Accountant's Report............................. F-43
Profit and Loss Account and Cash Flow Statement for the
fifty weeks ended December 16, 1997....................... F-44
Notes to Consolidated Financial Statements.................. F-46
</TABLE>
F-1
<PAGE> 78
GCIH, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 1,802 $ 536
Accounts receivable, net.................................. 40,600 34,506
Inventories............................................... 81,350 71,041
Income tax receivable..................................... 159 4,635
Other..................................................... 2,667 1,672
-------- --------
Total current assets.............................. 126,578 112,390
-------- --------
Property, Plant and Equipment............................... 28,456 27,867
Less accumulated depreciation............................. 4,366 3,219
-------- --------
24,090 24,648
-------- --------
Other Assets
Excess of cost over fair value of net assets acquired,
net.................................................... 21,548 22,257
Other..................................................... 6,226 4,596
-------- --------
Total other assets................................ 27,774 26,853
-------- --------
$178,442 $163,891
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 12,306 $ 14,759
Accrued expenses.......................................... 17,151 24,099
Revolver.................................................. 18,840 250
Current portion of long-term debt......................... 8,075 7,286
Other..................................................... 2,019 119
-------- --------
Total current liabilities......................... 58,391 46,513
-------- --------
Noncurrent Liabilities
Long-term debt............................................ 67,522 69,474
Other non-current liabilities............................. 15,230 13,875
-------- --------
Total noncurrent liabilities...................... 82,752 83,349
-------- --------
Redeemable preferred stock, including accrued dividends of
$3,417 and $2,965, respectively........................... 15,062 14,610
-------- --------
Shareholders' Equity........................................ 22,237 19,419
-------- --------
$178,442 $163,891
======== ========
</TABLE>
See accompanying notes
F-2
<PAGE> 79
GCIH, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
APRIL 4, MARCH 29,
1998 1997
-------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $64,647 $45,350
Cost of sales............................................... 47,212 32,654
------- -------
Gross margin.............................................. 17,435 12,696
Expenses:
Selling, general and administrative expenses.............. 9,614 6,718
Other..................................................... 0 514
------- -------
9,614 7,232
------- -------
Income before interest and income taxes..................... 7,821 5,464
Interest expense, net of interest income.................... 2,262 1,326
------- -------
Income before income taxes.................................. 5,559 4,138
Income tax expense.......................................... 2,139 1,614
------- -------
Net income.................................................. 3,420 2,524
Foreign currency translation.............................. (188) 0
------- -------
Comprehensive income........................................ $ 3,232 $ 2,524
======= =======
Net income as reported above................................ $ 3,420 $ 2,524
Less preferred stock dividends.............................. (452) (383)
------- -------
Net income available to common shareholders................. $ 2,968 $ 2,141
======= =======
Per Share amounts:
Earnings per common share................................. $ 4.18 $ 2.93
======= =======
Earnings per common share -- assuming dilution............ $ 3.16 $ 2.20
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 80
GCIH, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
APRIL 4, MARCH 29,
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 3,420 $ 2,524
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 1,281 615
Other.................................................. (947) 238
Changes in assets and liabilities
Accounts receivable.................................. (6,278) (7,600)
Inventories.......................................... (10,413) (5,443)
Accounts payable..................................... (1,620) 2,404
Other assets and liabilities, net.................... (859) (4,631)
-------- --------
(15,416) (11,893)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment................ (722) (797)
Proceeds from sale of property, plant and equipment....... -- 412
-------- --------
(722) (385)
-------- --------
FINANCING ACTIVITIES
Borrowings under revolving credit agreement............... 32,240 --
Repayments under revolving credit agreement............... (13,650) --
Principal payments on long-term borrowings................ (1,629) (975)
Other..................................................... 262 (148)
-------- --------
17,223 (1,123)
-------- --------
Effect of exchange rate changes on cash................... 181 --
Net increase (decrease) in cash and cash equivalents........ 1,266 (13,401)
Cash and cash equivalents at beginning of period............ 536 17,592
-------- --------
Cash and cash equivalents at end of period.................. $ 1,802 $ 4,191
======== ========
</TABLE>
See accompanying notes
F-4
<PAGE> 81
GCIH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been
prepared by GCIH, Inc. ("the Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations; however, the Company believes that the disclosures are
adequate to make the information presented not misleading. The interim financial
statements are unaudited and, in the opinion of management, contain all
adjustments necessary to present fairly the Company's financial position and the
results of its operations and cash flows for the interim periods presented. It
is suggested that these interim financial statements be read in conjunction with
the annual financial statements and the notes thereto included elsewhere in this
Prospectus.
2. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries which are Gerber Childrenswear,
Inc. and Auburn Holdings, Inc. Auburn Holdings, Inc., a wholly owned subsidiary
of the Company, acquired Auburn Hosiery Mills, Inc. and Sport Socks Co.
(Ireland) Limited on December 17, 1997. Sport Socks Co. (Limited) Ireland has
been translated into U.S. dollars based upon the exchange rate of U.S.
dollars/Irish pounds of U.S. $1.3755 to L1.00 and U.S. $1.3585 to L1.00 for the
statement of income and the balance sheet, respectively. All significant
intercompany balances have been eliminated in consolidation.
3. SEASONALITY OF BUSINESS
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.
4. USE OF ESTIMATES
The preparations of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5. INVENTORIES
A summary of inventories, by major classification, at April 4, 1998 and
December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
APRIL 4, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials......................................... $14,720 $14,192
Work in process....................................... 15,937 12,507
Finished goods........................................ 50,693 44,342
$81,350 $71,041
======= =======
</TABLE>
F-5
<PAGE> 82
GCIH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
<TABLE>
<CAPTION>
APRIL 4, MARCH 29,
1998 1997
---------- ----------
<S> <C> <C>
Numerator:
Net income........................................ $3,420,000 $2,524,000
Preferred stock dividends......................... (452,000) (383,000)
---------- ----------
Numerator for basic and diluted earnings per share--
net income available to common shareholders....... $2,968,000 $2,141,000
========== ==========
Denominator:
Denominator for basic earnings per share --
weighted-average shares........................ 710,505.9 730,716.7
Effective of dilutive securities:
Warrants....................................... 191,239.1 191,239.1
Nonvested stock................................ 38,821.2 51,226.0
---------- ----------
Denominator for diluted earnings per share --
adjusted weighted-average shares.................. 940,566.2 973.181.8
========== ==========
Basic earnings per share............................ $4.18 $2.93
========== ==========
Diluted earnings per share.......................... $3.16 $2.20
========== ==========
</TABLE>
8. SUBSEQUENT EVENTS
In connection with the Company's proposed public offering for the sale of
additional shares of its common stock, the Company filed a preliminary
registration statement with the Securities and Exchange Commission on Form S-1
(the "Offering"). The Company intends to use the proceeds from the Offering to
repay certain indebtedness of the Company, to redeem certain shares of the
Company's preferred stock and for other general corporate purposes.
Immediately prior to and in connection with the consummation of the
Offering, the Company and Gerber Childrenswear, Inc. ("Gerber") will consummate
a series of transactions pursuant to which the Company and Gerber will be
reorganized and recapitalized. The principal transactions are as follows:
Prior to the consummation of the Offering, the certificate of incorporation
of the Company will be amended and restated (the "Recapitalization") to provide
for the reclassification of its authorized common stock into two classes of
capital stock ("Common Stock and Class B Common Stock"). Each share of the
Common Stock will have one vote per share and the Class B Common Stock will have
no voting rights. The amended certificate will also provide that each share of
Class B Common Stock will be convertible at the option of the holder at any time
into one share of Common Stock and each share of Common Stock held by a
F-6
<PAGE> 83
GCIH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holder of Class B Common Stock will be convertible at the option of the holder
at any time into one share of Class B Common Stock. In addition, the amended
certificate will provide for change of the corporate name of the Company from
"GCIH, Inc." to "Gerber Childrenswear, Inc."
Prior to the consummation of the Offering and immediately after giving
effect to the Recapitalization, Gerber will be merged into the Company (the
"Merger") with the Company as the surviving entity. The Merger is intended to be
treated as a tax-free liquidation of Gerber. Upon consummation of the Merger,
113,623.6 shares of the Company's Redeemable Preferred Stock will be converted
into shares of Class A Common Stock of the Company (at a conversion ratio to be
determined at that date) and 2,828.4 shares will be converted into a right to
receive cash equal to the liquidation value per share at the time of the Merger.
The Company will retire all shares held in the treasury. Then, all of the
outstanding shares of the Company's Class A and Class C Common Stock will be
exchanged for shares of Class B Common Stock (new Class B) pursuant to a stock
split. All of the outstanding shares of the Company's Class B Common Stock (old
Class B) of the Company will be exchanged for shares of the Company's Common
Stock at a specified ratio. Finally, all of the outstanding warrants to purchase
shares of Class D Common Stock of the Company will be exchanged into warrants to
purchase shares of the Class B Common Stock (new Class B) of the Company.
The following pro forma information represents the historical amounts of
the Company adjusted to show the redemption and conversion of the Redeemable
Preferred Stock at an assumed conversion price of $14 per share, the conversion
of all classes of common stock of the Company into common stock of Gerber and a
stock split at an assumed ratio of approximately 15.5 to 1. The pro forma per
share amounts reflect the earnings per share as if the conversion of the
Redeemable Preferred Stock and the stock split had occurred on January 1, 1997.
<TABLE>
<CAPTION>
HISTORICAL
AMOUNTS
APRIL 4, PRO FORMA
1998 ADJUSTED
---------- ---------
<S> <C> <C>
Total assets................................................ $178,442 $178,442
Total liabilities........................................... 141,143 141,509
Redeemable preferred stock.................................. 15,062 --
Shareholders' equity........................................ 22,237 36,933
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------- ------------
1998 1997 1998 1997
----- ----- ---- ----
<S> <C> <C> <C> <C>
Per share amounts:
Earnings per common share................................. $4.18 $2.93 $.28 $.21
Earnings per common share -- assuming dilution............ 3.16 2.20 .22 .16
</TABLE>
Also, in connection with the Offering, the Company plans to adopt a
Long-Term Equity Incentive Plan (the "Incentive Plan") designed to provide
incentives to present and future key employees of the Company and its
subsidiaries as may be selected by the Compensation Committee of the Board of
Directors (the "Committee"). The Incentive Plan will provide for the granting to
Participants the following types of incentive awards: stock options, stock
appreciation rights, restricted stock, performance units, performance grants and
other awards deemed appropriate by the Committee. An aggregate of up to 750,000
shares will be reserved for issuance under the Incentive Plan. The Incentive
Plan affords the Company latitude in tailoring incentive compensation for the
retention of key employees. This plan also limits the number of shares each
participant in the plan shall be entitled to receive to no more than 25,000
common shares in any calendar year and is scheduled to terminate ten years from
the date the Incentive Plan is approved.
F-7
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GCIH, Inc.
We have audited the accompanying consolidated balance sheets of GCIH, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the year ended
December 31, 1997 and the period from January 22, 1996 (inception) to December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GCIH, Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1997 and the
period from January 22, 1996 (inception) to December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
January 30, 1998
F-8
<PAGE> 85
GCIH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 536 $ 17,592
Accounts receivable, net of allowances for doubtful
accounts of $2,510,000 (1997) and $1,798,000 (1996)
(Note 8)................................................ 34,506 17,979
Income taxes receivable................................... 4,635 --
Inventories (Notes 3 and 8)............................... 71,041 47,504
Deferred income taxes (Note 5)............................ 399 4,353
Other..................................................... 1,273 3,083
-------- --------
Total current assets.................................... 112,390 90,511
Property, plant and equipment, net (Notes 4 and 8).......... 24,648 9,938
Deferred income taxes (Note 5).............................. 2,281 2,075
Excess of cost over fair value of net assets acquired,
net....................................................... 22,257 1,606
Debt issuance costs, net.................................... 1,381 1,775
Other....................................................... 934 155
-------- --------
$163,891 $106,060
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,759 $ 10,078
Accrued expenses (Note 6)................................. 24,099 16,503
Income taxes payable...................................... -- 6,000
Current portion of obligations under capital leases (Note
9)...................................................... 119 --
Revolver (Note 8)......................................... 250 --
Current portion of long-term debt (Note 8)................ 7,286 1,725
-------- --------
Total current liabilities............................... 46,513 34,306
Accrued pension and postretirement benefit cost (Note 10)... 5,058 4,021
Other accrued liabilities (Note 7).......................... 8,713 3,853
Obligations under capital leases, less current portion (Note
9)........................................................ 104 --
Long-term debt, less current portion (Note 8)............... 69,474 41,711
Redeemable preferred stock, 12% non-voting, cumulative, par
value $.01 per share, 117,402.7 shares authorized, 116,452
outstanding (1997); 117,402.7 shares outstanding (1996)
(liquidation and redemption value of $100 per share)
including accrued dividends of $2,965,000 (1997) and
$1,328,000 (1996) (Note 11)............................... 14,610 13,068
Shareholders' equity (Note 12):
Common Stock, Class A, par value $.01 per share, 750,000.0
shares authorized, 587,328.3 shares outstanding (1997);
661,655.1 shares outstanding (1996)..................... 7 7
Common Stock, Class B, par value $.01 per share, 250,000
shares authorized, 166,915.3 shares outstanding (1997);
144,594.9 shares outstanding (1996)..................... 2 1
Common Stock, Class C with 225 votes per share, par value
$.01 per share, 2,500 shares authorized and
outstanding............................................. -- --
Common Stock, non-voting Class D, par value $.01 per
share, 191,250 shares authorized, none issued........... -- --
Treasury stock.............................................. (75) --
Detachable stock warrants................................... 189 189
Additional paid-in capital.................................. 6,537 752
Retained earnings........................................... 13,526 8,152
-------- --------
20,186 9,101
Less unearned compensation under restricted stock plan.... 767 --
-------- --------
Total shareholders' equity.............................. 19,419 9,101
-------- --------
$163,891 $106,060
======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE> 86
GCIH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 22,
YEAR ENDED 1996 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $202,037 $185,223
Cost of sales............................................... 146,294 138,608
-------- --------
Gross margin................................................ 55,743 46,615
Expenses:
Selling, general and administrative expenses, including
$9,465,000 of compensation in 1997 for restricted
stock.................................................. 37,231 23,894
Other..................................................... 231 689
-------- --------
37,462 24,583
-------- --------
Income before interest and income taxes..................... 18,281 22,032
Interest expense, net of interest income.................... 5,798 6,308
-------- --------
Income before income taxes.................................. 12,483 15,724
Federal and state income taxes (Note 5):
Current................................................... 1,303 11,635
Deferred.................................................. 3,461 (5,391)
-------- --------
4,764 6,244
-------- --------
Income before extraordinary item............................ 7,719 9,480
Extraordinary item -- loss on early extinguishment of debt
(net of income tax benefit of $452,000)................... (708) --
-------- --------
Net income.................................................. 7,011 9,480
Less preferred stock dividends.............................. (1,637) (1,328)
-------- --------
Net income available to common shareholders................. $ 5,374 $ 8,152
======== ========
Per share amounts:
Earnings per common share:
Income before extraordinary item....................... $ 8.47 $ 11.11
Extraordinary item..................................... (.99) --
-------- --------
Net income................................................ $ 7.48 $ 11.11
======== ========
Earnings per common share -- assuming dilution:
Income before extraordinary item....................... $ 6.39 $ 8.15
Extraordinary item..................................... (.74) --
-------- --------
Net income................................................ $ 5.65 $ 8.15
======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 87
GCIH, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
JANUARY 22, 1996 TO DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS A CLASS B CLASS B CLASS C CLASS C CLASS D CLASS D
COMMON COMMON COMMON COMMON COMMON COMMON COMMON COMMON TREASURY
SHARES STOCK SHARES STOCK SHARES STOCK SHARES STOCK SHARES
--------- ------- --------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 22, 1996... 661,655.1 $ 7 144,594.9 $ 1 2,500 $-- -- $-- --
Net income................... -- -- -- -- -- -- -- -- --
Dividend on redeemable
preferred stock............ -- -- -- -- -- -- -- -- --
--------- --- --------- --- ----- --- -- --- ---------
Balance at December 31,
1996......................... 661,655.1 7 144,594.9 1 2,500 -- -- -- --
Repurchase of shares for
treasury................... (74,326.8) -- (30,929.6) -- -- -- -- -- 105,256.4
Pursuant to restricted stock
plan:
Shares issued.............. -- -- 53,250.0 1 -- -- -- -- (53,250.0)
Amortization............... -- -- -- -- -- -- -- -- --
Forfeitures................ -- -- -- -- -- -- -- -- --
Net income................... -- -- -- -- -- -- -- -- --
Dividend on redeemable
preferred stock............ -- -- -- -- -- -- -- -- --
--------- --- --------- --- ----- --- -- --- ---------
Balance at December 31,
1997......................... 587,328.3 $ 7 166,915.3 $ 2 2,500 $-- -- $-- 52,006.4
========= === ========= === ===== === == === =========
<CAPTION>
DETACHABLE ADDITIONAL
TREASURY STOCK PAID-IN RETAINED UNEARNED
STOCK WARRANTS CAPITAL EARNINGS COMPENSATION TOTAL
-------- ---------- ---------- -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 22, 1996... $ -- $189 $ 752 $ -- $ -- $ 949
Net income................... -- -- -- 9,480 -- 9,480
Dividend on redeemable
preferred stock............ -- -- -- (1,328) -- (1,328)
----- ---- ------ ------- ------- -------
Balance at December 31,
1996......................... -- 189 752 8,152 -- 9,101
Repurchase of shares for
treasury................... (128) -- -- -- -- (128)
Pursuant to restricted stock
plan:
Shares issued.............. 53 -- 5,857 -- (1,000) 4,911
Amortization............... -- -- -- -- 161 161
Forfeitures................ -- -- (72) -- 72 --
Net income................... -- -- -- 7,011 -- 7,011
Dividend on redeemable
preferred stock............ -- -- -- (1,637) -- (1,637)
----- ---- ------ ------- ------- -------
Balance at December 31,
1997......................... $ (75) $189 $6,537 $13,526 $ (767) $19,419
===== ==== ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE> 88
GCIH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 22,
YEAR ENDED 1996 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 7,011 $ 9,480
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation.............................................. 1,976 1,339
Amortization of goodwill.................................. 84 83
Amortization of debt issuance costs....................... 478 412
Provision for allowance for doubtful accounts............. 712 1,798
Provision for deferred income taxes....................... 3,461 (5,391)
Compensation expense pursuant to restricted stock plan
(noncash)............................................... 4,858 --
Amortization pursuant to restricted stock plan............ 161 --
(Gain) on disposal of assets.............................. (2) --
Extraordinary item........................................ 708 --
Changes in operating assets and liabilities:
Inventories............................................. (15,048) 10,487
Accounts receivable..................................... (8,511) (3,296)
Other assets............................................ 538 (500)
Accounts payable........................................ 253 3,668
Accrued expenses........................................ 3,824 6,627
Income taxes payable.................................... (10,204) 6,000
Other accrued liabilities............................... 3,628 510
Accrued pension and postretirement benefit cost......... 1,037 1,034
-------- ---------
Net cash (used in) provided by operating activities......... (5,036) 32,251
INVESTING ACTIVITIES
Collections on notes receivable............................. 207 3,226
Purchases of property, plant and equipment.................. (4,180) (1,047)
Proceeds from sale of property, plant and equipment......... 445 --
Purchase of Auburn Holdings, Inc., net of cash acquired and
seller receivables........................................ (38,840) --
-------- ---------
Net cash (used in) provided by investing activities......... (42,368) 2,179
FINANCING ACTIVITIES
Borrowings under revolving credit agreement................. $ 88,824 $ 162,903
Repayments under revolving credit agreement................. (88,574) (177,755)
Proceeds from long-term borrowings.......................... 41,600 --
Principal payments on long-term borrowings.................. (10,205) (2,875)
Principal payments on capital leases........................ (88) --
Repurchase of common stock.................................. (128) --
Repurchase of preferred stock............................... (95) --
Proceeds from sale of restricted stock...................... 53 --
Debt issuance costs......................................... (1,039) --
-------- ---------
Net cash provided by (used in) financing activities......... 30,348 (17,727)
-------- ---------
Net (decrease) increase in cash and cash equivalents........ (17,056) 16,703
Cash and cash equivalents at beginning of period............ 17,592 889
-------- ---------
Cash and cash equivalents at end of period.................. $ 536 $ 17,592
======== =========
Supplemental Disclosure of Cash Flow Information:
Noncash items:
Reduction of notes payable, offset by reduction of notes
receivable............................................ $ 1,500 --
</TABLE>
See accompanying notes.
F-12
<PAGE> 89
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
GCIH, Inc. ("the Company") was formed to acquire 100% of the outstanding
stock of Gerber Childrenswear, Inc. from Gerber Products Company. The
acquisition was effective as of the start of business on January 22, 1996 and
was accounted for as a purchase. The purchase price was allocated to the net
assets acquired based on their respective fair values and the balance was
treated as excess of cost over fair value of net assets acquired. The total cost
of the acquisition was approximately $74 million. The excess of the cost over
fair value of net assets acquired is being amortized over twenty years on a
straight-line basis.
The acquisition was funded in part by long-term borrowings and a note
payable to the seller. The stock purchase agreement provided for the adjustment
of the $74 million purchase price based on net working capital, as defined, at
January 22, 1996. Calculated net working capital as defined resulted in a
reduction of the purchase price by $4.7 million. This was collected through cash
receipt of $3.2 million in 1996 and a $1.5 million reduction in the junior
subordinated note payable to Gerber Products Company in 1997.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries which are Gerber Childrenswear, Inc. and
Auburn Holdings, Inc. All material intercompany balances and transactions have
been eliminated in consolidation.
Earnings Per Common Share
Earnings per common share are calculated by dividing net income by the
weighted average shares outstanding in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
Revenue Recognition
Substantially all revenue is recognized when products are shipped to
customers.
Royalty Expense Recognition
The Company has certain royalty agreements and recognizes royalty expenses
for products sold under such agreements over the life and terms of the specific
royalty agreements on an accrual basis.
One such ten-year royalty agreement with Gerber Products Company contains a
"royalty-free" period for the first six years and escalating royalty rates for
the last four years of the agreement. The Company has estimated the total
royalties to be paid over the life of the agreement based on estimated sales
during the last four years and is recording current charges to operations for
these royalties on a straight line basis over the ten-year term of the
agreement.
Concentration of Credit Risk
The Company manufactures infant apparel and products that are primarily
sold to retail entities throughout the United States. The Company's primary
customers are mass merchants and discount stores. Sales to three customers
represented approximately 44%, 11% and 10% of 1997 net sales, respectively, and
44%, 6% and 10% of 1996 net sales, respectively. The Company performs periodic
credit evaluations of their customers and generally does not require collateral
for credit sales.
F-13
<PAGE> 90
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. At
certain times, the amount of cash deposited at a bank may exceed the limit on
insured deposits.
Undesignated cash is invested each night through participation in a bank
investment plan and bears interest at a variable rate. Under this agreement, the
bank sells securities that are direct obligations of or are fully guaranteed by
the United States government to the Company each night and repurchases the
investments the next business day.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Debt Issuance Costs
Debt issuance costs are being amortized over the lives of the related debt.
Accumulated amortization amounted to $224,000 and $412,000 at December 31, 1997
and 1996, respectively. Amortization expense is included in interest expense in
the accompanying statements of income.
Advertising
Advertising costs of approximately $5,071,000 and $3,250,000 for fiscal
years 1997 and 1996, respectively, were expensed as incurred.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of property,
plant and equipment is computed by the straight-line method over the estimated
useful lives of the assets for financial reporting purposes and computed based
upon "Modified Accelerated Cost Recovery System" guidelines for income tax
reporting purposes.
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments for which it is practicable to estimate that value.
The carrying amounts reported in the balance sheet for cash and long-term debt
approximate their fair value. The carrying amounts of variable-rate debt
approximate fair value due to interest rates adjusting to market rates.
New Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for financial statements
for fiscal years ending after December 31, 1997. This standard establishes
standards for the reporting and display of comprehensive income which is defined
under
F-14
<PAGE> 91
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 130 as "the change in equity (net assets) during a period from
transactions and other events and circumstances from nonowner sources." Under
SFAS No. 130, the Company has several choices in the disclosure of the
components of other comprehensive income. The Company plans to implement SFAS
No. 130 during the first quarter of fiscal year 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 131 (SFAS 131) "Disclosures about Segments
of an Enterprise and Related Information" which is effective for years beginning
after December 15, 1997. SFAS 131 establishes standards for the way that
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in 1998. Management has not completed its review of
SFAS 131, but does not anticipate that the adoption of this statement will have
a significant effect on the Company's reported segments.
Excess of Cost Over Net Assets of Businesses Acquired
The excess of investments in consolidated subsidiaries over the net asset
value at acquisition ("goodwill") is being amortized on a straight-line basis
over periods not exceeding twenty years. On an annual basis the Company reviews
the recoverability of goodwill based primarily upon an analysis of undiscounted
cash flows from the acquired businesses. Accumulated amortization amounted to
$167,000 and $83,000 at December 31, 1997 and 1996, respectively.
Forward Exchange Contracts
The Company uses forward foreign currency exchange contracts to minimize
currency exchange risk. Unrealized gains or losses resulting from changes in
currency exchange rates are recognized currently.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. ACQUISITIONS
On December 17, 1997, the Company acquired Auburn Hosiery Mills, Inc.
("Auburn") and Sport Socks Co. (Ireland) Limited ("Sport Socks") for $28 million
and $12 million in cash, respectively. Both companies are engaged in the
production and sale of various styles of socks to retail chain stores. The
acquisitions were financed through a term loan of $40 million. The acquisitions
have been recorded using the purchase method of accounting. Accordingly, the
purchase price has been allocated to assets and liabilities of the acquired
companies based on their estimated fair values as of the effective date of
acquisition. The purchase price exceeded the fair value of net assets acquired
by approximately $20 million, which is being amortized on a straight-line basis
over twenty years. The results of operations of Auburn and Sport Socks are
included in the accompanying consolidated financial statements from the date of
acquisition.
F-15
<PAGE> 92
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized unaudited pro forma financial information assumes
the acquisitions had occurred on January 1 of each year:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales.............................................. $270,100 $246,921
Income before extraordinary item....................... 6,625 10,856
Net earnings........................................... 5,917 10,856
Basic earnings per share............................... 5.96 12.99
Diluted earnings per share............................. 4.50 9.53
</TABLE>
The amounts are based upon certain assumptions and estimates, and do not
reflect any benefit from economies which might be achieved from combined
operations. The pro forma results do not necessarily represent results which
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Raw materials............................................ $14,192 $ 7,501
Work in process.......................................... 12,507 7,257
Finished goods........................................... 44,342 32,746
------- -------
$71,041 $47,504
======= =======
</TABLE>
Inventory mark downs are periodically recorded based on analysis by the
Company in order to reflect inventories at the lower of cost or market. If the
cost of the inventories exceeds their market value, provisions are made
currently for the difference between the cost and the market value. Provision
for potentially obsolete, irregular or slow-moving inventory is made based on
management's analysis of inventory levels, future sales forecasts and expected
sales prices.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Land..................................................... $ 742 $ 538
Buildings and leasehold improvements..................... 9,060 4,451
Machinery and equipment.................................. 14,997 5,164
Furniture and other equipment............................ 1,750 733
Vehicles................................................. 291 176
Construction in progress................................. 1,027 215
------- -------
27,867 11,277
Less accumulated depreciation............................ 3,219 1,339
------- -------
$24,648 $ 9,938
======= =======
</TABLE>
F-16
<PAGE> 93
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The components of the Company's net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Inventory reserves....................................... $ 647 $1,019
Postretirement benefits.................................. 1,729 1,509
Accrued royalty.......................................... 2,025 716
Restructuring reserves................................... 463 802
Other.................................................... 3,452 3,577
------ ------
Total deferred tax assets.................................. 8,316 7,623
Deferred tax liabilities:
Depreciation............................................. 2,404 828
Inventory methods........................................ 1,926 --
Other.................................................... 1,306 367
------ ------
Total deferred tax liabilities............................. 5,636 1,195
------ ------
Net deferred tax assets.................................... $2,680 $6,428
====== ======
</TABLE>
Income tax expense is different from the amount that would result from
applying the Federal statutory rate to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------ ------
<S> <C> <C>
Federal tax at statutory rate.............................. $4,244 $5,346
State income tax, net of Federal tax benefit............... 412 519
Other...................................................... 108 379
------ ------
Income tax expense......................................... $4,764 $6,244
====== ======
</TABLE>
Current and deferred income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1997 1996
------ -------
<S> <C> <C>
Current:
Federal................................................. $1,168 $10,379
State................................................... 135 1,256
------ -------
Total current............................................. 1,303 11,635
Deferred:
Inventory reserves...................................... 372 (1,019)
Postretirement benefits................................. (220) (232)
Accrued royalty......................................... (1,309) (716)
Inventory methods....................................... 2,676 (750)
Restructuring reserves.................................. 339 198
Other................................................... 1,603 (2,872)
------ -------
Total deferred............................................ 3,461 (5,391)
------ -------
Income tax expense........................................ $4,764 $ 6,244
====== =======
</TABLE>
F-17
<PAGE> 94
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes paid were approximately $11,734,000 and $5,638,000 in 1997 and
1996, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Interest................................................. $ 2,914 $ 2,869
Salaries, wages and payroll taxes........................ 7,618 1,801
Incentives............................................... 3,610 1,980
Advertising.............................................. 1,684 1,217
Self-insurance reserves.................................. 1,828 1,505
Royalties................................................ 1,194 358
Restructuring............................................ 335 1,541
Other.................................................... 4,916 5,232
------- -------
$24,099 $16,503
======= =======
</TABLE>
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------ ------
<S> <C> <C>
Royalties.................................................. $5,400 $1,909
Incentives................................................. -- 520
Other...................................................... 3,313 1,424
------ ------
$8,713 $3,853
====== ======
</TABLE>
F-18
<PAGE> 95
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
NationsBank term loan with interest accruing at the rate
equal to the greater of 1) the Federal Funds Rate plus
1/2 of 1%, or 2) the prime rate; plus an applicable
percentage based on the current Leverage Ratio (7.4% at
December 31, 1997); principal due on a quarterly payment
schedule through September 30, 2002....................... $38,500 $ --
Senior subordinated note payable with interest accruing at
12%; one-half of the principal is due in January 2003 and
the remaining balance in January 2004..................... 22,500 22,500
Junior subordinated note payable to Gerber Products Company
with interest accruing at 12%; principal is due January
2006...................................................... 11,000 12,500
Note payable to a bank with interest accruing at 8.75%;
principal and interest payable in monthly installments of
$15,992................................................... 1,583 --
Industrial Revenue Bond, payable in annual principal
installments of $100,000 through March 1, 1999, then
annual principal installments of $200,000 through March 1,
2004, plus interest at a floating rate not to exceed 14%
(3.3% -- 4.9% in 1997).................................... 1,200 --
Industrial Revenue Bond, payable in annual principal
installments of $100,000 through October 1, 1999, then
annual principal installments of $200,000 through October
1, 2004, plus interest at a floating interest rate not to
exceed 14% (3.3% -- 4.9% in 1997)......................... 1,200 --
Other....................................................... 921 --
Term note payable with interest accruing at 1) the prime
rate or the Federal Funds effective rate, whichever is
higher; plus 1.25%, or 2) the LIBOR rate plus 3........... -- 8,625
------- -------
76,904 43,625
Less current portion........................................ 7,286 1,725
Less unamortized discount................................... 144 189
------- -------
$69,474 $41,711
======= =======
</TABLE>
Substantially all of the Company's property, plant and equipment, accounts
receivable, and inventory have been pledged as collateral for the above debt.
The loan agreements require the Company to maintain certain financial ratios and
restricts the payment of dividends
The Company has available a revolving credit facility which had $250,000
outstanding at December 31, 1997. The revolving credit loan permits the Company
to borrow up to a maximum of $60,000,000 subject to specified levels of eligible
inventory, eligible inventory on order under letters of credit, and accounts
receivable with the total amount reduced by outstanding letters of credit. At
December 31, 1997, the Company had available borrowings up to approximately
$50,000,000. The Company also had outstanding letters of credit in conjunction
with purchases from foreign vendors of approximately $5,747,000 and $5,753,000
at December 31, 1997 and 1996, respectively.
Beginning in 1999, the revolving credit facility and term loan agreement
require mandatory principal prepayments annually based on excess cash flow, as
defined.
F-19
<PAGE> 96
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has available a foreign credit facility which had $735,000
outstanding at December 31, 1997. This credit facility permits the Company to
borrow up to a maximum of $3,400,000 on a long-term basis and $850,000 as a bank
overdraft. All amounts outstanding at December 31, 1997 relate to the long-term
portion.
Total interest paid was approximately $6,000,000 and $3,142,000 in fiscal
years 1997 and 1996, respectively.
The aggregate annual maturities of long-term debt at December 31, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
1998........................................... $ 7,286
1999........................................... 8,782
2000........................................... 8,966
2001........................................... 9,097
2002........................................... 7,229
Thereafter..................................... 35,544
-------
$76,904
=======
</TABLE>
9. LEASES
The Company leases buildings and machinery under both capital and operating
leases with various renewal terms and expiring in various years through 2012.
Two of these leases contain renewal options totaling 10 years.
Future minimum lease payments as of December 31, 1997 under leases
classified as capital leases and operating leases, are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR ENDING IN LEASES LEASES
- --------------------- ------- ---------
<S> <C> <C>
1998................................................. $127 $1,469
1999................................................. 109 1,018
2000................................................. 6 646
2001................................................. -- 579
2002................................................. -- 567
Thereafter.............................................. -- 708
---- ------
Total minimum lease payments.............................. 242 $4,987
======
Less amounts representing interest........................ 19
----
Present value of net minimum lease payments............... 223
Less current portion...................................... 119
----
$104
====
</TABLE>
Rent expense totaled approximately $2,292,000 for the year ended December
31, 1997 and $2,318,000 for the period from January 22, 1996 to December 31,
1996.
Assets recorded under capital leases, net of accumulated amortization, were
approximately $1,700,000 at December 31, 1997. The assets recorded under capital
leases are pledged as collateral for the capital lease obligations. Amortization
of assets recorded under capital lease obligations is included with depreciation
expense.
F-20
<PAGE> 97
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Previously, Gerber Childrenswear, Inc. had two non-contributory defined
benefit pension plans that covered substantially all full-time domestic
employees. These two plans were merged together effective May 31, 1996. Benefits
are based on the employee's years of service and, for salaried employees, each
employee's compensation during the last five years of employment. The Company's
funding policy is to make the minimum annual contributions required by
applicable regulations.
Accumulated plan benefits and projected benefit obligations, as estimated
by consulting actuaries, and plan net assets and funded status as of December
31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations........................... $(22,280) $(21,792)
Non-vested benefit obligations....................... (422) (525)
-------- --------
Accumulated benefit obligation......................... $(22,702) $(22,317)
======== ========
Projected benefit obligation........................... $(25,418) $(25,169)
Plan assets at fair value.............................. 25,155 24,630
-------- --------
Funded status -- projected benefit obligation greater
than plan assets..................................... (263) (539)
Unrecognized net (gain) loss........................... (183) 542
-------- --------
(Accrued) prepaid pension cost......................... $ (446) $ 3
======== ========
</TABLE>
Net pension cost included the following components at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Service cost -- benefits earned during the period...... $ 850 $ 845
Interest cost on projected benefit obligation.......... 1,709 1,541
Actual return on plan assets........................... (2,115) (1,917)
-------- --------
Net periodic pension cost.............................. $ 444 $ 469
======== ========
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of projected benefit obligations was 7.25% at December 31, 1997
and 1996. The weighted-average rate of increase in future compensation levels
used was 5.5% for December 31, 1997 and 1996. The expected long-term rate of
return on plan assets was 9% at December 31, 1997 and 1996.
The plan assets are invested primarily in mutual funds via the Gerber
Childrenswear, Inc. Retirement Plans Master Trust and in a group annuity
contract with an insurance company.
Gerber Childrenswear, Inc. also has an investment retirement plan for
salaried employees which provides for salaried employees and Company
contributions. The Company will match 50% of the employee's contributions up to
a maximum company match of 3% of the employee's compensation. In addition, the
Company has a defined contribution plan for the benefit of its full-time hourly
employees. The Company contributes one and one-half percent of each
participant's annual compensation to the plan. Employees are not allowed to
contribute to this plan. Effective January 1, 1997, these two plans were merged
together. Total expense under these plans was approximately $439,000 and
$230,000 for 1997 and 1996, respectively.
Sport Socks has a defined contribution pension plan. The assets of the plan
are held in an independently administered fund. No contributions were made
between December 17, 1997 and December 31, 1997.
Auburn has a defined contribution plan covering all employees who have 2
years of service of at least 1,000 hours each year. The contribution is
determined by its Board of Directors annually. No contributions were made
between December 17, 1997 and December 31, 1997.
F-21
<PAGE> 98
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gerber Childrenswear, Inc. also sponsors two defined benefit postretirement
health care plans covering all full-time domestic employees. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductibles and coinsurance. The accounting for
the plans anticipates future cost-sharing changes to the written plan that are
consistent with the Company's expressed intent to increase the retiree
contribution rate annually for the expected general inflation rate for that
year. The Company's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management. In conjunction with the acquisition
(Note 1), Gerber Products Company assumed the accumulated benefit obligation for
retirees.
The following table presents the plans' funded status at December 31, 1997
(in thousands):
<TABLE>
<CAPTION>
SALARIED NON-SALARIED TOTAL
-------- ------------ -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................... $ (21) $ (17) $ (38)
Fully eligible active plan participants........... (490) (230) (720)
Other active plan participants.................... (1,468) (1,464) (2,932)
------- ------- -------
Funded status....................................... (1,979) (1,711) (3,690)
Unrecognized net (gain)............................. (185) (737) (922)
------- ------- -------
Accrued postretirement benefit cost................. $(2,164) $(2,448) $(4,612)
======= ======= =======
Net periodic postretirement benefit cost includes
the following components:
Service cost...................................... $ 218 $ 205 $ 423
Interest cost..................................... 104 89 193
------- ------- -------
Net periodic postretirement benefit cost............ $ 322 $ 294 $ 616
======= ======= =======
</TABLE>
The following table presents the plans' funded status at December 31, 1996
(in thousands):
<TABLE>
<CAPTION>
SALARIED NON-SALARIED TOTAL
-------- ------------ -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................... $ -- $ -- $ --
Fully eligible active plan participants........... (452) (276) (728)
Other active plan participants.................... (1,495) (1,584) (3,079)
------- ------- -------
Funded status....................................... (1,947) (1,860) (3,807)
Unrecognized net loss (gain)........................ 86 (303) (217)
------- ------- -------
Accrued postretirement benefit cost................. $(1,861) $(2,163) $(4,024)
======= ======= =======
Net periodic postretirement benefit cost includes
the following components:
Service cost...................................... $ 217 $ 201 $ 418
Interest cost..................................... 108 104 212
------- ------- -------
Net periodic postretirement benefit cost............ $ 325 $ 305 $ 630
======= ======= =======
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of projected benefit obligations was 7.25% at December 31, 1997
and 1996. The weighted-average rate of increase in future compensation levels
used was 5.5% for December 31, 1997 and 1996. The weighted-average annual
assumed rate of increase in the per capita cost of covered medical benefits is
8.25 percent to 10 percent and is assumed to decrease gradually to 5.5 percent
by 2003 and remain at that level thereafter. The health care cost trend rate
F-22
<PAGE> 99
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rate by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1997 by approximately $689,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1997 by
approximately $131,000.
11. REDEEMABLE PREFERRED STOCK
The outstanding redeemable preferred stock has a scheduled redemption date
of January 31, 2007 at $100 per share plus all accrued and unpaid dividends
thereon. The Company may, at any time prior to this date, redeem all or a
portion of the preferred stock at the same price.
12. SHAREHOLDERS' EQUITY
During 1997, the Company sold shares of its Class B common stock to certain
employees for $1 per share. The total proceeds for the shares was $50,750 and
the total fair value for the shares was approximately $5,836,000. Some of these
shares were immediately vested while others vest over a five-year period. At the
time of issuance of the unvested shares, the difference between the amount paid
by the employees and the fair market value was credited to additional paid-in
capital with a corresponding charge to unearned compensation. The unearned
compensation is amortized to earnings over five years on a straight-line basis.
1997 amortization expense was $161,000. Previously amortized amounts for shares
forfeited is credited to compensation expense in the year of forfeiture. At the
time of issuance of the shares which were vested, the difference between the
amount paid by the employees and the fair market value was credited to
additional paid-in capital with a corresponding charge to expense for
$4,858,000.
Certain shareholders have demand registration rights with respect to shares
of common stock owned by them.
In connection with obtaining the $22,500,000 note payable for the
acquisition of Gerber Childrenswear, Inc., the Company issued a warrant to the
lender to purchase 191,250 shares of non-voting Class D common stock at a
nominal price. The warrant, in whole or in part, may be exercised at anytime
through January 22, 2006. The recorded value of the warrant at the date of
issuance was $189,338 (based on the relative fair values of the warrant and the
note) and reduced the face amount of the note payable.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate fair value due to
the short-maturity of these instruments.
Receivables: The carrying amounts reported in the balance sheet for
receivables approximate their fair value.
Long and short-term liabilities: The carrying amounts of the
Company's long- and short-term borrowings approximate their fair value,
based on the Company's analysis of long- and short-term rates available for
similar financing.
Forward exchange contracts: The fair value of the Company's forward
foreign currency exchange contracts is estimated by reference to quoted
prices. The estimated fair value of outstanding contracts at December 31,
1997 was approximately $9,600,000 which results in a loss of approximately
$1,042,000 which was recorded at fair value in connection with the
Company's acquisitions on December 17, 1997.
F-23
<PAGE> 100
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Numerator:
Income before extraordinary item.......................... $ 7,719,000 $ 9,480,000
Preferred stock dividends................................. (1,637,000) (1,328,000)
----------- -----------
Income available to common stockholders................... 6,082,000 8,152,000
Extraordinary item........................................ (708,000) --
----------- -----------
Numerator for basic and diluted earnings per share -- net
income available to common stockholders................... $ 5,374,000 $ 8,152,000
=========== ===========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares....................... 717,925 733,750
Effect of dilutive securities:
Warrants............................................... 191,239 191,186
Nonvested stock........................................ 42,303 75,000
----------- -----------
Denominator for diluted earnings per share -- adjusted
weighted-average shares................................... 951,467 999,936
=========== ===========
Basic earnings per share.................................... $ 7.48 $ 11.11
=========== ===========
Diluted earnings per share.................................. $ 5.65 $ 8.15
=========== ===========
</TABLE>
15. EXTRAORDINARY ITEM
In December 1997, the Company repaid its term note payable in the principal
amount of $6,500,000. The Company was required to pay a prepayment penalty of
$160,000 in connection with this transaction. The write-off of unamortized loan
costs and prepayment penalty totaling $708,000 (net of the income tax benefit of
$452,000) is included as an extraordinary item in the accompanying statement of
income for the year ended December 31, 1997.
16. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company operates in two business segments: apparel and hosiery. The
apparel segment consists of the production and sale of infant and toddler's
sleepwear, playwear, underwear, bedding and cloth diapers to mass merchandise
outlets in the United States under the Gerber trademark and private labels. The
hosiery segment which was acquired on December 17, 1997 consists of the
production and sale of sport socks under the Wilson, Coca Cola, and Dunlop names
to major retailers in the United States and Europe.
Sales, earnings before interest and income taxes, depreciation and
amortization, and capital expenditures are reported based on the operations of
each business segment or geographic region. Identifiable assets are those used
exclusively in the operations of each business segment or geographic region, or
which are allocated when used jointly.
F-24
<PAGE> 101
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present sales and other financial information by
business segment and geographic region for the years 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
BUSINESS SEGMENTS
Net trade sales:
Apparel.............................................. $200,526 $185,223
Hosiery.............................................. 1,511 --
-------- --------
Total net sales........................................ $202,037 $185,223
======== ========
Earnings (loss) before interest and taxes:
Apparel.............................................. $ 18,322 $ 22,032
Hosiery.............................................. (41) --
-------- --------
Total operating income................................. $ 18,281 $ 22,032
======== ========
Depreciation and amortization:
Apparel.............................................. $ 2,472 $ 1,834
Hosiery.............................................. 66 --
-------- --------
Total depreciation and amortization.................... $ 2,538 $ 1,834
======== ========
Capital additions:
Apparel.............................................. $ 4,180 $ 1,047
Hosiery.............................................. -- --
-------- --------
Total capital additions................................ $ 4,180 $ 1,047
======== ========
Identifiable assets:
Apparel.............................................. $113,200 $106,060
Hosiery.............................................. 50,691 --
-------- --------
Total assets........................................... $163,891 $106,060
======== ========
GEOGRAPHIC AREAS
Net trade sales:
United States........................................ $202,037 $185,223
Europe............................................... -- --
-------- --------
Total net sales........................................ $202,037 $185,223
======== ========
Earnings (loss) before interest and taxes:
United States........................................ $ 18,281 $ 22,032
Europe............................................... -- --
-------- --------
Total operating income................................. $ 18,281 $ 22,032
======== ========
Identifiable assets:
United States........................................ $153,944 $106,060
Europe............................................... 9,947 --
-------- --------
Total assets........................................... $163,891 $106,060
======== ========
</TABLE>
F-25
<PAGE> 102
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited financial data regarding the
Company's quarterly results of operations.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Net sales............................... $45,350 $40,162 $60,323 $56,202 $202,037
Gross margin............................ 12,696 12,122 16,837 14,088 55,743
Income(loss) before extraordinary
item.................................. 2,524 2,104 4,834 (1,743) 7,719
Extraordinary item -- loss on early
extinguishment of debt................ -- -- -- (708) (708)
Net income(loss)........................ 2,524 2,104 4,834 (2,451) 7,011
Basic earnings per share:
Income(loss) before extraordinary
item............................... 2.93 2.39 6.21 (3.06) 8.47
Extraordinary item.................... -- -- -- (0.99) (0.99)
Net income(loss)........................ 2.93 2.39 6.21 (4.05) 7.48
Diluted earnings per share:
Income(loss) before extraordinary
item............................... 2.20 1.81 4.71 (3.06)* 6.39
Extraordinary item.................... -- -- -- (.99)* (0.74)
Net income (loss)....................... 2.20 1.81 4.71 (4.05)* 5.65
* Same as basic -- no incremental shares are included due to loss in the quarter.
1996
Net sales............................... $36,606 $39,042 $58,336 $51,239 $185,223
Gross margin............................ 9,429 10,556 15,522 11,108 46,615
Net income.............................. 1,486 1,064 4,419 2,511 9,480
Basic earnings per share................ 1.57 1.00 5.57 2.97 11.11
Diluted earnings per share.............. 1.15 0.73 4.09 2.18 8.15
</TABLE>
18. OTHER MATTERS
The Company has employment contracts in the normal course of business with
three of its officers with remaining terms of approximately three years.
F-26
<PAGE> 103
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENTS (UNAUDITED)
On March 4, 1998, the Company filed a preliminary registration statement
with the Securities and Exchange Commission on Form S-1 for the sale of shares
of its common stock (the "Offering"). The Company intends to use the proceeds
from the Offering to repay certain indebtedness of the Company, to redeem
certain shares of the Company's preferred stock and for other general corporate
purposes.
Immediately prior to and in connection with the consummation of the
Offering, the Company and Gerber Childrenswear, Inc. ("Gerber") will consummate
a series of transactions pursuant to which the Company and Gerber will be
reorganized and recapitalized. The principal transactions are as follows:
Prior to the consummation of the Offering, the certificate of incorporation
of the Company will be amended and restated (the "Recapitalization") to provide
for the reclassification of its authorized common stock into two classes of
capital stock ("Common Stock and Class B Common Stock"). Each share of the
Common Stock will have one vote per share and the Class B Common Stock will have
no voting rights. The amended certificate will also provide that each share of
Class B Common Stock will be convertible at the option of the holder at any time
into one share of Common Stock and each share of Common Stock held by a holder
of Class B Common Stock will be convertible at the option of the holder at any
time into one share of Class B Common Stock. In addition, the amended
certificate will provide for change of the corporate name of the Company from
"GCIH, Inc." to "Gerber Childrenswear, Inc."
Prior to the consummation of the Offering and immediately after giving
effect to the Recapitalization, Gerber will be merged into the Company (the
"Merger") with the Company as the surviving entity. The Merger is intended to be
treated as a tax-free liquidation of Gerber. Upon consummation of the Merger,
113,623.6 shares of the Company's Redeemable Preferred Stock will be converted
into shares of Class A Common Stock of the Company (at a conversion ratio to be
determined at that date) and 2,828.4 shares will be converted into a right to
receive cash equal to the liquidation value per share at the time of the Merger.
The Company will retire all shares held in the treasury. Then, all of the
outstanding shares of the Company's Class A and Class C Common Stock will be
exchanged for shares of Class B Common Stock (new Class B) pursuant to a stock
split. All of the outstanding shares of the Company's Class B Common Stock (old
Class B) of the Company will be exchanged for shares of the Company's Common
Stock at a specified ratio. Finally, all of the outstanding warrants to purchase
shares of Class D Common Stock of the Company will be exchanged into warrants to
purchase shares of the Class B Common Stock (new Class B) of the Company.
The following pro forma information represents the historical amounts of
the Company adjusted to show the redemption and conversion of the Redeemable
Preferred Stock at an assumed conversion price of $14 per share, the conversion
of all classes of common stock of the Company into common stock of Gerber and a
stock split at an assumed ratio of approximately 15.5 to 1. The pro forma per
share amounts reflect the earnings per share as if the conversion of the
Redeemable Preferred Stock and the stock split had occurred on January 22, 1996.
F-27
<PAGE> 104
GCIH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL
AMOUNTS
DECEMBER 31, PRO FORMA
1997 ADJUSTED
------------ ---------
<S> <C> <C>
Total assets................................................ $163,891 $163,536
Total liabilities........................................... 129,862 129,862
Redeemable preferred stock.................................. 14,610 --
Shareholders' equity:
Common Stock.............................................. -- 26
Class B Common Stock...................................... -- 103
Common Stock, Class A..................................... 7 --
Common Stock, Class B..................................... 2 --
Common Stock, Class C..................................... -- --
Common Stock, Class D..................................... -- --
Treasury Stock............................................ (75) --
Detachable stock warrants................................. 189 189
Additional paid-in capital................................ 6,537 20,597
Retained earnings......................................... 13,526 13,526
Less unearned compensation................................ 767 767
-------- --------
Total shareholders' equity........................ 19,419 33,674
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------- ------------
1997 1996 1997 1996
---- ----- ---- ----
<S> <C> <C> <C> <C>
Per share amounts:
Earnings per common share:
Income before extraordinary item....................... 8.47 11.11 .63 .76
Extraordinary item..................................... (.99) -- (.06) --
---- ----- ---- ---
Net income................................................ 7.48 11.11 .57 .76
---- ----- ---- ---
Earnings per common share -- assuming dilution:
Income before extraordinary item....................... 6.39 8.15 .49 .57
Extraordinary item..................................... (.74) -- (.05) --
---- ----- ---- ---
Net income................................................ 5.65 8.15 .44 .57
---- ----- ---- ---
</TABLE>
Also, in connection with the Offering, the Company plans to adopt a
Long-Term Equity Incentive Plan (the "Incentive Plan") designed to provide
incentives to present and future key employees of the Company and its
subsidiaries as may be selected by the Compensation Committee of the Board of
Directors (the "Committee"). The Incentive Plan will provide for the granting to
Participants the following types of incentive awards: stock options, stock
appreciation rights, restricted stock, performance units, performance grants and
other awards deemed appropriate by the Committee. An aggregate of up to 750,000
shares will be reserved for issuance under the Incentive Plan. The Incentive
Plan affords the Company latitude in tailoring incentive compensation for the
retention of key employees. This plan also limits the number of shares each
participant in the plan shall be entitled to receive to no more than 25,000
common shares in any calendar year and is scheduled to terminate ten years from
the date the Incentive Plan is approved.
F-28
<PAGE> 105
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gerber Childrenswear, Inc.
We have audited the accompanying consolidated statements of income and cash
flows of Gerber Childrenswear, Inc. ("Predecessor Company") for the year ended
December 31, 1995. These financial statements are the responsibility of the
Predecessor Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of the Predecessor Company for the year ended December 31, 1995 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
September 12, 1997
F-29
<PAGE> 106
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
Net sales................................................... $197,401
Cost of sales............................................... 156,434
--------
Gross margin................................................ 40,967
Selling, general and administrative expenses................ 24,633
--------
Income before income taxes.................................. 16,334
Federal and state income taxes (Note 2):
Current................................................... $6,716
Deferred.................................................. (446) 6,270
------ --------
Net income.................................................. $ 10,064
========
</TABLE>
See accompanying notes.
F-30
<PAGE> 107
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 10,064
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 1,959
Provision for allowance for doubtful accounts............. (1,155)
Provision for deferred income taxes....................... (446)
Loss on disposal of fixed assets.......................... (10)
Changes in operating assets and liabilities:
Inventories............................................ 4,931
Accounts receivable.................................... (1,213)
Prepaid expenses....................................... (47)
Accounts payable....................................... (3,371)
Accrued expenses....................................... 1,362
Income taxes payable................................... 2,107
Other accrued liabilities.............................. (1,564)
Accrued pension and postretirement benefit cost........ 755
--------
Net cash provided by operating activities................... 13,372
INVESTING ACTIVITIES
Purchases of property, plant and equipment.................. (1,483)
FINANCING ACTIVITIES
Advances to parent.......................................... (11,728)
--------
Net increase in cash and cash equivalents................... 161
Cash and cash equivalents at December 31, 1994.............. 319
--------
Cash and cash equivalents at December 31, 1995.............. $ 480
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
Fixed assets transferred to parent as a dividend.......... $ 1,248
</TABLE>
See accompanying notes.
F-31
<PAGE> 108
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Gerber Childrenswear, Inc. ("the Company") is a wholly-owned subsidiary of
Gerber Products Company. In August 1994, Sandoz, Ltd. ("Sandoz"), a company
headquartered in Switzerland, acquired Gerber Products Company. The financial
statements of the Company as of December 31, 1995 are based on historical costs
incurred and recorded by the Company which in the opinion of management include
all material expenses on a stand-alone basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All material intercompany transactions have
been eliminated in consolidation.
Revenue Recognition
Substantially all revenue is recognized when products are shipped to
customers.
Concentration of Credit Risk
The Company manufactures infant apparel and products that are primarily
sold to retail entities throughout the United States. The Company's primary
customers are mass merchants and discount stores. Sales to three customers
represented approximately 58% of net sales for 1995. The Company performs
periodic credit evaluations of their customers and generally does not require
collateral for credit sales.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Advertising
Advertising costs of approximately $3,108,000 were expensed as incurred.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed by the
straight-line method over the estimated useful lives of the assets. Depreciation
for income tax reporting is computed based upon "Modified Accelerated Cost
Recovery System" guidelines.
Income Taxes
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
F-32
<PAGE> 109
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was included in a consolidated Federal income tax return filed
by its parent company, Gerber Products Company. The Company provides for income
taxes on a stand-alone separate taxpayer basis, and reflects current income
taxes as a part of its accounts with its parent company. In conjunction with the
sale of the Company in January 1996 to a third party, Gerber Products Company
assumed all current income tax liabilities at December 31, 1995 and up to the
date of the sale.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INCOME TAXES
Income tax expense is different from the amount that would result from
applying the Federal statutory rate to income before income taxes as follows (in
thousands):
<TABLE>
<S> <C>
Federal tax at statutory rate............................... $5,717
State income tax, net of Federal tax benefit................ 531
Other....................................................... 22
------
Income tax expense.......................................... $6,270
======
</TABLE>
Current and deferred income tax expense are as follows:
<TABLE>
<S> <C>
Current:
Federal................................................... $5,917
State..................................................... 799
------
Total current............................................... 6,716
Deferred:
Inventory reserves........................................ (704)
Postretirement benefits................................... (452)
Restructuring reserves.................................... 436
Depreciation.............................................. (308)
Other..................................................... 582
------
Total deferred.............................................. (446)
------
Income tax expense.......................................... $6,270
======
</TABLE>
Income taxes paid were approximately $400,000 in 1995.
3. EMPLOYEE BENEFIT PLANS
The Company has two non-contributory defined benefit pension plans that
cover substantially all full-time domestic employees. Benefits are based on the
employee's years of service and, for salaried employees, each employee's
compensation during the last five years of employment. The company's funding
policy is to make the minimum annual contributions required by applicable
regulations.
F-33
<PAGE> 110
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic pension cost included the following components at December 31,
1995 (in thousands):
<TABLE>
<CAPTION>
SALARIED NON-SALARIED TOTAL
-------- ------------- -------
<S> <C> <C> <C>
Service cost............................... $ 640 $ 174 $ 814
Interest cost.............................. 1,016 575 1,591
Expected return of assets.................. (1,316) (556) (1,872)
------- ----- -------
Net periodic pension cost.................. $ 340 $ 193 $ 533
======= ===== =======
</TABLE>
A weighted-average discount rate of 8.0% and a rate of increase in future
compensation levels of 5.5% were used in determining the actuarial present value
of projected benefit obligations. The expected long-term rate of return on
plans' assets was 9.0%.
The plans' assets are invested primarily in mutual funds via the Gerber
Childrenswear, Inc. Retirement Plans Master Trust and in a group annuity
contract with an insurance company.
The Company also has an investment retirement plan for salaried employees
which provides for salaried employees and Company contributions. The Company
will match 50% of the employee's contributions up to a maximum of 3% of the
employee's compensation. In addition, the Company has a defined contribution
plan for the benefit of its full-time hourly employees. The Company contributes
one and one-half percent of each participant's annual compensation to the plan.
Employees are not allowed to contribute to this plan. Total expense under these
salaried and hourly employees defined contribution plans was approximately
$536,000 for 1995.
The Company also sponsors two defined benefit postretirement health care
plans covering all full-time domestic employees. The plans are contributory,
with retiree contributions adjusted annually, and contain other cost-sharing
features such as deductibles and coinsurance. The accounting for the plans
anticipates future cost-sharing changes to the written plan that are consistent
with the Company's expressed intent to increase the retiree contribution rate
annually for the expected general inflation rate for that year. The Company's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management.
Net periodic post retirement benefit cost for 1995 included the following
components (in thousands):
<TABLE>
<CAPTION>
SALARIED NON-SALARIED TOTAL
-------- ------------ -----
<S> <C> <C> <C>
Service cost................................... $235 $260 $495
Interest cost.................................. 137 171 308
---- ---- ----
Net periodic postretirement benefit cost....... $372 $431 $803
==== ==== ====
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent. The weighted-average annual
assumed rate of increase in the per capita cost of covered medical benefits is 9
percent to 11 percent and is assumed to decrease gradually to 5.5 percent by
2003 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rate by one percentage point in
each year would increase the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by approximately
$170,000.
4. LEASES
The Company leases buildings and machinery under operating leases with
various renewal terms and expiring in various years through 2000. Rent expense
for 1995 was approximately $2,840,000. Future
F-34
<PAGE> 111
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum lease payments under noncancelable operating leases at December 31, 1995
are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $1,549
1997................................................ 984
1998................................................ 503
1999................................................ 496
2000................................................ 20
------
$3,552
======
</TABLE>
5. LETTERS OF CREDIT
The Company has letters of credit outstanding totaling approximately
$4,600,000. These are used in conjunction with purchases from foreign vendors.
6. BUSINESS SEGMENTS
The Company operates in the apparel line of business, which encompasses the
manufacture, distribution, and sale of infant and toddler's sleepwear, playwear,
underwear, bedding and cloth diapers to mass merchandise outlets under Gerber
trademark and private labels. The Company's principal operations and markets are
located in the United States.
Net sales, earnings before interest and income taxes, depreciation and
amortization, capital expenditures and identifiable assets of businesses outside
of the United States were not significant. Historically, transfers of product
between geographic areas have not been significant.
F-35
<PAGE> 112
INDEPENDENT AUDITORS' REPORT
Board of Directors
Auburn Hosiery Mills, Inc. and Subsidiary
Auburn, Kentucky
We have audited the accompanying consolidated statements of income and cash
flow of Auburn Hosiery Mills, Inc. and Subsidiary for the period January 1, 1997
through December 16, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated statements of income and
cash flows are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit of the
statements of income and cash flows provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of the operations of
Auburn Hosiery Mills, Inc. and Subsidiary and cash flows for the period January
1, 1997 through December 16, 1997, in conformity with generally accepted
accounting principles.
J. C. HOLLAND & CO., PSC
Bowling Green, Kentucky
January 16, 1998
F-36
<PAGE> 113
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
(EXCEPT EARNINGS
PER SHARE)
----------------
<S> <C>
Net sales................................................... $49,033
Cost of goods sold.......................................... 39,019
-------
Gross profit................................................ 10,014
-------
Operating expenses
Sales and distribution expenses -- Note 4................. 5,941
General and administrative expenses....................... 2,269
-------
8,210
-------
Income from operations...................................... 1,804
Other income (expense)
Commission income -- Note 4............................... 443
Interest expense.......................................... (333)
Loss on disposal of equipment............................. (6)
Interest income........................................... 182
Other..................................................... 380
-------
666
-------
Income before income taxes.................................. 2,470
Income taxes -- Note 2...................................... 939
-------
Net income.................................................. $ 1,531
=======
Basic and diluted earnings per share........................ $ 1,143
=======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-37
<PAGE> 114
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
----------
<S> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,531
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 1,413
Amortization........................................... 13
Loss on sale of assets................................. 6
Change in assets and liabilities:
Increase in accounts receivable...................... (1,658)
Decrease in inventories.............................. 407
Decrease in other receivables........................ 7
Increase in refundable income taxes.................. (432)
Increase in other current assets..................... (116)
Increase in accounts payable......................... 276
Increase in accrued royalties and commissions........ 54
Increase in accrued labor............................ 66
Increase in accrued vacation......................... 91
Increase in bank overdraft........................... 427
Increase in other accrued expenses and payables...... 304
Decrease in deferred income taxes.................... (2)
-------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 2,387
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,136)
Net decrease in restricted cash........................... 8
Appreciation in cash surrender value of life insurance.... (97)
Payments received on receivables from affiliates.......... 71
Loans to stockholder...................................... (1,512)
-------
NET CASH USED IN INVESTING ACTIVITIES............. (2,666)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving loan agreement............. 1,271
Principal payments on long-term debt...................... (1,038)
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 233
-------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 1
-------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (45)
CASH AND CASH EQUIVALENTS AT JANUARY 1, 1997................ 98
-------
CASH AND CASH EQUIVALENTS AT DECEMBER 16, 1997.... $ 53
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER
16, 1997 FOR:
Interest.................................................. $ 338
Income taxes.............................................. 1,584
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-38
<PAGE> 115
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 16, 1997
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Auburn Hosiery Mills, Inc. and Subsidiary (the "Company") is engaged in the
production and sale of various styles of socks to retail chain stores primarily
in the United States of America.
Basis of Consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiary after elimination of significant
intercompany balances and transactions.
Foreign Currency Translation
Assets and liabilities of the Company's wholly-owned subsidiary are
translated into U.S. dollars at the current rate of exchange, while revenues and
expenses are translated at the average exchange rate during the year.
Translation adjustments are excluded from the results of operations and are
reported as a separate component of stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, certificates of deposit
and highly liquid investments with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is computed
using currently adjusted standards that approximate actual cost on first-in,
first-out basis. Market is based on estimated net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. The cost is depreciated over the estimated
useful lives of the related assets. Leased equipment is amortized over the term
of the related lease. Depreciation and amortization are computed on the
straight-line method for financial reporting purposes and on an accelerated
method for income tax purposes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Intangibles
Loan closing costs and other deferred charges are amortized over the life
of the related charges on the straight-line method.
F-39
<PAGE> 116
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
S Corporation -- Income Tax Status
During 1987, the Company elected to be taxed under the provisions of
subchapter S of the Internal Revenue Code effective July 1, 1987. Under those
provisions, the Company did not pay federal or state corporate income taxes on
its taxable income. Instead, the stockholders were liable for individual federal
and state income taxes on their respective shares of the Company's taxable
income. Effective November 1, 1989, the Company terminated its S corporation
status when it purchased the wholly-owned subsidiary. A provision for federal
and state income taxes has been included in these financial statements for the
period January 1, 1997 through December 16, 1997.
Deferred Income Taxes
The Company accounts for its income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Differences are primarily
inventory cost, vacation payable and depreciation.
Earnings Per Share
Earnings per share amounts are based on the number of shares outstanding
during the period January 1, 1997 through December 16, 1997, which remained
unchanged.
New Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 130, Reporting
Comprehensive Income, which is effective for financial statements for fiscal
years ending after December 31, 1997. This standard establishes standards for
the reporting and display of comprehensive income which is defined under SFAS
No. 130 as "the change in equity (net assets) during a period from transactions
and other events and circumstances from nonowner sources." Under SFAS No. 130,
the Company has several choices in the disclosure of the components of other
comprehensive income. The Company plans to implement SFAS No. 130 during the
first quarter of fiscal year 1998, and management anticipates that such adoption
will have no material effect on the Company's financial condition or results of
operations.
NOTE 2: INCOME TAXES
Income tax expense is different from the amount that would result from
applying the federal statutory rate of 34% to income before income taxes as
follows:
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
----------
<S> <C>
Federal tax at statutory rate............................. $777
State income tax, net of federal tax benefit.............. 193
Other..................................................... (31)
----
Income Tax Expense.............................. $939
====
</TABLE>
F-40
<PAGE> 117
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Current and deferred income tax expense for the period January 1, 1997
through December 16, 1997 are as follows:
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
----------
<S> <C>
Current:
Federal.............................................. $755
State................................................ 185
----
Total Current................................... 940
----
Deferred:
Inventory............................................ 39
Accrued vacations.................................... (39)
Reserve for bad debts................................ (96)
Depreciation......................................... 95
----
Total Deferred.................................. (1)
----
Income Tax Expense.............................. $939
====
</TABLE>
Income taxes paid were approximately $1,401,000 for the period January 1,
1997 through December 16, 1997.
NOTE 3: OPERATING LEASES -- LESSEE
The Company leases various equipment under non-cancellable operating
leases.
Rent expense was approximately $101,000, net of subleases of approximately
$91,000, for the period January 1, 1997 through December 16, 1997.
NOTE 4: RELATED PARTY TRANSACTIONS
One of the Company's stockholders owns certain companies that AUBURN
HOSIERY MILLS, INC. uses as its sales representatives and pays those companies
sales commissions. Also, the Company remits royalties through its affiliates to
pay license grantors. The following is a summary of transactions with affiliates
for December 16, 1997 and the period January 1, 1997 through December 16, 1997.
<TABLE>
<CAPTION>
DOLLARS IN
THOUSANDS
----------
<S> <C>
Sales commissions paid to affiliates (included in sales and
distribution expense in the accompanying consolidated
statements of income)..................................... $2,732
======
Royalties paid through affiliates (included in sales and
distribution expense in the accompanying consolidated
statements of income)..................................... $2,157
======
</TABLE>
The Company sold greige goods inventory at market price to a foreign
affiliate, which amounted to approximately $149,000 for the period January 1,
1997 through December 16, 1997.
The Company's subsidiary received approximately $443,000 in commission
income from a foreign affiliate for the period January 1, 1997 through December
16, 1997.
F-41
<PAGE> 118
AUBURN HOSIERY MILLS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: CONCENTRATIONS
The Company sells a substantial portion of its product to certain
customers. Customers with ten percent or more of the Company's sales during the
period January 1, 1997 through December 16, 1997 aggregated to approximately
$32,239,000.
The Company manufactures and sells a substantial portion of its product
under a single licensing agreement. This agreement was renewed January 1, 1998
and expires December 31, 2002 and is renewable for an additional 5 years at that
time.
NOTE 6: PROFIT SHARING PLAN
The Company has a defined contribution plan covering all employees of the
Company who have two years of service of at least 1,000 hours each year. The
Company's contribution is determined by its Board of Directors annually. The
contributions charged to operations for the period January 1, 1997 through
December 16, 1997 was $100,000.
NOTE 7: CONTINGENCIES
The Company is self-insured for their group medical plan. Any person who is
actively working for the employer on a full-time basis (at least 30 hours per
week) and has been with the Company at least 90 days is eligible to participate
in the plan. Dependent coverage is also offered to qualified dependents of an
eligible employee. The Company has contracted with an administrator to process
claims and has purchased stop-loss insurance to limit its losses on individual
and aggregate claims. The Company's loss limit per person is $40,000 and the
individual lifetime maximum stop loss coverage is $1,000,000; the Company's
annual aggregate loss limit is based on a monthly limit per the average number
of employees in the plan. The Company's minimum annual aggregate loss is equal
to the greater of the average number of employees in the plan times a $330
allowance times 90% or $1,842,588. Stop-loss insurance will pay any claims in
excess of these calculated annual limits.
The Company elected to become self-insured for their worker's compensation
insurance. The Company has contracted with an administrator to process claims
and provide stop-loss insurance to limit its losses on individual and aggregate
claims. The Company's loss limit per event has a range from $150,000 to
$300,000; the Company's aggregate loss limit is $1,000,000. Stop-loss insurance
will pay any claims in excess of these limits.
The Company has obtained a letter of credit from Nations Bank for $150,000
for the purpose of supporting the worker's compensation self-insurance.
NOTE 8: SUBSEQUENT EVENT
The stockholders of Auburn Hosiery Mills, Inc. and Subsidiary sold 100% of
their stock to GCIH, Inc., a Delaware corporation, effective as of the close of
business December 16, 1997.
NOTE 9: SEGMENT INFORMATION
The Company operates in a single hosiery line of business, encompassing the
manufacture, distribution and sale of sport socks under the Wilson, Converse and
Coca-Cola names to major retailers. The Company's principal operations and
markets are located in the United States.
Net sales, earnings before interest and income taxes, depreciation and
amortization, capital expenditures and identifiable assets of businesses outside
of the United States were not significant. Historically, transfers of product
between geographic areas have not been significant. During the period January 1,
1997 through December 16, 1997, sales to a single customer amounted to
approximately 66% of total net sales.
F-42
<PAGE> 119
SPORT SOCKS CO. (IRELAND) LIMITED
Report of Independent Accountants
To the Board of Directors of Sport Socks Co. (Ireland) Limited
We have audited the accompanying statements of profit and loss account and
of cash flows of Sport Socks Co. (Ireland) Limited ("the company") for the fifty
weeks ended 16 December 1997 (the "financial statements") all expressed in Irish
pounds as set out on pages F-44 to F-55 inclusive. These financial statements
are the responsibility of the company's directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements audited by us present fairly, in
all material respects the results of its operations and its cash flows for the
fifty weeks ended 16 December 1997 in conformity with accounting principles
generally accepted in Ireland.
Accounting principles generally accepted in Ireland vary in certain
significant respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net loss expressed in Irish pounds for the fifty weeks ended 16 December 1997 to
the extent summarised in Note 16 to the financial statements.
PRICE WATERHOUSE
CORK, IRELAND
Date: 23 February 1998
F-43
<PAGE> 120
SPORT SOCKS CO. (IRELAND) LIMITED
PROFIT AND LOSS ACCOUNT
FIFTY WEEKS ENDED 16 DECEMBER 1997
<TABLE>
<CAPTION>
IRL
----------
<S> <C>
TURNOVER.................................................... 12,519,930
Cost of sales............................................... (8,514,277)
----------
GROSS PROFIT................................................ 4,005,653
Selling and distribution costs.............................. (2,434,199)
Administrative expenses..................................... (919,353)
Exceptional item -- loss on foreign exchange commitments
(note 10)................................................. (716,000)
----------
OPERATING LOSS.............................................. (63,899)
Interest receivable......................................... 9,913
Interest payable (note 3)................................... (56,835)
----------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (note 4)........ (110,821)
Taxation credit (note 5).................................... 25,275
----------
LOSS FOR THE FINANCIAL PERIOD............................... (85,546)
Transfer to other reserves (note 6)......................... (109,703)
Allotment of equity share capital (note 6).................. (100,000)
----------
Decrease in balance during the period....................... (295,249)
Balance at beginning of period.............................. 1,886,096
----------
BALANCE AT END OF PERIOD (note 7)........................... 1,590,847
==========
</TABLE>
Turnover and operating loss arose solely from continuing operations. There
were no recognised gains and losses other than those dealt with in the profit
and loss account.
The accompanying footnotes on pages F-46 to F-55 are an integral part of
these financial statements.
ON BEHALF OF THE BOARD
R L Solar
K K Angliss
F-44
<PAGE> 121
SPORT SOCKS CO. (IRELAND) LIMITED
CASH FLOW STATEMENT
FIFTY WEEKS ENDED 16 DECEMBER 1997
<TABLE>
<CAPTION>
IRL
----------
<S> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES (note 8).......... 1,731,068
----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid............................................... (58,741)
Interest element of finance lease rentals................... (1,281)
Interest received........................................... 9,372
----------
Net cash outflow from returns on investments and servicing
of finance................................................ (50,650)
----------
TAXATION
Corporation tax paid........................................ (113,882)
----------
CAPITAL EXPENDITURE
Purchase of tangible assets................................. (1,341,164)
----------
EQUITY DIVIDENDS PAID....................................... --
----------
Net cash inflow before management of liquid resources and
financing................................................. 225,372
----------
MANAGEMENT OF LIQUID RESOURCES.............................. --
----------
FINANCING
Bank loan advances (note 8)................................. 298,645
Bank loans repaid (note 8).................................. (393,832)
Repayment of loan from director (note 8).................... (100,000)
Capital element of finance lease rentals (note 8)........... (36,409)
Capital grants received..................................... 132,715
----------
Net cash outflow from financing............................. (98,881)
----------
INCREASE IN CASH (note 8)................................... 126,491
==========
</TABLE>
The accompanying footnotes on pages F-46 to F-55 are an integral part of
these financial statements.
ON BEHALF OF THE BOARD
R L Solar
K K Angliss
F-45
<PAGE> 122
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1 ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements are prepared under the historical cost convention,
in Irish pounds, and in accordance with accounting standards generally accepted
in Ireland. The preparation of financial accounts in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
TURNOVER
Turnover represents the invoiced value of goods to third parties, exclusive
of value added tax.
TANGIBLE ASSETS
Tangible assets are stated at cost less accumulated depreciation.
Depreciation is calculated in order to write off the cost of tangible
assets other than land over their estimated useful lives by equal annual
instalments. The estimated useful lives of tangible assets by reference to which
depreciation has been calculated are as follows:
<TABLE>
<S> <C>
Leasehold buildings....................................... 25 years
Plant and machinery....................................... 7 years
Office equipment.......................................... 10 years
Motor vehicles............................................ 3 years
</TABLE>
LEASES
Where tangible assets are financed by leasing agreements which give rights
approximating to ownership ("finance leases") they are treated as if they had
been purchased outright at the present values of the minimum lease payments and
the corresponding leasing liabilities are shown in the balance sheet as finance
leases.
Depreciation is calculated in order to write off the amounts capitalised
over the estimated useful lives of the assets by equal annual instalments.
Interest arising on finance leases is charged to the profit and loss account in
proportion to the amounts outstanding under the leases.
All operating lease rentals are charged to the profit and loss account on a
straight line basis.
STOCKS
Stocks are stated at the lower of cost and net realisable value.
Cost is based on normal levels of cost and activity and comprises cost of
purchase and, where applicable, cost of conversion to current condition. Cost of
purchase includes charges such as freight or duty where appropriate. Cost of
conversion includes direct labour, direct expenses and fixed and variable
production overhead expenditure.
Net realisable value comprises the actual or estimated selling price (net
of trade but before settlement discounts), less all further costs to completion,
and less all costs to be incurred in marketing, selling and distribution.
F-46
<PAGE> 123
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED TAXATION
Deferred taxation is provided on timing differences to the extent that it
is expected to become payable in the foreseeable future and any amount not
provided is disclosed as a contingent liability.
Timing differences are temporary differences between profits as computed
for taxation purposes and profits as stated in the financial statements which
arise because certain items of income and expenditure in the financial
statements are dealt with in different periods for taxation purposes.
FOREIGN CURRENCIES
Monetary assets and liabilities denominated in foreign currencies are
translated at the exchange rates ruling at the balance sheet date and revenues,
costs and non-monetary assets at the exchange rates ruling at the dates of the
transactions. However, where a transaction is covered by way of forward
contract, the contracted exchange rate is used to translate the asset,
liability, revenue or cost.
Profits and losses arising from foreign currency translations and on
settlement of amounts receivable and payable in foreign currency are dealt with
through the profit and loss account.
Monetary assets are money held and amounts to be received in money; all
other assets are non-monetary assets.
Where the company enters into forward currency contracts to hedge foreign
exchange exposures on anticipated foreign currency trading receipts, unrealised
gains and losses on all contracts yet to mature are calculated and reflected in
the profit and loss account for the period.
GRANTS
Capital grants are treated as deferred income, which is credited to the
profit and loss account on the same basis as the related tangible assets are
depreciated.
Employment grants receivable on creation of new jobs are treated as
deferred income, which is credited to the profit and loss account over the
minimum period for which each job must be maintained. The period by reference to
which employment grants are amortised is five years being the minimum period for
which each job must be maintained.
PENSION COSTS
Contributions to the defined contribution pension scheme are charged to the
profit and loss account as incurred.
2 BACKGROUND OF THE COMPANY AND BASIS OF PREPARATION
Sport Socks Co. (Ireland) Limited was incorporated on 19 December 1989 and
is registered in the Republic of Ireland. The company manufactures and sells
branded sport socks in Europe under established brand names such as Wilson, Coca
Cola and Dunlop through volume retailers and major sporting goods chains. The
company was wholly owned and controlled in the period by Mr. J. P. Manning,
shareholder and director. With effect from 17 December 1997, the company is a
wholly owned subsidiary of Gerber Childrenswear Inc. incorporated in the state
of Delaware, USA.
These financial statements, prepared for the fifty weeks ended 16 December
1997, do not constitute "statutory accounts" within the meaning of the Companies
Acts 1963 to 1990 of Ireland for the period presented. Statutory accounts were
prepared for the year ended 31 December 1997.
F-47
<PAGE> 124
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
These financial statements exclude a balance sheet, related balance sheet
notes, comparatives for the prior year, a Directors' Report and certain other
information (such as names and addresses of the Company's auditors, bankers and
solicitors) which are required of "statutory accounts" by the Companies Acts
1963 to 1990. However, they include all material disclosures required by
generally accepted accounting principles in Ireland including those Companies
Acts disclosures relating to profit and loss and cash flow statements.
3 INTEREST PAYABLE
<TABLE>
<CAPTION>
IRL
------
<S> <C>
This interest was in respect of:
Borrowings wholly repayable within five years:
- bank overdrafts...................................... 1,788
- bank loans........................................... 40,117
- finance leases....................................... 1,281
- creditors............................................ 13,649
------
56,835
======
</TABLE>
4 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
<TABLE>
<CAPTION>
IRL
---------
<S> <C>
Loss on ordinary activities before taxation has been arrived
at after charging:
Staff costs
- wages and salaries................................... 3,375,602
- social welfare costs................................. 313,801
- pension costs........................................ 75,217
---------
3,764,620
Depreciation................................................ 805,181
Royalties................................................... 679,351
Currency translation loss................................... 170,199
Loss on foreign exchange commitments........................ 716,000
Auditors' remuneration...................................... 19,795
Directors' emoluments....................................... --
=========
and after crediting:
Amortisation of capital grants.............................. 59,804
Amortisation of employments grants.......................... 172,998
Training grants............................................. 23,508
=========
</TABLE>
The estimated useful economic lives and recoverable values of tangible
assets are subject to regular review by management. Where management has
committed to a plan to dispose of or replace the assets, whether by sale or
abandonment, the assets are reduced to their estimated fair values and a charge
is reflected in the profit and loss account. As a result of the company's
ongoing capital expenditure investment programme in 1997, management abandoned
or were committed to a plan to dispose of certain assets resulting in a charge
to the profit and loss of IRL192,419 and which is included in the depreciation
charge.
F-48
<PAGE> 125
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5 TAXATION CREDIT
<TABLE>
<CAPTION>
IRL
------
<S> <C>
Based on profit for the period at 10%
Corporation tax............................................. --
Deferred tax................................................ 20,000
------
20,000
Overprovision in respect of prior years
Corporation tax............................................. 5,275
------
25,275
======
</TABLE>
There is no corporation tax charge for the period due to losses incurred.
6 CHANGES IN SHAREHOLDERS' EQUITY
The changes in shareholders' equity balances are comprised of the
following:
<TABLE>
<CAPTION>
CALLED UP
EQUITY SHARE PROFIT AND LOSS OTHER
CAPITAL ACCOUNT RESERVES
IRL IRL IRL
------------ --------------- --------
<S> <C> <C> <C>
Balance at 1 January 1997................................ 1,623,800 1,886,096 78,212
Transfers................................................ 100,000 (209,703) 109,703
Loss for the financial period............................ -- (85,546) --
--------- --------- -------
Balance at 16 December 1997.............................. 1,723,800 1,590,847 187,915
========= ========= =======
</TABLE>
Other reserves represent a non distributable reserve maintained in
compliance with the company's existing grant agreements.
During the period ended 16 December 1997 100,000 ordinary IRL1 shares were
allotted in consideration for the reduction by an equivalent amount of the
company's revenue reserves.
7 PROFIT AND LOSS ACCOUNT
Profit and loss account includes IRL810,037 which is not available for
distribution until the contingencies referred to in note 11 have expired.
F-49
<PAGE> 126
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
8 NOTES ON THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
IRL
----------
<S> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES:
Operating loss............................................ (63,899)
Depreciation.............................................. 805,181
Amortisation of capital grants............................ (59,804)
Amortisation of employment grants......................... (172,998)
Currency translation loss on director's loan.............. 83,697
Currency translation loss on bank loans................... 9,713
Exceptional item -- loss on foreign exchange
commitments............................................ 716,000
Increase in stocks........................................ (205,477)
Decrease in debtors....................................... 31,004
Increase in creditors..................................... 587,651
----------
1,731,068
==========
IRL
----------
RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET DEBT:
Increase in cash in the year.............................. 126,491
Cash outflow from decrease in debt and finance leases..... 131,596
Cash outflow from decrease in loan from director.......... 100,000
----------
Reduction in net debt resulting from cash flows........... 358,087
Effects of changes in foreign exchange rates.............. (93,410)
----------
Movement in net debt in the period........................ 264,677
Net debt at 1 January 1997................................ (1,021,195)
----------
Net debt at 16 December 1997.............................. (756,518)
==========
</TABLE>
F-50
<PAGE> 127
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
EFFECTS OF
AT FOREIGN AT
1 JANUARY EXCHANGE RATE OTHER 16 DECEMBER
1997 CASH FLOWS CHANGES CHANGES 1997
ANALYSIS OF CHANGES IN NET DEBT IRL IRL IRL IRL IRL
- ------------------------------- ---------- ---------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Cash at bank and in hand............... 455,059 (18,454) -- -- 436,605
Bank overdrafts........................ (144,945) 144,945 -- -- --
---------- -------- ------- -------- --------
Cash................................... 310,114 126,491 -- -- 436,605
---------- -------- ------- -------- --------
Bank loans
Due within one year.................... (217,593) (298,645) (9,713) 214,951 (311,000)
Due after one year..................... (413,424) 393,832 -- (214,951) (234,543)
---------- -------- ------- -------- --------
(631,017) 95,187 (9,713) -- (545,543)
---------- -------- ------- -------- --------
Finance leases
Due within one year.................... (28,239) 27,697 -- (19,266) (19,808)
Due after one year..................... (34,126) 8,712 -- 19,266 (6,148)
---------- -------- ------- -------- --------
(62,365) 36,409 -- -- (25,956)
---------- -------- ------- -------- --------
Loan from director..................... (637,927) 100,000 (83,697) -- (621,624)
---------- -------- ------- -------- --------
Net debt............................... (1,021,195) 358,087 (93,410) -- (756,518)
========== ======== ======= ======== ========
</TABLE>
Tangible assets purchases of IRL300,000 were made on extended credit terms.
This liability is repayable on an instalment basis over five years commencing
subsequent to 16 December 1997.
9 RELATED PARTY TRANSACTIONS
Details of the company's transactions with related parties are as follows:
(i) Cost of sales include purchases of stocks of IRL126,070 from
Auburn Hosiery Mills Inc, a company owned and controlled by Mr. J.P.
Manning during the period.
(ii) Selling and distribution costs include sales commission payable
of IRL286,573 to Sport Socks Co. (UK) Limited, a company owned and
controlled by Mr. J.P. Manning during the period.
(iii) Selling and distribution costs include Wilson licence royalties
of IRL372,683 and IRL80,016 respectively payable to Sales and Marketing
Hosiery Corporation and Auburn Hosiery Mills Inc., companies controlled and
owned by Mr. J.P. Manning, company shareholder and director during the
period.
(iv) Selling and distribution costs include sales and marketing costs
amounting to IRL214,376 representing the salary and related expenses of
sales and marketing personnel, recharged to the company by JP Manning Inc.,
a company controlled by Mr. J.P. Manning.
(iv) Included in administrative expenses are amounts of IRL5,597,
IRL8,500 and IRL7,350 respectively, paid to White and Case, and Anthony
Carroll & Co. and T. Collins relating to legal and engineering consultancy
services provided by firms in which J. Reiner, B. Carroll and T. Collins,
company directors, have respective interests.
10 FOREIGN EXCHANGE COMMITMENTS
The company's revenues are primarily received in currency other than Irish
pounds and accordingly the company is subject to currency exposure. The company
seeks to limit this risk by entering into forward
F-51
<PAGE> 128
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
currency contracts at varying maturity dates. Unrealised gains or losses on all
of those contracts yet to mature are calculated at the balance sheet date and
reflected in the profit and loss account for the period.
At the balance sheet date, the company has contracted to sell forward
foreign currencies equivalent to IRL8,032,000 at various rates and maturity
dates. Unrealised losses of IRL716,000 in respect of all of those contracts
relating to future transactions, excluding those contracts in respect of sales
which have arisen or were committed prior to the balance sheet date, are
reflected in the profit and loss account. This represents a change in accounting
policy for the company and is considered by the directors to be more appropriate
to the company's circumstances and give a fairer presentation of the results and
financial position of the business. The comparatives have not been restated as
in the opinion of the directors the financial effects of the change in
accounting policy are not material to the company's comparative results and
financial position.
If the forward currency contracts were considered separately from
underlying future revenues the company would be subject to market risk from
fluctuations in currency exchange rates. The company only enters these forward
contracts to hedge the related currency risks. Therefore there is a market risk
only to the extent that the actual foreign currency cashflows differ from
anticipated amounts and the only credit risk arises from potential non
performance by counter parties which is restricted to the hedging differential
and not the principal amount hedged. The company does not anticipate non
performance as the counterparties are all licensed banks.
11 CONTINGENT LIABILITIES
CAPITAL GRANTS
If certain circumstances occur, these grants could be repayable up to a
maximum of IRL950,808. Such circumstances would arise if the company ceased to
use the assets to which the grants relate.
EMPLOYMENT GRANTS
If certain circumstances occur, these grants could be repayable up to a
maximum of IRL864,991. Such circumstances would arise at any time within five
years from the date of receipt of the first moiety of the employment grant in
respect of any job if the job should become vacant and remain vacant for a
period in excess of six calendar months.
12 EMPLOYEES
The average number of persons employed by the company during the period was
270, 266 of whom are based in the Republic of Ireland, and 4 in Belgium.
13 PENSIONS
The company operates a defined contribution pension scheme. The assets of
the scheme are held separately from those of the company in an independently
administered fund. The pension cost charge represents contributions payable by
the company to the fund and amounted to IRL75,217.
F-52
<PAGE> 129
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
14 DIRECTORS' RESPONSIBILITIES
The directors are required to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
- Select suitable accounting policies and then apply them consistently
- Make judgements and estimates that are reasonable and prudent
- Prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business
The directors are responsible for keeping proper books of account which
disclose with reasonable accuracy at any time the financial position of the
company. They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
15 APPROVAL OF THE FINANCIAL STATEMENTS
The directors approved the financial statements on 23 February 1998.
16 DIFFERENCES BETWEEN IRISH AND US ACCOUNTING PRINCIPLES
The financial statements of the company are prepared in accordance with
Irish GAAP, which differ in certain significant respects from US GAAP. The
following is a reconciliation to US GAAP pursuant to Item 17 of Form 20-F.
<TABLE>
<CAPTION>
IRL
-------
<S> <C>
Net loss for the period (Irish GAAP)........................ (85,546)
Amortisation of interest capitalised(1)..................... (1,750)
Restructuring costs(2)...................................... 36,000
Loss on foreign exchange contracts(3)....................... 30,000
Income taxes(4)............................................. (7,000)
-------
NET LOSS FOR THE PERIOD (US GAAP)........................... (28,296)
=======
</TABLE>
- ---------------
(1) CAPITALISATION OF INTEREST EXPENSES AND RELATED AMORTISATION. Under Irish
GAAP, interest incurred during the period for which assets are under
construction is not required to be capitalised. Under US GAAP, such interest
incurred during the period is eligible for capitalisation. The amount
capitalised is to be an allocation of the interest cost incurred during the
period required to complete the asset. The Company had no assets under
construction during the period. The adjustment reflected above relates to
amortisation of past interest capitalised in accordance with US GAAP.
(2) RESTRUCTURING COSTS. Under Irish GAAP, the company has accrued over the
past three years, a provision to cover the potential costs associated with
possible employee redundancies at its manufacturing facility. The related
amount charged to profit and loss in the period ended 16 December 1997
totalled IRL36,000. These provisions, which do not conform with the more
prescriptive requirements of US GAAP, have been reversed.
(3) LOSS ON FORWARD EXCHANGE CONTRACTS. Under Irish GAAP, the Company adopted
during the period an accounting policy to mark to market forward foreign
exchange contracts which hedge anticipated transactions (e.g. Future sales).
Such transactions do not constitute firm commitments under US GAAP as
contemplated by Statement of Standards Accounting No. 52, "Foreign Currency
Translation".
F-53
<PAGE> 130
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Therefore, under US GAAP such contracts would have been marked to market for
both 1996 and 1997. The resultant adjustment of IRL30,000 represents that
portion of the total loss recognized under Irish GAAP in the current period
which would have been reflected in the prior year under US GAAP.
Additionally, the Company classified this loss on foreign exchange
commitments as an exceptional Item in the Irish GAAP financial statements.
Under US GAAP such an item is not considered to be an extraordinary item as
such classification is limited to those items that are both unusual in
nature and infrequent in occurrence.
(4) INCOME TAXES. Under Irish GAAP, deferred taxes are provided for temporary
differences and tax loss carryforwards using the liability method, when it
is probable that an asset or liability will crystalise. Under US GAAP,
deferred taxes are provided for temporary differences and for tax loss
carryforwards. A valuation allowance is established when it is more likely
than not that the deferred tax asset will not be realised. Additionally, for
US GAAP purposes, deferred taxes are provided in respect of US GAAP
adjustments to the book basis of assets and liabilities.
F-54
<PAGE> 131
SPORT SOCKS CO. (IRELAND) LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASHFLOWS
The company's cashflow statement prepared in accordance with Irish GAAP is
different from that which is required under SFAS 95. A statement of cash flows
provided under SFAS 95 is as follows:
<TABLE>
<CAPTION>
IRL
----------
<S> <C>
NET LOSS FOR THE PERIOD (US GAAP)........................... (28,296)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH PROVIDED FROM
OPERATING ACTIVITIES
Depreciation................................................ 806,931
Amortisation of capital grants.............................. (59,804)
Amortisation of employment grants........................... (172,998)
Currency translation loss on directors' loan................ 83,697
Currency translation loss on bank loans..................... 9,713
Exceptional item -- loss on foreign exchange commitments.... 686,000
Increase in stocks.......................................... (205,477)
Decrease in debtors......................................... 31,004
Increase in creditors and other liabilities................. 415,766
----------
Net cash provided by operating activities................... 1,566,536
----------
CASH UTILISED IN INVESTING ACTIVITIES
Payments for tangible assets................................ (1,341,164)
----------
CASHFLOWS FROM FINANCING ACTIVITIES
Proceeds from bank loan advances............................ 298,645
Payments to settle bank debt................................ (538,777)
Repayments of loan from director............................ (100,000)
Capital element of finance lease rentals.................... (36,409)
Capital grants received..................................... 132,715
----------
Net cash outflow from financing activities.................. (243,826)
----------
Net decrease in cash and cash equivalents for the year...... (18,454)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 455,059
----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 436,605
==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......... IRL60,022
Income tax....... IRL113,882
</TABLE>
F-55
<PAGE> 132
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 11
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Consolidated Financial
Data................................ 22
Unaudited Pro Forma Condensed
Consolidated Statement of
Operations.......................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 36
Management............................ 53
Certain Relationships and Related
Transactions........................ 60
Principal Stockholders................ 63
Description of Certain Indebtedness... 64
Description of Capital Stock.......... 66
Certain United States Federal Income
Tax Consequences to Non-United
States Holders of Common Stock...... 68
Shares Eligible for Future Sale....... 70
Underwriting.......................... 72
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 75
Index to Consolidated Financial
Statements.......................... F-1
UNTIL , 1998 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================
</TABLE>
======================================================
3,600,000 SHARES
GERBER LOGO
GERBER CHILDRENSWEAR, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
FURMAN SELZ
WASSERSTEIN PERELLA
SECURITIES, INC.
, 1998
======================================================
<PAGE> 133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<S> <C>
SEC registration fee........................................ $18,319.50
NASD filing fee............................................. 6,710.00
New York Stock Exchange original listing fee................ 92,685
Blue sky fees and expenses (including attorneys' fees and
expenses)................................................. 5,000
Printing and engraving expenses............................. 200,000
Transfer agent's fees and expenses.......................... 3,500
Accounting fees and expenses................................ 300,000
Legal fees and expenses..................................... 300,000
Miscellaneous expenses...................................... 73,785.50
----------
Total.................................................. $1,000,000
==========
</TABLE>
- ------------------------
* To be provided by amendment.
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is, or
is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
Section 145.
In that regard, the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director or officer of such corporation, or is or was
II-1
<PAGE> 134
serving at the request of such corporation as a director, officer or member of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability but in consideration of
all the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Over the past three years, the Company sold shares of its capital stock as
follows in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, or Rule 701 pursuant to Section
3(b) of the Securities Act.
SERIES A PREFERRED STOCK, PAR VALUE $0.01 PER SHARE.
Shares of Series A Preferred Stock of GCIH were sold to the following
persons on the following dates. Such shares were converted immediately prior to
the Offering into either (a) shares of Common Stock or (b) the right to receive
cash, in each case pursuant to the Merger described herein. See "Certain
Relationships and Related Transactions--The Reorganization."
<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
---- ---- --------- --------------
<S> <C> <C> <C>
January 22, 1996 Citicorp Venture Capital, Ltd. 86,974.5 $8,697,446.50
January 22, 1996 CCT III, L.P. 15,348.4 $1,534,843.50
January 22, 1996 Richard M. Cashin 3,327.5 $ 332,746.50
January 22, 1996 Natasha Partnership 2,774.4 $ 277,439.30
January 22, 1996 David Thomas 2,774.4 $ 277,439.30
January 22, 1996 Thomas McWilliams 950.7 $ 95,070.50
January 22, 1996 John Weber 475.4 $ 47,535.30
January 22, 1996 Byron L. Knief 237.7 $ 23,767.60
January 22, 1996 Michael A. Delaney 237.7 $ 23,767.60
January 22, 1996 David Y. Howe 237.7 $ 23,767.60
January 22, 1996 M. Saleem Muqaddam 190.1 $ 19,014.20
January 22, 1996 Charles E. Corpening 95.1 $ 9,507.00
January 22, 1996 Richard Solar 1,188.4 $ 118,838.10
January 22, 1996 Edward Kittredge 1,188.4 $ 118,838.10
January 22, 1996 David Jones 950.7(1) $ 95,070.40
January 22, 1996 David Uren 451.6 $ 45,158.50
</TABLE>
- ---------------
(1) Repurchased by the Company on February 11, 1997.
II-2
<PAGE> 135
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE.
Shares of Class A Common Stock of GCIH were sold to the following persons
on the following dates. Such shares were converted into Common Stock immediately
prior to the Offering pursuant to the Merger described herein. See "Certain
Relationships and Related Transactions--Reorganization."
<TABLE>
<CAPTION>
AGGREGATE
NUMBER PURCHASE
DATE NAME OF SHARES PRICE
---- ---- --------- -----------
<S> <C> <C> <C>
January 22, 1996 Citicorp Venture Capital, Ltd. 523,476.0(2) $523,476.00
January 22, 1996 CCT III, L.P. 79,584.0 $ 79,584.00
January 22, 1996 Richard M. Cashin 17,253.5 $ 17,253.50
January 22, 1996 63 BR Partnership 14,385.7 $ 14,385.70
January 22, 1996 David Thomas 14,385.7 $ 14,385.70
January 22, 1996 Alchemy, L.P. 4,929.5 $ 4,929.50
January 22, 1996 John Weber 2,464.7 $ 2,464.70
January 22, 1996 Byron L. Knief 1,232.4 $ 1,232.40
January 22, 1996 Michael A. Delaney 1,232.4 $ 1,232.40
January 22, 1996 David Y. Howe 1,232.4 $ 1,232.40
January 22, 1996 M. Saleem Muqaddam 985.8 $ 985.80
January 22, 1996 Charles E. Corpening 493.0 $ 493.00
</TABLE>
- ---------------
(2) The Company repurchased (a) 23,500 of such shares on February 11, 1997 for
$1.00 per share, or an aggregate consideration of $23,500 and (b)50,826.8
of such shares on September 30, 1997 at a price of $1.00 for an aggregate
consideration of $50,826.80. Such repurchased shares were canceled but
reissued in the form of Class B Common Stock of GCIH.
CLASS B COMMON STOCK, PAR VALUE $0.01 PER SHARE.
Shares of Class B Common of GCIH were sold to the following persons on the
following dates. Such shares were converted into shares of Common Stock
immediately prior to the Offering, pursuant to the Merger described herein. See
"Certain Relationships and Related Transactions--Reorganization."
<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
---- ---- --------- --------------
<S> <C> <C> <C>
January 22, 1996 Richard Solar 23,661.9 $ 23,661.90
January 22, 1996 Edward Kittredge 76,161.9 $ 27,161.90
January 22, 1996 David Jones 29,929.6(3) $ 29,929.60
January 22, 1996 David Uren 14,841.5 $ 14,841.50
February 11, 1997 Joseph Medalie 2,500 $ 2,500.00
February 28, 1997 Gerardo M. Arce 250 $ 250.00
February 28, 1997 Larry L. Bateman 500 $ 500.00
February 28, 1997 Charles W. Berry 500 $ 500.00
February 28, 1997 Ronald C. Boone 500 $ 500.00
February 28, 1997 Harvey Burak 1,000 $ 1,000.00
February 28, 1997 Ray Jefferson Caplenor 1,500(4) $ 1,500.00
February 28, 1997 LeeAnn Carroll 500 $ 500.00
February 28, 1997 Jay R. Cope 250 $ 250.00
February 28, 1997 Robert L. Gall 1,000 $ 1,000.00
February 28, 1997 George J. Boltz 250 $ 250.00
February 28, 1997 Bobbie C. Greene 250 $ 250.00
February 28, 1997 David R. Hamilton 250 $ 250.00
</TABLE>
II-3
<PAGE> 136
<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
---- ---- --------- --------------
<S> <C> <C> <C>
February 28, 1997 Kenneth R. Heatter 250 $ 250.00
February 28, 1997 Earle R. Keaton, Jr. 500 $ 500.00
February 28, 1997 Douglas E. Klein 250 $ 250.00
February 28, 1997 Christine R. Lanigan 1,000 $ 1,000.00
February 28, 1997 Angela C. Lombardi 1,000 $ 1,000.00
February 28, 1997 Raymond R. McManus 750 $ 750.00
February 28, 1997 Jacqueline D. McNulty 750 $ 750.00
February 28, 1997 Jeffrey Mintz 500 $ 500.00
February 28, 1997 Deanna L. Parris 250 $ 250.00
February 28, 1997 John Larry Pelt 250 $ 250.00
February 28, 1997 David C. Pittman 250 $ 250.00
February 28, 1997 James B. Robertson 250 $ 250.00
February 28, 1997 Marvin E. Roberts 250 $ 250.00
February 28, 1997 Jeanne E. Scannell 1,000 $ 1,000.00
February 28, 1997 Eugene L. Scarpa 500 $ 500.00
February 28, 1997 Lee M. Schaeffer 1,500 $ 1,500.00
February 28, 1997 Dwight Smith 500 $ 500.00
February 28, 1997 Dale F. Tarlow 1,000 $ 1,000.00
February 28, 1997 John M. Temple 1,000(5) $ 1,000.00
February 28, 1997 Philip V. Todaro 1,000 $ 1,000.00
February 28, 1997 Holly H. Waddell 250 $ 250.00
February 28, 1997 Deidre A. Wahlberg 500 $ 500.00
February 28, 1997 Ralph L. Wheeler 250 $ 250.00
February 28, 1997 Philip R. Whitaker 500 $ 500.00
July 25, 1997 Raymond McManus 250 $ 250.00
July 25, 1997 Robert L. Gall 250 $ 250.00
July 25, 1997 David G. Phillips 250 $ 250.00
September 30, 1997 Susan M. Vander Molen 250 $ 250.00
September 30, 1997 Richard Solar 7,500 $ 7,500.00
November 24, 1997 Edward Kittredge 20,000 $ 20,000.00
November 26, 1997 Robert P. Robertson 1,000 $ 1,000.00
November 26, 1997 David Hamilton 250 $ 250.00
</TABLE>
- ---------------
(3) Such shares were repurchased by the Company on February 11, 1997.
(4) Such shares were repurchased by the Company on January 15, 1998.
(5) Such shares were repurchased by the Company on September 20, 1997.
CLASS C COMMON STOCK, PAR VALUE $0.01 PER SHARE.
Shares of Class C Common of GCIH were sold to the following person on the
following date. Such shares were converted into shares of Common Stock
immediately prior to the Offering, pursuant to the Merger described herein. See
"Certain Relationships and Related Transactions -- Reorganization."
<TABLE>
<CAPTION>
NUMBER AGGREGATE
DATE NAME OF SHARES PURCHASE PRICE
---- ---- --------- --------------
<S> <C> <C> <C>
January 22, 1996 Lawrence R. Glenn 2,500 $ 2,500.00
</TABLE>
II-4
<PAGE> 137
CLASS D COMMON STOCK, PAR VALUE $0.01 PER SHARE.
No shares of such class have been issued. Warrants to purchase 191,250
shares of Class D Common Stock were issued to CMP on January 22, 1996 in
connection with the issuance of senior subordinated indebtedness of the Company
to CMP, for an aggregate consideration of $189,337.50. Such warrants were
converted into warrants to purchase Class B Common Stock of the Company,
immediately prior to the Offering, pursuant to the Merger described herein. See
"Certain Relationships and Related Transactions--Reorganization."
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Purchase Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
the registrant.
3.2 Form of Amended and Restated Bylaws of the registrant.
4.1 Form of certificate representing shares of Common Stock,
$0.01 par value per share.
4.2+ Credit Agreement by and among GCIH, Auburn, GCI, the
domestic subsidiaries of the same and various lending
institutions dated as of December 17, 1997.
4.3 First Amendment to Credit Agreement by and among GCIH,
Auburn, GCI, the domestic subsidiaries of the same and
various lending institutions dated as of April 3, 1998.
4.4 Second Amendment to Credit Agreement by and among GCIH,
Auburn, GCI, the domestic subsidiaries of the same and
various lending institutions dated as of June 4, 1998.
5.1 Opinion and consent of Kirkland & Ellis.
10.1+ Stock Purchase Agreement by and between GPC and GCIH dated
as of December 14, 1995.
10.2+ Form of Executive Stock Purchase Agreement between GCIH and
certain of its Executives, each dated January 22, 1996.
10.3+ Form of Manager Securities Purchase Agreement between GCIH
and certain of its Managers.
10.4+ Securities Purchase Agreement by and between GCIH and CVC,
dated as of January 22, 1996.
10.5+ Form of Director Stock Purchase Agreement between GCIH and
certain of its directors.
10.6 Amended and Restated Registration Rights Agreement by and
between GCIH, Citicorp Venture Capital, Ltd., and other
stockholders of GCIH, dated as of June 5, 1998.
10.7+ Stock Purchase Agreement by and among GCIH, James P.
Manning, Eileen Manning and Certain Charitable Remainder
Trusts dated as of November 12, 1997.
10.8+ Share Purchase Agreement by and among GCIH, James P. Manning
and Eileen Manning dated as of December 16, 1997.
10.9+ Amended and Restated Senior Subordinated Credit Agreement
dated as of December 17, 1997 by and among GCIH, GCI, CMP
and others.
10.10+ Subordination and Intercreditor Agreement by and among
Nationsbank, CMP, GCI and others dated as of December 17,
1997.
10.11+ 12% Junior Subordinated Note in the face amount of
$11,000,000, issued by GCIH to GPC as of December 29, 1997.
10.12+ License Agreement by and between Warner Bros. Division of
Time Warner Entertainment Company, L.P. and GCI dated as of
March 12, 1998.
10.13** License Agreement by and between GPC and GCI dated as of
January 22, 1996.
10.14+ License Agreement among The Kendall Company, GPC, and Soft
Care Apparel, Inc. (n/k/a GCI), dated as of July 31, 1986,
as amended pursuant to that certain Letter Agreement dated
January 19, 1996 by and among The Kendall Company, GPC, GCI
and GCIH.
10.15+ Trademark License Agreement between Auburn and Wilson
Sporting Goods Co. dated April 29, 1997; as sublicensed to
Sport Socks Ireland as of October 1, 1997, effective as of
January 1, 1998; as amended as of December 5, 1997.
</TABLE>
II-5
<PAGE> 138
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.16+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Zona Franca
Industrial La Romana (Sewing, Packaging).
10.17+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Altos
Buvillaverde.
10.18+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Altos
Buvillaverde.
10.19+ Lease Amendment by and between GCI and the Industrial
Development Board of the City of Evergreen, Alabama, dated
as of August 28, 1997, and assignment and assumption
agreement and resolution of the Industrial Development Board
dated as of the same date.
10.20+ Lease Agreement between GCI and Highland Properties, LLC
dated as of November 25, 1996, and amendments thereto, for
the lease of the Greenville facility.
10.21+ Severance Agreement by and between GPC, GCI and David E.
Uren, dated as of March 18, 1995.
10.22 Form of Amendment No. 1 to the Executive Stock Purchase
Agreement.
21.1+ Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP
23.2 Consent of J.C. Holland & Co., PSC
23.3 Consent of Price Waterhouse
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1).
23.5 Consent of The NPD Group, Inc.
24.1+ Powers of Attorney (included in signature page).
27.1+ Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** The Company has requested confidential treatment with respect to certain
provisions of this Exhibit from the Commission.
+ Previously filed.
(b) Financial Statement Schedules:
The following financial statement schedule for GCIH, Inc. is included in
this Registration Statement:
Schedule II -- Supplemental Schedule of Valuation and Qualifying Accounts
The following financial statement schedule for Gerber Childrenswear, Inc.
is included in this Registration Statement:
Schedule II -- Supplemental Schedule of Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore have
been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a posteffective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-6
<PAGE> 139
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that the undertakings set forth in paragraph (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed
to be the initial bona fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
In addition, the undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the Offering of such securities
at that time shall be deemed to be the initial bona fide Offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide Offering thereof.
II-7
<PAGE> 140
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on June 8, 1998.
GERBER CHILDRENSWEAR, INC.
By: /s/ RICHARD L. SOLAR
------------------------------------
Name: Richard L. Solar
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on June 8, 1998, by, or on behalf of, the
following persons in the capacities indicated with respect to Gerber
Childrenswear, Inc.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S>
* Chairman of the Board, President and Chief
- -------------------------------------------------------- Executive Officer (Principal Executive
Edward Kittredge Officer)
* Senior Vice President, Assistant Secretary
- -------------------------------------------------------- and Director (Principal Financial Officer)
Richard L. Solar
* Vice President of Finance, Secretary and
- -------------------------------------------------------- Treasurer (Principal Accounting Officer)
David E. Uren
* Director
- --------------------------------------------------------
Richard Cashin
* Director
- --------------------------------------------------------
Lawrence R. Glenn
* Director
- --------------------------------------------------------
Joseph Medalie
* Director
- --------------------------------------------------------
John D. Weber
*By: /s/ RICHARD L. SOLAR
----------------------------------------------------
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 141
SCHEDULE II
GCIH, INC.
SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts............... $ 1,798 $ 5,113 $4,401(1) $ 2,510
Period ended December 31, 1996:
Allowance for doubtful accounts............... -- 3,683 1,885(1) 1,798
</TABLE>
- ---------------
(1) Allowances, uncollected amounts and credit balances written off against
reserve, net of recoveries.
<PAGE> 142
SCHEDULE II
GERBER CHILDRENSWEAR, INC.
("PREDECESSOR COMPANY")
SUPPLEMENTAL SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COST BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts................ $ 3,755 $ 2,203 $ 3,358(1) $ 2,600
</TABLE>
- ---------------
(1) Allowances, uncollected amounts and credit balances written off against
reserve, net of recoveries.
<PAGE> 143
EXHIBIT INDEX
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1 Form of Purchase Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
the registrant.
3.2 Form of Amended and Restated Bylaws of the registrant.
4.1 Form of certificate representing shares of Common Stock,
$0.01 par value per share.
4.2 + Credit Agreement by and among GCIH, Auburn, GCI, the
domestic subsidiaries of the same and various lending
institutions dated as of December 17, 1997.
4.3 First Amendment to Credit Agreement by and among GCIH,
Auburn, GCI, the domestic subsidiaries of the same and
various lending institutions dated as of April 3, 1998.
4.4 Second Amendment to Credit Agreement by and among GCIH,
Auburn, GCI, the domestic subsidiaries of the same and
various lending institutions dated as of June 4, 1998.
5.1 Opinion and consent of Kirkland & Ellis.
10.1 + Stock Purchase Agreement by and between GPC and GCIH dated
as of December 14, 1995.
10.2 + Form of Executive Stock Purchase Agreement between GCIH and
certain of its Executives, each dated January 22, 1996.
10.3 + Form of Manager Securities Purchase Agreement between GCIH
and certain of its Managers.
10.4 + Securities Purchase Agreement by and between GCIH and CVC,
dated as of January 22, 1996.
10.5 + Form of Director Stock Purchase Agreement between GCIH and
certain of its directors.
10.6 Amended and Restated Registration Rights Agreement by and
between GCIH, Citicorp Venture Capital, Ltd., and other
stockholders of GCIH, dated as of June 5, 1998.
10.7 + Stock Purchase Agreement by and among GCIH, James P.
Manning, Eileen Manning and Certain Charitable Remainder
Trusts dated as of November 12, 1997.
10.8 + Share Purchase Agreement by and among GCIH, James P. Manning
and Eileen Manning dated as of December 16, 1997.
10.9 + Amended and Restated Senior Subordinated Credit Agreement
dated as of December 17, 1997 by and among GCIH, GCI, CMP
and others.
10.10+ Subordination and Intercreditor Agreement by and among
Nationsbank, CMP, GCI and others dated as of December 17,
1997.
10.11+ 12% Junior Subordinated Note in the face amount of
$11,000,000, issued by GCIH to GPC as of December 29, 1997.
10.12+ License Agreement by and between Warner Bros. Division of
Time Warner Entertainment Company, L.P. and GCI dated as of
March 12, 1998.
10.13** License Agreement by and between GPC and GCI dated as of
January 22, 1996.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.14+ License Agreement among The Kendall Company, GPC, and Soft
Care Apparel, Inc. (n/k/a GCI), dated as of July 31, 1986,
as amended pursuant to that certain Letter Agreement dated
January 19, 1996 by and among The Kendall Company, GPC, GCI
and GCIH.
10.15+ Trademark License Agreement between Auburn and Wilson
Sporting Goods Co. dated April 29, 1997; as sublicensed to
Sport Socks Ireland as of October 1, 1997, effective as of
January 1, 1998; as amended as of December 5, 1997.
10.16+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Zona Franca
Industrial La Romana (Sewing, Packaging).
10.17+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Altos
Buvillaverde.
10.18+ Lease Agreement by and between GCI and Operadora Zona Franca
De La Romana, S.A. for property located at Altos
Buvillaverde.
10.19+ Lease Amendment by and between GCI and the Industrial
Development Board of the City of Evergreen, Alabama, dated
as of August 28, 1997, and assignment and assumption
agreement and resolution of the Industrial Development Board
dated as of the same date.
10.20+ Lease Agreement between GCI and Highland Properties, LLC
dated as of November 25, 1996, and amendments thereto, for
the lease of the Greenville facility.
10.21+ Severance Agreement by and between GPC, GCI and David E.
Uren, dated as of March 18, 1995.
10.22 Form of Amendment No. 1 to the Executive Stock Purchase
Agreement.
21.1 + Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP
23.2 Consent of J.C. Holland & Co., PSC
23.3 Consent of Price Waterhouse
23.4 Consent of Kirkland & Ellis (included in Exhibit 5.1).
23.5 Consent of The NPD Group, Inc.
24.1 + Powers of Attorney (included in signature page).
27.1 + Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** The Company has requested confidential treatment with respect to certain
provisions of this Exhibit from the Commission.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
5/22/98
================================================================================
GERBER CHILDRENSWEAR, INC.
(a Delaware corporation)
3,600,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: June ___, 1998
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TABLE OF CONTENTS
PAGE
PURCHASE AGREEMENT.............................................................1
SECTION 1. Representations and Warranties....................................3
(a) Representations and Warranties by the Company..........................3
(i) Compliance with Registration Requirements......................3
(ii) Independent Accountants........................................4
(iii) Financial Statements...........................................4
(iv) No Material Adverse Change in Business.........................5
(v) Good Standing of the Company...................................5
(vi) Good Standing of Subsidiaries..................................5
(vii) Capitalization.................................................6
(viii) Authorization of Agreement.....................................6
(ix) Authorization and Description of Securities....................6
(x) Absence of Defaults and Conflicts..............................6
(xi) Absence of Labor Disputes......................................7
(xii) Absence of Proceedings.........................................7
(xiii) Accuracy of Exhibits...........................................7
(xiv) Possession of Intellectual Property............................7
(xv) Absence of Further Requirements................................8
(xvi) Possession of Licenses and Permits.............................8
(xvii) Title to Property..............................................9
(xviii) Investment Company Act.........................................9
(xix) Environmental Laws.............................................9
(xx) Registration Rights...........................................10
(xxi) Stabilization or Manipulation.................................10
(xxii) Accounting Controls...........................................10
(xxiii) Tax Returns...................................................10
(xxiv) Authorization of Merger.......................................10
(xxv) Reorganization................................................11
(b) Officer's Certificates................................................11
SECTION 2. Sale and Delivery to Underwriters; Closing.........................11
(a) Initial Securities....................................................11
(b) Option Securities.....................................................12
(c) Payment...............................................................12
(d) Denominations; Registration..........................................12
(e) Appointment of Qualified Independent Underwriter......................12
SECTION 3. Covenants of the Company...........................................13
(a) Compliance with Securities Regulations and Commission Requests........13
(b) Filing of Amendments..................................................13
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(c) Delivery of Registration Statements...................................13
(d) Delivery of Prospectuses..............................................14
(e) Continued Compliance with Securities Laws.............................14
(f) Blue Sky Qualifications...............................................14
(g) Rule 158..............................................................15
(h) Use of Proceeds.......................................................15
(i) Listing...............................................................15
(j) Restriction on Sale of Securities.....................................15
(k) Reporting Requirements................................................15
(l) Compliance with NASD Rules............................................15
(m) Compliance with Rule 463..............................................16
SECTION 4. Payment of Expenses................................................16
(a) Expenses..............................................................16
(b) Termination of Agreement..............................................16
SECTION 5. Conditions of Underwriters' Obligations............................16
(a) Effectiveness of Registration Statement...............................16
(b) Opinion of Counsel for the Company....................................17
(c) Opinion of Counsel for Underwriters...................................17
(d) Officer's Certificate.................................................17
(e) Accountants' Comfort Letters..........................................18
(f) Bring-down Comfort Letters............................................18
(g) Approval of Listing...................................................18
(h) No Objection..........................................................18
(i) Lock-up Agreements....................................................18
(j) Reorganization .......................................................18
(k) Conditions to Purchase of Option Securities...........................18
(l) Additional Documents..................................................19
(m) Termination of Agreement..............................................19
SECTION 6. Indemnification....................................................19
(a) Indemnification of Underwriters.......................................20
(b) Indemnification of Company, Directors and Officers....................21
(c) Actions against Parties; Notification.................................21
(d) Settlement without Consent if Failure to Reimburse....................22
(e) Indemnification for Reserved Securities...............................22
SECTION 7. Contribution.......................................................22
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.....24
SECTION 9. Termination of Agreement...........................................24
(a) Termination; General..................................................24
(b) Liabilities...........................................................24
SECTION 10. Default by One or More of the Underwriters........................25
SECTION 11. Notices...........................................................25
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SECTION 12. Parties...........................................................25
SECTION 13. Governing Law and Time............................................26
SECTION 14. Effect of Headings................................................26
SCHEDULES
Schedule A - List of Underwriters............................Sch A-1
Schedule B - Pricing Information.............................Sch B-1
Schedule C - List of Persons Subject to Lock-up..............Sch C-1
EXHIBITS
Exhibit A-1 Form of Opinion of Company's Counsel.................A-1
Exhibit A-2 Form of Opinion of Herbert Smith.....................A-2
Exhibit B Form of Lock-up Letter................................B-1
Exhibit C-1 Form of Comfort Letter of Ernst & Young LLP..........C-1
Exhibit C-2 Form of Comfort Letter of J.C. Holland & Co..........C-2
Exhibit C-3 Form of Comfort Letter of Price Waterhouse LLP.......C-3
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GERBER CHILDRENSWEAR, INC.
(a Delaware corporation)
3,600,000 Shares of Common Stock
(Par Value $0.01 Per Share)
PURCHASE AGREEMENT
May ___, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
Furman Selz LLC
Wasserstein Perella Securities, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Gerber Childrenswear, Inc., a Delaware corporation (f/k/a GCIH, Inc.) (the
"Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other
Underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, Bear, Stearns & Co. Inc., Lehman
Brothers Inc., Furman Selz LLC and Wasserstein Perella Securities, Inc. are
acting as representatives (in such capacity, the "Representatives"), with
respect to the issue and sale by the Company and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $0.01 per share, of the Company ("Common
Stock") set forth in said Schedule A, and with respect to the grant by the
Company to the Underwriters, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 540,000
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 3,600,000 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the 540,000 shares of
Common Stock subject to
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the option described in Section 2(b) hereof (the "Option Securities") are
hereinafter called, collectively, the "Securities."
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-47327) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated May 19, 1998 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
Gerber Childrenswear, Inc., a Delaware corporation, was the wholly owned
subsidiary of GCIH, Inc., a Delaware corporation ("GCIH"), until June ___, 1998.
Prior to the date hereof, (i) Gerber Childrenswear, Inc., a Delaware
corporation, was merged with and into the Company (then called GCIH), with the
Company (then called GCIH) being the surviving corporation (the "Merger"),
pursuant to an agreement of merger (the "Merger Agreement"), a Certificate of
Ownership and Merger was filed with the Secretary of State of the State of
Delaware (the "Merger Certificate"), and GCIH changed its name to Gerber
Childrenswear, Inc., (ii) the
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Company's certificate of incorporation was amended and restated to provide for,
among other things, the division of its authorized common stock into Common
Stock and Class B Common Stock (the "Class B Common Stock"), with each share of
Class B Common Stock having no voting rights and being convertible into one
share of Common Stock, and (iii) each share of GCIH Series A Preferred Stock was
exchanged into either Class B Common Stock of the Company or the right to
receive cash, each share of common stock and warrants to purchase common stock
of GCIH were exchanged for Common Stock, Class B Common Stock or warrants to
purchase Class B Common Stock of the Company, all indebtedness of GCIH was
assumed by the Company and the 10 shares of common stock of Gerber
Childrenswear, Inc. held by GCIH were canceled (all of such transactions,
collectively, as described in the Prospectus, the "Reorganization").
The Company and the Underwriters agree that up to 180,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Securities are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Securities may be offered to the
public as part of the public offering contemplated hereby.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with. At the respective times the Registration Statement, any
Rule 462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Prospectus, any preliminary
prospectus and any supplement thereto or prospectus wrapper prepared in
connection therewith, at their respective times of issuance and at the
Closing Time, complied and will comply in all
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material respects with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus and such preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection with
the offer and sale of Reserved Securities. Neither the Prospectus nor any
amendments or supplements thereto (including any prospectus wrapper), at
the time the Prospectus or any such amendment or supplement was issued and
at the Closing Time (and, if any Option Securities are purchased, at the
Date of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. If Rule 434 is used, the
Company will comply with the requirements of Rule 434 and the Prospectus
shall not be "materially different", as such term is used in Rule 434,
from the prospectus included in the Registration Statement at the time it
became effective. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information furnished to the Company in writing by any Underwriter through
Merrill Lynch expressly for use in the Registration Statement or
Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. Each of the accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the
statements of income, changes in shareholders' equity and cash flows of
the Company and its consolidated subsidiaries for the periods specified;
said financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of Auburn
Hosiery Mills, Inc. and its consolidated subsidiaries at the dates
indicated and the statement of income and cash flows of Auburn Hosiery
Mills, Inc. and its consolidated subsidiaries for the periods specified;
said financial statements have been prepared in conformity with U.S.
generally accepted accounting principles ("U.S. GAAP") applied on a
consistent basis throughout the periods involved. The financial statements
included in the Registration Statement and the Prospectus, together with
the related schedules and notes, present fairly the financial position of
Sport Socks Co. (Ireland) Limited and its consolidated
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subsidiaries at the dates indicated and the profit and loss account and
cash flow statement of Sport Socks Co. (Ireland) Limited and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with Irish generally accepted
accounting principles ("Irish GAAP") applied on a consistent basis
throughout the periods involved and include a proper reconciliation to
U.S. GAAP to the extent required by the 1933 Act and the rules and
regulations thereunder. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition (financial or otherwise),
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered
as one enterprise, and (C) there has been no dividend or distribution of
any kind declared, paid or made by GCIH or the Company on any class of its
capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement and the Merger Agreement; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each subsidiary of the Company
(each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the
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conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each such Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of capital stock of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of
such Subsidiary. The only subsidiaries of the Company are the subsidiaries
listed on Exhibit 21 to the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus in the column
entitled "Pro Forma Adjusted" under the caption "Capitalization." The
shares of issued and outstanding capital stock of the Company (including
the shares of Common Stock and Class B Common Stock issued by the Company
in connection with the Reorganization) have been duly authorized and are
validly issued and fully paid and non-assessable; none of the outstanding
shares of capital stock of the Company was issued in violation of the
preemptive or other similar rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder; and the issuance
of the Securities is not subject to the preemptive or other similar rights
of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. None of the Company or any of
its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the Merger Agreement and the consummation of the
transactions contemplated herein and in the Registration Statement and
pursuant to the Reorganization (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use of Proceeds") and
compliance by the Company with its obligations hereunder and thereunder
have been duly authorized by all necessary corporate action and
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do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments, nor will such action result in any violation
of the provisions of the charter or by-laws of the Company or any
subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Disputes. No labor dispute with the employees
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect. The Company is in compliance with all applicable federal,
state and local laws relating to the payment of wages to employees
(including, without limitation, the Fair Labor Standards Act, as amended).
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the properties or assets
thereof or the consummation of the transactions contemplated in this
Agreement or the performance by the Company of its obligations hereunder;
the aggregate of all pending legal or governmental proceedings to which
the Company or any subsidiary is a party or of which any of their
respective property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result in
a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, logos, characters, trade names or other
intellectual property (collectively,
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"Intellectual Property") necessary to carry on the business now operated
by them, and neither the Company nor any of its subsidiaries has received
any notice or is otherwise aware of any infringement of or conflict with
asserted rights of others with respect to any Intellectual Property or of
any facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the subject
of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect. All of the agreements pursuant to which the Company or any of its
Subsidiaries license Intellectual Property from third parties (the
"License Agreements") have been duly authorized, executed and delivered by
the Company or such Subsidiary and (assuming due authorization, execution
and delivery by the other parties thereto) constitute valid and binding
agreements of the Company or such Subsidiary, enforceable against the
Company or such Subsidiary in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
enforcement of creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law). Neither the Company nor any of its Subsidiaries is in
violation or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any such License
Agreement, nor has the Company or any of its Subsidiaries received notice
from any third party that the Company or any of its Subsidiaries is in
violation or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any such License
Agreement, except for any violation or default which, singly or in the
aggregate, would not reasonably be expected to result in a Material
Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, the Merger Agreement or the Registration
Statement or pursuant to the Reorganization, except such as have been
already obtained or as may be required under state securities laws.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and
its subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would
not, singly or in the aggregate, have a Material Adverse Effect; all of
the Governmental Licenses are valid and in full force and effect, except
when the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such
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Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one
enterprise, and under which the Company or any of its subsidiaries holds
properties described in the Prospectus, are in full force and effect, and
neither the Company nor any subsidiary has any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights
of the Company or any subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease.
(xviii) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xix) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent, decree or judgment,
relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required under
any applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
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<PAGE> 14
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xx) Registration Rights. There are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act other than persons who have waived such rights as disclosed
in the Registration Statement.
(xxi) Stabilization or Manipulation. Neither the Company nor any of
its officers, directors or controlling persons has taken, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale of the Securities.
(xxii) Accounting Controls. The Company and its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (A) transactions are executed in accordance
with management's general or specific authorization; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with U.S. GAAP (or Irish GAAP in the case of Sport Socks
(Ireland) Limited) and to maintain accountability for assets; (C) access
to assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxiii) Tax Returns. The Company and its Subsidiaries have filed all
federal, state, local and foreign tax returns that are required to have
been filed by them pursuant to applicable foreign, federal, state, local
or other law or have duly requested extensions thereof, except insofar as
the failure to file such returns or request such extensions would not
reasonably be expected to result in a Material Adverse Effect, and has
paid all taxes due pursuant to such returns or pursuant to any assessment
received by the Company and its Subsidiaries, except for such taxes or
assessments, if any, as are being contested in good faith and as to which
adequate reserves have been provided. The charges, accruals and reserves
on the books of the Company in respect of any income and corporation tax
liability of the Company and each Subsidiary for any years not finally
determined are adequate to meet any assessments or re-assessments for
additional income tax for any years not finally determined, except to the
extent of any inadequacy that would not reasonably be expected to result
in a Material Adverse Effect. No material taxes have been or will be
imposed on the Company in connection with the consummation of the Merger
and the Reorganization.
(xxiv) Authorization of Merger. Gerber Childrenswear, Inc. and GCIH
had all necessary corporate power and authority to enter into, to perform
the obligations to be performed by them under, and to consummate the
transactions contemplated by the Merger, the Merger Agreement, the Merger
Certificate and the Reorganization; the Merger, the Merger Agreement, the
Merger Certificate and the Reorganization have each been authorized by the
Gerber Childrenswear, Inc. and GCIH; the Merger Certificate has
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<PAGE> 15
been duly executed and filed by the Company with the Secretary of State of
the State of Delaware; the execution and filing of the Merger Certificate
has been duly and validly authorized and approved by all necessary
corporate action of Gerber Childrenswear, Inc. and GCIH; and the Merger
Certificate and the Merger Agreement constitute the legal, valid and
binding obligations of Gerber Childrenswear, Inc. and GCIH, enforceable
against the parties thereto in accordance with their terms, except as
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting enforcement
of creditors' rights generally or by general principles of equity.
(xxv) Reorganization. All actions and proceedings required by law to
be taken by Gerber Childrenswear, Inc. and GCIH in connection with the
Merger and the Reorganization have been duly and validly taken; the Merger
and the Reorganization have been duly and validly effected; and the
issuance by the Company of shares of Common Stock pursuant to the
Reorganization did not and will not require registration pursuant to the
1933 Act or the 1933 Act Regulations.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 540,000 shares of Common Stock
at the price per share set forth in Schedule B, less an amount per share equal
to any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time on one or more occasions only for the purpose of
covering over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by Merrill Lynch to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery (a "Date
of Delivery") shall be determined by Merrill Lynch, but shall not be later than
seven full business days after the exercise of said option, nor in any event
prior to the Closing Time, as hereinafter defined. If the option is exercised as
to all or any portion of the Option Securities, each of the Underwriters, acting
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<PAGE> 16
severally and not jointly, will purchase that proportion of the total number of
Option Securities then being purchased which the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter bears to the total
number of Initial Securities, subject in each case to such adjustments as
Merrill Lynch in its discretion shall make to eliminate any sales or purchases
of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004,
or at such other place as shall be mutually agreed upon by Merrill Lynch and
the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after the
date hereof (unless postponed in accordance with the provisions of Section 10),
or such other time not later than ten business days after such date as shall be
agreed upon by Merrill Lynch and the Company (such time and date of payment and
delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by Merrill Lynch and the
Company, on each Date of Delivery as specified in the notice from Merrill Lynch
to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose funds have not been received by the Closing
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. with respect to the offering
and sale of the Securities. Merrill Lynch, solely in its capacity as qualified
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<PAGE> 17
independent underwriter and not otherwise, is referred to herein as the
"Independent Underwriter."
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become
effective, or any supplement to the Prospectus or any amended Prospectus
shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the
Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b)
and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was
not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any
stop order is issued, to obtain the lifting thereof at the earliest
possible moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectus, will furnish the Representatives with copies of any
such documents a reasonable amount of time prior to such proposed filing
or use, as the case may be, and will not file or use any such document to
which the Representatives or counsel for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished
or will deliver to the Representatives and counsel for the Underwriters,
without charge, signed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representatives,
without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
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<PAGE> 18
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus
as such Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each Underwriter, without charge, during the
period when the Prospectus is required to be delivered under the 1933 Act
or the Securities Exchange Act of 1934 (the "1934 Act"), such number of
copies of the Prospectus (as amended or supplemented) as such Underwriter
may reasonably request. The Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or
for the Company, to amend the Registration Statement or amend or
supplement the Prospectus in order that the Prospectus will not include
any untrue statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at
any such time to amend the Registration Statement or amend or supplement
the Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements,
and the Company will furnish to the Underwriters such number of copies of
such amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Representatives may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
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<PAGE> 19
(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect the
listing of the Common Stock (including the Securities) on the New York
Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180 days
from the date of the Prospectus, the Company will not, without the prior
written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder and (B) options to purchase
Common Stock granted pursuant to existing employee benefit plans of the
Company referred to in the Prospectus.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act and the
rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the NASD or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of this
Agreement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer
restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the
Reserved Securities, the Company agrees to reimburse the Underwriters for
any reasonable expenses (including, without limitation, legal expenses)
they incur in connection with such release.
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<PAGE> 20
(m) Compliance with Rule 463. The Company will file with the
Commission such information as may be required pursuant to Rule 463 of the
1933 Act Regulations as provided therein.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the Securities and (x) the fees and expenses incurred in
connection with the listing of the Securities on the New York Stock Exchange,
(xi) all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, in connection with matters
related to the Reserved Securities and (xii) the fees and expenses of the
Independent Underwriter acting in such capacity.
(b) Termination of Agreement. If this Agreement is terminated by Merrill
Lynch in accordance with the provisions of Section 5 or Section 9(a)(i) hereof,
the Company shall reimburse the Underwriters for all of their out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information
16
<PAGE> 21
shall have been complied with to the reasonable satisfaction of counsel to
the Underwriters. A prospectus containing the Rule 430A Information shall
have been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed
and declared effective in accordance with the requirements of Rule 430A)
or, if the Company has elected to rely upon Rule 434, a Term Sheet shall
have been filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinions, dated as of
Closing Time, of each of Kirkland & Ellis, counsel for the Company, and
Herbert Smith, counsel for Auburn Hosiery Mills, Inc., in form and
substance satisfactory to counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit A-1 and A-2 hereto,
respectively, and to such further effect as counsel to the Underwriters
may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in
clauses (1), (3), (5) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by laws of the
Company), (7), (8), (11) (solely as to the information under "Description
of Capital Stock --Common Stock") and the third paragraph after clause 18
of Exhibit A hereto. In giving such opinion such counsel may rely, as to
all matters governed by the laws of jurisdictions other than the law of
the State of New York, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of
counsel satisfactory to the Representatives. Such counsel may also state
that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition (financial or otherwise), earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the Representatives shall have received a certificate of the President or
a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
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(e) Accountants' Comfort Letters. At the time of the execution of
this Agreement, the Representatives shall have received from Ernst & Young
LLP a letter in the form of Annex A-1 hereto, from J.C. Holland & Co. a
letter in the form of Annex A-2 hereto and from Price Waterhouse LLP a
letter in the form of Annex A-3 hereto, dated such date, in form and
substance satisfactory to the Representatives, together with signed or
reproduced copies of such letters for each of the other Underwriters,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus. In addition, at the time of the
execution of this Agreement, the Representatives shall have received from
Ernst & Young LLP an agreed upon procedures letter, dated such date, in
form and substance satisfactory to the Representative, together with
signed or reproduced copies of such letter for each of the other
Underwriters, with respect to certain financial information contained in
the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letters. At Closing Time, the Representatives
shall have received letters from each of Ernst & Young LLP, J.C. Holland &
Co. and Price Waterhouse LLP, dated as of Closing Time, to the effect that
they reaffirm the statements made in the letters furnished pursuant to
subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form
of Exhibit B hereto signed by the persons listed on Schedule C hereto. The
Company represents that the persons listed on Schedule C hereto include
all holders of securities of the Company.
(j) Reorganization. Prior to the Closing Time, the Reorganization
and the Merger, as described in the Registration Statement and the
Prospectus, shall have been duly and validly effected and all corporate
proceedings and legal matters incident to the Merger and the
Reclassification shall be reasonably satisfactory to counsel for the
Underwriters. Prior to the Closing Time, the Company shall have obtained
an amendment to its Credit Facility which permits the consummation of the
Reorganization and the Merger and the use of the proceeds of the offering
as described in the Prospectus under "Use of Proceeds" and such amendment
shall be binding on the Company.
(k) Conditions to Purchase of Option Securities. In the event that
the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any
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<PAGE> 23
portion of the Option Securities, the representations and warranties of
the Company contained herein and the statements in any certificates
furnished by the Company or any subsidiary of the Company hereunder shall
be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(d) hereof remains true and correct as of such
Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Kirkland & Ellis, counsel for the Company, and Herbert Smith,
counsel for Auburn Hosiery Mills, Inc., in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable
opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letters. A letter from each of Ernst &
Young LLP, J.C. Holland & Co. and Price Waterhouse LLP, in form and
substance satisfactory to the Representatives and dated such Date of
Delivery, substantially in the same form and substance as the
letters furnished to the Representatives pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days
prior to such Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities, on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase the
relevant Option Securities, may be terminated by Merrill Lynch by notice
to the Company at any
19
<PAGE> 24
time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6,
7 and 8 shall survive any such termination and remain in full force and
effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. (1) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in foreign jurisdictions in
connection with the reservation and sale of the Reserved Securities to
eligible employees of the Company or the omission or alleged omission
therefrom of a material fact necessary to make the statements therein,
when considered in conjunction with the Prospectus or preliminary
prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, or in connection with any violation
of the nature referred to in Section 6(a)(ii)(A) hereof, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or
20
<PAGE> 25
omission, or any such alleged untrue statement or omission, or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, to the extent that any such expense is not paid under
(i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, as a result of the
Independent Underwriter's participation as a "qualified independent underwriter"
within the meaning of Rule 2720 of the Conduct Rules of the National Association
of Securities Dealers, Inc. in connection with the offering of the U.S.
Securities.
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment thereto)
or such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
21
<PAGE> 26
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances; provided, that, if indemnity is
sought pursuant to Section 6(a)(2), then, in addition to the fees and expenses
of such counsel for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one counsel (in
addition to any local counsel) separate from its own counsel and that of the
other indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control the
Independent Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of 1934 Act in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances if, in the reasonable judgment of the Independent
Underwriter, there may exist a conflict of interest between the Independent
Underwriter and the other indemnified parties. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of eligible employees of the Company and other offerees to
pay for and accept delivery of Reserved Securities which, by the end of the
first business day following the date of this Agreement, were subject to a
properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other
22
<PAGE> 27
hand from the offering of the Securities pursuant to this Agreement or (ii) if
the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the Underwriters on the other hand in connection with the
statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof.
The Company and the Underwriters agree that Merrill Lynch will not receive
any additional benefits hereunder for serving as the Independent Underwriter in
connection with the offering and sale of the Securities.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
23
<PAGE> 28
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. Merrill Lynch may terminate this Agreement, by
notice to the Company, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the ordinary course of business, or
(ii) if there has occurred any material adverse change in the financial markets
in the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of Merrill Lynch, impracticable to market
the Securities or to enforce contracts for the sale of the Securities, or (iii)
if trading in any securities of the Company has been suspended or materially
limited by the Commission or the New York Stock Exchange, or if trading
generally on the American Stock Exchange or the New York Stock Exchange or in
the Nasdaq National Market has been suspended or materially limited, or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
24
<PAGE> 29
SECTION 10. Default by One or More of the Underwriters. If one or more of
the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the Underwriters to purchase and of the Company to sell the
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Lani Martin, with
a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New
York, New York 10004, attention of Valerie Ford Jacob, Esq.; and notices to the
Company shall be directed to it at Gerber Childrenswear, Inc., 1333 Broadway,
Suite 700, New York, New York 10018, attention of Edward Kittredge, with a copy
to Kirkland & Ellis, 153 East 53rd Street, 39th Floor, New York, New York 10022,
attention of Kirk Radke, Esq.
SECTION 12. Parties. This Agreement shall each inure to the benefit of and
be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or
25
<PAGE> 30
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Underwriters and the Company and
their respective successors and the controlling persons and officers and
directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters and the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
26
<PAGE> 31
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
GERBER CHILDRENSWEAR, INC.
By:_____________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS INC.
FURMAN SELZ LLC
WASSERSTEIN PERELLA SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:___________________________________
Authorized Signatory
For itself and as Representatives of the other
Underwriters named in Schedule A hereto.
27
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriters Securities
-------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
Bear, Stearns & Co. Inc.......................................
Lehman Brothers Inc...........................................
Furman Selz LLC...............................................
Wasserstein Perella Securities, Inc...........................
Total......................................................... 3,600,000
=========
</TABLE>
Sch A - 1
<PAGE> 33
SCHEDULE B
GERBER CHILDRENSWEAR, INC.
3,600,000 Shares of Common Stock
(Par Value $0.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $__________.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $__________, being an amount equal to the initial
public offering price set forth above less $__________ per share; provided that
the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities.
Sch B - 2
<PAGE> 34
SCHEDULE C
Citicorp Venture Capital, Ltd.
CCT III Partners, L.P.
Richard M. Cashin
63 BR Partnership
Natasha Partnership
Charles E. Corpening
Michael A. Delaney
David Y. Howe
Byron L. Knief
Alchemy, L.P.
Thomas F. McWilliams
M. Saleem Muqaddam
David F. Thomas
John Weber
Lawrence R. Glenn
Citicorp Mezzanine Partners, L.P.
Edward Kittredge
Richard Solar
Stephanie B. Solar
Stephanie B. Solar as custodian for Andrew B. Solar
Stephanie B. Solar as custodian for Lisa B. Solar
David Uren
Joseph Medalie
Harvey Burak
Geraldo M. Arce
Larry L. Bateman
Charles W. Berry
George J. Boltz
Ronald C. Boone
LeeAnn Carroll
Jay R. Cope
Robert L. Gall
Bobbie C. Greene
David R. Hamilton
Kenneth R. Heatter
Earle R. Keaton
Douglas E. Klein
Christine R. Lanigan
Angela C. Lombardi
Sch C - 1
<PAGE> 35
Raymond R. McManus
Jacqueline D. McNulty
Jeffrey Mintz
Susan M. Vander Molen
Deanna L. Parris
John Larry Pelt
David G. Phillips
David C. Pittman
James B. Robertson
Robert P. Robertson
Marvin E. Roberts
Jeanne E. Scannell
Eugene L. Scarpa
Lee M. Schaeffer
Dwight Smith
Dale F. Tarlow
John M. Temple
Philip V. Todaro
Holly H. Waddell
Deidre A. Wahlberg
Ralph L. Wheeler
Philip R. Whitaker
Sch C - 2
<PAGE> 36
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)
May ___, 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
Furman Selz LLC
Wasserstein Perella Securities, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
World Financial Center
North Tower
250 Vesey Street
New York, New York 10281
Ladies and Gentlemen:
We are issuing this letter in our capacity as special counsel for Gerber
Childrenswear, Inc. (the "Company") in response to the requirement in Section
5(b) of the Purchase Agreement dated April __, 1998 (the "Purchase Agreement")
between the Company and the underwriters named in Schedule A thereto (the
"Underwriters"). Every term which is defined or given a special meaning in the
Purchase Agreement and which is not given a different meaning in this letter has
the same meaning whenever it is used in this letter as the meaning it is given
in the Purchase Agreement.
In connection with the preparation of this letter, we have among other
things read:
(a) the registration statement on Form S- I (Registration No.
333-47327), including all exhibits thereto, filed by the Company
with the Securities and Exchange Commission (the "Commission") on
March 4, 1998 for the purpose of registering the offering of the
Securities under the Securities Act of 1933 (the "Securities Act")
(which registration statement, as amended by pre-effective
Amendments No. 1, No. 2 and No. 3 and as constituted at the time it
became effective is herein called the "Registration Statement");
<PAGE> 37
(b) the Company's prospectus dated ________, 1998, covering the offering
of the Securities through the Underwriters, in the form which
includes the initial offering price and related terms (which
prospectus is herein called the "Prospectus");
(c) an executed copy of the Purchase Agreement;
(d) a specimen certificate for the Securities;
(e) A certified copy of resolutions adopted by the Company's Board of
Directors on March 3, 1998 and April 9, 1998 and a certified copy of
resolutions adopted on _________, 1998 by the Pricing Committee
appointed in those Board resolutions; and
(f) Copies of all certificates and other documents delivered today at
the closing of the purchase and sale of the Securities under the
Purchase Agreement.
Subject to the assumptions, qualifications and limitations which are
identified in this letter, we advise you that:
1. The Company is a corporation existing and in good standing under the
General Corporation Law of the State of Delaware. The Company is qualified
to do business and is in good standing in each jurisdiction listed on
Schedule A to the opinion.
2. The Company has the corporate power to own and lease its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under the Purchase Agreement.
3. The Company has duly authorized, executed and delivered the Purchase
Agreement.
4. Each of the Company's domestic subsidiaries listed on Schedule B to this
opinion (the "Domestic Subsidiaries") has been duly incorporated and is a
corporation existing in good standing under the laws of the State of
Delaware; each Domestic Subsidiary has the corporate power to own and
lease its properties and to conduct its business as described in the
Prospectus; to the best of our knowledge, each Domestic Subsidiary is
owned by the Company, directly or indirectly, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity,
other than pursuant to the Company's Credit Agreement; and none of the
outstanding shares of capital stock of any Domestic Subsidiaries was
issued in violation of preemptive rights under the terms of the statute
under which the Domestic Subsidiary is incorporated, under the Domestic
Subsidiary's Certificate of Incorporation or under any contractual
provision of which we have knowledge.
5. The issuance of the Securities to be sold pursuant to the Purchase
Agreement has been duly authorized and when appropriate certificates
representing those Securities are duly countersigned by the Company's
transfer agent/registrar and delivered against payment of the agreed
consideration therefor in accordance with the Purchase Agreement, those
Securities will be validly issued, fully paid and nonassessable and no
holder of the
<PAGE> 38
Securities is or will be subject to personal liability by reason of being
such a holder. The issuance of those Securities is not subject to any
preemptive rights under the terms of the statute under which the Company
is incorporated, under the Company's Certificate of Incorporation or under
any contractual provision of which we have knowledge.
6. The Company's authorized capital stock (including its authorized common
stock) is as set forth under the heading "Capitalization" in the
Prospectus and conforms in all material respects to the description of the
terms thereof contained under the heading "Description of Capital Stock"
in the Prospectus. All of the shares of issued and outstanding capital
stock of the Company (including the shares of Common Stock issued in
connection with the Reorganization and the Merger) have been duly
authorized and validly issued and are fully paid and nonassessable; and
none of the outstanding shares of capital stock of the Company was issued
in violation of preemptive rights under the terms of the statute under
which the Company is incorporated, under the Company's Certificate of
Incorporation or under any contractual provision of which we have
knowledge.
7. A member of the Commission's staff has advised us by telephone that the
Commission's Division of Corporation Finance, pursuant to authority
delegated to it by the Commission, has entered an order declaring the
Registration Statement effective under the Securities Act on [insert
effective date] (the "Effective Date"); any required filing of the
Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and we have no knowledge that any
stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or overtly threatened by,
the Commission.
8. The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the
Registration Statement and Prospectus as of their respective effective or
issue dates (other than the financial statements and supporting schedules
included therein or omitted therefrom, as to which we express no opinion)
complied as to form in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations.
9. The form of certificate used to evidence the Common Stock complies in all
material respects with all applicable statutory requirements, with any
applicable requirements of the charter and bylaws of the Company and the
requirements of the New York Stock Exchange.
10. There is no legal or governmental proceeding that is pending or, to our
knowledge, threatened against the Company or any of its subsidiaries that
has caused us to conclude that such proceeding is required by Item 103 of
Regulation S-K to be described in the Prospectus but that is not so
described. We have no knowledge about any contract to which the Company
or any of its subsidiaries is a party or to which any of its property is
subject that has caused us to conclude that such contract is required to
be described in the Prospectus but is not so described or is required to
be filed as an exhibit to the Registration Statement but has not been so
filed.
<PAGE> 39
11. The information in the Prospectus under "Description of Capital Stock,"
and "Certain Federal Income Tax Considerations", to the extent that it
constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal proceedings, or legal conclusions, has been
reviewed by us and is correct in all material respects.
12. To the best of our knowledge, the Company and the Domestic Subsidiaries
are not in violation of their respective charters or bylaws.
13. No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act
and the 1933 Act Regulations, which have been obtained, the filing of a
Certificate of Ownership and Merger with the Delaware Secretary of State,
which has been completed, or as may be required under the securities or
blue sky laws of the various states, as to which we need express no
opinion) is necessary or required in connection with the due
authorization, execution and delivery of the Purchase Agreement or the
Merger Agreement or for the offering, issuance or sale of the Securities
or the consummation of the Reorganization and the Merger.
14. The Company's execution and delivery of the Purchase Agreement and the
Merger Agreement, the Company's performance of its obligations in the
Purchase Agreement and the Merger Agreement, and the Company's sale of the
Securities to you in accordance with the Purchase Agreement and the
consummation of the transactions contemplated in the Purchase Agreement
and pursuant to the Merger and the Reorganization (including the use of
the proceeds from the sale of the Securities as described in the
Prospectus under "Use of Proceeds" do not (i) violate the Company's
Certificate of Incorporation or Bylaws or (ii) constitute a violation by
the Company of any applicable provision of any law, statute or regulation,
judgment, order or decree (except that we express no opinion in this
paragraph as to compliance with any disclosure requirement or any
prohibition against fraud or misrepresentation or as to whether
performance of the indemnification or contribution provisions in the
Purchase Agreement would be permitted) or (iii) whether with or without
the giving of notice or lapse of time or both, breach, or result in a
default under, any existing obligation under any of the agreements listed
on Schedule C to this Opinion or filed as any of the following exhibits to
the Registration Statement (provided that we express no opinion as to
compliance with any financial test or cross-default provision (insofar as
it relates to a default under an agreement not enumerated below or listed
on Schedule C) in any such agreement): Exhibits 4.2, 10.1-10.21.
15. To the best of our knowledge, there are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1993 Act other than registration rights which have been waived.
16. The Merger Agreement has been duly authorized, executed and delivered by
each of GCIH and GCI and constitutes a valid and binding obligation of
each of GCIH and GCI, enforceable against GCIH and GCI in accordance with
its terms.
<PAGE> 40
17. The Company is not, and after the application of the proceeds from the
sale of the Common Stock as described in the Prospectus under "Use of
Proceeds," will not be, an investment company as such term is defined in
the 1940 Act.
18. All actions and proceeds required by law to be taken by GCIH and GCI in
connection with the Merger and the Reorganization have been duly and
validly taken; the Reorganization and the Merger have been duly and
validly effected; and the issuance by the Company of shares of Common
Stock pursuant to the Reorganization did not and will not require
registration pursuant to the 1933 Act or the 1933 Act Regulations.
* * *
The purpose of our professional engagement was not to establish factual
matters, and preparation of the Registration Statement involved many
determinations of a wholly or partially nonlegal character. We make no
representation that we have independently verified the accuracy, completeness or
fairness of the Prospectus or Registration Statement or that the actions taken
in connection with the preparation of the Registration Statement or Prospectus
(including the actions described in the next paragraph) were sufficient to cause
the Prospectus or Registration Statement to be accurate, complete or fair. We
are not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the Prospectus or the Registration Statement except
to the extent otherwise explicitly indicated in numbered paragraphs 6 and 12
above.
We can, however, confirm that we have participated in conferences with
representatives of the Company, representatives of the Underwriters, counsel for
the Underwriters and representatives of the independent accountants for the
Company during which disclosures in the Registration Statement and Prospectus
and related matters were discussed. In addition, we have reviewed certain
corporate records furnished to us by the Company.
Based upon our participation in the conferences and our document review
identified in the preceding paragraph, our understanding of applicable law and
the experience we have gained in our practice thereunder, and in reaching our
conclusions as to materiality, relying to the extent that we may properly do so
in the discharge of our professional responsibilities as experienced securities
law practitioners, on factual information provided by officers of our
clients, we can, however, advise you that nothing has come to our attention
that has caused us to conclude that (i) the Registration Statement at its
Effective Date contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Prospectus at the date it bears
or on the date of this letter contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (iii) as of the Effective Date, either the
Registration Statement or the Prospectus appeared on its face not to be
responsive in all material respects to the requirements of Form S-1.
* * *
Except for the activities described in the immediately preceding section of
this letter, we have not undertaken any investigation to determine the facts
upon which the advice in this letter is based.
<PAGE> 41
We have assumed for purposes of this letter: each document we have
reviewed for purposes of this letter is accurate and complete, each such
document that is an original is authentic, each such document that is a copy
conforms to an authentic original, and all signatures on each such document are
genuine; that the Purchase Agreement and every other agreement we have examined
for purposes of this letter constitutes a valid and binding obligation of each
party to that document and that each such party has satisfied all legal
requirements that are applicable to such party to the extent necessary to
entitle such party to enforce such agreement (except that we make no such
assumptions with respect to the Company); and that you have acted in good faith
and without notice of any fact which has caused you to reach any conclusion
contrary to any of the advice provided in this letter.
In preparing this letter we have relied without independent verification
upon: (i) information contained in certificates obtained from governmental
authorities; (ii) factual information represented to be true in the Purchase
Agreement and other documents specifically identified at the beginning of this
letter as having been read by us; (iii) factual information provided to us by
the Company or its representatives; (iv) certificates and statements from
officers of the Company as to the existence of contracts, contingencies and
other information; and (v) factual information we have obtained from such other
sources as we have deemed reasonable. We have assumed that there has been no
relevant change or development between the dates as of which the information
cited in the preceding sentence was given and the date of this letter and that
the information upon which we have relied is accurate and does not omit
disclosures necessary to prevent such information from being misleading. For
purposes of numbered paragraph 1, we have relied exclusively upon certificates
issued by governmental authorities in the relevant jurisdictions and such
opinion is not intended to provide any conclusion or assurance beyond that
conveyed by those certificates.
We confirm that we do not have knowledge that has caused us to conclude
that our reliance and assumptions cited in the two immediately preceding
paragraphs are unwarranted. Whenever this letter provides advice about (or based
upon) our knowledge of any particular information or about any information which
has or has not come to our attention such advice is based entirely on the
knowledge at the time this letter is delivered on the date it bears by the
lawyers with Kirkland & Ellis at that time who spent other than insubstantial
time representing the Company.
Our advice on every legal issue addressed in this letter is based
exclusively on the internal law of New York, the General Corporation Law of the
State of Delaware, and/or the federal law of the United States, and represents
our opinion as to how that issue would be resolved were it to be considered by
the highest court in the jurisdiction which enacted such law. None of the
opinions or other advice contained in this letter considers or covers: (i) any
state securities (or "blue sky") laws or regulations, (ii) any financial
statements or supporting schedules (or any notes to any such statements or
schedules) or other financial information set forth or incorporated by reference
in (or omitted from) the Registration Statement or the Prospectus or (iii) any
rules and regulations of the National Association of Securities Dealers, Inc.
relating to the compensation of underwriters. This letter does not cover any
other laws, statutes, governmental rules or regulations or decisions which in
our experience are not usually considered for or covered by
<PAGE> 42
opinions like those contained in this letter or are not generally applicable to
transactions of the kind covered by the Purchase Agreement
This letter speaks as of the time of its delivery on the date it bears. We
do not assume any obligation to provide you with any subsequent opinion or
advice by reason of any fact about which we did not have knowledge at that time,
by reason of any change subsequent to that time in any law, other governmental
requirement or interpretation thereof covered by any of our opinions or advice,
or for any other reason.
This letter may be relied upon by the Underwriters pursuant to the
Purchase Agreement. Without our written consent: (i) no person other than the
Underwriters may rely on this letter for any purpose; (ii) this letter may not
be cited or quoted in any financial statement, prospectus, private placement
memorandum or other similar document; (iii) this letter may not be cited or
quoted in any other document or communication which might encourage reliance
upon this letter by any person or for any purpose excluded by the restrictions
in this paragraph; and (iv) copies of this letter may not be furnished to anyone
for purposes of encouraging such reliance.
KIRKLAND & ELLIS
<PAGE> 43
Schedule A
Foreign Qualifications
Arizona
California
Illinois
Maine
Massachusetts
New York
North Carolina
South Carolina
Pennsylvania
Texas
Schedule B
Domestic Subsidiaries
Auburn Holdings, Inc.
GCI IP Sub, Inc.
A-1
<PAGE> 44
Schedule C
Contracts
1) 8/15/92, License Agreement, between the Coca-Cola Company and Auburn
Hosiery Mills, 8/15/92, License Agreement, between the Coca-Cola Company and
Sport Socks Co. (Ireland) Ltd. 3/21/97, Benelux License Agreement, between the
Coca-Cola Company and Sport Socks Co. (Ireland) Ltd.
2) 1/l/91, License Agreement between Converse Inc. and Converse
Accessories, Inc., as amended on 1/l/91, 10/2/91, 7/2/93, 11/13/95, 9/8/97, and
9/15/97; and 10/1/97, Assignment of Converse License Agreement, by Converse
Accessories, Inc. to Auburn Hosiery Mills, Inc.
3) 7/31/96, Trademark Sub-License Agreement, among Dunlop Slazenger Group
Limited, Dunlop Slazenger International Limited and Taramand Limited (Irish
company known as Euro Sports Socks Co.); and 10/l/97, Assignment of Dunlop
Trademark Sublicense, by Euro Sport Socks Company Ltd. (formerly Taramand
Limited), to Sport Socks Company (Ireland) Limited.
4) 3/12/98, License Agreement between the Warner Brothers Division of Time
Warner Entertainment Co., L.P. and Gerber Childrenswear, Inc.
5) 11/14/84, Licensing Agreement, between Frederica Coates and The Kendall
Company; 11/29/89, Letter Agreement between Frederica Coates and Gerber
Childrenswear, Inc., 8/28/95, License for Patents for Pinless Cloth Diapers from
Frederica Coates to Soft Care Apparel.
6) 12/17/97, Security Agreement among GCI and Auburn (Borrowers), GCIH,
Inc. and certain subsidiaries of the Parent and the Borrowers, and NationsBank,
N.A. (Collateral Agent) for the lenders from time to time party to the Credit
Agreement (The Lenders); 12/17/97, Pledge Agreement among GCI and Auburn
(Borrowers), GCIH, Inc. and certain subsidiaries of the Parent and the
Borrowers, and NationsBank, N.A. (Collateral Agent) for the lenders from time to
time party to the Credit Agreement (The Lenders).
7) 1/19/96, Restated Certificate of Incorporation of GCIH, Inc., as
amended; 1/19/96, Amended and Restated Bylaws of GCIH, Inc.
8) 1/1/89, Loan Agreement between the County of Logan, Kentucky and AHM
3/1/89, Loan Agreement between The County of Logan, Kentucky and AHM; 1/12/90,
Reimbursement Agreement I between AHM and Sovran Bank/Central South pursuant to
Trust Indenture dated 3/1/89; 1/12/90, Reimbursement Agreement II between AHM
and Sovran Bank/Central South pursuant to Trust Indenture dated 3/1/89; 1/12/90,
Reimbursement Agreement III between AHM and Sovran Bank/Central South pursuant
to Trust Indenture dated 10/1/89; 1/12/90, Reimbursement Agreement IV between
AHM and Sovran Bank/Central South pursuant to Trust Indenture dated 3/1/89;
1/12/90, Pledge and Security Agreement between AHM and Sovran Bank/Central South
pursuant to Reimbursement Agreement I.
A-2
<PAGE> 45
9) Agreements between Sports Socks and National Irish Bank, dated 5/28/96,
2/5/97 and 4/22/97, 8/27/96 floating charge between National Irish Bank Limited
and Sport Socks, 8/27/96 mortgage between National Irish Bank Limited and Sport
Socks.
10) Grant Agreements between Sports Socks and Auburn and the Industrial
Development Authority, 12/14/95 grant agreement, 12/10/93 grant agreement as
supplemented by a 4/11/95 letter, 8/4/92 grant agreement as supplemented by
letters dated 9/16/94 and 11/14/94, 1/19/90 grant agreement as amended by the
9/25/92 amendment, and 7/21/97 agreement to purchase land.
11) 12/17/97, Senior Subordinated Note of GCI and Auburn issued to
Citicorp Mezzanine Partners L.P.
12) 1/22/96, Stockholders Agreement, among GCIH, Inc., CVC, CMP, CCT III,
Ed Kittridge, Richard Solar, David Jones, David Uren, Lawrence Glenn, Richard
Cashin, 63 BR Partnership, Charles Corpening, Michael Delaney, David Howe, Byron
Knief, Alchemy, L.P., M. Saleem Muqaddam, David Thomas, and John Weber.
13) 1/22/96, Registration Rights Agreement, among GCIH, Inc., CVC, CMP,
CCT III, Ed Kittridge, Richard Solar, David Jones, David Uren, Lawrence Glenn,
Richard Cashin, 63 BR Partnership, Charles Corpening, Michael Delaney, David
Howe, Byron Knief, Alchemy, L.P., M. Saleem Muqaddam, David Thomas, and John
Weber.
14) 1/22/96, Warrant Agreement, between Citicorp Mezzanine Partners, L.P.
and GCIH, Inc., 1/22/96, Warrant issued to CMP permitting the purchase of
191,250 shares of Class D Common Stock at $.01 per share.
15) 2/28/97, Representative Securities Purchase Agreement, Among GCIH,
Harvey Burak and CVC.
A-3
<PAGE> 46
Exhibit A-2
FORM OF OPINION OF HERBERT SMITH
TO BE DELIVERED PURSUANT TO SECTION 5(b)
1) Auburn Hosiery Mills, Inc. ("Auburn") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of Kentucky,
has corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a material
adverse effect on Auburn's financial condition and results of operations.
2) All of the issued and outstanding shares of capital stock of Auburn
have been duly authorized and validly issued and are fully paid and
non-assessable and, to the best of our knowledge, is owned by Gerber
Childrenswear, Inc., directly or indirectly, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity, and none of the
outstanding shares of capital stock of Auburn was issued in violation of the
preemptive or similar rights of any securityholder of Auburn.
3) To the best of my knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which Auburn is a party,
or to which the property of Auburn is subject, which might reasonably be
expected to result in a material adverse effect on Auburn's financial condition
and results of operations.
A-4
<PAGE> 47
Exhibit B
______________, 1998
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
Furman Selz LLC
Wasserstein Perella Securities, Inc.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Gerber Childrenswear, Inc.
Dear Sirs:
The undersigned understands that Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc.,
Lehman Brothers Inc., Furman Selz LLC, and Wasserstein Perella Securities, Inc.
propose to enter into a Purchase Agreement (the "Purchase Agreement") with
Gerber Childrenswear, Inc., a Delaware corporation (the "Company") providing for
the public offering of shares (the "Securities") of the Company's common stock,
par value $0.01 per share (the "Common Stock"). In recognition of the benefit
that such an offering will confer upon the undersigned as a stockholder of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 180
days from the date of the Purchase Agreement, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
B-1
<PAGE> 48
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature: ______________________________
Print Name: ______________________________
B-2
<PAGE> 49
Exhibit C-1
FORM OF COMFORT LETTER OF ERNST & YOUNG LLP
PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to the
Company within the meaning of the 1933 Act and the applicable published
1933 Act Regulations.
(ii) In our opinion, the audited financial statements and the
related financial statement schedules of the Company included in the
Registration Statement and the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder.
(iii) On the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of a
reading of the unaudited interim consolidated financial statements of the
Company for the three month periods ended April 4, 1998 and April 4, 1997
(the "quarterly financials"), a review of the quarterly financials in
accordance with standards established by the American Institute of
Certified Public Accountants in Statement on Auditing Standards No. 71,
Interim Financial Information ("SAS 71"), a reading of the latest
available unaudited interim consolidated financial statements of the
Company, a reading of the minutes of all meetings of the stockholders and
directors of the Company and its subsidiaries and the committees of the
Company's Board of Directors and any subsidiary committees since January
1, 1998, inquiries of certain officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter, nothing
came to our attention that caused us to believe that:
(1) the quarterly financials included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations
or any material modifications should be made to the quarterly
financials included in the Prospectus for them to be in conformity
with generally accepted accounting principles;
(2) at a specified date not more than five days prior to the
date of this Agreement, there was any change in the total
shareholder equity of the Company and its subsidiaries or any
decrease in the consolidated net current assets of the Company and
its subsidiaries or any increase in long-term debt of the Company
and its subsidiaries, in each case as compared with amounts shown in
the latest balance sheet included in the Registration Statement,
except in each case for changes, decreases or increases that the
Registration Statement discloses have occurred; or
(3) for the period from April 4, 1998 to a specified date not
more than five days prior to the date of this Agreement, there was
any decrease in total net
C-1
<PAGE> 50
sales, total consolidated income before extraordinary items or
consolidated net income, in each case as compared with the
comparable period in the preceding year, except in each case for any
decreases that the Registration Statement discloses have occurred;
(iv) Based upon the procedures set forth in clause (ii) above and a
reading of the Selected Financial Data included in the Registration
Statement and a reading of the financial statements from which such data
were derived, nothing came to our attention that caused us to believe that
the Selected Financial Data included in the Registration Statement do not
comply as to form in all material respects with the disclosure
requirements of Item 301 of Regulation S-K of the 1933 Act, that the
amounts included in the Selected Financial Data are not in agreement with
the corresponding amounts in the audited consolidated financial statements
for the respective periods or that the financial statements not included
in the Registration Statement from which certain of such data were derived
are not in conformity with generally accepted accounting principles;
(v) We have compared the information in the Registration Statement
under selected captions with the disclosure requirements of Regulation S-K
of the 1933 Act and, on the basis of limited procedures specified herein,
nothing came to our attention that caused us to believe that this
information does not comply as to form in all material respects with the
disclosure requirements of Item 402 of Regulation S-K;
(vi) We are unable to and do not express any opinion on the Pro
Forma Statement of Operations (the "Pro Forma Statement") included in the
Registration Statement or on the pro forma adjustments applied to the
historical amounts included in the Pro Forma Statement; however, for
purposes of this letter we have:
(A) read the Pro Forma Statement;
(B) performed an audit of the Company's financial statements
to which the pro forma adjustments were applied;
(C) made inquiries of certain officials of the Company who
have responsibility for financial and accounting matters about the
basis for their determination of the pro forma adjustments and
whether the Pro Forma Statement complies as to form in all material
respects with the applicable accounting requirements of Rule 11-02
of Regulation S-X; and
(D) proved the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the Pro Forma
Statement;
and on the basis of such procedures and such other inquiries and
procedures as specified herein, nothing came to our attention that caused
us to believe that the Pro Forma Statement included in the Registration
Statement does not comply as to form in all material respects with the
applicable requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical amounts
in the compilation of those statements; and
C-2
<PAGE> 51
(vii) In addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which are specified
herein, and have compared certain of such items with, and have found such
items to be in agreement with, the accounting and financial records of the
Company.
C-3
<PAGE> 52
Exhibit C-2
FORM OF COMFORT LETTER OF J.C. HOLLAND & CO.
PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to Auburn
Hosiery Mills, Inc. within the meaning of the 1933 Act and the applicable
published 1933 Act Regulations.
(ii) In our opinion, the audited financial statements and the
related financial statement schedules of Auburn Hosiery Mills, Inc.
included in the Registration Statement and the Prospectus comply as to
form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder.
(iii) In addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which are specified
herein, and have compared certain of such items with, and have found such
items to be in agreement with, the accounting and financial records of
Auburn Hosiery Mills, Inc.
C-2
<PAGE> 53
Exhibit C-3
FORM OF COMFORT LETTER OF PRICE WATERHOUSE LLP
PURSUANT TO SECTION 5(e)
(i) We are independent public accountants with respect to Sport
Socks Co. (Ireland) Limited within the meaning of the 1933 Act and the
applicable published 1933 Act Regulations.
(ii) In our opinion, the audited financial statements and the
related financial statement schedules of Sport Socks Co. (Ireland) Limited
included in the Registration Statement and the Prospectus comply as to
form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder.
(iii) In addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which are specified
herein, and have compared certain of such items with, and have found such
items to be in agreement with, the accounting and financial records of
Sport Socks Co. (Ireland) Limited.
C-3
<PAGE> 1
Exhibit 3.1
CERTIFICATE
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
GCIH, INC.
I,_______________, being the duly elected _______________, of GCIH, Inc.,
a Delaware corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation") do hereby certify
the following:
1. That the Corporation filed its original Certificate of Incorporation
with the Secretary of State of Delaware on December 12, 1985.
2. The Board of Directors of the Corporation approved the foregoing
amendment and restatement pursuant to the provisions of Sections 141 and 242 of
the General Corporation Law of the State of Delaware and directed that the
amendment be submitted to the stockholders of the Corporation for their
consideration and approval.
3. The stockholders of the Corporation approved the foregoing amendment
and restatement pursuant to the provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
<PAGE> 2
RESTATED
CERTIFICATE OF INCORPORATION
OF
GCIH, INC.
ARTICLE ONE
Section 1. Registered Name. The name of the corporation is GCIH, INC.
(hereinafter referred to as the "Corporation").
ARTICLE TWO
Section 1. Registered Office. The registered office of the Corporation in
the State of Delaware shall be at the principal office of The Corporation Trust
Company in the City of Wilmington, County of New Castle, and the registered
agent in charge thereof shall be the Corporation Trust Company.
ARTICLE THREE
Section 1. Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE FOUR
Section 1. Authorized Shares.
(a) The total number of shares of capital stock which the
Corporation has authority to issue is 32,436,452 shares, consisting of:
1. 20,684,000 shares of Common Stock, par value $0.01 per
share (the "Common Stock");
2. 11,752,452 shares of Class B Common Stock, par value
$0.01 per share (the "Class B Common");
(b) The Common Stock and the Class B Common are hereafter
collectively referred to as the "Capital Stock."
<PAGE> 3
(c) In addition to any other consent or approval which may be
required pursuant to this Certificate of Incorporation, no amendment or waiver
of any provision of this Article Four shall be effective without the prior
approval of the holders of a majority of the then outstanding Common Stock.
Section 2. Capital Stock
(a) Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, by this Restated Certificate of
Incorporation or any amendments thereto, all of the voting power of the
Corporation shall be vested in the holders of the Common Stock, and each holder
of the Common Stock shall have one (1) vote for each share of Common Stock held
by such holder on all matters voted upon by the stockholders of the Corporation;
except, that the voting rights of the holders of Common Stock with respect to
the election of directors shall be governed by Section 1(b) of Article Five of
this Certificate of Incorporation. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Class B Common shall have no
voting rights.
(b) Dividends. As and when dividends are declared or paid with
respect to shares of Capital Stock, whether in cash, property or securities of
the Corporation, the holders of Common Stock and the holders of Class B Common
shall be entitled to receive such dividends pro rata at the same rate per share
of each class of Capital Stock; provided, that (i) if dividends are declared or
paid in shares of Capital Stock, the dividends payable to holders of Common
Stock shall be payable in shares of Common Stock and the dividends payable to
the holders of Class B Common shall be payable in shares of Class B Common and
(ii) if the dividends consist of other voting securities of the Corporation, the
dividends payable to the holders of Class B Common shall be payable in shares of
Class B Common non-voting securities (except as otherwise required by law) of
the Corporation which are otherwise identical to the voting securities and which
are convertible into such voting securities on the same terms as the Class B
Common is convertible into the Common Stock.
(c) Liquidation. The holders of Capital Stock shall be entitled to
participate pro rata at the same rate per share of each class of Capital Stock
in all distributions to the holders of Common Stock in any liquidation,
dissolution or winding up of the Corporation.
(d) Conversion of Class B Common to Common Stock.
1. Right to Convert. Subject to Section 4(b) below, the
holder or holders of a majority of the outstanding
shares of Class B Common shall be entitled at any time
to convert any or all of the outstanding shares of Class
B Common into the same number of shares of Common Stock.
2. Surrender of Certificates. Each conversion of shares of
Class B Common into shares of Common Stock shall be
effected by the surrender of the certificate or
certificates representing the shares to be converted at
the principal office of the Corporation at any time
during
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normal business hours, together with a written notice by
the holder of shares of such Class B Common stating that
such holder desires to convert the shares, or a stated
number of the shares, of such Class B Common represented
by such certificate or certificates into shares of
Common Stock. Each conversion of Class B Common shall be
deemed to have been effected as of the close of business
on the date on which such certificate or certificates
have been surrendered and such notice has been received,
and at such time the rights of the holder of the
converted Class B Common as such holder shall cease, and
the person or persons in whose name or names the
certificate or certificates for shares of Common Stock
are to be issued upon such conversion shall be deemed to
have become the holder or holders of record of the
shares of Common Stock represented thereby.
3. Issuance of Certificates. Promptly after the surrender
of certificates of Class B Common and the receipt of
written notice, the Corporation shall issue and deliver
in accordance with the surrendering holder's
instructions the certificate or certificates for the
Common Stock issuable upon such conversion.
4. No Charge. The issuance of certificates for Common Stock
upon conversion of Class B Common will be made without
charge to the holders of such shares of any issuance tax
in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the
related issuance of Common Stock.
5. Reserve Shares. The Corporation shall at all times
reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose
of issuance upon the conversion of the Class B Common,
such number of shares of Common Stock issuable upon
conversion of all outstanding shares of Class B Common.
All shares of Common Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as
may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any
applicable law or governmental regulation or any
requirements of any domestic securities exchange upon
which shares of Common Stock may be listed (except for
official notice of issuance which will be immediately
transmitted by the Corporation upon issuance).
6. Closing Books. The Corporation shall not close its books
against the transfer of shares of Common Stock in any
manner which would
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interfere with the timely conversion of any shares of
Class B Common.
(e) Conversion of Common Stock to Class B Common
1. Right to Convert. Subject to Section 5(b) below, any
holder of Class B Common shall be entitled at any time
to convert any or all of its shares of Common Stock into
the same number of shares of Class B Common.
2. Surrender of Certificates. Each conversion of shares of
Common Stock into shares of Class B Common shall be
effected by the surrender of the certificate or
certificates representing the shares to be converted at
the principal office of the Corporation at any time
during normal business hours, together with a written
notice by the holder of shares of such Class B Common
stating that such holder desires to convert a stated
number of the shares of such Common Stock represented by
such certificate or certificates into shares of Class B
Common. Each conversion of Common Stock shall be deemed
to have been effected as of the close of business on the
date on which such certificate or certificates have been
surrendered and such notice has been received, and at
such time the rights of the holder of the converted
Common Stock as such holder shall cease, and the person
or persons in whose name or names the certificate or
certificates for shares of Class B Common are to be
issued upon such conversion shall be deemed to have
become the holder or holders of record of the shares of
Class B Common represented thereby.
3. Issuance of Certificates. Promptly after the surrender
of certificates of Common Stock and the receipt of
written notice, the Corporation shall issue and deliver
in accordance with the surrendering holder's
instructions the certificate or certificates for the
Class B Common issuable upon such conversion.
4. No Charge. The issuance of certificates for Class B
Common upon conversion of Common Stock will be made
without charge to the holders of such shares of any
issuance tax in respect thereof or other cost incurred
by the Corporation in connection with such conversion
and the related issuance of Class B Common.
5. Reserve Shares. The Corporation shall at all times
reserve and keep available out of its authorized but
unissued shares of Class B Common, solely for the
purpose of issuance upon the conversion of the Common
Stock, such number of shares of Class B Common
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<PAGE> 6
issuable upon conversion of all outstanding shares of
Common Stock held by holders of Class B Common. All
shares of Class B Common which are so issuable shall,
when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as
may be necessary to assure that all such shares of Class
B Common may be so issued without violation of any
applicable law or governmental regulation or any
requirements of any domestic securities exchange upon
which shares of Class B Common may be listed (except for
official notice of issuance which will be immediately
transmitted by the Corporation upon issuance).
6. Closing Books. The Corporation shall not close its books
against the transfer of shares of Class B Common in any
manner which would interfere with the timely conversion
of any shares of Common Stock.
(f) Stock Splits. If the Corporation in any manner subdivides or
combines the outstanding shares of one class of Capital Stock, the outstanding
shares of each other class of Capital Stock shall be proportionately subdivided
or combined in a similar manner.
ARTICLE FIVE
Section 1. Board of Directors. The number of directors who shall serve on
the Board of Directors (the "Board") shall be eight and such number may be
increased or decreased from time to time exclusively by the Board pursuant to a
resolution adopted by a majority of the Board. At each annual meeting of
stockholders, commencing with the 1999 annual meeting of stockholders, the
common stockholders shall elect the directors, with each director to hold office
until his or her successor shall have been duly elected and qualified or until
his/her earlier death, resignation or removal.
(a) Nomination. Only persons who are nominated in accordance with
the procedures set forth in this paragraph shall be eligible to serve as
directors. Nominations of persons for election to the Board may be made at an
annual meeting of stockholders (a) by or at the direction of the Board or (b) by
or on behalf of a stockholder of the Corporation, or a duly authorized proxy for
such stockholder, who is a stockholder of record at the time of giving notice
provided for in this paragraph and who shall be entitled to vote for the
election of directors at the meeting. Any nominations not made by or at the
direction of the Board must be made pursuant to a notice in writing to the
Secretary of the Corporation delivered or mailed to, and received at, the
principal executive offices of the Corporation not fewer than 120 days or more
than 150 days prior to the anniversary date of the immediately preceding annual
meeting; provided, however, that in the event the annual meeting with respect to
which such notice is to be tendered is not held within 30 days before or after
such anniversary date such notice by the stockholder must be received at the
principal executive offices of the Corporation prior to the close of business on
the tenth day following the date on which notice of the meeting was first given
or made to the stockholders generally; and further
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provided, however, that, notwithstanding the foregoing, with respect to the 1998
annual meeting of stockholders, such notice by the stockholder must be received
at the principal executive offices of the Corporation prior to the close of
business on the tenth day following the date on which notice of the meeting was
first given or made to stockholders generally. Such stockholder's notice shall
set forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director, all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (including such person's written
consent to being named as a nominee and to serving as a director, if elected);
and (b) as to the stockholder giving such notice (i) the name and address, as
they appear on the Corporation's books, of such stockholder, (ii) the number of
shares of stock of the Corporation beneficially owned by such stockholder and
represented by proxy and (iii) a description of all arrangements and
understandings between such stockholder and any other person or persons
(including their names) in connection with such nomination and any material
interest of such stockholder in such nomination. At the request of the Board,
any person nominated by the Board for election as a director shall furnish to
the secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination that pertains to the nominee. If the Board
shall determine, based on the facts, that a nomination was not made in
accordance with the above procedures, the Chairman of the Board shall so declare
to the meeting and the defective nomination shall be disregarded.
(b) Election. Directors shall be elected at the annual meeting of
the stockholders or at any special meeting called for that purpose. In the
election of directors of the corporation, the principle of cumulative voting
shall apply. In any such election, each stockholder entitled to vote shall have
votes equal to the number of his or her shares with voting rights multiplied by
the number of directors to be elected at such meeting. Each stockholder may
divide and distribute such stockholder's votes, as so calculated, among any two
or more candidates for the directorships to be filled, or such stockholder may
cast such stockholder's votes for a single candidate. At such election, the
candidates receiving the highest number of votes, up to the number of directors
to be chosen, shall stand elected, and an absolute majority of the votes cast is
not a prerequisite to the election of any candidate to the Board.
(c) Removal. Any director may be removed for "Cause" at any time by
the affirmative vote of the majority of the Board. Any director may be removed
without "Cause" at any time by the affirmative vote of the holders of a majority
of the shares entitled to vote at a special meeting of stockholders called for
that purpose; provided, that if less than the entire Board is to be removed, no
director may be removed without "Cause" if the votes cast against his or her
removal would be sufficient to elect him or her if then cumulatively voted at an
election of the entire Board. For purposes of this Certificate of Incorporation
"Cause" shall mean the conviction of a felony involving the affairs of the
Corporation.
(d) Vacancies. Unless otherwise provided by the General Corporation
Law as it now exists or unless the Board otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies of the Board resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled only
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<PAGE> 8
by a majority vote of the directors then in office, though less than a quorum,
and directors so chosen shall hold office for a term expiring at the annual
meeting of the stockholders and until such director's successor shall have been
duly elected and qualified. No decrease in the number of authorized directors
constituting the entire Board shall shorten the term of any incumbent director.
(e) Liability. To the fullest extent permitted by the General
Corporation Law as it now exists and as it may hereafter be amended, no director
of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Section 2. Amendment. Notwithstanding any other provisions of this
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, the affirmative vote of the holders of at least
66-2/3% of the shares entitled to vote, following adoption of any such
amendment, and submission for a vote, by a majority of the Board, shall be
required to amend or repeal, or adopt any provisions inconsistent with, this
Article Five.
ARTICLE SIX
Section 1. Duration. The Corporation is to have perpetual existence.
ARTICLE SEVEN
Section 1. Special Election. The Corporation expressly elects not to be
governed by Section 203 of the General Corporation Law of the State of Delaware.
ARTICLE EIGHT
Section 1. Nature of Indemnity. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article Eight, the Corporation shall indemnify any such
person seeking
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<PAGE> 9
indemnification in connection with a proceeding initiated by such person only if
such proceeding was authorized by the Board of Directors of the Corporation. The
right to indemnification conferred in this Article Eight shall be a contract
right and, subject to Sections 2 and 5 of this Article Eight, shall include the
right to payment by the Corporation of the expenses incurred in defending any
such proceeding in advance of its final disposition. The Corporation may, by
action of the Board, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing indemnification of
directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the Corporation under Section 1 of
this Article Eight or advance of expenses under Section 5 of this Article Eight
shall be made promptly, and in any event within 30 days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
Eight is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within 30 days, the right to indemnification or
advances as granted by this Article Eight shall be enforceable by the director
or officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the Corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the Corporation.
Neither the failure of the Corporation (including the Board, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an actual
determination by the Corporation (including its Board, independent legal
counsel, or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
Section 3. Nonexclusivity of Article Eight. The rights to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article Eight shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the Corporation or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
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<PAGE> 10
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the Corporation would have the power to indemnify such
person against such liability under this Article Eight.
Section 5. Expenses. Expenses incurred by any person described in Section
1 of this Article Eight in defending a proceeding shall be paid by the
Corporation in advance of such proceed ing's final disposition unless otherwise
determined by the Board in the specific case upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Corporation. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the Board deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article Eight and who are or were employees or
agents of the Corporation, or who are or were serving at the request of the
Corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may be indemnified to the extent authorized
at any time or from time to time by the Board.
Section 7. Contract Rights. The provisions of this Article Eight shall be
deemed to be a contract right between the Corporation and each director or
officer who serves in any such capacity at any time while this Article Eight and
the relevant provisions of the General Corporation Law of the State of Delaware
or other applicable law are in effect, and any repeal or modification of this
Article Eight or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article Eight,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
Eight with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.
ARTICLE NINE
Section 1. Amendment. The Corporation reserves the right to amend or
repeal any provisions contained in this Certificate of Incorporation from time
to time and at any time in the manner now or hereafter prescribed by the laws of
the State of Delaware, and all rights conferred upon stockholders and directors
are granted subject to such reservation.
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Section 2. Bylaws. In furtherance and not in limitation of the powers
conferred by statute, the Board is hereby authorized to adopt, amend or repeal
the Bylaws of the Corporation.
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<PAGE> 12
IN WITNESS WHEREOF, the undersigned, being the _____________ of the
Corporation, under the penalties of perjury, do hereby declare and certify that
this act and deed of the Corporation and the facts stated herein are true, and
accordingly has hereunto signed this Restated Certificate of Incorporation as of
this _______ day of _______________ 1998.
GCIH, Inc.
By:_____________________________
Name: Richard L. Solar
Title: Senior Vice President
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
GCIH, INC.
(A Delaware Corporation)
<PAGE> 2
TABLE OF CONTENTS
ARTICLE ONE Offices
Section 1. Registered Office. .................................1
Section 2. Other Offices. .....................................1
ARTICLE TWO Meetings of Stockholders
Section 1. Time and Place. ....................................1
Section 2. Annual Meeting. .....................................1
Section 3. Special Meetings.....................................1
Section 4. Notice of Meetings...................................1
Section 5. Waiver of Notice.....................................2
Section 6. Adjournments. .......................................2
Section 7. Voting; Quorum.......................................2
Section 8. Proxies ............................................2
Section 9. List of Stockholders. ..............................3
ARTICLE THREE Directors
Section 1. Number; Tenure.......................................3
Section 2. Resignation; Removal. ..............................3
Section 3. Vacancies. .........................................3
Section 4. Management of Business. ............................3
ARTICLE FOUR Meetings of the Board
Section 1. Annual Meetings. ...................................4
Section 2. Special Meetings. ..................................4
Section 3. Place of Meetings. .................................4
Section 4. Notice of Meetings. .................................4
Section 5. Quorum; Voting. ....................................4
Section 6. Directors' Consent in Lieu of Meeting. .............4
Section 7. Organization. ......................................4
Section 8. Committees of the Board. ...........................5
Section 9. Action by Means of Telephone or Similar
Communications Equipment. ...........................5
Section 10. Compensation. ......................................5
ARTICLE FIVE Officers
Section 1. Designation. .......................................6
Section 2. Term of Office; Removal. ...........................6
Section 3. Compensation. ......................................6
Section 4. Vacancies. .........................................6
Section 5. The President. .....................................6
Section 6. Vice-Presidents. ...................................6
Section 7. The Secretary. .....................................6
Section 8. Assistant Secretaries. .............................7
Section 9. The Treasurer. .....................................7
Section 10. Assistant Treasurers. ..............................7
i
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ARTICLE SIX Share and Transfer of Shares
Section 1. Certificates Evidencing Shares. ....................7
Section 2. Stock Ledger. ......................................7
Section 3. Transfers of Shares. ...............................8
Section 4. Addresses of Stockholders. .........................8
Section 5. Lost, Destroyed and Mutilated Certificates. ........8
Section 6. Regulations. .......................................8
Section 7. Fixing Date for Determination of Stockholders of
Record. .............................................8
ARTICLE SEVEN General Provisions
Section 1. Dividends. ..........................................9
Section 2. Reserves. ..........................................9
Section 3. Checks. .............................................9
Section 4. Fiscal Year. .......................................9
Section 5. Seal. ...............................................9
Section 6. Execution of Proxies. ..............................9
ARTICLE EIGHT Amendments
Section 1. Amendments. .........................................9
ARTICLE NINE Indemnification
Section 1. Insurance for Indemnification. ....................10
ii
<PAGE> 4
ARTICLE ONE
Offices
Section 1. Registered Office. The registered office of GCIH, INC. (the
"Corporation") in the State of Delaware shall be at the principal office of The
Corporation Trust Company in the City of Wilmington, County of New Castle, and
the registered agent in charge thereof shall be the Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have offices and places
of business at such other places, within and without the State of Delaware, as
the Board of Directors ("Board") may from time to time determine or the business
of the Corporation may require.
ARTICLE TWO
Meetings of Stockholders
Section 1. Time and Place. All meetings of the stockholders of the
Corporation shall be held at such place, within or without the State of
Delaware, and at such time, as shall be designated from time to time by the
Board and stated in the notice of the meeting, or in a duly executed waiver of
notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders, commencing in
1999, shall be held on the third Tuesday in May, at a time to be fixed by the
Board, or at such other date and time as shall be designated by the Board and
stated in the notice of the meeting, at which the stockholders shall elect the
Board and transact such other business as may properly be brought before the
meeting.
Section 3. Special Meetings. Special meetings of the stockholders for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the President, and shall be
called by the President or Secretary at the request in writing of a majority of
the Directors then in office or at the request in writing of stockholders owning
at least a majority in amount of the entire capital stock of the Corporation
issued and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting.
Section 4. Notice of Meetings.
(a) Annual Meetings. Except as otherwise provided by law,
written notice of each annual or special meeting of stockholders stating the
place, date and time of such meeting and, in the case of a special meeting, the
purpose or purposes for which such meeting is to be held, shall be given
personally or by first-class mail (airmail in the case of international
communications) to each stockholder entitled to vote at the meeting, not less
than 10 nor more than 60 days before the date of such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the Stockholder at such Stockholder's address as it
appears on the records of the Corporation. If, prior to the time of mailing,
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<PAGE> 5
the Secretary of the Corporation (the "Secretary") shall have received from any
Stockholder a written request that notices intended for such Stockholder are to
be mailed to some address other than the address that appears on the records of
the Corporation, notices intended for such Stockholder shall be mailed to the
address designated in such request.
(b) Special Meetings. Notice of a special meeting of
Stockholders may be given by the person or persons calling the meeting, or upon
the written request of such person or persons, such notice shall be given by the
Secretary on behalf of such person or persons. If the person or persons calling
a special meeting of Stockholders give notice thereof, such person or persons
shall deliver a copy of such notice to the Secretary. Each request to the
Secretary for the giving of notice of a special meeting of Stockholders shall
state the purpose or purposes of such meeting.
Section 5. Waiver of Notice. Notice of any annual or special meeting of
Stockholders need not be given to any Stockholder who files a written waiver of
notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, nor the
purpose of, any meeting of Stockholders need be specified in any written waiver
of notice thereof. Attendance of a Stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was inadequate or improperly given.
Section 6. Adjournments. Whenever a meeting of Stockholders, annual or
special, is adjourned to another date, time or place, notice need not be given
of the adjourned meeting if the date, time and place thereof are announced at
the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder entitled to vote thereat. At the adjourned meeting, any business may
be transacted which might have been transacted at the original meeting.
Section 7. Quorum; Voting.
(a) Except as otherwise provided by law or the certificate of
incorporation of the Company, the recordholders of a majority of the outstanding
Common Stock of the Company issued and outstanding and entitled to vote thereat,
present in person or by proxy, shall constitute a quorum for the transaction of
business at all meetings of stockholders, whether annual or special.
(b) Except as otherwise provided by the certificate of incorporation
or any amendment thereto, at any meeting of the stockholders, each stockholder
shall be entitled to one vote, in person or by proxy, for each share of the
Common Stock of the Corporation held by such stockholder. Except as otherwise
provided by the certificate of incorporation or amendment thereto, when a quorum
is present at any meeting, the vote of the holders of a majority of the stock
present (in person or represented by proxy) having voting power shall decide any
question brought before such meeting.
Section 8. Proxies Each Stockholder entitled to vote at a meeting of
stockholders may
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authorize another person or persons to act for such stockholder by proxy. Every
proxy must be executed in writing by the stockholder or his attorney-in-fact and
filed with the Secretary before such meeting of the stockholders, at such time
as the Board may require. No proxy shall be valid after the expiration of three
years from the date thereof, unless otherwise provided in the proxy. Every proxy
shall be revocable by the stockholder executing it, except in those cases where
an irrevocable proxy is permitted by law.
Section 9. List of Stockholders. The officer or transfer agent who has
charge of the stock ledger of the Corporation shall prepare and make, or cause
to be prepared or made, at least ten days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE THREE
Directors
Section 1. Number; Tenure.
(a) The number of Directors which shall constitute the entire Board
shall be eight, and such number may be increased or decreased from time to time
exclusively by the Board.
(b) Directors shall be elected at the annual meeting of the
stockholders as provided in Section 1(b) of Article Five of the Certificate of
Incorporation, except as provided in Section 1(d) of Article Five of the
Certificate of Incorporation, and each Director elected shall hold office until
his successor shall have been duly elected and qualified or until his/her
earlier death, resignation, removal or attainment of the age of 75 years old;
provided, however, that any director who is 75 years old or older upon
consummation of the Corporation's initial public offering shall serve until
attainment of the age of 80 years old, unless earlier removed pursuant to
election or appointment of successor, death, resignation or removal according to
the terms of this Section 1(b).
Section 2. Resignation; Removal. Any Director may resign at any time. Any
or all of the Directors may be removed only as provided in Section 1(c) of
Article Five of the Certificate of Incorporation, .
Section 3. Vacancies. Vacancies shall be treated in accordance with
Section 1(d) of Article Five of the Certificate of Incorporation.
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<PAGE> 7
Section 4. Management of Business. The business of the Corporation shall
be managed by the Board, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or by the
certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
ARTICLE FOUR
Meetings of the Board
Section 1. Annual Meetings. As soon as practicable after each annual
election of directors by the stockholders, the Board shall meet for the purpose
of organization and the transaction of other business, unless it shall have
transacted all such business by written consent pursuant to Section 6 of this
Article Four.
Section 2. Special Meetings. Special meetings of the Board shall be held
at such times as the Chairman of the Board (the "Chairman"), the President of
the Corporation (the "President"), the Secretary or a majority of the Board
shall from time to time determine.
Section 3. Place of Meetings. The Board may its meetings at such place or
places within or without the State of Delaware as the Board or the Chairman may
form time to time determine, or as shall be designated in the respective notices
or waivers of notice of such meetings.
Section 4. Notice of Meetings. The Secretary shall give written notice to
each Director of each meeting of the Board, which notice shall state the place,
date, time and purpose of such meeting. Notice of each such meeting shall be
given to each Director, if by mail, addressed to him/her at his/her residence or
usual place of business, at least two days before the day on which such meeting
is to be held, or shall be sent to him/her at such place by telefax, telecopy,
telegraph, cable, or other form of recorded communication, or be delivered
personally or by telephone not later than the day before the day on which such
meeting is to be held. A written waiver of notice, signed by the Director
entitled to notice, whether before or after the time of the meeting referred to
in such waiver, shall be deemed equivalent to notice. Neither the business to be
transacted at, nor the purpose any meeting of the Board need be specified in any
written waiver of notice thereof. Attendance of a Director at a meeting of the
Board shall constitute a waiver of notice of such meeting, except as provided by
law.
Section 5. Quorum; Voting. At all meetings of the Board, a majority of the
Directors then in office shall constitute a quorum for the transaction of
business and the vote of a majority of the Directors present at any meeting at
which a quorum is present shall be the act of the Board, except as may be
otherwise specifically provided by law, the certificate of incorporation or
these Bylaws. In the absence of a quorum for any such meeting, a majority of the
Directors present at such meeting may adjourn such meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
Section 6. Directors' Consent in Lieu of Meeting. Any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by all
the members of the Board or such committee and such consent is filed with the
4
<PAGE> 8
minutes of the proceedings of the Board or such committee.
Section 7. Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside, in the following
order of precedence;:
(i) the Chairman;
(ii) the CEO;
(iii) the President; or
(iv) any Director chosen by a majority of the Directors
present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
Section 8. Committees of the Board. The Board may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more Directors. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he/she
or they constitute a quorum, may unanimously appoint another Director to act at
the meeting in the place of any such absent or disqualified member. Any
committee of the Board, to the extent provided in the resolution of the Board
designating such committee, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; provided, however, that no such committee shall be
vested with authority to take actions prohibited by law or the Certificate of
Incorporation. Each committee of the Board shall keep regular minutes of its
proceedings and report the same to the Board when so requested by the Board.
Section 9. Action by Means of Telephone or Similar Communications
Equipment. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
Section 10. Compensation. Unless otherwise restricted by the Certificate
of Incorporation, the Board may determine the compensation of Directors. In
addition, as determined by the Board, Directors may be reimbursed by the
Corporation for their expenses, if any, in the performance of their duties as
Directors. No such compensation or reimbursement shall preclude any Director
from serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE FIVE
5
<PAGE> 9
Officers
Section 1. Designation. The officers of the Corporation shall be chosen by
the Board and shall be a President, a Secretary and a Treasurer. The Board may
also choose one or more Vice- Presidents, Assistant Secretaries and Assistant
Treasurers. Any number of offices may be held by the same person.
Section 2. Term of Office; Removal. Each officer shall be elected by the
Board and shall hold office until his successor is elected and qualified or for
such other term as may be prescribed by the Board. Any officer elected by the
Board may be removed with or without cause at any time by the Board.
Section 3. Compensation. The compensation of each officer of the
Corporation shall be fixed by the Board, and the compensation of agents shall
either be so fixed or shall be fixed by officers "hereunto duly authorized.
Section 4. Vacancies. If an office becomes vacant for any reason, the
Board shall fill such vacancy. Any officer so elected by the Board shall serve
only until such time as the unexpired term of his predecessor shall have expired
unless re-elected by the Board.
Section 5. The President. The President shall be the chief executive
officer of the Corporation; he shall preside, when present, at all meetings of
the stockholders and Directors; he shall be ex officio a member of all standing
committees; he shall have general and active management and control of the
business and affairs of the Corporation, subject to the control of the Board,
and he shall see that all orders and resolutions of the Board are carried into
effect. Unless otherwise determined by the Board, he shall have the power to
vote all shares of stock and other securities owned by the Corporation.
Section 6. Vice-Presidents. The Vice-President or, if there be more than
one, the Vice- Presidents, in the order of their seniority or in any other order
determined by the Board, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President, and shall generally
assist the President and perform such other duties as the Board or the President
shall prescribe.
Section 7. The Secretary. The Secretary shall attend all meetings of the
Board and all meetings of the stockholders, and record all votes and the minutes
of all proceedings in a book to be kept for that purpose, and shall perform like
duties for the standing committees when required. He shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board, and shall perform such other duties as may be prescribed by the Board or
President, under whose supervision he shall act. He shall keep in safe custody
the seal of the Corporation and, when authorized by the Board, affix the same to
any instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary or
Assistant Treasurer. He shall keep in safe custody the certificate books and
stockholder records and such other books and records as the Board may direct and
shall perform all other duties incident to the office of Secretary.
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<PAGE> 10
Section 8. Assistant Secretaries. The Assistant Secretaries, if any, in
order of their seniority or in any other order determined by the Board, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties as the Board or
the President shall prescribe.
Section 9. The Treasurer. The Treasurer shall have the care and custody of
the corporate funds, and other valuable effects, including securities, and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and shall deposit all moneys and other valuable effects in
tile name and to the credit of the Corporation in such depositories as may be
designated by the Board. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, and shall render to the President and Directors, at the regular
meetings of the Board, or whenever they may require it, an account of all of his
transactions as Treasurer and of the financial condition of the Corporation. If
required by the Board, the Treasurer shall, at the expense of the Corporation,
give the Corporation a bond for such term, in such sum and with such surety or
sureties as shall be satisfactory to the Board for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 10. Assistant Treasurers. The Assistant Treasurers, if any, in the
order of their seniority or in any other order determined by the Board, shall,
in the absence or disability of the Treasurer, perform the duties and exercise
the power of the Treasurer and shall perform such other duties as the Board or
the President shall prescribe.
ARTICLE SIX
Shares and Transfer of Shares
Section 1. Certificates Evidencing Shares. The Corporation's shares shall
be evidenced by certificates in such form or forms as shall be approved by the
Board. Certificates shall be issued in consecutive order and shall be numbered
in the order of their issue, and shall be signed by (i) the Chairman, the CEO or
the President and (ii) by the Secretary, any Assistant Secretary, the Treasurer
or any Assistant Treasurer, and shall be sealed with the Corporation's seal or a
facsimile thereof. Any or all of the signatures on the certificate may be a
facsimile. In the event any such officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office or to be employed by the Corporation before such certificate is issued,
such certificate may be issued by the Corporation with the same effect as if
such officer had held such office on the date of issue.
Section 2. Stock Ledger. A stock ledger in one or more counterparts shall
be kept by the Secretary or a designated agent of the Corporation, in which
shall be recorded the name and address of each person, firm or corporation
owning the shares evidenced by each certificate evidencing shares issued by the
Corporation, the number of shares evidenced by each such certificate, the date
of issuance thereof and, in the case of cancellation, the date of cancellation.
Except as otherwise expressly required by law, the person in whose name shares
stand on the stock ledger of the
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<PAGE> 11
Corporation shall be deemed the owner and recordholder thereof for all purposes.
Section 3. Transfers of Shares. Registration of transfers of shares shall
be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such Shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
Section 4. Addresses of Stockholders. Each Stockholder shall designate to
the Secretary or a designated agent of the Corporation an address at which
notices of meetings and all other corporate notices may be served or mailed to
such Stockholder, and, if any Stockholder shall fail to so designate such an
address, corporate notices may be served upon such Stockholder by mail directed
to the mailing address, if any, as the same appears in the stock ledger of the
corporation or at the last known mailing address of such Stockholder.
Section 5. Lost, Destroyed and Mutilated Certificates. Each recordholder
of Shares shall promptly notify the Corporation of any loss, destruction or
mutilation of any certificate or certificates evidencing any Share or Shares of
which he/she is the recordholder. The Board may, in its discretion, cause the
Corporation to issue a new certificate in place of any certificate theretofore
issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon
the surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction, and the Board may, in its discretion, require the recordholder of
the Shares evidenced by the lost, stolen or destroyed certificate or his/her
legal representative to give the Corporation a bond sufficient to indemnify the
Corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 6. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
Section 7. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the Stockholders entitled to notice of
or to vote at any meeting of Stockholders or any adjournment thereof, or to
express consent to, or to dissent from, corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other such action. A determination of the Stockholders
entitled to notice of or to vote at a meeting of Stockholders shall apply to any
adjournment of such meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
ARTICLE SEVEN
General Provisions
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<PAGE> 12
Section 1. Dividends. Subject to the provisions of law and the certificate
of incorporation, dividends upon the capital stock of the Corporation, if any,
may be declared by the Board at any regular or special meeting, and may be paid
in cash, in property, or in shares of the capital stock of the Corporation.
Section 2. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Directors shall think conducive to the interest of
the Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
Section 3. Checks. All checks or demands for money and notes or other
instrument evidencing indebtedness or obligations of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by resolution of the Board.
Section 5. Seal. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the words "Corporate Seal
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
Section 6. Execution of Proxies. The Chairman, the CEO or the President,
or, in the absence or disability of any of them, any Vice President, may
authorize, from time to time, the execution and issuance of proxies to vote
shares of stock or other securities of other corporations held of record by the
Corporation and the execution of consents to action taken or to be taken by any
such corporation. All such proxies and consents, unless otherwise authorized by
the Board, shall be signed in the name of the Corporation by the Chairman, the
CEO or the President.
ARTICLE EIGHT
Amendments
Section 1. Amendments. Unless otherwise provided by law or the Certificate
of Incorporation or any amendment thereto, these Bylaws may be amended, altered
or repealed and new Bylaws adopted at any meeting of the Board by a majority
vote. The fact that the power to adopt, amend, alter, or repeal the Bylaws has
been conferred upon the Board shall not divest the stockholders of the same
powers.
ARTICLE NINE
Indemnification
Section 1. Insurance for Indemnification. The Corporation shall provide
indemnification
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<PAGE> 13
as set forth in Article Eight of the Certificate of Incorporation.
* * * * *
10
<PAGE> 1
Exhibit 4.1
COMMON STOCK COMMON STOCK
- -------------- ---------------
NUMBER SHARES
GC
- -------------- ---------------
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 373701 10 1
[GRAPHIC OMITTED]
GERBER CHILDRENSWEAR, INC.
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
is the owner of
- --------------------------------------------------------------------------------
CERTIFICATE OF STOCK
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Gerber Childrenswear, Inc. transferable on the books of the Corporation by
the holder hereof in person or by duly authorized attorney on surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
/s/ [ILLEGIBLE]
COUNTERSIGNED AND REGISTERED CHAIRMAN, PRESIDENT AND CEO
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED OFFICER ASSISTANT/SECRETARY
GERBER CHILDRENSWEAR, INC.
CORPORATE
SEAL
DELAWARE
American Bank Note Company
<PAGE> 1
Exhibit 4.3
FIRST AMENDMENT TO CREDIT AGREEMENT
AND
CONSENT, RELEASE AND WAIVER
This FIRST AMENDMENT TO CREDIT AGREEMENT AND CONSENT, RELEASE AND WAIVER
(this "Amendment") is entered into as of April 3, 1998 among GERBER
CHILDRENSWEAR, INC. ("Gerber"), a Delaware corporation and AUBURN HOSIERY MILLS,
INC., ("Auburn"), a Kentucky corporation (collectively the "Borrowers"); GCIH,
INC., a Delaware corporation (the "Parent") and the Subsidiaries of the Parent
(other than the Borrowers) and the Borrowers as Guarantors, the Lenders party
hereto and NATIONSBANK, N.A., as Administrative Agent for the Lenders (the
"Administrative Agent"). Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Credit Agreement (as defined below).
RECITALS
WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative
Agent entered into that certain Credit Agreement dated as of December 17, 1997
(the "Credit Agreement");
WHEREAS, Gerber wishes to effectuate an initial public offering (the
"Offering") of its Common Stock to be accomplished as follows:
a. The certificate of incorporation of Gerber will be amended and restated
to provide for an increase of its authorized share capital and the division of
its common stock into two classes with different voting rights;
b. The Parent will be merged into Gerber with Gerber being the surviving
entity;
c. The outstanding shares of common stock and preferred stock of the
Parent held by CVC, members of the management of the Parent, and CMP will be
converted into shares of Common Stock of Gerber (some of such shares will
subsequently be converted by CVC into shares of Common Stock) or exchanged for
cash; and
d. Gerber will offer to sell shares of its Class A Common Stock pursuant
to an initial public offering governed by the Securities Exchange Act of 1933,
as amended.
WHEREAS, the Borrowers also wish to amend or have the Lenders waive
certain terms of the Credit Agreement not related to the Offering; and
WHEREAS, the Administrative Agent and the Lenders have agreed to (a)
consent to the Offering, (b) release their lien on shares of Gerber in
connection with the Offering and (c) amend and waive certain terms of the Credit
Agreement, in each case, on the terms, and subject to the conditions, set forth
below.
1
<PAGE> 2
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT
1. Amendments to Credit Agreement.
(a) Definitions:
(i) The pricing grid set forth in the definition of "Applicable
Percentage" in Section 1.1 of the Credit Agreement is amended and
restated in its entirety to read as follows:
<TABLE>
<CAPTION>
================================================================================
Applicable Applicable Applicable
Percentage Applicable Percentage Percentage
For Percentage for Standby For
Pricing Leverage Eurodollar For Base Letter of Commitment
Level Ratio Loans Rate Loans Credit Fees Fees
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
I <1.0 to 1.0 .500% 0% .500% .200%
- --------------------------------------------------------------------------------
<1.5 to 1.0
but
II => 1.0 to 1.0 .625% 0% .625% .200%
- --------------------------------------------------------------------------------
< 2.0 to 1.0
but
III => 1.5 to 1.0 .750% 0% .750% .250%
- --------------------------------------------------------------------------------
< 2.5 to 1.0
but
IV => 2.0 to 1.0 1.00% 0% 1.00% .250%
- --------------------------------------------------------------------------------
< 3.0 to 1.0
but
V => 2.5 to 1.0 1.25% 0% 1.25% .250%
- --------------------------------------------------------------------------------
VI => 3.0 to 1.0 1.50% .25% 1.50% .375%
================================================================================
</TABLE>
Due to changes in the pricing grid, it is understood and agreed that the
initial Applicable Percentage in effect from the Closing Date until the first
Calculation Date subsequent to December 31, 1997 shall be based on Pricing Level
VI of the pricing grid set forth above.
(ii) The definition of "Change of Control" in Section 1.1 of the Credit
Agreement is amended and restated in its entirety to read as
follows:
"Change of Control" means (a) prior to the Offering, Citicorp
Venture Capital Group shall own (on a fully diluted, as if converted,
basis) less than 51% of the Voting Stock of GCIH, Inc., (b) subsequent to
the Offering, any "person" or "group" (within the meaning of Section 13(d)
or 14(d) of the Exchange Act), other than the Citicorp Venture Capital
Group, has become, directly or indirectly, the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
Person shall be deemed to have "beneficial ownership" of all shares that
any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), by way of
merger, consolidation or otherwise, of 20% or more of the Voting Stock of
Gerber
2
<PAGE> 3
Childrenswear, Inc. on a fully-diluted basis, after giving effect to the
conversion and exercise of all outstanding warrants, options and other
securities of Gerber Childrenswear, Inc. (whether or not such securities
are then currently convertible or exercisable) or (c) a change in control
(as defined in the documentation evidencing the Subordinated Debt) occurs.
(iii) The definition of "EBITDA" in Section 1.1 of the Credit Agreement is
amended and restated in its entirety to read as follows:
"EBITDA" means, for any period, with respect to the Credit Parties
and their Subsidiaries, on a consolidated basis, the sum of (a) Net Income
for such period (excluding the effect of any extraordinary or other
non-recurring gains (including any gain from the sale of property) or
non-cash losses) plus (b) an amount which, in the determination of Net
Income for such period has been deducted for (i) Interest Expense for such
period, (ii) total Federal, state, foreign or other income or franchise
taxes for such period, (iii) all depreciation and amortization for such
period and (iv) all other non-cash charges, including, without limitation,
royalty payments under existing License Agreements, all as determined in
accordance with GAAP; it being understood and agreed that EBITDA shall
include the EBITDA from Auburn Hosiery Mills, Inc. and its Subsidiaries,
Sports Socks Co. (Ireland) Limited, or any other Subsidiaries acquired by
the Credit Parties and their Subsidiaries for the applicable period
whether such EBITDA was earned prior to or subsequent to their acquisition
by GCIH, Inc.
(iv) The following new definitions are added to Section 1.1 of the Credit
Agreement in the appropriate alphabetical order:
"Offering" means the initial public offering of the shares of common
stock of Gerber Childrenswear, Inc. as set forth in the preliminary Form
S-1 filed with the Securities Exchange Commission on March 4, 1998 (as
such terms may be amended).
"Reorganization" means, in connection with the Offering (a) the
conversion of all of the outstanding shares of Preferred Stock into either
common stock of GCIH, Inc. or the right to receive cash, (b) the merger of
GCIH, Inc. into and with Gerber Childrenswear, Inc., with Gerber
Childrenswear, Inc. being the surviving entity and (c) in connection with
such merger, the exchange of all of the outstanding shares of all classes
of common stock and warrants to purchase common stock of GCIH, Inc. for
shares of common stock or warrants of Gerber Childrenswear, Inc.
(b) Section 3.3(b)(ii). Section 3.3(b)(ii) of the Credit Agreement is
amended and restated in its entirety to read as follows:
Within 10 days after the date the audited financial statements are
required to be delivered pursuant to Section 7.1(a) for each fiscal year,
commencing with the fiscal year ending December 31, 1999, the Borrowers
shall, if there is any principal amount outstanding with respect to the
Term Loans, make a prepayment of the Loans in an
3
<PAGE> 4
amount equal to 33% of the Excess Cash Flow earned during the preceding
fiscal year (to be applied as set forth in Section 3.3(c) below).
(c) Section 3.3(b)(iv). Section 3.3(b)(iv) of the Credit Agreement is
amended and restated in its entirety to read as follows:
Issuances of Equity. Immediately upon receipt by a Credit Party or
any of its Subsidiaries of proceeds from any Equity Issuance (other than
(A) an Equity Issuance consisting of the issuance of shares of Gerber
Childrenswear, Inc. to employees of the Credit Parties substantially
contemporaneous with the repurchase of shares of Gerber Childrenswear,
Inc. from other employees of Gerber Childrenswear, Inc. and (B) Equity
Issuances consisting of the issuance of shares of Gerber Childrenswear,
Inc. to management of the Credit Parties or their Subsidiaries not to
exceed a value of $25,000, in the aggregate, during any calendar year),
the Borrowers shall forward 100% of the Net Cash Proceeds of such Equity
Issuance to the Lenders as a prepayment of the Loans (to be applied as set
forth in Section 3.3(c) below); provided, however, that the Net Cash
Proceeds from the Offering shall be applied first to redeem all of the
Subordinated Debt, second, to the extent available, to prepay all existing
Preferred Stock (plus accrued dividends thereon) up to an aggregate amount
of $375,000 and third, to the extent available, to prepay the Term Loan,
first to the next four quarterly Principal Amortization Payments and then
to the remaining Principal Amortization Payments on a pro rata basis.
(d) Section 8.8. Section 8.8 of the Credit Agreement is amended and
restated in its entirety to read as follows:
No Credit Party will, nor will it permit its Subsidiaries to, directly or
indirectly, (a) declare or pay any dividends or make any other distribution upon
any shares of its capital stock of any class or (b) purchase, redeem or
otherwise acquire or retire or make any provisions for redemption, acquisition
or retirement of any shares of its capital stock of any class or any warrants or
options to purchase any such shares; provided that (i) any Subsidiary of a
Borrower may pay dividends to its parent, (ii) Gerber Childrenswear, Inc. may
repurchase its stock to the extent it constitutes a Permitted Investment, (iii)
any Credit Party may, and may permit its Subsidiaries to, pay a dividend solely
in shares of the class of stock on which such dividend is declared as long as no
Change in Control occurs and (iv) each of Gerber Childrenswear, Inc. and GCIH,
Inc. may issue, repurchase or exchange shares of its capital stock in connection
with the Reorganization.
(e) Section 8.11. Section 8.11 of the Credit Agreement is deleted in its
entirety.
(f) Section 8.15. The first sentence of Section 8.15 of the Credit
Agreement is amended and restated in its entirety to read as follows:
Except as permitted by Section 3.3(b)(iv), no Credit Party will, nor
will it permit its Subsidiaries to, (a) make or offer to make any voluntary or
optional principal payments with respect to the Subordinated Debt, (b) redeem or
offer to redeem any of the Subordinated Debt, or
4
<PAGE> 5
(c) deposit any funds intended to discharge or defease any or all of the
Subordinated Debt except, with respect to (b) and (c), as permitted in
accordance with the terms and conditions of the Senior Subordinated Credit
Agreement and the Intercreditor Agreement; provided that, notwithstanding the
foregoing, the Parent may repay up to $1,500,000 of principal owing under the
Junior Subordinated Note in exchange for amounts owed from Gerber Products
Company to GCIH, Inc.
2. Consent. Notwithstanding any terms in the Credit Documents to the contrary,
subject to the conditions set forth below, the Lenders hereby consent to the
Offering and the Reorganization (including any amendments to articles of
incorporation, bylaws or formation documents and any intercompany transactions
in the ordinary course, in each case consistent with the terms of the Offering
and the Reorganization):
(a) the Offering and Reorganization occur prior to June 1, 1998.
(b) the Reorganization occurs on terms identical to those described
herein and in the Form S-1 filed with the Securities and Exchange
Commission on March 4, 1998.
(c) Simultaneously with the consummation of the Offering and the
Reorganization the Borrowers provide to the Administrative Agent:
(i) certified copies of all amendments and articles of merger
filed by any Credit Party in connection with the
Reorganization, in form and substance reasonably satisfactory
to the Administrative Agent;
(ii) an updated Schedule 6.15 to the Credit Agreement;
(iii) an updated Schedule 2(a) to the Pledge Agreement, along with
any new stock certificates and executed stock powers as the
Administrative Agent may reasonably request; and
(iv) such other information, documents, filings or opinions as the
Administration Agent may reasonably request in connection with
the Offering and the Reorganization.
(d) Net Cash Proceeds from the Offering are greater than or equal to
$37,500,000.
3. References to the Parent, the Subordinated Debt and the Preferred Stock.
(a) Subsequent to the Reorganization and the Offering, GCIH, Inc. will no
longer exist and all references to the "Parent" or the "Parent and its
Subsidiaries" appearing in the Credit Agreement and the other Credit Documents
shall be replaced with references to Gerber Childrenswear, Inc. and Gerber
Childrenswear, Inc. and its Subsidiaries, respectively, except that references
to the "Parent" set forth in (i) the definitions of "Domestic Subsidiary",
"Foreign Subsidiary" and "Guarantor" in Section 1.1 of the Credit Agreement,
(ii) Section 8.4 of the Credit Agreement and (C) Section 11.6 shall be
disregarded.
5
<PAGE> 6
(b) Subsequent to the Reorganization and the Offering, (i) the Preferred
Stock will no longer exist and (ii) the Subordinated Debt will have been
satisfied in full, and all references to the "Preferred Stock", the
"Intercreditor Agreement", the "Junior Subordinated Note", the "Senior
Subordinated Credit Agreement" and the "Subordinated Debt" appearing in the
Credit Agreement and the other Credit Documents shall be disregarded.
4. Waivers.
(a) Notwithstanding anything to the contrary contained in Section 7.1(a)
of the Credit Agreement, the Lenders hereby waive the requirement that the
Credit Parties provide to the Agent and each of the Lenders, consolidating
financial statements for the fiscal year ended December 31, 1997. This is a one
time waiver and shall not be construed as a waiver to provide such financial
information for future periods.
(b) The Lenders hereby waive through April 30, 1998 any Default resulting
from the failure to comply with the requirements set forth in Section 7.16 of
the Credit Agreement. This is a one-time waiver and shall expire automatically
and without further notice to the Credit Parties on April 30, 1998.
5. Release of Gerber Childrenswear, Inc. Common Stock. The Administrative Agent
and the Lenders agree that in connection with the Offering and the
Reorganization, they will release their lien on the 10 shares of common stock of
Gerber Childrenswear, Inc. pledged by GCIH, Inc. pursuant to the Pledge
Agreement. The Lenders authorize the Administrative Agent to take such action as
appropriate in order to effectuate such release, including, without limitation,
the return of stock certificates.
6. Conditions Precedent. The effectiveness of this Amendment is subject to
receipt by the Administrative Agent of the following:
(a) copies of this Amendment duly executed by the Credit Parties and the
Lenders;
(b) certified copies of resolutions or authorization of each Credit
Party approving and adopting this Amendment, the transactions
contemplated herein and authorizing execution and delivery hereof;
(c) an opinion or opinions from counsel to the Credit Parties, in form
and substance satisfactory to the Administrative Agent, addressed to
the Administrative Agent on behalf of the Lenders and dated as of
the date hereof; and
(d) the payment of expenses, including without limitation reasonable
attorneys fees, incurred in connection with the preparation of the
Amendment.
7. Ratification of Credit Agreement. The term "Credit Agreement" as used in each
of the Credit Documents shall hereafter mean the Credit Agreement as amended and
modified by this
6
<PAGE> 7
Amendment. Except as herein specifically agreed, the Credit Agreement is hereby
ratified and confirmed and shall remain in full force and effect according to
its terms.
8. Authority/Enforceability. Each of the Credit Parties, the Administrative
Agent and the Lenders represents and warrants as follows:
(a) It has taken all necessary action to authorize the execution,
delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by such
Person and constitutes such Person's legal, valid and binding obligations,
enforceable in accordance with its terms, except as such enforceability
may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting creditors'
rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in
equity).
(c) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental authority or
third party is required in connection with the execution, delivery or
performance by such Person of this Amendment.
9. No Default. The Credit Parties represent and warrant to the Lenders that (a)
the representations and warranties of the Credit Parties set forth in Section 6
of the Credit Agreement (as amended by this Amendment) are true and correct as
of the date hereof and (b) no event has occurred and is continuing which
constitutes a Default or an Event of Default.
10. Counterparts. This Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument.
11. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NORTH CAROLINA.
[remainder of page intentionally left blank]
7
<PAGE> 8
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered and this Amendment shall be
effective as of the date first above written.
BORROWERS:
GERBER CHILDRENSWEAR, INC., a Delaware
corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
AUBURN HOSIERY MILLS, INC.,
a Kentucky corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
[Signatures continue]
<PAGE> 9
GUARANTORS:
GCIH, INC.,
a Delaware corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
COSTURA DOMINICANA, INC.,
a Delaware corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
AUBURN HOLDINGS, INC.,
a Delaware corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
GCI IP SUB, INC.,
a Delaware corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
AUBURN MERGER CO,
a Delaware corporation
By:_______________________________________________
Name: Richard Solar
Title: Senior Vice President
<PAGE> 10
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
LENDERS:
NATIONSBANK, N.A., acting in its capacity
as Administrative Agent and Collateral Agent and
individually as a Lender
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
NATIONSBANK OF TENNESSEE, N.A., solely in its
capacity as an Issuing Lender in connection with
certain Existing Letters of Credit
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 11
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
BANK OF AMERICA, FSB
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 12
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
THE CHASE MANHATTAN BANK
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 13
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
FLEET BANK, N.A.
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 14
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
SUNTRUST BANK, ATLANTA
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 15
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
WACHOVIA BANK, N.A.
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 16
Signature Page to First Amendment to Credit Agreement and Consent, Release
and Waiver dated as of April 3, 1998
BANK BOSTON, N.A.
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
<PAGE> 1
Exhibit 4.4
SECOND AMENDMENT TO CREDIT AGREEMENT
AND
CONSENT, RELEASE AND WAIVER
This SECOND AMENDMENT TO CREDIT AGREEMENT AND CONSENT, RELEASE AND WAIVER
(this "Amendment") is entered into as of June 1, 1998 among GERBER
CHILDRENSWEAR, INC., a Delaware corporation and AUBURN HOSIERY MILLS, INC., a
Kentucky corporation (collectively the "Borrowers"); GCIH, INC., a Delaware
corporation (the "Parent") and the Subsidiaries of the Parent (other than the
Borrowers) and the Borrowers as Guarantors, the Lenders party hereto and
NATIONSBANK, N.A., as Administrative Agent for the Lenders (the "Administrative
Agent"). Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Credit Agreement (as defined below).
RECITALS
WHEREAS, the Borrowers, the Guarantors, the Lenders and the Administrative
Agent entered into that certain Credit Agreement, dated as of December 17, 1997
(as amended by that certain First Amendment (the "First Amendment") to Credit
Agreement and Consent, Release and Waiver, dated as of April 3, 1998, the
"Credit Agreement").
WHEREAS, the proposed initial public offering described in the First
Amendment is no longer a complete and accurate description of the initial public
offering that the Credit Parties anticipate occurring.
WHEREAS, instead of the offering described in the First Amendment, the
Credit Parties wish to effectuate an initial public offering of the Common Stock
to be accomplished as follows:
a. Gerber Childrenswear, Inc. will be merged with and into GCIH, Inc. with
GCIH, Inc. being the surviving entity (the "Merger");
b. Immediately following the Merger, the certificate of incorporation of
GCIH, Inc. will be amended and restated to provide for (i) the reclassification
of its authorized common stock into two classes of common stock (the "Common
Stock" and the "Class B Common Stock"), each with different voting rights and
(ii) the change of GCIH, Inc.'s corporate name to Gerber Childrenswear, Inc.
(the "Surviving Company");
c. The outstanding shares of common stock and preferred stock of the
Surviving Company held by CVC, members of the management of the Surviving
Company and CMP will be converted into shares of Common Stock or Class B Common
Stock of the Surviving Company or exchanged for cash; and
d. The Surviving Company will offer to sell shares of its Common Stock
pursuant to an initial public offering governed by the Securities Exchange Act
of 1933, as amended.
<PAGE> 2
WHEREAS, the Administrative Agent and the Lenders have agreed to (a)
consent to the Offering, Reorganization and Merger, (b) release their lien on
shares of Gerber Childrenswear, Inc. in connection with the Offering,
Reorganization and Merger and (c) amend and waive certain terms of the Credit
Agreement, in each case, on the terms, and subject to the conditions, set forth
below.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT
1. Amendments to Credit Agreement.
(a) Existing DefinitioThe following definitions set forth in Section 1.1
of the Credit Agreement are amended and restated in their entirety to read as
follows:
"Offering" means the initial public offering of the shares of common
stock of the Surviving Company as set forth in Amendment No. 1 to Form S-1
filed with the Securities and Exchange Commission on April 27, 1998 and
Amendment No. 2 to Form S-1 filed with the Securities and Exchange
Commission on May 19, 1998 (as such terms may be amended).
"Reorganization" means, in connection with the Offering (a) the
merger of Gerber Childrenswear, Inc. with and into GCIH, Inc. with GCIH,
Inc. being the surviving entity, (b) the change of the corporate name of
GCIH, Inc. to Gerber Childrenswear, Inc., (c) the exchange of all of the
outstanding shares of all classes of common stock and warrants to purchase
common stock of GCIH, Inc. for shares of Common Stock, Class B Common
Stock or warrants of the Surviving Company and (d) the conversion of all
of the outstanding shares of Preferred Stock into either Common Stock or
the right to receive cash.
(b) New Definitions. The following new definitions are added to Section
1.1 of the Credit Agreement in the appropriate alphabetical order:
"Class B Common Stock" means Class B common stock of the Surviving
Company to be issued pursuant to the Reorganization.
"Common Stock" means common stock of the Surviving Company offered
for sale to the public pursuant to the Offering.
"Merger" means the merger of Gerber Childrenswear, Inc. with and
into GCIH, Inc. with GCIH, Inc. being the surviving entity and the
immediate change of name of GCIH, Inc. to Gerber Childrenswear, Inc.
<PAGE> 3
"Surviving Company" means Gerber Childrenswear, Inc., a Delaware
corporation, f/k/a GCIH, Inc.
2. Consent. Notwithstanding anything in the Credit Documents to the contrary,
subject to the conditions set forth below, the Lenders hereby consent to the
Offering, the Merger and the Reorganization (including any amendments to
articles of incorporation, bylaws or formation documents and any intercompany
transactions in the ordinary course, in each case consistent with the terms of
the Offering, Merger and the Reorganization):
(a) the Offering, the Merger and Reorganization occur prior to July
31, 1998.
(b) the Merger and Reorganization occur on terms identical to those
described herein and in Amendment No. 1 to Form S-1 filed with the
Securities and Exchange Commission on April 27, 1998 and Amendment No. 2
to Form S-1 filed with the Securities and Exchange Commission on May 19,
1998.
(c) Net Cash Proceeds from the Offering are greater than or equal to
$37,500,000.
(d) Simultaneously with the consummation of the Offering, the Merger
and the Reorganization, the Surviving Company provides to the
Administrative Agent:
(i) a duly executed Assumption Agreement in the form
attached hereto as Exhibit A;
(ii) certified copies of all amendments and articles of
merger filed by any Credit Party in connection with the Merger and
Reorganization, in form and substance reasonably satisfactory to the
Administrative Agent;
(iii) an opinion of counsel to the Credit Parties in
substantially the form attached hereto as Exhibit B;
(iv) an updated Schedule 6.15 to the Credit Agreement;
(v) an updated Schedule 2(a) to the Pledge Agreement,
together with any new stock certificates and executed stock powers
as the Administrative Agent may reasonably request;
(vi) evidence satisfactory to the Administrative Agent
that the Merger and Reorganization does not create a breach of, or
default under, any
3
<PAGE> 4
contract, agreement or instrument to which a Credit Party is a
party, including, without limitation, any Material License
Agreement;
(vii) such amendments, modifications or assumptions to
any Mortgage Documents as the Administrative Agent may reasonably
request in order to provide for the Lenders' continued
first-priority perfected security interest in any real estate
pledged by any Credit Party, together with opinions with respect
thereto;
(viii) such Uniform Commercial Code filings that the
Administrative Agent may reasonably request in order to provide for
its continued first-priority perfected security interest in any
Collateral, together with opinions with respect thereto;
(ix) evidence satisfactory to the Administrative Agent
that the Preferred Stock has all been converted into Common Stock or
the right to receive cash and that all of the Subordinated Debt has
been paid in full; and
(x) such other information, documents, filings or
opinions as the Administration Agent may reasonably request in
connection with the Offering, the Merger and the Reorganization.
3. References to the Parent, Gerber Childrenswear, Inc., the Subordinated Debt
and the Preferred Stock.
(a) As a part of the Reorganization, the Merger and the Offering,
GCIH, Inc.'s name will be changed to Gerber Childrenswear, Inc. and all
references to the "Parent" or the "Parent and its Subsidiaries" appearing
in the Credit Agreement and the other Credit Documents shall be replaced
with references to Gerber Childrenswear, Inc. and Gerber Childrenswear,
Inc. and its Subsidiaries, respectively, except that references to the
"Parent" set forth in (i) the definitions of "Domestic Subsidiary",
"Foreign Subsidiary" and "Guarantor" in Section 1.1 of the Credit
Agreement, (ii) Section 8.4 of the Credit Agreement and (iii) Section 11.6
shall be disregarded.
(b) Subsequent to the Reorganization, the Merger and the Offering,
all references in the Credit Agreement to Gerber Childrenswear, Inc. shall
mean a reference to the Surviving Company and all references to the
Borrowers shall mean a reference to Auburn Hosiery Mills, Inc. and the
Surviving Company.
4
<PAGE> 5
(c) Subsequent to the Reorganization, the Merger and the Offering,
(i) the Preferred Stock will no longer exist and (ii) the Subordinated
Debt will have been satisfied in full, and all references to the
"Preferred Stock", the "Intercreditor Agreement", the "Junior Subordinated
Note", the "Senior Subordinated Credit Agreement" and the "Subordinated
Debt" appearing in the Credit Agreement and the other Credit Documents
shall be disregarded.
4. Waiver. Subject to the conditions set forth in Section 2 above, the Lenders
hereby agree to waive any Event of Default caused by the Offering,
Reorganization or Merger as a result of a violation of Section 8.4 or Section
9.1(j) of the Credit Agreement. This is a one time waiver and shall not be
construed to be a waiver of any other Event of Default that may exist or an
agreement to waive any Event of Default that may occur in the future.
5. Release of Gerber Childrenswear, Inc. Common Stock. The Administrative Agent
and the Lenders agree that in connection with the Offering, the Merger and the
Reorganization, they will release their lien on the 10 shares of common stock of
Gerber Childrenswear, Inc. pledged by GCIH, Inc. pursuant to the Pledge
Agreement. The Lenders authorize the Administrative Agent to take such action as
appropriate in order to effectuate such release, including, without limitation,
the return of stock certificates.
6. Conditions Precedent. The effectiveness of this Amendment is subject to
receipt by the Administrative Agent of the following:
(a) copies of this Amendment duly executed by the Credit Parties and
the Lenders;
(b) certified copies of resolutions or authorization of each Credit
Party approving and adopting this Amendment, the transactions contemplated
herein and authorizing execution and delivery hereof;
(c) an opinion or opinions from counsel to the Credit Parties, in
form and substance satisfactory to the Administrative Agent, addressed to
the Administrative Agent on behalf of the Lenders and dated as of the date
hereof; and
(d) the payment of expenses, including without limitation reasonable
attorneys fees, incurred in connection with the preparation of the
Amendment.
7. Ratification of Credit Agreement. The term "Credit Agreement" as used in each
of the Credit Documents shall hereafter mean the Credit Agreement as amended and
modified by this Amendment. Except as herein specifically agreed, the Credit
Agreement, as amended by the First
5
<PAGE> 6
Amendment and this Amendment, is hereby ratified and confirmed and shall remain
in full force and effect according to its terms.
8. Authority/Enforceability. Each of the Credit Parties, the Administrative
Agent and the Lenders represents and warrants as follows:
(a) It has taken all necessary action to authorize the execution,
delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by such
Person and constitutes such Person's legal, valid and binding obligations,
enforceable in accordance with its terms, except as such enforceability
may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting creditors'
rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding at law or in
equity).
(c) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental authority or
third party is required in connection with the execution, delivery or
performance by such Person of this Amendment.
9. No Default. The Credit Parties represent and warrant to the Lenders that (a)
the representations and warranties of the Credit Parties set forth in Section 6
of the Credit Agreement (as amended by this Amendment) are true and correct as
of the date hereof and (b) no event has occurred and is continuing which
constitutes a Default or an Event of Default.
10. Counterparts/Telecopy. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall constitute one and the same instrument. Delivery of
executed counterparts of this Amendment by telecopy shall be effective as an
original and shall constitute a representation that an original shall be
delivered.
11. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NORTH CAROLINA.
[remainder of page intentionally left blank]
6
<PAGE> 7
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered and this Amendment shall be
effective as of the date first above written.
BORROWERS:
GERBER CHILDRENSWEAR, INC., a Delaware
corporation
By: /s/ Richard Solar
-----------------------------------
Name: Richard Solar
Title: Senior Vice President
AUBURN HOSIERY MILLS, INC.,
a Kentucky corporation
By: /s/ Richard Solar
-----------------------------------
Name: Richard Solar
Title: Senior Vice President
[Signatures continue]
8
<PAGE> 8
GUARANTORS:
GCIH, INC.,
a Delaware corporation
By: /s/ Richard Solar
-----------------------------------
Name: Richard Solar
Title: Senior Vice President
COSTURA DOMINICANA, INC.,
a Delaware corporation
By: /s/ Richard Solar
-----------------------------------
Title: Senior Vice President
AUBURN HOLDINGS, INC.,
a Delaware corporation
By: /s/ Richard Solar
-----------------------------------
Title: Senior Vice President
GCI IP SUB, INC.,
a Delaware corporation
By: /s/ Richard Solar
-----------------------------------
Name: Richard Solar
Title: Senior Vice President
<PAGE> 9
Signature Page to Second Amendment to Credit Agreement and Consent, Release and
Waiver
LENDERS:
NATIONSBANK, N.A., acting in its capacity
as Administrative Agent and Collateral Agent
and individually as a Lender
By: /s/ David H. Dinkins
-----------------------------------------
Name: David H. Dinkins
Title: Vice President
NATIONSBANK OF TENNESSEE, N.A., solely in its
capacity as an Issuing Lender in connection
with certain Existing Letters of Credit
By: /s/ David H. Dinkins
-----------------------------------------
Name: David H. Dinkins
Title: Vice President
<PAGE> 10
Signature Page to Second Amendment to Credit Agreement and Consent, Release and
Waiver
BANK OF AMERICA, FSB
By:
Name:
Title:
<PAGE> 11
Signature Page to Second Amendment to Credit Agreement, Consent and Release and
Waiver
THE CHASE MANHATTAN BANK
By:
Name:
Title:
<PAGE> 12
Signature Page to Second Amendment to Credit Agreement, Consent and Release and
Waiver
FLEET BANK, N.A.
By:
Name:
Title:
<PAGE> 13
Signature Page to Second Amendment to Credit Agreement, Consent and Release and
Waiver
SUNTRUST BANK, ATLANTA
By:
Name:
Title:
By:
Name:
Title:
<PAGE> 14
Signature Page to Second Amendment to Credit Agreement, Consent and Release and
Waiver
WACHOVIA BANK, N.A.
By:
Name:
Title:
<PAGE> 15
Signature Page to Second Amendment to Credit Agreement, Consent and Release and
Waiver
BANK BOSTON, N.A.
By:
Name:
Title:
<PAGE> 1
EXHIBIT 5.1
June 4, 1998
Gerber Childrenswear, Inc.
7005 Pelham Road
Suite D
Greenville, SC 29615
Re: Shares of Common Stock, $.01 par value
Ladies and Gentlemen:
We are acting as counsel to Gerber Childrenswear, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act"), of a Registration Statement on Form S-1 (File
No. 333-47327) (the "Registration Statement") pertaining to the registration of
a proposed offering of shares of the Company's Common Stock, $.01 par value per
share (the "Common Stock") yielding gross proceeds of up to $62,100,000.
We have examined originals, or copies certified or otherwise
identified to our satisfaction, of such documents, corporate records and other
instruments as we have deemed necessary for the purposes of this opinion,
including the following: (i) Amended and Restated Certificate of Incorporation
and the Bylaws of the Company, each as amended to the date hereof; and (ii)
certain resolutions adopted by the Board of Directors of the Company. In
addition, we have made such other and further investigations as we have deemed
necessary to enable us to express the opinions hereinafter set forth.
Based upon the foregoing and having regard to legal considerations
that we deem relevant, and subject to the comments and qualifications set forth
below, it is our opinion that the Common Stock has been duly authorized.
For purposes of this opinion, we have with your permission made the
following assumptions, in each case without independent verification: (i) the
authenticity of all documents submitted to us as originals, (ii) the conformity
to the originals of all documents submitted to us as copies, (iii) the
authenticity of the originals of all documents submitted to us as copies, (iv)
the genuineness of the signatures of persons signing all documents in connection
with which this opinion is rendered, (v) the authority of such persons signing
all documents on behalf of the parties thereto and (vi) the due authorization,
execution and delivery of all documents by the parties thereto.
<PAGE> 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the incorporation by reference of this opinion in a
registration statement filed under Rule 462(b) under the Securities Act of 1933,
as amended, which incorporates by reference the contents of the Registration
Statement. In giving such consent, we do not thereby concede that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act or the Rules and Regulations promulgated thereunder.
We do not find it necessary for purposes of this opinion to cover,
and accordingly we do not purport to cover herein, the application of the
securities or "Blue Sky" laws of the various states to the offering and sale of
the Common Stock.
This opinion shall be limited to the laws of the State of Delaware.
This opinion is furnished to you in connection with the filing of
the Registration Statement and is not to be used, circulated, quoted or
otherwise relied upon for any other purpose.
Very truly yours,
KIRKLAND & ELLIS
<PAGE> 1
Exhibit 10.6
EXECUTION COPY
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Amended and
Restated Registration Rights Agreement") dated as of June 5, 1998 by and among
Gerber Childrenswear, Inc., a Delaware corporation (the "Company"), GCIH, Inc.,
a Delaware corporation ("GCIH") and owner of 100% of the capital stock of the
Company, Citicorp Venture Capital, Ltd., a New York corporation ("CVC"),
Citicorp Mezzanine Partners, L.P., a Delaware limited partnership ("CMP"), CCT
III Partners, L.P., a Delaware limited partnership ("CCT"), Edward Kittredge,
Richard Solar, and David Uren (such three individuals, collectively, the
"Executive Officers").
WHEREAS, GCIH, CVC, CMP, CCT, the Executive Officers, and certain
others are parties to a registration rights agreement dated as of January 22,
1996, and as amended from time to time (the "Original Registration Rights
Agreement");
WHEREAS, the parties hereto constitute holders of a majority of
Registrable Securities (as such term is defined in the Original Registration
Rights Agreement), and such parties wish to amend and restate the Original
Registration Rights Agreement in its entirety;
WHEREAS, the Boards of Directors of GCIH and the Company have
approved a merger of GCIH into the Company, with the Company as the surviving
corporation (the "Merger"), whereby (a) holders of the Series A Preferred Stock,
par value $0.01 per share of GCIH shall receive either Class B Common Stock of
the Company or the right to receive cash, (b) the holders of shares of Class A
Common Stock, par value $0.01 per share of GCIH shall become holders of the
Class B Common Stock (as defined in Section 1 hereof), of the Company, (c) the
holders of the shares of Class B Common Stock, par value $0.01 per share of GCIH
shall become holders of the Common Stock (as defined in Section 1 hereof) of the
Company, (d) holders of the Class C Common Stock, par value $0.01 per share of
GCIH shall become holders of shares of Common Stock of the Company, and (e) the
holders of warrants to purchase the Class D Common Stock, par value $0.01 per
share of GCIH (the "CMP Warrants") shall become holders of warrants to purchase
the Class B Common of the Company;
WHEREAS, immediately following the consummation of the Merger, the
Company intends to file a Form S-1 under the Securities Act (as hereinafter
defined) for registration of certain shares of its Common Stock (the "Initial
Public Offering"); and
WHEREAS, in order to provide for and to clarify and restate the
rights and obligations of the parties hereto upon consummation of the Merger and
the Initial Public Offering, the parties hereto have entered into this
agreement, which shall become effective upon consummation of the Merger (such
consummation, the "Effective Time"), and immediately prior to the Initial Public
Offering and upon its effectiveness shall cause the Original Registration Rights
Agreement to cease to exist and be amended and restated in its entirety;
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Definitions. As used herein, the following terms shall have the following
meanings.
"CMP Registrable Securities" means (i) any shares of Common Stock
issued or issuable upon exercise of any portion of the CMP Warrants or acquired
by CMP, its affiliates (other than CVC, CCT and the Individual Purchasers) or
their respective affiliates on or after January 22, 1996 and (ii) any shares of
capital stock of the Company issued or issuable with respect to the securities
referred to in clause (i) by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization, in each of case (i) and (ii), which shares have not
been registered under the Securities Act. For purposes of this Agreement, a
Person will be deemed to be a holder of CMP Registrable Securities whenever such
Person has the right to acquire directly or indirectly such CMP Registrable
Securities (upon conversion or exercise in connection with a transfer of
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected.
"Class B Common" means, collectively, (i) the Class B Common Stock
of the Company, par value $0.01 per share, and (ii) any capital stock of the
Company issued or issuable with respect to the securities referred to in clause
(i) by way of a stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
"Common Stock" means, collectively, (i) the Common Stock of the
Company, par value $0.01 per share, and (ii) any capital stock of the Company
issued or issuable with respect to the securities referred to in clause (i) by
way of a stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization.
"CVC Registrable Securities" means (i) any shares of Stock of the
Company acquired by CVC or its affiliates (other than CMP and the Individual
Purchasers) on or after January 22, 1996, and (ii) any shares of capital stock
of the Company issued or issuable with respect to the securities referred to in
clause (i) above by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization, in each of case (i) and (ii), which shares have not been
registered under the Securities Act. For purposes of this Agreement, a Person
will be deemed to be a holder of CVC Registrable Securities whenever such Person
has the right to acquire directly or indirectly such CVC Registrable Securities
(upon conversion or exercise in connection with a transfer of securities or
otherwise, but disregarding any restrictions or limitations upon the exercise of
such right), whether or not such acquisition has actually been effected.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Executive Registrable Securities" means (i) any shares of Common
Stock issued or issuable to the Executives on or after January 22, 1996, if and
to the extent such shares of
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<PAGE> 3
Common Stock have vested pursuant to the terms of the Executive Stock Purchase
Agreements executed by such Executives and the Company and (ii) any shares of
capital stock of the Company issued or issuable with respect to the securities
referred to in clause (i) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization, in each of case (i) and (ii), which shares have not
been registered under the Securities Act. For purposes of this Agreement, a
Person will be deemed to be a holder of Executive Registrable Securities
whenever such Person has the right to acquire directly or indirectly such
Executive Registrable Securities (upon conversion or exercise in connection with
a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.
"Executives" means collectively the Executive Officers and certain
executives of the Company who have acquired or will acquire capital stock of the
Company and who have executed or will execute a joinder to the Original
Registration Rights Agreement or this Amended and Restated Registration Rights
Agreement, as the case may be.
"Holders Securities" means any securities held by CVC or any of its
affiliates (other than CMP) which are exchangeable, convertible or otherwise
similarly exercisable into Registrable Securities.
"Individual Purchasers" means Richard Cashin, 63 BR Partnership,
Charles E. Corpening, Michael A. Delaney, David Y. Howe, Byron L. Knief,
Alchemy, L.P., M. Saleem Muqaddam, David F. Thomas, and John Weber.
"Investor" means Lawrence R. Glenn.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a limited liability company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Purchaser Registrable Securities" means (i) any shares of Common
Stock issued or issuable to the Individual Purchasers or the Investor or
acquired by, or issued or issuable to, the Individual Purchasers or the Investor
by way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization, in each
of case (i) and (ii), which shares have not been registered under the Securities
Act. For purposes of this Agreement, a Person will be deemed to be a holder of
Purchaser Registrable Securities whenever such Person has the right to acquire
directly or indirectly such Purchaser Registrable Securities (upon conversion or
exercise in connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise of such right),
whether or not such acquisition has actually been effected.
"Qualified Public Offering" means the sale, in an underwritten
public offering registered under the Securities Act, of shares of the Company's
Common Stock having an aggregate value of at least $30 million.
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<PAGE> 4
"Registrable Securities" means, collectively, the CVC Registrable
Securities, the Purchaser Registrable Securities, the CMP Registrable
Securities, and the Executive Registrable Securities.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding discounts and commissions
and other similar fees described in the underwriting agreement) and other
Persons retained by the Company.
"Rule 144" means Rule 144 under the Securities Act (or any similar
rule then in force).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock" means collectively, (i) the Common Stock and Class B Stock,
and (ii) any capital stock of the Company issued or issuable with respect to the
securities referred to in clause (i) by way of a stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization.
2. Demand Registrations.
(a) Requests for Registration. Subject to Section 2(b) below, (i) at
any time and from time to time, the holders of a majority of the CVC Registrable
Securities and (ii) at any time after the earlier of (x) the fifth anniversary
hereof or (y) the six month anniversary of the consummation of a Qualified
Public Offering, the holders of a majority of the CMP Registrable Securities,
respectively, may request registration, whether underwritten or otherwise, under
the Securities Act of all or part of their Registrable Securities on Form S-1 or
any similar long-form registration ("Long-Form Registrations") or on Form S-2 or
S-3 or any similar short-form registration ("Short-Form Registrations") if
available. In addition, subject to Section 2(g) below, the holders of a majority
of the CVC Registrable Securities may request that the Company file with the SEC
a registration statement under the Securities Act on any applicable form
pursuant to Rule 415 under the Securities Act (a "415 Registration"). Each
request for a Long-Form Registration or Short-Form Registration shall specify
the approximate number of Registrable Securities requested to be registered and
the anticipated per share price range for such offering. Within ten days after
receipt of any such request for a Long-Form Registration or Short-Form
Registration, the Company will give written notice of such requested
registration to all other holders of Registrable Securities and will include
(subject to the provisions of this Agreement) in such registration, all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice.
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<PAGE> 5
All registrations requested pursuant to in this Section 2(a) are referred to
herein as "Demand Registrations". The Company acknowledges that the holders of
the CVC Registrable Securities may request a Demand Registration in connection
with a public offering of Holders Securities.
(b) Long-Form Registrations. (i) The holders of a majority of the
CVC Registrable Securities will be entitled to request up to five (5) Long-Form
Registrations and (ii) the holders of a majority of the CMP Registerable
Securities will be entitled to request one (1) Long-Form Registration,
respectively, in which the Company will pay all Registration Expenses. A
registration will not count as the permitted Long-Form Registration until it has
become effective and unless the holders of Registrable Securities are able to
register and sell at least 90% of the Registrable Securities requested to be
included in such registration.
(c) Short-Form Registrations. In addition to the Long-Form
Registrations provided pursuant to Section 2(b), (i) the holders of the CVC
Registrable Securities will be entitled to request an unlimited number of
Short-Form Registrations and (ii) the holders of a majority of CMP Registerable
Securities will be entitled to request an unlimited number of Short-Form
Registrations, respectively, in which the Company will pay all Registration
Expenses. Demand Registrations (other than 415 Registrations) will be Short-Form
Registrations whenever the Company is permitted to use any applicable short
form. After the Company has become subject to the reporting requirements of the
Exchange Act, the Company will use its best efforts to make Short-Form
Registrations available for the sale of Registrable Securities.
(d) Priority on Demand Registrations. The Company will not include
in any Long-Form Registration or Short-Form Registration any securities which
are not Registrable Securities without the prior written consent of the holders
of at least a majority of the Registrable Securities included in such
registration. If a Long-Form Registration or a Short-Form Registration is an
underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering, the Company will include in such registration (i) first, the number of
Registrable Securities requested to be included in such registration pro rata,
if necessary, among the holders of Registrable Securities based on the number of
shares of Registrable Securities owned by each such holder and (ii) second, any
other securities of the Company requested to be included in such registration
pro rata, if necessary, on the basis of the number of shares of such other
securities owned by each such holder. Any Persons other than holders of
Registrable Securities who participate in Demand Registrations which are not at
the Company's expense must pay their share of the Registration Expenses as
provided in Section 6 hereof.
(e) Restrictions on Demand Registrations. The Company will not be
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration.
(f) Selection of Underwriters. In the case of a Demand Registration
for an underwritten offering, the holders of a majority of the Registrable
Securities to be included in such
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<PAGE> 6
Demand Registration will have the right to select the investment banker(s) and
manager(s) to administer the offering, which investment banker(s) and manager(s)
will be nationally recognized, subject to (i) the Company's approval which will
not be unreasonably withheld and (ii) the negotiation of an underwriting
agreement reasonably acceptable to the Company.
(g) 415 Registrations.
(i) The holders of a majority of the CVC Registrable
Securities will be entitled to request one (1) 415 Registration in which the
Company will pay all Registration Expenses. Subject to the availability of
required financial information, within 45 days after the Company receives
written notice of a request for a 415 Registration, the Company shall file with
the SEC a registration statement under the Securities Act for the 415
Registration. The Company shall use its best efforts to cause the 415
Registration to be declared effective under the Securities Act as soon as
practical after filing, and once effective, the Company shall (subject to the
provisions of clause (ii) below) cause such 415 Registration to remain effective
for such time period as is specified in such request, but for no time period
longer than the period ending on the earlier of (i) the third anniversary of the
date of filing of the 415 Registration or (ii) the date on which all CVC
Registrable Securities have been sold pursuant to the 415 Registration or (iii)
the date as of which there are no longer any CVC Registrable Securities in
existence.
(ii) If the holders of a majority of the CVC Registrable
Securities notify the Company in writing that they intend to effect the sale of
all or substantially all of the CVC Registrable Securities held by such holders
pursuant to a single integrated offering pursuant to a then effective
registration statement for a 415 Registration (a "Takedown"), the Company and
each holder of Registrable Securities (other than the Individual Purchasers)
shall not effect any public sale or distribution of its equity securities, or
any securities convertible into or exchangeable or exercisable for its equity
securities, during the 90-day period beginning on the date such notice of a
Takedown is received.
(iii) If in connection with any Takedown the managing
underwriters (selected in accordance with clause (iv) below) advise the Company
that, in its opinion, the inclusion of any other securities other than CVC
Registrable Securities would adversely affect the marketability of the offering,
then no such securities shall be permitted to be included. Additionally, if in
connection with such an offering, the number of CVC Registrable Securities and
other securities (if any) requested to be included in such Takedown exceeds the
number of CVC Registrable Securities and other securities which can be sold in
such offering without adversely affecting the marketability of the offering, the
company shall include in such Sale (i) first, the CVC Registrable Securities
requested to be included in such Takedown, pro rata among the holders of such
Registrable Securities on the basis of the number of CVC Registrable Securities
owned by each such holder, and (ii) second, other securities requested to be
included in such Takedown to the extent permitted hereunder.
(iv) The holders of a majority of the CVC Registrable
Securities shall have the right to retain and select an investment banker and
manager to administer the 415
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<PAGE> 7
Registration and any Takedown pursuant thereto, subject to the Company's
approval which will not be unreasonably withheld.
(v) In addition to the provisions in Section 6 below, all
expenses incurred in connection with the management of the 415 Registration
(whether incurred by the Company or the holders of the CVC Registrable
Securities) shall be borne by the Company (including, without limitation, all
fees and expenses of the investment banker and manager) (excluding discounts and
commissions and other similar fees described in the underwriting agreement).
(h) Other Registration Rights. Except as provided in this Agreement,
the Company will not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of a majority of the CVC Registrable Securities.
3. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register
any of its Stock under the Securities Act (other than (i) pursuant to a Demand
Registration, (ii) pursuant to a registration statement on Form S-8 or S-4 or
any similar form, (iii) in connection with a registration the primary purpose of
which is to register debt securities (i.e., in connection with a so-called
"equity kicker") or (iv) in connection with the Initial Public Offering and a
registration form to be used may be used for the registration of Registrable
Securities (a "Piggyback Registration"), the Company will give prompt written
notice to all holders of Registrable Securities of its intention to effect such
a registration and will include in such registration all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within 20 days after the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities will be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company (other than the
Initial Public Offering), the Company will include in such registration all
securities requested to be included in such registration; provided, that if the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting the
marketability of the offering, the Company will include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares of
Registrable Securities owned by each such holder, and (iii) third, other
securities, if any, requested to be included in such registration.
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<PAGE> 8
(d) Priority on Secondary Registrations. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities (which registration was consented to pursuant to Section 2(h) above),
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, the Company will include in such
registration (i) first, the securities requested to be included therein by the
holders requesting such registration, (ii) second, the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of shares of Registrable
Securities owned by each such holder, and (iii) third, other securities
requested to be included in such registration not covered by clause (i) above.
(e) Selection of Underwriters. If any Piggyback Registration is an
underwritten offering, the investment banker(s) and manager(s) for the offering
will be selected by the Company.
(f) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securities pursuant to this
Section 3, and if such previous registration has not been withdrawn or
abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Forms S-4 or S-8 or any successor forms), whether on its own
behalf or at the request of any holder or holders of such securities, until a
period of at least six months has elapsed from the effective date of such
previous registration.
4. Holdback Agreements.
(a) Each holder of Registrable Securities (other than the Individual
Purchasers) hereby agrees not to effect any public sale or distribution
(including sales pursuant to Rule 144) of equity securities of the Company, or
any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 180-day period beginning on
the effective date of any Demand Registration (other than a 415 Registration) or
Piggyback Registration for a public offering to be underwritten on a firm
commitment basis in which Registrable Securities are included (except as part of
such underwritten registration), unless the underwriters managing the registered
public offering otherwise agree.
(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 180-day period beginning on the effective date of any
underwritten Demand Registration (other than a 415 Registration) or Piggyback
Registration (except as part of such underwritten registration or pursuant to
registrations on Forms S-4 or S-8 or any successor forms), unless the
underwriters managing the registered public offering otherwise agree, and (ii)
to cause each holder of Registrable Securities (other than the Individual
Purchasers) and each other holder of at least 5% (on a fully diluted basis) of
Common Stock, or any securities convertible into or exchangeable or exercisable
for Common Stock,
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<PAGE> 9
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such period (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
5. Registration Procedures. Whenever the holders of Registrable Securities have
requested that any Registrable Securities be registered pursuant to this
Agreement, the Company will use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of disposition thereof, and pursuant thereto the Company will as expeditiously
as possible:
(a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to the counsel selected by the holders of a majority of
the Registrable Securities covered by such registration statement copies of all
such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for a period of
not less than six months and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process (i.e., service of
process which is not limited solely to securities law violations) in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains
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<PAGE> 10
an untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading, and, at the request of any such seller, the
Company will promptly prepare a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit
to state any fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the Nasdaq National Market
("Nasdaq Market") and, if listed on the Nasdaq Market, use its best efforts to
secure designation of all such Registrable Securities covered by such
registration statement as a Nasdaq "National Market System security" within the
meaning of Rule 11Aa2-1 of the SEC or, failing that, to secure Nasdaq Market
authorization for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the National
Association of Securities Dealers;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earning statement covering the period of at
least twelve months beginning with the first day of the Company's first full
calendar quarter after the effective date of the registration statement, which
earning statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder;
(k) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;
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<PAGE> 11
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable the
sellers thereof to consummate the disposition of such Registrable Securities;
and
(n) obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as the holders of a majority of
the Registrable Securities being sold reasonably request.
If any such registration or comparable statement refers to any holder by name or
otherwise as the holder of any securities of the Company and if, in its sole and
exclusive judgment, such holder is or might be deemed to be a controlling person
of the Company, such holder shall have the right to require (i) the insertion
therein of language, in form and substance satisfactory to such holder and
presented to the Company in writing, to the effect that the holding by such
holder of such securities is not to be construed as a recommendation by such
holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply that such holder will assist in meeting any
future financial requirements of the Company, or (ii) in the event that such
reference to such holder by name or otherwise is not required by the Securities
Act or any similar Federal statute then in force, the deletion of the reference
to such holder; provided that with respect to this clause (ii) such holder shall
furnish to the Company an opinion of counsel to such effect, which opinion and
counsel shall be reasonably satisfactory to the Company.
6. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding discounts and commissions and other similar
fees described in the underwriting agreement) and other Persons retained by the
Company will be borne by the Company.
(b) In connection with each Demand Registration, each Piggyback
Registration and each 415 Registration, the Company will reimburse the holders
of Registrable Securities covered by such registration for the reasonable fees
and disbursements of one counsel chosen by the holders of a majority of the
Registrable Securities initially requesting such registration.
-11-
<PAGE> 12
7. Indemnification.
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses arising out of or
based upon any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse such holder, director, officer or
controlling person for any legal or other expenses reasonably incurred by such
holder, director, officer or controlling person in connection with the
investigation or defense of such loss, claim, damage, liability or expense,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such holder expressly for use therein or
by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Registrable
Securities.
(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, will indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; provided, that the obligation to indemnify
will be individual to each holder and will be limited to the net amount of
proceeds received by such holder from the sale of Registrable Securities
pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
-12-
<PAGE> 13
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
(d) The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and will survive the transfer of securities. The
Company also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
8. Participation in Underwritten Registrations. No Person may participate in any
registration hereunder which is underwritten unless such Person (a) agrees to
sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Person or Persons entitled hereunder to approve
such arrangements and (b) completes and executes all customary questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements; provided,
that no holder of Registrable Securities included in any underwritten
registration shall be required to make any representations or warranties to the
Company or the underwriters other than representations and warranties regarding
such holder and such holder's intended method of distribution.
9. Rule 144 Reporting. With a view to making available to the holders of
Registrable Securities the benefits of certain rules and regulations of the SEC
which may permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) make and keep current public information available, within the
meaning of Rule 144 or any similar or analogous rule promulgated under the
Securities Act, at all times after it has become subject to the reporting
requirements of the Exchange Act;
(b) file with the SEC, in a timely manner, all reports and other
documents required of the Company under the Securities Act and Exchange Act
(after it has become subject to such reporting requirements); and
(c) so long as any party hereto owns any Registrable Securities,
furnish to such Person forthwith upon request, a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time commencing 90 days after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements); a copy of the most recent
annual or quarterly report of the Company; and such other reports and documents
as such Person may reasonably request in availing itself of any rule or
regulation of the SEC allowing it to sell any such securities without
registration.
-13-
<PAGE> 14
10. Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via facsimile to
the recipient. Such notices, demands and other communications will be sent to
the address indicated below:
To the Company:
Gerber Childrenswear, Inc.
7005 Pelham Road
Greenville, South Carolina 29615
Attention: President
Telecopy No.: (864) 987-5499
With a copy to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: John Weber
Telecopy No.: (212) 888-2940
To CVC:
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: John Weber
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
-14-
<PAGE> 15
To any of the Executive Officers:
c/o Gerber Childrenswear, Inc.
1333 Broadway
7th Floor
New York, New York 10018
Attention: [Executive Officer's Name]
Telecopy No.: (212) 268-5122
and to:
Gerber Childrenswear, Inc.
7005 Pelham Road
Greenville, South Carolina 29615
Attention: [Executive Officer's Name]
Telecopy No.: (864) 987-5499
To any of the Individual Purchasers:
c/o Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: [Individual Purchaser]
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
To CMP:
Citicorp Mezzanine Partners, L.P.
399 Park Avenue
14th Floor
New York, NY 10043
Attention: Byron L. Knief
Telecopy No.: (212) 888-2940
-15-
<PAGE> 16
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Eunu Chun, Esq.
Telecopy No.: (212) 446-4900
To CCT:
CCT III Partners, L.P.
399 Park Avenue
14th Floor
New York, New York 10043
Attn: John Weber
Telecopy No.: (212) 888-2940
With a copy to:
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
11. Miscellaneous.
(a) No Inconsistent Agreements. The Company will not enter into any
agreement which is inconsistent with or violates the rights granted to the
holders of Registrable Securities in this Agreement.
(b) Remedies. Any Person having rights under any provision of this
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(c) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of
-16-
<PAGE> 17
the Company and holders of a majority of the Registrable Securities; provided,
that no amendment or waiver which adversely affects the holders of the CMP
Registrable Securities vis-a-vis the other holders of Registrable Securities
shall be effective without the prior written consent of the holders of a
majority of the CMP Registrable Securities. For avoidance of doubt, the addition
of a party to this Agreement shall not, in and of itself, be considered an
amendment which adversely affects the holders of the CMP Registrable Securities
vis-a-vis the other holders of Registrable Securities.
(d) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(e) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(h) Governing Law. The corporate laws of the State of Delaware will
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement shall be governed by and construed in
accordance with the domestic laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of New York.
* * * * *
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this Amended
and Restated Registration Rights Agreement as of the date first above written.
GCIH, INC.
By:
-------------------------------------
Name:
Title:
GERBER CHILDRENSWEAR, INC.
By:
-------------------------------------
Name:
Title:
CITICORP VENTURE CAPITAL, LTD.
By:
-------------------------------------
Name:
Title:
CITICORP MEZZANINE PARTNERS, L.P.
By: Citicorp Capital Investors, Ltd.
Its: General Partner
By:
-------------------------------------
Name:
Title:
CCT III PARTNERS, L.P.
By: CCT III Corporation
Its: General Partner
By:
-------------------------------------
Name:
Title:
<PAGE> 1
Exhibit 10.22
Form of Amendment No. 1 to
Executive Stock Purchase Agreement
Amendment No. 1 dated June 5, 1998 (the "Amendment") to the
Executive Stock Purchase Agreement (the "Original Agreement") dated as of
January 22, 1996 by and among GCIH, Inc., a Delaware corporation (the
"Company"), a Gerber Childrenswear, Inc., a Delaware corporation ("GCI"),
________ (the "Executive") and Citicorp Venture Capital, Ltd., a New York
corporation ("CVC"). Capitalized terms used but not defined herein have the
meanings ascribed to such terms in the Original Agreement.
WHEREAS, in connection with the initial public offering of certain
shares of the Company's common stock, the parties to the Original Agreement
desire to amend the Original Agreement as provided herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. The definition of "Cause" set forth in Section 1 of the Original
Agreement is hereby deleted in its entirety and replaced by the following:
"Cause" means: (i) the conviction of, or pleading guilty or nolo
contendere to, a felony involving moral turpitude; (ii) the commission of
any fraud, misappropriation or misconduct which causes demonstrable injury
to the Company or a Subsidiary; (iii) an act of dishonesty resulting or
intended to result, directly or indirectly, in material gain or personal
enrichment to the Executive at the expense of the Company or a Subsidiary;
(iv) any material breach of the Executive's fiduciary duties to the
Company as an employee or officer; (v) the willful and continued failure
of the Executive to perform substantially the Executive's duties with the
Company or one of its Subsidiaries (other than any such failure resulting
from incapacity due to physical or mental illness resulting in a
Disability), within a reasonable time after a written demand for
substantial performance is delivered to the Executive by the Board, which
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties; or (vi)
the willful failure by the Executive to comply with any other undertaking
set forth in the Agreement or any willful breach by the Executive hereof
that is reasonably likely to result in a material injury to the Company.
For purposes of this definition, no act or failure to act, on the
part of the Executive, shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable
belief that the Executive's action or omission was in the best interests
of the Company. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based
<PAGE> 2
upon the advice of regular outside counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive
in good faith and in the best interests of the Company. The cessation of
employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of a majority of the
entire membership of the Board (excluding the Executive if such Executive
is a member of the Board) at a meeting of the Board (excluding the
Executive if such Executive is a member of the Board) called and held for
such purposes (after reasonable notice is provided to the Executive and
the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board,
the Executive is guilty of the conduct described.
2. The following definition is hereby inserted in alphabetical order
in Section 1 of the Original Agreement:
"Fair Market Value" means, as of any date of determination, for each
share of Executive Stock, the average of the closing per share prices of
the sales of the Common Stock on all securities exchanges on which the
Common Stock may at the time be listed, or, if there have been no sales on
any such exchange on any day, the average of the highest bid and lowest
asked prices on all such exchanges at the end of such day, or, if on any
day the Common Stock is not so listed, the average of the representative
bid and asked per share prices quoted in the NASDAQ National Market System
as of 4:00 P.M., New York time, or, if on any day the Common Stock is not
quoted in the NASDAQ National Market System, the average of the highest
bid and lowest asked per share prices on such day in the domestic
over-the-counter market as reported by the NASDAQ National Quotation
Bureau, Incorporated, or any similar successor organization, in each such
case averaged over a period of 21 trading days consisting of the day as of
which the Fair Market Value is being determined and the 20 consecutive
trading days prior to such day. If at any time the Common Stock is not so
listed on any securities exchange or quoted in the NASDAQ National Market
System or the domestic over-the-counter market, the Fair Market Value will
be determined in good faith by the Board.
3. The introductory paragraph of Section 4 is hereby deleted in its
entirety and replaced by the following:
In the event the Executive ceases to be employed by the Company and
its Subsidiaries for any reason (the "Termination"), the Vesting Executive
Stock (whether held by the Executive or one or more of the Executive's
transferees) will be subject to repurchase by the Company and CVC (or its
designees) pursuant to the terms and conditions set forth in this Section
4 (the "Repurchase Option"). Notwithstanding the foregoing, after January
22, 2001, the Vesting Executive Stock will no longer be subject to
repurchase by the Company and CVC (or its designees).
-2-
<PAGE> 3
4. Section 4 of the Original Agreement is amended to replace the
term "Book Value" with the term "Fair Market Value" in paragraphs (a)(i), (b),
and (e) thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the date first written above.
GCIH, INC.
By:
--------------------------------
Name:
Title:
GERBER CHILDRENSWEAR, INC.
By:
--------------------------------
Name:
Title:
-----------------------------------
[EXECUTIVE]
Agreed and Accepted:
CITICORP VENTURE CAPITAL, LTD.
By:
-------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" and "Summary Historical and Pro Forma
Financial Information" and to the use of our report dated January 30, 1998 with
respect to the consolidated financial statements of GCIH, Inc., and to the use
of our report dated September 12, 1997 with respect to the consolidated
financial statements of Gerber Childrenswear, Inc. ("Predecessor Company") in
Amendment No. 3 to the Registration Statement (Form S-1) and related Prospectus
for the registration of shares of common stock of Gerber Childrenswear, Inc.
(the Successor Company).
Our audits also included the financial statement schedules of GCIH, Inc.
and Gerber Childrenswear, Inc. ("Predecessor Company") listed in Item 16(b).
These schedules are the responsibility of the Company's and the Predecessor
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Greenville, South Carolina
June 5, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF J.C. HOLLAND & CO., PSC, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 16, 1998 with respect to the consolidated
financial statements of Auburn Hosiery Mills, Inc., in Amendment No. 3 to the
Registration Statement (Form S-1 No. 47327) and related Prospectus of Gerber
Childrenswear, Inc. dated April 27, 1998.
J.C. Holland & Co., PSC
Bowling Green, Kentucky
June 5, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 3 to the Registration Statement on Form S-1 of our report dated 23
February 1998 relating to the financial statements of Sport Socks Co (Ireland)
Limited, which appears in such Prospectus. We also consent to the reference to
us under the headings "Experts" in such Prospectus.
PRICE WATERHOUSE
CORK, IRELAND
June 5, 1998
